Item 1. Business.
On February 24, 2021, we entered into a definitive merger agreement to be acquired by Merck Sharp & Dohme Corp., or Merck. Pursuant to the merger agreement, and upon the terms and subject to the conditions thereof, Panama Merger Sub, Inc., a wholly owned acquisition subsidiary of Merck, or Merger Sub, will commence a cash tender offer, or the Tender Offer, to acquire all of the issued and outstanding shares of our common stock at a price per share of $60, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by applicable law. The completion of the Tender Offer will be conditioned on at least a majority of the shares of our outstanding common stock having been validly tendered into and not withdrawn from the Tender Offer, receipt of certain regulatory approvals and other customary conditions.
Following the completion of the Tender Offer, Merger Sub will merge with and into our company, with our company surviving as a wholly owned subsidiary of Merck. The merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the merger. In the merger, each outstanding share of our common stock (other than shares of common stock held by us as treasury stock or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $60 per share in cash, without interest, subject to any withholding of taxes required by applicable law.
We expect the transaction to close in the first half of 2021. If the transaction is completed, it is expected that our common stock will be removed from listing on the Nasdaq Stock Market and from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended.
See Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 17 of the Notes to Consolidated Financial Statements included in this report for additional information regarding this transaction.
Overview
We are a clinical stage biopharmaceutical company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. We have combined a network-based conceptualization of the immune system with expertise in advanced protein engineering to develop our TALON (Therapeutic Autoimmune reguLatOry proteiN) drug design and discovery platform. Our TALON platform enables us to employ a modular approach to create a pipeline of product candidates using immunomodulatory effector modules that act at known control nodes within the immune network. We are also able to combine an effector module with a tissue-targeted tether module in a bifunctional format to guide delivery of the effector to a targeted tissue. Our lead product candidate, PT101, a combination of our interleukin-2, or IL-2, mutein effector module with a protein backbone, is designed to selectively expand regulatory T cells, or Treg cells, systemically, without activating proinflammatory cells, such as conventional T cells and natural killer, or NK, cells. We are initially developing PT101 for the treatment of patients with moderate-to-severe ulcerative colitis, or UC, and for the treatment of patients with systemic lupus erythematosus, or SLE. We reported positive top-line data from a Phase 1a clinical trial of PT101 in healthy volunteers in January 2021. Leveraging our TALON platform, we continue to develop and expand our library of effector and tether modules as part of our early stage research and discovery pipeline.
We believe there is a need to fundamentally rethink the approaches historically utilized in autoimmune disease drug development. Current therapies for autoimmune disease based on broad immunosuppression or focused on inhibiting one pathway of the immune network often leave patients suffering from chronic residual disease or disease progression. We created our TALON platform to develop therapies that manipulate the immune system at its known control nodes, which we believe will enable us to design and develop treatments for autoimmune diseases that provide a durable clinical benefit.
Our TALON platform is based on the concept of modularity. We start with immune effector modules that we engineer to mimic the action of known control nodes. We can combine these effector modules with a protein backbone to create a portfolio of product candidates tailored to a given autoimmune disease. Specifically, we believe that we can design effectors to act systemically, or using a bifunctional format we can combine our effectors with antibody-based tissue-targeted tethers to concentrate the effector within the target organ. We believe that we have the potential to generate a diverse pipeline of next-generation product candidates to address significant unmet medical needs in autoimmune diseases.
Our lead product candidate, PT101, is an effector module comprised of an engineered variant of wild-type IL-2, or an IL-2 mutein, fused to a protein backbone. We engineered PT101 to confer a high degree of selectivity for Treg cell expansion without activating proinflammatory cells, such as conventional T cells and NK cells. We believe that preferential activation and expansion of Treg cells, a natural regulatory node of the immune system, will enable PT101 to rebalance a dysregulated immune network in the context of a wide variety of autoimmune diseases. Based on the dose-escalation data observed in our preclinical studies, PT101 has
shown a high degree of selectivity for Treg cells over other types of immune cells such as conventional proinflammatory T cells and NK cells. We plan to develop PT101 for subcutaneous administration for the systemic treatment of a variety of autoimmune and inflammatory diseases, with an initial focus on the treatment of patients with UC and on the treatment of patients with SLE. We estimate UC will represent a worldwide market of over $7 billion by 2026 and SLE will represent a worldwide market of over $1.6 billion by 2028. In February 2020, we initiated a single-ascending dose Phase 1a clinical trial of PT101 in healthy volunteers in Canada, and we completed enrollment and dosing in October 2020. We reported top-line data from this trial in January 2021, in which PT101 was observed to be safe and well-tolerated, the primary objective of the trial. In the clinical trial, PT101 selectively expanded total Treg cells, with a mean maximal increase of up to 3.6-fold over baseline. PT101 also expanded a subset of activated Treg cells with high CD25 expression, known as CD25 bright Treg cells, with a mean maximal increase of up to 72.5-fold over baseline. CD25 bright Tregs may be a more active subset of Treg cells with enhanced immune regulatory function. There was no evidence of expansion of NK cells and conventional T cells at any dose studied. At doses of 3.5 mg and above, PT101 induced a two-fold or greater expansion of total Treg cells in more than 80% of subjects. Treg cells returned to baseline or near-baseline over the 28-day follow-up period, supporting our plan to utilize an every-four-weeks dosing regimen of PT101 in future clinical trials.
All adverse events observed in the trial were low grade (Grade 1 or 2) and self-limited. The most common adverse events were skin reactions of itching, redness or pain near or around the site of injection of PT101. In laboratory tests, some subjects showed transient elevations of eosinophils, a type of white blood cell, that were self-limited in nature and did not require medical treatment. We believe that the eosinophil elevation may be related to the IL-2 mechanism of PT101.
Based on these results and subject to regulatory feedback, we plan to submit an investigational new drug application, or IND, to the U.S. Food and Drug Administration, or FDA, and an investigational medicinal product dossier, or IMPD, to the European Medicines Agency, or EMA and commence a global Phase 1b/2a trial in patients with UC in mid-2021. In addition, subject to further regulatory feedback, we plan to initiate a global Phase 2 clinical trial in patients with SLE in the second half of 2021.
We are also developing a suite of PD-1 agonists. PD-1 is an inhibitory receptor that is naturally expressed by T cells following their activation. Based on the understood biology of PD-1, we believe agonism of PD-1 is an approach to intervene in ongoing activated proinflammatory T cell responses to prevent excessive and uncontrolled reactivity that can result in damage to host tissues, as well as concurrently stimulate immunomodulatory Treg cells. We are currently in preclinical development of PD-1 agonist antibody-based effectors that mimic the inhibitory effects of PD-1 without blocking the natural interaction between PD-1 and its ligands. Our efforts have generated PT627, a PD-1 agonist that does not require surface binding and retains its function when free floating in solution. Given the potential of PT627 to inhibit PD-1 within tissues as well as in the bloodstream, we believe it represents a markedly differentiated approach to PD-1 agonism for the treatment of autoimmune disease. We initiated IND-enabling studies of PT627 in the fourth quarter of 2020 and plan to file an IND with the FDA and/or an IMPD with the EMA for PT627 in 2022.
For autoimmune diseases that exhibit local manifestations, it can be challenging to administer a drug systemically and achieve a sufficient concentration of the drug at the target tissue for optimal therapeutic benefit. We are leveraging our TALON platform to engineer bifunctional therapeutics that tether our immune effector payload to the specific location where the immunomodulator is most likely to interact with infiltrating or activated immune cells. We believe tissue tethering will allow us to deliver the effector directly to the localized site of the autoimmune attack, create a high local concentration of the effector and extend the residence time of the effector at the site of action to increase local exposure.
Our most advanced bifunctional program, PT001, tethers a PD-1 agonist effector to a tether module that binds to mucosal vascular addressing cell adhesion molecule, or MAdCAM, to drive tissue-selective immunomodulation in the gastrointestinal tract. MAdCAM is a protein that is expressed in the gastrointestinal tract and controls the selective migration of immune cells from circulation into the underlying tissues. We are advancing both programs through preclinical development and plan to begin IND-enabling studies of PT001 in the first half of 2021.
Our discovery efforts are focused on expanding our library of effectors and tether modules. We are currently developing a CD39 effector designed to manipulate the inflammatory microenvironment. We are also expanding our library of tethers with ongoing efforts for autoimmune diseases of the skin, kidney and pancreas.
We established a collaboration with Astellas Pharma Inc., or Astellas, in October 2019 to develop locally acting immunomodulators for autoimmune diseases of the pancreas. Under this agreement, we are responsible for the design and discovery of bifunctional product candidates based on our TALON platform, and Astellas will conduct preclinical, clinical and commercialization activities for any candidates developed in the collaboration. The initial research plan is focused on three tissue-selective tether targets in the pancreas. The primary indication for which we and Astellas will seek to develop product candidates is type 1 diabetes. We received an upfront payment of $10.0 million and have the right to receive research, development and regulatory milestone payments under the collaboration. We also have the right to receive tiered royalties on worldwide net sales of any commercial products developed under the collaboration.
Our Pipeline
We are leveraging our modular TALON platform to discover and design product candidates for the treatment of a wide range of autoimmune diseases. Our lead therapeutic programs are summarized in the table below:
Strategy
Our goal is to transform the lives of patients living with autoimmune diseases by combining a network-based conceptualization of the immune system with our expertise in advanced protein engineering to design, develop and commercialize next-generation therapies. To achieve this goal, our strategy includes the following key components:
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Advance our lead product candidate, PT101, through clinical development in patients with UC and in patients with SLE. We are currently developing our lead product candidate, PT101, to treat a broad set of autoimmune diseases, initially targeting the treatment of patients with UC and the treatment of patients with SLE. Based on the dose-escalation observed in our preclinical studies, PT101 has shown a high degree of selectivity for Treg cells over conventional proinflammatory T cells and NK cells, even at high doses. We initiated a Phase 1a clinical trial of PT101 in healthy volunteers in Canada in February 2020 and completed enrollment and dosing in October 2020. We reported top-line data from this trial in January 2021, in which PT101 was observed to be safe and well-tolerated, the primary objective of the trial. In the clinical trial, PT101 selectively expanded Treg cells, with a mean maximal increase of up to 3.6-fold over baseline. There was no evidence of expansion of NK cells and conventional T cells at any dose level studied. Based on these results and subject to regulatory feedback, we plan to submit an IND to the U.S. Food and Drug Administration and an IMPD to the EMA, and to commence a global Phase 1b/2a trial in patients with UC in mid-2021. In addition, subject to further regulatory feedback, we plan to initiate a global Phase 2 clinical trial in patients with SLE in the second half of 2021.
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Progress our preclinical pipeline of additional product candidates for autoimmune diseases into clinical trials. We have discovered and engineered a library of modules that we believe can be combined to create therapeutics tailored to address autoimmune diseases. In addition to PT101, we have combined our IL-2 mutein effector with a MAdCAM-tether module to create PT002, a bifunctional MAdCAM-tethered IL-2 mutein, designed to address organ-specific inflammatory injury in the gastrointestinal tract. We are in preclinical development of PT627, a PD-1 agonist effector module combined with a protein backbone, that is designed to be active in a soluble manner. We have also combined our PD-1 agonist effector module with a MAdCAM-tether module to create PT001, a bifunctional MAdCAM-tethered PD-1 agonist. We initiated IND-enabling studies with PT627 in the fourth quarter of 2020. We plan to file an IND for PT627 with the FDA in 2022. We plan to begin IND-enabling studies for PT001 in the first half of 2021.
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Leverage our proprietary TALON platform to expand our library of effector and tether modules. We continue to expand our earlier stage research and discovery pipeline. We are adding new effector modules to our effector library, such as a CD39 effector, and continuing to add new tissue-tether modules to our tissue-tether library to enable us to treat autoimmune diseases of the skin, kidney and pancreas. We believe that these efforts could result in significant new opportunities to treat autoimmune diseases with high unmet medical need.
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Continue to selectively evaluate collaborations to maximize the reach of our proprietary TALON platform. Given the potential of our proprietary TALON platform to generate novel product candidates for the treatment of a wide variety of autoimmune diseases, we believe that we can maximize its potential by forming strategic collaborations with respect to certain targets, product candidates or disease areas that could benefit from the resources of either larger
biopharmaceutical companies or those specialized in a particular area. For example, we entered into a strategic collaboration with Astellas in October 2019 to discover, develop and commercialize locally acting immunomodulators for the treatment of autoimmune diseases of the pancreas, including type 1 diabetes.
Our Focus: A Network-Based Conceptualization of the Immune System
The immune system is a self-regulating, multi-scale network comprised of cellular nodes that recognizes and reacts to foreign pathogens while normally remaining unresponsive to host tissues. Normally, self-reactive T cells are eliminated during their development via thymic selection, a process referred to as central tolerance. However, even in healthy individuals, there are circulating T cells that evade central tolerance and are capable of mounting immune responses to host tissues. These T cells are generally kept under control by a variety of different mechanisms associated with known immune control nodes, a process referred to as peripheral tolerance. In autoimmune and inflammatory disease, the loss of control at one or more of these nodes leads to an unchecked immune response, where the immune system recognizes host proteins as foreign, and mounts an attack against the self.
Each of the immune control nodes described below has been identified by published literature through studies of human genetics, the genetic manipulation of preclinical models, studies of how cancers evade the immune system, and/or the adverse autoimmune effects of checkpoint inhibitors in oncology.
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Node: Regulatory cells (i.e. Treg cells)
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Mechanism: Regulation of Immune Over-Reactivity
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Description: a mechanism in which the responding cells of the immune system are monitored and controlled by immunoregulatory cells to prevent over-activation. Treg cells, for example, are naturally occurring immunoregulatory cells that express and secrete anti-inflammatory molecules creating a quiescent environment that tempers the potential responses of other nearby proinflammatory immune cells. The activation and expansion of Treg cells by its growth factor IL-2 increases the ratio of regulatory cells to proinflammatory cells and can prevent over-stimulation of activated cell responses.
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Example diseases associated with a loss of control at this node: Inflammatory bowel disease, or IBD (including UC), Type I interferon-related diseases (including systemic lupus erythematosus, Sjögren’s Syndrome), autoimmune hepatitis, primary sclerosing cholangitis, rheumatoid arthritis, type 1 diabetes, alopecia areata and inflammatory myopathies
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Node: Inhibitory Checkpoints (i.e. PD-1)
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Mechanism: Attenuation of Immune Activation
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Description: a mechanism in which engagement of co-inhibitory receptors on responding cells of the immune system work to slow down the immune response. PD-1, for example, is an inhibitory checkpoint receptor that is naturally expressed by T cells following their activation. Agonism of the PD-1 inhibitory receptor on an activated T cell by its natural ligands, PD-L1 or PD-L2, interrupts the intracellular signaling machinery within the T cell, arresting the response, and returning the T cell to a state of quiescence. Agonist antibodies to inhibitory checkpoint receptors such as PD-1 can mimic the natural ligands by interrupting cell signaling and attenuate ongoing activated immune responses.
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Example diseases associated with a loss of control at this node: type 1 diabetes, vitiligo, IBD, rheumatoid arthritis, Type I interferon-related diseases, myasthenia gravis, scleroderma and myocarditis
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Node: Soluble Mediators (i.e. CD39)
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Mechanism: Microenvironment Immune Modulation
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Description: a mechanism in which local secretion of anti-inflammatory cytokines and/or local expression of energy depleting enzymes create a microenvironment that prevents further escalation of the immune response and promotes a return to quiescence. CD39 is a regulatory enzyme that is expressed on many immune cell types, including Treg cells. CD39 functions to convert adenosine triphosphate, or ATP, into adenosine monophosphate, or AMP, which is then, in conjunction with CD73, a partner enzyme, degraded into adenosine, which is an anti-inflammatory mediator. This mechanism thereby modulates the duration, magnitude, and chemical nature of extracellular signals delivered to immune cells and drives a shift from an ATP-driven proinflammatory microenvironment to an anti-inflammatory microenvironment induced by adenosine.
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Example diseases associated with a loss of control at this node: atopic dermatitis, IBD, rheumatoid arthritis, arterial vascular diseases and vasculidities, multiple sclerosis and type 1 diabetes
Dysregulation at immune control nodes can lead to a variety of autoimmune diseases as described above. Notably, these diseases can have systemic manifestations, local manifestations, or both. The systemic nature is evident for diseases such as systemic lupus erythematosus and systemic sclerosis, but is also more subtly evident for diseases such as IBD (of which UC is a subtype) and rheumatoid arthritis, whose prominent organ-based features rest on a variable multi-organ injury pattern. Other autoimmune diseases, such as autoimmune hepatitis, vitiligo and alopecia areata, have a dominant local manifestation.
Traditional therapies for the treatment of autoimmune disease rely on either broad, nonspecific immunosuppression, such as high-dose corticosteroids, or selective inhibition of a specific biologic pathway within the vast immune network, such as anti-cytokine monoclonal antibodies or anti-kinase small molecules. Despite successes of these treatments, the global dampening of immune network activity via systemic immunosuppression or targeted pathway inhibition can lead to intolerable long-term side effects or may not achieve an adequate or durable clinical response in some patients, and there are unmet medical needs for these patients.
Our Approach
We believe there is a need to fundamentally rethink the approaches historically utilized in autoimmune disease drug development. Current therapies for autoimmune disease based on broad immunosuppression or focused on inhibiting one pathway of the immune network often leave patients suffering from chronic residual disease or disease progression. We believe that broad immunosuppression and narrow pathway inhibition have shown limited clinical utility because the immune system is a self-recalibrating multi-scale network that is best addressed by treatments that mimic the action of known control nodes of the immune network.
Our approach leverages the natural regulatory mechanism of the immune system as the basis of novel immunoregulatory therapeutics, which was made possible in recent years due to the adoption of advanced protein engineering technology. We aim to re-balance the immune response from a state of activation to a state of ready quiescence by modulating known control nodes of the immune system network. We have combined our understanding of these nodes and advanced protein engineering techniques to create our TALON platform, which we are using to develop therapies to manipulate the immune system at its known control nodes. We believe this will enable us to design and develop treatments for autoimmune diseases that provide a durable clinical benefit.
Our TALON platform is based on the concept of modularity as indicated by the graphic below. We start with immune effector modules that we engineer to mimic the action of known immune control nodes. We can combine these effector modules with a protein backbone to create a portfolio of product candidates tailored to a given autoimmune disease. Specifically, we believe that we can design effectors to act systemically, or using a bifunctional format we can combine our effectors with antibody-based tissue-targeted tethers to concentrate the effector within the target organ. We believe that we have the potential to generate a diverse pipeline of next-generation product candidates to address significant unmet medical needs in autoimmune diseases.
Our modular approach to treat autoimmunity includes three key steps:
Engineering of Immunomodulatory Effectors. We select known control nodes and then engineer effector modules to specifically activate the primary mechanisms of control of the immune network as follows:
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Regulation of Immune Over-Reactivity (e.g. IL-2 Mutein): We have engineered an IL-2 mutein effector to specifically expand the Treg cells in order to activate an inherent immunoregulatory mechanism.
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Attenuation of Immune Activation (e.g. PD-1 Agonist): We have designed antibody-based effectors that stimulate a known inhibitory immune checkpoint, PD-1, in order to control an active T cell-based immune attack.
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Microenvironment Immune Modulation (e.g. CD39): We have designed effectors that are designed to mimic the function of CD39, a native anti-inflammatory enzyme within an immune microenvironment to suppress an active immune response.
Discovery of Tissue Tethers. We engineer antibody fragments that bind to specific proteins whose expression is restricted to certain cells within specific target organs. By intersecting this expression pattern with the site of immune attack in an autoimmune disease, we can discover tissue-tethered modules that concentrate their payload where needed. We then engineer and screen these tethers iteratively until we achieve the desired tether-protein interaction behavior. We have an expanding library of tether modules that may enable us to localize our immune effectors to the gastrointestinal tract, skin, kidney and pancreas.
Combination of Modules for Tailored Therapeutic Design. Utilizing our modular approach, we have the ability to design therapeutics with systemic or tissue-targeted effect. We can couple our effectors to a protein backbone to confer desired drug-like properties (e.g. half-life extension), resulting in a systemically active effector product candidate. We can also add a tether module designed to target a specific tissue, which results in a bifunctional molecule tailored to concentrate the effector at the local site of autoimmune attack. We believe that our ability to mix and match our library of immune effectors with our library of tissue-selective tethers will enable us to rapidly create an array of bifunctional molecules for localized delivery of the effector payload.
The above approach is designed to enable us to empirically test the biology of an effector, in both systemic and bifunctional format, before we commit to a development candidate to enter IND-enabling studies. We use a combination of functional screening, structural modeling, extensive molecular characterization and future manufacturability assessments to select candidates to advance that have the desired biological properties and attractive manufacturability attributes.
We use a conceptual, practical and strategic approach to deploying our TALON platform to inform our autoimmune drug development effort, as follows:
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Conceptual: Our re-appraisal of the immune system as a self-regulating network of interrelated pathways rather than a set of vertical pathways, led us to consider use of the manipulation of known immune control nodes rather than global dampening or pathway-blockade approaches. We believe this novel approach has the potential to result in therapeutics that can achieve clinical response rates and durability of clinical efficacy beyond what has been achieved using traditional drug development approaches for the treatment of autoimmune disease.
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Practical: Our TALON platform enables us to combine our immune effector modules, each of which utilizes a key yet distinct mechanism of immune system controls, with protein backbones to guide systemic delivery or tissue-selective delivery via creation of bifunctional molecules with tissue-tether selective modules. We believe that the flexibility of this modular approach allows us to efficiently match desired drug characteristics with the nuances of the disease we target. Specifically, we can choose which effector we wish to deploy, and the precise tissue in which we wish to deploy it, based on our understanding of how the immune attack of that disease unfolds in the body or in a specific organ.
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Strategic: We strategically select diseases of interest based on several factors guided by the conceptual and practical considerations noted above. Before we advance a program, we must have a baseline understanding of how that disease manifests: where in the body and within which organ it manifests, which immune control system is proving inadequate, and where current standards of care are inadequate. From that foundation, we consider diseases for which we may be able to ascertain evidence of clinical efficacy at an early stage of clinical development. These factors guide our strategic decisions regarding which programs to advance, for which disease(s) they may be ideally suited, and the line of sight to clinical proof-of-concept and regulatory review.
Our approach has led to the integrated drug development strategy depicted below.
Tethering Technology
The immune system can act in either a systemic or local manner, or both. For some autoimmune diseases, intervention at the systemic level is most appropriate. However, for autoimmune diseases that exhibit local manifestations, it can be challenging to administer a drug systemically and achieve a sufficient concentration of the drug at the target tissue for optimal therapeutic benefit.
We are leveraging our TALON platform to engineer bifunctional therapeutics that tether our immune effector payload to the specific location where the immunomodulator is most likely to interact with infiltrating or activated immune cells. We believe tissue tethering may offer the following benefits:
(1)
The ability to precisely localize the effector to the specific anatomical location within an organ where autoimmune attack is concentrated;
(2)
The ability to create a high local concentration of the desired immunomodulator in a specific anatomical region; and
(3)
An extended residence time of the effector at the site of action to increase the local pharmacokinetic exposure.
We believe that our ability to increase local concentration of our effectors over extended periods of time has the potential to elicit profound and sustained regulation of the local tissue resident immune system and drive towards induction of local tissue tolerance. Furthermore, the extended local exposure should avoid the need for prolonged systemic exposure and may alleviate some of the potential toxicities associated with global chronic immunosuppressive therapies.
Our Programs
PT101
Our lead product candidate, PT101, is an effector module comprised of an engineered variant of wild-type IL-2 fused to a protein backbone. Unlike wild type IL-2, which activates a broad array of immune cells, including conventional proinflammatory T cells and NK cells, we engineered PT101 through modifications of its amino acid sequence to activate and expand Treg cells selectively over proinflammatory cells. We believe that preferential activation and expansion of Treg cells, a natural regulatory component of the cellular immune system, will enable PT101 to rebalance a dysregulated immune network in the context of a wide variety of autoimmune diseases. Based on the dose-escalation data observed in our preclinical studies, PT101 has shown a high degree of selectivity for Treg cells over conventional proinflammatory T cells and NK cells.
We are developing PT101 for subcutaneous administration for the systemic treatment of a variety of autoimmune and inflammatory diseases, with an initial focus on the treatment of patients with UC and patients with SLE. We initiated a Phase 1a clinical trial of PT101 in healthy volunteers in Canada in February 2020, and we completed enrollment and dosing in October 2020. We reported top-line data from this trial in January 2021, in which PT101 was observed to be safe and well-tolerated, the primary objective of the trial. In the clinical trial, PT101 selectively expanded total Treg cells, with a mean maximal increase of up to 3.6-fold over baseline. PT101 also expanded a subset of activated Treg cells with high CD25 expression, known as CD25 bright Treg cells, with a mean maximal increase of up to 72.5-fold over baseline. CD25 bright Treg cells may be a more active subset of Treg cells with enhanced immune regulatory function. There was no evidence of expansion of NK cells and conventional T cells at any dose studied. At doses of 3.5 mg and above, PT101 induced a two-fold or greater expansion of total Treg cells in more than 80% of subjects. Treg cells returned to baseline or near-baseline over the 28-day follow-up period, supporting our plan to utilize an every-four-week dosing regimen of PT101 in future clinical trials.
All adverse events observed in the trial were low grade (Grade 1 or 2) and self-limited. The most common adverse events were skin reactions of itching, redness or pain near or around the site of injection of PT101. In laboratory tests, some subjects showed transient elevations of eosinophils, a type of white blood cell, that were self-limited in nature and did not require medical treatment. We believe that the eosinophil elevation may be related to the IL-2 mechanism of PT101.
Based on these results and subject to regulatory feedback, we plan to submit an IND to the FDA and an IMPD to the EMA and commence a global Phase 1b/2a trial in patients with UC in mid-2021. In addition, subject to further regulatory feedback, we plan to initiate a global Phase 2 clinical trial in patients with SLE in the second half of 2021.
Activating Treg Cells with IL-2 to Modulate Peripheral Tolerance
Treg cells are a specialized subpopulation of immune cells whose function is to regulate immune responses, maintaining equilibrium among immune cells and peripheral self-tolerance. Treg cells attenuate ongoing inflammatory processes by a variety of mechanisms that can suppress the activity of effector T cells. Deficiencies in the number or function of Treg cells, for example as seen in rare patient populations who have a genetic lack of Treg cells, are associated with a myriad of autoimmune and inflammatory diseases, including those affecting the intestine. We believe these observations suggest that Treg cells play a key role in maintaining balance in the immune system, self-tolerance, and guarding against autoimmune disease.
The generation, survival, and functional activity of various proinflammatory immune cells as well as immunomodulatory Treg cells are driven by IL-2. IL-2 has dual and opposing functions, specifically that of stimulating conventional T cells and NK cells to promote immune attack, as well as expanding and activating Treg cells to control those immune responses. For example, recombinant IL-2, or aldesleukin, has been utilized since its approval in 1998 for the treatment of metastatic melanoma and renal cell carcinoma. At recommended doses in the oncology setting, it acts by non-specifically expanding immune cells that express the IL-2 receptor. However, at low doses, aldesleukin has shown an ability to achieve selective Treg cell expansion with encouraging clinical efficacy in multiple autoimmune diseases. We believe that aldesleukin’s narrow therapeutic window of selectively expanding Treg cell without expanding selectivity for conventional T cells and NK cells, combined with the need for daily subcutaneous administration due to its short half-life, are hindrances to routine use of aldesleukin as a viable autoimmune therapy. At present, there are no approved treatments utilizing IL-2 for autoimmune disease.
We believe these observations present an opportunity for an engineered variant of IL-2 to selectively expand Treg cells. An engineered IL-2 could have the advantage of utilizing the immune system’s natural control mechanism (i.e., Treg cells) to stimulate self-tolerance, while minimizing proinflammatory immune responses (i.e., conventional T and NK cells). The expansion of proinflammatory immune cells detracts from that efficacy associated with the expansion of Treg cells in the context of autoimmunity. We believe a strategy by which to achieve such a Treg cell selective IL-2 mutein involves the engineering of a biased interaction of IL-2 with specific components of its receptor.
The IL-2 receptor, or IL-2R, is comprised of three subunits: α, ß and g. These subunits combine to form two receptor formats with varying affinity for IL-2, as follows:
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The low affinity format: IL-2Rß plus IL-2Rg as found on conventional T and NK cells; and
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The high affinity format: IL-2Rα, IL-2Rß and IL-2Rg, as found on Treg cells.
In order to engineer IL-2 for selective Treg cell expansion, IL-2 may be modified to preferentially engage with the high affinity format receptor.
There are two potential approaches to achieve this, with several active clinical-stage programs exploring both of these approaches, as follows:
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Direct mutation of key amino acids of the IL-2 protein, referred to as an IL-2 mutein; and
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Pegylation, which involves the chemical addition of polyethylene glycol to IL-2
We believe direct mutation of IL-2 is a preferable approach as it allows for more control over the engineering of IL-2 and activity of the molecule and increases the potential for greater selectivity for Treg cells expansion over other types of immune cells, such as conventional T cells and NK cells. This selectivity could translate into the desired outcome of a wide therapeutic margin, whereby the product candidate can selectively expand Treg cells to a desired level without expanding proinflammatory immune cells.
In order to implement the direct mutations to create an IL-2 mutein, specific amino acid substitutions in wild type IL-2 are introduced to alter binding affinity to the different IL-2R subunits. IL-2 muteins that bind less favorably to IL-2Rß induce a signal only when IL-2Rα is expressed. As a result, these IL-2 muteins have the ability to preferentially activate Treg cells at concentrations that do not stimulate conventional T or NK cells. This biased binding away from IL-2Rß has been achieved by third parties by mutating the 88th amino acid in IL-2, or N88. Published literature suggests that N88 plays a role in creating Treg cell selectivity. The effect of the engineering of PT101 to increase IL-2Rα affinity and decrease IL-2Rß is shown in the graphic below.
Although significant progress has been made in the development of IL-2 muteins, we believe that an optimal IL-2 mutein would be a molecule that achieves a high degree of selectivity for Treg cells over conventional proinflammatory T cells and NK cells, exhibits molecular stability to reduce manufacturing complexity and minimizes the potential for immunogenicity. We believe that our approach resulted in a modified variant of IL-2 with potentially enhanced Treg cell selectivity beyond IL-2 muteins that rely on N88 or similar mutations. Literature reports suggest other IL-2 mutein programs in development exhibited an eventual loss of selectivity resulting in expansion or activation of conventional proinflammatory T cells and/or NK cells at high concentrations in preclinical studies. However, to date, we have not observed such a loss of selectivity with PT101, our IL-2 mutein, in preclinical studies of non-human primates, or in a Phase 1a clinical trial in healthy volunteers.
Rationale for Systemic PT101 for the Treatment of Patients with UC
PT101 is our IL-2 mutein effector module fused to a protein backbone. We designed PT101 as a systemic treatment to selectively expand Treg cells without having a meaningful effect on other immune cell types, particularly proinflammatory conventional T and NK cells. We believe that PT101 has the potential to treat a broad array of autoimmune diseases. We are initially focusing clinical development of PT101 for the treatment of patients with UC. Our focus on PT101 as a systemic treatment for patients with UC derives from the three core tenets of our drug development approach:
(1)
Conceptual Rationale (i.e. targeting the right immune control node): The prevailing hypothesis in UC is that the number and/or response of native Treg cells is inadequate. This hypothesis is supported by findings from a recently published open-label clinical trial of low-dose aldesleukin in patients with UC that was conducted by Dr. Scott Snapper, a member of our scientific advisory board. In this trial, 24 patients with moderate-to-severe drug-refractory UC were treated with aldesleukin at three low dose levels. The highest dose was abandoned due to loss of tolerability that was attributed to a loss of selectivity for Treg cells. The data from the trial showed evidence of approximately two-to-four
fold expansion of systemic Treg cell populations. After eight weeks of daily subcutaneous treatment, 10 of 24 patients achieved either a response or remission, with five of these patients achieving remission. In the lowest dose group, one of four patients achieved a remission and in the higher-dose group, nine of 15 patients achieved a response or remission. We believe that these data represent strong evidence that the Treg cellular pool can be expanded for clinical gain in the treatment of patients with moderate-to-severe UC.
(2)
Practical Rationale (i.e. tailoring systemic vs. local therapy): IBD, including UC, has both local (colonic) as well as extra-intestinal (arthritic, ocular and dermal) manifestations. The therapies currently approved for treatment of patients with moderate-to-severe UC are in general systemically active. The clinical evidence noted above that systemic Treg cell expansion can exert disease control in patients with UC further bolsters our view of treatment of IBD in a systemic manner. We believe these observations support the premise for PT101 as a systemic therapy for patients with moderate-to-severe UC.
(3)
Strategic Rationale (i.e. establishing line of sight to clinical efficacy): The aldesleukin trial conducted by Dr. Snapper referenced above suggests that a treatment that promotes Treg cell expansion could achieve initial disease control in approximately eight weeks, which suggests that an IL-2-based therapy could establish proof-of-concept based on clinical parameters in Phase 1 and Phase 2 clinical trials, rather than relying on biomarkers that suggest future clinical efficacy. We believe a strategy of achieving clinical proof-of-concept in early clinical trials affords the opportunity to reduce the risks associated with later-stage clinical development.
Ulcerative Colitis
UC is one of the principal sub-types of IBD, a chronic progressive autoimmune and inflammatory condition. In UC, the mucosal lining of the large intestine becomes inflamed, which results in the formation of ulcers. Patients with UC suffer from several gastrointestinal symptoms, including diarrhea, rectal bleeding and weight loss, with risk of more severe complications, including colonic perforation and systemic toxicity. Although UC primarily involves the bowel, it is also associated with manifestations in other organ systems, including joints, eyes and skin. UC is characterized by a chronic course of remissions and exacerbations of various intensity and severity.
UC typically onsets during young adulthood and approximately 25% of UC cases are diagnosed before the age of 20. According to a report cited by the Crohn’s and Colitis Foundation, as of 2011, there were approximately 907,000 people with UC in the United States and the incidence of UC is estimated to be 12.2 per 100,000 people, or approximately 38,000 new cases per year in the United States. We estimate that, based on a report published by GlobalData, the worldwide market for UC treatments was over $5 billion in 2016 and will grow to over $7 billion by 2026.
Treatment Paradigm for UC
The current standard-of-care for the treatment of patients with UC is primarily immunosuppressive therapies. Treatment choices depend on the severity of the disease and a patient’s responsiveness to treatment. The medications commonly used to treat patients with moderate-to-severe UC have a higher risk of toxicity. Specifically, corticosteroids are generally used to induce clinical remission, but treatment with corticosteroids is associated with multiple adverse effects. Additionally, of the patients who initially respond to corticosteroids, approximately 28% become steroid-dependent and approximately 38% require surgical resection of the large intestine within a year of treatment. Approximately 20-30% require a colonic resection, which is curative but can result in debilitating complications.
Patients with moderate-to-severe UC who become nonresponsive or intolerant to corticosteroids are typically advanced to treatment with anti-TNF biologics, anti-integrin biologics, or a Janus kinase, or JAK, inhibitor. In general, these therapies have shown waning efficacy when comparing clinical response rates from 12 to 52 weeks. Some advanced therapies can have a delay in onset of up to three months, and can result in neutropenia, pancreatitis, nephrotoxicity, hepatotoxicity or thrombotic complications. Additional therapies for the treatment of UC are in clinical development, including oral sphingosine-1-phosphate receptor-1, or S1P1, and oral integrin inhibitors, which focus on immunosuppression or interference in immune cell migration.
We believe that PT101 represents a novel approach to the treatment of UC and may enable us to address patients with moderate to severe UC by rebalancing the immune network via selective expansion of Treg cells and subsequent restoration of normal immune homeostasis in the intestine.
Rationale for Systemic PT101 for the Treatment of Patients with SLE
We are also planning to develop PT101 for the treatment of patients with SLE. Our focus on PT101 as a systemic treatment for patients with SLE derives from the three core tenets of our drug development approach:
1.
Conceptual Rationale (i.e. targeting the right immune control node): The cause of SLE is unknown, however, we believe the inability of Treg cells to control conventional T cells and B cells either through Treg dysfunction or inadequate Treg levels contributes significantly to the disease pathology. We believe that selectively expanding Treg cells could be a viable treatment approach to rebalance the immune system. Our hypothesis is supported by findings from several clinical studies of IL-2. In one clinical study published in the Annals of the Rheumatic Diseases, a single patient with refractory SLE was treated with low-dose IL-2 and showed a reduction of disease activity, as measured by the systemic lupus erythematosus disease activity index, corresponding with an expansion of Treg cells. Data from another clinical trial published in the Annals of the Rheumatic Diseases, in which five patients were given daily injections of subcutaneous low-dose IL-2 for five days and while clinical efficacy was not measured, these patients showed an expansion of Treg cells. In addition, the loss of CD25 expression seen in the patients’ Treg cells prior to treatment was corrected with low-dose IL-2 treatment. In a double-blind, placebo controlled clinical trial of low-dose IL-2 published in Annals of the Rheumatic Diseases, 60 patients with active SLE were treated with low dose IL-2 or placebo for 12 weeks. 65.52% of patients treated with low-dose IL-2 vs. 36.67% of patients treated with placebo showed clinical response at 24 weeks as measured by the SLE responder index-4. Findings from a recently published open-label trial of low-dose IL-2 in 12 patients with SLE that were treated for five days showed that eight patients with SLE had a clinical response as measured by global clinical impression. Further evidence supporting a modified IL-2 therapy in SLE were presented at the American College of Rheumatology Annual Meeting in 2020, which showed preliminary evidence of dose dependent improvements in skin outcomes and an increase in Treg cells in patients with mild to moderate SLE in a Phase 1b clinical trial of a pegylated IL-2 product candidate. We believe these data provide a strong rationale that Treg expansion can provide clinical benefit for patients with SLE.
(2)
Practical Rationale (i.e. tailoring systemic vs. local therapy): SLE is a prototypical systemic autoimmune disease, affecting many major organ systems. Therefore, we believe treatment with PT101 as a systemic therapy is most appropriate for SLE.
(3)
Strategic Rationale (i.e. establishing line of sight to clinical efficacy): Data from the clinical trials mentioned above suggest that treatment that promotes an approximately two-fold expansion of Treg cells achieved disease control following 12-24 weeks of treatment. We believe that an IL-2-based therapy could suggest proof-of-concept based on clinical parameters in Phase 2 clinical trials, and a strategy of achieving clinical proof-of-concept in mid-stage clinical trials affords the opportunity to reduce the risks associated with later-stage clinical development.
Systemic Lupus Erythematosus
SLE is a chronic autoimmune disease. It typically affects the skin, joints and internal organs, including the kidneys, heart and brain. The severity of SLE can range from mild to life-threatening. Serious complications of SLE include inflammation of the kidneys, or lupus nephritis, which can lead to end stage kidney disease, which in turn often requires dialysis or kidney transplant; cerebritis, or inflammation of the brain which can lead to seizures, stroke or death; and hardening of the arteries, which can lead to a heart attack or heart failure. Overall, SLE increases the risk of death compared to healthy individuals. Most patients experience periods of disease activity, or flares, and periods of remission, which can occur frequently or years apart, regardless of whether the patient is on therapy. SLE often negatively impacts patients’ lives leading to impaired quality of life and increased work disability.
According to the Lupus Foundation of America, approximately one million people in the U.S. are living with SLE, with approximately 11,000 new cases reported each year. SLE most frequently affects women of childbearing age, with 90% of the cases being in women and most cases having developed between the ages of 15 and 44. We estimate that, based on a report published by GlobalData, the worldwide market for SLE treatments was over $935 million in 2018 and will grow to over $1.6 billion by 2028.
Treatment Paradigm for SLE
There is no cure for SLE. Current treatments focus on suppressing chronic inflammation and preventing the progressive organ damage. The treatments used vary depending on the severity and location of the disease manifestation. The current standard of care for the long-term treatment of SLE is hydroxychloroquine. Corticosteroids, nonsteroidal anti-inflammatory drugs, and immunosuppressive agents are also used in the treatment and management of SLE. We believe current treatments are only modestly effective and present safety and/or immune suppression concerns with prolonged use.
In 2011, the FDA approved the first drug for SLE in more than 50 years, belimumab, an antibody that targets B lymphocyte stimulator, in combination with standard therapy. However, the modest therapeutic benefit of belimumab and delayed onset of improvement in disease activity suggest the need for additional therapeutic strategies for patients with SLE. More recently, in randomized controlled clinical trials, anifrolumab, an antibody that binds to a subunit of the type I interferon receptor in development
by AstraZeneca, has shown to benefit patients with SLE in clinical trials and AstraZeneca has disclosed plans to submit to the FDA for approval. We believe, based on published anifrolumab data, that additional therapies for SLE will still be needed even if it is approved.
We believe that PT101 represents a novel approach to the treatment of SLE and has the potential to restore normal immune homeostasis throughout the organ systems involved in SLE in patients.
Clinical Development of Systemically Delivered PT101
Phase 1a Clinical Trial of PT101 in Healthy Volunteers
We filed a clinical trial application, or a CTA, with Health Canada in December 2019, and we commenced our Phase 1a clinical trial of PT101 in Canada in February 2020. We completed enrollment and dosing in October 2020 and reported positive top-line data in January 2021.
The Phase 1a clinical trial was a randomized, double-blind, placebo-controlled single dose escalation trial in healthy adult subjects. The trial enrolled 56 healthy subjects across seven cohorts who each a received a subcutaneous fixed dose of placebo or PT101 ranging from 1.0 mg to 10.0 mg. Each cohort enrolled eight subjects who were randomized 3:1 (six active subjects and two placebo subjects). Subjects were followed for 28 days after dosing. The primary objective of the trial was to evaluate the safety and tolerability of PT101 following a single subcutaneous administration. The secondary objectives include evaluation of the drug-response (pharmacokinetic/pharmacodynamic) relationship, including the response of Treg cells as well as other types of immune cells, as an assessment of the selectivity of PT101 in order to establish proof of mechanism.
Prior to each dose escalation, there was a formal review by an independent, multi-disciplinary safety review committee, or SRC. The SRC was charged with reviewing in an unblinded manner the safety, tolerability, pharmacokinetic (PK) and pharmacodynamic (PD) study data and making further dose recommendations for the trial. After three cohorts had been dosed, the SRC reported that PT101 elicited what we believe to be its maximum total Treg cell response without eliciting a loss of selectivity as characterized by an observation that levels of conventional T cells and NK cells did not significantly increase. Accordingly, we and the SRC believed the Phase 1a trial had explored the full dose range of PT101. We therefore dosed additional cohorts within the already tested range. Doses tested were as follows: placebo (n= 14 subjects), 1.0 mg (n=6 subjects), 3.5 mg (n=12 subjects), 5.0 mg (n=12 subjects), 7.5 mg (n=6 subjects) and 10.0 mg (n=6 subjects).
We observed the following results in our Phase 1a clinical trial.
PT101 was Observed to be Safe and Well-Tolerated. Safety and tolerability were the primary objective of the clinical trial. There were no serious adverse events or dose-limiting toxicities reported in the trial and no subject withdrew from the trial. We did not observe any clinically important changes in vital signs or electrocardiograms. All of the reported adverse events were low grade (Grade 1 or 2), self-limited, reversible, and monitorable. The most frequently reported adverse events were Grade 1 injection site reactions of itching, redness or pain. Self-limited skin reactions extending beyond the injection site occurred in some subjects at the 7.5 mg and 10.0 mg doses. Mild Grade 1 dyspnea was reported in three subjects with no physical exam findings, no limitation in activity, and no requirement for treatment. Grade 2 adverse events were only observed in the 10.0 mg cohort. In laboratory tests, some patients showed transient elevations in the number of eosinophils, a type of white blood cell, that were self-limited in nature and did not require medical treatment. We believe that the eosinophil elevation may be related to the IL-2 mechanism of PT101. These laboratory findings were self-limited, did not require medical treatment, and were not deemed adverse. Changes in eosinophil levels have been reported after treatment with both native IL-2 and other modified IL-2s. We believe changes in eosinophil levels may represent an on-mechanism effect for drugs that stimulate the CD25 receptor, such as PT101. We did not observe any induction of anti-drug antibodies.
The table below presents the number of adverse events at each dose level.
Placebo
(n=14)
1.0 mg
(n=6)
3.5 mg
(n=12)
5.0 mg
(n=12)
7.5 mg
(n=6)
10 mg
(n=6)
Number with any AE (%)
3 (21%)
2 (33%)
3 (33%)
4 (33%)
4 (67%)
4 (67%)
PT101 Selectively Expanded Total Treg Cells. PT101 expanded total Treg cells with a mean maximal increase of up to 3.6-fold over baseline as measured in serum, which was achieved in the 3.5 mg dose. Mean maximal increase in total Treg cells was 1.4-fold in placebo, 1.8-fold in subjects treated with 1.0 mg of PT101, 3.6-fold in subjects treated with 3.5 mg, 3.5-fold in subjects treated with 5 mg, 3.4-fold in subjects treated with 7.5 mg and 3.2-fold in subjects treated with 10 mg. At doses of 3.5 mg and above, PT101 induced a two-fold or greater expansion of total Treg cells in more than 80% of subjects. Treg cells returned to baseline or near baseline over the 28-day follow-up period, supporting our plan to utilize an every four week dosing regimen in future clinical trials.
PT101 Expanded CD25 Bright Treg Cells. PT101 expanded CD25 bright Treg cells with a mean maximal increase of up to 72.5-fold over baseline, which was achieved in the 3.5 mg dose. CD25 bright Treg cells are a subset of activated Treg cells with high expression of CD25, which is also known as the IL-2 receptor alpha subunit. CD25 bright Treg cells may be a more active subset of Treg cells with enhanced immune regulatory function. Mean maximal increase in the CD25 bright subset of Treg cells was 3.4-fold in placebo, 8.6-fold in subjects treated with 1.0 mg of PT101, 72.5-fold in subjects treated with 3.5 mg, 54.1-fold in subjects treated with 5 mg, 51.6-fold in subjects treated with 7.5 mg and 37.4-fold in subjects treated with 10 mg.
Placebo
(n=14)
1.0 mg
(n=6)
3.5 mg
(n=12)
5.0 mg
(n=12)
7.5 mg
(n=6)
10 mg
(n=6)
Mean peak fold expansion of Total Treg cells (SEM)
1.4 (±0.08)
1.8 (±0.31)
3.6 (±0.66)
3.5 (±0.37)
3.4 (±0.57)
3.2 (±0.24)
Mean peak fold expansion of CD25bright Treg Subset (SEM)
3.4 (±0.49)
8.6 (±3.33)
72.5 (±26.39)
54.1 (±8.89)
51.6 (±17.17)
37.4 (±6.93)
SEM = standard error of the mean
There was no Evidence of Expansion of NK Cells and Conventional T Cells. We did not observe evidence of expansion of NK cells and conventional T cells, which included both CD4 and CD8 T cells. Across all doses and at multiple timepoints post treatment with PT101, circulating levels of conventional T cells and NK cells remained within the normal baseline range.
In June 2020, we received written pre-IND feedback from the FDA regarding the design of our planned Phase 1b/2a clinical trial of PT101 in patients with UC. We plan to submit an IND in the first half of 2021 that will include data from the Phase 1a clinical trial and IND-enabling studies as well as manufacturing data.
Subject to regulatory feedback, we expect to commence a global Phase 1b/2a clinical trial of PT101 in adult patients with moderate-to-severe UC at multiple sites in the United States, Canada and Europe in mid-2021. The planned Phase 1b/2a trial design will incorporate key learnings from pivotal trials of drugs approved for the treatment of UC. The planned target patient population will include patients who have had an inadequate response or intolerance to prior therapies, including corticosteroids, biologics or JAK inhibitors. We anticipate that this trial will be a randomized, double-blind placebo-controlled trial to further evaluate the safety and pharmacodynamics of PT101, and to assess its preliminary clinical efficacy, characterized by an improvement in clinical, histologic, and endoscopic disease activity.
In addition, and subject to further regulatory feedback, we plan to initiate a global Phase 2 clinical trial of PT101 in adult patients with SLE. We anticipate that this clinical trial will be a randomized, double-blind, placebo-controlled trial to evaluate the safety, pharmacodynamics and preliminary clinical efficacy of multiple doses PT101 in patients with SLE. We plan to initiate the trial in the second half of 2021.
Preclinical Studies of Systemically Delivered PT101
In our preclinical studies we have observed that PT101 selectively activated Treg cells in vitro and selectively expanded Treg cells in vivo. We have not observed significant activation or expansion of other types of immune cells, including conventional T cells or NK cells, at any investigated dose in non-human primates.
We conducted a preclinical study comparing the activity of wild-type IL-2 and PT101 on isolated human blood cells in vitro. We evaluated the phosphorylation of signal transducer and activator of transcription 5, or STAT5, which is a molecule downstream of IL-2R signaling that is commonly used to assess cellular activation by IL-2. With increasing doses of wild-type IL-2, we observed evidence of activation (i.e. pSTAT5) in conventional T cells, Treg cells and NK cells. With increasing doses of PT101, we only observed evidence of activation in Treg cells. We did not observe evidence of cellular activation in conventional T cells (Tconv) or NK cells in response to PT101, even at high doses in the micromolar range, suggesting PT101 may have a high degree of Treg cell selectivity.
We evaluated the in vivo activity of PT101 in cynomolgus monkeys in a time-course study. In this study, we administered a single subcutaneous injection of PT101 at day 0, and then evaluated the fold change in the number of Treg cells in the blood of individual monkeys at various timepoints over 28 days (n=24 monkeys, with six per group). As shown by the figure below, we observed an approximately 40-fold increase in the absolute Treg cell numbers in the higher dose group, which peaked after day six. The Treg cell numbers were approximately two-fold elevated at the end of the study.
We also evaluated the cellular selectivity of PT101 in cynomolgus monkeys in the same time-course study described above. The figure below shows the fold-change over baseline in the number of Treg cells as compared to other immune cell types at day seven (n=6 monkeys, highest dose group). Other than the expansion of Treg cells, we observed minimal changes in other immune cell types, which suggests that administration of PT101 resulted in a high degree of Treg cell selectivity.
In the same time-course study described above, we evaluated the magnitude of Treg cell expansion across the different dose levels of PT101. We compared Treg cell numbers seven days after a single subcutaneous administration of PT101 at three different dose levels (n=6 monkeys/group). The dose levels were selected to be approximately equivalent to 3, 10 and 30 times the minimum efficacious dose, or MED, which we defined as the lowest dose that elicited Treg cell expansion in other preclinical studies in humanized mice. We observed a dose-dependent increase in Treg cell numbers in response to increasing doses of PT101 in cynomolgus monkeys in vivo.
In addition to the preclinical studies described above, we conducted a 28-day good laboratory practice, or GLP, toxicology study of PT101 in cynomolgus monkeys. We administered PT101 weekly for four weeks, at three different dose levels and evaluated safety, tolerability and cellular responses (during dosing and the four-week recovery period) in six monkeys. The three different dose levels were selected to be approximately 10, 60 and 300 times the MED. Across all dose levels, we did not observe any adverse events, setting our no-observed-adverse-effect-level at a dose level equivalent to approximately 300 times the MED. We observed increases in Treg cells at each dose level without an increase in other immune cell types, including conventional T cells and NK cells, suggesting that administration of PT101 resulted in a high degree of selectivity for Treg cells, including at doses approximately 300 times higher than the MED.
We conducted a six-month GLP toxicology study of PT101 in cynomolgus monkeys. In this study, we administered PT101 weekly for six months at three different dose levels, which were selected to be approximately 10, 60 and 300 times the MED. Within the first three months of treatment in this ongoing study, we observed progressive skin rash in two of 14 monkeys in the mid-dose group and ten of 18 monkeys in the high-dose group. The skin findings were considered monitorable and reversible.
Across our preclinical studies we have observed preferential selectivity of PT101 for activating and expanding Treg cells over other immune cell types such as conventional proinflammatory T cells and NK cells in vitro and in vivo, even at high doses. In dose response studies in vivo, we observed a predictable dose-responsive expansion of Treg cells, without loss of selectivity. We did not observe a loss of selectivity in in vitro or in vivo studies in cynomolgus monkeys with doses equivalent to approximately 300 times the MED.
Tethered IL-2 Mutein
For autoimmune diseases where local drug effect may be desirable, we employed the modularity of our TALON platform to design PT101 to expand Treg cells in precise regions of target organs. We engineered a bifunctional molecule with a tissue-selective tether designed to guide delivery of the IL-2 mutein effector module to a specific tissue and to drive high local concentrations of the effector with prolonged residence times within the organ of interest.
To create a tethered IL-2 mutein, we set out to design a bifunctional molecule without altering the activity of the IL-2 mutein component, and to retain selectivity for expansion of Treg cells over conventional T cells and NK cells even at high local concentration.
PT002: MAdCAM-tethered-IL-2 mutein
PT002 is tethered bifunctional molecule that utilizes our IL-2 mutein effector module coupled with a MAdCAM-tether module. PT002 is designed to deliver the IL-2 mutein effector to the gastrointestinal tract where MAdCAM is expressed. MAdCAM is a protein that is expressed on specialized small blood vessels, known as high endothelial venules, or HEV, in the gastrointestinal tract. MAdCAM controls the selective migration of gut-homing immune cells from circulation into the underlying mucosal tissues of the gastrointestinal tract. MAdCAM expression is increased on the HEV in the gastrointestinal tract in response to inflammation. MAdCAM can also be induced under inflammatory conditions on the HEV in other organs, such as the liver and pancreas.
We designed PT002 to present a stimulatory signal for selective Treg cell expansion as these cells interact with MAdCAM to enter the wall of the gastrointestinal tract, or liver or pancreas. Published literature suggests immune cells must interact with MAdCAM for trafficking into the gut, and we believe that MAdCAM represents a compelling target to deliver a localized IL-2 mutein. We are currently conducting preclinical studies of PT002.
PD-1 Agonists
PD-1 is a protein natively expressed by activated T cells and serves as a checkpoint for the attenuation of immune activation. We have two research-stage PD-1 agonist programs: PT627 and PT001. PT627 is a systemic PD-1 agonist for which we initiated IND-enabling studies in the fourth quarter of 2020. PT001 is a PD-1 agonist effector module fused with a MAdCAM-selective tissue tether module to drive localization to the gastrointestinal tract, and we plan to initiate IND-enabling studies in the first half of 2021.
Immune Checkpoints and Immune System Control with PD-1 Agonists
Immune cells patrolling the body can rapidly activate powerful cellular defense mechanisms in response to invading pathogens. Immune cell activity is controlled by many activating and inhibitory factors, including activating receptors and inhibitory receptors, or checkpoints, which are expressed at the surface of these cells. Checkpoint proteins function as important control nodes within the immune network and are critical for development of self-tolerance, in order to prevent the immune system from attacking a host’s own cells indiscriminately.
PD-1 is an inhibitory receptor that is naturally expressed by T cells following their activation. PD-1 responds to two primary ligands, PD-L1 and PD-L2. Stimulation of PD-1 on T cells suppresses the T cell receptor and costimulatory receptor signaling pathways, thereby promoting cellular exhaustion, functional inactivation, and programmed cell death.
Mutations and disruptions in the interactions between PD-1 and its ligands have been associated with numerous autoimmune diseases such as systemic lupus erythematosus, rheumatoid arthritis and type 1 diabetes. In oncology, blocking the interaction between PD-1 and its ligands using checkpoint inhibitors has been associated with autoimmune adverse events in clinical trials. These data provide evidence that checkpoints such as PD-1 play a fundamental role in regulating normal immune responses. We believe that
inducing signaling through these checkpoint receptors may switch off detrimental immune responses and drive the immune system back toward a state of tolerance after control has been lost in autoimmune disease. The stimulation of PD-1 may have the potential to benefit patients in a wide array of autoimmune and inflammatory diseases.
Systemic PD-1 Agonist: PT627
Based on the understood biology of PD-1, we believe agonism of PD-1 is an approach to intervene in ongoing activated T cell responses to prevent excessive and uncontrolled reactivity that can result in damage to host tissues. For a compound to act as a PD-1 agonist however, it must bind to, and be capable of delivering a signal through, the native PD-1 receptor. For most PD-1 agonists described to date, the delivery of that signal has required the agonist to be attached to a cell surface.
We are currently in preclinical development of PD-1 agonist antibody-based effectors that mimic the inhibitory effects of PD-1 without blocking the natural interaction between PD-1 and its ligands. Our efforts have generated PT627, a PD-1 agonist that does not require surface binding and retains its function when free floating in solution. Given the potential of PT627 to inhibit PD-1 within tissues as well as in the bloodstream, we believe it represents a markedly differentiated approach to PD-1 agonism.
We are currently conducting IND-enabling studies of PT627. We plan to file an IND with the FDA in 2022.
Tethered PD-1 Agonists: PT001
Published evidence suggests that PD-1 action is a local phenomenon, that is within restricted regions of organs where an active immune process is ongoing. Consistently, there is evidence from published clinical trials that treatment with PD-1/PD-L1 checkpoint antagonists for oncology can induce organ-specific autoimmune injury, most prevalent in the intestine (autoimmune colitis), liver (an autoimmune-like hepatitis), skin (vitiligo and alopecia), and thyroid, and there is evidence that beta cell destruction may lead to type 1 diabetes.
Utilizing a PD-1 effector module fused to a tissue-tether module, we believe we can guide delivery of a PD-1 immune effector payload to the specific tissue location of immune attack for a given disease. PT001 is our bifunctional MAdCAM-tethered-PD-1 agonist utilizing the effector module of PT627. We designed the effector module to present both a systemic, as well as a concentrated local, PD-1 agonist signal. Specifically, we designed PT001 to concentrate its signal at the point of entry for inflammatory cells as these cells interact with MAdCAM as they migrate into the gastrointestinal tract wall, or liver or pancreas. Published literature suggests immune cells must interact with MAdCAM for trafficking into the gut, and we believe that MAdCAM represents a compelling target for localized PD-1 agonism presentation. We are currently conducting preclinical studies of PT001 and plan to begin IND-enabling studies in the first half of 2021.
Preclinical Studies of PT627 and PT001
In our preclinical studies we identified multiple PD-1 agonist antibodies that attenuate immune responses in vitro and in vivo. We conducted a series of in vitro functional screens to identify and prioritize antibodies with agonist, but not antagonist, activity for the PD-1 inhibitory receptor. In these discovery efforts, we prioritized antibodies that agonized PD-1 to attenuate immune activity without interfering with natural ligand binding.
We conducted three in vitro functional screening assays to prioritize our PD-1 antibodies. The first in vitro functional screen used a reporter cell line and was designed to identify, and then eliminate, any PD-1 antibodies that interfered with or blocked the natural ligand binding site. As shown in the left figure below, we used pembrolizumab, a checkpoint antagonist, as a positive control for identifying unwanted checkpoint antagonist activity. We screened a panel of PD-1 antibodies and selected only PD-1 antibodies, including PT627, that did not exhibit checkpoint antagonist activity when compared with pembrolizumab.
The second and third in vitro functional screens used the reporter cell line but were designed to identify, and then select for further study, PD-1 antibodies that could directly agonize PD-1. We screened our panel of PD-1 antibodies in a surface-bound assay format (middle figure below) and a soluble assay format (right figure below). We identified a number of PD-1 agonist antibodies, including PT627, that exhibited agonist activity when evaluated in this surface-bound assay format. However, we identified only one antibody, PT627, that additionally exhibited agonist activity in a soluble assay format. Each of the figures below shows the PD-1 signaling complex formation of the molecules being tested. The PD-1 signaling complex formation is measured using a light-based method in which a high value signals activity and a low value signals a lack of activity.
Collectively, we believe these observations suggest PT627 may have a differentiated profile because of its ability to induce PD-1 agonism in a soluble format without requiring surface binding. We believe that PT627 may be a differentiated antibody in which PD-1 agonism may be achieved without requiring cell binding.
We evaluated the immunomodulatory activity of PT627 in a humanized mouse xenogeneic graft-versus-host disease, or xeno-GvHD, model, an aggressive model of multi-organ autoimmune injury. In this model, human blood cells are grafted into immunodeficient mice. The grafted immune cells reacted to the host mouse tissues causing wide-spread, multi-organ inflammation, and a rapid loss of life. We dosed xeno-GvHD mice with PT627 at weekly intervals beginning ten days after engraftment and continued through day 72. As show in the figure below, we observed a delayed onset of disease in xeno-GvHD mice treated with PT627 compared with vehicle treated mice (n=15 mice/group). These observations suggest PT627 may attenuate or delay the broad in vivo inflammatory responses associated with the xeno-GvHD model.
We designed PT001 to guide and concentrate the PD-1 agonist component of the bifunctional molecule to the MAdCAM-expressing HEV in the gastrointestinal tract. We first evaluated the ability of PT001 to localize to the MAdCAM-expressing HEV in the gastrointestinal tract in vivo. We injected PT001, or the untethered-control test article, subcutaneously into mice with chemically induced intestinal inflammation. Seven days after dosing, we harvested the intestines and stained the tissues by immunohistochemistry. We detected PT001 as indicated by the brown staining in the image on the right below with the expected tissue distribution pattern in the gut, but we did not detect untethered control test article. These observations suggest that PT001, but not untethered-control molecules, is able to localize to the HEV in the gastrointestinal tract in vivo following subcutaneous dosing in mice.
We next evaluated the in vivo immunomodulatory activity of PT001 in the humanized mouse xeno-GvHD model. We dosed xeno-GvHD mice with PT001 at weekly intervals beginning at day 10 after engraftment and continuing through day 72. We observed a distinct survival advantage in xeno-GvHD mice treated with PT001 compared to vehicle or control treated mice or mice treated with PT627 (n=15 mice/group). We observed that the survival advantage in mice treated with PT001 extended a number of weeks beyond the end of the dosing period. These studies suggest that tethering a PD-1 agonist can have a beneficial immunomodulatory effect that is differentiated from the beneficial immunomodulatory effect observed with a soluble PD-1 agonist.
In February 2021, we presented preclinical data of PT001 at the Network for Pancreatic Organ Donors with Diabetes 13th Annual Scientific Meeting. The research, done in collaboration with St. Vincent’s Institute of Medical Research in Australia and funded by JDRF and the JDRF T1D Fund, showed that PT001 treatment delayed the onset of hyperglycemia in a mouse model of type 1 diabetes.
In summary, observations from our preclinical studies suggest PD-1 agonist antibodies can attenuate immune responses in vitro and in vivo. Although PT627 and PT001 exhibited different activity profiles, we observed promising immunomodulatory effects with both PD-1 agonists in the xeno-GvHD mouse model. Preclinical data presented at the Annual FOCIS Meeting in 2020 showed that in cell-based assays, our PD-1 agonists suppressed the gene and protein expression of many known immune activation pathways, suggesting that these agonists could be a promising treatment approach for autoimmune diseases.
We believe that we can create a pipeline of molecules by mixing and matching our immunomodulatory immune effectors with different tissue-tether components from our library of tissue tethers to drive localization to different organs. By switching the MAdCAM tissue-tether component for a tissue-tether component that drives localization to a different organ, we believe that we have the ability to build a broad portfolio of tissue-tethered PD-1 agonists that can be deployed to deliver localized immunomodulatory therapy to different parts of the body for treating a wide array of other diseases.
The potential of our tissue-tethered PD-1 bifunctional molecules to localize to organs to contribute to the maintenance of normal immune homeostasis, contribute to the resolution of inflammation, and be associated with better disease prognosis affords us the opportunity to attenuate the local inflammatory response and restore tissue tolerance in a targeted manner while potentially sparing the systemic immune system.
Discovery Programs
Induction of local immunomodulation via bifunctional TALONs
Skin-Tethered CD39
CD39 is an extracellular enzyme that is expressed on the surface of numerous immune cells. It is regarded as an immune checkpoint in that it functions to inhibit the immune system by degrading ATP into AMP. Extracellular ATP acts as a danger signal, binding to cell surface receptors and activating a wide range of innate and adaptive immune responses such as those observed during chronic inflammation. CD39 removes this key danger signal and thereby dampens the resultant multi-cellular immune response. A partner enzyme to CD39, CD73, then degrades AMP into adenosine, which is an anti-inflammatory mediator. Together, CD39 and CD73 constitute a mechanism that the immune system uses to remove proinflammatory ATP and to generate anti-inflammatory adenosine.
Deficiencies in CD39 or CD73 can result in a diminished population of Treg cells and enhanced immune cell activity, leading to exacerbated inflammation in several preclinical mouse models of autoimmunity such as lupus, collagen-induced arthritis, and experimental autoimmune encephalopathy. Overexpression of CD39 has been shown to suppress disease in a model of type 1 diabetes. Third parties are currently evaluating approaches for overexpressing or delivering recombinant CD39 or CD73 in preclinical studies.
We created a mouse recombinant CD39 effector module that behaves similar to wild-type mouse CD39. Using our TALON platform, we coupled this CD39 effector module to a skin-tethered module designed to concentrate the CD39 payload at the dermal-epidermal interface. In order to test whether the concentration of CD39 at the skin barrier would have advantages over a systemically active CD39 molecule, we compared this skin-tethered-CD39 bifunctional module to CD39 on a systemically active backbone, as well as to a steroid positive control (dexamethasone) in a rodent model of contact hypersensitivity. In this model, the mouse is sensitized with antigen, and then a day after test article injection, the ear of the mouse is injected with that antigen, which induces a brisk contact hypersensitivity response characterized by ear swelling, which can be measured as ear thickness. Treating the animal with vehicle allowed the full response to manifest, evidence as marked ear thickening. Treating with the systemically active CD39 had no meaningful efficacy, however concentrating CD39 in the skin via the skin-tethered CD39 prototype abrogated the response to a degree akin to steroid (dexamethasone). The data observed in this study are shown in the figure below.
Both modules of this molecule, CD39 effector and skin-tether, are currently undergoing iterative stages of protein engineering to refine their biological properties.
Skin-Tethered PD-1 Agonist
PD-1 is a protein natively expressed by activated T cells and serves as a checkpoint for the attenuation of immune activation. In addition to our two PD-1 agonist programs, PT627 and PT001, mentioned above, we have a discovery-stage program of a PD-1 agonist coupled with a skin-tethered module. We designed this molecule to concentrate the PD-1 agonist at the dermal-epidermal interface in the skin.
We tested this molecule in a mouse model of vitiligo, an autoimmune skin condition that leads to depigmentation of the skin. In this model, vitiligo was induced through adoptive transfer of melanocyte-specific T cells. We administered PD-1 agonists weekly for five weeks post disease induction and then, upon the conclusion of dosing, calculated a vitiligo score using a point scale based on the extent of depigmentation at different locations. We observed that treatment with the skin-tethered PD-1 agonist significantly reduced skin depigmentation as shown by the vitiligo scores. We also observed that this effect was tether-dependent, as mice treated with an untethered PD-1 agonist had scores that were similar to the vehicle-treated mice. These data are shown in the figure below. In addition, we observed that the skin-tethered PD-1 agonist selectively reduced the number of T cells found in the skin, but did not observe a reduction of systemic T cells.
The skin-tethered PD-1 agonist is currently undergoing iterative stages of protein engineering to refine its biological and drug-like properties.
New Tissue Tether Modules
We are actively building a library to tether modules to target our immune effectors to various organs where autoimmune attack is known to occur. Beyond MAdCAM for gastrointestinal and hepatic autoimmunity, and our skin tethers as noted above, we have active programs for renal and pancreatic tether discovery. We are also expanding our library of tethers to other organ systems where autoimmune disease may manifest.
Our pancreatic program is partnered with Astellas. Under this collaboration to develop locally acting immunomodulators for autoimmune diseases of the pancreas, we are responsible for the design and discovery of bifunctional product candidates based on our TALON platform, and Astellas will conduct preclinical, clinical and commercialization activities for any candidates developed in the collaboration. Our initial focus for our activities under this collaboration is on type 1 diabetes.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our technology, expertise, scientific knowledge and intellectual property provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions. Any product candidates that we successfully develop and commercialize may compete with existing therapies and new therapies that may become available in the future.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industry may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
The key competitive factors affecting the success of all of our product candidates that we develop for the treatment of autoimmune disease, if approved, are likely to be efficacy, safety, convenience, price, the level of generic competition and the availability of reimbursement from government and other third-party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over competitive generic products.
We are aware of several other companies developing programs that utilize IL-2 for the selective expansion of regulatory T cells, including Amgen Inc., Nektar Therapeutics (in partnership with Eli Lilly & Company), Roche Holding AG, or Roche, and Bristol-Myers Squibb, or BMS. We are also aware of other companies with research or preclinical-stage programs in this area, including Synthorx, Inc. (a subsidiary of Sanofi S.A.), Moderna, Inc. and Xencor, Inc. We are also aware of other companies with PD-1 agonist programs for the treatment of autoimmune diseases, including AnaptysBio, Inc., BMS, and Eli Lilly & Company, Janssen Pharmaceuticals and Ono Pharmaceuticals.
If approved for the treatment of patients with moderate-to-severe UC, PT101 would compete with Entyvio, which is an α4β7 integrin antibody marketed by Takeda Pharmaceutical Company Ltd, Stelara, which is an IL-12/IL-23 antibody marketed by Johnson & Johnson, Xeljanz, which is a JAK1 inhibitor marketed by Pfizer Inc., and multiple branded and biosimilar TNF antibodies, including Humira, marketed by AbbVie, Remicade, marketed by Johnson & Johnson, and Simponi, marketed by Johnson & Johnson. If approved for the treatment of patients with SLE, PT101 would compete with Benlysta, which is a BAFF antibody marketed by GlaxoSmithKline, H. P. Acthar Gel, which is marketed by Mallinckrodt LLC, and a number of branded and generic non-steroid and steroid based therapies, including hydroxychloroquine, azathioprine and mycophenolate mofetil.
We are aware of several companies with product candidates for the treatment of patients with UC, including Rinvoq, which is a JAK1 inhibitor being developed in Phase 3 clinical trials by AbbVie, ozanimod or Zeposia, which is a S1P inhibitor being developed in Phase 3 clinical trials by BMS, etrolizumab, which is a β7 integrin being developed in Phase 3 clinical trials by Roche, deucravacitinib or BMS-986165, which is a TYK2 inhibitor being developed in Phase 2 clinical trials by BMS, mirikizumab, which is an anti-IL-23 antibody being developed in Phase 3 clinical trials by Eli Lilly, and filgotinib, a JAK1 inhibitor which has been filed for approval in Europe and is being developed in Phase 3 clinical trials by Gilead Sciences, Inc., and Galapagos N.V. We are also aware of additional product candidates in clinical trials by AbbVie, Abivax SA, Amgen Inc., Arena Pharmaceuticals, Inc., Applied Molecular Transport, Inc., Boehringer Ingelheim, BMS, Gilead Sciences, Inc., GlaxoSmithKline plc, Gossamer Bio, Inc., Immunic, Incyte Corp., Janssen Pharmaceutica N.V., Landos Biopharma, Inc., Morphic Therapeutic, Inc., Pfizer Inc., Protagonist Therapeutics, Inc., Seres Therapeutics Inc., Theravance Biopharma, Inc.
We are aware of several companies with product candidates for the treatment of patients with SLE, including anifrolumab, which is an interferon-alpha 1 receptor antibody that has completed Phase 3 clinical trials and is expected to be submitted to the FDA for approval by AstraZeneca, Gazyva, which is a CD20 antibody being developed in Phase 3 clinical trials by Roche, Lupuzor, which is an autophagy modulator being developed in Phase 3 clinical trials by Avion Pharmaceuticals and ImmuPharma, KZR-616, which is
an immunoproteosome inhibitor being developed in Phase 2 clinical trials by Kezar Life Sciences, BIIB059, which is a BDCA2 antibody being developed in Phase 2 clinical trials by Biogen, lenabasum, which is a CB2 agonist being developed in Phase 2 clinical trials by Corbus, telitacicept, which is a recombinant TACI-Fc fusion protein which is being developed in Phase 2 clinical trials by RemeGen Ltd., ALPN-101, which is a dual CD28/ICOS inhibitor being developed in Phase 2 clinical trials by Alpine Immune Sciences and Abbvie, deucravacitinib or BMS-986165, which is a TYK2 inhibitor being developed in Phase 2 clinical trials by BMS, NKTR-358 or LY3471851, which is a modified IL-2 being developed in Phase 1/2 clinical trials by Nektar and Eli Lilly, and AMG-592 or efavaleukin alfa, which is a modified IL-2 being developed in Phase 1/2 clinical trials by Amgen We are also aware of additional product candidates in clinical trials by Abbvie, Alexion, Apellis Pharmaceuticals, Aurinia, Boehringer Ingelheim, Boston Pharmaceuticals, ChemoCentryx, Equillium, Galapagos, Gilead, Idorsia, Incyte, Janssen Pharmaceutica, Novartis, Omeros, Pfizer, Roche, Servier, Viela Bio, UCB, and Xencor.
Manufacturing
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely on and expect to continue to rely on third-party contract manufacturing organizations, or CMOs, for both drug substance and finished drug product. We have engaged third-party manufacturers to supply the drug substances for our product candidates and a third-party manufacturer to develop and manufacture finished drug product for PT101 that we plan to use in our Phase 1 clinical trials. We currently obtain our supplies from these manufacturers on a purchase order basis and do not have long-term supply arrangements in place. Should any of these manufacturers become unavailable to us for any reason, we believe that there are a number of potential replacements, although we may incur some delay in identifying and qualifying such replacements.
Our product candidates are manufactured using reliable processes from readily available starting materials. The approach is amenable to scale up and does not require unusual equipment in the manufacturing process. We expect to continue to develop product candidates that can be produced cost-effectively at contract manufacturing facilities.
Intellectual Property
We strive to protect the proprietary technologies that we believe are important to our business, including pursuing and maintaining patent protection intended to cover the composition of matter of our product candidates, their methods of use, related technologies and other inventions that are important to our business. In addition to patent protection, we also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection, including certain aspects of our TALON platform.
Our commercial success depends in part upon our ability to obtain and maintain patent and other proprietary protection for commercially important technologies, inventions and know how related to our business, defend and enforce our intellectual property rights, in particular, our patent rights, preserve the confidentiality of our trade secrets and operate without infringing valid and enforceable intellectual property rights of others.
The patent positions for biotechnology and pharmaceutical companies like ours are generally uncertain and can involve complex legal, scientific and factual issues. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued, and its scope can be reinterpreted and even challenged after issuance. As a result, we cannot guarantee that any of our product candidates will be protected or remain protectable by enforceable patents. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged, circumvented or invalidated by third parties.
As of December 31, 2020, our solely owned patent estate included three issued U.S. patents, six pending U.S. non-provisional patent applications, three pending U.S. provisional applications, three international PCT applications pending, and over 35 pending foreign patent application.
PT101
With regard to our PT101 product candidate, we solely own one issued U.S. patent with composition of matter claims covering PT101, which is expected to expire in 2038, without taking potential patent term extensions into account. In addition, we also own three pending U.S. patent applications with composition of matter and method of use claims covering PT101 and its use, and over 14 foreign patent applications pending in jurisdictions such as Europe, Japan, Australia, Canada, China, and Korea, which, if issued, are expected to expire in 2038, without taking potential patent term extensions into account.
We are aware of certain European and other foreign patents and applications owned by a third party with claims that are broadly directed methods of using IL-2 muteins to treat certain autoimmune disease indications, including, but not limited to, rheumatoid arthritis. The patents or patents issuing from these pending applications could be construed to cover PT101, as well as other products containing IL-2 muteins. We are not currently evaluating PT101 for treatment of rheumatoid arthritis.
PT627
With regard to our PT627 product candidate, we solely own two U.S. provisional patent applications, one U.S. non-provisional application, one PCT application, and one foreign patent application with claims directed to PD-1 antibodies, where patents if issued, would be expected to expire no earlier than 2040, without taking potential patent term extensions into account.
PT001
With regard to our PT001 product candidate, we solely own two U.S. provisional patent applications, one U.S. non-provisional application, one PCT application, and one foreign patent application with claims directed to PD-1 agonist molecules, where patent applications claiming priority to this provisional application, if issued, would be expected to expire no earlier than 2040, without taking potential patent term extensions into account. We also own a U.S. non-provisional application and ten foreign patent applications pending in jurisdictions such as such as Europe, Japan, Australia, Canada, China, and Korea, which, if issued, are expected to expire in 2038, without taking potential patent term extensions into account.
PT002
With regard to our PT002 patent candidate, we own one issued U.S. patent with composition of matter claims covering PT002, which is expected to expire in 2038, without taking potential patent term extensions into account. We also own two U.S. provisional patent applications, eight pending U.S. non-provisional applications and over 35 foreign patent applications pending in jurisdictions such as Europe, Japan, Australia, Canada, China, and Korea, which, if issued, would be expected to expire from 2038 to 2041, without taking potential patent term extensions into account.
License and Collaboration Agreements
License and Collaboration Agreement with Astellas Pharma
In October 2019, we entered into a license and collaboration agreement with Astellas, or the Astellas agreement. The Astellas agreement is a research and development collaboration to discover and develop novel compounds for autoimmune diseases of the pancreas, including type 1 diabetes. Under the Astellas agreement, we are responsible for design and discovery of drug candidates and Astellas will be responsible for conducting preclinical, clinical and commercialization activities for candidates developed during the collaboration.
Under the Astellas agreement, we and Astellas will conduct a research collaboration program to discover, identify, characterize and optimize bifunctional antibodies or other biologics consisting of a tissue-selective tether and an effector, or Compounds. The Astellas agreement provides that the research term will end on the earlier of (a) the completion of the activities set forth in the research plan and (b) the fifth anniversary of the effective date of the Astellas agreement. We have estimated that our research and development commitments will be completed by the end of 2022. All research activities under the Astellas agreement are conducted according to a research plan. The initial research plan is focused on three tissue-selective tether targets in the pancreas. The primary indication for which we and Astellas will seek to develop Compounds is type 1 diabetes, including latent autoimmune diabetes in adults. Under the collaboration, we may also develop Compounds for the treatment of any human disease or condition, which we refer to as non-primary indications.
We are obligated to generate Compounds and to perform in vitro and in vivo characterization activities necessary or useful in support of the nomination of a Compound for consideration by the joint steering committee, or JSC, consisting of an equal number representatives from each party to coordinate, oversee and resolve disputes under the Astellas agreement. Either party may nominate a Compound to the JSC during the research term to be designated by the JSC as a Licensed Compound for development. Following the designation of a Licensed Compound, Astellas is solely responsible for, and has sole authority with respect to, at its own expense, all non-clinical and clinical development activities of the Licensed Compound, including all manufacturing. Astellas will also be solely responsible for, and have sole authority with respect to, at its own expense, all commercialization activities and all regulatory responsibilities, including preparing and filing INDs, marketing authorization applications and obtaining and maintaining regulatory approvals for any product that contains a Licensed Compound as an active ingredient, referred to as a Licensed Product. Astellas is required to reimburse certain of our research costs for activities under the research plan.
Astellas paid us an upfront payment of $10.0 million in the fourth quarter of 2019. We have the right to receive, on a Licensed Compound-by-Licensed Compound basis, potential research and development milestone payments up to an aggregate of $43.0 million for the first Licensed Compound and $38.0 million for subsequent Licensed Compounds and regulatory milestones up to an aggregate of $105.0 million. If any Astellas Licensed Products are successfully commercialized, we would be eligible to receive, on a Licensed Compound-by-Licensed Compound basis, up to $150.0 million in potential commercial milestone payments based on the worldwide net sales of all Licensed Products containing the same Licensed Compound.
We are also eligible to receive from Astellas, on a Licensed Product-by-Licensed Product basis, tiered royalties at rates ranging from mid- to high-single digit percentages based on worldwide net sales by Astellas, its affiliates and sublicensees, subject to specified reductions. Any royalty payments owed to us are subject to reduction when there is no valid claim covering such product and regulatory exclusivity does not apply to such Licensed Product in such country or where one or more biosimilar products becomes commercially available in such country. Royalty payments under the Astellas agreement are payable beginning on the first commercial sale of the product in the country until the later of the expiration of the last valid claim covering such product, expiration of regulatory exclusivity or eleven years after the first commercial sale of such product in such country, but the royalty payments generally may not fall below our royalty obligations to third parties plus a royalty of a low single-digit percentage.
During the term of the Astellas agreement, we are not permitted to use tethers targeted at certain proteins expressed on pancreatic cells that are identified in the research plan, or develop, manufacture or commercialize any product directed toward tether targets that are identified in the research plan, or, in either case, grant a license to a third party or sublicense to enable any third party to do so.
Any time after the first anniversary of the effective date of the Astellas agreement, Astellas may terminate the Astellas agreement for convenience upon advance prior written notice. Each party has the right to terminate the Astellas agreement due to the other party’s material breach if such breach remains uncured for a specified cure period or if the other party becomes bankrupt. We have the right to terminate the agreement under certain circumstances if Astellas or any of its sublicensees challenges the validity or enforceability of any of our patent rights. The Astellas agreement will automatically terminate if no Licensed Compound has been designated by the date that is six months after the expiration of the research period.
Distributed Bio
In October 2017, we entered into an antibody library subscription agreement with Distributed Bio, Inc., or Distributed Bio. We refer to this agreement as the Distributed Bio library agreement. Pursuant to the Distributed Bio library agreement, we obtained a non-exclusive license to use an antibody library of Distributed Bio, or the Antibody Library, anti-PD-1 antibodies isolated from the Antibody Library by Distributed Bio, or the Anti-PD-1 Antibodies, and certain software to conduct research and development related to the discovery of antibodies against biological targets of interest to us. We refer to the Antibody Library, the Anti-PD-1 Antibodies and the software collectively as the Deliverables. Distributed Bio has also agreed to assign to us and we own all rights in the sequences of any Anti-PD-1 Antibody and antibody sequences that we identify by panning the Antibody Library, or the Panned Antibodies, including any derivative sequences and any molecules or products containing or any method of manufacture or use of any of the foregoing, which we refer to collectively as the Assigned Antibody Rights.
We are required to make milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones with respect to any antibody that has a target recognition site derived from an Anti-PD-1 Antibody, a Panned Antibody or an antibody provided by Distributed Bio under any other agreement with us, and that is included in the Assigned Antibody Rights, which we refer to as an Antibody Product. We may be required to pay up to $4.3 million in clinical milestones and $12.0 million in regulatory milestones for each Antibody Product. Each such milestone payment will be paid only once with respect to any set of targets to which any Antibody Product is directed. The milestone payments may be offset by up to 50% of any amount paid by us to any third party for the achievement of the same or similar milestones with respect to any Antibody Product.
The Distributed Bio library agreement had an initial term, on a Deliverable-by-Deliverable basis, of one year from receipt of the applicable Deliverable and automatically renews for additional one-year terms. We have the right to terminate the Distributed Bio library agreement at any time, in whole or with respect to any Deliverable. The Distributed Bio library agreement may also be terminated by either party with respect to any Deliverable for material breach by the other party.
We also pay Distributed Bio for antibody discovery services under a master services agreement that we entered into with Distributed Bio concurrently with the Distributed Bio library agreement, which we refer to as the Distributed Bio MSA. Pursuant to the Distributed Bio MSA, we are identifying antibodies, other than the Anti-PD-1 Antibodies described above, including antibodies that relate to our MAdCAM-tethering program. We own all antibody sequences and other deliverables provided to us and inventions developed under the Distributed Bio MSA. We pay fees to Distributed Bio under the Distributed Bio MSA. We are also required to make the same milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones as described in the Distributed Bio library agreement for any Antibody Product, but we will not owe milestone payments more than once for the same
Antibody Product if such milestone is achieved under both of the Distributed Bio library agreement and the Distributed Bio MSA. The Distributed Bio MSA had an initial term of one year and automatically renews for additional one-year terms. Either party can terminate the Distributed Bio MSA at any time.
We paid an aggregate of approximately $2.2 million in subscription fees and other fees under the Distributed Bio library agreement and Distributed Bio MSA through December 31, 2020. Beginning in 2020, we ceased subscribing to the Distributed Bio antibody library, and as a result are no longer obligated to pay subscription fees under such agreement. We continue to engage Distributed Bio for antibody discovery services pursuant to the Distributed Bio MSA and we pay for such services on a service-by-service basis.
Government Regulation and Product Approvals
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, pricing, reimbursement, sales, quality control, approval, packaging, storage, record-keeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products, including biological products. The processes for obtaining marketing approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Licensure and Regulation of Biologics in the United States
In the United States, our product candidates are regulated as biological products, or biologics, under the Public Health Service Act, or PHSA, and the Federal Food, Drug and Cosmetic Act, or FDCA, and their implementing regulations and guidances. The failure to comply with the applicable U.S. requirements at any time during the product development process, including preclinical testing, clinical testing, the approval process, or post-approval process, may subject an applicant to delays in the conduct of the study, regulatory review, and approval, and/or administrative or judicial sanctions.
An applicant seeking approval to market and distribute a new biologic in the United States generally must satisfactorily complete each of the following steps:
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preclinical laboratory tests, animal studies, and formulation studies all performed in accordance with the FDA’s GLP regulations;
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completion of the manufacture, under current Good Manufacturing Practices, or cGMP, conditions, of the drug substance and drug product that the sponsor intends to use in human clinical trials along with required analytical and stability testing;
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submission to the FDA of an IND, for human clinical testing, which must become effective before human clinical trials may begin;
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approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated;
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performance of adequate and well-controlled human clinical trials to establish the safety, potency, and purity of the product candidate for each proposed indication, in accordance with current Good Clinical Practices, or GCP;
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preparation and submission to the FDA of a biologics license application, or BLA, for a biologic product candidate requesting marketing for one or more proposed indications, including submission of detailed information on the manufacture and composition of the product candidate in clinical development and proposed labeling;
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review of the product candidate by an FDA advisory committee, where appropriate or if applicable;
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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities, including those of third parties, at which the product candidate, or components thereof, are produced to assess compliance with cGMP requirements and to assure that the facilities, methods, and controls are adequate to preserve the product candidate’s identity, strength, quality, and purity;
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satisfactory completion of any FDA audits of the preclinical studies and clinical trial sites to assure compliance with GLP, as applicable, and GCP, and the integrity of clinical data in support of the BLA;
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payment of user Prescription Drug User Free Act, or PDUFA, securing FDA approval of the BLA and licensure of the new biologic product; and
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compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS, and any post-approval studies or other post-marketing commitments required by the FDA.
Preclinical Studies and Investigational New Drug Application
Before testing any biologic product candidate in humans, the product candidate must undergo preclinical testing. Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate in animal studies the potential for efficacy and toxicity.
An IND is an exemption from the FDCA that allows an unapproved product candidate to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA authorization to administer such investigational product to humans. The IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about the product candidate or conduct of the proposed clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns before the clinical trials can begin or recommence.
As a result, submission of the IND may result in the FDA not allowing the trials to commence or not allowing the trial to commence on the terms originally specified by the sponsor in the IND. If the FDA raises concerns or questions either during this initial 30-day period, or at any time during the IND or clinical trial process, it may choose to impose a partial or complete clinical hold. Clinical holds may be imposed by the FDA when there is an important concern for patient safety and may be a result of new data, findings, or developments in clinical, preclinical, and/or chemistry, manufacturing, and controls. This order issued by the FDA would delay either a proposed clinical trial or cause suspension of an ongoing trial, until all outstanding concerns have been adequately addressed and the FDA has notified the company that investigations may proceed. This could cause significant delays or difficulties in completing our planned clinical trial or future clinical trials in a timely manner.
Expanded Access to an Investigational Product for Treatment Use
Expanded access, sometimes called “compassionate use,” is the use of investigational products outside of clinical trials to treat patients with serious or immediately life-threatening diseases or conditions when there are no comparable or satisfactory alternative treatment options. The rules and regulations related to expanded access are intended to improve access to investigational products for patients who may benefit from investigational therapies. FDA regulations allow access to investigational products under an IND by the company or the treating physician for treatment purposes on a case-by-case basis for: individual patients (single-patient IND applications for treatment in emergency settings and non-emergency settings); intermediate-size patient populations; and larger populations for use of the investigational product under a treatment protocol or treatment IND application.
When considering an IND application for expanded access to an investigational product with the purpose of treating a patient or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of the following criteria apply: patient(s) have a serious or immediately life-threatening disease or condition, and there is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; the potential patient benefit justifies the potential risks of the treatment and the potential risks are not unreasonable in the context or condition to be treated; and the expanded use of the investigational drug for the requested treatment will not interfere with the initiation, conduct, or completion of clinical investigations that could support marketing approval of the product or otherwise compromise the potential development of the product.
There is no obligation for a sponsor to make its drug products available for expanded access; however, as required by the 21st Century Cures Act, or Cures Act, passed in 2016, if a sponsor has a policy regarding how it responds to expanded access requests, it must make that policy publicly available. Sponsors are required to make such policies publicly available upon the earlier of initiation of a Phase 2 or Phase 3 trial; or 15 days after the investigational drug or biologic receives designation as a breakthrough therapy, fast track product, or regenerative medicine advanced therapy.
In addition, on May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a manufacturer to make its investigational products available to eligible patients as a result of the Right to Try Act.
Human Clinical Trials in Support of a BLA
Clinical trials involve the administration of the investigational product candidate to healthy volunteers or patients with the disease or condition to be treated under the supervision of a qualified principal investigator in accordance with GCP requirements. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, inclusion and exclusion criteria, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND.
A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. When a foreign clinical trial is conducted under an IND, all FDA IND requirements must be met unless waived. When a foreign clinical trial is not conducted under an IND, the sponsor must ensure that the trial complies with certain regulatory requirements of the FDA in order to use the trial as support for an IND or application for marketing approval. Specifically, the FDA requires that such trials be conducted in accordance with GCP, including review and approval by an independent ethics committee and informed consent from participants. The GCP requirements encompass both ethical and data integrity standards for clinical trials. The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical trials, as well as the quality and integrity of the resulting data. They further help ensure that non-IND foreign trials are conducted in a manner comparable to that required for clinical trials in the United States.
Further, each clinical trial must be reviewed and approved by an IRB either centrally or individually at each institution at which the clinical trial will be conducted. The IRB will consider, among other things, clinical trial design, patient informed consent, ethical factors, the safety of human subjects, and the possible liability of the institution. An IRB must operate in compliance with FDA regulations. The FDA, IRB, or the clinical trial sponsor may suspend or discontinue a clinical trial at any time for various reasons, including a finding that the clinical trial is not being conducted in accordance with FDA requirements or that the participants are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP rules and the requirements for informed consent.
Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board, or DSMB. This group may recommend continuation of the trial as planned, changes in trial conduct, or cessation of the trial at designated check points based on certain available data from the trial to which only the DSMB has access.
Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Additional studies may be required after approval.
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Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse effects, dose tolerance, absorption, metabolism, distribution, excretion, and pharmacodynamics in healthy humans or, on occasion, in patients, such as cancer patients.
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Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, evaluate the efficacy of the product candidate for specific targeted indications and determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more costly Phase 3 clinical trials.
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Phase 3 clinical trials typically involve administration of the investigational product to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval and physician labeling.
In some cases, the FDA may approve a BLA for a product but require the sponsor to conduct additional clinical trials to further assess the product’s safety and effectiveness after approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and to confirm a clinical benefit in the case of biologics 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 or to request a change in the product labeling. The failure to exercise due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of approval for products.
Under the Pediatric Research Equity Act of 2003, a BLA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. Sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation. The
applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in the Food and Drug Administration Safety and Innovation Act, or FDASIA. The FDA maintains a list of diseases that are exempt from PREA requirements due to low prevalence of disease in the pediatric population. In 2017, with passage of the FDA Reauthorization Act of 2017, or FDARA, Congress further modified these provisions. Previously, drugs that had been granted orphan drug designation were exempt from the requirements of the Pediatric Research Equity Act.
Information about applicable clinical trials must be submitted within specific timeframes to the NIH for public dissemination on its ClinicalTrials.gov website.
Compliance with cGMP Requirements
Before approving a BLA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in full compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The PHSA emphasizes the importance of manufacturing control for products like biologics whose attributes cannot be precisely defined.
Manufacturers and others involved in the manufacture and distribution of products must also register their establishments with the FDA and certain state agencies. Both domestic and foreign manufacturing establishments must register and provide additional information to the FDA upon their initial participation in the manufacturing process. Any product manufactured by or imported from a facility that has not registered, whether foreign or domestic, is deemed misbranded under the FDCA. Establishments may be subject to periodic unannounced inspections by government authorities to ensure compliance with cGMPs and other laws. Inspections generally follow a “risk-based schedule” that may result in certain establishments being inspected more frequently. Manufacturers may also have to provide, on request, electronic or physical records regarding their establishments. Delaying, denying, limiting, or refusing inspection by the FDA may lead to a product being deemed to be adulterated.
Review and Approval of a BLA
The results of product candidate development, preclinical testing, and clinical trials, including negative or ambiguous results as well as positive findings, are submitted to the FDA as part of a BLA requesting license to market the product. The BLA must contain extensive manufacturing information and detailed information on the composition of the product and proposed labeling as well as payment of a user fee and an annual program fee. Under federal law, the submission of most BLAs is subject to a substantial application user fee. The sponsor of a licensed BLA is also subject to an annual program fee. Certain exceptions and waivers are available for some of these fees, such as an exception from the application fee for products with orphan designation and a waiver for certain small businesses.
The FDA has 60 days after submission of the application to conduct an initial review to determine whether it is sufficient to accept for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission has been accepted for filing, the FDA begins an in-depth review of the application. Under the goals and policies agreed to by the FDA under the PDUFA, the FDA has ten months in which to complete its initial review of a standard application and respond to the applicant, and six months for a priority review of the application. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs. The review process may often be significantly extended by FDA requests for additional information or clarification. The review process and the PDUFA goal date may be extended by three months if the FDA requests or if the applicant otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.
Under the PHSA, the FDA may approve a BLA if it determines that the product is safe, pure, and potent, and the facility where the product will be manufactured meets standards designed to ensure that it continues to be safe, pure, and potent. On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the inspection of the manufacturing facilities and any FDA audits of preclinical and clinical trial sites to assure compliance with GCPs, the FDA may issue an approval letter or a complete response letter, or CRL. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. If the application is not approved, the CRL will contain the conditions that must be met in order to secure final approval of the application, and when possible will outline recommended actions the sponsor might take to obtain approval of the application. Sponsors that receive a CRL may submit to the FDA information that represents a complete response to the issues identified by the FDA. The FDA will not approve an application until issues identified in CRL have been addressed.
The FDA may also refer the application to an advisory committee for review, evaluation, and recommendation as to whether the application should be approved. In particular, the FDA may refer applications for novel biologic products or biologic products that present difficult questions of safety or efficacy to an advisory committee. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates, and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
If the FDA approves a new product, it may limit the approved indication(s) for use of the product. It may also require that contraindications, warnings, or precautions be included in the product labeling. In addition, the FDA may call for post-approval studies, including Phase 4 clinical trials, to further assess the product’s efficacy and/or safety after approval. The agency may also require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, to help ensure that the benefits of the product outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Expedited Review Designations
The FDA is authorized to expedite the review of BLAs in several ways. Under the Fast Track program, the sponsor of a product candidate may request the FDA to designate the product for a specific indication as a Fast Track product concurrent with or after the filing of the IND. Candidate products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied. In addition to other benefits, such as the ability to have greater interactions with the FDA, the FDA may initiate review of sections of a Fast Track application before the application is complete, a process known as rolling review.
Any product candidate submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as breakthrough therapy designation, priority review and accelerated approval.
Breakthrough therapy designation. To qualify for the breakthrough therapy program, product candidates must be intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence must indicate that such product candidates may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. The FDA will seek to ensure the sponsor of a breakthrough therapy product candidate receives intensive guidance on an efficient drug development program, intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review and rolling review.
Priority review. A product candidate is eligible for priority review if it treats a serious condition and, if approved, it would be a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention compared to marketed products. FDA aims to complete its review of priority review applications within six months as opposed to 10 months for standard review.
Accelerated approval. Drug or biologic products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval. Accelerated approval means that a product candidate may be approved on the basis of adequate and well controlled clinical trials establishing that the product candidate has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity and prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug or biologic product candidate receiving accelerated approval perform adequate and well controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials.
Regenerative advanced therapy. With passage of the 21st Century Cures Act, or the Cures Act, in December 2016, Congress authorized the FDA to accelerate review and approval of products designated as regenerative advanced therapies. A product is eligible for this designation if it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product candidate has the potential to address unmet medical needs for such disease or condition. The benefits of a regenerative advanced therapy designation include early interactions with the
FDA to expedite development and review, benefits available to breakthrough therapies, potential eligibility for priority review and accelerated approval based on surrogate or intermediate endpoints.
None of these expedited programs change the standards for approval but they may help expedite the development or approval process of product candidates.
Post-Approval Regulation
If regulatory approval for marketing of a product or new indication for an existing product is obtained, the sponsor will be required to comply with all regular post-approval regulatory requirements as well as any post-approval requirements that the FDA have imposed as part of the approval process. The sponsor will be required to report certain adverse reactions and production problems to the FDA, provide updated safety and efficacy information and comply with requirements concerning advertising and promotional labeling requirements. Manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon manufacturers. Accordingly, the sponsor and its third-party manufacturers must continue to expend time, money, and effort in the areas of production and quality control to maintain compliance with cGMP regulations and other regulatory requirements.
A product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official lot release, the manufacturer must submit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety, purity, potency, and effectiveness of pharmaceutical products.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
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restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials;
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refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals;
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product seizure or detention, or refusal to permit the import or export of products; or
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injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates the marketing, labeling, advertising, and promotion of prescription drug products placed on the market. This regulation includes, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet and social media. Promotional claims about a drug’s safety or effectiveness are prohibited before the drug is approved. After approval, a drug product generally may not be promoted for uses that are not approved by the FDA, as reflected in the product’s prescribing information. In the United States, healthcare professionals are generally permitted to prescribe drugs for such uses not described in the drug’s labeling, known as off-label uses, because the FDA does not regulate the practice of medicine. However, FDA regulations impose rigorous restrictions on manufacturers’ communications, prohibiting the promotion of off-label uses.
If a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative and judicial enforcement by the FDA, the DOJ, or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Orphan Drug Designation and Exclusivity
Orphan drug designation in the United States is designed to encourage sponsors to develop products intended for rare diseases or conditions. In the United States, a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the United States or that affects 200,000 or more individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available the biologic for the disease or condition will be recovered from sales of the product in the United States.
Orphan drug designation qualifies a company for tax credits and market exclusivity for seven years following the date of the product’s marketing approval if granted by the FDA. An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. A product candidate with orphan drug designation must then go through the review and approval process like any other product.
A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product. In addition, a sponsor of a product that is otherwise the same product as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first drug. More than one sponsor may receive orphan drug designation for the same product for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation.
If a product with orphan designation receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will receive orphan drug exclusivity. Orphan drug exclusivity means that the FDA may not approve another sponsor’s marketing application for the same product for the same indication for seven years, except in certain limited circumstances. If a product designated as an orphan drug ultimately receives marketing approval for an indication broader than what was designated in its orphan drug application, it may not be entitled to exclusivity.
The period of exclusivity begins on the date that the marketing application is approved by the FDA and applies only to the indication for which the product has been designated. The FDA may approve a second application for the same product for a different use or a second application for a clinically superior version of the product for the same use. The FDA cannot, however, approve the same product made by another manufacturer for the same indication during the market exclusivity period unless it has the consent of the sponsor or the sponsor is unable to provide sufficient quantities.
Further, orphan drug exclusivity will not bar approval of another product under certain circumstances, including if the company with orphan drug exclusivity is not able to meet market demand or the subsequent product with the same drug for the same condition is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care. This is the case despite an earlier court opinion holding that the Orphan Drug Act unambiguously required the FDA to recognize orphan drug exclusivity regardless of a showing of clinical superiority. Under Omnibus legislation signed by President Trump on December 27, 2020, the requirement for a product to show clinical superiority applies to drugs and biologics that received orphan drug designation before enactment of FDARA in 2017, but have not yet been approved or licensed by FDA.
Pediatric Exclusivity
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if a BLA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity that cover the product are extended by six months.
Biosimilars and Exclusivity
The 2010 Patient Protection and Affordable Care Act, which was signed into law in March 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009, or BPCIA. The BPCIA established a regulatory scheme authorizing the FDA to approve biosimilars and interchangeable biosimilars. A biosimilar is a biological product that is highly similar to an existing FDA-licensed “reference product.” The FDA has approved a number of biosimilar products for use in the United States. No interchangeable biosimilars, however, have been approved. The FDA has issued several guidance documents outlining an approach to review and approval of biosimilars. Additional guidances are expected to be finalized by the FDA in the near term.
Under the BPCIA, a manufacturer may submit an application for licensure of a biologic product that is “biosimilar to” or “interchangeable with” a previously approved biological product or “reference product.” In order for the FDA to approve a biosimilar product, it must find that there are no clinically meaningful differences between the reference product and proposed biosimilar product in terms of safety, purity, and potency. For the FDA to approve a biosimilar product as interchangeable with a reference product, the agency must find that the biosimilar product can be expected to produce the same clinical results as the reference product, and (for products administered multiple times) that the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the reference product was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product if the FDA approves a full BLA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity, and potency of their product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are governed by state pharmacy law. Since the passage of the BPCIA, many states have passed laws or amendments to laws, including laws governing pharmacy practices, which are state-regulated, to regulate the use of biosimilars.
Federal and State Data Privacy and Security Laws
Under the federal Health Insurance Portability and Accountability Act of 1966, or HIPAA, the HHS has issued regulations to protect the privacy and security of protected health information, or PHI, used or disclosed by covered entities including certain healthcare providers, health plans, and healthcare clearinghouses. HIPAA also regulates standardization of data content, codes, and formats used in healthcare transactions and standardization of identifiers for health plans and providers. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their regulations, including the omnibus final rule published on January 25, 2013, also imposes certain obligations on the business associates of covered entities that obtain protected health information in providing services to or on behalf of covered entities. In addition to federal privacy regulations, there are a number of state laws governing confidentiality and security of health information that are applicable to our business. In addition to possible federal civil and criminal penalties for HIPAA violations, state attorneys general are authorized to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. Accordingly, state attorneys general (along with private plaintiffs) have brought civil actions seeking injunctions and damages resulting from alleged violations of HIPAA’s privacy and security rules. New laws and regulations governing privacy and security may be adopted in the future as well. Where state laws are more protective than HIPAA, we must comply with the state laws we are subject to, in addition to HIPAA. In certain cases, it may be necessary to modify our planned operations and procedures to comply with these more stringent state laws. Not only may some of these state laws impose fines and penalties upon violators, but also some, unlike HIPAA, may afford private rights of action to individuals who believe their personal information has been misused.
Additionally, California recently enacted legislation that has been dubbed the first “GDPR-like” law in the United States. Known as the California Consumer Privacy Act, or CCPA, it creates new individual privacy rights for consumers (as that word is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households. The CCPA went into effect on January 1, 2020 and requires covered companies to provide new disclosures to California consumers, provide such consumers new ways to opt-out of certain sales of personal information, and allow for a new cause of action for data breaches. In March 2020, the California State Attorney General proposed varying versions of companion draft regulations which are not yet finalized. Despite the delay in adopting regulations, the California State Attorney General will commence enforcement actions against violators beginning July 1, 2020. The CCPA could impact our business activities depending on how it is interpreted and exemplifies the vulnerability of our business to not only cyber threats but also the evolving regulatory environment related to personal data and protected health information.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is possible that some of our current or future business activities, including certain clinical research, sales, and marketing practices and the provision of certain items and services to our customers, could be subject to challenge under one or more of such privacy and data security laws. The heightening compliance environment and the need to build and maintain robust and secure systems to comply with different privacy compliance and/or reporting requirements in multiple jurisdictions could increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements. If our operations are found to be in violation of any of the privacy or data security laws or regulations described above that are applicable to us, or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal, civil, and administrative penalties, damages, fines, imprisonment, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements, and/or oversight if we become subject to a consent decree or similar agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations. To the extent that any of our product candidates, once approved, are sold in a foreign country, we may be subject to similar foreign laws.
Patent Term Restoration and Extension
In the United States, a patent claiming a new biologic product, its method of use or its method of manufacture may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent extension of up to five years for patent term lost during product development and FDA regulatory review. Assuming grant of the patent for which the extension is sought, the restoration period for a patent covering a product is typically one-half the time between the effective date of IND and the submission date of the BLA, plus the time between the submission date of the BLA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date in the United States. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent for which extension is sought. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension in consultation with the FDA.
FDA Approval of Companion Diagnostics
In August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeutic products and in vitro companion diagnostics. According to the guidance, for novel drugs, a companion diagnostic device and its corresponding therapeutic should be approved or cleared contemporaneously by the FDA for the use indicated in the therapeutic product’s labeling. Approval or clearance of the companion diagnostic device will ensure that the device has been adequately evaluated and has adequate performance characteristics in the intended population. In July 2016, the FDA issued a draft guidance intended to assist sponsors of the drug therapeutic and in vitro companion diagnostic device on issues related to co-development of the products.
The 2014 guidance also explains that a companion diagnostic device used to make treatment decisions in clinical trials of a biologic product candidate generally will be considered an investigational device, unless it is employed for an intended use for which the device is already approved or cleared. If used to make critical treatment decisions, such as patient selection, the diagnostic device generally will be considered a significant risk device under the FDA’s Investigational Device Exemption, or IDE, regulations. Thus, the sponsor of the diagnostic device will be required to comply with the IDE regulations. According to the guidance, if a diagnostic device and a product are to be studied together to support their respective approvals, both products can be studied in the same investigational study, if the study meets both the requirements of the IDE regulations and the IND regulations. The guidance provides that depending on the details of the study plan and subjects, a sponsor may seek to submit an IND alone, or both an IND and an IDE.
Under the FDCA, in vitro diagnostics, including companion diagnostics, are regulated as medical devices. In the United States, the FDCA and its implementing regulations, and other federal and state statutes and regulations govern, among other things, medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post market surveillance. Unless an exemption applies, diagnostic tests require marketing clearance or approval from the FDA prior to commercial distribution.
The FDA previously has required in vitro companion diagnostics intended to select the patients who will respond to the product candidate to obtain pre-market approval, or PMA, simultaneously with approval of the therapeutic product candidate. The PMA process, including the gathering of clinical and preclinical data and the submission to and review by the FDA, can take several years or longer. It involves a rigorous premarket review during which the applicant must prepare and provide the FDA with reasonable assurance of the device’s safety and effectiveness and information about the device and its components regarding, among other things, device design, manufacturing and labeling. PMA applications are subject to an application fee.
Regulation and Procedures Governing Approval of Medicinal Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety, and efficacy, and governing, among other things, clinical trials, marketing authorization, commercial sales, and distribution of products. Whether or not it obtains FDA approval for a product, an applicant will need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the process governing approval of medicinal products in the European Union generally follows the same lines as in the United States. It entails satisfactory completion of preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication. It also requires the submission to the relevant competent authorities of a marketing authorization application, or MAA, and granting of a marketing authorization by these authorities before the product can be marketed and sold in the European Union.
Clinical Trial Approval
Pursuant to the currently applicable Clinical Trials Directive 2001/20/EC and the Directive 2005/28/EC on GCP, a system for the approval of clinical trials in the European Union has been implemented through national legislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of a European Union member state in which the clinical trial is to be conducted, or in multiple member states if the clinical trial is to be conducted in a number of member states. Furthermore, the applicant may only start a clinical trial at a specific site after the competent ethics committee has issued a favorable opinion. The clinical trial application must be accompanied by an investigational medicinal product dossier with supporting information prescribed by Directive 2001/20/EC and Directive 2005/28/EC and corresponding national laws of the member states and further detailed in applicable guidance documents.
In April 2014, the EU adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current Clinical Trials Directive 2001/20/EC. The new Clinical Trials Regulation will become directly applicable to and binding in all 28 EU Member States without the need for any national implementing legislation. It will overhaul the current system of approvals for clinical trials in the EU. Specifically, the new legislation aims at simplifying and streamlining the approval of clinical trials in the EU. Under the new coordinated procedure for the approval of clinical trials, the sponsor of a clinical trial will be required to submit a single application for approval of a clinical trial to a reporting EU Member State (RMS) through an EU Portal. The submission procedure will be the same irrespective of whether the clinical trial is to be conducted in a single EU Member State or in more than one EU Member State.
The Regulation was published on June 16, 2014 but has not yet become effective. In January 2020, the website of the European Commission reported that the implementation of the Clinical Trials Regulation was dependent on the development of a fully functional clinical trials portal and database, which would be confirmed by an independent audit, and that the new legislation would come into effect six months after the European Commission publishes a notice of this confirmation. The website indicated that the audit was expected to commence in December 2020. In late 2020, the EMA indicated that it plans to focus on the findings of a system audit; improving the usability, quality and stability of the clinical trial information system; and knowledge transfer to prepare users and their organizations for the new clinical trial system. The EMA has indicated that the system will go live in December 2021.
Parties conducting certain clinical trials must, as in the United States, post clinical trial information in the European Union at the EudraCT website: https://eudract.ema.europa.eu.
PRIME Designation in the EU
In March 2016, the European Medicines Agency, or EMA, launched an initiative to facilitate development of product candidates in indications, often rare, for which few or no therapies currently exist. The PRIority Medicines, or PRIME, scheme is intended to encourage drug development in areas of unmet medical need and provides accelerated assessment of products representing substantial innovation reviewed under the centralized procedure. Products from small-and medium-sized enterprises may qualify for earlier entry into the PRIME scheme than larger companies. Many benefits accrue to sponsors of product candidates with PRIME designation, including but not limited to, early and proactive regulatory dialogue with the EMA, frequent discussions on clinical trial designs and other development program elements, and accelerated marketing authorization application assessment once a dossier has been submitted. Importantly, a dedicated EMA contact and rapporteur from the Committee for Human Medicinal Products, or CHMP, or Committee for Advanced Therapies are appointed early in the PRIME scheme facilitating increased understanding of the product at the EMA’s Committee level. A kick-off meeting initiates these relationships and includes a team of multidisciplinary experts at the EMA to provide guidance on the overall development and regulatory strategies.
Marketing Authorization
To obtain a marketing authorization for a product under the European Union regulatory system, an applicant must submit an MAA, either under a centralized procedure administered by the EMA or one of the procedures administered by competent authorities in European Union Member States (decentralized procedure, national procedure, or mutual recognition procedure). A marketing authorization may be granted only to an applicant established in the European Union. Regulation (EC) No 1901/2006 provides that prior to obtaining a marketing authorization in the European Union, an applicant must demonstrate compliance with all measures included in an EMA-approved Pediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted a product-specific waiver, class waiver, or a deferral for one or more of the measures included in the PIP.
The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all EU member states. Pursuant to Regulation (EC) No. 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases, including products for the treatment of cancer. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional. Manufacturers
must demonstrate the quality, safety, and efficacy of their products to the EMA, which provides an opinion regarding the MAA. The European Commission grants or refuses marketing authorization in light of the opinion delivered by the EMA.
Specifically, the grant of marketing authorization in the European Union for products containing viable human tissues or cells such as gene therapy medicinal products is governed by Regulation 1394/2007/EC on advanced therapy medicinal products, read in combination with Directive 2001/83/EC of the European Parliament and of the Council, commonly known as the Community code on medicinal products.
Regulation 1394/2007/EC lays down specific rules concerning the authorization, supervision, and pharmacovigilance of gene therapy medicinal products, somatic cell therapy medicinal products, and tissue engineered products. Manufacturers of advanced therapy medicinal products must demonstrate the quality, safety, and efficacy of their products to EMA which provides an opinion regarding the application for marketing authorization. The European Commission grants or refuses marketing authorization in light of the opinion delivered by EMA.
Under the centralized procedure, the CHMP established at the EMA is responsible for conducting an initial assessment of a product. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation may be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and, in particular, from the viewpoint of therapeutic innovation. If the CHMP accepts such a request, the time limit of 210 days will be reduced to 150 days, but it is possible that the CHMP may revert to the standard time limit for the centralized procedure if it determines that it is no longer appropriate to conduct an accelerated assessment.
Regulatory Data Protection in the European Union
In the European Union, new chemical entities approved on the basis of a complete independent data package qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Regulation (EC) No 726/2004, as amended, and Directive 2001/83/EC, as amended. Data exclusivity prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic (abbreviated) application for a period of eight years. During the additional two-year period of market exclusivity, a generic marketing authorization application can be submitted, and the innovator’s data may be referenced, but no generic medicinal product can be marketed until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to authorization, is held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company may market another version of the product if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical tests and clinical trials.
Patent Term Extensions in the European Union and Other Jurisdictions
The European Union also provides for patent term extension through Supplementary Protection Certificates, or SPCs. The rules and requirements for obtaining a SPC are similar to those in the United States. An SPC may extend the term of a patent for up to five years after its originally scheduled expiration date and can provide up to a maximum of fifteen years of marketing exclusivity for a drug. In certain circumstances, these periods may be extended for six additional months if pediatric exclusivity is obtained, which is described in detail below. Although SPCs are available throughout the European Union, sponsors must apply on a country-by-country basis. Similar patent term extension rights exist in certain other foreign jurisdictions outside the European Union.
Periods of Authorization and Renewals
A marketing authorization is valid for five years, in principle, and it may be renewed after five years on the basis of a reevaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To that end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. Once renewed, the marketing authorization is valid for an unlimited period, unless the European Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal period. Any authorization that is not followed by the placement of the drug on the EU market (in the case of the centralized procedure) or on the market of the authorizing member state within three years after authorization ceases to be valid.
Regulatory Requirements after Marketing Authorization
Following approval, the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of the medicinal product. These include compliance with the European Union’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed. In addition, the manufacturing of authorized products, for which a separate manufacturer’s license is mandatory, must also be conducted in strict compliance with the EMA’s GMP requirements and comparable requirements of other regulatory bodies in the European Union, which mandate the methods, facilities, and controls used in manufacturing, processing and packing of drugs to assure their safety and identity. Finally, the marketing and promotion of authorized products, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the European Union under Directive 2001/83EC, as amended.
Orphan Drug Designation and Exclusivity
Regulation (EC) No 141/2000 and Regulation (EC) No. 847/2000 provide that a product can be designated as an orphan drug by the European Commission if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of (1) a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the European Union when the application is made, or (2) a life-threatening, seriously debilitating or serious and chronic condition in the European Union and that without incentives it is unlikely that the marketing of the drug in the European Union would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention, or treatment of the condition in question that has been authorized in the European Union or, if such method exists, the drug will be of significant benefit to those affected by that condition.
An orphan drug designation provides a number of benefits, including fee reductions, regulatory assistance, and the possibility to apply for a centralized European Union marketing authorization. Marketing authorization for an orphan drug leads to a ten-year period of market exclusivity. During this market exclusivity period, neither the EMA nor the European Commission or the member states can accept an application or grant a marketing authorization for a “similar medicinal product.” A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for the same therapeutic indication. The market exclusivity period for the authorized therapeutic indication may, however, be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan drug designation because, for example, the product is sufficiently profitable not to justify market exclusivity.
Brexit and the Regulatory Framework in the United Kingdom
On June 23, 2016, the electorate in the United Kingdom voted in favor of leaving the EU, commonly referred to as Brexit. Following protracted negotiations, the United Kingdom left the EU on January 31, 2020. Under the withdrawal agreement, there is a transitional period until December 31, 2020 (extendable by up to two years). On December 24, 2020, the United Kingdom and the European Union entered into a Trade and Cooperation Agreement. The agreement sets out certain procedures for approval and recognition of medical products in each jurisdiction. Since the regulatory framework for pharmaceutical products in the United Kingdom covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from EU directives and regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the UK, as the UK legislation now has the potential to diverge from EU legislation. It remains to be seen how Brexit will impact regulatory requirements for product candidates and products in the UK in the long-term. The MHRA has recently published detailed guidance for industry and organizations to follow from January 1, 2021 now the transition period is over, which will be updated as the UK’s regulatory position on medicinal products evolves over time.
Furthermore, while the Data Protection Act of 2018 in the United Kingdom that “implements” and complements the European Union’s General Data Protection Regulation, or GDPR, has achieved Royal Assent on May 23, 2018 and is now effective in the United Kingdom, it is still unclear whether transfer of data from the European Economic Area, or EEA, to the United Kingdom will remain lawful under GDPR. The Trade and Cooperation Agreement provides for a transitional period during which the United Kingdom will be treated like an European Union member state in relation to processing and transfers of personal data for four months from January 1, 2021. This may be extended by two further months. After such period, the United Kingdom will be a “third country” under the GDPR unless the European Commission adopts an adequacy decision in respect of transfers of personal data to the United Kingdom. The United Kingdom has already determined that it considers all of the EU 27 and EEA member states to be adequate for the purposes of data protection, ensuring that data flows from the United Kingdom to the EU/EEA remain unaffected.
General Data Protection Regulation
The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the EU, including personal health data, is subject to the GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the EU, including the U.S., and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR will be a rigorous and time-intensive process that may increase the cost of doing business or require companies to change their business practices to ensure full compliance.
Coverage, Pricing, and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we may seek regulatory approval by the FDA or other government authorities. In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Patients are unlikely to use any product candidates we may develop unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of such product candidates. Even if any product candidates we may develop are approved, sales of such product candidates will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers, and managed care organizations, provide coverage, and establish adequate reimbursement levels for, such product candidates. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party payor not to cover any product candidates we may develop could reduce physician utilization of such product candidates once approved and have a material adverse effect on our sales, results of operations and financial condition. Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor. Third-party reimbursement and coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In addition, any companion diagnostic tests require coverage and reimbursement separate and apart from the coverage and reimbursement for their companion pharmaceutical or biological products. Similar challenges to obtaining coverage and reimbursement, applicable to pharmaceutical or biological products, will apply to any companion diagnostics.
The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices of pharmaceuticals have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement, and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit revenue generated from the sale of any approved products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we or our collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Outside the United States, ensuring adequate coverage and payment for any product candidates we may develop will face challenges. Pricing of prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of any product candidates we may develop to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies (so called health technology assessments) in order to obtain reimbursement or pricing approval. For example, the European Union provides options for its member states to restrict the range of products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. The downward pressure on healthcare costs in general, particularly prescription products, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic, and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states, and parallel trade (arbitrage between low-priced and high-priced member states), can further reduce prices. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries.
Healthcare Law and Regulation
Health care providers and third-party payors play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse, anti-kickback, false claims laws, patient privacy laws and regulations and other health care laws and regulations that may constrain business and/or financial arrangements.
Restrictions under applicable federal and state health care laws and regulations, include the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal health care program such as Medicare and Medicaid; the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false, fictitious or fraudulent or knowingly making, using or causing to made or used a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government; the Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making, or offering or promising to make, improper payments to non-U.S. officials for the purpose of obtaining or retaining business or otherwise seeking favorable treatment; and the federal transparency requirements known as the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, within the United States Department of Health and Human Services, information related to payments and other transfers of value made by that entity to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.
Further, some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures. Additionally, some state and local laws require the registration of pharmaceutical sales representatives in the jurisdiction. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Healthcare Reform
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States.
By way of example, the United States and state governments continue to propose and pass legislation designed to reduce the cost of healthcare. In March 2010, the United States Congress enacted the ACA, which, among other things, includes changes to the coverage and payment for products under government healthcare programs.
Other legislative changes have been proposed and adopted since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2030 under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the ACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by President Trump on December 22, 2017, Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019. Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Court of Appeals for the Fifth Circuit court affirmed the lower court’s ruling that the individual mandate portion of the ACA is unconstitutional and it remanded the case to the district court for reconsideration of the severability question and additional analysis of the provisions of the ACA. Thereafter, the U.S. Supreme Court agreed to hear this case. Oral argument in the case took place on November 10, 2020. On February 10, 2021, the Biden Administration withdrew DOJ’s support for this lawsuit. A ruling by the Court is expected sometime this year. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The Trump Administration also took executive actions to undermine or delay implementation of the ACA, including directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On January 28, 2021, however, President Biden rescinded those orders and issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit Americans’ access to health care, and consider actions that will protect and strengthen that access. Under this Order, federal agencies are directed to re-examine: policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19; demonstrations and waivers under Medicaid and the ACA that may reduce coverage or undermine the programs, including work requirements; policies that undermine the Health Insurance Marketplace or other markets for health insurance; policies that make it more difficult to enroll in Medicaid and the ACA; and policies that reduce affordability of coverage or financial assistance, including for dependents.
The costs of prescription pharmaceuticals have also been the subject of considerable discussion in the United States To date, there have been several recent U.S. congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. To those ends, President Trump issued five executive orders intended to lower the costs of prescription drug products but it is unclear whether, and to what extent, these orders will remain in force under the Biden Administration. Further, on September 24, 2020, the Trump Administration finalized a rulemaking allowing states or certain other non-federal government entities to submit importation program proposals to the FDA for review and approval. Applicants are required to demonstrate that their importation plans pose no additional risk to public health and safety and will result in significant cost savings for consumers. The FDA has issued draft guidance that would allow manufacturers to import their own FDA-approved drugs that are authorized for sale in other countries (multi-market approved products).
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care organizations and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
Human Capital Resources
As of December 31, 2020, we had 56 full-time employees, including 23 employees with M.D., Pharm.D. or Ph.D. degrees. Of these full-time employees, 42 are engaged in research and development activities and 14 are engaged in general and administrative activities. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. We are committed to Diversity, Equity and Inclusion (DE&I) across all aspects of our organization, including hiring, promotion and development practices. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees and directors through the granting of stock-based compensation awards.
Our Corporate Information
Our executive offices are located at 134 Coolidge Avenue, 2nd Floor, Watertown, Massachusetts 02472, and our telephone number is (617) 393-5925. Our website is www.pandiontx.com.
We were formed under the laws of the State of Delaware in September 2016 as a corporation under the name Immunotolerance, Inc. We changed our name to Pandion Therapeutics, Inc. in June 2017. On January 1, 2019, we completed a series of transactions in which Pandion Therapeutics, Inc. became a direct wholly owned subsidiary of Pandion Therapeutics Holdco LLC, a Delaware limited liability company. Immediately prior to our initial public offering, we converted from a Delaware limited liability company to a Delaware corporation and changed our name to Pandion Therapeutics, Inc.
Available Information
Through our website, we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act of 1934, as amended, or the Exchange Act. We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission, or the SEC. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. In addition, we regularly use our website to post information regarding our business, product development programs and governance, and we encourage investors to use our website, particularly the information in the section entitled “Investors & Media,” as a source of information about us.
The information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be a part of this Annual Report on Form 10-K. Our website address is included in this Annual Report on Form 10-K as an inactive technical reference only.
Item 1A.
Item 1A. Risk Factors.
Our future operating results could differ materially from the results described in this Annual Report on Form 10-K due to the risks and uncertainties described below. You should consider carefully the following information about risks below in evaluating our business. If any of the following risks actually occur, our business, financial conditions, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline. In addition, we cannot assure investors that our assumptions and expectations will prove to be correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. See page i of this Annual Report on Form 10-K for a discussion of some of the forward-looking statements that are qualified by these risk factors. Factors that could cause or contribute to such differences include those factors discussed below.
Risks Related to the Pending Transaction with Merck
We may not complete the pending transaction with Merck within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.
On February 24, 2021, we entered into a definitive merger agreement with Merck Sharp & Dohme Corp., or Merck, and Panama Merger Sub Inc., a wholly owned subsidiary of Merck, or Merger Sub, or the Merger Agreement. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub commenced a cash tender offer, or the Tender Offer, to acquire all of the issued and outstanding shares of our common stock at a price per share of $60, net to the seller in cash, without interest, subject to any withholding of taxes required by applicable law. Following the completion of the Tender Offer, Merger Sub
will merge with and into our company, with our company surviving as a wholly owned subsidiary of Merck, and each outstanding share of our common stock (other than shares of common stock held by us as treasury stock or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $60 per share in cash, without interest, subject to any withholding of taxed required by applicable law.
The completion of the pending transaction with Merck will be conditioned on (1) at least a majority of the shares of our outstanding common stock having been validly tendered into and not withdrawn from the Tender Offer, (2) receipt of certain regulatory approvals, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (3) the accuracy of certain representations and warranties that we made and compliance by us with certain covenants contained in the Merger Agreement, subject to qualifications, (4) there not having been a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to us since the date of the Merger Agreement, and (5) other customary conditions. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of our Board of Directors or a termination of the Merger Agreement by us to enter into an agreement for a “Superior Proposal,” as defined in the Merger Agreement. As a result, we cannot assure you that the transaction with Merck will be completed, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.
If the transaction is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices of our common stock reflects a market assumption that the transaction will be completed. We could be required to pay Merck a termination fee of $65 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. The failure to complete the transaction also may result in negative publicity and negatively affect our relationship with our stockholders, employees, collaborators, customers, regulators and other business partners. We may also be required to devote significant time and resources to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.
The pendency of the transaction with Merck could adversely affect our business, financial results and/or operations.
Our efforts to complete the transaction could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the transaction will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the transaction is pending because employees may experience uncertainty about their roles following consummation of the transaction. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the transaction and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with collaborators, vendors, customers, regulators and other business partners. For example, vendors, collaborators and other counterparties, including Astellas Pharma Inc., or Astellas, may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the transaction could be exacerbated by any delays in completion of the transaction or termination of the Merger Agreement.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations absent Merck’s prior consent. These limitations include, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, take certain actions relating to intellectual property, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially and adversely affect our business, results of operations and financial condition.
In certain instances, the Merger Agreement requires us to pay a termination fee to Merck, which could require us to use available cash that would have otherwise been available for general corporate purposes.
Under the terms of the Merger Agreement, we may be required to pay Merck a termination fee of $65 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement, including, but not limited to, a change in the recommendation of our Board of Directors or a termination of the Merger Agreement by us to enter into an agreement for a “Superior Proposal,” as defined in the Merger Agreement. If the Merger Agreement is terminated under such circumstances, the termination fee we may be required to pay under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes and other uses. For these and other reasons, termination of the Merger
Agreement could materially and adversely affect our business operations and financial condition, which in turn would materially and adversely affect the price of our common stock.
We have incurred, and will continue to incur, direct and indirect costs as a result of the pending transaction with Merck.
We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the pending transaction. We must pay substantially all of these costs and expenses whether or not the transaction is completed.
There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.
Risks Related to our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception. We expect to incur losses over the next several years and may never achieve or maintain profitability.
Since our inception, we have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical trials, and have incurred significant operating losses. Our net loss was $38.1 million and $21.9 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $86.0 million. To date, we have financed our operations primarily through sales of our preferred stock and preferred shares, issuances of convertible promissory notes, proceeds from a simple agreement for future equity, or SAFE, borrowings under our loan and security agreement with Silicon Valley Bank, which we refer to as our loan agreement, an upfront payment received under the license and collaboration agreement, or the Astellas agreement, with Astellas and sales of our common stock in our initial public offering, or IPO, which closed on July 21, 2020. We are still in the early stages of development of our product candidates, and we have not completed development of any product candidates. We expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we:
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continue our clinical development of PT101, including our planned Phase 1b/2a clinical trial in patients with moderate-to-severe ulcerative colitis, or UC, and our planned Phase 2 trial in patients with systemic lupus erythematosus, or SLE;
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leverage our TALON (Therapeutic Autoimmune reguLatOry proteiN) drug design and discovery platform to advance additional product candidates into preclinical and clinical development;
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pursue the discovery of drug targets for other autoimmune and inflammatory diseases and the subsequent development of any resulting product candidates;
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seek marketing approvals for any product candidates that successfully complete clinical trials;
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scale up our manufacturing processes and capabilities, or arrange for a third party to do so on our behalf, to support our clinical trials of our product candidates and commercialization of any of our product candidates for which we may obtain marketing approval;
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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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acquire or in-license products, product candidates, technologies and/or data referencing rights;
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maintain, expand, enforce, defend and protect our intellectual property;
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hire additional clinical, regulatory, quality control and scientific personnel; and
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add operational, financial and management information systems and personnel, including personnel to support our research, product development and planned future commercialization efforts and our operations as a public company.
In addition, our expenses will increase if, among other things:
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we are required by the U.S. Food and Drug Administration, or the FDA, the European Medicines Agency, or the EMA, Health Canada or other regulatory authorities to perform trials or studies in addition to, or different than, those expected;
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there are any delays in completing our clinical trials or the development of any of our product candidates; or
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there are any third-party challenges to our intellectual property or we need to defend against any intellectual property-related claim.
We have no products for which we have obtained marketing approval and have not generated any revenue from product sales. Even if we obtain marketing approval for, and are successful in commercializing, one or more of our product candidates, we expect to incur substantial additional research and development and other expenditures to develop and market additional product candidates or to expand the approved indications of any marketed product. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue.
We have never generated revenue from product sales and may never achieve or maintain profitability.
We have never generated revenue from product sales. We expect that it will be a number of years, if ever, before we have a product candidate ready for commercialization. To become and remain profitable, we must succeed in developing, and eventually commercializing, a product or products that generate significant revenue. The ability to achieve this success will require us to be effective in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product candidates, obtaining marketing approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain marketing approval. We are only in the preliminary stages of these activities and there is no assurance that we will be successful in these activities. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability.
Our ability to generate revenue from product sales and achieve profitability depends on our ability to successfully develop and obtain the marketing approvals necessary to commercialize our product candidates. We do not have any products approved for sale and do not anticipate generating revenue from product sales for the next several years, if ever. Our ability to generate future revenue from product sales depends heavily on our success in:
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completing preclinical and clinical development of our product candidates and identifying and developing new product candidates;
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seeking and obtaining marketing approvals for any of our product candidates;
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launching and commercializing product candidates for which we obtain marketing approval by establishing a sales force, marketing, medical affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
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achieving formulary status in hospitals and adequate coverage and reimbursement by government and third-party payors for our product candidates, if approved;
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establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate products and services, in both amount and quality, to support clinical development and the market demand for our product candidates, if approved;
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obtaining market acceptance of our product candidates, if approved, as viable treatment options;
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addressing any competing technological and market developments;
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negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in such collaborations;
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maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;
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defending against third-party interference or infringement claims, if any; and
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attracting, hiring and retaining qualified personnel.
Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs in commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the FDA, EMA, Health Canada or other regulatory agencies to perform clinical trials or studies in addition to those that we currently anticipate. Even if we are able to generate revenue from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product candidates or even continue our operations. A decline in the value of our company could also cause our stockholders to lose all or part of their investment.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect to devote substantial financial resources to our ongoing and planned activities, particularly as we prepare for the planned Phase 1b/2a clinical trial of PT101 in patients with UC and the planned Phase 2 clinical trial of PT101 in patients with SLE and continue research and development and initiate additional clinical trials of, and seek marketing approval for, PT101 and other product candidates. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance our preclinical activities and clinical trials. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution. Furthermore, we have incurred and expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. We currently have no credit facility or committed sources of capital. If we are unable to raise capital or obtain adequate funds when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our research and development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our future capital requirements will depend on many factors, including:
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the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical trials for our product candidates, including our planned Phase 1b/2a clinical trial of PT101 in patients with UC and our planned Phase 2 clinical trial of PT101 in patients with SLE;
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the number of, and development requirements for, other product candidates that we pursue;
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the costs, timing and outcome of regulatory review of our product candidates;
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our ability to enter into contract manufacturing arrangements for supply of active pharmaceutical ingredient, or API, and manufacture of our product candidates and the terms of such arrangements;
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the success of our collaboration with Astellas;
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our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
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the payment or receipt of milestones and receipt of other collaboration-based revenues, if any;
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the costs and timing of any future commercialization activities, including product manufacturing, sales, marketing and distribution, for any of our product candidates for which we may receive marketing approval;
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the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
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the extent to which we acquire or in-license other products, product candidates, technologies or data referencing rights;
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the impacts of the COVID-19 pandemic;
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the ability to receive additional non-dilutive funding, including grants from organizations and foundations; and
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the costs of operating as a public company.
As of December 31, 2020, we had cash and cash equivalents of approximately $219.9 million. We believe that our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements through the first half of 2024. However, we have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete our capital resources sooner than we currently expect.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial revenues from product sales, we expect to finance our cash needs through a combination of equity offerings, current or future debt facilities, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Our limited operating history may make it difficult for stockholders to evaluate the success of our business to date and to assess our future viability.
We commenced activities in 2017 and are an early-stage company. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying drug targets and potential product candidates, securing intellectual property rights, undertaking preclinical studies and initiating one early-stage clinical trial. We have not yet demonstrated our ability to successfully develop any product candidate, obtain marketing approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions our stockholders make about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing products.
In addition, as our business grows, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
We expect our financial condition and operating results to fluctuate significantly from quarter-to-quarter and year-to-year due to a variety of factors, many of which are beyond our control. Accordingly, our stockholders should not rely upon the results of any quarterly or annual periods as indications of future operating performance.
Any future indebtedness may limit cash flow available to invest in the ongoing needs of our business.
Any future indebtedness combined with our other financial obligations and contractual commitments could have significant adverse consequences, including:
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requiring us to dedicate a substantial portion of cash flow from operations or cash on hand to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital, capital expenditures, product development efforts and other general corporate purposes;
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increasing our vulnerability to adverse changes in general economic, industry and market conditions;
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subjecting us to restrictive covenants that may reduce our ability to take certain corporate actions, such as paying dividends, or obtain further debt or equity financing;
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limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
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placing us at a competitive disadvantage compared to our competitors that have less debt or better debt servicing options.
We intend to satisfy any future debt service obligations with our existing cash and funds from external sources. Nonetheless, we may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under any future debt. Funds from external sources may not be available on acceptable terms, if at all. In addition, a failure to comply with the covenants under any future loan agreements we may enter into could result in an event of default and acceleration of amounts due. If an event of default occurs and the lenders accelerate the amounts due under such loan agreements, we may not be able to make accelerated payments, and such lenders could seek to enforce security interests in the collateral securing such indebtedness.
Changes in tax laws or in their implementation or interpretation may adversely affect our business and financial condition.
Changes in tax law may adversely affect our business or financial condition. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, or the TCJA, which significantly revised the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains significant changes to corporate taxation, including reducing the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limiting the tax deduction for net interest expense to 30% of adjusted taxable income (except for certain small businesses), limiting the deduction for net operating losses, or NOLs, arising in taxable years beginning after December 31, 2017 to 80% of current year taxable income and elimination of NOL carrybacks for losses arising in taxable years ending after December 31, 2017 (though any such NOLs may be carried forward indefinitely), imposing a one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, eliminating U.S. tax on foreign earnings
(subject to certain important exceptions), allowing immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.
As part of Congress’ response to the COVID-19 pandemic, the Families First Coronavirus Response Act, or FFCR Act, was enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was enacted on March 27, 2020. COVID-19 relief provisions were also included in the Consolidated Appropriations Act, 2021, or CAA, which was enacted on December 27, 2020. The FFCR Act, the CARES Act, and the CAA contain numerous tax provisions. In particular, the CARES Act retroactively and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income limitation on the use of NOLs, which was enacted as part of the TCJA. It also provides that NOLs arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxes the limitation on the tax deductibility of net interest expense by increasing the limitation from 30% to 50% of adjusted taxable income.
Regulatory guidance under the TCJA, the FFCR Act and the CARES Act and the CAA is and continues to be forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on us. In addition, it is uncertain if and to what extent various states will conform to the TCJA, the FFCR Act or the CARES Act and the CAA.
Our ability to use our NOLs and research and development tax credit carryforwards to offset future taxable income may be subject to certain limitations.
As of December 31, 2020, we had federal and state net operating loss carryforwards of $60.1 million and $56.2 million, respectively, which each begin to expire in 2037. Approximately $57.4 million of the federal net operating losses can be carried forward indefinitely. As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $2.8 million and $1.4 million, respectively, which begin to expire in 2038 and 2032, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities.
We have a history of cumulative losses and anticipate that we will continue to incur significant losses in the foreseeable future; thus, we do not know whether or when we will generate taxable income necessary to utilize our NOLs or research and development tax credit carryforwards.
In general, under Section 382 of the Code and corresponding provisions of state law, a corporation that undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, is subject to limitations on its ability to utilize its pre-change NOLs and research and development tax credit carryforwards to offset future taxable income. We have not conducted a study to assess whether any such ownership changes have occurred. We may have experienced such ownership changes in the past and may experience such ownership changes in the future as a result of subsequent changes in our stock ownership (which may be outside our control). As a result, if, and to the extent that, we earn net taxable income, our ability to use our pre-change NOLs and research and development tax credit carryforwards to offset such taxable income may be subject to limitations. Our NOLs or credits may also be impaired under state law.
There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise become unavailable to offset future income tax liabilities. As described above in “Changes in tax laws or in their implementation or interpretation may adversely affect our business and financial condition,” the TCJA includes changes to U.S. federal tax rates and the rules governing NOL carryforwards that may significantly impact our ability to utilize our NOLs to offset taxable income in the future. For these reasons, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes.
Risks Related to the Discovery and Development of our Product Candidates
Our approach to the discovery and development of product candidates is unproven, and we do not know whether we will be able to successfully develop any products.
We focus on using our product candidates to actively rebalance the immune system in either a systemic or a tissue-localized fashion for therapeutic benefit in patients with autoimmune disease, including by using a novel and proprietary variant of interleukin-2, or IL-2, which is a signaling molecule in the immune system, and agonists of programmed death domain-1, or PD-1, which is a protein that is naturally expressed by all activated T cells. To date, there are no approved therapeutic products utilizing IL-2 or an agonist of PD-1 for the treatment of autoimmune disease. Our future success depends on the successful development of this novel therapeutic approach. We have not yet succeeded and may not succeed in demonstrating the efficacy and safety of any of our product candidates in clinical trials or in obtaining marketing approval thereafter. To date, we have completed a single-dose Phase 1a clinical trial of PT101 in healthy volunteers, but we have not studied multiple doses of PT101 in a clinical trial, and we have not studied
PT101 in a disease population. We have not yet conducted any clinical trials of our other product candidates. As such, there may be adverse effects from treatment with any of our current or future product candidates that we cannot predict at this time.
As a result of these factors, it is more difficult for us to predict the time and cost of product candidate development, and we cannot predict whether the application of our TALON platform, or any similar or competitive platforms, will result in the development and marketing approval of any products. There can be no assurance that any development problems we experience in the future related to our TALON platform or any of our research programs will not cause significant delays or unanticipated costs, or that such development problems can be solved. Any of these factors may prevent us from completing our preclinical studies or any clinical trials that we may initiate or commercializing any product candidates we may develop on a timely or profitable basis, if at all.
The ongoing COVID-19 pandemic may affect our ability to initiate and complete preclinical studies, delay the initiation of our planned clinical trials or future clinical trials, disrupt regulatory activities, disrupt our manufacturing and supply chain or have other adverse effects on our business and operations. In addition, this pandemic has adversely impacted economies worldwide, which could result in adverse effects on our business, operations and ability to raise capital.
The ongoing COVID-19 pandemic has caused many governments to implement measures to slow the spread of COVID-19 through quarantines, travel restrictions, heightened border scrutiny and other measures. The COVID-19 pandemic and government measures taken in response have also had a significant impact, both directly and indirectly, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. The future progression of the COVID-19 pandemic, including the impacts of new variants of the virus that causes COVID-19, and its effects on our business and operations are uncertain.
Enrollment in our Phase 1a clinical trial of PT101 was not adversely impacted by the COVID-19 pandemic, and we believe that we have sufficient supply of clinical trial material to conduct our planned Phase 1b/2a clinical trial of PT101 in patients with UC and our planned Phase 2 clinical trial of PT101 in patients with SLE. We cannot provide assurance, however, that some factors from the COVID-19 pandemic will not delay or otherwise adversely affect our clinical development, research, manufacturing and business operations activities, as well as our business generally, in the future.
The extent to which COVID-19 impacts our operations or those of the third parties on which we rely will depend on many factors, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19, and the actions to contain the COVID-19 pandemic or address its impact in the short and long term. Additionally, the conduct of our clinical trials, preclinical studies and manufacturing activities is dependent upon the availability of clinical trial sites, contract research and manufacturing organizations, researchers and investigators, regulatory agency personnel and logistics providers, all of which may be adversely affected by the COVID-19 pandemic.
Any negative impact that the COVID-19 pandemic has on recruiting or retaining patients in our clinical trials, the ability of our suppliers to provide materials for our product candidates, or the regulatory review process could cause additional delays with respect to product development activities, which could materially and adversely affect our ability to obtain marketing approval for and to commercialize our product candidates, increase our operating expenses, affect our ability to raise additional capital, and have a material adverse effect on our financial results.
We and the third-party manufacturers and contract research organizations, or CROs, that we engage may face disruptions that could affect our ability to initiate and complete preclinical studies or clinical trials, including disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacturing of our product candidates, laboratory supplies for our preclinical studies and planned clinical trials, or animals that are used for preclinical testing, in each case, for which there may be shortages because of ongoing efforts to address the COVID-19 pandemic. The response to the COVID-19 pandemic may redirect resources with respect to regulatory and intellectual property matters in a way that would adversely impact our ability to pursue marketing approvals and protect our intellectual property. In addition, we may face impediments to regulatory meetings and potential approvals due to measures intended to limit in-person interactions.
In response to the COVID-19 pandemic and in accordance with direction from state and local governmental authorities, we have restricted access to our facility to those individuals who must perform critical research, translational medicine and laboratory support activities that must be completed on site, limited the number of such people that can be present at our facility at any one time, and required that most of our non-research employees work remotely. In the event that governmental authorities were to keep these restrictions in place for an extended period or impose further restrictions, our employees conducting research and development activities may not be able to access our laboratory space, and our core research activities may be significantly limited or curtailed, possibly for an extended period of time.
The COVID-19 pandemic continues to rapidly evolve, and its ultimate scope, duration and effects are unknown. The extent of the impact of the disruptions to our business, preclinical studies and clinical trials as a result of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the COVID-19 pandemic, travel restrictions and actions to contain the COVID-19 pandemic, such as social distancing and quarantines or lock-downs in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
The pandemic has significantly impacted economies worldwide, which could result in adverse effects on our business, operations and ability to raise capital. We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business and it has the potential to adversely affect our business, financial condition, results of operations, and prospects.
We are early in our development efforts, and we only have one product candidate in a clinical trial. If we are unable to advance our current or future product candidates into and through clinical trials, obtain marketing approval and ultimately commercialize our product candidates or experience significant delays in doing so, our business will be materially harmed.
We are early in our development efforts, and we have advanced only one candidate into clinical trials, PT101 for the treatment patients with UC and patients with SLE. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development, marketing approval and eventual commercialization of PT101 and our other current and future product candidates discovered using our TALON platform.
The success of PT101 and our other current and future product candidates will depend on several factors, including the following:
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successfully completing preclinical studies and initiating clinical trials for our early stage product candidates;
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successful enrollment and completion of clinical trials for PT101 and any other product candidates that we advance into clinical development;
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data from our clinical program that support an acceptable risk-benefit profile of our product candidates in the intended patient populations;
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acceptance by the FDA, EMA, Health Canada or other regulatory agencies of the investigational new drug applications, or INDs, clinical trial applications, or other regulatory filings for PT101 and our other product candidates;
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expanding and maintaining a workforce of experienced scientists and others to continue to develop our product candidates;
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successfully applying for and receiving marketing approvals from applicable regulatory authorities;
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obtaining and maintaining intellectual property protection and regulatory exclusivity for our product candidates;
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making arrangements with third-party manufacturers for, or establishing, commercial manufacturing capabilities;
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establishing sales, marketing and distribution capabilities and successfully launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;
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acceptance of our products, if and when approved, by patients, the medical community and third-party payors;
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effectively competing with other therapies;
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obtaining and maintaining coverage, adequate pricing and adequate reimbursement from third-party payors, including government payors;
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maintaining, enforcing, defending and protecting our rights in our intellectual property portfolio;
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not infringing, misappropriating or otherwise violating others’ intellectual property or proprietary rights; and
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maintaining a continued acceptable safety profile of our products following receipt of any marketing approvals.
We do not have complete control over many of these factors, including certain aspects of clinical development and the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing, distribution and sales efforts of any future collaborator. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully develop and commercialize our product candidates, which would materially harm our business.
In the near term, we are dependent on the success of PT101. If we are unable to complete the clinical development of, obtain marketing approval for or successfully commercialize PT101, or if we experience significant delays in doing so, our business would be substantially harmed.
We do not currently have products approved for sale and are investing a significant portion of our efforts and financial resources in the development of PT101. Although we have other programs in preclinical development and we intend to develop additional product candidates in the coming years, it will take additional investment and time for such product candidates to reach the same stage of development as PT101, and there can be no assurance that they will ever do so. Our prospects are substantially dependent on our ability to develop and obtain marketing approval for, and successfully commercialize, PT101 in one or more disease indications.
We may not be successful in our efforts to use our TALON platform to build a pipeline of product candidates and advance products through commercial approval.
A key element of our strategy is to combine a network-based conceptualization of the immune system with our TALON platform to discover and design product candidates that harness the intrinsic regulatory elements of the immune system to address autoimmune diseases. Even if we are successful in identifying target diseases and product candidates, the product candidates that we identify may not be suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to receive marketing approval and achieve market acceptance. We have never commercialized a product using our TALON platform and may never be able to do so. Identifying, developing, obtaining marketing approval for and commercializing additional product candidates will require substantial additional funding and is prone to the risks of failure inherent in product development. We cannot provide our stockholders any assurance that we will be able to successfully identify additional product candidates with our TALON platform, advance any of these additional product candidates through the development process or successfully commercialize any such additional product candidates. Regulatory authorities have substantial discretion in the approval process and may cause delays in the approval or rejection of an application. As a result of these factors, it is difficult for us to predict the time and cost of product candidate development. There can be no assurance that any development problems we experience in the future related to our TALON platform or any of our research or development programs will not cause significant delays or unanticipated costs, or that such development problems can be solved. If we do not successfully identify, develop, obtain marketing approval for and commercialize product candidates based upon our technological approach, we will not be able to generate product revenues.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. If we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
We currently only have one product candidate in clinical development. The risk of failure for each of our product candidates is high. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or will receive marketing approval. The time required to obtain approval from the FDA, EMA, Health Canada or other comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of regulatory authorities. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. We have not yet completed a clinical trial of any product candidate. Clinical trials may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. Even if the clinical trials are successful, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application may cause delays in the approval or rejection of an application.
Before we can commence clinical trials for a product candidate, we must complete extensive preclinical testing and studies that support our planned INDs and other regulatory filings in the United States and abroad. We cannot be certain of the timely completion or outcome of our preclinical testing and studies and cannot predict if the outcome of our preclinical testing and studies will ultimately support the further development of our current or future product candidates or whether regulatory authorities will accept our proposed clinical programs. As a result, we may not be able to submit applications to initiate clinical development on the timelines we expect, if at all, and the submission of these applications may not result in regulatory authorities allowing clinical trials to begin. Furthermore, product candidates are subject to continued preclinical safety studies, which may be conducted concurrently with our clinical testing. The outcomes of these safety studies may delay the launch of or enrollment in future clinical trials and could impact our ability to continue to conduct our clinical trials.
Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. We cannot guarantee that any of our clinical trials will be conducted as planned or completed on schedule, or at all. A failure of one or more clinical trials can occur at any stage of testing, which may result from a multitude of factors, including, but not limited to, flaws in study design, dose selection issues, placebo effects, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits.
Preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products. Furthermore, the failure of any of our product candidates to demonstrate safety and efficacy in any clinical trial could negatively impact the perception of our other product candidates and/or cause the FDA, EMA, Health Canada or other regulatory authorities to require additional testing before approving any of our product candidates.
Our current and future product candidates could fail to receive regulatory approval for many reasons, including the following:
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the FDA, EMA, Health Canada or other foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
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we may be unable to demonstrate to the satisfaction of the FDA, EMA, Health Canada or other foreign regulatory authorities that a product candidate is safe, pure and potent or effective for its proposed indication;
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the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA, Health Canada or other foreign regulatory authorities for approval;
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we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
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the FDA, EMA, Health Canada or other foreign regulatory authorities may disagree with our interpretation of data from clinical trials or preclinical studies;
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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a Biologics License Application, or BLA, to the FDA, or similar foreign submission to the EMA, Health Canada or other foreign regulatory authority, to obtain approval in the United States, the European Union or elsewhere;
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the FDA, EMA, Health Canada or other foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
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the approval policies or regulations of the FDA, EMA, Health Canada or other foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of clinical trial results may result in our failing to obtain regulatory approval to market any product candidate we develop, which would significantly harm our business, results of operations and prospects.
The FDA, EMA, Health Canada and other comparable foreign regulatory authorities have substantial discretion in the approval process and determining when or whether regulatory approval will be obtained for any product candidate that we develop. Even if we believe the data collected from future clinical trials of our product candidates are promising, such data may not be sufficient to support approval by the FDA, EMA, Health Canada or any other comparable foreign regulatory authorities.
Even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
We may incur unexpected costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
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regulators or institutional review boards, or IRBs, or independent ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
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we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;
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regulators may decide the design of our clinical trials is flawed, for example if our trial protocol does not evaluate treatment effects in trial subjects for a sufficient length of time;
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clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
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preclinical testing may produce results based on which we may decide, or regulators may require us, to conduct additional preclinical studies before we proceed with certain clinical trials, limit the scope of our clinical trials, halt ongoing clinical trials or abandon product development programs;
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the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;
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our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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regulators, IRBs or ethics committees may require us to perform additional or unanticipated clinical trials to obtain approval or we may be subject to additional post-marketing testing requirements to maintain regulatory approval;
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regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate;
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the cost of clinical trials of our product candidates may be greater than we anticipate;
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the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate;
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our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, IRBs or ethics committees to suspend or terminate the trials; and
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regulators may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a risk evaluation and mitigation strategy, or REMS.
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are conducted or their ethics committees, by the data review committee or data safety monitoring board for such trial or by the FDA, EMA or other foreign regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA, EMA or other foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, including those relating to the class of products to which our product candidates belong.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
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be delayed in obtaining marketing approval for our product candidates;
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not obtain marketing approval at all;
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obtain approval for indications or patient populations that are not as broad as intended or desired;
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obtain approval with labeling or a REMS that includes significant use or distribution restrictions or safety warnings;
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be subject to additional post-marketing testing requirements; or
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have the product removed from the market after obtaining marketing approval.
Our development costs will also increase if we experience delays in preclinical studies or clinical trials or in obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. We may also determine to change the design or protocol of one or more of our clinical trials, including to add additional patients or arms, which could result in increased costs and expenses and/or delays. Significant preclinical study or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.
Preclinical drug development is uncertain. Some or all of our preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect our ability to obtain marketing approvals or commercialize these product candidates on a timely basis or at all, which would have an adverse effect on our business.
In order to obtain FDA approval to market a new biological product, we must demonstrate proof of safety, purity and potency or efficacy in humans. To satisfy these requirements, we will have to conduct adequate and well-controlled clinical trials. Before we can commence clinical trials for a product candidate, we must complete extensive preclinical testing and studies that support an IND in the
United States. Although we have completed a Phase 1 trial in Canada, we have not yet submitted an IND to the FDA for any of our product candidates. We cannot be certain of the timely completion or outcome of our preclinical testing and studies, and we cannot predict if the FDA will accept our proposed clinical programs or if the outcome of our preclinical testing and studies will ultimately support the further development of these product candidates. As a result, we cannot be sure that we will be able to submit INDs or similar applications for any preclinical programs on the timelines we expect, if at all, and we cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.
Conducting preclinical testing is a lengthy, time-consuming and expensive process. The length of time may vary substantially according to the type, complexity, novelty and intended use of the product candidate, and often can be several years or more per product candidate. Delays associated with product candidates for which we are conducting preclinical testing and studies ourselves may cause us to incur additional operating expenses.
Moreover, we may be affected by delays associated with the preclinical testing and studies of certain product candidates conducted by our potential partners over which we have no control. The commencement and rate of completion of preclinical studies and clinical trials for a product candidate may be delayed by many factors, including, for example:
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inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical trials; and
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delays in reaching a consensus with regulatory agencies on study design.
Moreover, even if we do initiate clinical trials for other product candidates, our development efforts may not be successful, and clinical trials that we conduct or that third parties conduct on our behalf may not demonstrate sufficient safety, purity and potency or efficacy necessary to obtain the requisite marketing approvals for any of our product candidates or product candidates employing our technology. Even if we obtain positive results from preclinical studies or initial clinical trials, we may not achieve the same success in future trials.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary regulatory approvals could be delayed or prevented.
Identifying and qualifying patients to participate in clinical trials for our product candidates is critical to our success. Successful and timely completion of clinical trials will require that we enroll a sufficient number of patients who remain in the trial until its conclusion. We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside of the United States.
Patient enrollment is affected by a variety of other factors, including:
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the prevalence and severity of the disease under investigation;
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the eligibility criteria for the trial in question;
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the perceived risks and benefits of the product candidate under trial;
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the requirements of the trial protocols;
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the availability of existing treatments for the indications for which we are conducting clinical trials;
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the ability to recruit clinical trial investigators with the appropriate competencies and experience;
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the efforts to facilitate timely enrollment in clinical trials;
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the patient referral practices of physicians;
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the ability to monitor patients adequately during and after treatment;
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the proximity and availability of clinical trial sites for prospective patients;
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the conduct of clinical trials by competitors for product candidates that treat the same indications or address the same patient populations as our product candidates; and
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the cost to, or lack of adequate compensation for, prospective patients.
Other pharmaceutical and biotechnology companies have reported experiencing delays in enrollment in their ongoing clinical trials as a result of the COVID-19 pandemic, and we could also experience such delays. Our inability to locate, enroll and retain a sufficient number of patients for our clinical trials would result in significant delays, could require us to abandon one or more clinical trials altogether and could delay or prevent our receipt of necessary regulatory approvals. Enrollment delays in our clinical trials may
result in increased development costs for our product candidates, which would cause the value of our company to decline and limit our ability to obtain additional financing.
If serious adverse events, undesirable side effects or unexpected characteristics are identified during the development of PT101 or any other current or future product candidate we may develop in the future, we may need to abandon or limit our further clinical development of those product candidates.
If our current or future product candidates are associated with serious adverse events or undesirable side effects in clinical trials or have characteristics that are unexpected in clinical trials or preclinical testing, we may need to abandon their development or limit development to more narrow uses or subpopulations in which the serious adverse events, undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In pharmaceutical development, many compounds that initially show promise in early-stage or clinical testing are later found to cause side effects that delay or prevent further development of the compound.
Additionally, if results of our clinical trials reveal undesirable side effects, we, the FDA or the IRBs or ethics committees at the institutions in which our studies are conducted could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete any of our clinical trials. If we elect or are forced to suspend or terminate any clinical trial of our product candidates, the commercial prospects of such product candidate will be harmed, and our ability to generate product revenue from such product candidate will be delayed or eliminated. Any of these occurrences could materially harm our business.
Interim and preliminary results from our clinical trials that we announce or publish from time to time may change as more participant data become available and are subject to audit and verification procedures, which could result in material changes in the final data.
From time to time, we may publish interim or preliminary results from our clinical trials. Interim results from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as participant enrollment continues and more participant data become available. We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully evaluate all data. Preliminary or top-line results also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary or interim data and final data could be material and could significantly harm our reputation and business prospects and may cause the trading price of our common stock to fluctuate significantly.
Results of preclinical studies and early clinical trials of our product candidates may not be predictive of future trial results.
Success in preclinical studies and early clinical trials, including our Phase 1a clinical trial of PT101, does not ensure that later clinical trials will be successful. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. Even if we are able to commence clinical trials, issues may arise that could suspend or terminate such clinical trials. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in clinical trials, even after positive results in earlier preclinical studies or clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Notwithstanding any potential promising results in earlier studies and trials, we cannot be certain that we will not face similar setbacks. In addition, the results of our preclinical animal studies, including our autoimmune mouse studies and animal studies, may not be predictive of the results of outcomes in human clinical trials. For example, our autoimmune product candidates that are in preclinical development may demonstrate different chemical and biological properties in patients than they do in laboratory animal studies or may interact with human biological systems in unforeseen or harmful ways.
If any of our product candidates receives marketing approval and we, or others, later discover that the drug is less effective than previously believed or causes undesirable side effects that were not previously identified, our ability to market the drug could be compromised.
Clinical trials of our product candidates are conducted in carefully defined subsets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If one or more of our product
candidates receives regulatory approval, and we, or others, later discover that they are less effective than previously believed, or cause undesirable side effects, a number of potentially significant negative consequences could result, including:
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withdrawal or limitation by regulatory authorities of approvals of such product;
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seizure of the product by regulatory authorities;
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recall of the product;
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restrictions on the marketing of the product or the manufacturing process for any component thereof;
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requirement by regulatory authorities of additional warnings on the label, such as a “black box” warning or contraindication;
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requirement that we implement a REMS or create a medication guide outlining the risks of such side effects for distribution to patients;
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commitment to expensive post-marketing studies as a prerequisite of approval by regulatory authorities of such product;
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the product may become less competitive;
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initiation of regulatory investigations and government enforcement actions;
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initiation of legal action against us to hold us liable for harm caused to patients; and
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harm to our reputation and resulting harm to physician or patient acceptance of our products.
Any of these events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and could significantly harm our business, financial condition, and results of operations.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. Failure to allocate resources or capitalize on strategies in a successful manner will have an adverse impact on our business.
We plan to conduct additional clinical trials for our product candidates, including at sites outside the United States, and the FDA may not accept data from trials conducted in such locations.
We conducted a Phase 1a clinical trial of PT101 in healthy volunteers in Canada, and we may conduct additional clinical trials in North America, Europe and Asia. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of these data is subject to conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and be performed by qualified investigators in accordance with ethical principles and good clinical practices, or GCPs. The trial population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population and U.S. medical practice in ways that the FDA deems clinically meaningful. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will depend on its determination that the trials also complied with all applicable U.S. laws and regulations. If the FDA does not accept the data from any trial that we conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time-consuming and could delay or permanently halt our development of the applicable product candidates.
Risks Related to our Dependence on Third Parties
We have relied, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, which may harm our business.
We relied on third-party CROs to conduct our Phase 1a clinical trial of PT101 and plan to rely on third-party CROs or third-party research collaboratives to conduct our planned clinical trials. We do not plan to independently conduct clinical trials of our other product candidates. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical
institutions and clinical investigators, to conduct our clinical trials. These agreements might terminate for a variety of reasons, including a failure to perform by the third parties. If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all, and our product development activities might be delayed.
Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with GCPs for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully develop and commercialize our product candidates. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.
Manufacturing biologic products is complex and subject to product loss for a variety of reasons. We contract with third parties for the manufacture of our product candidates for preclinical and clinical testing and expect to continue to do so for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.
We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely, and expect to continue to rely, on third parties for the manufacture of PT101 and our other product candidates for preclinical and clinical testing, as well as for commercial manufacture if any of our product candidates receive marketing approval. We also rely on these third parties for packaging, labeling, sterilization, storage, distribution and other production logistics. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts. We may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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reliance on the third party for regulatory compliance and quality assurance;
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the possible breach of the manufacturing agreement by the third party;
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the possible misappropriation of our proprietary information, including our trade secrets and know-how; and
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the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.
We or our third-party manufacturers may encounter shortages in the raw materials or active pharmaceutical ingredient necessary to produce our product candidates in the quantities needed for our clinical trials or, if our product candidates are approved, in sufficient quantities for commercialization or to meet an increase in demand, as a result of capacity constraints or delays or disruptions in the market for the raw materials or active pharmaceutical ingredient, including shortages caused by the purchase of such raw materials or active pharmaceutical ingredient by our competitors or others. The failure of us or our third-party manufacturers to obtain the raw materials or active pharmaceutical ingredient necessary to manufacture sufficient quantities of our product candidates may have a material adverse effect on our business.
Our third-party manufacturers are subject to inspection and approval by regulatory authorities before we can commence the manufacture and sale of any of our product candidates, and thereafter subject to ongoing inspection from time to time. Third-party manufacturers may not be able to comply with current good manufacturing practices, or cGMP, regulations or similar regulatory requirements outside of the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in regulatory actions, such as the issuance of FDA Form 483 notices of observations, warning letters or sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.
Manufacturing biologic products, such as PT101, is complex, especially in large quantities. Biologic products must be made consistently and in compliance with a clearly defined manufacturing process. Accordingly, it is essential to be able to validate and control the manufacturing process to assure that it is reproducible. The manufacture of biologics is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, vendor or operator error, inconsistency in yields, variability in product characteristics and difficulties in scaling the product process. We have not yet scaled up the manufacturing process for any of our product candidates for potential commercialization. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination, which could harm our results of operations and cause potential reputational damage. Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. As a result, we may not obtain access to these facilities on a priority basis or at all. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.
Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a source for bulk drug substance nor do we have any agreements with third-party manufacturers for long-term commercial supply. If any of our future contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers. Although we believe that there are several potential alternative manufacturers who could manufacture our product candidates, we may incur added costs and delays in identifying and qualifying any such replacement or be unable to reach agreement with an alternative manufacturer.
Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.
We expect to depend on collaborations with third parties for the research, development, manufacture and commercialization of programs or product candidates. If these collaborations are not successful, our business could be adversely affected.
As part of our strategy, we intend to seek to enter into collaborations with third parties for one or more of our programs or product candidates. For example, in October 2019, we entered into the Astellas agreement to develop locally acting immunomodulators for autoimmune diseases of the pancreas. Our likely collaborators for any other collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. In the Astellas agreement and in any other arrangements that we may enter into with any third parties, we will have limited control over the amount and timing of resources that any future collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenue from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
Collaborations that we enter into may not be successful, and any success will depend heavily on the efforts and activities of such collaborators. Collaborations pose a number of risks, including the following:
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collaborators have significant discretion in determining the amount and timing of efforts and resources that they will apply to these collaborations;
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collaborators may not perform their obligations as expected;
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collaborators may not pursue development of our product candidates or may elect not to continue or renew development programs based on results of clinical trials or other studies, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;
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collaborators may not pursue commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew commercialization programs based on results of clinical trials or other studies, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that may divert resources or create competing priorities. For example, Astellas is solely responsible for, and has sole authority with respect to, at its own expense, all commercialization activities and all regulatory responsibilities, including preparing and filing INDs, marketing authorization applications and obtaining and maintaining regulatory approvals for products under the Astellas agreement;
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collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
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we may not have access to, or may be restricted from disclosing, certain information regarding product candidates being developed or commercialized under a collaboration and, consequently, may have limited ability to inform our stockholders about the status of such product candidates on a discretionary basis;
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collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidates and products if the collaborators believe that the competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
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product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
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a collaborator may fail to comply with applicable regulatory requirements regarding the development, manufacture, distribution or marketing of a product candidate or product;
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a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of such product or products;
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disagreements with collaborators, including disagreements over intellectual property or proprietary rights, contract interpretation or the preferred course of development, might cause delays or terminations of the research, development or commercialization of product candidates, might lead to additional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
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collaborators may not properly obtain, maintain, enforce, defend or protect our intellectual property or proprietary rights or may use our proprietary information in such a way as to potentially lead to disputes or legal proceedings that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
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disputes may arise with respect to the ownership of intellectual property developed pursuant to our collaborations;
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collaborators may infringe, misappropriate or otherwise violate the intellectual property or proprietary rights of third parties, which may expose us to litigation and potential liability; and
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collaborations may be terminated for the convenience of the collaborator, and, if terminated, we could be required to raise additional capital to pursue further development or commercialization of the applicable product candidates. For example, any time after the first anniversary of the effective date of the Astellas agreement, Astellas may terminate the Astellas agreement for convenience upon advance prior written notice.
Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. If any collaborations that we enter into do not result in the successful development and commercialization of products or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of our product candidates could be delayed and we may need additional resources to develop our product candidates. All of the risks relating to product development, regulatory approval and commercialization also apply to the activities of our collaborators.
Additionally, subject to its contractual obligations to us, if a collaborator of ours is involved in a business combination, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception in the business and financial communities could be adversely affected.
If we are not able to establish or maintain collaborations on commercially reasonable terms, we may have to alter our development and commercialization plans and our business could be adversely affected.
We face significant competition in attracting appropriate collaborators, and a number of more established companies may also be pursuing strategies to license or acquire third-party intellectual property rights that we consider attractive. These established companies may have a competitive advantage over us due to their size, financial resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. Whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA, EMA, Health Canada or other regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, the terms of any existing collaboration agreements, and industry and market conditions generally. The
collaborator may also have the opportunity to collaborate on other product candidates or technologies for similar indications and will have to evaluate whether such a collaboration could be more attractive than the one with us for our product candidate.
We may also be restricted under existing or future license agreements from entering into agreements on certain terms with potential collaborators. For example, during the term of the Astellas agreement, we are not permitted to use tethers that are identified in the research plan, or develop, manufacture or commercialize any product directed toward tether targets that are identified in the research plan, or, in either case, grant a license to a third party or sublicense to enable any third party to do so.
Collaborations are complex and time-consuming to negotiate, document and execute. In addition, consolidation among large pharmaceutical and biotechnology companies has reduced the number of potential future collaborators.
We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our TALON platform.
If any third-party manufacturer of our product candidates is unable to increase the scale of its production of our product candidates, and/or increase the product yield of its manufacturing, then our costs to manufacture the product may increase and commercialization may be delayed.
In order to produce sufficient quantities to meet the demand for clinical trials and, if approved, subsequent commercialization of any current or future product candidates that we may develop, our third-party manufacturers will be required to increase their production and optimize their manufacturing processes while maintaining the quality of the product. The transition to larger scale production could prove difficult. In addition, if our third-party manufacturers are not able to optimize their manufacturing processes to increase the product yield for our product candidates, or if they are unable to produce increased amounts of our product candidates while maintaining the quality of the product, then we may not be able to meet the demands of clinical trials or market demands, which could decrease our ability to generate profits and have a material adverse impact on our business and results of operation.
Risks Related to our Intellectual Property
If we are unable to obtain, maintain, enforce and protect patent protection for our technology and product candidates or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully develop and commercialize our technology and product candidates may be adversely affected.
Our success depends in large part on our ability to obtain and maintain protection of the intellectual property we may own solely and jointly with others or may license from others, particularly patents, in the United States and other countries with respect to any proprietary technology and product candidates we develop. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our product candidates that are important to our business and by in-licensing intellectual property related to our technologies and product candidates. If we are unable to obtain or maintain patent protection with respect to any proprietary technology or product candidate, our business, financial condition, results of operations and prospects could be materially harmed.
The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, defend or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain, enforce and defend the patents, covering technology that we license from third parties. Therefore, these in-licensed patents and applications may not be prepared, filed, prosecuted, maintained, defended and enforced in a manner consistent with the best interests of our business.
The patent position of pharmaceutical and biotechnology companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. In addition, the scope of patent protection outside of the United States is uncertain and laws of foreign countries may not protect our rights to the same extent as the laws of the United States
or vice versa. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does.
With respect to our patent rights, we cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors. Further, we may not be aware of all third-party intellectual property rights potentially relating to our product candidates. We are aware of a European Patent which could be construed to cover a method of use for an IL-2 mutein for the treatment of arthritis and other autoimmune disorders, including, but not limited to, rheumatoid arthritis. We may in the future evaluate PT101 or other product candidates for the treatment of rheumatoid arthritis, and if this patent were maintained in Europe and construed to cover PT101, we may not be able to sell PT101 in Europe for this indication during the term of the patent.
In addition, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not published at all. Therefore, neither we nor our licensors can know with certainty whether either we or our licensors were the first to make the inventions claimed in the patents and patent applications we own or in-license now or in the future, or that either we or our licensors were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our owned and in-licensed patent rights are highly uncertain. Moreover, our owned and in-licensed pending and future patent applications may not result in patents being issued which protect our technology and product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents and our ability to obtain, protect, maintain, defend and enforce our patent rights, narrow the scope of our patent protection and, more generally, could affect the value or narrow the scope of our patent rights.
Moreover, we may be subject to a third-party preissuance submission of prior art to the United States Patent and Trademark Office, or USPTO, or become involved in opposition, derivation, revocation, reexamination, inter partes review, post-grant review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or product candidates and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party patent rights. If the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.
Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates. Such proceedings also may result in substantial cost and require significant time from our management and employees, even if the eventual outcome is favorable to us. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Furthermore, our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing technology and products similar or identical to any of our technology and product candidates.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including biosimilars. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
If we are unable to obtain licenses from third parties on commercially reasonable terms or fail to comply with our obligations under such agreements, our business could be harmed.
It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license from these third parties. If we are unable to license such technology, or if we are forced to license such technology on unfavorable terms, our business could be materially harmed. If we are unable to obtain a necessary license, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales or an obligation on our part to pay royalties and/or other forms of compensation. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us.
If we are unable to obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may be required to expend significant time and resources to redesign our technology, product candidates, or the methods for manufacturing them or to develop or license replacement technology, all of which may not be feasible on a technical or commercial basis. If we are unable to do so, we may be unable to develop or commercialize the affected technology and product candidates, which could harm our business, financial condition, results of operations and prospects significantly.
Additionally, if we fail to comply with our obligations under license agreements, our counterparties may have the right to terminate these agreements, in which event we might not be able to develop, manufacture or market, or may be forced to cease developing, manufacturing or marketing, any product that is covered by these agreements or may face other penalties under such agreements. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements, or restrictions on our ability to freely assign or sublicense our rights under such agreements when it is in the interest of our business to do so, may result in our having to negotiate new or reinstated agreements with less favorable terms, cause us to lose our rights under these agreements, including our rights to important intellectual property or technology or impede, or delay or prohibit the further development or commercialization of one or more product candidates that rely on such agreements.
Our product candidates may face competition from biosimilars approved through an abbreviated regulatory pathway.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009, or BPCIA, which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-approved reference biological product. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first approved by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first approved. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of the other company’s product. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty.
We believe that any of our product candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than anticipated.
Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
If we do not obtain patent term extension in the United States under the Hatch-Waxman Act and in foreign countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for any product candidates we may develop, our business may be materially harmed.
In the United States, the patent term of a patent that covers an FDA-approved drug may be eligible for limited patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under clinical development and regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, and only one patent applicable to and that covers an approved drug may
be extended. Similar provisions are available in Europe, such as supplementary protection certificates, and certain other non-United States jurisdictions to extend the term of a patent that covers an approved drug. While, in the future, if and when our product candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those product candidates, there is no guarantee that the applicable authorities will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions. We may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority could be less than we request. If we are unable to obtain any patent term extension or the term of any such extension is less than we request, our competitors may obtain approval of competing products following the expiration of our patent rights, and our business, financial condition, results of operations and prospects could be materially harmed.
It is possible that we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering any of our product candidates that we may identify even where that patent is eligible for patent term extension, or if we obtain such an extension, it may be for a shorter period than we had sought.
Changes to patent laws in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either the patent laws or interpretation of patent laws in the United States, including patent reform legislation such as the Leahy-Smith America Invents Act, or the Leahy-Smith Act, could increase the uncertainties and costs surrounding the prosecution of our patent applications and the maintenance, enforcement or defense of our issued patents. The Leahy-Smith Act includes a number of significant changes to United States patent law. These changes include provisions that affect the way patent applications are prosecuted, redefine prior art, provide more efficient and cost-effective avenues for competitors to challenge the validity of patents, and enable third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent at USPTO-administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith Act, the United States transitioned to a first-to-file system in which, assuming that the other statutory requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. As such, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our patent rights and our ability to protect, defend and enforce our patent rights in the future.
We may become involved in lawsuits to protect or enforce our patent or other intellectual property rights, which could be expensive, time-consuming and unsuccessful.
Competitors and other third parties may infringe, misappropriate or otherwise violate our issued patents or other intellectual property. As a result, we may need to file infringement, misappropriation or other intellectual property related claims, which can be expensive and time-consuming. Any claims we assert against perceived infringers could provoke such parties to assert counterclaims against us alleging that we infringe, misappropriate or otherwise violate their intellectual property. In addition, in a patent infringement proceeding, such parties could counterclaim that the patents we have asserted are invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may institute such claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). The outcome following legal assertions of invalidity and unenforceability is unpredictable.
An adverse result in any such proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put any of our patent applications at risk of not yielding an issued patent. A court may also refuse to stop the third party from using the technology at issue in a proceeding on the grounds that our patents do not cover such technology. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information or trade secrets could be compromised by disclosure during this type of litigation. Any of the foregoing could allow such third parties to develop and commercialize competing technologies and products and have a material adverse impact on our business, financial condition, results of operations and prospects.
Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive license is offered and our competitors gain access to the same technology. Our defense of litigation or interference or derivation proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidates to market.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
Issued patents covering our product candidates could be found invalid or unenforceable if challenged in court. We may not be able to protect our trade secrets in court.
If we or one of our licensing partners initiates legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description or non-enablement. In addition, patent validity challenges may, under certain circumstances, be based upon non-statutory obviousness-type double patenting, which, if successful, could result in a finding that the claims are invalid for obviousness-type double patenting or the loss of patent term, including a patent term adjustment granted by the USPTO, if a terminal disclaimer is filed to obviate a finding of obviousness-type double patenting. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld information material to patentability from the USPTO, or made a misleading statement, during prosecution. Third parties also may raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions. Such proceedings could result in the revocation or cancellation of or amendment to our patents in such a way that they no longer cover our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which the patent examiner and we or our licensing partners were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we could lose at least part, and perhaps all, of the patent protection on one or more of our product candidates. Such a loss of patent protection could have a material adverse impact on our business.
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect, and some courts inside and outside the United States are less willing or unwilling to protect trade secrets. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.
Third parties may initiate legal proceedings alleging that we are infringing, misappropriating or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of third parties. There is considerable patent and other intellectual property litigation in the pharmaceutical and biotechnology industries. We may become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our technology and product candidates, including interference proceedings, post grant review, inter partes review, and derivation proceedings before the USPTO and similar proceedings in foreign jurisdictions such as oppositions before the European Patent Office. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are pursuing development candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our technologies or product candidates that we may identify may be subject to claims of infringement of the patent rights of third parties.
The legal threshold for initiating litigation or contested proceedings is low, so that even lawsuits or proceedings with a low probability of success might be initiated and require significant resources to defend. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can. The risks of being involved in such litigation and proceedings may increase if and as our product candidates near commercialization and as we gain the greater visibility associated with being a public company. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of merit. We may not be aware of all such intellectual property rights potentially relating to our technology and product candidates and their uses, or we may incorrectly conclude that third party intellectual property is invalid or that our activities and product candidates do not infringe such intellectual property. Thus, we do not know with certainty that our technology and product candidates, or our development and commercialization thereof, do not and will not infringe, misappropriate or otherwise violate any third party’s intellectual property.
While our product candidates are in preclinical studies and clinical trials, we believe that their use in these preclinical studies and clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As our product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases. We attempt to ensure that our product candidates and the methods we employ to manufacture them, as well as the methods for their use we intend to promote, do not infringe other parties’ patents and other proprietary rights. We cannot assure our stockholders that they do not, however, and competitors or other parties may assert that we infringe their proprietary rights in any event.
Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations or methods, such as methods of manufacture or methods for treatment, related to the discovery, use or manufacture of the product candidates that we may identify or related to our technologies. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that the product candidates that we may identify may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. Moreover, as noted above, there may be existing patents that we are not aware of or that we have incorrectly concluded are invalid or not infringed by our activities. If any third-party patents were held by a court of competent jurisdiction to cover, for example, the manufacturing process of the product candidates that we may identify, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire.
We may test our product candidates administered with other product candidates or products that are covered by patents held by other companies or institutions. In the event that a labeling instruction is required in product packaging recommending that combination, we could be accused of, or held liable for, infringement of the third-party patents covering the product candidate or product recommended for administration with our product candidates. In such a case, we could be required to obtain a license from the other company or institution to use the required or desired package labeling, which may not be available on commercially reasonable terms, or at all.
We are aware of certain U.S. and foreign patents and applications owned by certain third parties with claims that are directed to IL-2 muteins that are conjugated to certain proteins, some of which would expire as late as 2037. These patents could be construed to cover PT101 and we may not be able to commercialize PT101 in such jurisdictions. If the pending patent applications were to issue in certain jurisdictions, we may not be able to commercialize PT101 in such jurisdictions during the term of the patent. In addition, we are aware of certain European and other foreign patents and applications owned by a third party with claims that are broadly directed methods of using IL-2 muteins to treat certain autoimmune disease indications, including rheumatoid arthritis, which would expire as
late as 2030. The patents or patents issuing from these pending applications could be construed to cover PT101, as well as other products containing IL-2 muteins.
Generally, conducting clinical trials and other development activities in the United States is not considered an act of infringement. If and when products are approved by the FDA, that certain third party may then seek to enforce its patents by filing a patent infringement lawsuit against us or our licensee(s). In such lawsuit, we or our licensees may incur substantial expenses defending our rights or our licensees rights to commercialize such product candidates, and in connection with such lawsuit and under certain circumstances, it is possible that we or our licensees could be required to cease or delay the commercialization of a product candidate and/or be required to pay monetary damages or other amounts, including royalties on the sales of such products. Moreover, any such lawsuit may also consume substantial time and resources of our management team and board of directors. The threat or consequences of such a lawsuit may also result in royalty and other monetary obligations being imposed on us, which may adversely affect our results of operations and financial condition.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize the product candidates that we may identify. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.
We may choose to take a license or, if we are found to infringe, misappropriate or otherwise violate a third party’s intellectual property rights, we could also be required to obtain a license from such third party to continue developing, manufacturing and marketing our technology and product candidates. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us and could require us to make substantial licensing and royalty payments. We could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technology or product. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right and could be forced to indemnify our customers or collaborators. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. In addition, we may be forced to redesign our product candidates, seek new regulatory approvals and indemnify third parties pursuant to contractual agreements. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar material adverse effect on our business, financial condition, results of operations and prospects.
Intellectual property litigation or other legal proceedings relating to intellectual property could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and may also have an advantage in such proceedings due to their more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other proceedings could compromise our ability to compete in the marketplace.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance, renewal and annuity fees and various other government fees on any issued patent and pending patent application must be paid to the USPTO and foreign patent agencies in several stages or annually over the lifetime of our patents and patent applications. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In certain circumstances, we may rely on our licensing partners to pay these fees to, or comply with the procedural and documentary rules of, the relevant patent agency. With respect to our patents, we rely on outside firms and outside counsel to remind us of the due dates and to make payment after we instruct them to do so. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or
patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, potential competitors might be able to enter the market with similar or identical products or technology. If we fail to maintain the patents and patent applications covering our product candidates, it would have a material adverse effect on our business, financial condition, results of operations and prospects.
If we fail to comply with our obligations in our intellectual property licenses arrangements with third parties, or otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important to our business.
We are party to agreements, and we may enter into additional arrangements, with third parties that may impose diligence, development and commercialization timelines, milestone payment, royalty, insurance and other obligations on us. We have existing agreements, pursuant to which we are obligated to pay royalties on net product sales of product candidates or related technologies to the extent they are covered by the agreements. If we fail to comply with such obligations under current or future agreements, our counterparties may have the right to terminate these agreements or require us to grant them certain rights. Such an occurrence could materially adversely affect the value of any product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including our rights to important intellectual property or technology, which would have a material adverse effect on our business, financial condition, results of operations and prospects. While we still face all of the risks described herein with respect to those agreements, we cannot prevent third parties from also accessing those technologies. In addition, our licenses may place restrictions on our future business opportunities.
Disputes may arise regarding intellectual property subject to a licensing agreement, including:
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the scope of rights granted under the agreement and other interpretation related issues;
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the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
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the sublicensing of patent and other rights under our collaborative development relationships;
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our diligence obligations under the agreement and what activities satisfy those diligence obligations;
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the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
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the priority of invention of patented technology.
In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected technology and product candidates, which could have a material adverse effect on our business, financial conditions, results of operations and prospects.
Our current or future licensors may have relied on third-party consultants or collaborators or on funds from third parties such that our licensors are not the sole and exclusive owners of the intellectual property or intellectual property rights we in-license. If other third parties have ownership rights to intellectual property or intellectual property rights we in-license, they may be able to license such intellectual property or intellectual property rights to our competitors, and our competitors could market competing products and technology. This could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.
In spite of our best efforts, our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements, thereby removing our ability to develop and commercialize product candidates and technology covered by these license agreements. If these in-licenses are terminated, or if the underlying intellectual property fails to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products and technologies identical to ours. This could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects.
We may not be able to protect our intellectual property and proprietary rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States, and even where such protection is nominally available, judicial and governmental enforcement of such intellectual property rights may be lacking. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection or licenses but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our intellectual property and proprietary rights generally. In addition, certain jurisdictions do not protect to the same extent or at all inventions that constitute new methods of treatment.
Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may be subject to claims that former employees, collaborators or other third parties have an interest in our patents, trade secrets or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our ownership of our patents, trade secrets or other intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be subject to claims by third parties asserting that our employees, consultants or contractors have wrongfully used or disclosed confidential information of third parties, or we have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees, consultants and contractors were previously employed at universities or other pharmaceutical or biotechnology companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims.
In addition, while it is our policy to require our employees, consultants and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our intellectual property assignment agreements with them may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or
defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial conditions, results of operations and prospects.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could have a material adverse effect on our competitive business position and prospects. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products, which license may not be available on commercially reasonable terms, or at all, or such license may be non-exclusive. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to our management and employees.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and product candidates, we also rely on trade secrets and confidentiality agreements to protect our unpatented know-how, technology and other proprietary information, to maintain our competitive position, including certain aspects of our TALON platform. We seek to protect our trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract research organizations, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants, but we cannot guarantee that we have entered into such agreements with each party that may have or has had access to our trade secrets or proprietary technology. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Detecting the disclosure or misappropriation of a trade secret and enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside of the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and adversely harmed.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Any registered trademarks or trade names may be challenged, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
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portions of our TALON platform are protected by trade secrets, but much of our TALON platform is not protected by intellectual property, including patents, trade secrets and know-how, and we may not be able to develop, acquire or in-license any patentable technologies or other intellectual property related to the unprotected portions of our TALON platform;
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others may be able to make product candidates that are similar to ours but that are not covered by the claims of the patents that we own;
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we, or our current or future collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent applications that we license or may own in the future;
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we, or our current or future collaborators, might not have been the first to file patent applications covering certain of our or their inventions;
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others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned or in-licensed intellectual property rights;
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it is possible that our pending patent applications or those we may own or in-license in the future will not lead to issued patents;
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issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors;
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our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
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we cannot ensure that any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our product candidates;
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we cannot ensure that any patents issued to us will provide a basis for an exclusive market for our commercially viable product candidates or will provide us with any competitive advantages;
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we cannot ensure that our commercial activities or product candidates will not infringe upon the patents of others;
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we cannot ensure that we will be able to successfully commercialize our product candidates on a substantial scale, if approved, before our relevant patents expire;
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we may not develop additional proprietary technologies that are patentable;
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the patents of others may harm our business; and
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we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property.
Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to the Commercialization of our Product Candidates
Even if any of our current or future product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success, and the market opportunity for any of such product candidates, if approved, may be smaller than we estimate.
If any of our current or future product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may not be successful. If our current or future product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our current or future product candidates, if approved for commercial sale, will depend on a number of factors, including:
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the efficacy and potential advantages of such product candidates compared to the advantages and relative risks of alternative treatments;
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the effectiveness of sales and marketing efforts;
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the cost of treatment in relation to alternative treatments, including any similar biosimilar treatments;
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our ability to offer our products, if approved, for sale at competitive prices;
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the clinical indications for which the product is approved;
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the convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support;
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the timing of market introduction of competitive products;
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the availability of third-party coverage and adequate reimbursement, and patients’ willingness to pay out of pocket for required co-payments or in the absence of third-party coverage or adequate reimbursement;
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the prevalence and severity of any side effects; and
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any restrictions on the use of our products, if approved, together with other medications.
Our assessment of the potential market opportunity for our current or future product candidates is based on industry and market data that we obtained from industry publications, research, surveys and studies conducted by third parties and our analysis of these data, research, surveys and studies. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. Our estimates of the potential market opportunities for our product candidates include a number of key assumptions based on our industry knowledge, industry publications and third-party research, surveys and studies, which may be based on a small sample size and fail to accurately reflect market opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions. If any of our assumptions or estimates, or these publications, research, surveys or studies prove to be inaccurate, then the actual market for any of our product candidates may be smaller than we expect, and as a result our revenues from product sales may be limited and it may be more difficult for us to achieve or maintain profitability.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.
The development and commercialization of new drug or biologic products is highly competitive. We face competition with respect to our current product candidates, and will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of many of the disease indications for which we are developing our product candidates. Some of these competitive products and therapies are based on scientific approaches that are similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
We are aware of several other companies developing programs that utilize IL-2 for the selective expansion of regulatory T cells, including Amgen Inc., Nektar Therapeutics (in partnership with Eli Lilly & Company, or Eli Lilly), Roche Holding AG, or Roche, and Bristol-Myers Squibb, or BMS. We are also aware of other companies with research or preclinical-stage programs in this area, including Synthorx, Inc. (a subsidiary of Sanofi), Moderna, Inc. and Xencor, Inc. We are also aware of other companies with PD-1 agonist programs for the treatment of autoimmune diseases, including AnaptysBio, Inc., Eli Lilly, and Ono Pharmaceutical.
If approved for the treatment of patients with moderate-to-severe UC who are nonresponsive or intolerant to corticosteroids, PT101 would compete with Entyvio, which is an a4ß7 integrin antibody marketed by Takeda Pharmaceutical Company Ltd, Humira, which is a TNF antibody marketed by AbbVie, Stelara, which is an IL-12/IL-23 antibody marketed by Johnson & Johnson, Xeljanz, which is a JAK1 inhibitor marketed by Pfizer Inc., and Simponi, which is a TNF antibody marketed by Johnson & Johnson. If approved for the treatment of patients with SLE, PT101 would compete with Benlysta, which is a BAFF antibody marketed by GlaxoSmithKline, H. P. Acthar Gel, which is marketed by Mallinckrodt LLC, and a number of branded and generic non-steroid and steroid-based therapies, including hydroxychloroquine, azathioprine and mycophenolate mofetil.
We are aware of several companies with product candidates for the treatment of patients with UC, including Rinvoq, which is a JAK1 inhibitor being developed in Phase 3 clinical trials by AbbVie, ozanimod, or Zeposia, which is a S1P inhibitor being developed in Phase 3 clinical trials by BMS, etrolizumab, which is a ß7 integrin being developed in Phase 3 clinical trials by Roche, deucravacitinib or BMS-986165, which is a TYK2 inhibitor being developed in Phase 2 clinical trials by BMS, mirikizumab, which is an anti-IL-23 antibody being developed in Phase 3 clinical trials by Eli Lilly and filgotinib, a JAK1 inhibitor which has been filed for approval in Europe and is being developed in Phase 3 clinical trials by Gilead Sciences, Inc, and Galapagos N.V. We are also aware of additional product candidates in clinical trials by AbbVie, Abivax SA, Amgen Inc., Arena Pharmaceuticals, Inc., Applied Molecular Transport, Inc., Boehringer Ingelheim, Bristol-Myers Squibb Company, Gilead Sciences, Inc., GlaxoSmithKline plc, Gossamer Bio, Inc., Immunic, Incyte Corp., Janssen Pharmaceutica N.V., Landos Biopharma, Inc., Morphic Therapeutic, Inc., Pfizer Inc., Protagonist Therapeutics, Inc., Seres Therapeutics, Inc., Theravance Biopharma, Inc. and Vedanta Biosciences, Inc.
We are aware of several companies with product candidates for the treatment of patients with SLE, including anifrolumab, which is an interferon-alpha 1 receptor antibody that has completed Phase 3 clinical trials and is being developed by AstraZeneca, Gazyva, which is a CD20 antibody being developed in Phase 3 clinical trials by Roche, Lupuzor, which is an autophagy modulator being developed in Phase 3 clinical trials by Avion Pharmaceuticals and ImmuPharma, KZR-616, which is an immunoproteosome inhibitor being developed in Phase 2 clinical trials by Kezar Life Sciences, BIIB059, which is a BDCA2 antibody being developed in
Phase 2 clinical trials by Biogen, lenabasum, which is a CB2 agonist being developed in Phase 2 clinical trials by Corbus, telitacicept, which is a recombinant TACI-Fc fusion protein which is being developed in Phase 2 clinical trials by RemeGen Ltd., ALPN-101, which is a dual CD28/ICOS inhibitor being developed in Phase 2 clinical trials by Alpine Immune Sciences and Abbvie, deucravacitinib or BMS-986165, which is a TYK2 inhibitor being developed in Phase 2 clinical trials by BMS, NKTR-358 or LY3471851, which is a modified IL-2 being developed in Phase 1/2 clinical trials by Nektar and Eli Lilly, and AMG-592 or efavaleukin alfa, which is a modified IL-2 being developed in Phase 1/2 clinical trials by Amgen We are also aware of additional product candidates in clinical trials by Abbvie, Alexion, Apellis Pharmaceuticals, Aurinia, Boehringer Ingelheim, Boston Pharmaceuticals, ChemoCentryx, Equillium, Galapagos, Gilead, Idorsia, Incyte, Janssen Pharmaceutica, Novartis, Omeros, Pfizer, Roche, Servier, Viela Bio, UCB, and Xencor.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our development programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of biosimilar products. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over competitive biosimilar products.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
See “Business-Competition” for additional information regarding competing products and product candidates.
If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, we may not be successful in commercializing our current and future product candidates if and when they are approved.
We do not have a sales or marketing infrastructure and have no experience as a company in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any product for which we have obtained marketing approval, we will need to establish a sales, marketing and distribution organization, either ourselves or through collaborations or other arrangements with third parties.
In the future, we expect to build a focused, specialty sales and marketing infrastructure to market some of our product candidates in the United States, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. These efforts may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales, marketing, coverage or reimbursement, customer service, medical affairs and other support personnel;
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the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products;
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the inability of reimbursement professionals to negotiate arrangements for formulary access, reimbursement and other acceptance by payors;
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the inability to price our products at a sufficient price point to ensure an adequate and attractive level of profitability;
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restricted or closed distribution channels that make it difficult to distribute our products to segments of the patient population;
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the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
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unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we are unable to establish our own sales, marketing and distribution capabilities and we enter into arrangements with third parties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are acceptable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.
We expect to rely on contract manufacturing organizations to manufacture our product candidates. If we are unable to enter into such arrangements as expected or if such organizations do not meet our supply requirements, development and/or commercialization of our product candidates may be delayed.
We expect to rely on third parties to manufacture clinical supplies of our product candidates and commercial supplies of our products, if and when approved for marketing by applicable regulatory authorities, as well as for packaging, sterilization, storage, distribution and other production logistics. If we are unable to enter into such arrangements on the terms or timeline we expect, development and/or commercialization of our product candidates may be delayed. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or manufacture our product candidates in accordance with regulatory requirements, if there are disagreements between us and such parties or if such parties are unable to expand capacities to support commercialization of any of our product candidates for which we obtain marketing approval, we may not be able to fulfill, or may be delayed in producing sufficient product candidates to meet, our supply requirements. These facilities may also be affected by pandemics, including the ongoing COVID-19 pandemic, natural disasters, such as floods or fire, or such facilities could face manufacturing issues, such as contamination or regulatory concerns following a regulatory inspection of such facility. In such instances, we may need to locate an appropriate replacement third-party facility and establish a contractual relationship, which may not be readily available or on acceptable terms, which would cause additional delay and increased expense, including as a result of additional required FDA approvals, and may have a material adverse effect on our business.
Our third-party manufacturers will be subject to inspection and approval by the FDA before we can commence the manufacture and sale of any of our product candidates, and thereafter subject to FDA inspection from time to time. Failure by our third-party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA approval regimen with respect to our product candidates may result in regulatory actions such as the issuance of FDA Form 483 notices of observations, warning letters or injunctions or the loss of operating licenses.
We or our third-party manufacturers may also encounter shortages in the raw materials or API necessary to produce our product candidates in the quantities needed for our clinical trials or, if our product candidates are approved, in sufficient quantities for commercialization or to meet an increase in demand, as a result of capacity constraints or delays or disruptions in the market for the raw materials or API, including shortages caused by the purchase of such raw materials or API by our competitors or others. The failure of us or our third-party manufacturers to obtain the raw materials or API necessary to manufacture sufficient quantities of our product candidates may have a material adverse effect on our business.
Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third-party coverage or reimbursement practices or healthcare reform initiatives, which could harm our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if our product candidates obtain marketing approval.
Our ability to commercialize any product candidates successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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cost-effective; and
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neither experimental nor investigational.
The availability and adequacy of coverage and reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health insurers and other third-party payors are essential for most patients to be able to afford our product candidates, if approved. Our ability to achieve acceptable levels of coverage and reimbursement for our product candidates, if approved, by governmental authorities, private health insurers and other organizations will have an effect on our ability to successfully commercialize, our product candidates. Assuming we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require patient out-of-pocket costs that patients find unacceptably high.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult. We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare 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 policies. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
There can be no assurance that our product candidates, even if they are approved for sale in the United States or in other countries, will be considered medically reasonable and necessary for a specific indication or cost-effective by third-party payors, or that coverage and an adequate level of reimbursement will be available or that third-party payors’ reimbursement policies will not adversely affect our ability to sell our product candidates profitably.
Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties that, if they materialize, could harm our business.
Our future profitability will depend, in part, on our ability to commercialize our product candidates in markets outside of the United States. If we commercialize our product candidates in foreign markets, we will be subject to additional risks and uncertainties, including:
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economic weakness, including inflation, or political instability in particular economies and markets;
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the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements, many of which vary between countries;
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different medical practices and customs in foreign countries affecting acceptance in the marketplace;
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tariffs and trade barriers, as well as other governmental controls and trade restrictions;
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other trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or foreign governments;
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longer accounts receivable collection times;
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longer lead times for shipping;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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workforce uncertainty in countries where labor unrest is common;
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language barriers for technical training;
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reduced protection of intellectual property rights in some foreign countries, and related prevalence of biosimilar alternatives to therapeutics;
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foreign currency exchange rate fluctuations and currency controls;
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differing foreign reimbursement landscapes;
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uncertain and potentially inadequate reimbursement of our products; and
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the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
If risks related to any of these uncertainties materializes, it could have a material adverse effect on our business.
Clinical trial and product liability lawsuits against us could divert our resources and could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of clinical trial and product liability exposure related to the testing of our product candidates in human clinical trials, and we will face an even greater risk if we commercially sell any products that we may develop. While we currently have no products that have been approved for commercial sale, the current and future use of product candidates by us in clinical trials, and the sale of any approved products in the future, may expose us to liability claims. These claims might be made by patients that use the product, healthcare providers, pharmaceutical companies or others selling such products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for any product candidates or products that we may develop;
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termination of clinical trials;
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injury to our reputation and significant negative media attention;
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withdrawal of clinical trial participants;
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significant costs to defend any related litigation;
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substantial monetary awards to trial participants or patients;
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loss of revenue;
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reduced resources of our management to pursue our business strategy; and
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the inability to commercialize any products that we may develop.
We currently hold $5.0 million in clinical trial liability insurance coverage in the aggregate, with a per incident limit of $5.0 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commence commercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. If a successful clinical trial or product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims and our business operations could be impaired.
Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of any product candidates we develop. If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize, or will be delayed in commercializing, product candidates we develop, and our ability to generate revenue will be materially impaired.
Any product candidates we develop and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory authorities in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate in a given jurisdiction. We have not received approval to market any product candidates from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications necessary to gain marketing approvals and expect to rely on third-party CROs to assist us in this process. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information, including manufacturing information, to the various regulatory authorities for each therapeutic indication to establish the biologic product candidate’s safety, purity and potency. Any product candidates we develop may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate.
Finally, disruptions at the FDA and other agencies may prolong the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. The Trump Administration also took several executive actions that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities. It remains to be seen whether these orders and resulting regulations will remain in force during the Biden Administration.
If we experience delays in obtaining approval or if we fail to obtain approval of any product candidates we develop, the commercial prospects for those product candidates may be harmed and our ability to generate revenues will be materially impaired.
Failure to obtain marketing approval in foreign jurisdictions would prevent any product candidates we develop from being marketed in such jurisdictions, which, in turn, would materially impair our ability to generate revenue.
In order to market and sell any product candidates we develop in the European Union, Canada and many other foreign jurisdictions, we or our collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product be approved for reimbursement before the product can be approved for sale in that country. We or these third parties may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our product candidates in any jurisdiction, which would materially impair our ability to generate revenue.
Additionally, we could face heightened risks with respect to seeking marketing approval in the United Kingdom as a result of the recent withdrawal of the United Kingdom from the European Union, commonly referred to as Brexit. Pursuant to the formal withdrawal arrangements agreed between the United Kingdom and the European Union, the United Kingdom withdrew from the
European Union, effective December 31, 2020. On December 24, 2020, the United Kingdom and European Union entered into a Trade and Cooperation Agreement. The agreement sets out certain procedures for approval and recognition of medical products in each jurisdiction. Since the regulatory framework for pharmaceutical products in the United Kingdom covering the quality, safety, and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales, and distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regime that applies to products and the approval of product candidates in the United Kingdom. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing any product candidates in the United Kingdom and/or the European Union and restrict our ability to generate revenue and achieve and sustain profitability. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the United Kingdom and/or European Union for any product candidates, which could significantly and materially harm our business.
A Fast Track, Breakthrough Therapy or Priority Review designation by the FDA may not lead to a faster development or regulatory review or approval process, and does not assure FDA approval of our product candidates.
If a product candidate is intended for the treatment of a serious or life threatening condition and the product candidate demonstrates the potential to address unmet medical need for this condition, the sponsor may apply to FDA for fast track designation. For fast track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a fast track product’s application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast track product may be effective.
In addition, an applicant may seek designation of its product as a breakthrough therapy, which is a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens.
Further, if FDA determines that a product candidate offers major advances in treatment or provides a treatment where no adequate therapy exists, the FDA may designate the product candidate for priority review. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority review designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months.
We may seek these and other designations for our product candidates. The FDA has broad discretion with respect to whether or not to grant these designations to a product candidate, so even if we believe a particular product candidate is eligible for such designation or status, the FDA may decide not to grant it. Moreover, a fast track or breakthrough therapy designation does not necessarily mean a faster regulatory review process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. As a result, while we may seek and receive these designations for our product candidates, we may not experience a faster development process, review or approval compared to conventional FDA procedures. In addition, the FDA may withdraw these designations if it believes that the designation is no longer supported by data from our clinical development program.
Even if we, or any collaborators we may have, obtain marketing approvals for any product candidates we develop, the terms of approvals and ongoing regulation of our products could require the substantial expenditure of resources and may limit how we, or they, manufacture and market our products, which could materially impair our ability to generate revenue.
Any product candidate for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data, labeling, advertising, and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to physicians and record-keeping. Even if marketing approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product.
Accordingly, assuming we, or any collaborators we may have, receive marketing approval for one or more product candidates we develop, we, and such collaborators, and our and their contract manufacturers will continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance, and quality control. If we and such collaborators are not able to comply with post-approval regulatory requirements, we and such collaborators could have the marketing approvals for our products withdrawn by regulatory authorities and our, or such collaborators’, ability to market any future products
could be limited, which could adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have a negative effect on our business, operating results, financial condition, and prospects.
Any product candidate for which we obtain marketing approval could be subject to restrictions or withdrawal from the market, and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products, when and if any of them are approved.
The FDA and other regulatory agencies closely regulate the post-approval marketing and promotion of medicines to ensure that they are marketed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA and other regulatory agencies impose stringent restrictions on manufacturers’ communications regarding off-label use, and if we market our products, if approved, in a manner inconsistent with their approved labeling, we may be subject to enforcement action for off-label marketing by the FDA and other federal and state enforcement agencies, including the Department of Justice. Violation of the Federal Food, Product, and Cosmetic Act and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription products may also lead to investigations or allegations of violations of federal and state health care fraud and abuse laws and state consumer protection laws.
In addition, later discovery of previously unknown problems with our medicines, manufacturers, or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
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restrictions on such medicines, manufacturers, or manufacturing processes;
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restrictions on the labeling or marketing of a medicine;
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restrictions on the distribution or use of a medicine;
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requirements to conduct post-marketing clinical trials;
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receipt of warning or untitled letters;
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withdrawal of the medicines from the market;
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refusal to approve pending applications or supplements to approved applications that we submit;
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recall of medicines;
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fines, restitution, or disgorgement of profits or revenue;
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suspension or withdrawal of marketing approvals;
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suspension of any ongoing clinical trials;
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refusal to permit the import or export of our medicines;
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product seizure; and
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injunctions or the imposition of civil or criminal penalties.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize any product candidates we develop and adversely affect our business, financial condition, results of operations, and prospects.
Our relationships with healthcare providers, physicians, and third-party payors will be subject to applicable anti-kickback, fraud and abuse, and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings.
Healthcare providers, physicians, and third-party payors play a primary role in the recommendation and prescription of any product candidates that we develop for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell, and distribute our medicines for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
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the federal healthcare Anti-Kickback Statute, or AKS, prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid. In addition, the government may assert that a claim including items or services resulting from a violation of AKS constitutes a false
or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute. Violations of AKS carry potentially significant civil and criminal penalties, including imprisonment, fines, administrative civil monetary penalties, and exclusion from participation in federal healthcare programs. The AKS has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution; but the exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection;
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the federal civil and criminal false claims and civil monetary penalties laws, including the federal False Claims Act impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval from Medicare, Medicaid, or other government payors that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. For example, manufacturers have been prosecuted for causing false claims to be submitted because of off-label promotion purportedly concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal healthcare programs for the product. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program (including private payors) or making false or fraudulent statements relating to healthcare matters. Similar to the federal AKS, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Additionally, HIPAA, as amended by HITECH and its implementing regulations, also imposes certain requirements, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information without appropriate authorization by entities subject to the rule, such as health plans, health care clearinghouses, and health care providers;
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the federal transparency requirements under the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report to the Department of Health and Human Services information related to payments and other transfers of value to physicians (currently defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to certain non-physician providers such as physician assistants and nurse practitioners; and
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analogous state laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and certain 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 in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.
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. If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, 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 business, financial condition, results of operations, and prospects.
The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order, or use of medicinal products is prohibited in the European Union. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of European Union Member States, such as the UK Bribery Act 2010. Infringement of these laws could result in substantial fines and imprisonment.
Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional
organization, and/or the regulatory authorities of the individual European Union Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct applicable in the European Union Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines, or imprisonment.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal, and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Liabilities they incur pursuant to these laws could result in significant costs or an interruption in operations, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Current and future legislation may increase the difficulty and cost for us and any collaborators to obtain marketing approval and commercialize our product candidates and affect the prices we, or they, may obtain.
In the U.S. and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our drug candidates, restrict or regulate post-approval activities and affect our ability, or the ability of any collaborators, to profitably sell or commercialize any product candidate for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any collaborators, may receive for any approved products.
In March 2010, the ACA was passed, which substantially changed the way healthcare is financed by both government and private insurers, and significantly impacts the U.S. pharmaceutical industry. . In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2029 unless additional Congressional action is taken. The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030. The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
Since enactment of the PPACA, there have been, and continue to be, numerous legal challenges and Congressional actions to repeal and replace provisions of the law. For example, with enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), Congress repealed the “individual mandate.” The repeal of this provision, which requires most Americans to carry a minimal level of health insurance, became effective in 2019. Further, on December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Court of Appeals for the Fifth Circuit court affirmed the lower court’s ruling that the individual mandate portion of the ACA is unconstitutional and it remanded the case to the district court for reconsideration of the severability question and additional analysis of the provisions of the ACA. Thereafter, the U.S. Supreme Court agreed to hear this case. Oral argument in the case took place on November 10, 2020. On February 10, 2021, the Biden Administration withdrew the federal government’s support for overturning the ACA. A ruling by the Court is expected sometime this year. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results.
The Trump Administration also took executive actions to undermine or delay implementation of the ACA, including directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. On January 28, 2021, however, President Biden issued a new Executive Order which directs federal agencies to reconsider rules and other policies that limit Americans’ access to health care, and consider actions that will protect and strengthen that access. Under this Order, federal agencies are directed to re-examine: policies that undermine protections for people with pre-existing conditions, including complications related to COVID-19; demonstrations and waivers under Medicaid and the ACA that may reduce coverage or undermine the programs, including work
requirements; policies that undermine the Health Insurance Marketplace or other markets for health insurance; policies that make it more difficult to enroll in Medicaid and the ACA; and policies that reduce affordability of coverage or financial assistance, including for dependents. This Executive Order also directs the U.S. Department of Health and Human Services to create a special enrollment period for the Health Insurance Marketplace in response to the COVID-19 pandemic.
We expect that these healthcare reforms, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product and/or the level of reimbursement physicians receive for administering any approved product we might bring to market. Reductions in reimbursement levels may negatively impact the prices we receive or the frequency with which our products are prescribed or administered. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Accordingly, such reforms, if enacted, could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain marketing approval and may affect our overall financial condition and ability to develop or commercialize product candidates
The prices of prescription pharmaceuticals in the United States and foreign jurisdictions is subject to considerable legislative and executive actions and could impact the prices we obtain for our products, if and when licensed.
The prices of prescription pharmaceuticals have also been the subject of considerable discussion in the United States. To date, there have been several recent U.S. congressional inquiries, as well as proposed and enacted state and federal legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for products. To those ends, President Trump issued several executive orders intended to lower the costs of prescription drug products. Certain of these orders are reflected in recently promulgated regulations, including an interim final rule implementing President Trump’s most favored nation model, but such final rule is currently subject to a nationwide preliminary injunction. It remains to be seen whether these orders and resulting regulations will remain in force during the Biden Administration. Further, on September 24, 2020, the Trump Administration finalized a rulemaking allowing states or certain other non-federal government entities to submit importation program proposals to the FDA for review and approval. Applicants are required to demonstrate that their importation plans pose no additional risk to public health and safety and will result in significant cost savings for consumers. The FDA has issued draft guidance that would allow manufacturers to import their own FDA-approved drugs that are authorized for sale in other countries (multi-market approved products).
At the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional health care organizations and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
In the European Union, similar political, economic and regulatory developments may affect our ability to profitably commercialize our product candidates, if approved. In markets outside of the United States and the European Union, reimbursement and healthcare payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.
Compliance with global privacy and data security requirements could result in additional costs and liabilities to us or inhibit our ability to collect and process data globally, and the failure to comply with such requirements could subject us to significant fines and penalties, which may have a material adverse effect on our business, financial condition or results of operations.
The regulatory framework for the collection, use, safeguarding, sharing, transfer and other processing of information worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Globally, virtually every jurisdiction in which we operate has established its own data security and privacy frameworks with which we must comply. For example, the collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the European Union, including personal health data,
is subject to the EU General Data Protection Regulation, or the GDPR, which took effect across all member states of the European Economic Area, or EEA, in May 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR increases our obligations with respect to clinical trials conducted in the EEA by expanding the definition of personal data to include coded data and requiring changes to informed consent practices and more detailed notices for clinical trial subjects and investigators. In addition, the GDPR also imposes strict rules on the transfer of personal data to countries outside the European Union, including the United States and, as a result, increases the scrutiny that clinical trial sites located in the EEA should apply to transfers of personal data from such sites to countries that are considered to lack an adequate level of data protection, such as the United States. The GDPR also permits data protection authorities to require destruction of improperly gathered or used personal information and/or impose substantial fines for violations of the GDPR, which can be up to four percent of global revenues or 20 million Euros, whichever is greater, and it also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. In addition, the GDPR provides that European Union member states may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data.
Similar actions are either in place or under way in the United States. There are a broad variety of data protection laws that are applicable to our activities, and a wide range of enforcement agencies at both the state and federal levels that can review companies for privacy and data security concerns based on general consumer protection laws. The Federal Trade Commission and state Attorneys General all are aggressive in reviewing privacy and data security protections for consumers. New laws also are being considered at both the state and federal levels. For example, the California Consumer Privacy Act-which went into effect on January 1, 2020-is creating similar risks and obligations as those created by GDPR, though the Act does exempt certain information collected as part of a clinical trial subject to the Federal Policy for the Protection of Human Subjects (the Common Rule). In March 2020, the California State Attorney General proposed varying versions of companion draft regulations which are not yet finalized. Despite the delay in adopting regulations, the California State Attorney General will commence enforcement actions against violators beginning July 1, 2020. Many other states are considering similar legislation. A broad range of legislative measures also have been introduced at the federal level. Accordingly, failure to comply with federal and state laws (both those currently in effect and future legislation) regarding privacy and security of personal information could expose us to fines and penalties under such laws. There also is the threat of consumer class actions related to these laws and the overall protection of personal data. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which could harm our reputation and our business.
Given the breadth and depth of changes in data protection obligations, preparing for and complying with these requirements is rigorous and time intensive and requires significant resources and a review of our technologies, systems and practices, as well as those of any third-party collaborators, service providers, contractors or consultants that process or transfer personal data collected in the European Union. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personal information from our clinical trials, could require us to change our business practices and put in place additional compliance mechanisms, may interrupt or delay our development, regulatory and commercialization activities and increase our cost of doing business, and could lead to government enforcement actions, private litigation and significant fines and penalties against us and could have a material adverse effect on our business, financial condition or results of operations.
Our employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, vendors, consultants and partners, and, if we commence clinical trials, our principal investigators and CROs. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in the European Union and other jurisdictions, provide accurate information to the FDA, the European Commission, and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.
Laws and regulations governing any international operations we may have in the future may preclude us from developing, manufacturing and selling certain product candidates outside of the United States and require us to develop and implement costly compliance programs.
We are subject to numerous laws and regulations in each jurisdiction outside the United States in which we operate. The creation, implementation and maintenance of international business practices compliance programs is costly and such programs are difficult to enforce, particularly where reliance on third parties is required.
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the Department of Justice. The SEC is involved with enforcement of the books and records provisions of the FCPA.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.
Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. Further, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order, or use of medicinal products is prohibited in the European Union. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of European Union Member States, such as the UK Bribery Act 2010. Infringement of these laws could result in substantial fines and imprisonment. Payments made to physicians in certain European Union Member States must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and approval by the physician’s employer, his or her competent professional organization, and/or the regulatory authorities of the individual European Union Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct applicable in the European Union Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines, or imprisonment.
If we or any third-party manufacturer we engage now or in the future fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs or liabilities that could have a material adverse effect on our business.
We and third-party manufacturers we engage now are, and any third-party manufacturer we may engage in the future will be, subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.
Although we maintain general liability insurance as well as workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. 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.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or commercialization efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
Further, with respect to the operations of our current and any future third-party contract manufacturers, it is possible that if they fail to operate in compliance with applicable environmental, health and safety laws and regulations or properly dispose of wastes associated with our products, we could be held liable for any resulting damages, suffer reputational harm or experience a disruption in the manufacture and supply of our product candidates or products. In addition, our supply chain may be adversely impacted if any of our third-party contract manufacturers become subject to injunctions or other sanctions as a result of their non-compliance with environmental, health and safety laws and regulations.
Risks Related to Employee Matters and Managing Growth
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on the research and development, clinical, financial, operational and other business expertise of our executive officers, as well as the other principal members of our management, scientific and clinical teams. Although we have entered into employment agreements with our executive officers, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. Recruiting and retaining qualified scientific, clinical, manufacturing, accounting, legal and sales and marketing personnel will also be critical to our success.
The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain marketing approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. Our success as a public company also depends on implementing and maintaining internal controls and the accuracy and timeliness of our financial reporting. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
We expect to expand our development and regulatory capabilities and potentially implement sales, marketing and distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of drug development, clinical, regulatory affairs, manufacturing and quality control and, if any of our product candidates receives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
Our internal computer systems, or those of our collaborators or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.
Our internal computer systems and those of any collaborators, contractors or consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Such systems are also vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, unauthorized access to or deletion of files, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. We cannot guarantee that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate any future breaches. Cyber-attacks also could include phishing attempts or e-mail fraud to cause payments or information to be transmitted to an unintended recipient.
To the extent we experience a material system failure, accident, cyber-attack or security breach, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary
information or other similar disruptions. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability, our competitive position could be harmed and the further development and commercialization of our product candidates could be delayed.
Risks Related to our Common Stock
Our executive officers, directors and principal stockholders, if they choose to act together, have the ability to control all matters submitted to stockholders for approval.
As of February 28, 2021, our executive officers and directors and our stockholders who owned more than 5% of our outstanding common stock owned shares representing approximately 80.22% of our capital stock. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets.
This concentration of ownership control may:
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delay, defer or prevent a change in control;
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entrench our management and board of directors; or
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delay or prevent a merger, consolidation, takeover or other business combination involving us that other stockholders may desire.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current directors and members of management.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
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establish a classified board of directors such that only one of three classes of directors is elected each year;
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allow the authorized number of our directors to be changed only by resolution of our board of directors;
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limit the manner in which stockholders can remove directors from our board of directors;
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establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
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require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
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limit who may call stockholder meetings;
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authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
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require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal specified provisions of our certificate of incorporation or bylaws.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
An active trading market for our common stock may not continue to develop or be sustained.
Our shares began trading on the Nasdaq Global Select Market on July 17, 2020. Given the limited trading history of our shares of common stock, there is a risk that an active trading market for our shares will not continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for you to sell your shares without depressing the market price for the shares or at all.
If securities analysts do not publish or cease publishing research or reports or publish misleading, inaccurate or unfavorable research about our business or if they publish negative evaluations of our stock, the price and trading volume of our stock could decline.
The trading market for our common stock relies, in part, on the research and reports that industry or financial analysts publish about us or our business. There can be no assurance that existing analysts will continue to cover us or that new analysts will begin to cover us. There is also no assurance that any covering analyst will provide favorable coverage. Although we have obtained analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock or publish inaccurate or unfavorable research about our business, or provides more favorable relative recommendations about our competitors, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price and trading volume to decline.
The price of our common stock may be volatile and fluctuate substantially.
Our stock price has been, and is likely to continue to be volatile. The stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, our stockholders may not be able to sell their common stock at or above the price they paid for it. The market price for our common stock may be influenced by many factors, including:
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the perceived likelihood of the completion of the pending transaction with Merck;
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results of or developments in preclinical studies and clinical trials of our product candidates or those of our competitors or potential collaborators;
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our success in commercializing our product candidates, if and when approved;
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developments with respect to competitive products or technologies;
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regulatory or legal developments in the United States and other countries;
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developments or disputes concerning patent applications, issued patents or other intellectual property or proprietary rights;
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the recruitment or departure of key personnel;
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the level of expenses related to any of our product candidates or clinical development programs;
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the results of our efforts to discover, develop, acquire or in-license products, product candidates, technologies, the costs of commercializing any such products and the costs of development of any such product candidates or technologies;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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variations in our financial results or the financial results of companies that are perceived to be similar to us;
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sales of common stock by us, our executive officers, directors or principal stockholders, or others;
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changes in the structure of healthcare payment systems;
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market conditions in the pharmaceutical and biotechnology sectors;
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general economic, industry and market conditions, such as the impact of the COVID-19 pandemic on our industry and market conditions; and
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the other factors described in this “Risk Factors” section.
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. Any lawsuit to which we are a party, with or without merit, may result in an unfavorable judgment. We also may decide to settle lawsuits on unfavorable terms. Any such negative outcome could result in payments of substantial damages or fines, damage to our reputation or adverse changes to our offerings or business practices. Such litigation may
also cause us to incur other substantial costs to defend such claims and divert management’s attention and resources. Furthermore, negative public announcements of the results of hearings, motions or other interim proceedings or developments could have a negative effect on the market price of our common stock.
We are an “emerging growth company” and a “smaller reporting company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may remain an EGC until December 31, 2025, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.07 billion or more in any fiscal year, we would cease to be an EGC as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1.0 billion of non-convertible debt over a three-year period. For so long as we remain an EGC, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not EGCs. These exemptions include:
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not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
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reduced disclosure obligations regarding executive compensation; and
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exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Even after we no longer qualify as an emerging growth company, we may continue to qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. In addition, if we are a smaller reporting company with less than $100 million in annual revenue, we would not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404.
We may choose to take advantage of some, but not all, of the available exemptions. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of 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.
In addition, the JOBS Act permits an EGC to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an EGC.
We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, we have incurred and particularly after we are no longer an EGC or a smaller reporting company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs, particularly as we hire additional financial and accounting employees to meet public company internal control and financial reporting requirements, and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.
We are evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the SEC. However, while we remain an EGC or a smaller reporting company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, including through hiring additional financial and accounting personnel, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses in our internal control over financial reporting, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be our stockholders’ sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, any future debt agreements may preclude, us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.
Our certificate of incorporation designates the state courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders. Our certificate of incorporation further provides that the federal district courts of the United States of the America are the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions could discourage lawsuits against the company and our directors, officers and employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or stockholders to our company or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the DGCL or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware or (4) any action asserting a claim arising pursuant to any provision of our certificate of incorporation or bylaws (in each case, as they may be amended from time to time) or governed by the internal affairs doctrine. This exclusive forum provision will not apply to actions arising under the Securities Act of 1933, as amended, or the Securities Act, or the Securities Exchange Act of 1934, as amended.
We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, this exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees. The enforceability of a similar choice of forum provision in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in such action. 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 materially adversely affect our business, financial condition and operating results.
Our certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. This exclusive forum provision may limit the ability of our stockholders to bring a claim arising under the Securities Act in a judicial forum that such stockholders find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
We occupy approximately 21,225 square feet of office and laboratory space in Watertown, Massachusetts under a lease that expires in March 2026 with an option to renew for an additional three years. We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available as and when needed.
Item 3.
Item 3. Legal Proceedings.
We are currently not a party to any material legal proceedings.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades under the symbol “PAND” on the Nasdaq Global Select Market and has been publicly traded since July 17, 2020. Prior to this time, there was no public market for our common stock.
Use of proceeds from registered securities
On July 21, 2020, we completed our initial public offering, or IPO, in which we issued and sold 8,494,166 shares of common stock, $0.001 par value per share, which included an additional 994,166 shares of common stock sold to the underwriters on August 11, 2020 pursuant to the partial exercise by the underwriters of their option to purchase additional shares of common stock at a price to the public of $18.00 per share. The offer and sale of the shares in the IPO was registered under the Securities Act pursuant to registration statements on Form S-1 (File No. 333-239500), which was filed with the SEC on June 26, 2020 and subsequently amended and declared effective on July 16, 2020, and Form S-1 (File No. 333-239894), which was filed pursuant to Rule 462(b) of the Securities Act and declared effective with the SEC on July 16, 2020. The underwriters of the offering were Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, SVB Leerink LLC and BMO Capital Markets Corp. The IPO commenced on July 16, 2020 and terminated without the sale of 130,834 shares registered for potential issuance upon exercise of the underwriters’ option to purchase additional shares.
We raised approximately $138.6 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses of $14.3 million payable by us. No underwriting discounts and commissions or offering expenses were paid directly or indirectly to any of our directors of officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
We have not used any of the net proceeds from our IPO as of December 31, 2020. There has been no material change in the planned use of proceeds from our IPO, as described in our final prospectus filed with the SEC on July 17, 2020 pursuant to Rule 424(b) under the Securities Act.
Unregistered Sales of Equity Securities
None.
Repurchases of equity securities by the issuer
None.
Holders of Record
As of December 31, 2020, there were 87 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare and pay dividends will be made at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, financial condition, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
Item 6.
Item 6. Selected Financial Data.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward- looking statements.
Overview
We are a clinical stage biopharmaceutical company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. We have combined a network-based conceptualization of the immune system with expertise in advanced protein engineering to develop our TALON (Therapeutic Autoimmune reguLatOry proteiN) drug design and discovery platform. Our TALON platform enables us to employ a modular approach to create a pipeline of product candidates using immunomodulatory effector modules that act at known control nodes within the immune network. We are also able to combine an effector module with a tissue-targeted tether module in a bifunctional format to guide delivery of the effector to a targeted tissue. Our lead product candidate, PT101, a combination of our interleukin-2, or IL-2, mutein effector module with a protein backbone, is designed to selectively expand regulatory T cells, or Treg cells, systemically, without activating proinflammatory cells, such as conventional T cells and natural killer, or NK, cells. We are initially developing PT101 for the treatment of patients with moderate-to-severe ulcerative colitis, or UC, and for the treatment of patients with systemic lupus erythematosus, or SLE. We reported positive top-line data from a Phase 1a clinical trial of PT101 in healthy volunteers in January 2021. Leveraging our TALON platform, we continue to develop and expand our library of effector and tether modules as part of our early stage research and discovery pipeline. Our early stage research includes a suite of PD-1 agonists in preclinical development. PD-1 is an inhibitory receptor that is naturally expressed by T cells following their activation. We initiated investigational new drug, or IND, -enabling studies with our systemic PD-1 agonist, PT627, in the fourth quarter of 2020 and we plan to begin IND-enabling studies for our GI/liver-tethered PD-1 agonist, PT001, in the first half of 2021.
We were formed under the laws of the State of Delaware in September 2016 as a corporation under the name Immunotolerance, Inc. and began operations in January 2017. We changed our name to Pandion Therapeutics, Inc. in June 2017. On January 1, 2019, we completed a series of transactions in which Pandion Therapeutics, Inc. became a direct wholly owned subsidiary of Pandion Therapeutics Holdco LLC, or Pandion LLC, a Delaware limited liability company, and all outstanding equity securities of Pandion Therapeutics, Inc. were canceled and converted on a one-for-one basis into equity securities of Pandion LLC.
On July 10, 2020, our subsidiary, Pandion Therapeutics, Inc. changed its name to Pandion Operations, Inc. and we subsequently engaged in the following transactions, which we refer to collectively as the Conversion:
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we converted from a Delaware limited liability company to a Delaware corporation by filing a certificate of conversion with the Secretary of State of the State of Delaware; and
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we changed our name from Pandion Therapeutics Holdco LLC to Pandion Therapeutics, Inc.
As part of the Conversion:
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holders of Series A preferred shares of Pandion Therapeutics Holdco LLC received one share of Series A preferred stock of Pandion Therapeutics, Inc. for each Series A preferred share held immediately prior to the Conversion;
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holders of Series A prime preferred shares of Pandion Therapeutics Holdco LLC received one share of Series A prime preferred stock of Pandion Therapeutics, Inc. for each Series A prime preferred share held immediately prior to the Conversion;
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holders of Series B preferred shares of Pandion Therapeutics Holdco LLC received one share of Series B preferred stock of Pandion Therapeutics, Inc. for each Series B preferred share held immediately prior to the Conversion;
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holders of common shares of Pandion Therapeutics Holdco LLC received one share of common stock of Pandion Therapeutics, Inc. for each common share held immediately prior to the Conversion; and
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holders of outstanding incentive shares in Pandion Therapeutics Holdco LLC, all of which were intended to constitute profits interests for U.S. federal income tax purposes, received a number of shares of common stock of Pandion Therapeutics, Inc. based upon a conversion price determined by our board of directors immediately prior to the Conversion. Of the shares of common stock issued in respect of incentive shares, 1,368,515 continue to be
subject to vesting in accordance with the vesting schedule applicable to such incentive shares. Based on the determined fair value of $18.00 per common share, the incentive shares converted into an aggregate of 1,504,586 shares of our common stock, and we granted options to purchase an aggregate of 971,123 shares of our common stock.
In connection with the Conversion, Pandion Therapeutics, Inc. continues to hold all property and assets of Pandion Therapeutics Holdco LLC and has assumed all of the debts and obligations of Pandion Therapeutics Holdco LLC. On July 16, 2020, Pandion LLC converted into a corporation by filing a certificate of conversion with the Secretary of State of the State of Delaware and we changed our name to Pandion Therapeutics, Inc. On the effective date of the Conversion, the members of the board of directors of Pandion Therapeutics Holdco LLC became the members of the board of directors of Pandion Therapeutics, Inc. and the officers of Pandion Therapeutics Holdco LLC became the officers of Pandion Therapeutics, Inc.
Our lead product candidate, PT101, is in Phase 1 clinical development and our other product candidates and our discovery stage programs are in preclinical or earlier stages of development. Our ability to generate revenue from product sales sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. To date, our operations have been financed primarily through the issuance of redeemable convertible preferred shares, a simple agreement for future equity, or SAFE, convertible notes and a term loan and, most recently, common stock in our initial public offering, or IPO. On July 21, 2020, we completed an IPO of our common stock and issued and sold 7,500,000 shares of common stock at a public offering price of $18.00 per share, resulting in net proceeds of $122.0 million after deducting underwriting discounts and commissions and estimated offering expenses. In addition, on August 11, 2020, we issued and sold an additional 994,166 shares of our common stock at the public offering price of $18.00 per share upon the partial exercise of the underwriters’ option to purchase additional shares of common stock and received additional net proceeds of $16.6 million after deducting underwriting discounts and commissions.
Since inception, we have had significant operating losses. Our net loss was $38.1 million and $21.9 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $86.0 million.
Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued expenses. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, as well as hire additional personnel, pay fees to outside consultants, lawyers and accountants, and incur other increased costs associated with being a public company. In addition, if and when, if ever, we seek and obtain regulatory approval to commercialize any product candidate, we will also incur increased expenses in connection with commercialization and marketing of any such product. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
Based upon our current operating plan, we believe that our existing cash and cash equivalents of $219.9 million as of December 31, 2020 will be sufficient to fund our operating expenses and capital expenditure requirements through the first half of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. To finance our operations beyond that point we will need to raise additional capital, which cannot be assured.
To date, we have not had any products approved for sale and, therefore, have not generated any product revenue. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As a result, until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies, including our research and development activities. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To date, our financial condition and operations have not been significantly impacted by the COVID-19 pandemic. However, we cannot at this time predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on our financial condition and operations, including planned clinical trials. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the pandemic and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results may be materially adversely affected.
On February 24, 2021, we entered into the Merger Agreement with Merck. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, a wholly owned acquisition subsidiary of Merck will commence a cash tender offer, or the Tender Offer, to acquire all of the issued and outstanding shares of our common stock at a price per share of $60, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by applicable law. The completion of the Tender Offer will be conditioned on at least a majority of the shares of our outstanding common stock having been validly tendered into and not withdrawn from the offer, receipt of certain regulatory approvals and other customary conditions. Following the completion of the Tender Offer, the acquisition subsidiary will merge with and into our company, with our company surviving as a wholly owned subsidiary of Merck. The merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with not stockholder vote required to consummate the merger. In the merger, each outstanding share of our common stock (other than shares of common stock held by us as treasury stock or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $60 per share in cash, without interest, subject to any withholding of taxes required by applicable law. The transaction is expected to close in the first half of 2021.
Components of Operating Results
Revenue
We have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in regulatory marketing approval, we may generate revenue in the future from product sales. However, we cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates, and we may never succeed in obtaining regulatory approval for, or commercializing, any of our product candidates.
In October 2019, we entered into a license and collaboration agreement, or the Astellas agreement, with Astellas Pharma Inc., or Astellas, to develop locally acting immunomodulators for autoimmune diseases of the pancreas. Under the terms of the Astellas agreement, we are responsible for the design and discovery of bifunctional product candidates based on our TALON platform, and Astellas will conduct preclinical, clinical and commercialization activities for any candidates developed in the collaboration. The initial research plan is focused on three tissue-selective tether targets in the pancreas. The primary indication for which we and Astellas are seeking to develop compounds is type 1 diabetes. We received an upfront payment of $10.0 million and have the right to receive research, development and regulatory milestone payments under the collaboration. We also have the right to receive tiered royalties on worldwide net sales of any commercial products developed under the collaboration.
We may also in the future enter into additional license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreement.
Operating Expenses: Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates and our drug discovery efforts, which include:
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personnel costs, which include salaries, benefits and equity-based compensation expense;
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expenses incurred under agreements with consultants and third-party contract organizations that conduct research and development activities on our behalf;
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costs related to sponsored research service agreements;
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costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers;
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laboratory and vendor expenses related to the execution of preclinical studies and planned clinical trials; and
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laboratory supplies and equipment used for internal research and development activities.
We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and third-party service providers.
We use our personnel and infrastructure resources across multiple research and development programs directed toward identifying and developing product candidates. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of internal personnel costs and external costs, such as fees paid to consultants, contractors and contract research organizations, or CROs, in connection with our development activities. We do not fully allocate costs to programs as many of our research and development costs are indirect or are deployed across multiple programs.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, advancing our programs and conducting clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming and the successful development of our product candidates is highly uncertain.
Because of the numerous risks and uncertainties associated with product development and the current stage of development of our product candidates and programs, we cannot reasonably estimate or know the nature, timing and estimated costs necessary to complete the remainder of the development of our product candidates or programs. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:
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successfully completing preclinical studies and initiating clinical trials;
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successful enrollment and completion of clinical trials;
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data from our clinical program that support an acceptable risk-benefit profile of our product candidates in the intended patient populations;
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any delays in our planned clinical trials as a result of the COVID-19 pandemic;
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acceptance by the U.S. Food and Drug Administration, or FDA, European Medicines Agency, Health Canada or other regulatory agencies of the investigational new drug applications, clinical trial applications or other regulatory filings for PT101 and future product candidates;
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expanding and maintaining a workforce of experienced scientists and others to continue to develop our product candidates;
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successfully applying for and receiving marketing approvals from applicable regulatory authorities;
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obtaining and maintaining intellectual property protection and regulatory exclusivity for our product candidates;
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making arrangements with third-party manufacturers for, or establishing, commercial manufacturing capabilities; and
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maintaining a continued acceptable safety profile of our products following receipt of any marketing approvals.
We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.
Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase for the foreseeable future as we continue to implement our business strategy, which includes advancing PT101 through clinical development and other product candidates into clinical development, expanding our research and development efforts, including hiring additional personnel to support our research and development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.
Operating Expenses: General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, insurance expense and other expenses for outside professional services, including legal, human resources, audit and accounting services and facility-related fees not otherwise included in research and development expenses. Personnel costs consist of salaries, benefits and equity-based compensation expense, for our personnel in executive, finance and accounting, business operations and other administrative functions. We expect our general and administrative expenses to increase over the next several years to support our continued research and development activities, manufacturing activities, increased costs of expanding our operations and operating as a public company. These increases will likely include increases related to the hiring of additional personnel and legal, regulatory and other fees and services associated with
maintaining compliance with Nasdaq listing rules and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company.
Other Income (Expense), Net
Our other income (expense), net is comprised of interest income earned on cash reserves in our operating account, interest expense principally on our term loan, and fair value adjustments on the convertible note with the Juvenile Diabetes Research Foundation, or the JDRF Note, for which we have elected the fair value option of accounting.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following sets forth our results of operations for the years ended December 31, 2020 and 2019:
Revenue
For the years ended December 31, 2020 and 2019, we recognized $8.8 million and $1.0 million in revenue under the Astellas agreement. While the contractual term under the Astellas agreement is five years, based on the research plan and budget agreed to by the joint steering committee established under the Astellas agreement, we initially estimate our research and development commitments will be completed by the end of 2022. As of December 31, 2020, we estimated a total transaction price of $28.7 million, consisting of the fixed upfront payment of $10.0 million and estimated research funding and reimbursement of external costs of $18.7 million presently budgeted under the Astellas agreement to be incurred through 2022. As of December 31, 2020, we have no contract assets and short-term and long-term deferred revenues of $3.8 million and $3.8 million, respectively, which is presently estimated to be recognized through 2022. The aggregate amount of the transaction price that remained unsatisfied as of December 31, 2020 is estimated to be $18.9 million, of which we expect to recognize $8.8 million in 2021 and $10.1 million in 2022.
Research and Development Expenses
Research and development expenses were comprised of:
Direct and allocated research and development expenses by program were comprised of:
Research and development expenses were $33.9 million for the year ended December 31, 2020, compared to $18.2 million for the year ended December 31, 2019. The increase of $15.7 million was primarily due to an increase in activities across all of our programs and across all cost categories. During 2020, we initiated a Phase 1 clinical trial of PT101, increased activities under the Astellas collaboration and continued to advance our preclinical pipeline. During 2019, we advanced our lead product candidate, PT101, through preclinical activities. We also advanced our pipeline of candidates engineered using our TALON platform, including PT002, PT627 and PT001.
To support the continued advancement of our pipeline, we increased the number of internal employees devoted to research and development activities to 42 at December 31, 2020 from 29 at December 31, 2019. Preclinical and consulting services and development activities outsourced to CROs increased $8.6 million, of which $4.4 million was with respect to PT101, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Our facility and supply costs across all programs also increased $1.7 million and $0.7 million, respectively, during the year ended December 31, 2020 as compared to the year ended December 31, 2019, commensurate with the expansion of our pipeline of research and development programs. We expect our research and development expenses will continue to increase as we advance our pipeline of product candidates through planned preclinical and clinical development.
General and Administrative Expenses
General and administrative expenses to support our business activities were comprised of:
The increase in general and administrative expenses of $7.8 million in the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to a $2.6 million increase in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities. It was also partially attributable to a $2.9 million increase in personnel costs from additions to general and administrative employees, including an increase of $1.6 million in non-cash equity-based compensation, $1.6 million in additional insurance premiums related to being a public company and a $0.4 million increase in allocated facilities and equipment costs in the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Other Income (Expense), Net
Our other income (expense), net was comprised of:
Our other income (expense) consists primarily of interest income earned on our cash balance and interest expense and other costs related to our term loan, which was repaid in July 2020. We have elected to account for the JDRF convertible promissory note at fair value and have recorded a gain of $0.1 million in the fair value of the convertible note for each of the years ended December 31, 2020 and 2019.
Liquidity and Capital Resources
Sources of Liquidity
In July 2020, we completed our IPO and issued and sold 8,494,166 shares of common stock at a public offering price of $18.00 per share which includes 994,166 shares sold upon the partial exercise of the underwriters’ option in August 2020 to purchase additional shares of common stock, resulting in aggregate net proceeds of $138.6 million after deducting underwriting discounts and commissions and offering costs of $14.3 million. Prior to our IPO, we financed our operations primarily through the sales of our preferred stock and preferred shares, the sale of the SAFE, issuances of convertible promissory notes, a term loan and payments received under our collaboration agreement with Astellas. Since inception, we have had significant operating losses. Our net loss was $38.1 million and $21.9 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $86.0 million and $219.9 million in cash and cash equivalents.
In February 2020, we issued and sold an aggregate of 15,693,109 Series A preferred shares at a price per share of $1.147 in cash, for an aggregate purchase price of $18.0 million and incurred issuance costs of $20,000. In March 2020, we issued and sold an aggregate of 19,158,922 Series B preferred shares at a price per share of $2.0878 in cash, for an aggregate purchase price of $40.0 million and incurred issuance costs of $271,000. In June 2020, we issued 20,116,868 additional Series B redeemable convertible preferred shares for gross proceeds of $42.0 million and incurred issuance costs of $136,000. We also entered into the SAFE, pursuant to which we issued rights to one investor to receive shares of our capital stock for an aggregate purchase price of $6.0 million. Upon closing of our IPO in July 2020, the SAFE converted, by its terms, into 333,333 shares of our common stock based on the initial public offering price of $18.00 per share.
Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
Cash Flows
The following table summarizes our cash flows:
Net Cash Used in Operating Activities
Cash used in operating activities of $35.0 million during the year ended December 31, 2020 was attributable to our net loss of $38.1 million and a decrease of $2.9 million in our deferred revenue under the Astellas agreement, offset by a $2.2 million net increase in our working capital and non-cash charges of $3.3 million principally with respect to equity-based compensation and depreciation expense.
Cash used in operating activities of $13.4 million during the year ended December 31, 2019 was attributable to our net loss of $21.9 million together with a $2.2 million net increase in our working capital, offset by a $10.4 million increase in our deferred revenue under the Astellas agreement and non-cash charges of $0.3 million principally with respect to equity-based compensation and depreciation expense.
Net Cash Used in Investing Activities
Investing activities for all periods presented consist of purchases of property and equipment.
Net Cash Provided by Financing Activities
Cash provided by financing activities for the year ended December 31, 2020 was $242.2 million comprised of $138.6 million of aggregate net proceeds from the issuance of common stock in our IPO in July 2020 and August 2020, $6.0 million net proceeds from the SAFE in June 2020, $81.6 million net proceeds from the sale and issuance of our Series B redeemable convertible preferred shares in March 2020 and June 2020 and $18.0 million net proceeds from the sale and issuance of our Series A redeemable convertible preferred shares in February 2020.
Cash provided by financing activities for the year ended December 31, 2019 was $19.9 million comprised of $18.0 million net proceeds upon the second issuance of our Series A redeemable convertible preferred shares in January 2019 and $1.9 million of net proceeds on our term loan borrowing.
Loan and Security Agreement
In November 2019, we entered into a secured term loan facility with Silicon Valley Bank in the amount of $10.0 million, or the Term Loan Facility, with an initial advance of $2.0 million. A second advance of $4.0 million was available to be drawn prior to June 30, 2020 and a third advance of $4.0 million was available to be drawn based upon the achievement of certain events prior to June 30, 2020. The loans under the Term Loan Facility bore interest at the greater of (i) the prime rate less 1% and (ii) 4.25%. In response to the financial impact of the COVID-19 pandemic, in April 2020 the lender extended monthly interest-only payments on the outstanding term loan through November 2021 and the final maturity date on the term loan to May 2024. The Term Loan Facility was collateralized by a first priority perfected security interest in all of our tangible and intangible property, with the exception of our intellectual property, and by a negative pledge on our intellectual property. In July 2020, we repaid the $2.0 million of principal outstanding under the Term Loan Facility and, in connection with such repayment, the facility was terminated pursuant to its terms. We have no further payment obligations under the Term Loan Facility and no amounts under the secured term loan facility are available for borrowing.
Funding Requirements
Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services, costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.
Based upon our current operating plan, we believe that our cash and cash equivalents of $219.9 million as of December 31, 2020 will be sufficient to fund our operating expenses and capital expenditure requirements through the first half of 2024. To finance our operations beyond that point we will need to raise additional capital, which cannot be assured. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We currently have no credit facility or committed sources of capital. We will continue to seek funds through equity offerings, debt financings or other capital sources,
including potentially collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
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the progress, costs and results of our planned Phase 1b/2a clinical trial of PT101 in UC and our planned Phase 2 clinical trial of PT101 in SLE;
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the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical trials for our product candidates;
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the number of, and development requirements for, other product candidates that we pursue;
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the costs, timing and outcome of regulatory review of our product candidates;
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our ability to enter into contract manufacturing arrangements for supply of active pharmaceutical ingredient and manufacture of our product candidates and the terms of such arrangements;
•
the success of our collaboration with Astellas;
•
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;
•
the payment or receipt of milestones and receipt of other collaboration-based revenues, if any;
•
the costs and timing of any future commercialization activities, including product manufacturing, sales, marketing and distribution, for any of our product candidates for which we may receive marketing approval;
•
the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
•
the extent to which we acquire or in-license other products, product candidates, technologies or data referencing rights;
•
the impacts of the COVID-19 pandemic;
•
the ability to receive additional non-dilutive funding, including grants from organizations and foundations; and
•
the costs of operating as a public company.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
All of our revenue relates to the Astellas agreement. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect consideration to which we are entitled in exchange for the goods or services we transfer to the customer.
We are required to make a number of estimates and judgments in the process of recording our revenue. These estimates include determining the performance obligations, estimating the total transaction price, determining the period over which we record our revenue, estimating the total costs to completion and costs incurred to date. We have allocated the estimated $28.7 million accounting transaction price entirely to a single, bundled performance obligation comprised of the licenses provided to Astellas, our research services and other ancillary promises. We recorded the $10.0 million upfront payment from Astellas as deferred revenue in November 2019 and will record future invoices under the Astellas agreement as deferred revenue. While the contractual term under the Astellas agreement is five years, based on the research plan and budget agreed to by the joint steering committee established under the Astellas agreement, we will recognize the estimated total transaction price over the estimated period the research and development services are expected to be provided which, as of December 31, 2020, is approximately three years through 2022. We believe our performance obligation to Astellas is satisfied over the course of our performance of the research and development activities under the Astellas agreement and, depicting our performance in satisfaction of our performance obligation, we use input method as a measure of progress towards completion according to actual costs incurred compared to estimated total costs to estimate progress toward satisfaction of our performance. We will remeasure our progress towards completion of our performance obligation at the end of each reporting period.
For further discussion of revenue recognition, see Note 2 to our audited consolidated financial statements for the years ended December 31, 2020 and 2019 included elsewhere in this Form 10-K.
Research and Development Costs
We estimate costs of research and development activities conducted by service providers, which include, the conduct of sponsored research, preclinical studies and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in the accrued and other current liabilities or prepaid expenses on the balance sheets and within research and development expense on the consolidated statements of operations.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We make significant judgments and estimates in determining the accrued liabilities and prepaid expense balances in each reporting period. As actual costs become known, we adjust our accrued liabilities or prepaid expenses. We have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
Equity-based Compensation
We account for equity-based compensation in accordance with ASC 718, Compensation-Stock Compensation, or ASC 718. In accordance with ASC 718, compensation cost is measured at estimated fair value and is included as compensation expense over the vesting period during which service is provided in exchange for the award.
We used a Black-Scholes option pricing model to determine fair value of our previously issued incentive shares and use a Black-Scholes option pricing model to determine fair value of our stock options. The Black-Scholes option pricing model includes various assumptions, including the fair value of common shares, expected life of equity awards, the expected volatility and the
expected risk-free interest rate. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside our control. As a result, if other assumptions had been used, equity-based compensation cost could have been materially impacted. Furthermore, if we use different assumptions for future grants, share-based compensation cost could be materially impacted in future periods.
The fair value of each of our equity awards has been estimated using Black-Scholes based on the following assumptions:
We will continue to use judgment in evaluating the assumptions utilized for our equity-based compensation expense calculations on a prospective basis. In addition to the assumptions used in Black-Scholes, the amount of equity-based compensation expense we recognize in our financial statements includes equity award forfeitures as they occurred.
As there was no public market for our common shares prior to our IPO in July 2020, our board of directors, with input from management, has determined the estimated fair value of our common shares as of the date of each equity award grant considering our then-most recently available third-party valuation of common shares. Valuations are updated when facts and circumstances indicate that the most recent valuation is no longer valid, such as changes in the stage of our development efforts, various exit strategies and their timing, and other scientific developments that could be related to the valuation of our company, or, at a minimum, annually. Third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common share valuations in 2019:
•
For awards of incentive shares in January through June 2019 we utilized the back-solve method for inferring the equity value predicated on the likely second closing of our Series A redeemable convertible preferred shares financing and employed an option-pricing method, or OPM, framework to allocate equity to our common shares.
•
For awards of incentive shares in September, October and December 2019 we utilized a guideline transactions market approach for inferring the equity value implied by a selection of guideline transactions and employed an OPM framework to allocate equity to our common shares.
•
For awards of incentive shares in May and June 2020 we utilized a hybrid methodology that employed a probability-weighted value across multiple scenarios including an OPM framework and an IPO scenario. The total value of equity under each scenario was allocated among equity classes and the estimated probabilities for each scenario were then applied to derive the fair value per common share.
The estimates of fair value of our common shares are highly complex and subjective. There are significant judgments and estimates inherent in the determination of the fair value of our common shares. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event, the related valuations associated with these events, and the determinations of the appropriate valuation methods at each valuation date. The assumptions underlying these valuations represent our best estimates, which involve inherent uncertainties and the application of management judgment. If we had made different assumptions, our equity-based compensation expense, net loss and net loss per share applicable to common shareholders could have been materially different.
Following the completion of our IPO, the fair value of our incentive stock option grants and awards has been estimated using Black-Scholes based on the following assumptions
Determination of the Fair Value of Convertible Note and Series A Prime Convertible Preferred Shares
We have elected the fair value option for the accounting for the JDRF convertible promissory note issued in 2018. Fair value adjustments to the convertible notes are included in our other income (expenses).
•
The fair value of the initial closing of our convertible notes in December 2018 was determined to be equal to the proceeds of $2.0 million on issuance.
•
The fair value of the convertible note as of December 31, 2019 was determined using a Monte Carlo simulation model. Application of the Monte Carlo simulation model involves making assumptions for the expected time to the applicable financing dates, probability of each respective financing scenario versus holding to maturity, total value of equity as of each valuation date, volatility, and risk-free rate. The Monte Carlo simulation model iteratively solves for the calibrated discount rate such that the fair value of the convertible note as of the issuance date is equivalent to the total proceeds on issuance. The selected discount rate as of December 31, 2019 considers the calibrated discount rate as of the issuance date, risk-free rate, and changes in the credit risk for the company.
•
The fair value of the JDRF convertible promissory note on conversion was determined to be equal to the value of our Series A prime redeemable convertible preferred shares into which the convertible note was converted. In valuing our Series A prime redeemable convertible preferred shares for purposes of accounting for the conversion of the JDRF convertible promissory note, we utilized a probability-weighted hybrid method combining (i) trade-sale scenario and the back-solve method for inferring the equity value predicated on the likely closing of our Series B redeemable convertible preferred shares financing, and (ii) an IPO scenario with reference to guideline IPOs in the biotech sector. Under the hybrid method, the per share value calculated under the two scenarios is weighted based on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share value of the Series A prime redeemable convertible preferred shares.
In February 2020, the outstanding principal and accrued interest under the JDRF Note automatically converted at a price of $2.294 per share into 948,225 Series A prime redeemable convertible preferred shares. The final fair value adjustment to the JDRF Note in the year ended December 31, 2020 was determined to be equal to the fair value of the Series A prime redeemable convertible preferred shares into which the JDRF Note was converted. We determine the fair value of our Series A prime redeemable convertible preferred shares using a probability-weighted hybrid method combining (i) an option pricing model, or OPM, and (ii) an IPO scenario with reference to guideline IPOs in the biotechnology sector. For purposes of the OPM the key inputs include an 80.3% volatility rate, a 1.6-year estimated term, a risk-free rate of 0.3% and dividends of zero. For our IPO scenario, the key inputs include a weighted average cost of capital of 25% and a 0.8-year term to a liquidity event. For the year ended December 31, 2020, we recognized a $0.1 gain in the consolidated statements of operations as fair value adjustments on convertible note with respect to changes to the fair value of the JDRF Note.
Recently Adopted Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to our consolidated financial statements for the years ended December 31, 2020 and 2019 appearing elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020:
(1)
Represents our future minimum lease obligation under our non-cancelable operating a lease for our corporate headquarters in Watertown, Massachusetts, which expires in March 2026.
In addition, under various licensing and related agreements to which we are a party, we may be required to make milestone and earnout payments and to pay royalties and other amounts to third parties. We have not included any such contingent payment obligations in the table above as the amount, timing and likelihood of such payments are not known. Such contingent payment obligations are described below.
Pursuant to the antibody library subscription agreement, or Distributed Bio library agreement, with Distributed Bio, Inc., or Distributed Bio, we obtained a non-exclusive license to use an antibody library of Distributed Bio, or the Antibody Library, anti-PD-1 antibodies isolated from the Antibody Library by Distributed Bio, or the Anti-PD-1 Antibodies, and certain software to conduct research and development related to the discovery of antibodies against biological targets of interest to us. We refer to the Antibody Library, the Anti-PD-1 Antibodies and the software collectively as the Deliverables. Distributed Bio has also agreed to assign to us and we own all rights in the sequences of any Anti-PD-1 Antibody and antibody sequences that we identify by panning the Antibody Library, or the Panned Antibodies, including any derivative sequences and any molecules or products containing or any method of manufacture or use of any of the foregoing, which we refer to collectively as the Assigned Antibody Rights. Under the Distributed Bio library agreement, we paid subscription fees to Distributed Bio in connection with the use of the Deliverables. We are also required to make milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones with respect to any antibody that has a target recognition site derived from an Anti-PD-1 Antibody, a Panned Antibody or an antibody provided by Distributed Bio under any other agreement with us, and that is included in the Assigned Antibody Rights, which we refer to as an Antibody Product. We may be required to pay up to $4.3 million in clinical milestones and $12.0 million in regulatory milestones for each Antibody Product. Each such milestone payment will be paid only once with respect to any set of targets to which any Antibody Product is directed. The milestone payments may be offset by up to 50% of any amount paid by us to any third party for the achievement of the same or similar milestones with respect to any Antibody Product.
We also pay Distributed Bio for antibody discovery services under a master services agreement that we entered into with Distributed Bio concurrently with the Distributed Bio library agreement, which we refer to as the Distributed Bio MSA. We are required to make the same milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones as described in the Distributed Bio library agreement for any Antibody Product, but we will not owe milestone payments more than once for the same Antibody Product if such milestone is achieved under both of the Distributed Bio library agreement and the Distributed Bio MSA.
We paid an aggregate of approximately $2.2 million in subscription fees and other fees under the Distributed Bio library agreement and Distributed Bio MSA through December 31, 2020. Beginning in 2020, we ceased subscribing to the Distributed Bio antibody library, and as a result are no longer obligated to pay subscription fees under such agreement. We continue to engage Distributed Bio for antibody discovery services pursuant to the Distributed Bio MSA and we pay for such services on a service-by-service basis.
We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other third parties for clinical trials, preclinical research studies, chemistry and testing and manufacturing services. These contracts are generally cancelable by us upon up to 30 days’ prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to and through the date of cancellation. These payments are not included in the table of contractual obligations and commitments above as the amount and timing of these payments are not known.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
Emerging Growth Company Status
As an emerging growth company, or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements.
In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We may remain classified as an EGC until December 31, 2025, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1 billion of non-convertible debt over a three-year period.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. We held cash and cash equivalents of $219.9 million as of December 31, 2020. Historically, we have generally held our cash equivalents in money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K. An index of those financial statements is found in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and interim chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, mean controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company on the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including, our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our chief executive officer and interim chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable level.
Management’s Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Except to the extent provided below, the information required by this Item 10 will be included in the “Corporate Governance” section of our Definitive Proxy Statement to be filed with the Securities and Exchange Commission, or SEC, with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
We post our Code of Business Conduct & Ethics, which applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, in the “Corporate Governance” sub-section of the “Investor Relations” section (investors.pandiontx.com) of our corporate website at www.pandiontx.com. We intend to disclose on our website any amendments to, or waivers from, the Code of Business Conduct & Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
Item 11.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in the “Executive and Director Compensation” and “Compensation Committee Interlocks and Insider Participation” sections of our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in the “Securities Authorized for Issuance Under Equity Compensation Plans” and “Principal Stockholders” sections of our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in the “Transactions with Related Persons” and “Corporate Governance” sections of our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be included in the “Ratification of the Appointment of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm” section of our Definitive Proxy Statement to be filed with the SEC with respect to our 2021 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(1)For a list of the financial statements included herein, see Index to the Consolidated Financial Statements on page of this Annual Report on Form 10-K, incorporated into this Item by reference.
(2)Financial statement schedules have been omitted because they are either not required or not applicable or the information is included in the consolidated financial statements or the notes thereto.
(3)Exhibits
Exhibit
Number
Description
2.1
Form of Plan of Conversion (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
2.2
Agreement and Plan of Merger, dated as of February 24, 2021 among Pandion Therapeutics, Inc., Merck Sharp & Dohme Corp. and Panama Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2021).
3.1
Restated Certificate of Incorporation of Pandion Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 21, 2020).
3.2
Amended and Restated Bylaws of Pandion Therapeutics, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed with the SEC on July 21, 2020).
4.1
Specimen Stock Certificate evidencing the shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
4.2*
Description of Securities Registered Under Section 12 of the Exchange Act
4.3
Amended and Restated Investors’ Rights Agreement, dated as of March 23, 2020, by and among the Registrant and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.2+
2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.3+
Form of Stock Option Agreement under the 2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.4+
Form of Restricted Stock Unit Agreement under the 2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.5+
2020 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.6+
Summary of Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.7†
License and Collaboration Agreement, dated October 30, 2019, by and between the Registrant and Astellas Pharma Inc. (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.8†
Antibody Library Subscription Agreement, dated October 11, 2017, by and between the Registrant and Distributed Bio, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.9†
Master Services Agreement, dated October 11, 2017, by and between the Registrant and Distributed Bio, Inc. (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.10
Warrant issued on November 8, 2019 to Silicon Valley Bank by the Registrant (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
Exhibit
Number
Description
10.11
Lease, dated February 6, 2020, by and between the Registrant and BMR-134 Coolidge Avenue LLC (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.12+
Offer of Employment, dated July 3, 2019, by and between the Registrant and Rahul Kakkar, M.D. (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.13+
Offer of Employment, dated March 11, 2017, by and between the Registrant and Jo Viney, Ph.D. (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.14+
Offer of Employment, dated July 1, 2019, by and between the Registrant and Vikas Goyal (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.15+
Offer of Employment, dated May 8, 2017, by and between the Registrant and Anthony Coyle, Ph.D. (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.16+
Consulting Agreement, dated March 27, 2017, by and between the Registrant and Alan Crane (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.17
Form of Indemnification Agreement between the Registrant and each of its Executive Officers and Directors (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.18+
Employment Agreement, dated July 10, 2020, by and between the Registrant and Rahul Kakkar, M.D. (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.19+
Employment Agreement, dated July 10, 2020, by and between the Registrant and Jo Viney, Ph.D. (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.20+
Letter Agreement, dated July 8, 2020, by and between the Registrant and Vikas Goyal (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1/A, filed with the SEC on July 16, 2020).
10.21
Form of Tender and Support Agreement, dated as of February 24, 2021, among Merck Sharp & Dohme Corp., Panama Merger Sub, Inc. and certain stockholders of Pandion Therapeutics, Inc. (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 25, 2021).
10.22*
Confidential Disclosure-In Agreement, dated as of April 9, 2018, between Pandion Therapeutics, Inc. and Merck Sharp & Dohme Corp.
10.23*
Amendment No. 1 to Confidential Disclosure-In Agreement, dated as of December 16, 2019, between Pandion Therapeutics, Inc. and Merck Sharp & Dohme Corp.
10.24*
Amendment No. 2 to the Confidential Disclosure-In Agreement, dated as of December 18, 2020, between Pandion Therapeutics, Inc. and Merck Sharp & Dohme Corp.
10.25*
Amendment No. 3 to the Confidential Disclosure-In Agreement, dated as of February 13, 2021, between Pandion Therapeutics, Inc. and Merck Sharp & Dohme Corp.
10.26*
Exclusivity Agreement, dated as of February 9, 2021, between Pandion Therapeutics, Inc. and Merck Sharp & Dohme Corp.
10.27
Letter Agreement, dated as of February 24, 2021, between Pandion Therapeutics, Inc. and Jo Viney, Ph.D. (incorporated by reference to Exhibit (e)(17) to the Registrant’s Schedule 14D-9, filed with the SEC on March 4, 2021).
10.28
Letter Agreement, dated as of February 24, 2021, between Pandion Therapeutics, Inc. and John Sundy, M.D., Ph.D. (incorporated by reference to Exhibit (e)(18) to the Registrant’s Schedule 14D-9, filed with the SEC on March 4, 2021).
21.1*
Subsidiaries of the Registrant
23.1*
Consent of Independent Registered Public Accounting Firm
Exhibit
Number
Description
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
+
Indicates a management contract or any compensatory plan, contract or arrangement.
†
Certain portions of the exhibit are subject to confidential treatment.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pandion Therapeutics, Inc.
Date: March 12, 2021
By:
/s/ Rahul Kakkar
Rahul Kakkar, M.D.
Chief Executive Officer, Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Rahul Kakkar
Chief Executive Officer, Director
March 12, 2021
Rahul Kakkar, M.D.
(Principal Executive Officer)
/s/ Gregg Beloff
Interim Chief Financial Officer
March 12, 2021
Gregg Beloff
(Principal Financial Officer)
/s/ Eric Larson
Vice President, Finance
March 12, 2021
Eric Larson
(Principal Accounting Officer)
/s/ Alan Crane
Chairman of the Board of Directors
March 12, 2021
Alan Crane
/s/ Daniel Becker
Director
March 12, 2021
Daniel Becker, M.D., Ph.D.
/s/ Jill Carroll
Director
March 12, 2021
Jill Carroll
/s/ Donald Frail
Director
March 12, 2021
Donald Frail, Ph.D.
/s/ Christopher Fuglesang
Director
March 12, 2021
Christopher Fuglesang, Ph.D.
/s/ Carlo Rizzuto
Director
March 12, 2021
Carlo Rizzuto, Ph.D.
/s/ Nancy Stagliano
Director
March 12, 2021
Nancy Stagliano, Ph.D.
/s/ Katina Dorton
Director
March 12, 2021
Katina Dorton, J.D.
PANDION THERAPEUTICS, INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Page
Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Redeemable Convertible Preferred Shares and Stockholders’/Members’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Pandion Therapeutics, Inc. (successor to Pandion Therapeutics Holdco LLC)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pandion Therapeutics, Inc. (successor to Pandion Therapeutics Holdco LLC) and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, redeemable convertible preferred shares and stockholders’/members’ equity (deficit), and cash flows, for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 12, 2021
We have served as the Company’s auditor since 2019.
PANDION THERAPEUTICS, INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
See accompanying notes to the consolidated financial statements.
PANDION THERAPEUTICS, INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
See accompanying notes to the consolidated financial statements.
PANDION THERAPEUTICS, INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Consolidated Statements of Redeemable Convertible Preferred Shares and Stockholders’/Members’ Deficit
(in thousands, except share amounts)
See accompanying notes to the consolidated financial statements.
PANDION THERAPEUTICS, INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to the consolidated financial statement
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
1.
DESCRIPTION OF BUSINESS, ORGANIZATION AND LIQUIDITY
Business
Pandion Therapeutics, Inc., successor to Pandion Therapeutics Holdco LLC, is a clinical stage biopharmaceutical company developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. We have combined a network-based conceptualization of the immune system, focused on its control nodes, with expertise in advanced protein engineering to develop our TALON (Therapeutic Autoimmune reguLatOry proteiN) drug design and discovery platform.
As used in these financial statements, unless the context otherwise requires, references to the “company,” “we,” “us,” and “our” refer to Pandion Therapeutics Inc., its wholly owned subsidiaries Pandion Operations, Inc. and Pandion ProgramCo 1, Inc., and Pandion Securities Corp., a subsidiary of Pandion Operations, Inc.
Pandion Therapeutics, Inc. was incorporated on September 19, 2016 as a Delaware corporation. We began operations in January 2017. Our principal offices are located in Watertown, Massachusetts. On December 31, 2018, Pandion Therapeutics Holdco LLC was formed in the state of Delaware. On January 1, 2019, we completed a series of transactions in which Pandion Therapeutics, Inc. became a direct wholly owned subsidiary of Pandion Therapeutics Holdco LLC and all outstanding equity securities of Pandion Therapeutics, Inc. were canceled and converted on a one-for-one basis into equity securities of Pandion Therapeutics Holdco LLC, which we refer to as the “Restructuring.” In accordance with the terms of the LLC Operating Agreement, and on the effective date of the Restructuring;
•
each share of Pandion Therapeutics, Inc. common stock issued and outstanding immediately prior to the effective date of the Restructuring was converted into one common share of Pandion Therapeutics Holdco LLC;
•
each share of Pandion Therapeutics, Inc. Series A redeemable convertible preferred stock issued and outstanding immediately prior to the effective date of the Restructuring was converted into one Series A redeemable convertible preferred share of Pandion Therapeutics Holdco LLC;
•
all outstanding stock options to purchase shares of Pandion Therapeutics, Inc. common stock were cancelled and replaced with the same number of incentive shares in Pandion Therapeutics Holdco LLC;
•
each warrant issued by Pandion Therapeutics, Inc. that was outstanding immediately prior to the effective date of the Restructuring was cancelled and an equivalent number of incentive shares of Pandion Therapeutics Holdco LLC were issued; and
•
Pandion Therapeutics, Inc. became a wholly owned subsidiary of Pandion Therapeutics Holdco LLC.
We determined that the Restructuring lacked economic substance and was therefore accounted for in a manner consistent with a common control transaction. Similarly, as there was no change in fair value between shareholders, individually or as a class, we determined that the exchange of shares occurring in the Restructuring should be accounted for as a modification of the equity securities and presented as a reclassification of the components of equity.
Initial Public Offering and Corporate Conversion
In July 2020 we completed our initial public offering, or IPO, of an aggregate of 8,494,166 shares of common stock at a price to the public of $18.00 per share, which included 994,166 shares issued upon the partial exercise by the underwriters in August of 2020 of their option to purchase additional shares of common stock. We received aggregate net proceeds from the IPO of $138.6 million, after deducting underwriting discounts and commissions and offering costs, of $14.3 million.
Immediately prior to consummation of the IPO, all outstanding shares of our Series A, Series A Prime and Series B convertible preferred stock were converted into 17,950,177 shares of common stock. Additionally, all of our outstanding incentive shares were converted into 1,504,586 shares of common stock. Our common stock began trading on the Nasdaq Global Select Market on July 17, 2020 under the symbol “PAND”.
On July 21, 2020, we amended and restated the certificate of incorporation of Pandion Therapeutics, Inc to authorize 200,000,000 shares of common stock and 5,000,000 shares of preferred stock, which shares of preferred stock are currently undesignated.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
In contemplation of the initial public offering, on July 10, 2020, our wholly owned subsidiary Pandion Therapeutics, Inc. changed its name to Pandion Operations, Inc. and we subsequently engaged in the following transactions, which we refer to collectively as the Conversion:
•
we converted from a Delaware limited liability company to a Delaware corporation by filing a certificate of conversion with the Secretary of State of the State of Delaware; and
•
we changed our name from Pandion Therapeutics Holdco LLC to Pandion Therapeutics, Inc.
As part of the Conversion:
•
holders of Series A preferred shares of Pandion Therapeutics Holdco LLC received one share of Series A preferred stock of Pandion Therapeutics, Inc. for each Series A preferred share held immediately prior to the Conversion;
•
holders of Series A prime preferred shares of Pandion Therapeutics Holdco LLC received one share of Series A prime preferred stock of Pandion Therapeutics, Inc. for each Series A prime preferred share held immediately prior to the Conversion;
•
holders of Series B preferred shares of Pandion Therapeutics Holdco LLC received one share of Series B preferred stock of Pandion Therapeutics, Inc. for each Series B preferred share held immediately prior to the Conversion;
•
holders of common shares of Pandion Therapeutics Holdco LLC received one share of common stock of Pandion Therapeutics, Inc. for each common share held immediately prior to the Conversion;
•
holders of outstanding incentive shares in Pandion Therapeutics Holdco LLC, all of which were intended to constitute profits interests for U.S. federal income tax purposes, received a number of shares of common stock of Pandion Therapeutics, Inc. based upon a conversion price determined by our board of directors immediately prior to the Conversion. Of the shares of common stock issued in respect of incentive shares, 1,368,515 continue to be subject to vesting in accordance with the vesting schedule applicable to such incentive shares. Based on the determined fair value of $18.00 per common share, the incentive shares converted into an aggregate of 1,504,586 shares of our common stock, and we granted options to purchase an aggregate of 971,123 shares of our common stock.
Following the Conversion, Pandion Therapeutics, Inc. held all property and assets of Pandion Therapeutics Holdco LLC and assumed all of the debts and obligations of Pandion Therapeutics Holdco LLC. On the effective date of the Conversion, the members of the board of directors of Pandion Therapeutics Holdco LLC became the members of the board of directors of Pandion Therapeutics, Inc. and the officers of Pandion Therapeutics Holdco LLC became the officers of Pandion Therapeutics, Inc.
Reverse Share Split
Our board of directors and shareholders approved a one-for-5.0994 reverse share split of our issued and outstanding common shares and incentive shares and a proportional adjustment to the existing conversion ratios for our preferred shares and preferred warrants effective as of July 13, 2020. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse share split.
Liquidity
Since inception, we have devoted substantially all our efforts to business planning, research and development, recruiting management and technical staff, and raising capital and have financed our operations primarily through the net proceeds received from our IPO, the issuance of redeemable convertible preferred shares, debt financings, a simple agreement for future equity, or SAFE, and a collaboration agreement.
We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if our product development efforts are successful, it is uncertain when, if ever, we will realize significant revenue from product sales.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
We have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the consolidated financial statements are issued. As of December 31, 2020, we had an accumulated deficit of $86.0 million. We have incurred losses and negative cash flows from operations since inception, including net losses of $38.1 million and $21.9 million for the years ended December 31, 2020 and 2019, respectively. We expect that our operating losses and negative cash flows will continue for the foreseeable future as we continue to develop our product candidates. We expect that our cash and cash equivalents of $219.9 million as of December 31, 2020 will be sufficient to fund our operating expenses and capital requirements for more than 12 months from the date the consolidated financial statements are issued. Additional funding will be necessary to fund future clinical and pre-clinical activities and we do not currently have any external committed sources of funds. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects and our ability to continue operations.
Coronavirus Pandemic
In March 2020, the World Health Organization declared the global novel coronavirus disease 2019, or COVID-19, outbreak a pandemic. Our operations have not been significantly impacted by the COVID-19 outbreak. However, we cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our financial condition and operations, including ongoing and planned clinical trials. The impact of the COVID-19 coronavirus outbreak on our financial performance will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results may be materially adversely affected.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, increasing the ability to deduct interest expense, and deferring social security payments, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The CARES Act has not had a material impact on our financial position and results of operations.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification, or ASC, and Accounting Standards Updates, or ASU, of the Financial Accounting Standards Board, or FASB.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to accrued research and development expenses, other long-lived assets, the fair value of our common and incentive shares, fair value of convertible notes, equity-based compensation and the valuation of deferred tax assets. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources and adjusts those estimates and assumptions when facts and circumstances dictate.
We utilize estimates and assumptions in determining the fair value of our common shares, including equity-based awards. We have granted stock options at exercise prices that represented the fair value of our common stock on grant date, as well as incentive shares. We utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, to estimate the fair value of our common shares. Each valuation methodology includes estimates and assumptions that require our judgment. These estimates and assumptions include a number of objective and subjective factors,
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
including external market conditions, the prices at which we sold redeemable convertible preferred shares, the superior rights and preferences of the redeemable convertible preferred shares senior to our common shares at the time, and a probability analysis of various liquidity events, such as a public offering or sale of the company, under differing scenarios. Changes to the key assumptions used in the valuations could result in different fair values of common shares at each valuation date.
Principles of consolidation
These consolidated financial statements include the accounts of the Pandion Therapeutics, Inc, its wholly owned subsidiaries Pandion Operations, Inc. and Pandion ProgramCo 1, Inc., and Pandion Securities Corp., a subsidiary of Pandion Operations, Inc. All intercompany amounts have been eliminated in consolidation.
Cash and cash equivalents
We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. At December 31, 2020 and 2019, cash equivalents were comprised primarily of money market funds.
Concentrations of credit risk and off-balance sheet risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents.
Our investment policy includes guidelines regarding the quality of the financial institutions and financial instruments and defines allowable investments that we believe minimizes the exposure to concentration of credit risk. We may invest in money market funds, U.S. Treasury securities, corporate debt, U.S. government-related agency securities, commercial paper and certificates of deposit. These deposits may exceed federally insured limits. We have not experienced any losses historically in these accounts and believe that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality. We have no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.
Our revenue for the years ended December 31, 2020 and 2019 and related accounts receivable balance at December 31, 2020 and 2019 derives entirely from Astellas Pharma Inc., or Astellas (Note 12).
Fair value of financial instruments
Fair value is defined as the price we would receive to sell an investment in a timely transaction or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. A framework is used for measuring fair value utilizing a three-tier hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are as follows:
Level 1-Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2-Quoted prices in markets that are not considered to be active or financial instrument valuations for which all significant inputs are observable, either directly or indirectly; and
Level 3-Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Financial instruments are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the investment. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.
We monitor the availability of inputs that are significant to the measurement of fair value to assess the appropriate categorization of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, our
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
policy is to recognize significant transfers between levels at the end of the reporting period. The significance of transfers between levels is evaluated based upon the nature of the financial instrument and size of the transfer relative to total net assets available for benefits.
Deferred offering costs
We capitalize certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. Upon the closing of our initial public offering, these costs were reclassified to additional paid-in capital. If an equity financing is no longer considered probable of being consummated, the deferred offering costs would be expensed immediately to operating expenses in the statement of operations. There were no deferred offering costs at December 31, 2020 and 2019.
Property and equipment
Property and equipment are recorded at cost. Expenditures for repairs and maintenance are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in the determination of net income or loss. Fixed assets acquired for research and development purposes are assessed for alternative future use. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset.
Our fixed assets consist of laboratory equipment and office equipment with an estimated useful life of five years and leasehold improvements are amortized over the lease term.
Impairment of long-lived assets
We evaluate our long-lived assets, which consist of laboratory equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. To date, no impairments have been recognized in our consolidated financial statements.
Research and development expenses
We expense research and development costs as incurred. Our research and development expenses consist primarily of costs incurred for the discovery and development of our systemic and tissue targeted immune modulators, and related product candidates and include consultants to conduct preclinical and non-clinical studies, costs to acquire, develop and manufacture supplies for clinical trials and other studies, expenses incurred under agreements with contract manufacturing organizations, or CMOs, contract research organizations, or CROs, investigative sites, consultants to conduct clinical trials and salaries and related costs, including equity-based compensation, depreciation and other allocated facility-related and overhead expenses.
Accrued research and development costs
We record accruals for estimated costs of preclinical and clinical studies and manufacturing development. A portion of our clinical and manufacturing development activities are conducted by third-party service providers, including CROs and CMOs. The financial terms of these contracts are subject to negotiation, which vary by contract and may result in payments that do not match the periods over which materials or services are provided. We accrue the costs incurred under the agreements based on an estimate of actual work completed in accordance with the agreements. In the event we make advance payments for goods or services that will be used or rendered for future research and development activities, the payments are deferred and capitalized as a prepaid expense and recognized as expense as the goods are received or the related services are rendered. Such payments are evaluated for current or long-term classification based on when they are expected to be realized. If we do not identify costs that have begun to be incurred or if we underestimate or overestimate the level of services performed or the costs of these services, actual expenses could differ from our estimates. To date, we have not experienced significant changes in its estimates of preclinical studies, clinical trial and contract manufacturing accruals.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Redeemable convertible preferred shares
We classify redeemable convertible preferred shares as temporary equity outside of members’ deficit on our accompanying consolidated balance sheets due to certain redemption events that are not within our control. In the event of a deemed liquidation event, the proceeds from the event are distributed in accordance with liquidation preferences (Note 9). As a result of becoming redeemable due to the passage of time, we record changes in the redemption value and accrete the redeemable convertible preferred shares immediately to redemption value as they occur using the current redemption method. These increases are effected through charges against retained earnings, if any. In the absence of retained earnings, the accretion is charged to the accumulated deficit. The accretion is added to net loss to arrive at the net loss attributable to common shareholders in the calculation of loss per common share.
Revenue recognition
As of December 31, 2020 and 2019, all of our revenue is generated from our October 2019 license and collaboration agreement with Astellas directed toward the research, development and commercialization of locally acting immunomodulators for autoimmune diseases of the pancreas, or the Astellas Agreement. The Astellas Agreement is within the scope of ASC 606, Revenue from Contracts with Customers.
Under ASC 606, an entity recognizes revenue when or as its customer obtains control of distinct promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect consideration we are entitled to in exchange for the goods or services it transfers to the customer.
Our customer arrangements primarily consist of a license, or an option to license, rights to our intellectual property and research and developments services. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available and whether the goods or services are integral or dependent to other goods or services in the contract.
We estimate the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration or variable consideration. At the inception of each arrangement that includes variable consideration, we evaluate the amount of potential payments and the likelihood that the payments will be received. We utilize either the most likely amount method or expected amount method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration which is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.
Development and regulatory milestone payments are assessed under the most likely amount method and not constrained if it is probable that a significant revenue reversal will not occur. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment. To date, we have not recognized any consideration related to the achievement of development, regulatory, or commercial milestone revenue resulting from the Astellas Agreement.
For revenue related to sales-based royalties received from licensees, including milestone payments based on the level of sales, where the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any consideration related to sales-based royalty revenue resulting from the Astellas Agreement.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
We allocate the transaction price based on the estimated stand-alone selling price of each of the performance obligations. We must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in a contract with a customer. We utilize key assumptions to determine the stand-alone selling price for service obligations, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Additionally, in determining the standalone selling price for material rights, we may reference comparable transactions, clinical trial success probabilities, and develop estimates of option exercise likelihood. Any variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts we would expect to receive for the satisfaction of each performance obligation.
The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
To the extent we receive payments, including non-refundable payments, in excess of the recognized revenue, such excess is recorded as deferred revenue until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional.
Incentive shares
Prior to the IPO, we granted incentive shares to employees and non-employees, which generally vest over a four-year period. The incentive shares represented a separate substantive class of equity with defined rights within the LLC Operating Agreement. The incentive shares represented profits interests in us, which was an interest in the increase in the value of us over the Floor Amount, as defined in the LLC Operating Agreement and as determined at the time of grant. The holder, therefore, had the right to participate in distributions of profits only in excess of the Floor Amount. The Floor Amount was based on the valuation of our common shares on or around the grant date.
We accounted for incentive shares granted in accordance with ASC 718, Compensation-Stock Compensation (ASC 718). In accordance with ASC 718, compensation expense was measured at the estimated fair value of the incentive shares and was included as compensation expense over the vesting period during which an employee provides service in exchange for the award.
Equity-based compensation
We measure all stock options, incentive shares and other share-based awards granted based on the fair value on the date of the grant and recognize compensation expense with respect to those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we have issued stock options, incentive shares and restricted common share awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We recognize forfeitures related to equity-based compensation awards as they occur and reverse any previously recognized compensation cost associated with forfeited awards in the period the forfeiture occurs.
We classify equity-based compensation expense in our consolidated statement of operations in the same manner in which the award recipients’ payroll costs are classified or in which the award recipients’ service payments are classified.
The fair value of each equity award grant is estimated on the date of grant using the Black-Scholes option-pricing model, or Black-Scholes. The grant date fair value of our equity awards utilized in Black-Scholes is determined by our board of directors with the assistance of management. The grant date fair value of our common shares is determined using valuation methodologies which utilizes certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability. In determining the fair value of our common shares, the methodologies used to estimate our enterprise value were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
We measure employee and board of director equity-based compensation for stock option and restricted stock grants based on the grant date fair value of the equity awards. Equity-based compensation expense is recognized over the requisite service period of the awards. For equity awards that have a performance condition, we recognize compensation expense based on our assessment of the probability that the performance condition will be achieved.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Income taxes
Pandion Therapeutics Holdco LLC was taxed under the provisions of Subchapter K-Partners and Partnerships of the Internal Revenue Code. Under those provisions, Pandion Therapeutics Holdco LLC did not pay federal or state corporate income taxes on its taxable income. Instead, each member includes net operating income or loss for Pandion Therapeutics Holdco LLC on its individual return.
Pandion Therapeutics, Inc., Pandion Operations, Inc., Pandion ProgramCo1, Inc. and Pandion Securities Corp. use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
We assess the likelihood of deferred tax assets being realized. We provide a valuation allowance when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible.
We file U.S. federal and state income tax returns. Our tax positions are subject to audit. Financial statement effects of uncertain tax positions are recognized when it is more likely than not, based on the technical merits of the position, that it will be sustained upon examination. We evaluate uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. To date, we have not been subject to any interest and penalties.
Net loss per share
We calculate basic and diluted net loss per share in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the dilutive effects of potentially dilutive securities outstanding during the period. Potentially dilutive securities include performance shares, warrants for common and redeemable convertible preferred shares and redeemable convertible preferred shares. The dilutive effect of performance shares and warrant for common or redeemable convertible preferred shares is computed using the treasury stock method and the dilutive effect of redeemable convertible preferred shares is calculated using the if-converted method. For all periods presented, diluted net loss per share is the same as basic net loss per share since the effect of including potential common shares is anti-dilutive.
Segments
Operating segments are defined as components of an entity for which separate discrete financial information is made available and that is regularly evaluated by the chief operating decision maker, or CODM, in making decisions regarding resource allocation and assessing performance. Our CODM is our chief executive officer and we manage our operations as a single segment for the purposes of assessing performance and making operating decisions. Our singular concentration is focused on the development of therapeutics for autoimmune and inflammatory diseases.
Comprehensive loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss includes net loss as well as other changes in stockholders’/members’ equity (deficit) that result from transactions and economic events other than those with holders/members. There was no difference between net loss and comprehensive loss for the years ended December 31, 2020 and 2019.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Recently adopted accounting pronouncements
Effective January 1, 2020, we adopted ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The impact of adopting ASU 2018-13 was immaterial on our consolidated financial statements.
Recently issued accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize the liabilities related to all leases, including operating leases, with a term greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. In June 2020, FASB issued ASU 2020-05 Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities that amended the effective date for ASU 2016-02 for us to the annual reporting periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. We are currently assessing the impact of adopting ASU 2016-02 on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The guidance will become effective for us for fiscal years beginning after December 15, 2022. We are currently evaluating the impact that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for us for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact that ASU 2019-12 will have on our consolidated financial statements and related disclosures.
3.
FAIR VALUE MEASUREMENTS
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
The following table presents a roll-forward of the fair value of the convertible notes payable for which fair value is determined by Level 3 inputs (in thousands):
Our money market funds are highly liquid investments that are valued based on quoted market prices in active markets, which represent a Level 1 measurement within the fair value hierarchy.
Valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Our convertible note and SAFE is classified within Level 3 of the fair value hierarchy because the fair value measurement is based, in part, on significant inputs not observed in the market.
The fair value of the SAFE on issuance was determined to be equal to the proceeds of $6.0 million that we received from the sale of the SAFE. Fair value of the SAFE on conversion into common stock (Note 9) was determined to be equal to the fair value of the 333,333 shares of common stock issued upon conversion of the SAFE.
In December 2018, we entered into an agreement for the sale of up to $4.0 million of convertible notes with the Juvenile Diabetes Research Foundation, or JDRF, T1D Fund, or JDRF Note, of which $2.0 million was initially sold. We have elected to account for the JDRF Note at fair value. We determine fair value of the JDRF Note using a scenario-based valuation method and a Monte Carlo simulation model with inputs based on certain subjective assumptions, including (a) expected stock price volatility, (b) calculation of a forecast horizon, (c) a risk-free interest rate, and (d) a discount rate. This approach results in the classification of these securities as Level 3 of the fair value hierarchy. The assumptions utilized to value the JDRF Note obligation as of December 31, 2019 were (a) expected stock price volatility of 90%; (b) a forecast horizon of 1.9 years: (c) a risk-free interest rate of 1.6%; and (d) a discount rate of 14.8%. For the year ended December 31, 2019, we recognized a $110,000 gain in the consolidated statements of operations as fair value adjustments on convertible note with respect to changes to the fair value of the JDRF Note during the year.
In February 2020, the outstanding principal and accrued interest under the JDRF Note automatically converted at a price of $2.294 per share into 948,225 Series A prime redeemable convertible preferred shares. The final fair value adjustment to the JDRF Note in the year ended December 31, 2020 was determined to be equal to the fair value of the Series A prime redeemable convertible preferred shares into which the JDRF Note was converted. We determine the fair value of our Series A prime redeemable convertible preferred shares using a probability-weighted hybrid method combining (i) an option pricing model, or OPM, and (ii) an IPO scenario with reference to guideline IPOs in the biotechnology sector. For purposes of the OPM the key inputs include an 80.3% volatility rate, a 1.6-year estimated term, a risk-free rate of 0.3% and dividends of zero. For our IPO scenario, the key inputs include a weighted average cost of capital of 25% and a 0.8-year term to a liquidity event. For the year ended December 31, 2020, we recognized a $89,000 gain in the consolidated statements of operations as fair value adjustments on convertible note with respect to changes to the fair value of the JDRF Note.
There were no transfers among Level 1, Level 2 or Level 3 categories in the years ended December 31, 2020 or 2019.
4.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following (in thousands):
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
In October 2019, several batches of our drug substance were inadvertently disposed of by a vendor resulting in a loss of approximately $1.9 million for the year ended December 31, 2019. During the first quarter of 2020, we entered into a settlement agreement to recover the full cost of replacing the drug substance, resulting in a loss recovery receivable being recorded at December 31, 2019.
5.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following (in thousands):
Depreciation expense was $512,000 and $242,000 for the years ended December 31, 2020 and 2019, respectively.
6.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
7.
LONG-TERM DEBT
JDRF convertible note
The JDRF Note accrued interest at 7% per year and was scheduled to mature on the third anniversary of each closing. The first closing of $2.0 million took place on the execution date of the JDRF Notes and had a maturity date of December 4, 2021.
A second closing of $2.0 million of additional JDRF Notes was subject to the achievement of certain preclinical milestones. However, as a result of our Series B redeemable convertible preferred share financing in March 2020 (Note 9), we were required to issue and sell our redeemable convertible preferred shares in lieu of the issuance of the second JDRF Note.
Upon issuance, we elected the fair value option to account for the JDRF Note. As of December 31, 2019, the fair value of the JDRF Note was $1.9 million. We recognized a $0.1 gain in our consolidated statements of operations as fair value adjustments on convertible note with respect to changes to the fair value of the JDRF Note for each of the years ended December 31, 2020 and 2019.
In February 2020, the outstanding principal and accrued interest under the JDRF Note automatically converted at a price of $2.294 per share into 948,225 Series A prime redeemable convertible preferred shares.
Term loan
In November 2019, we entered into a secured term loan facility in the amount of $10.0 million, or Term Loan Facility, with an initial advance of $2.0 million. A second advance of $4.0 million was available to be drawn prior to June 30, 2020 and a third advance of $4.0 million was available to be drawn based upon the achievement of certain events prior to June 30, 2020. The loans under the Term Loan Facility bore interest at the greater of (i) the prime rate less 1% and (ii) 4.25%. In response to the financial impact of the COVID-19 pandemic, in April 2020 the lender extended monthly interest-only payments on the outstanding term loan through November 2021 and the final maturity date on the term loan to May 2024. We were required to pay a $85,000 final payment fee in connection with the Term Loan Facility that was amortized to interest expense over the term
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
of the agreement. The Term Loan Facility was collateralized by a first priority perfected security interest in all of our tangible and intangible property, with the exception of our intellectual property. Interest expense under the outstanding term loan was $50,000 and $12,000 for the years ended December 31, 2020 and 2019.
Debt issuance costs of $100,000 were recognized in recording the Term Loan Facility and were amortized to interest expense over the term of the agreement. There were approximately $94,000 of unamortized debt issuance costs at December 31, 2019. Approximately $98,000 and $6,000 related to the amortization of the debt issuance costs on the Term Loan was charged to interest expense during the years ended December 31, 2020 and 2019.
In connection with the Term Loan Facility, we issued a warrant to the lender to purchase an aggregate of 55,976 Series A redeemable convertible preferred shares at $1.147 per share. The warrant may be exercised by the holder at any time in whole or in part and will expire in November 2029. At the date of issuance, the fair value of the warrant was determined to be $49,000 utilizing Black-Scholes with the following assumptions: expected term of ten years, risk-free rate of 1.94%, volatility of 70.1% and a dividend yield of zero. The proceeds of the Term Loan were allocated between the Term Loan and the warrants on a relative fair value basis, resulting in a debt discount. The debt discount is being amortized as interest expense over the life of the Term Loan using the effective interest method. For the years ended December 31, 2020 and 2019, we recognized approximately $126,000 and $8,000 of interest expense related to the amortization of the debt discount on the Term Loan.
In July 2020, we repaid the $2.0 million of principal outstanding under the Term Loan and a prepayment fee of $60,000. In connection with such repayment, the facility was terminated pursuant to its terms. We have no further payment obligations under the Term Loan and no amounts under the secured term loan facility are available for borrowing.
8.
COMMITMENTS AND CONTINGENCIES
Operating lease
At the beginning of 2020, we had leased facilities in Cambridge, Massachusetts under an operating lease that was terminated in April 2020. In February 2020, we vacated the Cambridge, Massachusetts facility and entered into a lease for laboratory and office facilities in Watertown, Massachusetts that expires in March 2026 with a three-year renewal option and opened a secured letter of credit with a third-party financial institution in lieu of a security deposit for $0.5 million. Base rent for this lease is approximately $1.5 million annually with annual escalations of 3%.
Rent expense for the years ended December 31, 2020 and 2019 was $1.8 million and $1.0 million, respectively.
With the subsequent Watertown, Massachusetts facility lease, our minimum obligations under non-cancelable operating leases are as follows (in thousands):
Licensing Commitments
In October 2017, we entered into an antibody library subscription agreement and an antibody discovery services agreement with Distributed Bio, Inc. whereby we obtained a non-exclusive license to use an antibody library and certain software to conduct research and development related to the discovery of antibodies against biological targets of interest to us. Under the agreements, we pay subscription and other fees to Distributed Bio, Inc. and we are also required to make milestone payments to Distributed Bio, Inc. upon achievement of certain clinical and regulatory milestones. We may be required to pay up to $4.3 million in clinical milestones and $12.0 million in regulatory milestones for each antibody product. No milestones have been met as of December 31, 2020. We recorded research and development expense related to these agreements of $0.6 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Beginning in 2020, we ceased subscribing to the Distributed Bio antibody library, and as a result are no longer obligated to pay subscription fees under such agreement. We continue to engage Distributed Bio for antibody discovery services pursuant to the Distributed Bio MSA and we pay for such services on a service-by-service basis.
Legal proceedings
We are not currently a party to any material legal proceedings. At each reporting date, we evaluate whether a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We expense the costs related to its legal proceedings as incurred.
Indemnification agreements
As permitted under Delaware law, we indemnify our officers, directors and employees for certain events or occurrences while the officer or director or employee is, or was, serving at our request in such capacity. The term of the indemnification is for the officer’s, director’s or employee’s lifetime. Further, in the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. To date however, we have not incurred any material costs as a result of such indemnifications nor experienced any losses related to them. As of December 31, 2020, we were not aware of any claims under indemnification arrangements and does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible; therefore, no related reserves were established.
9.
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHARES
In the third quarter of 2020, we completed our IPO, selling an aggregate of 8,494,166 shares of common stock at a price to the public of $18.00 per share, which included 994,166 shares issued upon the partial exercise by the underwriters in August of 2020 of their option to purchase additional shares of common stock. Immediately prior to the consummation of the IPO, all outstanding shares of our Series A, Series A Prime and Series B convertible preferred stock were converted into 17,950,177 shares of common stock.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
The following table summarizes outstanding redeemable convertible preferred shares (in thousands, except share and per share amounts):
Issuances of redeemable convertible preferred shares
In January 2019, we issued 15,693,109 Series A redeemable convertible preferred shares at a price of $1.147 per share for gross cash proceeds of $18.0 million. We incurred issuance costs of $34,000.
In February 2020, we issued 15,693,109 Series A redeemable convertible preferred shares at a price of $1.147 per share for gross cash proceeds of $18.0 million. At this closing, the outstanding principal and accrued interest under the JDRF Note automatically converted at a per share price of $2.294 into 948,225 Series A prime redeemable convertible preferred shares.
In March 2020, we completed an $80.0 million Series B financing comprised of an initial closing and issuance of 19,158,922 Series B redeemable convertible preferred shares at $2.0878 per share to new and existing investors for gross cash proceeds of $40.0 million and incurred issuance costs of $271,000.
In connection with the initial issuance of the Series B redeemable convertible preferred shares, the holders received the right to purchase, and we were under the obligation to sell, an additional 19,158,922 shares of Series B redeemable convertible preferred shares upon achieving a certain clinical development milestone, or the Tranche Right.
We determined that the Tranche Right did not meet the definition of a freestanding financial instrument because it is not legally detachable. Further, we determined that the Tranche Right does not meet the definition of an embedded derivative that requires bifurcation from the equity instrument. Therefore, at the initial issuance of the Series B redeemable convertible preferred shares, there was no accounting for the Tranche Right.
In June 2020, we issued 19,158,922 Series B redeemable convertible preferred shares at $2.0878 per share in a second closing of our Series B financing to existing investors for gross cash proceeds of $40.0 million and incurred issuance costs of $136,000. We also issued 957,946 Series B redeemable convertible preferred shares to JDRF per the terms of the JDRF Note for gross cash proceeds of $2.0 million.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Simple Agreement for Future Equity
In June 2020, we entered into a SAFE with a related party, pursuant to which we received $6.0 million in cash in exchange for the providing the investor the right to receive shares of our capital stock. The SAFE contained a number of conversion and redemption provisions, including settlement upon liquidity or dissolution events. We elected the fair value option of accounting for the SAFE. Upon consummation of our initial public offering in July 2020, the SAFE was converted, by its terms, into 333,333 shares of our common stock based on the initial public offering price of $18.00 per share.
10.
COMMON SHARES
We had 200,000,000 shares of common stock authorized, of which 29,515,583 were issued and 28,381,893 were outstanding at December 31, 2020.
Restricted common shares
During 2017, we issued 1,429,902 shares of restricted common stock to founders, employees and consultants for aggregate consideration of $1,000. The purchase price of the restricted common stock was the estimated fair value on the grant date. The restricted common stock is subject to vesting over a period of three to four years, and vesting may be accelerated upon a change in control, as defined in the holder agreements. If the holders cease to have a business relationship with us, we may repurchase any unvested shares held by these individuals at their original purchase price. Though legally outstanding, the unvested restricted common stock is not considered outstanding for accounting purposes until the shares vest.
The following table summarizes vesting of restricted common shares:
Restricted common stock
In the third quarter of 2020, immediately prior to the consummation of the IPO, all outstanding restricted common shares issued by Pandion Therapeutics Holdco LLC were converted into shares of common stock of Pandion Therapeutics, Inc. Additionally, all of our outstanding incentive shares were converted into 1,504,586 shares of common stock, of which 1,368,515 shares were restricted common stock subject to continued vesting.
The following table summarizes vesting of restricted common stock:
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
11.
INCENTIVE SHARES AND EQUITY-BASED COMPENSATION
Incentive Shares
Prior to the Conversion, we granted incentive shares (profits interest awards) to employees, consultants and non-employee members of our Board of Directors. The LLC Operating Agreement of Pandion Therapeutics Holdco LLC initially provided for the grant of up to 1,717,678 incentive shares. In March 2020, the LLC Operating Agreement was amended to authorize the issuance of up to an aggregate of 13,182,678 incentive shares. Each unvested incentive share represented a non-voting equity interest in Pandion Therapeutics Holdco LLC that entitled the holder to a percentage of the profits and appreciation in the equity value of Pandion Therapeutics Holdco LLC arising after the date of grant and after such time as an applicable threshold amount was met.
As part of the Restructuring (Note 1), all of the outstanding stock options and warrants issued under our 2017 Stock Incentive Plan were cancelled and exchanged for incentive shares. On January 1, 2019, we exchanged 195,630 stock options and 14,031 warrants for 209,661 incentive shares with a weighted average fair value of $0.66. We consider this exchange of awards to be a modification with no additional compensation expense. During the year ended December 31, 2019, we granted 737,090 incentive shares with a weighted average fair value of $1.07. As of December 31, 2020, there were no incentive shares available for future grant.
The following table provides a summary of the incentive share activity for the years ended December 31, 2020 and 2019:
The fair value of incentive shares issued was determined using a Black-Scholes option pricing model with the following assumptions:
2020 Stock Incentive Plan
In anticipation of our IPO, in July 2020, our board of directors adopted and our stockholders approved the 2020 Stock Incentive Plan, or the 2020 Plan, which became effective on July 16, 2020. The 2020 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, awards of restricted stock, restricted stock units and other stock-based awards. The number of shares of our common stock reserved for issuance under the 2020 Plan is equal to the sum of: (1) 2,519,375; plus (2) the number of shares (up to 1,504,613) equal to the number of shares of common stock issued in respect of restricted common shares and incentive shares of Pandion Therapeutics Holdco LLC that were subject to vesting immediately prior to the effectiveness of the registration statement for our IPO that expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right; plus (3) an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year commencing on January 1, 2021 and continuing until, and including, the fiscal year ending December 31, 2030, equal to the lowest of (i) 6,000,000 shares of our common stock, (ii) 4% of the number of shares of our common stock outstanding on such date and (iii) an amount determined by our board of directors. As of December 31, 2020, we had 1,381,177 share available for issuance under
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
2020 Stock Incentive Plan. On January 1, 2021, an additional 1,180,623 shares became available for issuance under the 2020 Plan pursuant to the automatic increase described above.
We issued 1,143,417 stock options with a weighted average fair value of $11.01 during the year ended December 31, 2020. The following table provides a summary of stock option activity under the 2020 Plan during the year ended December 31, 2020 (in thousands, except share data).
The fair value of incentive shares issued was determined using a Black-Scholes option pricing model with the following assumptions:
2020 Employee Stock Purchase Plan
In July 2020, our board of directors adopted and our stockholders approved the 2020 Employee Stock Purchase Plan, or the ESPP, which became effective on July 16, 2020. A total of 209,948 shares of common stock were reserved for issuance under the ESPP. The number of shares of our common stock reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year, beginning with the fiscal year commencing on January 1, 2021 and continuing for each fiscal year until, and including, the fiscal year commencing on January 1, 2031, in an amount equal to the lowest of (1) 1,500,000 shares of our common stock, (2) 1% of the number of shares of our common stock outstanding on the first day of such fiscal year and (3) an amount determined by our board of directors. No shares have been issued under the ESPP as of December 31, 2020. On January 1, 2021, an additional 295,156 shares became available for issuance under the ESPP pursuant to the automatic increase described above.
Equity-based compensation
We recorded equity-based compensation expense related to the issuance of incentive shares and stock options of $2.6 million and $0.1 million during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was $2.9 million of unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of approximately 3.2 years. As of December 31, 2020, there was $10.6 million of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of approximately 3.3 years.
Equity-based compensation expense recorded in the accompanying consolidated statements of operations is as follows (in thousands):
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
12.
ASTELLAS AGREEMENT
Under the Astellas Agreement, we will be responsible for design and discovery of bispecific drug candidates based on our proprietary modular immune effector and tissue tether platform and Astellas will be responsible for conducting preclinical, clinical and commercialization activities for the selected candidates developed under the Astellas Agreement. In connection with our services to Astellas, we have granted a non-exclusive, non-transferable research license to Astellas and an exclusive, non-transferable, royalty-bearing, perpetual license to our technology with respect to the designated compound(s) for Astellas to further develop and ultimately commercialize for the treatment of autoimmune diseases of the pancreas. We do not share in the rights to clinical data and results under the Astellas Agreement. In addition, we are obligated under the Astellas Agreement to certain governance activities, reporting obligations and have made other ancillary commitments. The Astellas Agreement has a contractual term of five years.
We identified our research and development services, the licenses granted to Astellas and our governance obligations to Astellas as the material promises under the Astellas Agreement. For purposes of identifying our performance obligations under the Astellas Agreement, we believe that while the licenses were granted to Astellas at the outset of the Astellas Agreement, the grant of those licenses did not singularly result in the transfer of our broader obligation to Astellas under the Astellas Agreement, as the license has no true value without the performance of our research and development services, the technology transfer and joint steering committee participation.
Our research and development work with respect to bispecific drug candidates are unique with respect to our proprietary knowledge and know how in the design of bispecific antibodies and coupling bispecific antibodies with effector molecules to modulate immune activity. While capable of being distinct, those research and development activities are not distinct within the context of the Astellas Agreement. The licenses provided to Astellas are not transferable and we believe of limited value without our specific research and development services and thus are not capable of being distinct. While our governance obligations are capable of being distinct, those activities are integrated with our research and development efforts under the Astellas Agreement and are not distinct in the context of the contract. Taken together with our research and development activities, including the governance oversight to those activities, the licenses granted under the Astellas Agreement will enable us to further advance designated licensed compounds into and through clinical development, regulatory approval and ultimately commercialization. Therefore, we believe the licenses bundled together with our research and development services and our governance obligations therein constitute a single distinct performance obligation under the Astellas Agreement for accounting purposes, or Performance Obligation.
Under the Astellas Agreement, we received a non-refundable, upfront payment of $10.0 million in November 2019. As of December 31, 2020, we estimate that we will receive a further $12.6 million of research funding and external cost reimbursement. We have the right to receive, on a licensed compound-by licensed compound basis, potential research and development milestone payments up to an aggregate of $43.0 million for the first Licensed Compound and $38.0 million for subsequent Licensed Compounds and regulatory milestones up to an aggregate of $105.0 million. If any Astellas licensed products are successfully commercialized, we would be eligible to receive, on a licensed compound-by licensed compound basis, up to $150.0 million from potential commercial milestone payments based on the worldwide net sales of all licensed products containing the same licensed compound. We may also receive tiered mid to high single-digit royalty payments on worldwide net sales of any commercial products developed through our work together under the Astellas Agreement. The achievement and timing of the milestones depend on the success of development, approval and sales progress, if any, of commercial products developed through the collaboration in the future.
Provided Astellas designates at least one compound to progress in development under the Astellas Agreement, Astellas may designate up to five further compounds during a period of three years following the expiration of the five year term of the Astellas Agreement for their further evaluation to progress in development. We have no further obligation to Astellas during this period or in the evaluation of any such compounds they may designate, however Astellas may request us to conduct services in connection with their evaluations, however we are not obligated to conduct additional services. We assessed this provision as a potential material right and determined that we have no obligation to provide services (if requested) related to the designated compounds during the additional period and, as such, this provision does not provide Astellas with a material right.
While the contractual term under the Astellas Agreement is five years, based on the research plan and budget agreed to by the joint steering committee established under the Astellas Agreement, we initially estimate our research and development commitments will be completed by the end of 2022. As of December 31, 2020, we estimated a total transaction price of $28.7 million, consisting of the fixed upfront payment and estimated research funding and reimbursement of external costs of $18.7 million presently budgeted under the Astellas Agreement to be incurred through 2022, the effective term of our Performance Obligation to Astellas. Upon execution of the Astellas Agreement and as of December 31, 2020, contingent and variable consideration consisting of milestone payments has been constrained and excluded from the transaction price given the significant uncertainty of achievement of the development and regulatory milestones.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
We have allocated the transaction price entirely to the single, bundled performance obligation. We recorded the $10.0 million up-front payment from Astellas as deferred revenue in November 2019 and will record future invoices under the Astellas Agreement as deferred revenue. We will recognize the estimated total transaction price over the estimated period the research and development services are expected to be provided which, as of December 31, 2020, is through 2022. We believe the Performance Obligation is satisfied over the course of our performance of the research and development activities under the Astellas Agreement and, depicting our performance in satisfaction of the Performance Obligation, we use input method as a measure of progress towards completion of the Performance Obligation according to actual costs incurred compared to estimated total costs to estimate progress toward satisfaction of the Performance Obligation. We will remeasure our progress towards completion of the Performance Obligation at the end of each reporting period. For the years ended December 31, 2020 and 2019, we recognized $8.8 million and $1.0 million of revenue under the Astellas Agreement.
We invoice Astellas under the Astellas agreement quarterly in arrears for the cost of external services, quarterly in advance for our estimated internal services and annually to true-up our advance invoicing for estimated internal services. Invoiced amounts under the Astellas Agreement expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current portion of deferred revenue in the accompanying consolidated balance sheets. Invoiced amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. As of December 31, 2020, we have no contract assets and short-term and long-term deferred revenues of $3.8 million and $3.8 million, respectively, which is presently estimated to be recognized through 2022. The aggregate amount of the transaction price allocated to the Performance Obligation that remains unsatisfied as of December 31, 2020 is estimated be $18.9 million, of which we expect $8.8 million and $10.1 million to be recognized in 2021 and 2022, respectively.
13.
INCOME TAXES
The Company has not recorded any net tax provision for the periods presented due to the losses incurred and the need for a full valuation allowance against its deferred tax assets.
The reconciliation of the federal statutory income tax rate to our effective income tax rate is as follows:
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal components of our deferred tax assets and liabilities consisted of the following (in thousands):
We have incurred net operating losses in each year since inception. We have not reflected the benefit of any such net operating loss carryforwards in the consolidated financial statements. Due to our history of losses, and lack of other positive evidence, we have determined that it is more likely than not that our net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2020 and 2019. We increased our valuation allowance by $12.0 million for the year ended December 31, 2020 in order to maintain a full valuation allowance against all of our deferred tax assets.
As of December 31, 2020, we had federal net operating loss carryforwards, or NOLs, of $60.1 million and federal tax credits of $2.8 million available to offset tax liabilities. Our federal NOLs and federal tax credit carryforwards begin to expire in 2037 and 2038, respectively. Of the federal NOLs, $57.4 million have an infinite life. We also had gross state NOLs of $56.2 million and state tax credits of $1.4 million which are available to offset state tax liabilities. The state NOLs begin to expire in 2037 and the state tax credits begin to expire in 2032.
Federal and state NOLs and tax credit carryforwards are also subject to annual limitations in the event that cumulative changes in the ownership interests of significant stockholders exceed 50% over a three-year period, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986. We have not completed an analysis to determine if the NOLs and tax credits are limited due to a change in ownership.
As of December 31, 2020 and 2019, we had not recorded any amounts for unrecognized tax benefits. Our policy is to record interest and penalties related to income taxes as part of our income tax provision. As of December 31, 2020, and 2019 we had not accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in our consolidated statements of operations and comprehensive loss.
We file income tax returns in the United States. Our federal and Massachusetts tax returns are not currently under examination by any taxing authority for any open tax year. Due to NOLs, all years remain open for income tax examination. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the IRS or state tax authorities to the extent utilized in a future period. No federal or state tax audits are currently in process.
14.
DEFINED CONTRIBUTION PLAN
In September 2017, we established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code, or 401(k) Plan. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. We are not required to make and have not made any contributions to the 401(k) Plan for the years ended December 31, 2020 and 2019.
During the quarter ended December 31, 2020, our Compensation Committee approved us to start making match contributions to employees’ 401(k) effective January 1, 2021.
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
15.
NET LOSS PER SHARE
Net Loss per Share
Basic and diluted net loss per share attributable to common shareholders is calculated as follows (in thousands except share and per share amounts):
The following outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per share, as their effect is anti-dilutive:
16.
RELATED PARTY TRANSACTIONS
We engaged a firm managed by an executive of the company for professional services related to accounting, finance and other administrative functions. For the years ended December 31, 2020 and 2019, the costs incurred under this arrangement totaled $1.0 million and $417,000, respectively, which were recorded as general and administrative expense in the accompanying consolidated statements of operations. As of December 31, 2020 and 2019, amounts owed under this arrangement totaled $57,000 and $34,000, respectively, and are included in accounts payable in the accompanying consolidated balance sheets.
We engaged a director of the company to provide advice and services as requested by the board of directors. For the years ended December 31, 2020 and 2019, the costs incurred under this arrangement totaled approximately $69,000 and $163,000, respectively, which were recorded as general and administrative expense in the accompanying consolidated statements of operations. This agreement was terminated in July 2020.
In March 2020, we issued 19,158,922 Series B preferred redeemable convertible shares at a price of $2.0878 per share, for gross cash proceeds of $40.0 million, of which 12,883,010 shares were sold to our 5% stockholders and their affiliates, and certain of our executive officers and non-employee directors. In June 2020, we issued 19,158,922 Series B redeemable convertible preferred shares in an additional closing at the same price per share as the first closing for gross cash proceeds of $40.0 million, of which 12,883,010 shares were sold to our 5% stockholders and their affiliates, and certain of our executive officers and non-employee directors.
17.
SUBSEQUENT EVENTS
On February 24, 2021, the Company entered into an Agreement and Plan of Merger, or Merger Agreement, with Merck Sharp & Dohme Corp., a New Jersey corporation, or Merck, and Panama Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of Merck (Merger Sub). Under the terms of the Merger Agreement, Merger Sub will commence a cash tender offer, or the Tender Offer, to acquire all of the issued and outstanding shares of common stock of the Company at a price per share equal to $60, net to the seller of such shares in cash, without interest, subject to any withholding of taxes required by
PANDION THERAPEUTICS INC. (SUCCESSOR TO PANDION THERAPEUTICS HOLDCO LLC)
Notes to the Consolidated Financial Statements
applicable law. Following the completion of the Tender Offer, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Merck, or the Merger. The Merger will be governed by Section 251(h) of the General Corporation Law of the State of Delaware, with no stockholder vote required to consummate the Merger. In the Merger, each outstanding share of the Company’s common stock (other than shares of common stock held by the Company as treasury stock or held by stockholders who are entitled to demand, and who properly demand, appraisal rights under Delaware law) will be converted into the right to receive $60 per share in cash, without interest, subject to any withholding of taxes required by applicable law. The transaction is expected to close in the first half of 2021.
The consummation of the Merger will be conditioned on (1) at least a majority of the shares of the Company's outstanding common stock having been validly tendered into and not withdrawn from the Tender Offer, (2) receipt of certain regulatory approvals, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (3) the accuracy of certain representations and warranties that the Company made and compliance by the Company with certain covenants contained in the Merger Agreement, subject to qualifications, (4) there not having been a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to the Company since the date of the Merger Agreement, and (5) other customary conditions. The Tender Offer and the Merger are not subject to a financing contingency.
The Merger Agreement may be terminated by the Company under certain circumstances, including in connection with an Acquisition Proposal (as defined in the Merger Agreement) that the Company’s Board of Directors determines constitutes a Superior Proposal (as defined in the Merger Agreement). If termination of the Merger Agreement occurs under certain specified circumstances, the Company may be required to pay Merck a termination fee of $65 million. The Company expects expenses will be incurred in connection with the closing of the transaction with Merck.