2019-10K_Taxonomy2019

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-K

_______________________________



(Mark One)



 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from                      to                    .

Commission File Number: 001-37841



Kadmon Holdings, Inc.

(Exact name of registrant as specified in its charter)

_______________________________



 

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

27-3576929

(I.R.S. Employer
Identification No.)

450 East 29th Street,  New York,  NY

(Address of principal executive offices)

 

10016

(Zip Code)

(833) 900-5366 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:





 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

KDMN

The New York Stock Exchange



 

Securities registered pursuant to Section 12(g) of the Act: None

_______________________________

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES NO

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 

As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of its voting and non-voting common equity held by non-affiliates was approximately $139,954,795 based upon the closing price of the registrant’s common stock on June 28, 2019.

The number of shares of the registrant’s common stock outstanding as of March 2, 2020 was 159,763,100.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Kadmon Holdings, Inc.’s definitive proxy statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

 







 

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Kadmon Holdings, Inc.

Table of Contents





 

 



 

Page

PART I

 

Item 1.

Business

Item 1A.

Risk Factors 

23 

Item 1B.

Unresolved Staff Comments

55 

Item 2.

Properties 

55 

Item 3.

Legal Proceedings

55 

Item 4.

Mine Safety Disclosures 

55 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

56 

Item 6.

Selected Financial Data

56 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

57 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk 

68 

Item 8.

Financial Statements and Supplementary Data 

69 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 

69 

Item 9A.

Controls and Procedures 

69 

Item 9B.

Other Information 

69 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance 

70 

Item 11.

Executive Compensation 

70 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

70 

Item 13.

Certain Relationships and Related Transactions, and Director Independence 

70 

Item 14.

Principal Accounting Fees and Services 

70 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules 

70 

Item 16.

Form 10-K Summary 

70 

 

 

 

Signatures

106 









 

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FORWARD‑LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward‑looking statements. All statements other than statements of historical facts contained in this Annual Report on Form 10-K may be forward‑looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding future capital expenditures and obligations, are forward‑looking statements. In some cases, you can identify forward‑looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

Forward‑looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward‑looking statements. We believe that these factors include, but are not limited to, the following:

·

the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

·

our ability to advance product candidates into, and successfully complete, clinical trials;

·

our reliance on the success of our product candidates;

·

the timing or likelihood of regulatory filings and approvals;

·

our ability to expand our sales and marketing capabilities;

·

the commercialization,  pricing and reimbursement of our product candidates, if approved;

·

the implementation of our business model, strategic plans for our business, product candidates and technology;

·

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

·

our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights and proprietary technology of third parties;

·

cost associated with defending or enforcing, if any, intellectual property infringement, misappropriation or other intellectual property violation, product liability and other claims;

·

regulatory and governmental policy developments in the United States, Europe and other jurisdictions;

·

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

·

the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;

·

our ability to maintain and establish collaborations;

·

the rate and degree of market acceptance, if any, of our product candidates, if approved;

·

developments relating to our competitors and our industry, including competing therapies;

·

our ability to effectively manage our anticipated growth;

·

our ability to attract and retain qualified employees and key personnel;

·

our ability to achieve cost savings and benefits from our efforts to streamline our operations and to not harm our business with such efforts;

·

our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act);

·

statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share performance;

·

litigation, including costs associated with prosecuting or defending pending or threatened claims and any adverse outcomes or settlements not covered by insurance;

·

our expected use of cash and cash equivalents and other sources of liquidity;

·

the future trading price of the shares of our common stock and the impact of securities analysts’ reports on these prices;

·

the future trading price of our investments and our potential inability to sell those securities;

·

our ability to apply unused federal and state net operating loss carryforwards against future taxable income; and

·

other risks and uncertainties, including those listed under the caption “Risk Factors.”

The forward‑looking statements in this Annual Report on Form 10-K are only predictions, and we may not actually achieve the plans, intentions or expectations included in our forward‑looking statements. We have based these forward‑looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward‑looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward‑looking statements as predictions of future events. The events and circumstances reflected in our forward‑looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward‑looking statements.

 

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PART  I

Item 1. Business

Overview

We are a clinical-stage biopharmaceutical company that discovers, develops and delivers transformative therapies for unmet medical needs. Our team has a proven track record of successful drug development and commercialization. Our clinical pipeline includes treatments for immune and fibrotic diseases as well as immuno-oncology therapies. We leverage our multi‑disciplinary research and clinical development team members to identify and pursue a diverse portfolio of novel product candidates, both through in-licensing products and employing our small molecule and biologics platforms. We expect to continue to progress our clinical candidates and have further clinical trial events throughout 2020. Below is a brief description of our lead product candidates:

·

Immune and Fibrotic Diseases. We are developing oral small molecule inhibitors of Rho-associated coiled-coil kinase (“ROCK”) to treat immune and fibrotic diseases. Research by Kadmon and several academic institutions has demonstrated that inhibition of ROCK can regulate aberrant immune responses and fibrotic processes.

o

KD025. KD025, our most advanced product candidate, is an orally administered, selective small molecule inhibitor of Rho-associated coiled-coil kinase 2 (“ROCK2”). A pivotal study of KD025 is ongoing in patients with chronic graft-versus-host disease (“cGVHD”), a complication that can occur following hematopoietic cell transplantation (“HCT”) and that results in multi-organ inflammation and fibrosis. The U.S. Food and Drug Administration (“FDA”) has granted Breakthrough Therapy Designation to KD025 for the treatment of cGVHD after failure of two or more prior lines of systemic therapy. The FDA has also granted Orphan Drug Designation to KD025 for the treatment of cGVHD.    

In November 2019, we announced positive topline results from the planned interim analysis of ROCKstar (KD025-213), our pivotal trial evaluating KD025 in patients with cGVHD who have received at least two prior lines of systemic therapy. The trial met the primary endpoint of Overall Response Rate (“ORR”) at the interim analysis, which was conducted, as scheduled, two months after completion of enrollment. KD025 showed statistically significant ORRs of 64% with KD025 200 mg once daily (95% Confidence Interval (“CI”): 51%, 75%; p<0.0001) and 67% with KD025 200 mg twice daily (95% CI: 54%, 78%; p<0.0001). In February 2020, we announced expanded results of the interim analysis of KD025-213, showing that ORRs were consistent across key subgroups, including in patients with four or more organs affected by cGVHD (n=69; 64%) and patients who had no response to their last line of treatment (n=74; 68%). Responses were observed in all affected organ systems, including in organs with fibrotic disease. KD025 has been well tolerated and adverse events have been consistent with those expected in the patient population. Additional secondary endpoints, including duration of response, corticosteroid dose reductions, Failure-Free Survival, Overall Survival and Lee Symptom Scale reductions continue to mature and will be available later in 2020.

Further, in December 2019, we presented two-year follow-up data from our ongoing Phase 2a clinical trial of KD025 in cGVHD (KD025-208). The data showed continued patient benefit, with an ORR of 65% across all three dose cohorts. Responses were observed in all affected organ systems, including organs with fibrotic disease. Kaplan-Meier median duration of response was 35 weeks. KD025 was well tolerated, with no increased risk of infection observed. Twenty-four percent of the patients in the trial had remained on KD025 therapy for more than one-and-a-half years as of June 30, 2019. Subject to FDA feedback, we intend to submit a New Drug Application for KD025 in the second half of 2020.

We also initiated a double-blind, placebo-controlled Phase 2 clinical trial of KD025 for the treatment of systemic sclerosis, a life-threatening autoimmune disease characterized by chronic inflammation, fibrosis and vascular damage, in 2019.

o

KD045. KD045 is a potent, selective, oral inhibitor of ROCK for the treatment of fibrotic diseases and is the lead product candidate from our internal effort to identify and develop next-generation ROCK inhibitors. In mouse models of lung, kidney and liver fibrosis, KD045 demonstrated robust activity, highlighting the therapeutic potential of ROCK inhibition and supporting clinical development of this agent. Investigational New Drug (“IND”)-enabling activities of KD045 are currently ongoing.

 

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·

Immuno-oncology. We have a biologics research platform focused on the development of immuno-oncology therapeutics, specifically,  IL-15-containing fusion proteins for the treatment of cancer.

o

KD033. KD033 is an anti-PD-L1/IL-15 fusion protein and is the most advanced product candidate from our IL-15 platform. KD033 significantly inhibited tumor growth in many mouse syngeneic models, including PD-L1-expressing models that are resistant to approved immunotherapies. In these models, KD033 has demonstrated long-lasting responses through the induction of immune system memory. We expect to initiate a clinical trial of KD033 in the first half of 2020.

Our Strategy

Our goal is to develop innovative therapies for significant unmet medical needs. Our key strategies to achieve this goal are listed below:

·

Advance KD025 for the treatment of immune diseases. We are conducting a pivotal trial, ROCKstar (KD025-213), of KD025 in patients with cGVHD who have received at least two prior lines of systemic therapy. As further discussed below, we recently announced positive topline results from the planned interim analysis of the trial. We also initiated a Phase 2 clinical trial of KD025 in systemic sclerosis in 2019. 

·

Develop KD033 for the treatment of cancer. We plan to initiate clinical trial of KD033 in the first half of 2020.

·

Develop KD045 for the treatment of fibrotic diseases. We expect to complete our ongoing IND-enabling activities of KD045, our ROCK inhibitor.  

·

Leverage our research platforms to develop new product candidates. In addition to KD033 and KD045, we intend to use our small molecule and biologics research capabilities to develop new therapies in the areas of immune disorders, fibrotic diseases and immuno-oncology.

Kadmon Pharmaceuticals is our wholly owned, fully integrated commercial operation. We do not currently depend on commercial revenues from Kadmon Pharmaceuticals to support our non-commercial operations. Our commercial infrastructure, including the regulatory, compliance, quality and chemistry, manufacturing and controls (CMC) teams of Kadmon Pharmaceuticals, currently supports the development of our clinical-stage product candidates. We plan to leverage our commercial infrastructure to commercialize our product candidates, if approved.

Our Clinical‑Stage Pipeline

Picture 2

ROCK Inhibitors for Immune and Fibrotic Diseases

ROCK is an “on” switch in cells that regulates cell movement, shape, differentiation and function. Two isoforms exist: ROCK1 and ROCK2, and dysregulation of ROCK is implicated in many chronic diseases. Kadmon’s research has demonstrated that inhibition of ROCK can regulate aberrant immune responses and fibrotic processes. Kadmon’s ROCK portfolio includes a ROCK2-selective inhibitor, KD025, for the treatment of immune diseases, and KD045, a ROCK inhibitor for the treatment of fibrotic diseases. 

 

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Kadmon’s research has helped define the role of ROCK in the pathogenesis of many diseases, including immune and fibrotic disorders. Specifically, our research has demonstrated that KD025 helps to resolve immune dysregulation by down-regulating pro-inflammatory Th17 cells and increasing regulatory T (Treg) cells.



ROCK is downstream of major pro-fibrotic mediators and regulates multiple fibrotic processes, including stress fiber formation, myofibroblast activation and pro-fibrotic gene transcription. KD025 has down-regulated key fibrotic processes in preclinical models, including with profibrotic gene transcription, stress fiber formation, myofibroblast activation and collagen deposition.

KD025 Clinical Program

To date, more than 550 subjects have been dosed with KD025 for immune or fibrotic diseases or as healthy volunteers. KD025 has been well tolerated and demonstrated clinical activity.

KD025 for the Treatment of Chronic Graft-Versus-Host Disease

Medical Need: Chronic Graft-Versus-Host Disease

cGVHD is a common complication that can occur following HCT. In cGVHD, transplanted immune cells (graft) attack the patient’s cells (host), leading to inflammation and fibrosis in multiple tissues. Approximately 14,000 patients in the United States are living with cGVHD, and approximately 5,000 new patients are diagnosed with cGVHD per year.

KD025 in Chronic Graft-Versus-Host Disease

KD025 has demonstrated clinical activity and tolerability in an ongoing pivotal trial in patients with cGVHD who have received two or more prior lines of systemic therapy (KD025-213, or ROCKstar) as well as in an ongoing Phase 2 clinical trial in patients with steroid-dependent or steroid-refractory cGVHD with one to three prior lines of treatment for the disease (KD025-208).

Ongoing Pivotal Trial of KD025 in Chronic Graft‑Versus‑Host Disease (ROCKstar (KD025-213))

KD025-213 is an ongoing, open-label pivotal trial of KD025 in adults and adolescents with cGVHD who have received at least two prior lines of systemic therapy. Patients were randomized to receive KD025 200 mg QD or 200 mg BID (63 patients per arm). Either KD025 dose may be considered by the FDA for registration. The primary endpoint is the ORR, defined as the percentage of patients who meet the 2014 National Institutes of Health (“NIH”) Consensus Conference overall response criteria of Complete Response (CR) or Partial Response (PR). During a Type C meeting in March 2018, the FDA provided guidance to Kadmon on the design of a pivotal study of KD025 in cGVHD. The FDA granted Breakthrough Therapy Designation to KD025 in cGVHD in October 2018. We plan to continue our dialogue with regulatory authorities throughout 2020 to obtain further guidance on the regulatory pathway to approval for KD025 in cGVHD. 

In November 2019, we announced positive topline results from the planned interim analysis of ROCKstar. The trial met the primary endpoint at the interim analysis, which was conducted as scheduled two months after completion of enrollment. KD025 showed statistically significant ORRs of 64% with KD025 200 mg QD (95% CI: 51%, 75%; p<0.0001) and 67% with KD025 200 mg BID (95% CI: 54%, 78%; p<0.0001). Statistical significance is achieved if the lower bound of the 95% CI of ORR exceeds 30%, which was achieved in both arms of the trial at the interim analysis. While the ORR endpoint was met at the interim analysis, the primary analysis of the KD025-213 study will occur six months after completion of enrollment. Topline data from the primary analysis of KD025-213 are expected in the second quarter of 2020.

In February 2020, we announced expanded results of the interim analysis of KD025-213, showing that ORRs were consistent across key subgroups, including in patients with four or more organs affected by cGVHD (n=69; 64%) and patients who had no response to their last line of treatment (n=74; 68%). Responses were observed in all affected organ systems, including in organs with fibrotic disease. KD025 has been well tolerated and adverse events have been consistent with those expected in the patient population. Additional secondary endpoints, including duration of response, corticosteroid dose reductions, Failure-Free Survival, Overall Survival and Lee Symptom Scale reductions continue to mature and will be available later in 2020.

Ongoing Phase 2a Clinical Trial of KD025 in cGVHD (KD025-208)

KD025-208 is an ongoing Phase 2 clinical trial in patients with steroid-dependent or steroid-refractory cGVHD with one to three prior lines of treatment for the disease. Three cohorts of patients, (KD025 200 mg QD (n=17), KD025 200 mg BID (n=16) and KD025 400 mg QD (n=21)), were enrolled sequentially following a safety assessment of the previous cohort. KD025 achieved an ORR of approximately 65% across all three cohorts. Responses were observed across all affected organ systems, including in organs with fibrotic disease. Responses were durable, with a median duration of response of 35 weeks.

 

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and patients reported improvements in quality of life and were also able to reduce and/or completely discontinue doses of corticosteroids and other immunosuppressants. Pharmacodynamics data showed a decrease in Th17 cells and an increase in Treg cells during KD025 treatment, consistent with KD025 mechanism of action. KD025 was well tolerated, with no treatment-related serious adverse events and no apparent increased risk of infection. Twenty-four percent of the patients in the trial had remained on KD025 therapy for more than one-and-a-half years as of June 30, 2019.

KD025 for the Treatment of Systemic Sclerosis

Medical Need: Systemic Sclerosis

Systemic sclerosis (“SSc”) is a life-threatening autoimmune disease characterized by chronic tissue inflammation, fibrosis and vascular damage. SSc affects 75,000 to 100,000 people in the United States. Currently, there are no FDA approved drugs for the treatment of SSc. 

KD025 in SSc

In 2019, we initiated a double-blind, placebo-controlled Phase 2 clinical trial of KD025 in SSc, a disease in which KD025 has demonstrated potential in preclinical models. Sixty patients are being randomized to receive KD025 200 mg QD, KD025 200 mg BID or placebo (20 patients per arm) blinded for 28 weeks and open-label for an additional 24 weeks (total 52 weeks). The primary endpoint is the change in Combined Response Index for Systemic Sclerosis (CRISS) score, a measure of improvement in systemic sclerosis, at 24 weeks.

KD045

Kadmon is developing KD045, a next-generation ROCK inhibitor for the treatment of fibrotic diseases. A key challenge in the development of ROCK inhibitors is to develop potent, selective oral therapies. Earlier-generation ROCK inhibitors target the majority of the AGC kinase family and lack specificity or potency to effectively target ROCK. Using innovative medicinal chemistry, computational and structure-based design approaches, we have identified and developed proprietary, next-generation inhibitors with enhanced potency and AGC-kinase selectivity to specifically target ROCK. We have selected our lead candidate from this effort, KD045, for clinical development.

KD045 inhibited key fibrotic processes in multiple in vivo pharmacology models, including in models of bleomycin-induced lung fibrosis, renal fibrosis and liver fibrosis. KD045 has been shown to selectively target ROCK, exhibiting a favorable safety profile compared to earlier-generation ROCK inhibitors. IND-enabling studies are ongoing for KD045.

KD033

We have an in-house novel phage display library able to generate fully human monoclonal antibodies against many protein targets. This platform is run by an experienced group of scientists with an outstanding antibody development track record. Prior to joining Kadmon, this team was involved in the development of multiple commercially successful antibodies including Erbitux (cetuximab) and Cyramza (ramucirumab). Our scientists are developing monoclonal antibodies as well as fusion proteins and bispecific antibodies that we believe represent the next generation of cancer immunotherapies.

Our most advanced candidate from the biologics platform, KD033, is a novel anti-PD-L1/IL-15 fusion protein designed to stimulate an immune response directed to the tumor microenvironment. Recombinant IL-15 alone, which stimulates cancer-fighting immune effector cells. We have developed KD033 as a novel approach to overcome this challenge by fusing IL-15 to an anti-PD-L1 antibody to direct IL-15 activity specifically to the tumor microenvironment, which is designed to promote efficacy and induce durable responses while potentially decreasing safety concerns. 

Preclinical data demonstrated that a single dose of KD033 inhibited tumor growth across multiple in vivo syngeneic tumor models. KD033 induced a strong immune response with a single treatment, resulting in mice that remained tumor-free following several tumor re-challenges. Furthermore, KD033 in combination with anti-PD-1 therapy demonstrated synergistic activity, providing clinical rationale for administering KD033 in combination with other immune checkpoint inhibitors. KD033 has demonstrated significant tumor inhibition in murine models that are resistant to approved immunotherapies (PD-L1, PD-1 or CTLA-4 antibodies), suggesting that KD033 may deliver promising clinical outcomes in cancer patients resistant or refractory to immuno-oncology monotherapy. We have presented encouraging preclinical data on KD033 at scientific conferences. We plan to initiate a clinical trial of KD033 in the first half of 2020.

 

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Other Clinical Programs

KD025 for the Treatment of Idiopathic Pulmonary Fibrosis

Independent research from academic institutions has demonstrated that ROCK signaling is increased in idiopathic pulmonary fibrosis (“IPF”) in humans as well as in murine lung samples. In our preclinical research, KD025 reduced fibrosis in multiple preclinical models, including lung fibrosis in a bleomycin mouse model system. These data suggest that ROCK inhibition has therapeutic potential in IPF by blocking key fibrotic processes mediated by ROCK.

Ongoing Phase 2 Clinical Trial of KD025 in Idiopathic Pulmonary Fibrosis (KD025-207)

We are conducting a randomized, open-label, Phase 2 clinical trial to examine the safety, tolerability and activity of KD025 in IPF patients who have received or been offered pirfenidone and/or nintedanib. The study enrolled 39 patients who were randomized 2:1 to receive KD025 at 400 mg QD or best supportive care (“BSC”). The primary efficacy endpoint is a measure of lung function, the forced vital capacity (“FVC”), at 24 weeks. In initial data, KD025 demonstrated clinical benefit in IPF patients, with a median decline in FVC of 48 mL at week 24, compared to a median decline of 175 mL in patients treated with BSC. KD025 was well tolerated, with no drug-related SAEs.

We have expanded the KD025-207 study to enroll approximately 35 additional patients. We expect these data to support the development of KD045, Kadmon’s ROCK inhibitor, for the treatment of fibrotic diseases, including IPF.

Tesevatinib for the Treatment of Polycystic Kidney Disease (“PKD”)

Tesevatinib is an oral tyrosine kinase inhibitor in development for the treatment of autosomal dominant polycystic kidney disease (ADPKD), a genetic kidney disorder. To date, more than 300 subjects have received tesevatinib for the treatment of PKD or cancer, or as healthy volunteers.

Our randomized, placebo-controlled Phase 2 clinical trial of tesevatinib in ADPKD is ongoing and has completed enrollment. We have de-prioritized the tesevatinib program, and we do not currently expect to fund additional studies once the Phase 2 trial is concluded.

Our Drug Discovery Platforms 

We have two drug discovery platforms that support our pipeline of clinical‑stage product candidates: small molecules and biologics. We are developing novel therapies in the areas of immune and fibrotic diseases as well as immuno-oncology.

Research and Development

Research and development expenses consist primarily of costs incurred for the development of our product candidates. For the years ended December 31, 2019 and 2018, we recognized $56.5 million and $49.0 million, respectively, in research and development expenses. For further detail about our research and development activities, refer to the research and development sections in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.

Sales and Marketing

Kadmon Pharmaceuticals is our wholly owned, fully integrated commercial operation. We currently market CLOVIQUE™ (Trientine Hydrochloride Capsules, USP), a room-temperature stable innovative product developed in-house at Kadmon and generic Trientine Hydrochloride Capsules USP, 250 mg (collectively, CLOVIQUE). Trientine hydrochloride is used for the treatment of Wilson’s disease in patients who are intolerant of penicillamine. CLOVIQUE is the first FDA-approved trientine product in a portable blister pack that offers room temperature stability for up to 30 days, potentially providing patients more convenience than existing treatment options. 

We do not currently place significant value on our commercial operations from a revenue‑generation standpoint, as revenues from such operations do not currently support our research and development efforts. We leverage our commercial infrastructure to support the development of our clinical-stage product candidates by providing quality assurance, compliance, regulatory and pharmacovigilance among other capabilities. We believe our commercial infrastructure will be most advantageous to us in the future, in connection with the anticipated commercialization of our pipeline product candidates, if approved.

Kadmon Pharmaceuticals is a commercial organization encompassing managed care and specialty pharmacy account directors, experienced regulatory, quality, compliance and CMC teams, marketing experts and sales specialists.

 

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Kadmon Pharmaceuticals has long-standing relationships with specialty pharmacies. The specialty pharmacies through which we distribute our products are fully independent of Kadmon. We do not have any ownership interest in or affiliations with any specialty pharmacy, nor do we consolidate the financial results of any specialty pharmacies with our own.

Investment in MeiraGTx

On June 12, 2018, MeiraGTx Holdings plc (“MeiraGTx”) completed its initial public offering (the “MeiraGTx IPO”) whereby it sold 5,000,000 ordinary shares at $15.00 per share. Upon completion of the MeiraGTx IPO, we owned approximately 13.0% of MeiraGTx’s issued and outstanding ordinary shares and we no longer had the ability to exert significant influence over MeiraGTx’s operations. In October 2019, we entered into a transaction pursuant to which we sold approximately 1.4 million ordinary shares of MeiraGTx for gross proceeds of $22.0 million. As of December 31, 2019, we owned approximately 2.1 million, or 5.7%, of the issued and outstanding ordinary shares of MeiraGTx, with a fair value of $42.0 million.

Strategic Collaborations and License Agreements

Nano Terra, Inc.

In April 2011, in connection with the acquisition of Surface Logix, Inc. (“SLx”) by Nano Terra, Inc. (“Nano Terra”), our subsidiary Kadmon Corporation entered into a joint venture with SLx through the formation of NT Life Sciences, LLC (“NT Life”), whereby Kadmon Corporation contributed $0.9 million at the date of formation in exchange for a 50.0% interest in NT Life. Contemporaneously with our entry into the joint venture, we entered into an exclusive sub-license agreement with NT Life and SLx, under which NT Life granted us rights to certain patents and know-how it licensed from SLx relating to KD025 (formerly SLx-2119). Under this agreement, NT Life granted to us an exclusive, worldwide, royalty-bearing, sublicensable license (under the patents and know how it licensed from SLx) to make, have made, use, sell, offer for sale, import and export certain products, including KD025. NT Life also granted to us a worldwide, non-exclusive, non-transferable, sublicensable license under certain SLx platform technology to make, have made, use, sell, offer for sale, import and export the products. The initial purpose of the joint venture with SLx was to develop assets licensed to us from SLx and to define the royalty obligations with respect to certain products not exclusively licensed to us. The joint venture is, however, currently inactive. We expect that the joint venture will become active and develop certain intellectual property in the future.

We are the sublicensee of granted patents in the United States for KD025, as well as applications in Australia, Canada, Europe, Japan and the United States, which claim KD025 as a composition‑of‑matter, and use of KD025 to treat certain diseases. The last-to-expire U.S. patent in this family has a term that ends in October 2029 based on a calculated PTA and without regard to any potential PTE, which could further extend the term by an additional five years.

In consideration for the rights granted to us by NT Life, we agreed to assume certain of Nano Terra’s payment obligations, which are limited to the royalty percentages discussed in this paragraph, under the Agreement and Plan of Merger dated April 8, 2011, by and among Nano Terra, NT Acquisition, Inc., SLx, and Dion Madsen, as the Stockholder Representative of SLx (the “Nano Terra Merger Agreement”). Pursuant to these obligations, we are required to pay to the Stockholder Representative and NT Life royalties on net sales in the amount of 5% and 10% respectively. As we own 50% of NT Life, the cumulative result of these obligations is that we will owe aggregate royalty payments totaling 9.75% on net sales of licensed products. Pursuant to the assumption of Nano Terra’s payment obligations, if we further assign or sublicense our rights to any licensed product to certain third parties, we are also required to pay to the Stockholder Representative a portion of any sublicensing revenue relating to such licensed product ranging from the low twenty percents to the low forty percents, subject to specified deductions and adjustments. We are also required to pay to NT Life any remaining sublicensing revenue after giving effect to the foregoing sublicense revenue payment to the Stockholder Representative.

Unless earlier terminated, our agreement with NT Life will, with respect to a licensed product, end on a country‑by‑country and licensed product‑by‑licensed product basis upon the latest of (a) the expiration or invalidation of the last valid claim of a licensed patent right covering such licensed product in such country and (b) the expiration or termination of payment obligations with respect to such licensed product in such country under the Nano Terra Merger Agreement. The agreement will, with respect to the licensed SLx platform technology, end on a country‑by‑country basis upon the expiration or invalidation of the last valid claim of a licensed patent right covering such SLx platform technology. We may terminate the agreement at any time upon six months’ written notice to NT Life and if we provide such notice, NT Life may accelerate such termination upon thirty days’ prior written notice. Either party may terminate the agreement for any material breach by the other party that is not cured within a specified time period. NT Life may terminate the agreement if we challenge the licensed patents. Either party may terminate the agreement upon the bankruptcy or insolvency of the other party. The agreement shall terminate in the event we are dissolved.

In addition, the agreement shall terminate on a licensed product‑by‑licensed product basis in the event such licensed product reverts to the Stockholder Representative because of a failure to satisfy the diligence requirements as set forth in the Nano Terra Merger Agreement. More specifically, pursuant to our sub-license agreement with NT Life and SLx, we agreed

 

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to assume certain of Nano Terra’s diligence obligations under the Nano Terra Merger Agreement such that we are obligated to use commercially reasonable efforts to develop the licensed products, including KD025. With respect to KD025, our diligence obligations do not expire until the completion of a certain specified Phase 2 clinical trial of KD025 in oncology. If, prior to the expiration of our diligence obligations, we fail to comply with such diligence obligations for any licensed product, including KD025, the Stockholder Representative may require Nano Terra to assign all assets of SLx, including intellectual property, relating to such licensed product to an entity designated by such Stockholder Representative, subject to Nano Terra’s and our rights to contest such assignment. If such an assignment takes place, our sublicense rights to such intellectual property for such licensed product will terminate.

If the agreement is terminated, among other things, we will be required to cease all development and commercialization of the licensed products, including KD025, all licenses granted to us will terminate and we are obligated to grant NT Life a perpetual, irrevocable, worldwide, exclusive license under certain intellectual property owned or controlled by us that relate to the licensed products to develop and commercialize such licensed products.

Dyax Corp. (acquired by Shire Plc in January 2016 and acquired by Takeda Pharmaceutical Co. Ltd in 2018) 

In July 2011, we entered into a license agreement with Dyax Corp. (“Dyax”) for the rights to use the Dyax Antibody Libraries, Dyax Materials and Dyax Know‑How (collectively “Dyax Property”). The agreement terminated on September 22, 2015, but we had a right to a commercial license of any research target within two years of expiration of the agreement. We exercised this right to a commercial license of two targets in September 2017, one of which is KD033, resulting in a license fee payable to Shire Plc of $1.5 million, which was recorded as research and development expense in the third quarter of 2017.  Under the terms of the agreement, we also recorded $1.5 million as research and development expense during the fourth quarter of 2019, related to development milestones we met during that quarter.

Our Intellectual Property

The proprietary nature of, and protection for, our product candidates, their methods of use, and our technologies are an important part of our strategy to discover and develop small molecules and biologics that address areas of significant unmet medical needs in inflammatory and fibrotic diseases, genetic diseases, and in the area of immuno‑oncology. We are the owner or exclusive licensee of patents and applications relating to certain of our product candidates, and are pursuing additional patent protection for them and for our other product candidates and technologies. 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. Additionally, we maintain copyrights and trademarks, both registered and unregistered.

Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important products, product candidates, technologies, inventions and know‑how related to our business and our ability to defend and enforce our patents, preserve the confidentiality of our trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know‑how, continuing technological innovation and in‑licensing opportunities to develop, strengthen and maintain the proprietary position of our development programs. We actively seek to protect our proprietary information, including our trade secrets and proprietary know‑how, by requiring our employees, consultants, advisors and partners to enter into confidentiality agreements and other arrangements upon the commencement of their employment or engagement. The chart below identifies which of our product candidates are covered by patents and patent applications that we own or license, the relevant expiration periods and the major jurisdictions. Additional patent applications have been filed to extend the patent life on some of these products, but there can be no assurance that these will issue as filed.



 

 

 

 

 

 

 

 

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Product Candidate

 

Description/
Indications

US Patent
Numbers

Patent
Expiration

Patent
Type

Major
Jurisdictions

Claim
Type

KD025

ROCK2 Inhibitor/cGVHD

15,303,420

(pending)

2035*

Utility

US

Method of Use

KD025

ROCK2 Inhibitor/immune diseases (incl. GVHD)

US2013/063752

2033+

Utility

US, JP

Method of Use

KD025

Inhibitor/immune diseases (incl. GVHD)

(pending)

2033*

 

CA, CN, EA, EP

Method of Use

KD025

ROCK2 Inhibitor/Fibrosis

8,357,693

2029+

Utility

US

Composition of Matter/
Method of Use

KD025

ROCK2 Inhibitor/Fibrosis

8,916,576

2026+

Utility

CA, CN, EA, EP, JP,

Composition of Matter/
Method of Use

Tesevatinib

Multi‑kinase Inhibitor/Oncology

7,576,074

8,658,654

2026+

Utility

AU, CA, EP, JP, US

Composition of Matter/
Method of Use

Tesevatinib

Multi‑kinase Inhibitor/Polycystic Kidney Disease

9,364,479

2031+

Utility

CA, CN, EA, EP, TW, US

Method of Use

KD033

Monoclonal Antibody, Immunoconjugate/Oncology

15,111,102

2035+

Utility

US

(pending in CN, JP, EU)

Composition of Matter/
Method of Use

KD045

Inhibitors of Rho-associated Coiled-Coil Kinase

US 62/553,619

(pending)

2037*

Utility

US

Composition of Matter/
Method of Use

CLOVIQUE

Chelating Agent/Wilson’s Disease

Pending

2036*

Provisional

US

Formulation

KD035

VEGFR2 Monoclonal Antibody/Oncology, Angiogenesis

2015/0284464 A1

2033+

Utility

CN, EA, EP, JP, US

Composition of Matter/
Method of Use

Ribavirin

Nucleoside Inhibitor/Hepatitis

6,720,000

7,538,094

7,723,310

2028+

Utility

US

Composition of Matter

Metabolic Inhibitors

Metabolic Inhibitors/Viral Infection

9,029,413

2028*

Utility

CA, EP, JP, US

Method of Use

GLUT Inhibitors

Glucose Uptake Inhibitors/Immunological and Infectious Diseases

Pending

2036*

Provisional

US

Composition of Matter

PD‑L1/VEGFR Antibody

Bispecific Antibody/Oncology

Pending

2037*

Provisional

US, TBD

Composition of Matter/
Method of Use

_________________________

+            Indicates the expiration date of a granted patent for which a Patent Term Adjustment (PTA) has been fixed by the United States Patent and Trademark Office. The date may be lengthened by a Patent Term Extension (PTE) upon regulatory approval.

*            Indicates the calculated expiration date of a pending patent application based solely on a twenty‑year term from the international filing date, without regard to the outcome of patent prosecution or obtaining a PTA and/or PTE.

Manufacturing and Supply

We currently do not own or operate manufacturing facilities for the production of our product candidates. We currently outsource to a limited number of external service providers the production of all active pharmaceutical ingredients (API), drug substances and drug products, and we expect to continue to do so to meet the preclinical and clinical requirements of our product candidates. We do not have long‑term agreements with these third parties. We have framework agreements with most of our external service providers, under which they generally provide services to us on a short‑term, project‑by‑project basis. We have long‑term relationships with our manufacturing and supply chain partners for our commercial products.

Currently, our drug substance or API raw materials for our product candidates can be supplied by multiple source suppliers. Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, which govern record keeping, manufacturing processes and controls, personnel, quality control and quality assurance, among others. The contract manufacturing organizations that we use to manufacture our product are obligated to operate under current Good Manufacturing Practice regulations (cGMP) conditions.

 

Competition

We compete directly with companies that focus on cGVHD,  systemic sclerosis and IPF, and companies dedicating their resources to novel forms of therapies for these indications. We also face competition from academic research institutions, governmental agencies and other various public and private research institutions. With the proliferation of new drugs and therapies in these areas, we expect to face increasingly intense competition as new technologies become available.

 

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Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. 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 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 top 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, if approved, are likely to be their efficacy, safety, dosing convenience, price, the effectiveness of companion diagnostics in guiding the use of related therapeutics, 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, less expensive, more convenient or easier to administer, or have fewer or less severe effects than any products that we may develop. Our competitors also may obtain FDA, European Medicines Agency (“EMA”) 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. Even if our product candidates achieve marketing approval, they may be priced at a significant premium over competitive products if any have been approved by then.

There are a number of currently marketed therapies and products in late‑stage clinical development to treat cGVHD, systemic sclerosis and IPF, including:



 

 

 

 



 

 

 

 

cGVHD

 

Systemic Sclerosis

 

IPF



 

 

 

 

Imbruvica (ibrutinib)

 

Lenabasum

 

Esbriet (pirfenidone)

Jakafi (ruxolitinib)

 

Ofev (nintedanib)

 

Ofev (nintedanib)

Corticosteroids

 

Mycophenolate mofetil

 

 

Calcineurin inhibitors

 

Cyclosporine

 

 

Certain products in development may provide efficacy, safety, dosing convenience and other benefits that are not provided by currently marketed therapies. As a result, they may provide significant competition for any of our product candidates for which we obtain marketing approval.

Government Regulation

Government Regulation and Product Approval

Government authorities in the United States and in other countries extensively regulate, among other things, the research, development, testing, manufacture (including manufacturing changes), quality control, approval, labeling, packaging, storage, record‑keeping, promotion, advertising, distribution, marketing, export and import of products such as those we are developing. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources.

U.S. Drug Development Process

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (“FDCA”), and in the case of biologics, also the Public Health Service Act, and various implementing regulations. Most biological products meet the FDCA’s definition of “drug” and are subject to FDA drug requirements, supplemented by biologics requirements.

 

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Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process, or after approval, may subject an applicant to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties. The process required by the FDA before a drug or biologic may be marketed in the United States generally involves the following:

·

completion of preclinical laboratory tests, animal studies and formulation studies according to Good Laboratory Practices regulations;

·

submission to the FDA of an IND, which must become effective before human clinical studies may begin;

·

approval by an independent institutional review board (“IRB”), at each clinical site before each trial may be initiated;

·

performance of adequate and well‑controlled human clinical studies according to “good clinical practices” (“GCP”) regulations, to establish the safety and efficacy of the proposed drug or biologic for its intended use;

·

preparation and submission to the FDA of a New Drug Application (“NDA”) or Biologics License Application (“BLA”);

·

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with cGMP to assure that the facilities, methods, and controls are adequate to preserve the drug’s identity, strength, quality, and purity; and

·

FDA review and approval of the NDA or BLA.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Once a pharmaceutical or biological product candidate is identified for development, it enters the preclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity, formulation and stability, as well as animal studies. When a sponsor wants to proceed to test the product candidate in humans, it must submit an IND in order to conduct clinical trials.

An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any available clinical data or literature, to the FDA as part of the IND. The sponsor must also include a protocol detailing, among other things, the objectives of the initial clinical study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the initial clinical study lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions related to a proposed clinical study and places the study on a clinical hold within that 30‑day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical study can begin. Clinical holds also may be imposed by the FDA at any time before or during clinical studies due to safety concerns or non‑compliance, and may be imposed on all product candidates within a certain pharmaceutical class. The FDA also can impose partial clinical holds, for example, prohibiting the initiation of clinical studies of a certain duration or for a certain dose.

All clinical studies must be conducted under the supervision of one or more qualified investigators in accordance with GCP regulations. These regulations include the requirement that all research subjects provide informed consent in writing before their participation in any clinical study. Further, an IRB must review and approve the plan for any clinical study before it commences at any institution, and the IRB must conduct continuing review and reapprove the study at least annually. An IRB considers, among other things, whether the risks to individuals participating in the clinical study are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the clinical study and the consent form that must be provided to each clinical study subject or his or her legal representative and must monitor the clinical study until completed.

Each new clinical protocol and any amendments to the protocol must be submitted for FDA review, and to the IRBs for approval. Protocols detail, among other things, the objectives of the clinical study, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety.

Information about certain clinical trials must be submitted within specific timeframes to the NIH, for public dissemination on their ClinicalTrials.gov website.

 

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Human clinical studies are typically conducted in three sequential phases that may overlap or be combined:

·

Phase 1.  The product is initially introduced into a small number of healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion and, if possible, to gain early evidence on effectiveness. In the case of some products for severe or life‑threatening diseases, especially when the product is suspected or known to be unavoidably toxic, the initial human testing may be conducted in patients.

·

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

·

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

Progress reports detailing the results of the clinical studies must be submitted at least annually to the FDA and safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical study at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical study at its institution if the clinical study is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

Concurrent with clinical studies, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

United States Review and Approval Processes

Assuming successful completion of the required clinical testing, the results of product development, preclinical studies and clinical studies, along with descriptions of the manufacturing process, analytical tests conducted on the drug, proposed labeling and other relevant information, are submitted to the FDA as part of an NDA for a new drug, or a BLA for a biological drug product, requesting approval to market the product.

The submission of an NDA or BLA is subject to the payment of a substantial application user fee although a waiver of such fee may be obtained under certain limited circumstances. For example, the agency will waive the application fee for the first human drug application that a small business or its affiliate submits for review. The sponsor of an approved NDA or BLA is also subject to annual product and establishment user fees. For FDA fiscal year 2019 the application fee for an application with clinical data was $2,942,965. Sponsors are also subject to a prescription drug program fee. For fiscal 2019, the prescription drug program fee was $325,424.

In addition, under the Pediatric Research Equity Act of 2003, an NDA or BLA applications (or supplements to applications) for a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective, unless the applicant has obtained a waiver or deferral.

In 2012, the Food and Drug Administration Safety and Innovation Act (“FDASIA”) amended the FDCA to require that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan (PSP), within sixty days of an End‑of‑Phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of data or full or partial waivers. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed‑upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from preclinical studies, early phase clinical studies, and/or other clinical development programs.

 

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The FDA also may require submission of a Risk Evaluation and Mitigation Strategy (“REMS”) to mitigate any identified or suspected serious risks. The REMS could include medication guides, physician communication plans, assessment plans, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.

The FDA reviews all NDAs and BLAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. The FDA may request additional information rather than accept an application for filing. In this event, the application must be re‑submitted with the additional information. The re‑submitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in‑depth substantive review.

The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP‑compliant. For biologics, the applicant must demonstrate that the product is safe, pure, and potent (interpreted to include effectiveness), and that the facilities designed for its production meet standards to ensure the product will consistently be safe, pure, and potent.

The FDA may approve an NDA or BLA only if the methods used in, and the facilities and controls used for, the manufacture processing, packing, and testing of the product are adequate to ensure and preserve its identity, strength, quality, and purity. Drug cGMPs are established in 21 C.F.R. Parts 210 and 211, and biologic drug products must meet the drug standards as well as the supplemental requirements in 21 C.F.R. Part 600 et seq.

Before approving an NDA or BLA, the FDA often will inspect the facility or facilities where the product is or will be manufactured.

The FDA may refer the NDA or BLA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. An advisory committee is a panel of experts, including clinicians and other scientific experts, who provide advice and recommendations when requested by the FDA. The FDA is not bound by the recommendation of an advisory committee, but it considers such recommendations when making decisions.

Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to ensure that clinical data supporting the submission were developed in compliance with GCP.

The approval process is lengthy and difficult and the FDA may refuse to approve an NDA or BLA if the applicable regulatory criteria are not satisfied, or may require additional clinical data or other data and information. Even if such data and information are submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria for approval. Data obtained from clinical studies are not always conclusive and the FDA may interpret data differently than an applicant interprets the same data.

After the FDA’s evaluation of an application, the FDA may issue an approval letter, or, in some cases, a complete response letter to indicate that the review cycle is complete and that the application is not ready for approval. A complete response letter generally contains a statement of specific conditions that must be met to secure final approval of the application and may require additional clinical or preclinical testing for the FDA to reconsider the application. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical studies. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the application, addressing all of the deficiencies identified in the letter, or withdraw the application or request an opportunity for a hearing.

Even with submission of additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require post‑approval studies, including Phase 4 clinical studies, to further assess safety and effectiveness after approval and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.

 

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ANDAs and Section 505(b)(2) New Drug Applications

Most drug products obtain FDA marketing approval pursuant to an NDA or BLA (described above) for innovator products, or an abbreviated new drug application (“ANDA”) for generic products. Relevant to ANDAs, the Hatch‑Waxman amendments to the FDCA established a statutory procedure for submission and FDA review and approval of ANDAs for generic versions of branded drugs previously approved by the FDA (such previously approved drugs are also referred to as listed drugs). Because the safety and efficacy of listed drugs have already been established by the brand company (sometimes referred to as the innovator), the FDA does not require a demonstration of safety and efficacy of generic products. However, a generic manufacturer is typically required to conduct bioequivalence studies of its test product against the listed drug. The bioequivalence studies for orally administered, systemically available drug products assess the rate and extent to which the API is absorbed into the bloodstream from the drug product and becomes available at the site of action. Bioequivalence is established when there is an absence of a significant difference in the rate and extent for absorption of the generic product and the listed drug. For some drugs (e.g., locally acting drugs like topical anti‑fungals), other means of demonstrating bioequivalence may be required by the FDA, especially where rate and/or extent of absorption are difficult or impossible to measure. In addition to the bioequivalence data, an ANDA must contain patent certifications and chemistry, manufacturing, labeling and stability data.

The third alternative is a special type of NDA, commonly referred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s findings of safety and efficacy of an existing product, or published literature, in support of its application. Section 505(b)(2) NDAs often provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely upon the FDA’s findings with respect to certain preclinical or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents of the applicant or that are held by third parties whose claims cover the applicant’s product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the Orange Book. Any subsequent applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must make one of the following certifications to the FDA concerning patents: (1) the patent information concerning the reference listed drug product has not been submitted to the FDA; (2) any such patent that was filed has expired; (3) the date on which such patent will expire; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. This last certification is known as a paragraph IV certification. A notice of the paragraph IV certification must be provided to each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the ANDA or 505(b)(2) application refers. The applicant may also elect to submit a “section viii” statement certifying that its proposed label does not contain (or carves out) any language regarding the patented method‑of‑use rather than certify to a listed method‑of‑use patent.

If the reference NDA holder or patent owners assert a patent challenge directed to one of the Orange Book listed patents within 45 days of the receipt of the paragraph IV certification notice, the FDA is prohibited from approving the application until the earlier of 30 months from the receipt of the paragraph IV certification expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the applicant. The ANDA or 505(b)(2) application also will not be approved until any applicable non‑patent exclusivity listed in the Orange Book for the branded reference drug has expired as described in further detail below. Thus approval of a Section 505(b)(2) NDA or ANDA can be stalled until all the listed patents claiming the referenced product have expired, until any non‑patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA or Section 505(b)(2) applicant.

Expedited Programs

Fast Track Designation

The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs (including biological drug products) are eligible for Fast Track designation if they are intended to treat a serious or life‑threatening disease or condition for which there is no effective treatment and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug or biologic

 

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may request the FDA to designate the drug or biologic as a Fast Track product concurrently with, or at any time after, submission of an IND, and the FDA must determine if the product candidate qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request.

The FDA may initiate review of sections of a Fast Track drug’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides, and the FDA approves, a schedule for the submission of each portion of the NDA or BLA and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the application is submitted. Additionally, the Fast Track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical study process.

Accelerated Approval

Under the FDA’s accelerated approval regulations, the FDA may approve a drug or biologic for a serious or life‑threatening illness that fills an unmet medical need, providing a meaningful therapeutic benefit to patients over existing treatments, based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. In clinical studies, a surrogate endpoint is a marker, such as a measurement of laboratory or clinical signs of a disease or condition that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A product candidate approved on this basis is subject to rigorous post‑marketing compliance requirements, including the completion of post‑approval clinical studies sometimes referred to as Phase 4 studies to confirm the effect on the clinical endpoint. Failure to conduct required post‑approval studies, or to confirm a clinical benefit during post‑marketing studies, will allow the FDA to withdraw the product from the market on an expedited basis. All promotional materials for product candidates approved under accelerated approval regulations are subject to prior review by the FDA.

Breakthrough Designation

The FDASIA amended the FDCA to require the FDA to expedite the development and review of a breakthrough therapy. A drug or biologic product can be designated as a breakthrough therapy if it is intended to treat a serious or life‑threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A sponsor may request that a drug or biologic product be designated as a breakthrough therapy concurrently with, or at any time after, the submission of an IND, and the FDA must determine if the product candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. If so designated, the FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to gather preclinical and clinical data is as efficient as practicable, involving senior managers and experienced review staff in a cross‑disciplinary review, assigning a cross‑disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor, and taking steps to ensure that the design of the clinical studies is as efficient as practicable.

Priority Review

Priority review is granted where there is evidence that the proposed product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious condition. If criteria are not met for priority review, the application is subject to the standard FDA review period of 10 months after the FDA accepts the application for filing. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

Post‑Approval Requirements

Drugs and biologics manufactured or distributed pursuant to FDA approvals are subject to extensive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping (including certain electronic record and signature requirements), periodic reporting, product sampling and distribution, advertising and promotion and reporting of certain adverse experiences, deviations, and other problems with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.

 

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The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved label. Further, manufacturers must continue to comply with cGMP requirements, which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

Manufacturers and certain other entities involved in the manufacturing and distribution of approved products 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 cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release.

Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third‑party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

The FDA may impose a number of post‑approval requirements as a condition of approval of an application. For example, the FDA may require post‑marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.

The FDA may withdraw a product approval if compliance with regulatory requirements 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, problems with manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on the product or even complete withdrawal of the product from the market.

Potential implications include required revisions to the approved labeling to add new safety information; imposition of post‑market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:

·

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

·

warning letters or holds on post‑approval clinical trials;

·

refusal of the FDA to approve pending NDAs/BLAs or supplements to approved NDAs/BLAs, or suspension or revocation of product license approvals;

·

product seizure or detention, or refusal to permit the import or export of products; or

·

injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs and biologics may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off‑label uses, and a company that is found to have improperly promoted off‑label uses may be subject to significant liability.

In addition, the distribution of prescription drugs and biologics is subject to the Prescription Drug Marketing Act (PDMA), which regulates the distribution of the products and product samples at the federal level, and sets minimum standards for the registration and regulation of distributors by the states. Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability in distribution.

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations, guidances and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our product candidates. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

 

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Patent Term Restoration

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch‑Waxman Act. The Hatch‑Waxman Act permits a patent restoration term of up to five years as compensation for patent term effectively lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one‑half the time between the effective date of an IND and the submission date of an NDA plus the time between the submission date of an NDA/BLA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension. Extensions are not granted as a matter of right and the extension must be applied for prior to expiration of the patent and within a 60-day period from the date the product is first approved for commercial marketing. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we may apply for Patent Term Extensions, defined as the length of the regulatory review of products covered by our granted patents, for some of our currently owned or licensed applications and patents to add patent life beyond their current expiration dates. Such extensions will depend on the length of the regulatory review; however, there can be no assurance that any such extension will be granted to us.

Marketing Exclusivity

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

Pediatric exclusivity is another type of exclusivity in the United States. Pediatric exclusivity, if granted, provides an additional six months to the term of any existing regulatory exclusivity, including the non‑patent exclusivity periods described above. This six‑month exclusivity may be granted based on the voluntary completion of a pediatric clinical study in accordance with an FDA‑issued “Written Request” for such a clinical study.

With respect to biologics, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (collectively, the PPACA) signed into law on March 23, 2010, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated licensure pathway for biological products that are biosimilar to or interchangeable with an FDA‑licensed reference biological product. To date, only one biosimilar has been licensed under the BPCIA in the United States (in September 2015), with many more well into the process for approval. Numerous biosimilars have already been approved in Europe. The FDA has issued several guidance documents outlining an approach to review and approval of biosimilars, although there has been significant litigation and questions over interpretation of such guidelines.

Biosimilarity, which requires that the product be “highly similar” and there be no clinically significant differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. However, complexities associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant hurdles to implementation of the abbreviated approval pathway that are still being worked out by the FDA.

 

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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 licensed 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 licensed. 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 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.

The BPCIA is complex and only beginning to be interpreted and implemented by the FDA. In addition, recent government proposals have sought to reduce the 12‑year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact, implementation, and meaning of the BPCIA is subject to significant uncertainty.

Orphan Designation and Exclusivity

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs (including biological drug products) intended to treat a rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the United States or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that costs of research and development of the drug for the indication can be recovered by sales of the drug in the United States. Orphan drug designation must be requested before submitting an NDA or BLA.

After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first applicant to receive FDA approval for a particular active ingredient to treat a particular disease or condition with FDA orphan drug designation is entitled to a seven‑year exclusive marketing period in the United States for that product, for that indication. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA/BLA application user fee.

During the exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease or condition, except in limited circumstances, such as if the second applicant demonstrates the clinical superiority of its product to the product with orphan drug exclusivity through a demonstration of superior safety, superior efficacy, or a major contribution to patient care, or if the manufacturer of the product with orphan exclusivity is not able to assure sufficient quantities of the product. “Same drug” means a drug that contains the same identity of the active moiety if it is a drug composed of small molecules, or of the principal molecular structural features if it is composed of macromolecules and is intended for the same use as a previously approved drug, except that if the subsequent drug can be shown to be clinically superior to the first drug, it will not be considered to be the same drug. Drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition.

Pharmaceutical Coverage, Pricing and Reimbursement

In the United States, sales of CLOVIQUE and any products for which we may receive regulatory approval for commercial sale will depend in part on the availability of coverage and reimbursement from third‑party payors. Third‑party payors include government authorities, managed care providers, private health insurers and other organizations.

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval. The process for determining whether a payor will provide coverage for a biologic or drug may be separate from the process for setting the reimbursement rate that the payor will pay for the product. Some of the additional requirements and restrictions on coverage and reimbursement levels imposed by third‑party payors influence the purchase of healthcare services and products. Third‑party payors may limit coverage to specific biologics and drugs on an approved list, or formulary, which might not include all of the FDA‑approved biologics or drugs for a particular indication, or place biologics and drugs at certain formulary levels that result in lower reimbursement levels and higher cost‑sharing obligation imposed on patients. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third‑party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Further, one payor’s determination to provide coverage does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement may differ significantly from payor to payor.

Third‑party payors are increasingly challenging the price and examining the medical necessity and cost‑effectiveness of medical products and services, in addition to their safety and efficacy. In order to obtain and maintain coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive

 

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pharmacoeconomic studies in order to demonstrate the medical necessity and cost‑effectiveness of any products, in addition to the costs required to obtain regulatory approvals. Our product candidates may not be considered medically necessary or cost‑effective. If third‑party payors do not consider a product to be cost‑effective compared to other available therapies, they may not cover the product after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell its products at a profit.

The U.S. government and state legislatures have shown significant interest in implementing cost containment programs to limit the growth of government‑paid healthcare costs, including price controls, restrictions on reimbursement and coverage and requirements for substitution of generic products for branded prescription drugs. Adoption of government controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could exclude or limit our drugs and product candidates from coverage and limit payments for pharmaceuticals.

In addition, we expect that the increased emphasis on managed care and cost containment measures in the United States by third‑party payors and government authorities to continue and will place pressure on pharmaceutical pricing and coverage. 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 receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Other Healthcare Laws and Compliance Requirements

Healthcare providers, physicians, and third‑party payors often play a primary role in the recommendation and prescription of any currently marketed products and product candidates for which we may obtain marketing approval. Our current and future arrangements with healthcare providers, physicians, third‑party payors and customers, and our sales, marketing and educational activities, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations (at the federal and state level) that may constrain our business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval.

In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that govern certain of our operations include the following, but are not limited to:

a)

federal and state laws relating to the Medicare and Medicaid programs and any other federal healthcare program;

b)

federal and state laws relating to healthcare fraud and abuse, including, without limitation, the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)), the federal False Claims Act (31 U.S.C. §§ 3729 et seq.), the False Statements Statute, (42 U.S.C. § 1320a-7b(a)), the Exclusion Laws (42 U.S.C. § 1320a-7), the federal Physician Payment Sunshine Act (42 U.S.C. § 1320a-7h), the Drug Supply Chain Security Act (21 U.S.C. § 351 et seq.), the Anti-Inducement Statute (42 U.S.C. § 1320a-7a(a)(5)), the Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a) and criminal laws relating to healthcare fraud and abuse, including but not limited to 18 U.S.C. §§ 286, 287 and 1001, and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, (Pub.L. 104-191);

c)

state laws relating to Medicaid or any other state healthcare or health insurance programs;

d)

federal or state laws relating to billing or claims for reimbursement submitted to any third party payor, employer or similar entity, or patient;

e)

any other federal or state laws relating to fraudulent, abusive or unlawful practices connected in any way with the provision or marketing of healthcare items or services, including laws relating to the billing or submitting of claims for reimbursement for any items or services reimbursable under any state, federal or other governmental healthcare or health insurance program or any private payor; and

f)

federal and state laws relating to health information privacy and security, including HIPAA, and any rules or regulations promulgated thereunder, and the Health Information Technology for Economic and Clinical Health Act, enacted as part of the American Recovery and Reinvestment Act of 2009 and any regulations promulgated thereunder.

If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from participation in government healthcare programs, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre‑marketing product approvals, private qui tam actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including government contracts 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.

 

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Foreign Regulation of Drugs and Biologics

In order to market any product outside of the United States, we will need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding development, approval, commercial sales and distribution of our products, and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products, if approved. Whether or not we obtain FDA approval for a product, we must obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.

Employees

As of December 31, 2019,  we employed 115 people, including 73 in research and development, 18 in commercial operations and 24 in a general and administrative capacity, including executive officers. We also engage a number of temporary employees and consultants. None of our employees is represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) December 31, 2021, (2) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (3) the date on which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

For as long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and financial statements in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote to approve executive compensation and shareholder approval of any golden parachute payments not previously approved. We are choosing to “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, and intend to take advantage of the other reporting exemptions until we are no longer an “emerging growth company.”

Facilities

Our corporate headquarters are located in New York, New York, and consist of approximately 35,771 square feet of space under a lease that expires in October 2025. In addition, we also have locations in Warrendale, Pennsylvania; Cambridge, Massachusetts and Monmouth Junction, New Jersey. We believe that our facilities are adequate for our current needs and for the foreseeable future.

Corporate Information

Our common stock is currently listed on The New York Stock Exchange under the symbol “KDMN.” We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, and therefore we are subject to reduced public company reporting requirements. Our principal executive offices are located at 450 East 29th Street, New York, New York 10016, and our telephone number is (833)-900-5366. Our website address is www.kadmon.com.

Available Information

We make available on or through our website certain reports and amendments to those reports that we file with, or furnish to, the SEC in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. Our website address is www.kadmon.com. Copies of this information may be obtained at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K or any other filings we make with the SEC.

 

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Item 1A.  Risk Factors

Described below are various risks and uncertainties that may affect our business. These risks and uncertainties are not the only ones we face. You should recognize that other significant risks and uncertainties may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. Certain risks and uncertainties, including ones that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, may also affect our business. If any of the risks described below actually occur, our business, financial condition or results of operations could be materially and adversely affected. 

Risks Related to Our Financial Position

We have incurred substantial losses since our inception, anticipate that we will continue to incur losses for the foreseeable future and may not achieve or sustain profitability. We expect to continue to incur significant expenses related to the development of our clinical product candidates for at least the next several years, and we anticipate that our expenses will increase substantially as a result of multiple initiatives. These factors individually and collectively raise a substantial doubt about or ability to continue as a going concern.

Since inception, we have incurred substantial operating losses. Our consolidated net losses were $61.4 million and  $54.3 million for the years ended December 31, 2019 and 2018,  respectively. Our accumulated deficits were $333.1 million and $269.6 million at December 31, 2019 and 2018, respectively. To date, we have financed our clinical development operations primarily through issuance of common stock and other equity securities in public and private offerings and debt financings. We expect to continue to incur significant expenses related to the development of our clinical product candidates for at least the next several years. We anticipate that our expenses will increase substantially as we:

·

initiate or continue our clinical trials related to our most advanced product candidates;

·

continue the research and development of our other product candidates;

·

seek to discover additional product candidates;

·

seek regulatory approvals for our product candidates;

·

scale up our sales, marketing and distribution infrastructure and product sourcing capabilities to commercialize additional products we may acquire or license from others or for which we may develop and obtain regulatory approval; and/or

·

scale up our operational, financial and management information systems and personnel, including personnel to support our product development and planned additional commercialization efforts.

In the absence of substantial revenue from the sale of our products and products that we distribute, or from other sources (the amount, timing, nature or source of which cannot be predicted), we expect our substantial losses to continue as we develop our business and we may need to discontinue operations. Our ability to generate sufficient revenues from our existing products or from any of our product candidates in development, and to transition to profitability and generate consistent positive cash flow is uncertain. We may continue to incur losses and negative cash flow and may never transition to profitability or positive cash flow.

Our independent registered public accounting firm has included an explanatory paragraph in its report as of and for the year ended December 31, 2019 expressing substantial doubt in our ability to continue as a going concern based on our recurring and continuing losses from operations and our need for additional funding to continue operations. Our consolidated financial statements as of December 31, 2019 do not include any adjustments that might result from the outcome of this going concern uncertainty and have been prepared under the assumption that we will continue to operate as a going concern for the next twelve months, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we are unable to continue as a going concern we may be forced to liquidate our assets which would have an adverse impact on our business and developmental activities. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The reaction of investors to the inclusion of a going concern statement by our independent registered public accounting firm and our potential inability to continue as a going concern may materially adversely affect our stock price and our ability to raise new capital or to enter into strategic alliances.

We will need additional funding in the future, which may not be available to us, and this may force us to delay, reduce or eliminate our product development programs or commercialization efforts.

We will need to expend substantial resources for research and development and commercialization of our marketed products, including costs associated with:

·

clinical trials for our product candidates;

·

discovery of additional product candidates;

·

life‑cycle management of our marketed products;

 

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·

the continued commercialization of our commercial products; and/or

·

preparing for potential commercialization of our late‑stage product candidates and, if one or more of those product candidates receive(s) regulatory approval, to fund the launch of that (those) product(s).

We do not expect that our existing cash, cash equivalents and restricted cash will be sufficient to enable us to fund the completion of development and commercialization of any of our product candidates. We do not have any additional committed external source of funds. Our expenses may increase for many reasons, including:

·

clinical trial‑related expenses for our product candidates;

·

the potential launch and marketing of our late‑stage product candidates; and/or

·

manufacturing scale‑up for commercialization of our late‑stage product candidates.

To the extent that we need to raise additional capital through the sale of equity or convertible debt securities, investors in our common stock will be diluted, and the terms of any newly issued securities may include liquidation or other preferences that adversely affect the value of our common stock.

Risks Related to Our Clinical Development Pipeline

We depend heavily on the success of KD025. If we are unable to obtain regulatory approval for KD025, our ability to create stockholder value will be limited.

Our most advanced product candidate is KD025, for which we are currently conducting a pivotal trial, ROCKstar (KD025-213), in patients with cGVHD who have received at least two prior lines of systemic therapy. We do not generate meaningful revenues from any FDA-approved drug products. Two of our product candidates, KD025 and tesevatinib, are in clinical trials and we have additional internally developed product candidates such as KD033 and KD045, which are in the early stages of development. There is no guarantee that our clinical trials will be successful or that we will continue with clinical studies to support an approval from the FDA of any of our product candidates for any indication. We note that most drug candidates never reach the clinical development stage and even those that do have only a small chance of successfully completing clinical development and gaining regulatory approval. Therefore, our business currently depends heavily on the successful development, regulatory approval and commercialization of KD025, which may never occur.

Clinical development is a lengthy and expensive process with a potentially uncertain outcome. Our long‑term success depends upon the successful development and commercialization of our product candidates, which is highly uncertain.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical studies and early clinical trials may not be predictive of the results of later-stage clinical trials. We cannot assure you that the FDA will view the results as we do or that any future trials of our drug candidates will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Any future clinical trial results for our drug candidates may not be successful.

In addition, a number of factors could contribute to a lack of favorable safety and efficacy results for our drug candidates. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period and surgical technique, and due to varying patient characteristics, including demographic factors and health status.

To date, we have invested a significant portion of our efforts and financial resources in the acquisition and development of our product candidates. Our long‑term success depends upon the successful development, regulatory approval and commercialization of these product candidates. If we fail to obtain regulatory approval to market and sell our product candidates, or if approval is delayed, we will be unable to generate revenue from the sale of these products, our potential for generating positive cash flow will be diminished and the capital necessary to fund our operations will be increased. Our business depends significantly on the successful development, regulatory approval and commercialization of our product candidates, which may never occur.

We cannot be certain as to what type and how many clinical trials the FDA will require us to conduct before we may successfully gain approval to market any of our product candidates. Prior to approving a new drug or biologic, the FDA generally requires that the effectiveness of the product candidate (which is not typically fully investigated until Phase 3) be demonstrated in two adequate and well‑controlled clinical trials. In some situations, the FDA approves drugs or biologics on the basis of a single well‑controlled clinical trial establishing effectiveness. However, if the FDA determines that our Phase 3 clinical trial results do not demonstrate a statistically significant, clinically significant benefit with an acceptable safety profile, or if the FDA requires us to conduct additional Phase 3 clinical trials in order to gain approval, we will incur significant additional development costs and commercialization of these products would be prevented or delayed and our business would be adversely affected.

 

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Our ongoing clinical trials may be subject to delays or setbacks for a variety of common and unpredictable reasons.

We may experience unforeseen delays or setbacks in our ongoing clinical trials, such as trial initiation timing, trial redesign or amendments, timing and availability of patient enrollment or successful trial completion. Such delays and setbacks are common and unpredictable in pharmaceutical drug development. Clinical trials can be delayed for a variety of reasons, including delays related to:

·

regulatory objections to commencing a clinical trial, continuing a clinical trial that is underway, or proceeding to the next phase of investigation, including inability to reach agreement with the FDA or non‑U.S. regulators regarding the scope or design of our clinical trials or for other reasons such as safety concerns that might be identified through preclinical testing and animal studies or clinical trials, at any stage;

·

reaching agreement on acceptable terms with prospective contract research organizations (CROs), and clinical trial sites (the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites);

·

failure of CROs or other third‑party contractors to comply with contractual and regulatory requirements or to perform their services in a timely or acceptable manner;

·

difficulty identifying and engaging qualified clinical investigators;

·

obtaining institutional review board (IRB) approval at each site;

·

difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indication as product candidates we seek to commercialize;

·

having patients complete a trial or return for post‑treatment follow‑up;

·

clinical sites deviating from trial protocol or dropping out of a trial;

·

inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy, particularly for those patients receiving a placebo;

·

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

·

adding new clinical trial sites;

·

inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indication as our product candidates;

·

changes in applicable regulatory policies and regulations;

·

insufficient data to support regulatory approval;

·

difficulty in maintaining contact with subjects during or after treatment, which may result in incomplete data; or

·

manufacturing sufficient quantities of the product candidate for use in clinical trials.

In late 2019, a novel strain of COVID-19, also known as coronavirus, was reported in Wuhan, China and began spreading to various parts of the world. Epidemics such as this can adversely impact our business as they can cause disruptions, such as interruptions to supply chain and reduction in access to personnel and services, which could result in delays and complications with respect to our research and development programs and clinical trials. In addition, certain of our business partners and vendors are based in areas currently affected by coronavirus, which could cause additional adverse impact on our business. 

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Furthermore, we rely on clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance.

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 being conducted, by the Data Safety Monitoring Board for such trial or by the FDA or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including:

·

failure by us, CROs or clinical investigators to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

·

failed inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

·

unforeseen safety or efficacy issues or any determination that a clinical trial presents unacceptable health risks;

·

failure to demonstrate a benefit from using a drug; or

 

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·

lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties, changes in governmental regulations or administrative actions, or other reasons.

If we experience delays in the completion or termination of any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

If serious adverse events or other undesirable side effects are identified during the use of product candidates in investigator‑sponsored trials, it may adversely affect our development of such product candidates.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt non‑clinical studies and clinical trials, or could make it more difficult for us to enroll patients in our clinical trials. If serious adverse events or other undesirable side effects, or unexpected characteristics of our product candidates are observed in investigator‑sponsored trials, further clinical development of such product candidate may be delayed or we may not be able to continue development of such product candidate at all, and the occurrence of these events could have a material adverse effect on our business. Undesirable side effects caused by our product candidates could also result in the delay or denial of regulatory approval by the FDA or other regulatory authorities or in a more restrictive label than we expect.

The regulatory approval processes of the FDA and similar foreign authorities are lengthy, time consuming, expensive and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. It is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

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

·

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

·

we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;

·

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

·

we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

·

the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

·

the data collected from clinical trials of our product candidates may not be sufficient to support a submission for regulatory approval in the United States or elsewhere;

·

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third‑party manufacturers with which we contract for clinical and commercial supplies; and/or

·

the approval policies or regulations of the FDA or comparable 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 future clinical trial results may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects.

In addition, 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;

 

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·

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.

If we do not achieve our projected development goals in the timeframes we announce and expect, or we face significant competition from other biotechnology and pharmaceutical companies, the commercialization of our products may be delayed, our operating results may be lower that we expect, the credibility of our management may be adversely affected and, as a result, the value of our common stock may decline.

Even if we obtain regulatory approval for our product candidates, they may never be successfully launched or become profitable, in which case our business, prospects, operating results and financial condition may be materially harmed.

In order to successfully launch our product candidates and have them become profitable, we anticipate that we will have to dedicate substantial time and resources and hire additional personnel to expand and enhance our commercial infrastructure, which will at a minimum include the following:

·

ensure the quality of the product candidate manufactured by our suppliers and by us;

·

expand our sales and marketing force;

·

expand and enhance programs and other procedures to educate physicians and drive physician adoption of our product candidates;

·

create additional policies and procedures, and hire additional personnel to carry out those policies and procedures, to ensure customer satisfaction with our products;

·

obtain reimbursement for hospitals and physicians; and/or

·

expand and enhance our general and administrative operations to manage our anticipated growth in operations and to support public company activities.

Because of the numerous risks and uncertainties associated with launch and profitability of our product candidates, we are unable to predict the extent of any future losses, or when we will become profitable, if ever.

Our product candidates may have undesirable side effects that may delay or prevent marketing approval or, if approval is obtained, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.

Undesirable or unexpected side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug‑related side effects could affect patient recruitment, the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Additionally, if one or more of our product candidates receives marketing approval and we or others later identify undesirable or unexpected side effects caused by such products, a number of potentially significant negative consequences could result, including:

·

we could be sued and held liable for harm caused to patients;

·

sales of the product may decrease significantly; and/or

·

our reputation may suffer.

In addition, a regulatory agency may:

·

suspend or withdraw approvals of such product;

·

suspend any ongoing clinical trials;

·

refuse to approve pending applications or supplements to approved applications filed by us, our collaborators or our potential future collaborators;

·

require additional warnings on the label;

·

require that we create a medication guide outlining the risks of such side effects for distribution to patients;

·

issue warning letters;

·

mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;

·

require us or our collaborators to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

·

impose other civil or criminal penalties;

 

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·

impose restrictions on operations, including costly new manufacturing requirements; and/or

·

seize or detain products or require a product recall.

Non‑compliance may also result in potential whistleblower lawsuits and the potential for liability under the False Claims Act or other laws and regulations, as discussed above. Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.

The results of previous clinical trials may not be predictive of future results, and the results of our current and planned clinical trials may not satisfy the requirements of the FDA or non‑U.S. regulatory authorities.

Clinical failure can occur at any stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any of our current and future collaborators may decide, or regulators may require us, to conduct additional clinical or preclinical testing. In addition, data obtained from tests are susceptible to varying interpretations, and regulators may not interpret data as favorably as we do, which may delay, limit or prevent regulatory approval.

We will be required to demonstrate with substantial evidence through well‑controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future larger registration clinical trials will be successful because product candidates in later‑stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and non‑U.S. regulatory authorities despite having progressed through initial clinical trials. Product candidates that have shown promising results in early clinical trials may still suffer significant setbacks in subsequent registration clinical trials. Similarly, the outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and preliminary and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.

Further, at various points during the course of the preclinical and clinical trial process, companies must assess both the statistical and clinical significance of trial results. In this context, “statistical significance” refers to the likelihood that a result or relationship is caused by something other than random chance or error. Statistical significance is measured by a “p‑value,” which indicates the probability value that the results observed in a study were due to chance alone. A p‑value of < 0.05 is generally considered statistically significant, meaning that the probability of the results occurring by chance alone is less than five percent. The lower the p‑value, the less likely that the results observed were random. “Clinical significance,” on the other hand, is a qualitative assessment of the results observed. Where we use the term “clinically significant,” we have not necessarily made a formal statistical assessment of the probability that the change in patient status was attributable to the study drug as opposed to chance alone, nor does such a statement necessarily mean that study endpoints have been met or the protocol has been completed. A clinically significant effect is one that is determined to have practical importance for patients and physicians, and includes benefits that are often defined by peer‑reviewed literature as having a meaningful impact on a patient’s condition. An effect that is statistically significant may or may not also be clinically significant. When a study fails to result in statistical significance, the FDA may not consider such study to serve as substantial evidence of safety and effectiveness required for approval. Even if a study results in statistical significance, the FDA may also consider clinical significance in evaluating a marketing application. For example, the FDA typically requires more than one pivotal clinical study to support approval of a new drug. However, the FDA has indicated that approval may be based on a single study in limited situations in which a trial has demonstrated a clinically significant effect. In either case, the clinical or statistical significance of a particular study result in no way guarantees that FDA or other regulators will ultimately determine that the drug being investigated is safe and effective.

In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We may be unable to design and execute a clinical trial to support regulatory approval.

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase 1, Phase 2, Phase 3 or other clinical trials we or any of our collaborators may conduct will demonstrate consistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.

Further, our product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials or registration trials. The FDA or other non‑U.S. regulatory authorities may disagree with our trial design and our interpretation of data from preclinical studies and clinical trials. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal Phase 3 clinical trial that has the potential to result in the FDA or other agencies’ approval. In addition, any of these regulatory authorities may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post‑marketing clinical trials. The FDA or other non‑U.S.

 

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regulatory authorities may not approve the labeling claims that we believe would be necessary or desirable for the successful commercialization of our product candidates.

We may not be successful in our efforts to use and expand our drug discovery platforms to build a pipeline of product candidates.

A key element of our strategy is to leverage our drug discovery platforms to identify and develop new product candidates for additional diseases with significant unmet medical needs. Although our research and development efforts to date have contributed to the development of product candidates directed at inflammatory and fibrotic diseases, oncology and genetic diseases, we may not be able to develop product candidates that are safe and effective. Even if we are successful in continuing to build our pipeline, the potential 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 be products that will receive marketing approval and achieve market acceptance. If we do not continue to successfully develop and begin to commercialize product candidates, we will face difficulty in obtaining product revenues in future periods, which could result in significant harm to our financial position and adversely affect the price of our common stock.

We face substantial competition, which may result in others discovering, developing and commercializing products before or more successfully than our products and product candidates.

The development and commercialization of new therapeutics is highly competitive. We face competition (from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide) with respect to our current product candidates and will face competition with respect to any product candidates that we may seek to develop or products we commercialize in the future. We also face competition from academic research institutions, governmental agencies and other various public and private research institutions. Many of these competitors are attempting to develop therapeutics for our target indications. With the proliferation of new drugs and therapies in these areas, we expect to face increasingly intense competition as new technologies become available. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future.

There are products already approved for many of the diseases we are targeting. Many of these approved products are well established therapies and are widely accepted by physicians, patients and third‑party payors. This may make it difficult for us to achieve our business strategy of replacing existing therapies with our product candidates. Our commercial operations face significant direct competition and our competitors may develop products that are safer, more effective, more convenient or less costly than any that we are developing or that would render our product candidates obsolete or non‑competitive. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours.

Many of our competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. Mergers and acquisitions in the pharmaceutical, biotechnology and diagnostic industries 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.

Our product candidates for which we intend to seek approval may face competition sooner than anticipated, and for biologics there is additional uncertainty as the relevant law is relatively new and there is limited precedent.

Although we plan to pursue all available FDA exclusivities for our product candidates, we may face competition sooner than anticipated. Market and data exclusivity provisions under the Federal Food, Drug, and Cosmetic Act (FDCA) can delay the submission or the approval of certain applications for competing products. The FDCA provides a five‑year period of non‑patent data exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity, running from the time of NDA approval. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the five‑year exclusivity period for a new chemical entity, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company that references the previously approved drug. However, the FDA may accept an ANDA or 505(b)(2) NDA for review after four years if it contains a certification of patent invalidity or non‑infringement.

The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA or 505(b)(2) NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example (for new indications, dosages, strengths or dosage forms of an existing drug). This three‑year exclusivity covers only the conditions of use associated with the new clinical investigations and, as a general matter, does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original, unmodified drug product.

 

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Five‑year and three‑year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well‑controlled clinical trials necessary to demonstrate safety and effectiveness.

The PPACA, signed into law on March 23, 2010, includes a subtitle called the BPCIA, which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA‑licensed 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 licensed 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 licensed. 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 their product. While it is uncertain when such processes intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological products.

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 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.

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 focus on our most promising research programs and product candidates. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater 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.

We may not be able to attract collaborators or external funding for the development and commercialization of our product candidates.

Our product development programs and potential commercialization of our product candidates will require substantial additional capital to fund expenses. As part of our ongoing strategy, we may seek additional collaborative arrangements with pharmaceutical and biotechnology companies or other third parties or external funding for certain of our development programs and/or seek to expand existing collaborations to cover additional commercialization and/or development activities. We have a number of research programs and early‑stage clinical development programs. At any time, we may determine that in order to continue development of a product candidate or program or successfully commercialize a drug we need to identify a collaborator or amend or expand an existing collaboration. Potentially, and depending on the circumstances, we may desire that a collaborator either agree to fund portions of a drug development program led by us, or agree to provide all the funding and directly lead the development and commercialization of a program. We face significant competition in seeking appropriate collaborators. Collaborations are complex and time‑consuming to negotiate and document. We may also be restricted under existing collaboration agreements from entering into agreements on certain terms with other potential collaborators. No assurance can be given that any efforts we make to seek additional collaborative arrangements will be successfully completed on acceptable terms, a timely basis or at all.

If we are unable to negotiate favorable collaborations, we may have to curtail the development of a particular product candidate, reduce or delay its development program and its potential commercialization, reduce the scope of our sales or marketing activities, and/or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.

 

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Risks Related to Our Marketed Products

We cannot be certain how profitable, if at all, the commercialization of our marketed products will be.

We must compete effectively against other therapies with our products or any of our product candidates for which we obtain marketing approval.  We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability.

In addition to the risks discussed elsewhere in this section, our ability to continue to generate revenues from our commercialized products will depend on a number of factors, including, but not limited to:

·

achievement of broad market acceptance and coverage by third‑party payors for our products;

·

the effectiveness of our collaborators’ efforts in marketing and selling our products;

·

our ability to successfully manufacture, or have manufactured, commercial quantities of our products at acceptable cost levels and in compliance with regulatory requirements;

·

our ability to maintain a cost‑efficient organization and, to the extent we seek to do so, to collaborate successfully with additional third parties;

·

our ability to expand and maintain intellectual property protection for our products successfully;

·

the efficacy and safety of our products; and/or

·

our ability to comply with regulatory requirements, which are subject to change.

Because of the numerous risks and uncertainties associated with our commercialization efforts, we may not be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. A failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

Our inability to accurately estimate demand for our products, the uptake of new products or the timing of fluctuations in the inventories maintained by customers makes it difficult for us to accurately forecast sales and may cause our financial results to fluctuate.

We may be unable to accurately estimate demand for our products, including uptake from new products, as demand is dependent on a number of factors. We sell products primarily to wholesalers and specialty pharmacies. These customers maintain and control their own inventory levels by making estimates to determine end user demand. Our customers may not be effective in matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by our customers can cause our operating results to fluctuate unexpectedly. Adverse changes in economic conditions or other factors may cause our customers to reduce their inventories of our products, which would reduce their orders from us, even if end user demand has not changed. If our inventory exceeds demand from our customers and exceeds its shelf life, we will be required to destroy unsold inventory and write off its value. As our inventory and distribution channels fluctuate from quarter to quarter, we may continue to see fluctuations in our earnings and a mismatch between prescription demand for our products and our revenues.

If we discover safety issues with any of our products or if we fail to comply with continuing U.S. and applicable foreign regulations, commercialization efforts for the product could be negatively affected, the approved product could be subject to withdrawal of approval or sales could be suspended, and our business could be materially harmed.

Our products are subject to continuing regulatory oversight, including the review of additional safety information. Drugs are more widely used by patients once approval has been obtained and therefore side effects and other problems may be observed after approval that were not seen or anticipated, or were not as prevalent or severe, during pre‑approval clinical trials or nonclinical studies. The subsequent discovery of previously unknown problems with a product, or public speculation about adverse safety events, could negatively affect commercial sales of the product, result in restrictions on the product or lead to the withdrawal of the product from the market.

If we or our collaborators fail to comply with applicable continuing regulatory requirements, we or our collaborators may be subject to fines, suspension or withdrawal of regulatory approvals for specific products, product recalls and seizures, injunctions, consent decrees or other operating restrictions and/or criminal prosecutions. In addition, the manufacturers we engage to make our products and the manufacturing facilities in which our products are made are subject to periodic review and inspection by the FDA and foreign regulatory authorities. If problems are identified during the review or inspection of these manufacturers or manufacturing facilities, it could result in our inability to use the facility to make our product or a determination that inventories are not safe for commercial sale.

 

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If physicians, nurses, pharmacists, patients, the medical community and/or third‑party payors do not accept our drugs or product candidates, we may be unable to generate significant revenue in future periods.

Our drugs may not gain or maintain market acceptance among physicians, nurses, pharmacists, patients, the medical community and/or third‑party payors. Effectively marketing our products and any of our product candidates, if approved, requires substantial efforts and resources, both prior to launch and after approval; and marketing efforts are subject to numerous regulatory restrictions as well as fraud and abuse laws. The demand for our drugs and degree of market acceptance of our product candidates will depend on a number of factors including:

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limitations or warnings contained in the approved labeling for any of our drugs or product candidates;

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changes in the standard of care for the targeted indications for any of our drugs or product candidates;

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lower demonstrated efficacy, safety and/or tolerability compared to other drugs;

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prevalence and severity of adverse events;

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lack of cost‑effectiveness;

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limited or lack of reimbursement and coverage from government authorities, managed care plans and other third‑party payors;

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a decision to wait for the approval of other therapies in development that have significant perceived advantages over our drug;

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the clinical indications for which the product is approved;

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adverse publicity about any of our drugs or product candidates or favorable publicity about competitive products;

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the timing or market introduction of any approved products as well as competitive products;

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the extent to which our drugs and product candidates are approved for inclusion on formularies of hospitals and manages care organizations;

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whether our drugs and product candidates are designated under physician treatment guidelines as first‑line therapies or as a second‑ or third‑line therapies for particular diseases;

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convenience and ease of administration;

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availability of alternative therapies at similar or lower cost, including generic and over‑the‑counter products;

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other potential advantages of alternative treatment methods;

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ineffective sales, marketing and/or distribution support; and/or

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potential product liability claims.

If any of our drugs or product candidates fails to maintain or achieve, as applicable, market acceptance, we will not be able to generate significant revenue in future periods.

Failure to comply with FDA promotional rules may subject us to withdrawal, and correction, of related product promotion, seizure of product and other administrative or enforcement actions as well as the potential for ancillary liability under the False Claims Act and/or product liability litigation.

The FDA regulates the promotion of our products, which may only be promoted within their approved indication for use. Promotional materials and activity must be presented with fair balance of the risks and benefits of any product in a manner which is not otherwise inaccurate or misleading. The FDCA and the FDA’s implementing regulations require that manufacturers label, advertise and promote their products with appropriate safety warnings and adequate directions for their FDA‑approved use. However, the FDA does not have the legal authority to regulate the practice of medicine. Although physicians are permitted, based on their medical judgment, to prescribe products for indications other than those approved by the FDA, manufacturers are prohibited from promoting their products for such off‑label uses.

If the FDA determines that our promotional materials, training or other activities constitute off‑label promotion, it could request that we modify our training or promotional materials or other activities or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure, civil fine and criminal penalties. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may also lead to investigations or allegations of violations of federal and state healthcare fraud and abuse laws and state consumer protection laws. The FDA or other regulatory authorities could also request that we enter into a consent decree or a corporate integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored, changed or curtailed.

Although recent decisions of the United States Supreme Court, the U.S. Court of Appeals for the Second Circuit and the U.S. District Court for the Southern District of New York have clarified that the United States may not, consistent with

 

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the First Amendment, restrict or punish a pharmaceutical manufacturer’s truthful and non‑misleading speech promoting the lawful use of an approved drug, there are still significant risks in this area. It is unclear how these court decisions will impact the FDA’s enforcement practices, and there is likely to be substantial disagreement and difference of opinion regarding whether any particular statement is truthful and not misleading.

In the past we have been subject to enforcement action relating to allegations of improper promotion of our products, and we may be subject to such action in the future.

If we cannot successfully manage the promotion of our currently marketed products, and product candidates, if approved, we could become subject to significant liability which would materially adversely affect our business and financial condition. It is also possible that other federal, state or foreign enforcement authorities, or private parties, might take action if they believe that an alleged improper promotion led to inappropriate use of one of our products and/or the submission and payment of claims for an off‑label use, which could result in significant fines or penalties under other statutory provisions, such as the False Claims Act and similar laws. Even if it is later determined that we were not in violation of these laws, we may face negative publicity, incur significant expenses defending our actions and have to divert significant management resources from other matters. In addition, there are a number of specific FDA requirements related to drug labeling and advertising, and failure to adhere to these requirements could result in our products being deemed “misbranded.”

The manufacture of pharmaceutical products is a highly complex process, and if our suppliers encounter problems manufacturing our products, our business could suffer.

The manufacture of pharmaceutical products is a highly complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for our products, changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in the types of products produced, physical limitations that could inhibit continuous supply, man‑made or natural disasters and environmental factors. If problems arise during the production of a batch of product, that batch of product may have to be discarded and we may experience product shortages or incur added expenses. This could, among other things, lead to increased costs, lost revenue, damage to customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred.

Risks Related to Government Regulation

If we engage in research or commercial activities involving any of our products or pipeline assets in a manner that violates federal or state healthcare laws, including fraud and abuse laws, false claims laws, disclosure laws, government price reporting and healthcare information privacy and security laws or other similar laws, we may be subject to corporate or individual civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.

Our business operations and activities are subject to extensive federal, state and local fraud and abuse and other healthcare laws and regulations, such as the False Claims Act and the federal Anti‑Kickback Statute, the Foreign Corrupt Practices Act (“FCPA”), federal Physician Payment Sunshine Act, the federal Drug Supply Chain Security Act, federal Civil Monetary Penalty statute, the PPACA program integrity requirements, patient privacy laws and regulation, criminal laws relating to healthcare fraud and abuse, including but not limited to the Health Insurance Portability and Accountability Act, federal consumer protection and unfair competition laws, federal government price reporting laws and state law equivalents of each of these. These laws and regulations constrain, among other things, the business or financial arrangements and relationships through which we may research and develop any product candidate, as well as market, sell and distribute any approved products.

In addition, any sales of our products or product candidates, if approved, commercialized outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

We have entered into consulting agreements, scientific advisory board and other financial arrangements with physicians, including some who prescribe our products and may prescribe our product candidates, if approved. Compensation for some of these arrangements includes the provision of stock options. While these arrangements were structured to comply with all applicable laws, including state and federal anti‑kickback laws, to the extent applicable, regulatory agencies may view these arrangements as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. Moreover, while we do not submit claims and our customers make the ultimate decision on how to submit claims, we may provide reimbursement guidance and support to our customers and patients. If a government authority were to conclude that we provided improper advice to our customers and/or encouraged the submission of false claims for reimbursement, we could face action against by government authorities.

 

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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. The sales and marketing practices of our industry are the subject of immense scrutiny from federal and state government agencies. Despite sequestration measures, governmental enforcement funding continues at robust levels and enforcement officials are interpreting fraud and abuse laws broadly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are subject to a variety of interpretations. Even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources, divert our management’s attention from the operation of the business, and generate negative publicity, which could harm our business. If our past or present operations are found to be in violation of any such laws or any other governmental regulations that may apply to us, we may be subject to, without limitation, civil, criminal and administrative penalties, damages, monetary fines, disgorgement, exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and/or the curtailment or restructuring of our operations. If we were to be excluded from federal healthcare programs, it would mean that no federal healthcare program payment could be made for any of our products.

Our commercial success depends on adequate reimbursement and coverage from third‑party commercial and government payors for our products, and changes to coverage or reimbursement policies, as well as healthcare reform measures, may materially harm our sales and potential revenue.

Most patients rely on reimbursement from third‑party payors, including government programs (such as Medicare and Medicaid) and private payor healthcare and insurance programs to pay for their medical needs, including any drugs we may market. Coverage and reimbursement for our products can differ significantly from payor to payor. Even when we obtain coverage and reimbursement for our products, we may not be able to maintain adequate coverage and reimbursement in the future.

There is significant uncertainty related to the third‑party coverage and reimbursement of newly approved products. We intend to seek approval to market our product candidates in the United States, Europe and other selected foreign jurisdictions. Market acceptance and commercial success of our product candidates in both domestic and international markets will depend significantly on the availability of adequate coverage and reimbursement from third‑party payors for any of our product candidates.

Obtaining coverage and reimbursement approval for a product from a government or other third‑party payor is a time consuming and costly process that could require us to provide to the payor supporting scientific, clinical and cost‑effectiveness data for the use of our products to each third‑party payor separately, with no assurance that coverage and adequate reimbursement will be obtained or applied consistently. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. Additionally, coverage may be more limited than the purposes for which the product is approved by the FDA or similar regulatory authorities outside of the United States. Assuming that coverage is obtained for a given product, the resulting reimbursement rates might not be adequate or may require co‑payments that patients find unacceptably high. Patients, physicians, and other healthcare providers may be less likely to prescribe, dispense or use, as applicable, our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

Government payors and other third‑party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and the amount of reimbursement. Coverage decisions may depend upon clinical and economic standards that disfavor new drug or biologic products when more established or lower‑cost therapeutic alternatives are already available or subsequently become available. Based upon a number of factors, including clinical and economic standards, our products may not qualify for coverage and reimbursement. Coverage and reimbursement by a third‑party payor may depend upon a number of factors, including, but not limited to, 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;

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neither experimental nor investigational;

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prescribed by a practitioner acting within the scope of license and health plan participation agreements;

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documented adequately in the patient’s medical record;

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dispensed by a participating pharmacy; and/or

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logged and documented appropriately by the dispensing pharmacy.

 

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The market for our products will depend significantly on access to third‑party payors’ drug formularies for which third‑party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third‑party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. If coverage and reimbursement of our future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

In the United States, our products may be subject to discounts from list price and rebate obligations. Third‑party payors have from time to time refused to include our products in their formularies, limit the type of patients for whom coverage will be provided, or restrict patient access to our products through formulary control or otherwise, in favor of less‑costly generic versions of ribavirin or other treatment alternatives. Any change in formulary coverage, treatment paradigm, reimbursement levels, discounts or rebates offered on our products may impact our anticipated revenues.

In the United States, governmental and commercial third‑party payors are developing increasingly sophisticated methods of controlling healthcare costs. We believe that pricing pressure for our products will continue, and future coverage and reimbursement will likely be subject to increased restrictions. For example, the PPACA, which has already imposed significant healthcare cost containment measures, also encourages the development of comparative effectiveness research and any adverse findings for our products from such research may reduce the extent of coverage and reimbursement for our products. The PPACA created the Patient‑Centered Outcomes Research Institute to review the effectiveness of treatments and medications in federally‑funded healthcare programs. The PCORI publishes the results of its studies. An adverse finding result may result in a treatment or product being removed from Medicare or Medicare coverage.

Managed care organizations continue to seek price discounts and in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs, which may result in managed care organizations influencing prescription decisions for a larger segment of the population, which could constrain pricing, formulary position or reimbursement for our products. Economic pressure on state budgets may also have a similar impact on Medicaid coverage and reimbursement.

In certain countries in the European Union and some other international markets, governments provide healthcare at low‑cost to consumers and regulate pharmaceutical pricing, patient eligibility or reimbursement levels to control costs for the government‑sponsored healthcare system. We expect to see strong efforts to reduce healthcare costs in our international markets, including: patient access restrictions; suspensions on price increases; prospective and possibly retroactive price reductions, mandatory discounts and rebates, and other recoupments; recoveries of past price increases; and greater importation of drugs from lower‑cost countries to higher‑cost countries. In addition, certain countries set prices by reference to the prices in other countries where our products are marketed. Thus, our inability to secure adequate prices in a particular country may not only limit the marketing of our products within that country, but may also adversely affect our ability to obtain acceptable prices in other markets.

Healthcare reform measures could hinder or prevent our product candidates’ commercial success, if approved, and could increase our costs.

In both the United States and certain foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is a significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding individual access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. For example, in 2010, the PPACA was enacted, which was intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals, strengthening of program integrity measures and enforcement authority, and expansion of the Medicaid program. The PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. Several provisions of the new law, which have varying effective dates, may affect us and will likely increase certain of our costs. In this regard, the PPACA includes the following provisions:

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an annual, non‑deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs that began in 2011;

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an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;

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an extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

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new methodologies by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and for drugs that are line extensions;

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changes to the Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point‑of‑sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D;

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expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;

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expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

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a new requirement to annually report drug samples that manufacturers and distributors provide to licensed practitioners or to pharmacies of hospitals or other healthcare entities;

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a licensure framework for follow‑on biologic products;

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a new Patient‑Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and

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creation of the Independent Payment Advisory Board which has the authority to recommend certain changes to the Medicare program that could result in reduced payments for prescription drugs.

The reforms imposed by the new law will significantly impact the pharmaceutical industry; however, the full effects of the PPACA cannot be known until these provisions are implemented and the CMS and other federal and state agencies issue and finalize all applicable regulations or guidance. We will continue to evaluate the PPACA, the implementation of regulations or guidance related to various provisions of the PPACA by federal agencies, as well as trends and changes that may be encouraged by the legislation and that may potentially have an impact on our business over time. The cost of implementing more detailed record keeping systems and otherwise complying with these regulations could substantially increase our costs. The changes to the way our products are reimbursed by the CMS could reduce our revenues. Both of these situations could adversely affect our results of operations. There have been judicial and Congressional challenges to certain aspects of the PPACA, and we expect there will be additional challenges and amendments to the PPACA in the future. Significant uncertainty exists regarding the effect of the PPACA, particularly in light of the recent election and campaign pledges to repeal or reform the PPACA.

In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. These changes included aggregate reductions to Medicare payments to providers and suppliers of up to 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2025 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers and suppliers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws and future healthcare reform laws may result in additional reductions in Medicare and other healthcare funding.

There also have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels and elsewhere directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. In May 2018, President Trump announced a Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs. On October 25, 2018, President Trump announced certain actions that are intended to reduce the prices Medicare will pay for drugs.

The Trump Administration has also taken executive actions to undermine or delay implementation of the PPACA.  In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices.  In October 2017, the President signed a second Executive Order allowing for the use of association health plans and short-term health insurance, which may provide fewer health benefits than the plans sold through the PPACA exchanges. At the same time, the Administration announced that it will discontinue the payment of cost-sharing reduction, or CSR, payments to insurance companies until Congress approves the appropriation of funds for such CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the PPACA. A bipartisan bill to appropriate funds for CSR payments was introduced in the Senate, but the future of that bill is uncertain.

   

More recently, with enactment of the Tax Cuts and Jobs Act of 2017, which was signed by the President 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. According to the Congressional Budget

 

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Office, the repeal of the individual mandate will cause 13 million fewer Americans to be insured in 2027 and premiums in insurance markets may rise.  Further, each chamber of the Congress has put forth multiple bills designed to repeal or repeal and replace portions of the PPACA. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the PPACA.



Government price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our current and future products.

International operations are also generally subject to extensive price and market regulations and there are many proposals for additional cost‑containment measures, including proposals that would directly or indirectly impose additional price controls or reduce the value of our intellectual property portfolio or may make it economically unsound to launch our products in certain countries. We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. Future price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our current and future products, which would adversely affect our revenue and results of operations.

Additionally, in some countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been obtained. Reference pricing used by various European Union member states and parallel distribution or arbitrage between low‑priced and high‑priced member states, can further reduce prices. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that compare the cost‑effectiveness of our product candidates to other available therapies, which is time‑consuming and costly. If reimbursement of our product candidates is unavailable or limited in scope or amount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in such country.

We could be adversely affected by violations of the FCPA and similar worldwide anti‑bribery laws.

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making payments to non‑U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to anti‑bribery laws in the jurisdictions in which we operate. Although we have policies and procedures designed to ensure that we, our employees and our agents comply with the FCPA and other anti‑bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries with respect to our business or any businesses that we acquire. We do business in a number of countries in which FCPA violations have recently been enforced. Failure to comply with the FCPA, other anti‑bribery laws or other laws governing the conduct of business with foreign government entities, including local laws, could disrupt our business and lead to severe criminal and civil penalties, including imprisonment, criminal and civil fines, loss of our export licenses, suspension of our ability to do business with the federal government, denial of government reimbursement for our products and/or exclusion from participation in government healthcare programs. Other remedial measures could include further changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions, any of which could have a material adverse effect on our business, financial condition, results of operations and liquidity. We could also be adversely affected by any allegation that we violated such laws.

If our processes and systems are not compliant with regulatory requirements, we could be subject to restrictions on marketing our products or could be delayed in submitting regulatory filings seeking approvals for our product candidates.

We have a number of regulated processes and systems that are required to obtain and maintain regulatory approval for our drugs and product candidates. These processes and systems are subject to continual review and periodic inspection by the FDA and other regulatory bodies. If compliance issues are identified at any point in the development and approval process, we may experience delays in filing for regulatory approval for our product candidates, or delays in obtaining regulatory approval after filing. Any later discovery of previously unknown problems or safety issues with approved drugs or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such drugs or manufacturing processes, withdrawal of drugs from the market, the imposition of civil or criminal penalties or a refusal by the FDA and/or other regulatory bodies to approve pending applications for marketing approval of new drugs or supplements to approved applications, any of which could have a material adverse effect on our business. Given the number of high profile adverse safety events associated with certain drug products, regulatory authorities may require, as a condition of approval, costly risk evaluation and mitigation strategies, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling, expedited reporting of certain adverse events, pre‑approval of promotional materials and restrictions on direct‑to‑consumer advertising. For example, any labeling approved for any of our product candidates may include a restriction on the term of its use, or it may not include one or more intended indications. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, as well as increased costs to assure compliance with

 

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any new post‑approval regulatory requirements. Any of these restrictions or requirements could force us or our collaborators to conduct costly studies.

In addition, we are a party to agreements that transfer responsibility for complying with specified regulatory requirements, such as packaging, storage, advertising, promotion, record‑keeping and submission of safety and other post‑market information on the product or compliance with manufacturing requirements, to our collaborators and third‑party manufacturers. Approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current good manufacturing practices (“cGMP”). As such, we and our contract manufacturers, which we are responsible for overseeing and monitoring for compliance, are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. The FDA may hold us responsible for any deficiencies or noncompliance of our contract manufacturers in relation to our product candidates and commercial products. If our collaborators or third‑party manufacturers do not fulfill these regulatory obligations, any drugs we market or for which we or they obtain approval may be deemed adulterated, which carries significant legal implications, and may be subject to later restrictions on manufacturing or sale, which could have a material adverse effect on our business.

Risks Related to Our Intellectual Property Rights

If we are unable to obtain and maintain patent protection for our products and product candidates, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and product candidates similar or identical to ours, and our ability to successfully commercialize our products and product candidates may be adversely affected.

Our commercial success will depend, in part, on our ability to obtain and maintain patent protection in the United States and other countries with respect to our products and product candidates. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our products and product candidates that are important to our business. We cannot be certain that patents will be issued or granted with respect to applications that are currently pending or that we apply for in the future with respect to one or more of our products and product candidates, or that issued or granted patents will not later be found to be invalid and/or unenforceable.

The patent prosecution process is expensive and time‑consuming, and we may not be able to file and prosecute 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. Although we enter into non‑disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, collaboration partners, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection.

We may license patent rights that are valuable to our business from third parties, in which event we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology or medicines underlying such licenses. We cannot be certain that these patents and applications will be prosecuted and enforced in a manner consistent with the best interests of our business. If any such licensors fail to maintain such patents, or lose rights to those patents, the rights we have licensed may be reduced or eliminated and our right to develop and commercialize any of our products that are the subject of such licensed rights could be adversely affected. In addition to the foregoing, the risks associated with patent rights that we license from third parties also apply to patent rights we own.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued, and even if issued, the patents may not meaningfully protect our products or product candidates, effectively prevent competitors and third parties from commercializing competitive products or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative products in a non‑infringing manner. Changes in the patent laws, implementing regulations or interpretation of the patent laws in the United States and other countries may also diminish the value of our patents or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent as the laws of the United States, and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. For those countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use or sale of our proprietary medicines and technology or to prevent third parties from selling or importing products made using our inventions in and into the United States and 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, but enforcement is not as strong as that in the United States. These products

 

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may compete with our products and our intellectual property rights may not be effective or sufficient to prevent them from competing.

We may not be aware of all third-party intellectual property rights potentially relating to our product candidates. 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 at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our owned or any licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

Assuming the other requirements for patentability are met, prior to March 2013, in the United States, the first to make 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. Beginning in March 2013, the United States transitioned to a first‑inventor‑to‑file system in which, assuming the other requirements for patentability are met, the first‑inventor‑to‑file a patent application will be entitled to the patent. We may be subject to a third‑party preissuance submission of prior art to the U.S. Patent and Trademark Office (U.S. PTO) or become involved in opposition, derivation, revocation, reexamination, post‑grant and inter partes review or interference proceedings challenging our patent rights or the patent rights of others. Participation in these proceedings can be very complex, expensive and may divert our management’s attention from our core business. Furthermore, 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 products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize medicines without infringing third‑party patent rights.

Even if our patent applications do issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us or otherwise provide us with any competitive advantage. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop others from using or commercializing similar or identical products, or limit the duration of the patent protection of our products and product candidates. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. Patent protection may not be available for some of our products or the processes under which they are used or manufactured.

Issued patents covering one or more of our products could be found invalid or unenforceable if challenged in court.

If we or one of our licensing partners initiated 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 and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Although we have conducted due diligence on patents we have exclusively in‑licensed, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. 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 U.S. PTO, or made a misleading statement, during prosecution. Third parties may also 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, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our products and 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 we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.

Third‑party claims of intellectual property infringement, misappropriation or other violation may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter partes reexamination proceedings before the U.S. PTO, and corresponding foreign patent offices. 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

 

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issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization and may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. There may be third‑party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third‑party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, 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 unless we obtained a license under the applicable patents, or until such patents expire.

Similarly, if any third‑party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product unless we obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all. Even if we or our future strategic collaborators were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property and it could require us to make substantial licensing and royalty payments.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. 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. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects.

Most of our competitors are larger than we are and have substantially greater resources and may be able to sustain the costs of complex patent litigation longer than we could. 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 internal research programs, in‑license needed technology or enter into strategic collaborations that would help us bring our product candidates to market.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time‑consuming and unsuccessful.

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time‑consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

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. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

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.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to patents, we rely on trade secrets, technical know‑how and proprietary information concerning our business strategy in order to protect our competitive position in medical research and development. Trade secrets are difficult

 

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to protect, and it is possible that our trade secrets and know‑how will over time be disseminated within the industry through independent development and intentional or inadvertent disclosures.

We seek to protect our trade secrets, in part, by entering into non‑disclosure and confidentiality agreements with parties who have access to them, such as our employees, collaboration partners, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. However, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets. Our agreements with research and development collaboration partners contain contractual limitations regarding the publication and public disclosure of data and other information generated during the course of research. Despite these efforts, any of these parties may breach the agreements and intentionally or inadvertently disclose or use our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.

Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets or the equivalent knowledge, methods and know‑how were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them 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 harmed. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

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:

·

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of the patents that we own or have exclusively licensed;

·

we or our licensors or collaboration partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;

·

we or our licensors or collaboration partners might not have been the first to file patent applications covering certain of our or their inventions;

·

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

·

it is possible that our pending patent applications will not lead to issued patents;

·

issued patents that we own or have exclusively licensed may not provide us with any competitive advantages or may be held invalid or unenforceable, as a result of legal challenges by our competitors;

·

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;

·

we may not develop additional proprietary technologies that are patentable; and/or

·

the patents of others may have an adverse effect on our business.

Should any of these events occur, they could significantly harm our business, results of operations and prospects.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know‑how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employees’ former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. 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.

 

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We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. We may also have, in the future, ownership disputes arising, for example, from conflicting obligations of 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 ownership. 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, valuable intellectual property. Such an outcome could have a material adverse effect on our business. 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.

If we do not obtain patent term extension for any product candidates we may develop, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any product candidates we may develop, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent extension term of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended. However, we may not be granted an extension 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 applicable time period or the scope of patent protection afforded 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, third parties may obtain approval of competing products following our patent expiration, and our business, financial condition, results of operations, and prospects could be materially harmed.

Risks Related to Our Dependence on Third Parties

We expect to continue to contract with third‑party suppliers for the production of our commercial product portfolio as well as our developmental product candidates for clinical trial use and, if approved, for commercialization.

We currently employ third parties for the manufacturing of our commercial products and product candidates. This increases the risk that we will not have sufficient quantities of our products or product candidates within the timeframe and at an acceptable cost which could delay, prevent or impair our development or commercialization efforts. Additionally, we may not be able to quickly respond to changes in customer demand which could harm our business as a result of the inability to supply the market or an excess of inventory that we are unable to sell.

The facilities used by our contract manufacturers to manufacture our product candidates must adhere to FDA requirements, and are subject to inspections that may be conducted after we submit our marketing applications to the FDA in connection with review of our application, and on an ongoing basis relevant to postmarketing compliance. Although we are subject to regulatory responsibility for the quality of products manufactured by our contract manufacturers and oversight of their activities, we do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as cGMPs, for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will be subject to enforcement action, and if substantial noncompliance is identified and not corrected, they may be precluded from manufacturing product for the United States or other markets. In addition, although the FDA will hold us responsible for due diligence in the selection of, and oversight in the operations of, our contract manufacturers, we do not have direct control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority identified significant compliance concerns with our contract manufacturers, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our products or product candidates, if approved.

We have agreements with third‑party manufacturers for the provision of active pharmaceutical ingredient (API), drug product manufacturing and packaging of our commercial products. Reliance on third‑party manufacturers carries additional risks, such as not being able to comply with cGMP or similar regulatory requirements outside the United States. Our failure, or the failure of our third‑party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.

Due to FDA requirements and other factors, we are generally unable to make changes to our supplier arrangements without delay. Manufacturing services related to each of our pharmaceutical products are primarily provided by a single

 

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source. Each of our raw materials are also provided by a single source. We attempt to mitigate this risk through long‑term contracts and inventory safety stock. In the event that any of these third‑party manufacturers fail regulatory compliance, fail to meet quality assurance specifications or experience an unavoidable extraordinary event, our business could be adversely affected.

Any products that we may develop may compete with other product candidates and commercialized products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us. Any performance failure or refusal to supply on the part of our existing or future suppliers could delay clinical development, marketing approval or commercialization of our products. If our current suppliers cannot perform as agreed, we may be required to replace one or more of these suppliers. Although we believe that there are a number of potential long‑term replacements to each supplier, we may incur added costs and delays in identifying and qualifying any such replacements.

We rely on third parties to store and distribute supplies for our clinical trials and for the manufacture of our product candidates. Any performance failure on the part of our existing or future distributors could delay clinical development or regulatory approval or our product candidates or commercialization of our products, producing additional losses and depriving us of potential product revenue.

We have acquired or in‑licensed many of our products from external sources and may owe milestones or royalties based on the achievement of future successes or penalties if certain diligence requirements are not met.

In certain cases, our license or acquisition agreements require us to conduct research or clinical trials within a specified time frame, or we may owe a penalty or lose the right to the product for development. If we do not conduct the necessary research or clinical trials within the specified time frame, we may be required to pay cash penalties to extend the time frame during which studies may be conducted, our licensors may exercise a right to have the product returned or may have the right to terminate the agreement, in which event we would not be able to market products covered by such agreement.

On some of the products we have licensed, we may be obligated in future periods to make significant development and commercial milestone payments as well as royalties. As a result, we may have to raise additional capital (which would likely cause our equity holders to experience dilution) to cover the required milestone payments. The milestone payments and royalties we may owe on the sale of our products may reduce the overall profitability of our operations and if we are unable to sell sufficient product to cover the costs of these milestone payments, our operating profitability, business and value of our equity securities may be adversely impacted.

We depend on intellectual property licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would harm our business.

We are dependent on patents, know‑how and proprietary technology, both our own and licensed from others. We are party to intellectual property license agreements with third parties and expect to enter into additional license agreements in the future. Our current license agreements impose, and we expect that future license agreements will impose, various diligence, development, commercialization, payment and other obligations. If we fail to comply with our obligations under these agreements, the licensor may have the right to terminate the license agreement or may exercise a right to have the intellectual property that we license returned. For example, under our exclusive sub-license agreement for KD025 with NT Life and SLx, if we fail to comply with our diligence obligations, the former owners of the intellectual property licensed under such agreement may require us and our licensors to return such intellectual property, in which case our license to such intellectual property would terminate. Any termination of these licenses could result in the loss of significant rights and could have a material adverse effect on our ability to commercialize our product candidates, including KD025.

Disputes may also arise between us and our licensors regarding intellectual property subject to a license agreement, including those relating to:

·

the scope of rights granted under the license agreement and other interpretation‑related issues;

·

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;

·

our right to sublicense patent and other rights to third parties under collaborative development relationships;

·

whether we are complying with our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates; and/or

·

the allocation of ownership of inventions and know‑how resulting from the joint creation or use of intellectual property by our licensors and by us and our collaboration partners.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates. We are generally also subject to all of the same risks with respect to protection of intellectual property

 

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that we license as we are for intellectual property that we own. If we or our licensors fail to adequately protect this intellectual property, our ability to commercialize our products could suffer.

We depend, in part, on our licensors to file, prosecute, maintain, defend and enforce patents and patent applications that are material to our business.

In certain of our license agreements, the patents relating to our product candidates are controlled by certain of our licensors. Such licensors generally have rights to file, prosecute, maintain and defend the patents we have licensed from such licensors. We generally have the first right to enforce our patent rights, although our ability to settle such claims often requires the consent of the licensor. If our licensors or any future licensees having rights to file, prosecute, maintain or defend our patent rights fail to conduct these activities for patents or patent applications covering any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using or selling competing products. We cannot be certain that such activities by our licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights.

Pursuant to the terms of the license agreements with some of our licensors, the licensors may have the right to control enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents and, even if we are permitted to pursue such enforcement or defense, we cannot ensure the cooperation of our licensors. We cannot be certain that our licensors will allocate sufficient resources or prioritize their or our enforcement of such patents or defense of such claims to protect our interests in the licensed patents. Even if we are not a party to these legal actions, an adverse outcome could harm our business because it might prevent us from continuing to license intellectual property that we may need to operate our business. In addition, even when we have the right to control patent prosecution of licensed patents and patent applications, enforcement of licensed patents, or defense of claims asserting the invalidity of those patents, we may still be adversely affected or prejudiced by actions or inactions of our licensors and their counsel that took place prior to or after our assuming control.

We rely in part 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.

We do not independently conduct clinical trials of our product candidates. We rely on third parties, such as medical institutions and clinical investigators, and may in the future rely on other third parties, to perform this function. Our reliance on these third parties for clinical development activities reduces our control over these activities but does not relieve us of our responsibilities. We 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, we, along with medical institutions and clinical investigators, are required to comply with “good clinical practices” or “GCP,” which is an international ethical and scientific quality standard for designating, recording and reporting trials that involve the participation of human subjects, and which is implemented via regulations and guidelines enforced by, among others, the FDA, the EMA, the Competent Authorities of the Member States of the European Economic Area (EEA), and comparable foreign regulatory authorities for all of our products in clinical development. GCP is designed to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of patients in clinical trials are protected. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs, study sites, or clinical investigators fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials and create other regulatory and litigation exposure, which would among other things delay the regulatory approval process.

We face risks in connection with existing and future collaborations with respect to the development, manufacture and commercialization of our products and product candidates.

The risks that we face in connection with our current and any future collaborations include the following:

·

Our collaborators may change the focus of their development and commercialization efforts or may have insufficient resources to effectively develop our product candidates. The ability of some of our products and product candidates to reach their potential could be limited if collaborators decrease or fail to increase development or commercialization efforts related to those products or product candidates.

·

Any future collaboration agreements may have the effect of limiting the areas of research and development that we may pursue, either alone or in collaboration with third parties.

·

Collaborators may develop and commercialize, either alone or with others, drugs that are similar to or competitive with the drugs or product candidates that are the subject of their collaborations with us.

Our collaboration agreements are subject to termination under various circumstances.

 

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Risks Related to Our Operations

Our future success depends on our ability to retain our key executives and to attract, retain and motivate qualified personnel.

The biopharmaceutical industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these 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. This may limit their availability to us.

In order to induce valuable employees to continue their employment with us, we have provided equity incentives that vest over time. The value to employees of equity incentives that vest over time is significantly affected by the success of our operations and clinical trials for our product candidates, much of which is beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies.

Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Our employment arrangements generally provide for at‑will employment, which means that any of our employees could leave our employment at any time, with or without notice. The loss of the services of any of our executive officers or other key employees and our inability to find suitable replacements could potentially harm our business, financial condition and prospects. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid‑level and senior managers as well as junior, mid‑level and senior scientific and medical personnel.

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical, biotechnology, pharmaceutical and other businesses and institutions. Many of the other companies and institutions that we compete with for qualified personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high quality candidates than what we have to offer. If we are unable to continue to attract and retain high quality personnel, the rate and success at which we can develop and commercialize product candidates will be limited.

Our employees, independent contractors, principal investigators, agents, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

We are exposed to the risk that our employees, independent contractors, principal investigators, agents, consultants, commercial partners and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent failures to:

·

comply with regulations by the FDA and other similar foreign regulatory bodies;

·

provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies;

·

comply with manufacturing standards;

·

comply with federal and state data privacy, security, fraud and abuse and other healthcare laws and regulations in the United States and similar foreign laws;

·

report financial information or data accurately; and/or

·

disclose unauthorized activities to us.

In particular, the promotion, sales and marketing of healthcare items and services, as well as certain 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 may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, including off‑label uses of our products, structuring and commission(s), certain customer incentive programs, patient assistance programs, and other business arrangements generally. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Ethics. However, it is not always possible to identify and deter misconduct by employees and other third‑parties, 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

 

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protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. 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 and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages, fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs or other sanctions, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates and marketed products.

We face an inherent risk of product liability as a result of the clinical testing of our product candidates, whether by us, on our behalf or by unaffiliated third parties or investigators, and will face an even greater risk for any products that we commercialize. For example, we may be sued if any product we develop or sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates, if approved, or our other marketed products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

·

decreased demand for our product candidates or products that we may develop or sell;

·

injury to our reputation;

·

withdrawal of clinical trial participants;

·

initiation of investigations by regulators;

·

costs to defend the related litigation;

·

a diversion of management’s time and our resources;

·

substantial monetary awards to trial participants or patients;

·

product recalls, withdrawals or labeling, marketing or promotional restrictions;

·

loss of revenues from product sales; and/or

·

the inability to commercialize our product candidates or our marketed products.

Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry an aggregate of $10.0 million of product liability insurance, which we believe is adequate for our commercial products and our clinical trials. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Our operating results are subject to significant fluctuations.

Our quarterly revenues, expenses and net income (loss) have fluctuated in the past and are likely to fluctuate significantly in the future due to the timing of charges and expenses that we may encounter. In recent periods, for instance, we have recorded charges that include:

·

unrealized gain (losses) on investments in equity securities; and

·

gains (losses) related to the change in fair value of financial instruments

Our quarterly revenues, expenses and net income (loss) may fluctuate significantly from quarter to quarter and year to year, such that a period to period comparison of our results of operations may not be a good indication of our future performance.

Specifically, the market price of our investment in MeiraGTx may be volatile and fluctuate substantially, which could result in significant changes to the fair value of our investment and limit our ability to sell those securities. The stock market in general and the market for smaller biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated or disproportionate to the operating performance of particular companies. Broad market and industry factors may negatively affect the market price of MeiraGTx common stock, regardless of its actual operating performance. Further, a decline in the financial markets and related factors beyond our control or the control of MeiraGTx may cause the price of MeiraGTx to decline rapidly and unexpectedly. In addition, MeiraGTx may require significant

 

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additional capital to continue its planned operations. To raise capital, MeiraGTx may sell equity securities, convertible securities or other securities in one or more transactions, which may result in material dilution of our investment in MeiraGTx and result in additional volatility in the fair value of our investment in MeiraGTx. As a result of this volatility, the fair value of our investment in MeiraGTx may be significantly and adversely affected. Investments in common stock of companies traded on public markets, including our MeiraGTx investment, are reflected on our balance sheet at fair value based on the closing price of the shares owned on the last trading day before the date of the balance sheet. Fluctuations in the underlying bid price of the shares result in unrealized gains or losses. In accordance with FASB ASC 321, Investments – Equity Securities, we recognize these fluctuations in value as other expense (income). Accordingly, a decline in the trading price of MeiraGTx would require us to recognize unrealized losses, which could result in significant harm to our financial position and adversely affect the price of our common stock. Furthermore, as a result of this volatility, we may not be able to sell our common stock of MeiraGTx at prices we find attractive, or we may be required to recognize realized losses if we sell MeiraGTx common stock. In October 2019, the Company entered into a transaction pursuant to which it sold approximately 1.4 million ordinary shares of MeiraGTx for gross proceeds of $22.0 million. After consummation of the transaction, the Company held approximately 5.7% of the outstanding ordinary shares of MeiraGTx with a fair value of $42.0 million at December 31, 2019.

If we are unable to successfully implement our strategic plan, our business may be materially harmed.

We plan to continue to develop and commercialize novel drugs for significant unmet medical needs while we continue to market our commercial products to eligible patients to generate revenue. Absent a successful launch of one or more of our product candidates, we expect our total revenue to decline significantly. In order to maintain a strong financial position, we are focusing our investment on development programs for our most advanced product candidates. In an effort to mitigate our drug development risk and improve our chance of ultimate commercial success, we are developing multiple product candidates in a variety of disease indications. There can be no assurance that our development programs will be successful or that our research programs will result in drugs that we can successfully develop and commercialize.

Our business may become subject to economic, political, regulatory and other risks associated with international operations.

Our business is subject to risks associated with conducting business internationally. Some of our suppliers and collaborative and clinical trial relationships are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

·

economic weakness, including inflation, or political instability in particular foreign economies and markets;

·

differing regulatory requirements for drug approvals in foreign countries;

·

potentially reduced protection for intellectual property rights;

·

difficulties in compliance with non‑U.S. laws and regulations;

·

changes in non‑U.S. regulations and customs, tariffs and trade barriers;

·

changes in non‑U.S. currency exchange rates and currency controls;

·

changes in a specific country’s or region’s political or economic environment;

·

trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non‑U.S. governments;

·

negative consequences from changes in tax laws;

·

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

·

workforce uncertainty in countries where labor unrest is more common than in the United States;

·

difficulties associated with staffing and managing foreign operations, including differing labor relations;

·

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and/or

·

business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

If we engage in future acquisitions or strategic collaborations, this may increase our capital requirements, dilute our equity holders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.

We may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. Any potential acquisition or strategic collaboration may entail numerous risks, including:

·

increased operating expenses and cash requirements;

·

the assumption of additional indebtedness or contingent liabilities;

 

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·

assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel;

·

the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition;

·

retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;

·

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals; and/or

·

our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one‑time expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our business.

If we acquire or license technologies, products or product candidates, we will incur a variety of costs and may never realize benefits from the transaction.

If appropriate opportunities become available, we might license or acquire technologies, resources, drugs or product candidates. We might never realize the anticipated benefits of such a transaction, and we may later incur impairment charges related to assets acquired in any such transaction. In particular, due to the risks inherent in drug development, we may not successfully develop or obtain marketing approval for the product candidates we acquire. Future licenses or acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, the creation of contingent liabilities, impairment expenses related to goodwill, and impairment or amortization expenses related to other intangible assets, which could harm our financial condition.

We will need to grow our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

At December 31, 2019, we had 115 full‑time employees. As our development and commercialization plans and strategies develop, we expect to expand our employee base for managerial, operational, sales, marketing, financial and other resources. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees. Also, our management may need to divert a disproportionate amount of their attention away from our day‑to‑day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations which may result in weaknesses in our infrastructure, give rise to operational errors, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of existing and additional product candidates. If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our product candidates and compete effectively with others in our industry will depend, in part, on our ability to effectively manage any future growth.

A disruption in our computer networks, including those related to cybersecurity, could adversely affect our financial performance.

We rely on sophisticated information technology systems to operate our business. These systems are potentially vulnerable to malicious intrusion, random attack, loss of data privacy, or breakdown. Although we have invested in the protection of our data and information technology and also monitor our systems on an ongoing basis, there can be no assurance that these efforts will prevent breakdowns or breaches in our information technology systems that could adversely affect our business.

We rely on our computer networks and systems, some of which are managed by third parties, to manage and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners), and to manage or support a variety of critical business processes and activities. We may face threats to our networks from unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to external or internal attacks. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of sensitive or proprietary information. In addition, a cybersecurity attack could result in other negative consequences, including disruption of our internal operations, increased cybersecurity protection costs, lost revenue, regulatory actions or litigation. Any disruption could also have a material adverse impact on our operations. We have not experienced any known attacks on our information technology systems that have resulted in any material system failure, accident or security breach to date.

 

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We may be subject to security breaches or other cybersecurity incidents that could compromise our information and expose us to liability.

We routinely collect and store sensitive data (such as intellectual property, proprietary business information and personally identifiable information) for the Company, its employees and its suppliers and customers. We make significant efforts to maintain the security and integrity of our computer systems and networks and to protect this information. We have not experienced any known attacks on our information technology systems that have resulted in any material system failure, accident or security breach to date. However, like other companies in our industry, our networks and infrastructure may be vulnerable to cyber-attacks or intrusions, including by computer hackers, foreign governments, foreign companies or competitors, or may be breached by employee error, malfeasance or other disruption. Any such breach could result in unauthorized access to (or disclosure of) sensitive, proprietary or confidential information of ours, our employees or our suppliers or customers, and/or loss or damage to our data. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. Any such unauthorized access, disclosure, or loss of information could cause competitive harms, result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and/or cause reputational harm.  

Risks Related to Our Common Stock

We expect that our stock price will fluctuate significantly.

The trading prices of the securities of pharmaceutical and biotechnology companies have been highly volatile. The trading price of our common stock also may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section, these factors include:

·

adverse results or delays in the planned clinical trials of our product candidates or any future clinical trials we may conduct, or changes in the development status of our product candidates;

·

any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;

·

regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our products and product candidates, including clinical trial requirements for approvals;

·

our inability to obtain or delays in obtaining adequate product supply for any approved product or inability to do so at acceptable prices;

·

failure to commercialize our product candidates or if the size and growth of the markets we intend to target fail to meet expectations;

·

additions or departures of key scientific or management personnel;

·

unanticipated serious safety concerns related to the use of our product candidates;

·

introductions or announcements of new products offered by us or significant acquisitions, strategic collaborations, joint ventures or capital commitments by us, our collaborators or our competitors and the timing of such introductions or announcements;

·

our ability or inability to effectively manage our growth;

·

changes in the structure of healthcare payment systems;

·

our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

·

publication of research reports about us or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

·

market conditions in the pharmaceutical and biotechnology sectors or the economy generally;

·

our ability or inability to raise additional capital through the issuance of equity or debt or collaboration arrangements and the terms on which we raise it;

·

trading volume of our common stock;

·

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; and/or

·

significant lawsuits, including patent or stockholder litigation.

 

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The stock market in general, and market prices for the securities of biopharmaceutical companies like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In several recent situations when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.

If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our business, our stock price and trading volume could decline.

The trading market for our common stock may be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have, and may never obtain research coverage by securities and industry analysts. If no or few analysts commence research coverage of us, or one or more of the analysts who cover us issues an adverse opinion about our company, our stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Future sales of our common stock or securities convertible into our common stock in the public market could cause our stock price to fall.

Our stock price could decline as a result of sales of a large number of shares of our common stock or securities convertible into our common stock or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Certain holders of our shares have rights requiring us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, subject to certain conditions. Shares issued upon the exercise of stock options outstanding under our equity incentive plans or pursuant to future awards granted under those plans will become available for sale in the public market to the extent permitted by the provisions of applicable vesting schedules, any applicable market stand‑off and lock‑up agreements, Rule 144 and Rule 701 under the Securities Act, as well as, to the extent applicable, under the registration statement on Form S-8 that we have filed.

Once we register the offer and sale of shares for the holders of registration rights and shares to be issued under our equity incentive plans, they can be freely sold in the public market upon issuance or resale (as applicable).

In addition, in the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our stock price to decline.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, any future testing by us conducted in connection with Section 404 of the Sarbanes‑Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement.

We are required, pursuant to Section 404 of the Sarbanes‑Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. We could be an emerging growth company for up to five years following the date of our IPO. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

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The holders of the convertible preferred stock will be entitled to be paid a liquidation preference, which under some circumstances will include a substantial premium.

In the event of a liquidation (as defined in the certificate of designations governing our convertible preferred stock), certain bankruptcy events or a failure to make any payment due on our or our subsidiaries’ indebtedness after giving effect to any applicable cure period, the holders of the convertible preferred stock will be entitled to payment of a liquidation preference. The liquidation preference for each share of convertible preferred stock will equal the greater of (i) (A) (I) the original purchase price per share of convertible preferred stock plus dividend arrearages thereon in cash plus (II) any dividends accrued and unpaid thereon from the last dividend payment date to the date of the final distribution to such holder plus (B) in the majority of the events identified in the previous sentence, a premium equal to 20.2% of the amount described in clause (i)(A) of this sentence at such time or (ii) an amount per share of convertible preferred stock equal to the amount which would have been payable or distributable if each share of convertible preferred stock been converted into shares of our common stock immediately before the liquidation event.

Until the holders of the convertible preferred stock have been paid their liquidation preference in full, no payment will be made to any holder of common stock. If our assets, or the proceeds from their sale, distributable among the holders of the convertible preferred stock are not sufficient to pay the liquidation preference in full and the liquidating payments on any parity securities, then those assets or proceeds will be distributed among the holders of the convertible preferred stock and those parity securities on a pro rata basis. In that case, there would be no assets or proceeds remaining to be distributed to holders of our common stock, which would have a material adverse effect on the trading price of our common stock.

The holders of the convertible preferred stock are entitled to have their shares of convertible preferred stock redeemed at a substantial premium in certain events

Our convertible preferred stock is redeemable if we or our significant subsidiaries are the subject of certain bankruptcy events and upon the failure to make payments of amounts due on our or any of our subsidiaries’ indebtedness after giving effect to any applicable cure period. Upon the occurrence of any of these events, the holders of our convertible preferred stock shall, in their sole discretion, be entitled to receive an amount equal to the original purchase price per share of convertible preferred stock plus dividend arrearages thereon plus any dividends accrued and unpaid thereon from the last dividend payment date to, but excluding, the date of such redemption plus the premium described under “The holders of the convertible preferred stock will be entitled to be paid a liquidation preference, which under some circumstances will include a substantial premium.” If we were to become obligated to redeem all or a substantial portion of the outstanding convertible preferred stock, that could have a material adverse effect on the trading price of our common stock.

Shares of our convertible preferred stock are convertible into shares of our common stock and, upon conversion, will dilute your percentage of ownership.

Concurrently with the closing of our IPO, we issued 30,000 shares of our convertible preferred stock pursuant to an exchange agreement with holders of our Senior Convertible Term Loan. Holders of the convertible preferred stock shall be entitled to receive a cumulative dividend at an annual rate of 5% of the sum of the original purchase price per share of convertible preferred stock plus any dividend arrearages. In addition, holders of the convertible preferred stock shall be entitled to receive dividends paid or payable on our common stock with respect to the number of shares of our common stock into which each share of convertible preferred stock is then convertible at the then applicable conversion price. Shares of our convertible preferred stock are convertible at any time at the option of the holder into shares of our common stock at a conversion price equal to their original purchase price plus any accrued but unpaid dividends. In May 2019, a holder of 1,292 shares of our 5% convertible preferred stock exercised its right to convert such shares into 154,645 shares of our common stock. At December 31, 2019,  3,536,125 shares of our common stock are issuable upon conversion of our convertible preferred stock. This issuance of common stock upon the conversion would dilute the percentage ownership of holders of our common stock by approximately 2.2% as of December 31, 2019. The dilutive effect of the conversion of these securities may adversely affect our ability to obtain additional equity financing on favorable terms or at all.

Holders of the convertible preferred stock may exert substantial influence over us and may exercise their control in a manner adverse to your interests.

So long as shares of our convertible preferred stock remain outstanding, without the consent of at least a majority of the then outstanding shares of the convertible preferred stock, we may not (i) authorize or approve the issuance of any convertible preferred stock, senior securities or parity securities (or, in each case, any security convertible into, or convertible or exchangeable therefor or linked thereto) or authorize or create or increase the authorized amount of any convertible preferred stock, senior securities or parity securities (or, in each case, any security convertible into, or convertible or exchangeable therefor or linked thereto); (ii) authorize or approve the purchase or redemption of any parity securities or junior securities; (iii) amend, alter or repeal any of the provisions of the certificate of designations, our certificate of incorporation or our by‑laws in a manner that would adversely affect the powers, designations, preferences and rights of the convertible preferred stock; (iv) contract, create, incur, assume or suffer to exist any indebtedness or guarantee any such indebtedness with an aggregate value of more than $5,000,000 (subject to certain exceptions); or (v) agree to take any of the above actions. The holders of convertible preferred stock will have one vote for each share of common stock into which such

 

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holders’ shares could then be converted at the time, and with respect to such vote, will have voting rights and powers equal to the voting rights and powers of the holders of our common stock.

The certificate of designations governing the convertible preferred stock also provides that no amendment or waiver of any provision of the certificate of designations or our charter or bylaws shall, without the prior written consent of all holders of the convertible preferred stock who are known to us to hold, together with their affiliates, more than 5% of the convertible preferred stock then outstanding (i) reduce any amounts payable or that may become payable to holders of the convertible preferred stock; (ii) postpone the payment date of any amount payable to holders of the convertible preferred stock or waive or excuse any payment; (iii) modify or waive the conversion rights of the convertible preferred stock in a manner that would adversely affect any holder of the convertible preferred stock; or (iv) change any of the voting‑related provisions or any other provision of the certificate of designations specifying the number or percentage of holders of the convertible preferred stock which are required to waive, amend or modify any rights under the certificate of designations or make any determination or grant any consent under that document.

We will require additional capital in the future, which may not be available to us. Issuances of our equity securities to provide this capital may dilute your ownership in us.

We will need to raise additional funds through public or private debt or equity financings in order to:

·

take advantage of expansion opportunities;

·

acquire complementary products, product candidates or technologies;

·

develop new products or technologies; and/or

·

respond to competitive pressures.

Any additional capital raised through the issuance of our equity securities would dilute your percentage ownership interest in us. Furthermore, any additional financing we may need may not be available on terms favorable to us or at all. The unavailability of needed financing could adversely affect our ability to execute our business strategy. 

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and holders of 5% or more of our capital stock, together with their respective affiliates, beneficially owned 50.1% of our capital stock as of March 2, 2020, of which 2.7% is beneficially owned by our executive officers. Accordingly, our executive officers, directors and principal stockholders are able to determine the composition of the board of directors, retain the voting power to approve all matters requiring stockholder approval, including mergers and other business combinations, and continue to have significant influence over our operations. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us that you may believe are in your best interests as one of our stockholders. This in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management.

Anti‑takeover provisions in our charter documents and under Delaware law could make an acquisition of us difficult, limit attempts by our stockholders to replace or remove our current management and adversely affect our stock price.

Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our stock. Among other things, our certificate of incorporation and bylaws:

·

permit the board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;

·

provide that the authorized number of directors may be changed only by resolution of the board of directors;

·

provide that all vacancies, including newly‑created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; and

·

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be taken by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any stockholder owning in excess of 15.0% of our outstanding stock for a period of three years following the date on which the stockholder obtained such 15.0% equity interest in us.

 

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We will continue to incur significant costs by being a public company.

As a public company, we incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. We also incur costs associated with corporate governance requirements, including requirements of the SEC and the New York Stock Exchange (NYSE). We expect these rules and regulations to continue to increase our legal and financial compliance costs and to make some activities more time‑consuming and costly. We also expect that these rules and regulations may continue to make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

When we cease to be an “emerging growth company” and when our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

We are an “emerging growth company,” as defined in the JOBS Act, and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We will take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO, which is December 31, 2021, (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Our management has broad discretion in using cash and cash equivalents and our other capital resources.

We expect to continue to use our cash and cash equivalents and our other capital resources to fund the clinical development of our pipeline and for general corporate purposes. Our management has broad discretion in the application of our cash and cash equivalents and our other capital resources and could spend the funds in ways that do not improve our results of operations or enhance the value of our equity. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, diminish available cash flows available to service our debt, cause the value of our equity to decline and delay the development of our product candidates. Pending their use, we may invest cash and cash equivalents and our other capital resources in a manner that does not produce income or that loses value.

We could be classified as an inadvertent investment company.

We are not engaged in the business of investing, reinvesting or trading in securities, and we do not hold ourselves out as being engaged in those activities. However, due to various strategic collaborations and corporate transactions customary in our industry, we own, and may come to own, securities of third parties. As such, there can be no assurance that we will be able to avoid being inadvertently deemed an investment company under the Investment Company Act of 1940 (the “Investment Company Act”). If we were deemed to be an investment company, we would be subject to burdensome compliance requirements and restrictions that would limit our activities, including limitations on our capital structure, our ability to sell our securities and our ability to transact business, which would have a material adverse effect on our financial condition and results of operations. To avoid being deemed an investment company, we may be required to sell certain of our investments or to conduct our business in a manner that does not subject us to the requirements of the Investment Company Act, which could have an adverse effect on our business, financial condition and results of operations.

 

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Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of existing or any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our equity securities will likely be your sole source of gain for the foreseeable future.

Future sales and issuances of equity securities, convertible securities or other securities could result in additional dilution of the percentage ownership of holders of our common stock.

We expect that additional capital will be needed in the future to continue our planned operations. To raise capital, we may sell equity securities, convertible securities or other securities in one or more transactions at prices and in a manner we determine from time to time. If we sell equity securities, convertible securities or other securities in more than one transaction, investors in such future offerings may be materially diluted by subsequent sales. Such sales would also likely result in material dilution to our existing equity holders, and new investors could gain rights, preferences and privileges senior to those of holders of our existing equity securities.

 

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Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

We have three primary operating locations which are occupied under long‑term leasing arrangements. In October 2010, Kadmon Corporation, LLC entered into a corporate headquarters and laboratory lease in New York, New York, expiring in February 2021 and opened a secured letter of credit with a third party financial institution in lieu of a security deposit for $2.0 million. Since inception, there have been six amendments to this lease agreement, which have altered office and laboratory capacity and extended the lease term through October 2025. We have the ability to extend portions of the lease on the same terms and conditions as the current lease, except that the base rent will be adjusted to the fair market rental rate for the building based on the rental rate for comparable space in the building at the time of extension.

We are party to an operating lease in Warrendale, Pennsylvania (our specialty-focused commercial operation), which expires on September 30, 2022, with a two five‑year renewal options, which would extend the term to September 30, 2032, if exercised. Rental payments under the renewal period will be at market rates determined from the average rentals of similar tenants in the same industrial park.

In August 2015, we entered into an office lease agreement in Cambridge, Massachusetts (our clinical office) effective January 2016 and expiring in April 2023. We opened a secured letter of credit with a third party financial institution in lieu of a security deposit for $91,000.

For additional information, see Contractual Obligations and Commitments in Part II, Item 7 of this Annual Report on Form 10-K.

Item 3. Legal Proceedings

We are not currently subject to any material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of our business. 



Item 4. Mine Safety Disclosures.

Not applicable.

 

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is listed on the NYSE under the symbol KDMN.  

Holders of Record

On March 2, 2020, there were approximately 212 stockholders of record of our common stock and the closing price of our common stock was $4.85 per share as reported by the NYSE. Since many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Dividend Policy

We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business and paying any debts. We have never declared nor paid any dividends on our common stock and do not anticipate paying cash dividends to holders of our common stock in the foreseeable future. See “Risk Factors—Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.” Any determination to pay dividends on our common stock in the future will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and covenants in our existing financing arrangements and any future financing arrangements. Holders of the convertible preferred stock are entitled to receive a cumulative dividend at an annual rate of 5% of the original purchase price per share of convertible preferred stock, when and as declared by our board of directors and to the extent of funds legally available for the payment of dividends. Holders of the convertible preferred stock are also entitled to participate in all dividends declared and paid to holders of our common stock on an “as if” converted basis.

Purchases of Equity Securities by the Issuer of Affiliated Purchasers

None.

Securities Authorized for issuance under our Equity Compensation Plans

The information called for by this item will be included in our definitive proxy statement with respect to our 2020 Annual Meeting of Shareholders to be filed with the SEC, and is incorporated herein by reference.



Item 6. Selected Financial Data.



As a “smaller reporting company”, we are not required to provide the information required by this item.



 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In this Annual Report on Form 10-K, unless otherwise stated or the context otherwise requires, references to the “Company,” “Kadmon,” “we,” “us” and “our” refer to Kadmon Holdings, Inc. and its consolidated subsidiaries. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing 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, 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 “Risk Factors” section of this Annual Report on Form 10-K, 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.

Overview

We are a clinical-stage biopharmaceutical company that discovers, develops and delivers transformative therapies for unmet medical needs. Our team has a proven track record of successful drug development and commercialization. Our clinical pipeline includes treatments for immune and fibrotic diseases as well as immuno-oncology therapies. We expect to continue to progress our clinical candidates and have further clinical trial events to report in 2020.

KD025, our most advanced product candidate, is an orally administered, selective small molecule inhibitor of Rho-associated coiled-coil kinase 2 (ROCK2). A pivotal study of KD025 is ongoing in patients with chronic graft-versus-host disease (cGVHD), a complication that can occur following hematopoietic cell transplantation (HCT) that results in multi-organ inflammation and fibrosis. The U.S. Food and Drug Administration (FDA) has granted Breakthrough Therapy Designation to KD025 for the treatment of cGVHD after failure of two or more prior lines of systemic therapy. The FDA has also granted Orphan Drug Designation to KD025 for the treatment of cGVHD.    

In November 2019, we announced positive topline results from the planned interim analysis of ROCKstar (KD025-213), our pivotal trial evaluating KD025 in patients with cGVHD who have received at least two prior lines of systemic therapy. The trial met the primary endpoint of Overall Response Rate (ORR) at the interim analysis, which was conducted as scheduled two months after completion of enrollment. KD025 showed statistically significant ORRs of 64% with KD025 200 mg once daily (95% Confidence Interval (“CI”): 51%, 75%; p<0.0001) and 67% with KD025 200 mg twice daily (95% CI: 54%, 78%; p<0.0001). In February 2020, we announced expanded results of the interim analysis of KD025-213, showing that ORRs were consistent across key subgroups, including in patients with four or more organs affected by cGVHD (n=69; 64%) and patients who had no response to their last line of treatment (n=74; 68%). Responses were observed in all affected organ systems, including in organs with fibrotic disease. KD025 has been well tolerated and adverse events have been consistent with those expected in the patient population. Additional secondary endpoints, including duration of response, corticosteroid dose reductions, Failure-Free Survival, Overall Survival and Lee Symptom Scale reductions continue to mature and will be available later in 2020 

Further, in December 2019, we presented two-year follow-up data from our ongoing Phase 2a clinical trial of KD025 in cGVHD (KD025-208). The data showed continued patient benefit, with an ORR of 65% across all three dose cohorts. Responses were observed in all affected organ systems, including organs with fibrotic disease. Kaplan-Meier median duration of response was 35 weeks. KD025 was well tolerated, with no increased risk of infection observed. Twenty-four percent of the patients in the trial had remained on KD025 therapy for more than one-and-a-half years as of June 30, 2019. 

We also initiated a double-blind, placebo-controlled Phase 2 clinical trial of KD025 for the treatment of systemic sclerosis, a life-threatening autoimmune disease characterized by chronic inflammation, fibrosis and vascular damage, in 2019.

In October 2019, we entered into a transaction pursuant to which we sold approximately 1.4 million ordinary shares of MeiraGTx Holdings plc (“MeiraGTx”) for gross proceeds of $22.0 million. After consummation of the transaction, we held approximately 5.7% of the outstanding ordinary shares of MeiraGTx with a fair value of $42.0 million recorded as a current investment in equity securities at December 31, 2019. The fair value of our investment in MeiraGTx is subject to market conditions and may be volatile and fluctuate substantially.

In November 2019, we raised $101.6 million ($95.0 million net of $6.6 million of underwriting discounts and other offering expenses payable by us) from the issuance of 29,900,000 shares of common stock at a price of $3.40 per share (“2019 Public Offering”). Additionally, in November 2019, the Company repaid in full all amounts outstanding under the 2015 Credit Agreement and the Company no longer maintains any outstanding debt.

 

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Our operations to date have been focused on developing first‑in‑class innovative therapies for indications with significant unmet medical needs while leveraging our commercial infrastructure. We have never been profitable and had an accumulated deficit of $333.1 million at December 31, 2019. Our net losses were $61.4 million and $54.3 million for the years ended December 31, 2019 and 2018, respectively. Although our commercial business generates revenue, we expect to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, hire additional personnel and initiate commercialization of any products that receive regulatory approval. We anticipate that our expenses will increase substantially if, or as, we:

·

invest significantly to further develop our most advanced product candidates, including KD025;

·

initiate clinical trials of KD033 and KD045 and preclinical studies for our other product candidates;

·

seek regulatory approval for our product candidates that successfully complete clinical trials;

·

continue to invest in our research platforms;

·

seek to identify additional product candidates;

·

scale up our sales, marketing and distribution infrastructure and product sourcing capabilities;

·

acquire or in‑license other product candidates and technologies;

·

scale up our operational, financial and management information systems and personnel, including personnel to support our product development;

·

make milestone or other payments under any in‑license agreements; or

·

maintain, expand and protect our intellectual property portfolio

Components of Statement of Operations

Revenue

Our revenue is derived from sales of our portfolio of products, including CLOVIQUE and products obtained from Camber Pharmaceuticals, Inc. (“Camber”) pursuant to our terminated supply and distribution agreement with Camber, licensing revenue related to our strategic partnerships, and service revenue from our sublease agreements with MeiraGTx. No meaningful revenue has been generated from sales of our other products. Revenue in 2019 primarily includes the recognition of licensing fees related to our strategic partnership with BioNova Pharmaceuticals Ltd. (“BioNova”), pursuant to which we and BioNova formed a joint venture to develop KD025 in China.

Cost of Sales

Cost of sales consists of product costs, including ingredient costs and costs of contract manufacturers for production, and shipping and handling of the products. Also included are costs related to quality release testing and stability testing of the products. Other costs included in cost of sales are packaging costs, warehousing costs and certain allocated costs related to management, facilities and other expenses associated with supply chain logistics.

Research and development expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

·

license fees related to our license and collaboration agreements;

·

research and development‑based employee‑related expenses, including salaries, benefits, travel and other compensation expenses;

·

expenses incurred under our agreements with contract research organizations that conduct nonclinical and preclinical studies, and clinical sites and consultants that conduct our clinical trials;

·

costs associated with regulatory filings;

·

costs of laboratory supplies and the acquisition, development and manufacture of preclinical and clinical study materials and study drugs; and

·

allocated facility-related expenses.

Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, including timing of initiation of clinical trials and enrollment of patients in clinical trials.

 

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We do not allocate personnel‑related costs, including share‑based compensation, costs associated with broad technology platform improvements and other indirect costs to specific product candidates. We do not allocate these costs to specific product candidates because they are deployed across multiple overlapping projects under development, making it difficult to specifically and accurately allocate such costs to a particular product candidate. 

The successful development of our product candidates is highly uncertain and subject to numerous risks including, but not limited to:

·

the scope, rate of progress and expense of our research and development activities;

·

clinical trial results;

·

the scope, terms and timing of regulatory approvals;

·

the expense of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

·

the cost, timing and our ability to acquire sufficient clinical and commercial supplies for any product candidates and products that we may develop; and

·

the risks disclosed in the section entitled “Risk Factors” in this Annual Report on Form 10-K.

A change in the outcome of any of these variables could mean a significant change in the expenses and timing associated with the development of any product candidate.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of salaries and related costs for non‑research personnel, including stock‑based compensation and travel expenses for our employees in executive, operational, finance, legal, commercial, regulatory, pharmacovigilance and human resource functions. Other selling, general and administrative expenses include facility‑related costs, lease expense, business insurance, director compensation, accounting and legal services, consulting costs and programs and marketing costs to support the commercial business.

Other income (expense)

Other income (expense) is comprised of interest income earned on cash and cash equivalents and restricted cash, interest expense on our outstanding indebtedness, and amortization of debt discount, debt premium and deferred financing costs associated with our indebtedness through November 2019 when the indebtedness was repaid in full.

Other income (expense) includes realized and unrealized gains on equity securities. The realized gains represent the total gains on our investment in MeiraGTx sold since MeiraGTx’s IPO in June 2018. The unrealized gains on equity securities consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held.

Other income also includes gains and losses arising from changes in fair value of our financial instruments are recognized in other income in the consolidated statements of operations. Such financial instruments include warrant liabilities which are exercisable and redeemable at the option of the holder upon the occurrence of, and during the continuance of, an event of default under the warrant agreement. The change in fair value is based upon the fair value of the underlying security at the end of each reporting period, as calculated using the Black‑Scholes option pricing model.

In addition, we operate in currencies other than the U.S. dollar to fund research and development and commercial activities performed by various third‑party vendors. The translation of these currencies into U.S. dollars results in foreign currency gains or losses, depending on the change in value of these currencies against the U.S. dollar, which are included in other income.

Income taxes

At December 31, 2019 and 2018, we had a deferred tax liability of $0.5 million and $0.4 million, respectively, and a full valuation allowance for our deferred tax assets. As of December 31, 2019, we have unused federal and state net operating loss (“NOL”) carryforwards of $371.1 million and $307.2 million, respectively, that may be applied against and reduce future taxable income. We recorded a valuation allowance to fully offset the gross deferred tax asset, because it is more likely than not that we will not realize future benefits associated with these deferred tax assets at December 31, 2019 and 2018. These NOL carryforwards expire at various dates through December 31, 2037, with the exception of approximately $79.9 million of federal net operating loss carryforwards which will not expire.

The use of our NOL carryforwards may, however, be subject to limitations as a result of an ownership change. A corporation undergoes an “ownership change,” in general, if a greater than 50% change (by value) in its equity ownership by one or more five‑percent stockholders (or certain groups of non‑fivepercent stockholders) over a three‑year period occurs. After such an ownership change, the corporation’s use of its pre‑change NOL carryforwards and other pre‑change tax attributes to offset its post‑change income is subject to an annual limitation determined by the equity value of the corporation

 

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on the date the ownership change occurs multiplied by a rate determined monthly by the Internal Revenue Service. We experienced ownership changes under Section 382 of the Code in 2010, 2011 and 2016, but we did not reduce the gross deferred tax assets related to the NOL carryforwards because the limitations do not hinder our ability to potentially utilize all of the NOL carryforwards. We also experienced another ownership change in 2019, as a result of equity offerings. This ownership change reduced our ability to fully utilize all of our NOL carryforwards and, consequently, we reduced the gross deferred tax assets related to our NOL carryforwards by $125.2 million. 

Critical Accounting Policies and Significant Judgments and Estimates

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 accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reporting amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to investments, goodwill, fair value of financial instruments, share‑based compensation and accrued expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe to be 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. If actual results for the critical accounting estimates listed below varied from our estimates, it could significantly impact our financial results. We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods presented. While our significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies” of the notes to our consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgements and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board’s, or FASB, Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers.  Accordingly, revenue is recognized when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC Topic 606, we perform the following five steps:

i.

identify the contract(s) with a customer;

ii.

identify the performance obligations in the contract;

iii.

determine the transaction price;

iv.

allocate the transaction price to the performance obligations; and

v.

recognize revenue when (or as) performance obligations are satisfied

We only apply the five-step model to contracts when we determine that it is probable we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Any amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in our balance sheet.  Any amounts which are deferred and are expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue.  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.

Our revenues have primarily been generated through product sales, collaborative research, development and commercialization license agreements and other service agreements.  The terms of these license agreements typically may include payment to us of one or more of the following:  nonrefundable, up-front license fees, research, development and commercial milestone payments; and other contingent payments due based on the activities of the counterparty or the reimbursement by licensees of costs associated with patent maintenance.  Each of these types of revenue are recorded as license revenues in our statement of operations.

In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each arrangement, we perform the following steps:

 

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i.

identify the promised goods and services in the contract;

ii.

determine whether the promised goods or services are performance obligations, including whether they are distinct within the context of the contract;

iii.

measure the transaction price, including the constraint on variable consideration;

iv.

allocate the transaction price to the performance obligations; and

v.

recognize revenue when (or as) performance obligations are satisfied

See Note 11, “License Agreements” for additional details regarding our license arrangements. 

As part of the accounting for these arrangements, we allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling price may be, but is not presumed to be, the contract price. In determining the allocation, we maximize the use of observable inputs.  When the stand-alone selling price of a good or service is not directly observable, we estimate the stand-alone selling price for each performance obligation using assumptions that require judgment. Acceptable estimation methods include, but are not limited to: (i) the adjusted market assessment approach, (ii) the expected cost plus margin approach, and (iii) the residual approach (when the stand-alone selling price is not directly observable and is either highly variable or uncertain). In order for the residual approach to be used, we must demonstrate that (a) there are observable stand-alone selling prices for one or more of the performance obligations and (b) one of the two criteria in ASC 606-10- 32-34(c)(1) and (2) is met. The residual approach cannot be used if it would result in a stand-alone selling price of zero for a performance obligation as a performance obligation, by definition, has value on a stand-alone basis. 

An option in a contract to acquire additional goods or services gives rise to a performance obligation only if the option provides a material right to the customer that it would not receive without entering into that contract. Factors that we consider in evaluating whether an option represents a material right include, but are not limited to: (i) the overall objective of the arrangement, (ii) the benefit the collaborator might obtain from the arrangement without exercising the option, (iii) the cost to exercise the option (e.g. priced at a significant and incremental discount) and (iv) the likelihood that the option will be exercised. With respect to options determined to be performance obligations, we recognize revenue when those future goods or services are transferred or when the options expire. 

Our revenue arrangements may include the following: 

Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with 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 for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. 

Milestone Payments: At the inception of an agreement that includes research and development milestone payments, we evaluate whether each milestone is considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license revenues and earnings in the period of adjustment. 

Research and Development Activities: If we are entitled to reimbursement from our collaborators for specified research and development activities or the reimbursement of costs associated with patent maintenance, we determine whether such funding would result in license revenues or an offset to research and development expenses.

Royalties: If we are entitled to receive sales-based royalties from our collaborator, including milestone payments based on the level of sales, and 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, provided the reported sales are reliably measurable, 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 royalty revenue resulting from any of our collaboration and license arrangements. 

 

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Manufacturing Supply and Research Services: Arrangements that include a promise for future supply of drug substance, drug product or research services at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If we are entitled to additional payments when the licensee exercises these options, any additional payments are recorded in license revenues when the licensee obtains control of the goods, which is upon delivery, or as the services are performed. 

We receive payments from our licensees based on schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt, and may require deferral of revenue recognition to a future period until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. 

Share‑based compensation expense

We are required to estimate the grant-date fair value of stock options and stock appreciation rights issued to employees and recognize this cost over the period these awards vest. We estimate the fair value of each stock option granted using the Black-Scholes option pricing model. The Black-Scholes model requires the input of assumptions, including the expected stock price volatility, the calculation of expected term and the fair value of the underlying common stock on the date of grant, among other inputs. Generally, we have issued stock options that vest over time. For these awards, we record compensation cost on a straight-line basis over the vesting period. We calculate the fair value of the award on the grant date, which is the date the award is authorized by the board of directors and the employee has an understanding of the terms of the award. 

The assumptions relating to the valuation of our options granted for the years ended December 31, 2019 and 2018 are shown below. The table does not include Performance Options.





 

 

 

 



 

 

 

 



 

Years Ended



 

December 31, 2019

 

December 31, 2018

Weighted average fair value of grants

 

$2.07

 

$1.69

Expected volatility

 

75.96% - 77.73%

 

72.94% - 75.92%

Risk-free interest rate

 

1.41% - 2.61%

 

2.44% - 2.90%

Expected life

 

5.5 - 6.0 years

 

5.5 - 6.0 years

Expected dividend yield

 

0%

 

0%



The following table summarizes by grant date the number of shares subject to options granted since January 1, 2018, the per share exercise price of the options, the fair value of common stock underlying the options on date of grant and the per share estimated fair value of the options:



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Grant Date

 

Number of Shares
Subject to
Options Granted

 

Per Share
Exercise Price
of Options

 

Fair Value of
Common Stock
per Share on
Date of
Option Grant

 

Per Share
Estimated
Fair Value
of Options

February 19, 2018

 

2,000 

 

$

3.63 

 

$

3.63 

 

$

2.42 

March 16, 2018

 

3,077 

 

$

4.48 

 

$

4.48 

 

$

2.05 

April 3, 2018

 

1,597,500 

 

$

4.06 

 

$

4.06 

 

$

2.71 

April 10, 2018

 

40,000 

 

$

4.22 

 

$

4.22 

 

$

2.83 

May 9, 2018

 

2,000 

 

$

3.96 

 

$

3.96 

 

$

2.66 

June 25, 2018

 

33,847 

 

$

3.88 

 

$

3.88 

 

$

1.67 

July 27, 2018

 

200,000 

 

$

3.35 

 

$

3.35 

 

$

2.16 

December 14, 2018

 

1,829,500 

 

$

2.47 

 

$

2.47 

 

$

1.62 

January 22, 2019

 

64,935 

 

$

2.27 

 

$

2.27 

 

$

1.54 

February 6, 2019

 

64,935 

 

$

2.27 

 

$

2.27 

 

$

1.54 

February 8, 2019

 

400,000 

 

$

2.17 

 

$

2.17 

 

$

1.48 

May 15, 2019

 

664,103 

 

$

2.29 

 

$

2.29 

 

$

1.51 

May 22, 2019

 

100,000 

 

$

2.25 

 

$

2.25 

 

$

1.48 

August 30, 2019

 

300,000 

 

$

2.14 

 

$

2.14 

 

$

1.42 

November 19, 2019

 

1,350,000 

 

$

4.15 

 

$

4.15 

 

$

2.76 



 

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Expenses Accrued Under Contractual Arrangements with Third Parties; Accrued Clinical Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.



We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing expenses, we estimate the time period over which services will be performed and the level of effort to be expended in each period, which is based on an established protocol specific to each clinical trial. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.



To date, we have not experienced significant changes in our estimates of accrued research and development expenses following each applicable reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information regarding the status or conduct of our clinical studies and other research activities.



Investment in Equity Securities 

Equity securities consist of investments in common stock of companies traded on public markets (see Note 10 of the notes to our audited consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K). These shares are carried on our balance sheet at fair value based on the closing price of the shares owned on the last trading day before the balance sheet of this report. Fluctuations in the underlying bid price of the shares result in unrealized gains or losses. In accordance with FASB ASC 321, Investments – Equity Securities (“ASC 321”), we recognize these fluctuations in value as other expense (income). For investments sold, we recognize the gains and losses attributable to these investments as realized gains or losses in other expense (income).

Our total investment balance in equity securities totaled $42.0 million at December 31, 2019, all of which related to our investment in MeiraGTx’s common stock. 

Recent Accounting Pronouncements 

See Note 2 “Summary of Significant Accounting Policies,” of the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recently issued and adopted accounting pronouncements. 



 

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Results of Operations



 

 

 

 

 

 



 

 

 

 

 

 



 

Years Ended December 31,



 

2019

 

2018



 

(in thousands)

Revenues

 

 

 

 

 

 

Net sales

 

$

420 

 

$

691 

License and other revenue

 

 

4,675 

 

 

705 

Total revenue

 

 

5,095 

 

 

1,396 

Cost of sales

 

 

377 

 

 

412 

Write-down of inventory

 

 

912 

 

 

270 

Gross profit

 

 

3,806 

 

 

714 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

56,461 

 

 

48,966 

Selling, general and administrative

 

 

36,425 

 

 

37,644 

Total operating expenses

 

 

92,886 

 

 

86,610 

Loss from operations

 

 

(89,080)

 

 

(85,896)

Other income

 

 

27,758 

 

 

31,120 

Income tax expense (benefit)

 

 

46 

 

 

(524)

Net loss

 

$

(61,368)

 

$

(54,252)

Deemed dividend on convertible preferred stock

 

 

2,058 

 

 

2,011 

Net loss attributable to common stockholders

 

$

(63,426)

 

$

(56,263)



Comparison of the years ended December 31, 2019 and 2018

Revenues

Total revenue for 2019 increased by 264.3% as compared to 2018 primarily due to a $4.0 million milestone payment earned pursuant to a joint venture and license agreement entered into with BioNova and BK Pharmaceuticals Limited to develop KD025 in China (see Note 11 of the notes to our audited consolidated financial statements in Part IV, Item 15 of this Annual Report on Form 10-K).

Cost of sales and write-down of inventory

The decrease in cost of sales was primarily attributable to the decline in net sales revenue for the year ended December 31, 2019 as compared to the year ended December 31, 2018.  

The increase in inventory write-downs during the year ended December 31, 2019 as compared to the year ended December 31, 2018 was related to write-downs of our CLOVIQUE inventory based on our expectation that such inventory will not be sold prior to reaching its product expiration date.

Research and development expenses

Research and development expenses increased by 15.3% for the year ended December 31, 2019 as compared the year ended December 31, 2018. The increase of approximately $7.5 million in research and development expense for 2019 was primarily related to direct external costs of developing our lead product candidate, KD025. For the years ended December 31, 2019 and 2018, we recognized expense of $18.3 million and $10.1 million, respectively, for KD025. There was no significant change in our expense related to developing our other product candidates across multiple projects in 2019 as compared to 2018.

 

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Other income

The following table provides components of other income (expense):





 

 

 

 

 

 



 

 

 

 

 

 



 

Years Ended December 31,



 

2019

 

2018



 

(in thousands)

Interest expense

 

$

(2,816)

 

$

(3,565)

Amortization of deferred financing costs, debt discount and debt premium

 

 

(565)

 

 

(1,054)

Change in fair value of financial instruments

 

 

(961)

 

 

1,525 

Unrealized gain on equity securities

 

 

7,922 

 

 

34,075 

Realized gain on equity securities

 

 

22,000 

 

 

 —

Loss on equity method investment

 

 

 —

 

 

(1,242)

Interest income

 

 

2,067 

 

 

1,307 

Other income

 

 

111 

 

 

74 

Other income

 

$

27,758 

 

$

31,120 

For the years ended December 31, 2019 and 2018,  other income consisted primarily of unrealized and realized gains related to our investment in MeiraGTx ordinary shares as well as interest income. Interest expense and other costs related to our debt decreased in 2019 as the Company repaid its debt in full in November 2019. See Note 10 “Investment in MeiraGTx,” of the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details related to the Company’s investment in equity securities.

Income taxes

 For the year ended December 31, 2019, we recorded an income tax expense of less than $0.1 million related to an adjustment to the deferred tax liability. 



The Tax Cuts and Jobs Act (the “TCJA”) was enacted in December 2017. In accordance with the TCJA, the Company determined it necessary to reduce the recorded deferred tax liability by $0.6 million during the second quarter of 2018 to allow naked credit deferred tax liabilities to be used as a source of taxable income in the future. The change in deferred tax liability has been recognized as income tax benefit in the consolidated financial statements of operations for the year ended December 31, 2018.

Deemed Dividend

We have 28,708 shares of 5% convertible preferred stock outstanding, which accrue dividends at a rate of 5% and convert into shares of our common stock at $9.60 per share. In May 2019, the holders of 1,292 shares of 5% convertible preferred stock exercised their right to convert their convertible preferred shares into 154,645 shares of the Company’s common stock. We accrued dividends, inclusive of a beneficial conversion feature on the accrued dividends, on the 5% convertible preferred stock during each of the years ended December 31, 2019 and 2018.

 

 

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Liquidity and Capital Resources

Overview

We had an accumulated deficit of $333.1 million, working capital of $155.9 million, and cash and cash equivalents of $139.6 million at December 31, 2019.  Net cash used in operating activities was $80.1 million and $71.2 million for the years ended December 31, 2019 and 2018, respectively. 



In November 2019, we raised $101.6 million ($95.0 million net of $6.6 million of underwriting discounts and other offering expenses payable by us) from the issuance of 29,900,000 shares of common stock at a price of $3.40 per share. Additionally, in November 2019, we repaid in full all amounts outstanding under our credit agreement with Perceptive Credit Opportunities Fund, L.P., as amended, and we no longer maintain any outstanding debt.

In October 2019, we entered into a transaction pursuant to which we sold approximately 1.4 million ordinary shares of MeiraGTx for gross proceeds of $22.0 million. After consummation of the transaction, we held approximately 5.7% of the outstanding ordinary shares of MeiraGTx with a fair value of $42.0 million recorded as a current investment in equity securities at December 31, 2019.

We filed a shelf registration statement on Form S-3 (File No. 333-233766) on September 13, 2019, which was declared effective by the Securities Exchange Commission (“SEC”) on September 24, 2019. Under this registration statement, we may sell, in one or more transactions, up to $200.0 million of common stock, preferred stock, debt securities, warrants, purchase contracts and units, an amount which includes $50.0 million of shares of its common stock that may be issued in one or more “at-the-market” placements at prevailing market prices under our Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”). We had sold securities totaling an aggregate of $101.6 million pursuant to this registration statement as of December 31, 2019.

 

In April 2019, we sold 2,538,100 shares of common stock at a price of $2.70 per share and received total gross proceeds of $6.9 million ($6.7 million net of $0.2 million of commissions payable by us) and in January 2019, we sold 13,778,705 shares of common stock at a weighted average price of $2.17 per share and received total gross proceeds of $29.9 million ($29.0 million net of $0.9 million of commissions payable by us). These sales were effected pursuant to our registration statement on Form S-3 (File No. 333-222364), which was declared effective by the SEC on January 10, 2018, under the Sales Agreement.



Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We have not established a source of revenues sufficient to cover our operating costs, and as such, have been dependent on funding operations through the issuance of debt and sale of equity securities. Since inception, we have experienced significant loses and incurred negative cash flows from operations. We expect to incur further losses over the next several years as we develop our business. We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy, including our planned product development efforts, preparation for our planned clinical trials, performance of clinical trials and our research and discovery efforts.



Our cash and cash equivalents available at December 31, 2019 was $139.6 million, which is expected to enable us to advance our planned Phase 2 clinical studies for KD025, advance certain of our other pipeline product candidates, including KD033 and KD045, and provide for other working capital purposes. Although cash and cash equivalents will be sufficient to fund the foregoing, cash and cash equivalents will not be sufficient to enable us to meet our long-term expected plans, including commercialization of clinical pipeline products, if approved, or initiation or completion of future registrational studies. Following the completion of our ongoing and planned clinical trials, we will likely need to raise additional capital within one year of the issuance of this report to fund continued operations.  We have no commitments for any additional financing and may not be successful in our efforts to raise additional funds or achieve profitable operations. Any amounts raised will be used for further development of our product candidates, to provide financing for marketing and promotion, to secure additional property and equipment, and for other working capital purposes.



If we are unable to obtain additional capital (which is not assured at this time), our long-term business plan may not be accomplished and we may be forced to curtail or cease operations. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments or classifications that may result from our possible inability to continue as a going concern.



 

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Sources of Liquidity

Since our inception through December 31, 2019, we have raised net proceeds from the issuance of equity and debt.

The following table sets forth the primary sources and uses of cash and cash equivalents for each period set forth below:



 

 

 

 

 



 

 

 

 

 

   

Year Ended



December 31,



2019

 

2018



(in thousands)

Net cash provided by (used in):

 

 

 

 

 

Operating activities

$

(80,067)

 

$

(71,227)

Investing activities

 

21,485 

 

 

(864)

Financing activities

 

103,439 

 

 

99,314 

Net increase in cash, cash equivalents and restricted cash

$

44,857 

 

$

27,223 



Operating Activities

The net cash used in operating activities was $80.1 million for the year ended December 31, 2019, and consisted primarily of a net loss of $61.4 million adjusted for $15.1 million in non‑cash items and a net decrease in operating assets and liabilities of $3.7 million. The net loss, adjusted for non‑cash items, was primarily driven by selling, general and administrative expenses of $26.3 million, research and development expense related to the advancement of our clinical product candidates of $54.2 million and interest paid on our debt of $2.7 million.

The net cash used in operating activities was $71.2 million for the year ended December 31, 2018, and consisted primarily of a net loss of $54.3 million adjusted for $21.6 million in non‑cash items, as well as, a net increase in operating assets and liabilities of $4.7 million. The net loss, adjusted for non‑cash items, was primarily driven by selling, general and administrative expenses of $28.8 million, research and development expense related to the advancement of our clinical product candidates of $45.9 million and interest paid on our debt of $3.6 million, partially offset by the net sales less cost of sales primarily from Camber products of $0.3 million.

Investing Activities

Net cash provided by (used in) investing activities was $21.5 million and ($0.9) million for the years ended December 31, 2019 and 2018, consisting of proceeds from the sale of a portion of our investment in MeiraGTx of $22.0 million and for 2018 primarily consist of costs related to the purchase lab equipment and in‑house software purchased to support our clinical and research operations.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2019 was $103.4 million, consisting primarily of net proceeds from the issuance of common stock in our 2019 Public Offering and the 2019 placements under our Sales Agreement, together totaling $130.8 million, partially offset by principal payments on our secured term debt of $28.0 million.

Net cash provided by financing activities for the year ended December 31, 2018 was $99.3 million, consisting primarily of net proceeds from the issuance of common stock in a public offering of $105.8 million, partially offset by principal payments on our secured term debt of $6.6 million.

Future Funding Requirements

We expect our expenses to increase compared to prior periods in connection with our ongoing activities, particularly as we continue research and development, continue and initiate clinical trials and seek regulatory approvals for our product candidates. In anticipation of regulatory approval for any of our product candidates, we expect to incur significant pre‑commercialization expenses related to product sales, marketing, distribution and manufacturing.

The expected use of our cash and cash equivalents at December 31, 2019 represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of, and results from, clinical trials, the potential need to conduct additional clinical trials to obtain approval of our product candidates for all intended indications, as well as any additional collaborations that we may

 

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enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of our existing cash and cash equivalents. In addition, we anticipate the need to raise additional funds from the issuance of additional equity, and our management will retain broad discretion over the allocation of those funds as well.

 

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2019:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Payments due by period (in thousands)



 

 

 

 

Less than

 

 

 

 

 

 

 

More than



 

Total

 

1 year

 

1 - 3 years

 

3 - 5 years

 

5 years