Item 1. Business.
When used in this report, the terms, “we,”
the “Company,” “our,” and “us” refers to Neurotrope, Inc., a Nevada corporation (formerly BlueFlash
Communications, Inc., a Florida corporation) (“Neurotrope”), and its subsidiary Neurotrope Bioscience, a Delaware corporation
(“Neurotrope BioScience”).
Overview
We
are a biopharmaceutical company with product candidates in pre-clinical and clinical development. Neurotrope BioScience began
operations in October 2012. We are principally focused on developing a product platform based upon a drug candidate called bryostatin
for the treatment of Alzheimer’s disease (“AD”), which is in the clinical testing stage. We are also developing
bryostatin for other neurodegenerative or cognitive diseases and dysfunctions, such as Fragile X and Niemann-Pick Type C, which
are in pre-clinical testing. Neurotrope has been a party to a technology license and services agreement with the original
Blanchette Rockefeller Neurosciences Institute (“BRNI”) (which has been known as Cognitive Research Enterprises, Inc.
(“CRE”) since October 2016), and its affiliate NRV II, LLC, which we collectively refer to herein as “CRE,”
pursuant to which we now have an exclusive non-transferable license to certain patents and technologies required to develop our
proposed products. Neurotrope BioScience was formed for the primary purpose of commercializing the technologies initially
developed originally by BRNI for therapeutic applications for AD or other cognitive dysfunctions. These technologies have been
under development by BRNI since 1999 and, until March 2013, had been financed through funding from a variety of non-investor sources
(which include not-for-profit foundations, the National Institutes of Health, which is part of the U.S. Department of Health and
Human Services, and individual philanthropists). From March 2013 forward, development of the licensed technology has been funded
principally through Neurotrope BioScience in collaboration with CRE.
According to the Alzheimer’s Association,
an estimated 36 million people worldwide had AD in 2015. The prevalence of AD is independent of race, ethnicity, geography, life
style and, to a large extent, genetics. The most common cause of developing AD is old age. In developing countries, where the median
age of death is less than 65 years old, AD is rarely recognized or diagnosed. In the U.S., 5.3 million people were estimated to
have AD in 2015, and 96% of these people were older than 65 years of age.
Researchers have explored and continue to explore
a wide range of drug mechanisms in hopes of developing drugs to combat AD. We believe that our approach, which involves the activation
of an enzyme called protein kinase C epsilon (“PKCε”), represents a novel mechanism in potential AD drug therapies.
Bryostatin-1, our lead PKC epsilon activator, has in animal studies demonstrated potential for multi-modal efficacies: prevention
of neuronal death, generation of new synaptic networks, anti-amyloid oligomers and plaques, anti-tau and neurofibrillary tangles,
and cognitive enhancement.
CRE conducted an expanded access program, formerly
known as compassionate use, of bryostatin-1 in patients with advanced AD. Five patients were treated, four of which were treated
under an Investigational New Drug Application (“IND”), cleared by the U.S. Food and Drug Administration (the “FDA”).
The IND was initially held by CRE and was transferred to Neurotrope on February 4, 2015. One of these patients, who had familial
AD, has died, but the death was not drug-related. Treatment of another one of these patients concluded after almost one year on
the protocol. We have provided limited funding, study drug, and personnel support under the terms of our agreement with CRE for
this modest expansion of our clinical effort in AD during the 2016 timeframe.
In October 2015, we announced the initiation
of a Phase 2 clinical trial to evaluate bryostatin for the treatment of patients with moderately severe to severe AD. We have completed
enrollment, randomization and dosing of 148 patients in this double-blind, placebo-controlled study at 29 sites in the United States.
The primary objective of the clinical trial is to assess the safety along with preliminary evaluation of efficacy of two doses
of bryostatin in the patient population. We believe
bryostatin may restore synaptic structures and functions damaged by AD, leading to improvements in cognition and memory. Beyond
AD, we believe that several other neurologic diseases, such as Fragile X Syndrome and Niemann Pick Type C Disease (both of which
we are pursuing), ischemic stroke, traumatic brain injury, depression and aging in the brain, may be amenable to treatment with
bryostatin. In August 2016, we announced that we submitted to the FDA an amended protocol for our Phase 2 clinical trial of
lead candidate bryostatin-1 for the treatment of advanced AD. As planned in the original protocol, the primary efficacy outcome
will occur at Week 13, and does not change with the amendment. The primary efficacy endpoint is based on the Severe Impairment
Battery scale, a well-validated assessment used extensively in severe AD drug trials. Secondary efficacy endpoints include Activities
of Daily Living, Neuropsychiatric Inventory and Mini-Mental State Exam. As a result of the amendment, we expect to report top line
data in the second quarter of 2017.
To
the extent resources permit, we intend to pursue development of selected technology platforms with applications related to the
treatment of AD and other neurodegenerative disorders based on our current licensed technology or technology available from third
party licensors or collaborators.
Financings to Date
In February 2013, through a private placement,
Neurotrope BioScience issued 9,073,300 shares of its Series A convertible preferred stock (“Neurotrope BioScience Series
A Stock”), at $1.00 per share, resulting in gross proceeds of $9,073,300. In May 2013, Neurotrope BioScience issued an additional
1,313,325 shares of Neurotrope BioScience Series A Stock at $1.00 per share, resulting in gross proceeds of $1,313,325. In August
2013, Neurotrope BioScience issued 11,533,375 of Neurotrope BioScience Series A Stock at $1.00 per share, resulting in gross proceeds
of $11,533,375. All of the outstanding shares of Neurotrope BioScience Series A Stock were converted on a one-for-one basis into
shares of Neurotrope, Inc.’s Series A convertible preferred stock, par value $0.0001 per share (“Series A Stock”),
in connection with the Reverse Merger (as defined below) in August 2013. In October 2013, we issued 1,080,000 additional shares
of our Series A Stock at $1.00 per share, resulting in gross proceeds of $1,080,000, for a total of $23,000,000 of gross proceeds
raised between February and October 2013.
In a November 2015 private placement, we sold
units consisting of our Series B convertible preferred stock, par value $0.0001 per share (the “Series B Stock”), together
with Series A warrants to purchase shares of our common stock (“Series A Warrants”), Series B warrants to purchase
shares of our common stock (“Series B Warrants”), Series C warrants to purchase shares of our common stock (“Series
C Warrants”), Series D warrants to purchase shares of our common stock (“Series D Warrants”) and Series E warrants
to purchase shares of our common stock (“Series E Warrants” and, together with the Series A Warrants, Series B Warrants,
Series C Warrants and Series D Warrants, the “Series A-E Warrants”), and certain placement agent warrants, resulting
in gross proceeds of $15,640,963 (the “November 2015 Private Placement”). The private placement was completed in two
closings, which took place on November 13, 2015 and November 30, 2015. In connection with this private placement, effective as
of November 13, 2015, the holders of all 16,656,894 shares of our Series A Stock converted their shares into 620,781 shares of
our common stock, which included 100,253 shares of our common stock issued in accordance with anti-dilution rights of the Series
A Stock.
In a November 2016 private placement, we sold
3,828,754 shares of common stock and warrants to purchase an equivalent number of shares of our common stock, with an exercise
price of $12.80 per share (subject to adjustment), for a period of five years from the date of issuance (the “Series F Warrants”),
at a purchase price of $6.40 per share of common stock and Series F Warrant, resulting in gross proceeds of approximately $24.5
million (the “November 2016 Private Placement”). The private placement was completed in two closings, which took place
on November 17, 2016 and November 22, 2016.
In connection with the November 2016 Private
Placement, on November 17, 2016, we filed with the Secretary of State of the State of Nevada an Amendment to our Certificate of
Designations, Preferences and Rights of Series B Preferred Stock (the “Series B COD Amendment”), originally filed November
13, 2015 with the Secretary of State of the State of Nevada, as corrected by the Certificate of Correction filed November 19, 2015
with the Secretary of State of the State of Nevada (as so corrected, the “Certificate of Designation”). The Series
B COD Amendment (i) provided that the Company’s entry into a binding securities purchase agreement, by and among the Company
and the investors signatory thereto, in connection with a private placement of the Company’s common stock and warrants, that
results in at least $8,000,000 of aggregate gross proceeds to the Company (a “Private Placement”), shall result in
the automatic conversion of the Company’s Series B Stock into shares of the Company’s common stock at a conversion
price of $18.56 immediately prior to the initial closing of the Private Placement with aggregate gross proceeds to the Company
of at least $8,000,000 and (ii) amended the definition of “Excluded Securities” to include the issuance of the Company’s
common stock and warrants issued in any Private Placement. As a result of the November 2016 Private Placement, all of the issued
and outstanding shares of Series B Stock were converted into an aggregate of 825,962 shares of our common stock on November 17,
2016. The Series B COD Amendment was approved by the “Required Holders” as defined in the Certificate of Designation.
As a result of the mandatory conversion of the Series B Stock, the anti-dilution protection for dilutive issuances in the Series
A Warrants, the Series C Warrants and the Series E Warrants ceased to be effective pursuant to the terms of such warrants.
Pursuant to the purchase agreement entered
into in connection with November 2016 Private Placement, we agreed to reduce the exercise prices of certain of our outstanding
warrants to purchase shares of common stock that were issued in connection with the November 2015 Private Placement. Effective
as of November 18, 2016, the exercise price of each of the Series A Warrants and the Series C Warrants was reduced to $0.32 per
share and the exercise price of the Series E Warrants was reduced to $32.00 per share, in each case subject to adjustment as provided
in such Warrants.
In connection with the November 2016 Private
Placement, pursuant to a Placement Agency Agreement, dated October 13, 2016 (the “Placement Agency Agreement”), among
the Company, Katalyst Securities LLC (“Katalyst”) and GP Nurmenkari Inc. (“GP Nurmenkari,” and, together
with Katalyst, the “Placement Agents”), we agreed to pay the Placement Agents (i) a cash fee at each closing under
the purchase agreement equal to ten percent (10%) of each closing’s gross proceeds and (ii) warrants to purchase shares of
common stock at each closing under the purchase agreement equal to ten percent (10%) of the number of shares of common stock sold
in each closing, with an exercise price of $6.40 per share and a five-year term (the “Broker Warrants”). Such Warrants
became exercisable when our stockholders approved an amendment to our Articles of Incorporation to increase the number of authorized
shares and such amendment was filed in Nevada, which occurred on February 24, 2017.
Under the Placement Agency Agreement, we agreed
to amend certain warrants previously issued to the Placement Agents. Immediately following the receipt of at least $8,000,000 of
gross proceeds as part of the November 2016 Private Placement, the exercise price of the 70,119 unexercised placement agent Series
B Warrants and/or broker warrants issued by the Company as placement agent compensation to Katalyst, their registered representatives
and designees, assignees or successors in interest, in connection with the Company’s completed financing in November 2015
(collectively, the “Series B Broker Warrants”), was reduced to $0.32 per share of common stock, provided that the Series
B Broker Warrants that have their exercise price reduced shall not be exercisable for six months from the date of the initial closing
under the purchase agreement. Additionally, immediately following the receipt of at least $10,000,000 of gross proceeds as part
of the November 2016 Private Placement, the exercise price of the 41,416 unexercised placement agent Series A Warrants and/or broker
warrants issued by the Company as placement agent compensation to EDI Financial, Inc., Katalyst, their registered representatives
and designees, assignees or successors in interest, in connection with the Company’s completed financings in 2013 (collectively,
the “Series A Broker Warrants”) shall be reduced to $0.32 per share of common stock, provided that the Series A Broker
Warrants that have their exercise price reduced shall not be exercisable for one year from the date of the initial closing under
the purchase agreement. Accordingly, the exercise price of the Series A Broker Warrants and the Series B Broker Warrants has been
reduced to $0.32 per share of common stock as of November 23, 2016.
Organizational History
We were incorporated as BlueFlash Communications,
Inc. in Florida on January 11, 2011. Prior to the Reverse Merger (as defined below) and Split-Off (as defined below), our business
was to provide software solutions to deliver geo-location targeted coupon advertising to mobile internet devices.
On August 9, 2013, we reincorporated in the
State of Nevada by merging into a newly-formed special-purpose subsidiary, Neurotrope, Inc., which was incorporated on June 13,
2013, and was the surviving corporation in such reincorporation merger, or the Reincorporation Merger. As a result of the Reincorporation
Merger, (i) we changed our name to Neurotrope, Inc. and (ii) we changed our jurisdiction of incorporation from Florida to Nevada.
On August 23, 2013, our wholly-owned subsidiary,
Neurotrope Acquisition, Inc., or Acquisition Sub, a corporation formed in the State of Nevada on August 15, 2013 merged with and
into Neurotrope BioScience, a corporation incorporated in the State of Delaware on October 31, 2012. Neurotrope BioScience was
the surviving corporation in the merger, or the Reverse Merger, and became our wholly-owned subsidiary. All of the outstanding
shares of Neurotrope BioScience common stock, (“Neurotrope BioScience Common Stock”), were converted into shares of
our common stock, par value $0.0001 per share, and all of the outstanding shares of Neurotrope BioScience Series A Stock were converted
into shares of our Series A Stock, in each case on a one-for-one basis.
In connection with the Reverse Merger and pursuant
to a split-off agreement (the “Split-Off”), we transferred our pre-Reverse Merger business to Marissa Watson, our pre-Reverse
Merger majority stockholder, in exchange for the surrender and cancellation of certain shares of our common stock owned by her.
As a result of the Reverse Merger and Split-Off,
we discontinued our pre-Reverse Merger business and acquired the business of Neurotrope BioScience. Following the Reverse Merger
and Split-Off, we have undertaken the business operations of Neurotrope BioScience as a publicly-traded company under the name
Neurotrope, Inc., through Neurotrope BioScience, which is now our wholly-owned subsidiary.
In accordance with “reverse merger”
accounting treatment, our historical financial statements as of period ends, and for periods ended, prior to the Reverse Merger
were replaced with the historical financial statements of Neurotrope BioScience prior to the Reverse Merger in all applicable filings
with the Securities and Exchange Commission (the “SEC”).
On January 11, 2017, we effected a 1-for-32
reverse stock split of our shares of common stock. As a result of the reverse stock split, every thirty-two (32) shares of our
pre-reverse split common stock was combined and reclassified into one share of common stock. All references to common shares have
been retroactively adjusted to reflect the reverse stock split. In addition, our pre-reverse split 400,000,000 authorized shares
of common stock was proportionately reduced to 12,500,000 authorized shares of common stock as a result of the reverse stock split.
On February 24, 2017, we increased our authorized
common stock to 150,000,000 shares.
AD and the Potential Market for our Products
The Epidemic of AD
According to the Alzheimer’s Association,
it has been estimated that 36 million people worldwide had AD in 2015. The prevalence of AD is independent of race, ethnicity,
geography, lifestyle and, to a large extent, genetics. The most common cause of developing AD is living a long life. In developing
countries where the median age of death is less than 65 years old, AD is rarely recognized or diagnosed. In the United States in
2015, 5.3 million people are estimated to have AD, and approximately 96% of these people are older than 65 years of age.
Researchers continue to explore a wide range
of drug mechanisms in hopes of developing drugs to combat this disease.
Figure 1
illustrates the range of mechanisms
under consideration. Our approach, which involves the activation of the enzyme PKCε, represents a novel mechanism in the
armamentarium of potential AD drug therapies.
Figure 1. Different Pharmacologic Targets
being pursued for the Treatment of AD
1
It has been shown that, during several years
preceding the diagnosis of dementia associated with AD, there can be gradual cognition decline, which at first may have rather
benign characteristics. At this stage, known as mild cognitive impairment (“MCI”), 60% of these patients will convert
to early AD. In MCI, there can already be significant loss of synapses (the junctions between nerve cells) and compromised release
of the chemical messengers onto their post-synaptic targets
1
.
MCI, therefore, can transition into mild, moderate and, finally, severe stages of Alzheimer’s disease that are characterized
by greater systemic loss of neurons and synapses in the brain tissue. Multiple failures in acetylcholine and glutamate neurotransmitter
systems (neurotransmitters) may cause some of the symptoms of early AD, and thus these systems have become targets for pharmacologic
intervention.
1
Business Insights: Reference
Code B100040-005, Publication Date May 2011, “Advances in AD Drug Discovery”
In MCI and early AD, the amyloid load in the
brain may or may not increase while the symptoms of early AD begin to occur. Loss of neurons and synaptic networks can be accompanied
by abnormal processing of β amyloid (“Aβ”) peptide, causing elevation of the soluble Aβ oligomers, eventually
leading to the formation of Aβ plaques (protein deposits) in the brain.
The conventional amyloid cascade hypothesis
holds that amyloid pathology leads to hyperphosphorylated tau proteins (a protein found in nerve cells) being deposited within
neurons in the form of insoluble tangles, excitotoxicity (overstimulation of nerve cells by neurotransmitters), inflammation and
finally synaptic depletion and neuronal death. Other hypotheses suggest that AD begins earlier with dysfunctional tau metabolism
– independent of amyloid levels. However, the majority of drug development efforts during the past two decades have focused
on stopping the production of Aβ or its fragments, and the elimination of these peptides from either intracellular or extracellular
locations has represented the preponderance of drug design efforts to halt the progression of AD. However, these efforts have been
largely unsuccessful.
We believe the current failures of therapies
clearing formed amyloid plaques come from an incomplete view of the process. In our view, amyloid plaques and the tau-based neurofibrillary
tangles are pathologic hallmarks of AD, but cognitive deficits and synaptic loss can often occur in AD patients in the absence
of amyloid plaques. We believe the appearance of these plaques and tangles is not necessarily linked to the death of neurons or
synapses, and that the elimination of the plaques does not restore cognitive function as already demonstrated in extensive clinical
testing with pathologic correlates. However, we believe that the soluble amyloid pre-plaque oligomers, through their toxicity to
synapses and neurons, are important in the progression of the disease.
In animal studies, the scientific team
led by our Chief Scientific Officer, Dr. Alkon, at the Blanchette Rockefeller Neurosciences Institute, or BRNI (now
known CRE) found that PKCε activation in neurons targets the loss of synapses in the brains of animals with AD, and
can delay or temporarily arrest other elements of the disease, i.e. the elevation of the toxic Aβ peptide, the loss
of neurons, the appearance of plaques and tangles, and the loss of cognitive function.
Potential Market for Our Products
According to an article titled “Progress
in AD” published in The Journal of Neurology in 2012, there has been a dearth of new product introductions in the last 20
years either for the treatment of AD symptoms or its definitive diagnosis in patients who begin exhibiting the memory and cognitive
disorders associated with the disease. According to the Alzheimer’s Association, all of the products introduced to date for
the treatment of AD have yielded negative or marginal results with no long-term effect on the progression of AD and no improvement
in the memory or cognitive performance of the patients receiving these therapies. With 36 million people worldwide estimated to
have had AD in 2015, there is significant commercial potential for a new therapeutic that is effective in delaying the progression
of the disease.
We believe the markets for drugs or therapies
to treat the underlying pathology of AD exist largely, but not exclusively, in the developed world and principally comprise the
North American, European and Japanese markets. The aggregate AD market is subdivided into four distinct segments, which are shown
in
Figure 2
, as are the compounded annual growth rates (“CAGRs”) for these segments over the
2009-2014 timeframe.
Sales of the major drug therapies available
only by prescription are reported in
Figure 2
, which includes, among others, the acetylcholinesterase inhibitors (Exelon®,
Razadyne®, and Aricept®) and the glutamate antagonist, Namenda®.
2
These
drugs are approved for the symptomatic treatment of the cognitive aspects of AD, but have no meaningful effect on disease progression,
causing only temporary improvement in cognitive decline. Despite their limited efficacy, this group of drugs had collective worldwide
sales in 2011 in excess of approximately $6 billion, according to a BBC Research Report. The negative CAGR for this segment reflects
the fact that this class of drugs faces generic competition over the timeframe considered.
Figure 2. Global Market for AD ($ mm):
2009-2014
3
Market Segments
|
|
2009
|
|
|
2014
|
|
|
CAGR%
2009-14
|
|
Prescription Drugs for AD
|
|
|
5,947
|
|
|
|
5,211
|
|
|
|
-2.6
|
|
Diagnostics / Biomarkers
|
|
|
1,164
|
|
|
|
2,855
|
|
|
|
19.6
|
|
Therapeutics for Treatment of Symptoms
|
|
|
567
|
|
|
|
726
|
|
|
|
5.1
|
|
Imaging
|
|
|
361
|
|
|
|
852
|
|
|
|
18.7
|
|
Total
|
|
|
8,039
|
|
|
|
9,644
|
|
|
|
3.7
|
|
The “Therapeutics for Treatment of Symptoms”
category cited in
Figure 2
represents drugs from other classes that are being used to temporarily treat some of
the symptoms of AD.
4
Neurotrope’s Proposed Products
Challenges in Treating AD
One of the challenges in treating AD is that
its symptoms become manifest only years after the disease process can be definitely diagnosed. Treatment strategies attempting
to intervene once symptoms become more apparent are focused on stimulating the neurotransmitter activity of still healthy neurons,
or removing the amyloid plaque deposited in the brain. All drug development efforts to date that have targeted the removal of beta-amyloid
or tau protein as their therapeutic mechanism of action have failed, and drugs approved for stimulating neurotransmitter activity
offer short-lived, palliative results for AD patients. As such, these strategies have yielded negative or marginal results with
no effect on the progression of AD and no improvement in the memory or cognitive performance of the patients receiving these therapies.
2
Exelon is a registered
trademark of Novartis AG Corporation; Razadyne is a registered trademark of Johnson & Johnson Corporation; Aricept is a registered
trademark of Eisai R&D Management Co., Ltd. Corporation; and Namenda is a registered trademark of Merz Pharma GmbH & Co.
3
BCC Research
Report PHM062A AD Therapeutics and Diagnostics: Global Markets, January 2010. Available at
http://www.bccresearch.com/market-research/pharmaceuticals/alzheimers-disease-therapeutics-phm062a.html
.
4
See footnote
3.
Dying neurons and synapses have, to date, not
been therapeutic targets for restoration, and many in the AD field currently believe that stemming the progression of the disease
may only be possible with very early stage intervention. The FDA is encouraging the pharmaceutical industry to increase efforts
to investigate such early stage interventional treatments by recommending that modified clinical endpoints, both functional and
cognitive, be established to monitor the efficacy of drug prototypes being tested in early stage AD patients, according to an article
published in The New England Journal of Medicine.
5
In contrast, we believe that our data from
various preclinical animal models and compassionate use trials demonstrates that activation of PKCε in central nervous
system neurons improves neuronal vitality and function in areas of the brain damaged by AD, potentially resulting in the improvement
of memory and cognition.
Synaptogenesis
We believe that deficient activity or low concentrations
of PKCε in aging subjects is one of the main causes of the neurodegeneration seen in AD. The schematic in
Figure
3
illustrates only a portion of the changes mediated by PKCε, and how it may help reverse the neuronal damage
and loss central to the pathogenic process in AD.
Figure 3. PKCε Activation Involves
5 Different Mechanisms to Stop the Progression of AD
5
NEJM.org: The New England Journal of Medicine, March
15, 2013, page 1: Drug Development of Early AD, N. Kozauer, M.D., and Russell Katz, M.D.
Activation of PKCε has been achieved
with drug prototypes that mimic the activity of diacylglycerol and phosphatidylserine, which are the natural binding targets for
this enzyme. In addition, a variety of in vitro and in vivo animal models have demonstrated that these drug prototypes are effective
in restoring the structure and function of neuronal synapses. Our first clinical application of the PKCε activators is
focused on the treatment of AD, but a number of other neurodegenerative diseases may be amenable to similar treatment. A list of
these potential future drug targets is shown in
Figure 4
.
Figure 4. Therapeutic targets for neuroregeneration
through PKCε activation
Treatment of AD by Stimulating Synaptic
Regeneration and Prevention of Neuronal Death
Dr. Alkon’s team at BRNI (now
known as CRE) conducted research in synaptic regeneration and the prevention of neuronal death, outside the conventional
wisdom that has dominated research efforts in the industry. The pathology of AD likely has multiple layers in its
development, in addition to the presence of tau phosphorylated tangles and Aβ oligomers. However, once this process
presents clinical manifestations of AD, restoring synaptic function thus far has not been effectively achieved by removing
Aβ plaques with experimental drug interventions. Once neurons undergo toxic changes with soluble Aβ oligomers, the
loss of function to the patient has been irreversible.
CRE’s and Neurotrope’s approach
has been to restore general viability and hence synaptic function in still-functioning neurons by stimulating the regeneration
and growth of the dendritic branches, spines, and pre-synaptic terminals on these neurons. (Dendrites are the branched projections
of a neuron that act to propagate the electrochemical stimulation received from other neural cells.) This process can be visualized
with serial sections visualized by the electron microscope in the brains of rats whose neurons and synapses have been damaged by
ischemic shock (depriving oxygen) or traumatic injury to the brain. The morphology of the damaged neurons in these animal models
looks strikingly different after they are treated with experimental drugs that activate PKCε. The new growth of dendritic
trees on the damaged neurons creates a multiplicity of new synaptic connections, basically re-wiring the damaged neurons and restoring
their function. Earlier therapeutic intervention with a PKCε activator produces markedly improved outcomes in tests measuring
restored animal cognitive function.
PKCε Activation Stimulates the
Formation of New Synaptic Connections
The new synaptic connections formed
from the damaged neurons revitalized by PKCε in rats can be demonstrated in various behavioral models for the animals
that are used to measure memory functions. Treatment with bryostatin, for 12 weeks in genetically modified rodents
pre-disposed to develop an AD-type of pathology showed that bryostatin promoted the growth of new synapses and preserved the
existing synapses. In addition, this drug also reversed the decrease of PKCε and the reciprocal increase of soluble
amyloid.
6
In cell tissue cultures, there is
a difference in morphology between neurons damaged by the application of ASPD (soluble oligomers of Aβ) as compared to
synapses rejuvenated by the application of bryostatin. Treatment with bryostatin,
through PKCε activation, stimulates the revitalization of neurons and the formation of new synaptic connections.
6
Journal of Neuroscience 2011,
31 (2), 630, D. Alkon et al.
The Central Role of PKCε in Maintaining Neuron Structure
and Function
Upon activation, PKCε migrates from
the intraneuronal cytoplasm to the cell membrane, where it activates signal-regulating enzymes (specifically the m-RNA stabilizing
protein, HUD, and downstream growth factors such as BDNF, NGF, IGF, etc.; MAP kinases Erk1/2; the BCl-2 apoptosis cascade; and
NF-κβ), causing a series of changes leading to increased DNA transcription, synaptic maturation, a consequent increase
in levels of growth factor proteins (such as nerve growth factor and brain-derived neurotrophic factor), an inhibition of programmed
cell-death and a reduction of β amyloid, and hyperphosphorylated tau.
This myriad of events is orchestrated by PKCε,
and prompts a number of secondary events occurring in both the pre- and post-synaptic portions of the neuron. Cellular visualization
of this effect shows an increase in the number of pre-synaptic vesicles in the neurons, an increase in pre-synaptic levels of PKCε
and an increase in the number of mushroom spines associated with individual synaptic boutons (knoblike enlargements at the end
of a nerve fiber, where it forms a synapse). Their genesis in these neurons is responsible for the formation of new synapses during
associative learning and memory, and for regeneration of synaptic networks in pre-clinical models of Alzheimer’s disease,
stroke, traumatic brain injury, and Fragile X mental retardation.
The central role of PKCε activation
in these dynamic events expands the amyloid and tau hypotheses for AD by including pathways to restore the synaptic networks lost
during neurodegeneration and to prevent further loss. This mechanistic framework offers new targets for therapeutic intervention
which not only prevent the formation of tangles and plaque, but also prevents neuronal death, and promotes the induction of new,
mature synaptic networks.
Decreased amyloid formation from PKCε
activation results from an increase in the rate of Aβ degradation by ECE (endothelin converting enzyme) and induction of α-secretase
cleavage of amyloid precursor protein (the precursor molecule to Aβ) through phosphorylation of an enzyme known as Erk. In
rodent models genetically predisposed to forming large amounts of amyloid deposits in their brains, PKCε activation was
found to interrupt the ongoing formation of amyloid, suggesting that this approach may delay the progression of AD.
The key to CRE’s innovation in this area
has been in identifying highly potent drug prototypes that at low concentrations cause the specific and transient activation of
PKCε, without interacting with the other isozyme variants of PKC whose inactivation would negate the synaptogenic properties
of the e isoform.
Testing PKCε Activation in Humans
The basic drug mechanism invoking PKCε
activation for neuronal rejuvenation and synaptic regeneration has never been evaluated in humans for any drug class or therapeutic
application. We believe that the pre-clinical and clinical research in this field as described above is an ideal platform for testing
this approach in human subjects.
We have licensed a body of biomedical research
from CRE, formerly known as the Blanchette Rockefeller Neurosciences Institute, or BRNI, that is comprised of new methods and drug
prototypes designed to stimulate neuronal regeneration. For additional information, see “Business – Intellectual Property
–
Technology License and Services Agreement.” We believe the commercial application of this technology
has potential to impact AD as well as traumatic brain injury, ischemic stroke, post-traumatic stress syndrome and learning disorders.
Drug Prototypes That Treat AD through
Regeneration
CRE has developed a new chemical family of
polyunsaturated fatty acid (“PUFA”) analogs, which appear to be effective in the activation of PKCε. Representative
structures of bryostatin and a lead PUFA analog are shown in
Figure 5
.
Figure 5. Structures of Bryostatin 1 and
a PUFA Analog Effective in the Activation of PKCε
7
7
Trends in Biochemical Sciences V. 34, #3, p.136.
T.J. Nelson et al, “Neuroprotective versus Tumorigenic protein kinase C activators.”
Ki values = effective concentration of the drug
in achieving 50% activation of PKCε
These molecules activate PKCε by binding
to two different and distinct active sites on the enzyme. The natural ligands that bind to these sites are diacylglycerol and phosphatidylserine.
Bryostatin acts as a mimetic (mimic) for diacylglycerol by binding to the diacylglycerol site and, similarly, the PUFA analogs
act as mimetics for phosphatidylserine by binding to the phosphatidylserine site.
Part of the hierarchal array of in vitro and
in vivo tests useful in optimizing the potency of our potential drug prototypes is displayed in
Figure 6
.
Figure 6. Optimization of PKCε Activation
Effects in Lead Drug Candidates: Array of in vitro and in vivo Test Models
Bryostatin
Our lead product candidate is bryostatin. Bryostatin
is a natural product isolated from a marine invertebrate organism, a bryozoan called
Bugula neritina
. Several total
syntheses of this complex molecule have been achieved in recent years in various academic chemistry laboratories, and these approaches
represent a possible alternative source of this drug. Importantly, we have now obtained an exclusive license for neurologic disorders
to a new, accelerated synthesis of bryostatin-1 recently developed at Stanford University by Dr. Paul Wender and his team. Bryostatin
is a PKCα and
e
activator that was originally developed as a potential anticancer
drug. According to Clinical Cancer Research, this drug candidate was previously evaluated in 63 clinical studies involving more
than 1,400 patients at the National Cancer Institute (“NCI”) for the treatment of various forms of cancer. While having
failed these studies as an experimental anti-cancer therapy, much useful information on the safety, pharmacodynamics and toxicity
of the drug was obtained from these in-human trials. In general, bryostatin-1 was considered to be “well-tolerated”
in these anti-cancer trials.
It was discovered that at doses at the lower
levels than those used in these anticancer trials, bryostatin is a potent activator of PKCε and may have efficacy in treating
AD. As described above, activation of PKCε has now been shown to partially restore synaptic function in neurons damaged
by AD in in vitro and in vivo animal models.
The NCI has entered into a material transfer
agreement with CRE to provide the bryostatin required for pre-clinical research as well as the Phase 2 clinical trials planned
by the Company. The clinical material transfer agreement specifies that CRE retains all of the bryostatin intellectual property.
Our license agreement with CRE (see “Business – Intellectual Property –
Technology License and Services
Agreement”) permits our access to new bryostatin clinical trial data and information held by the NCI, as well as past clinical,
safety and toxicity data compiled by the NCI during the time this drug was being evaluated for its anticancer properties.
See
Item 1A, “Risk Factors—We are partly dependent upon the NCI to supply bryostatin for our clinical trials.”
CRE previously conducted an exploratory evaluation
of bryostatin on a compassionate use basis in AD patients who have an inherited form of AD, frequently called familial AD, under
an FDA-approved study protocol. Familial AD results from one of four major mutations in the genome, and this mutation is passed
on from generation to generation within a family that carries the defective gene. The tragic consequence of familial AD is that
it strikes its victims at an early age, often while they are in their twenties. The aggressive progression of familial AD can render
these patients in the terminal stages of AD in their late 30s and early 40s.
Bryologs
On May 12, 2014, we entered into a license
agreement (the “Stanford License”) with The Board of Trustees of the Leland Stanford Junior University (“Stanford”)
pursuant to which Stanford has granted to us a revenue-bearing, world-wide right and exclusive license, with the right to grant
sublicenses (on certain conditions), under three issued U.S. patents and one pending U.S. patent and related technology for the
use of bryostatin structural derivatives, known as “bryologs,” for use in the treatment of central nervous system disorders,
lysosomal storage diseases, stroke, cardioprotection and traumatic brain injury, collectively referred to as the Licensed Field
of Use, for the life of the licensed patents. As mentioned above, in January 2017, we entered into an additional license agreement
with Stanford relating to an accelerated synthesis of bryostatin-1.
Also as mentioned above, our initial drug candidate,
bryostatin, is a natural product isolated from a marine invertebrate organism, a bryozoan called
Bugula neritina
. However,
it takes large quantities of biomass harvested from the oceans to produce even small quantities of bryostatin, and supply is limited.
Stanford researchers have synthesized a large
family of bryologs over a number of years as part of a research program to define the essential molecular features critical to
bryostatin’s biological activity. The bryologs are easier to produce than bryostatin due to their less complex chemical structures.
They represent a collection of potential drug candidates, some of which we expect to advance to clinical trials for the treatment
of several neurodegenerative diseases such as ischemic stroke, Fragile X Syndrome, traumatic brain injury and AD, although there
can be no assurance that we will be successful in doing so.
We are required by the Stanford License to
use commercially reasonable efforts to develop, manufacture, and sell products (“Licensed Products”) in the Licensed
Field of Use (as defined in the Stanford License). In addition, we must meet specific diligence milestones, and upon meeting such
milestones, make specified milestone payments to Stanford. We will also pay Stanford royalties on net sales, if any, of Licensed
Products (as defined in the Stanford License).
Stanford retains the right, on behalf of itself
and all other non-profit research institutions, to practice the licensed patents and use the licensed technology for any non-profit
purpose, including sponsored research and collaborations. The license is also subject to Title 35, Sections 200-204, of the United
States Code, which governs patent rights in inventions made with U.S. government assistance. Among other things, these provisions
provide the United States government with nonexclusive rights in the licensed patents. They also impose the obligation that products
based on the licensed patents sold or produced in the United States be “manufactured substantially in the United States.”
PUFA Analogs
Several other drug prototypes termed the PUFA
analogs have been synthesized at CRE and evaluated for their PKCε activating properties in models of AD. The PUFA analogs
are not structurally related to bryostatin and activate PKCε at a different site. We believe the PUFA analogs represent
a potential source for follow-on drug candidates. PKCε activators from the PUFA family of drug prototypes have demonstrated
neuroregeneration efficacy roughly equivalent to and, in some cases, potentially superior to that of bryostatin. If the PUFA analogs
show adequate potency in preclinical models of AD, we would plan to advance a drug prototype from this chemical family.
Other Potential Products
We may acquire, by license or otherwise, other
development stage products that are consistent with our product portfolio objectives and commercialization strategy.
Discontinued Research
We had planned to develop two other lines of
research related to learning and memory disorders: (i) drug prototypes that activate or inhibit the enzyme carbonic anhydrase to
modulate the attention status of animals, which may have had applications for attention deficit disorder and post-traumatic stress
disorder, and (ii) generalizing the application of a blood-brain-barrier delivery system to a variety of drugs through a contract
research service to be offered to other pharmaceutical companies seeking to improve the penetration of their drug prototypes into
the brain.
We have decided, however, to focus our efforts
on neurodegenerative diseases, which are the most advanced programs in our portfolio, and therefore will not be pursuing either
the drug candidate for activating carbonic anhydrase or the blood-brain-barrier delivery system.
We also relinquished rights to the AD diagnostic
system under the terms of the February 2015 SOW (see below).
February 2015 SOW and November 2015 SOW
Effective November 13, 2013, we agreed to a
statement of work with CRE pursuant to which we contracted for the further development of our potential therapeutic product. Pursuant
to this statement of work, we paid CRE $251,939 for related personnel and research services. CRE completed the services pursuant
to this statement of work in 2014. As of March 12, 2014, we entered into a statement of work with CRE to continue pre-clinical
activities relating to the commercialization of our therapeutic product. We paid CRE the entire total pursuant to this statement
of work of approximately $465,000 during the year ended December 31, 2014. CRE completed the services pursuant to this statement
of work in 2014.
On February 4, 2015, we entered into a Statement
of Work and Account Satisfaction Agreement with CRE (the “February 2015 SOW”), which was effective as of October 1,
2014 and continued until September 30, 2015.
Pursuant to the February 2015 SOW, we agreed,
among other things, to pay CRE $20,000 in quarterly payments during the twelve months from the date of the February 2015 SOW in
exchange for advising and consulting services by CRE’s Scientific Director (our Chief Scientific Officer Dr. Dan Alkon),
regarding our contract with Icahn School of Medicine at Mt. Sinai Hospital for the use of bryostatin in the treatment of Niemann-Pick
Type C disease.
Under the February 2015 SOW, Neurotrope BioScience
also agreed to pay CRE $2,400,000 in service fees and other amounts payable at a rate of $200,000 per month for each month from
October 1, 2014 through September 30, 2015. The parties agreed that the first $600,000 of payments satisfy certain outstanding
amounts owed to CRE. In consideration for the February 2015 SOW, in addition to the terms described above, CRE also agreed to (a)
use commercially reasonable efforts to enroll, at no cost to Neurotrope BioScience, at least four additional compassionate use
or expanded access patients, in trials of CRE’s Alzheimer’s therapeutic drug platform during the term of the February
2015 SOW, (b) perform certain services requested by Neurotrope BioScience for the further development of CRE’s Alzheimer’s
therapeutic drug platform, (c) perform certain services for the further development of CRE’s Alzheimer’s diagnostic
test, (d) to the extent permitted by applicable law, transfer all of its rights and regulatory obligations, except for those relating
to the compassionate use expanded access trials, associated with CRE’s IND 71,276 to Neurotrope BioScience, (e) conduct initial
research on the application of its PKCε platform to treat Fragile X disease, along with various other terms and conditions,
(f) conduct initial research on PUFA derivatives for the purpose of developing a commercially usable PKCε activator and
(g) provide assistance, advice and other similar services to us regarding our analysis of bryologs pursuant to our agreement with
Stanford University, for the purpose of developing a commercially usable PKCε activator. Furthermore, CRE agreed to transfer
a certain amount of bryostatin drug substance and bryostatin kits containing drug substance for non-human use to a third-party
for storage. In order for CRE to perform certain of the services described in (c) above, Neurotrope BioScience reimbursed a third
party for services CRE received from such third party in the amount of $150,000 in connection with CRE’s former diagnostic
trial program with such third party.
Neurotrope Bioscience entered into a new Statement
of Work Agreement on November 12, 2015 (the “November 2015 SOW Agreement”). The November 2015 SOW Agreement replaced
the February 2015 SOW Agreement, which was effective as of October 1, 2014 and expired on September 30, 2015. Pursuant to the November
2015 SOW Agreement, Neurotrope Bioscience agreed to pay CRE $1,166,666 in service fees payable in the amount of $83,333 per month
for each month from November 1, 2015 through December 31, 2016. The payments under the November 2015 SOW Agreement satisfied Neurotrope
Bioscience’s obligations to reimburse CRE pursuant to Section 5.6 of the CRE License for any and all attorneys’ fees,
translation costs, filing fees, maintenance fees, and other costs and expenses related to applying for, filing, prosecuting, and
maintaining patents and applications for the licensed intellectual property incurred by CRE during the term of the November 2015
SOW Agreement (but, for the avoidance of doubt, such payments shall not satisfy any attorneys’ fees, translation costs, filing
fees, maintenance fees, or other costs or expenses related to applying for, filing, prosecuting, and maintaining patents and applications
for the licensed intellectual property incurred by CRE after the expiration or termination of the November 2015 SOW Agreement term),
as well as any litigation costs which CRE may incur related to any of the licensed intellectual property during the November 2015
SOW Agreement term. CRE shall not commence any litigation to enforce the licensed intellectual property without the consent of
Neurotrope (which consent shall not be unreasonably withheld, delayed, or denied).
In consideration for the payments made pursuant
to the November 2015 SOW Agreement, CRE agreed to perform the services requested by Neurotrope Bioscience for the further development
of Neurotrope’s bryostatin drug platform. Thus far, four patients have been treated, three of which were treated under an
IND cleared by the FDA. The payments set forth above satisfied any and all of Neurotrope Bioscience’s obligation whatsoever
to CRE or to any other third party for costs incurred or to be incurred by CRE relating to such trials. Neurotrope Bioscience and
CRE shall jointly review protocols which shall be established to the parties’ mutual satisfaction and contain appropriate
safety measures to be employed by the treating physician. No additional compassionate use or expanded access patients will be enrolled
by CRE without the consent of Neurotrope Bioscience.
Services Agreement
On October 9, 2015, Neurotrope BioScience,
our wholly-owned subsidiary, executed a Services Agreement with Worldwide Clinical Trials, Inc. (“WCT”), effective
as of August 31, 2015. The Services Agreement relates to services for Neurotrope BioScience’s Phase 2 clinical study assessing
the safety, tolerability and efficacy of bryostatin in the treatment of moderately severe to severe AD (the “Study”).
Pursuant to the terms of the Services Agreement, WCT agreed to provide services to enroll approximately 150 study subjects at approximately
30 sites across the United States. We began enrollment at the initial sites at the end of 2015 and completed enrollment in November
2016. This trial was designed to administer dosing of bryostatin for up to six months for moderately severe to severe AD patients,
but has been amended to administer dosing of bryostatin for up to three months (see details of the amendment below). Among the
trial’s endpoints are the measurement of improvement in cognition, activities of daily living and behavior. The Company’s
goal is to show the robust treatment effect that the regulatory agencies, the marketplace and, most importantly, our patients and
their caregivers are seeking.
On July 27, 2016, we received approval of the
institutional review board (“IRB”) for our amended protocol submitted on July 21, 2016 to the FDA relating to the Phase
2 clinical trial of our lead drug candidate, bryostatin-1, for the treatment of advanced AD, which amended protocol eliminates
the second, exploratory, study period following the first 12 weeks of treatment. The primary objective is the assessment of safety
and tolerability of bryostatin to occur at 13 weeks, which has not been changed with this amendment. The secondary objective is
to assess efficacy, also at week 13. Such amendment, to cut the exploratory part of the study, was made for business reasons in
order to provide earlier completion of the study and for the planning of future studies. The changes to the study design were not
due to any safety concerns. In the study, two doses of bryostatin, 20μg or 40μg, will be compared to placebo. Study subjects
receive a total of 7 doses of the study drug over 12 weeks of treatment, followed by safety and efficacy assessments at week 13
and a final study visit at week 16. There will be no second randomization for additional treatment. Subjects who have already entered
into the second study period will be discontinued and evaluated 30 days following last treatment for their final study visit. In
November 2016, we completed patient enrollment and we currently expect to report early in the second quarter of 2017.
Intellectual Property
Technology License and Services Agreement
On February 4, 2015, Neurotrope BioScience,
CRE and NRV II, LLC entered into an Amended and Restated Technology License and Services Agreement (the “CRE License”),
which further amended and restated the Technology License and Services Agreement dated as of October 31, 2012, as amended by Amendment
No. 1 dated as of August 21, 2013.
Pursuant to the CRE License, Neurotrope BioScience
maintained its exclusive (except as described below), non-transferable (except pursuant to the CRE License’s assignment provision),
world-wide, royalty-bearing right, with a right to sublicense (in accordance with the terms and conditions described below), under
CRE’s and NRV II’s respective right, title and interest in and to certain patents and technology owned by CRE or licensed
to NRV II, LLC by CRE as of or subsequent to October 31, 2012 to develop, use, manufacture, market, offer for sale, sell, distribute,
import and export certain products or services for therapeutic applications for AD and other cognitive dysfunctions in humans or
animals (the “Field of Use”). Additionally, the CRE License specifies that all patents that issue from a certain patent
application, shall constitute licensed patents and all trade secrets, know-how and other confidential information claimed by such
patents constitute licensed technology under the CRE License. Furthermore, on July 10, 2015, under the terms of the Statement of
Work and Account Satisfaction Agreement dated February 4, 2015, Neurotrope BioScience’s rights relating to an in vitro diagnostic
test system reverted back to CRE and, accordingly, Neurotrope BioScience no longer has any rights under the CRE License for diagnostic
applications using the CRE patent portfolio or technology.
Notwithstanding the above license terms, CRE
and its affiliates retain rights to use the licensed intellectual property in the Field of Use to engage in research and development
and other non-commercial activities and to provide services to Neurotrope BioScience or to perform other activities in connection
with the CRE License.
Under the CRE License, CRE and Neurotrope BioScience
may not enter into sublicense agreements with third parties except with CRE’s prior written consent, which consent shall
not be commercially unreasonably withheld. Furthermore, the CRE License dated February 4, 2015 revises the agreement that was entered
into as of October 31, 2012 and amended on August 21, 2013, in that it provides that any intellectual property developed, conceived
or created in connection with a sublicense agreement that Neurotrope BioScience entered into with a third party pursuant to the
terms of the CRE License will be licensed to CRE and its affiliates for any and all non-commercial purposes, on a worldwide, perpetual,
non-exclusive, irrevocable, non-terminable, fully paid-up, royalty-free, transferable basis, with the right to freely sublicense
such intellectual property. Previously, the agreement had provided that such intellectual property would be assigned to CRE.
Pursuant to the terms of the November 12, 2015
amendment to the CRE License, we paid an aggregate of approximately $348,000 to CRE following the closings of the Series B private
placement, which constituted an advance royalty payment to CRE and will be offset (with no interest) against the amount of future
royalty obligations payable until such time that the amount of such future royalty obligations equals in full the amount of the
advance royalty payments made. Neurotrope Bioscience shall be subtracted from the gross proceeds to determine the “Post-PA
Fee Proceeds.”
Under the CRE License, CRE and Neurotrope BioScience
will jointly own data, reports and information that is generated on or after February 28, 2013, pursuant to the license agreement
dated October 31, 2012 and amended on August 21, 2013, by Neurotrope BioScience, on behalf of Neurotrope BioScience by a third
party or by CRE pursuant to a statement of work that the parties enter into pursuant to the CRE License, in each case to the extent
not constituting or containing any data, reports or information generated prior to such date or by CRE not pursuant to a statement
of work (the “Jointly Owned Data”). CRE has agreed not to use the Jointly Owned Data inside or outside the Field of
Use for any commercial purpose during the term of the CRE License or following any expiration of the CRE License other than an
expiration that is the result of a breach by Neurotrope BioScience of the CRE License that caused any licensed patent to expire,
become abandoned or be declared unenforceable or invalid or caused any licensed technology to enter the public domain (a “Natural
Expiration”) provided, however, CRE may use the Jointly Owned Data inside or outside the Field of Use for any commercial
purpose following any termination of the CRE License. Also, CRE granted Neurotrope BioScience a license during the term and following
any Natural Expiration, to use certain CRE data in the Field of Use for any commercial purposes falling within the scope of the
license granted to Neurotrope BioScience under the CRE License.
The CRE License further requires us to pay
CRE (i) a fixed research fee equal to a pro rata amount of $1 million in the year during which we close on a Series B Preferred
Stock financing resulting in proceeds of at least $25 million, (ii) a fixed research fee of $1 million per year for each of the
five calendar years following the completion of such financing and (iii) an annual fixed research fee in an amount to be negotiated
and agreed upon no later than 90 days prior to the end of the fifth calendar year following the completion of such financing to
be paid with respect to each remaining calendar year during the term of the CRE License. This fixed research fee is not yet due.
Our Licensed Intellectual Property
We have licensed from CRE an extensive intellectual
property portfolio that includes issued patents, pending patent applications and provisional patent applications, in the U.S. and
elsewhere, which, we believe, together cover these key pharmaceutical markets. A method of use patent has been issued to CRE that
covers the use of the PUFA family of molecules for the same therapeutic applications.
We believe the CRE License provides us rights
to the patents and technologies required to develop our proposed products. The patents and technologies licensed to us pursuant
to the CRE License include, without limitation, the following:
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therapies based on bryostatin and PUFA chemical families; and
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methods for treating AD.
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A number of CRE’s patent applications
for treatment of neurological disorders have been under active prosecution for many years and have been the subject of multiple
rejections for anticipation and/or obviousness based on prior art. There are no guarantees that CRE’s pending patent applications
will issue into commercially meaningful patents. If these patent applications are not approved or successfully prosecuted, then
we will attempt to seek other means of protecting its proprietary position including, but not limited to, trade secrets, proprietary
formulations and methods, etc.
A substantial amount of in-human data exists
that was generated by the NCI that involves the earlier evaluation of bryostatin as an anticancer agent. The NCI also holds the
existing inventory of the bryostatin drug product which is suitable for use in man. Our use of the substantial data package generated
by the NCI on bryostatin, as well as access to the clinical supply of this substance, is permitted under a material transfer agreements
entered into and between the NCI and CRE.
There are no known patent conflicts or freedom
to operate issues at this time which could encumber our ability to commercialize the PKCε activators for the treatment
of cognition and memory disorders. However, we cannot provide any assurance that such conflicts will not arise in the future. See
the Risk Factors captioned
“Our commercial success will depend, in part, on our ability, and the ability of our licensors,
to obtain and maintain patent protection. Our licensors’ failure to obtain and maintain patent protection for our products
may have a material adverse effect on our business.”
and
“Our licensed patented technologies may infringe
on other patents, which may expose us to costly litigation.”
under “Risk Factors.”
We also have the right to re-license certain
patents and patent applications in certain jurisdictions that we had licensed under the CRE License but had previously elected
to relinquish. In the event that we decide to re-license any of such patents and/or patent applications, then we are required to
reimburse CRE for all of the attorneys’ fees, translation costs, filing fees, maintenance fees, and other costs and expenses
related to such patents and/or patent applications that have been incurred since we elected to relinquish them under the CRE License.
Governmental Regulation and Product Approval
The manufacturing and marketing of our potential
products and our ongoing research and development activities are subject to extensive regulation by the FDA and comparable regulatory
agencies in state and local jurisdictions and in foreign countries.
United States Regulation of Drugs
Before any drug product can be marketed in
the United States, it must receive approval from the FDA. To receive this approval, any drug we develop must undergo rigorous preclinical
testing and clinical trials that demonstrate the product candidate’s safety and effectiveness for each indicated use. This
extensive regulatory process controls, among other things, the development, testing, manufacture, safety, efficacy, record keeping,
labeling, storage, approval, advertising, promotion, sale, and distribution of pharmaceutical products.
In general, before any new pharmaceutical product
can be marketed in the United States, the process typically required by the FDA includes:
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preclinical laboratory and animal tests;
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submission of an IND, which must become effective before human clinical trials may begin;
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adequate and well-controlled human clinical trials to establish the safety and efficacy of the
proposed drug for its intended use;
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pre-approval inspection of manufacturing facilities and selected clinical investigators;
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submission of a New Drug Application (“NDA”) to the FDA; and
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FDA approval of an NDA or an NDA supplement (for subsequent indications or other modifications,
including a change in location of the manufacturing facility).
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Preclinical Testing
In the United States, drug candidates are tested
in animals until adequate proof of safety and efficacy is established. These preclinical studies generally evaluate the mechanism
of action and pharmacology of the product and assess the potential safety and efficacy of the product. Tested compounds must be
produced according to applicable current good manufacturing practice requirements and preclinical safety tests must be conducted
in compliance with FDA and international regulations regarding good laboratory practices. The results of the preclinical tests,
together with manufacturing information and analytical data, are generally submitted to the FDA as part of an IND, which must become
effective before human clinical trials may commence. The IND will automatically become effective 30 days after receipt by the FDA,
unless before that time the FDA requests an extension or raises concerns about the conduct of the clinical trials as outlined in
the application. If the FDA has any concerns, the sponsor of the IND and the FDA must resolve the concerns before clinical trials
can begin. Regulatory authorities may require additional preclinical data before allowing the clinical studies to commence or proceed
from one phase to another, and could demand that the studies be discontinued or suspended at any time if there are significant
safety issues. Furthermore, an independent institutional review board for each medical center proposing to participate in the conduct
of the clinical trial must review and approve the clinical protocol and patient informed consent form before commencement of the
study at the respective medical center.
Clinical Trials
Clinical trials for new drug candidates are
typically conducted in three sequential phases that may overlap. In phase 1, the initial introduction of the drug candidate into
healthy human volunteers, the emphasis is on testing for safety or adverse effects, dosage, tolerance, metabolism, distribution,
excretion, and clinical pharmacology. Phase 2 involves studies in a limited patient population to determine the initial efficacy
of the drug candidate for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible
adverse side effects and safety risks. Once a compound shows evidence of activity and is found to have an acceptable safety profile
in phase 2 evaluations, pivotal phase 3 trials are undertaken to more fully evaluate clinical outcomes and to establish the overall
risk/benefit profile of the drug, and to provide, if appropriate, an adequate basis for product labeling. During all clinical trials,
physicians will monitor patients to determine effectiveness of the drug candidate and to observe and report any reactions or safety
risks that may result from use of the drug candidate. The FDA, the trial sites institutional review board or the sponsor may suspend
a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health
risk.
The data from the clinical trials, together
with preclinical data and other supporting information that establishes a drug candidate’s profile, are submitted to the
FDA in the form of an NDA or NDA supplement (for approval of a new indication if the product candidate is already approved for
another indication). Under applicable laws and FDA regulations, each NDA submitted for FDA approval is usually given an internal
administrative review within 45 to 60 days following submission of the NDA. If deemed complete, the FDA will “file”
the NDA, thereby triggering substantive review of the application. The FDA can refuse to file any NDA that it deems incomplete
or not properly reviewable. The FDA has established internal substantive review goals of six months for priority NDAs (for drugs
addressing serious or life threatening conditions for which there is an unmet medical need) and ten months for regular NDAs. The
FDA, however, is not legally required to complete its review within these periods, and these performance goals may change over
time. Moreover, the outcome of the review, even if generally favorable, is not typically an actual approval, but an “action
letter” that describes additional work that must be done before the NDA can be approved. The FDA’s review of an NDA
may involve review and recommendations by an independent FDA advisory committee. The FDA may deny approval of an NDA or an NDA
supplement if the applicable regulatory criteria are not satisfied, or it may require additional clinical data and/or an additional
pivotal phase 3 clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA or NDA supplement does
not satisfy the criteria for approval.
Data Review and Approval
Substantial financial resources are necessary
to fund the research, clinical trials and related activities necessary to satisfy FDA requirements or similar requirements of state,
local and foreign regulatory agencies. It normally takes many years to satisfy these various regulatory requirements, assuming
they are satisfied. Information generated in this process is susceptible to varying interpretations that could delay, limit, or
prevent regulatory approval at any stage of the process. Accordingly, the actual time and expense required to bring a product to
market may vary substantially. We cannot assure you that we will submit applications for required authorizations to manufacture
and/or market potential products or that any such application will be reviewed and approved by the appropriate regulatory authorities
in a timely manner, if at all. Data obtained from clinical activities is not always conclusive and may be susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. Success in early stage clinical trials does not ensure
success in later stage clinical trials. Even if a product candidate receives regulatory approval, the approval may be significantly
limited to specific disease states, patient populations and dosages, or have conditions placed on them that restrict the commercial
applications, advertising, promotion or distribution of these products.
Once issued, the FDA may withdraw product approval
if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the
FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and
the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
The FDA may also request additional clinical trials after a product is approved. These so-called phase 4 studies may be made a
condition to be satisfied after a drug receives approval. The results of phase 4 studies can confirm the effectiveness of a product
candidate and can provide important safety information via the FDA’s voluntary adverse drug reaction reporting system. Any
products manufactured or distributed by us pursuant to FDA approvals would be subject to continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections
by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation
requirements upon us and our third-party manufacturers. We cannot be certain that we or our present or future suppliers will be
able to comply with the good manufacturing practices regulations and other FDA regulatory requirements. If our present or future
suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from
distribution or withdraw approval of the NDA for that drug. Furthermore, even after regulatory approval is obtained, later discovery
of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product
from the market.
The FDA closely regulates the marketing and
promotion of drugs. Approval may be subject to post-marketing surveillance and other record keeping and reporting obligations,
and involve ongoing requirements. Product approvals may be withdrawn if compliance with regulatory standards is not maintained
or if problems occur following initial marketing. A company can make only those claims relating to safety and efficacy that are
approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising
and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in
the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across
medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances.
The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers’
communications on the subject of such off-label use.
Fast Track Approval
The Federal Food, Drug, and Cosmetic Act, as
amended, and FDA regulations provide certain mechanisms for the accelerated “Fast Track” approval of potential products
intended to treat serious or life-threatening illnesses which have demonstrated the potential to address unmet medical needs. The
procedures permit early consultation and commitment from the FDA regarding the preclinical and clinical studies necessary to gain
marketing approval. Provisions of this regulatory framework also permit, in certain cases, NDAs to be approved on the basis of
valid indirect measurements of benefit of product effectiveness, thus accelerating the normal approval process. In the future,
certain potential products employing our technology might qualify for this accelerated regulatory procedure. Even if the FDA agrees
that these potential products qualify for accelerated approval procedures, the FDA may deny approval of our drugs or may require
additional studies before approval. The FDA may also require us to perform post-approval, or phase 4, studies as a condition of
such early approval. In addition, the FDA may impose restrictions on distribution and/or promotion in connection with any accelerated
approval, and may withdraw approval if post-approval studies do not confirm the intended clinical benefit or safety of the potential
product.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant
orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that
affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA.
After the FDA grants orphan drug designation, the identity of the therapeutic agent 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. If a product that has orphan drug designation subsequently receives FDA approval for the disease for which
it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other
applications to market the same drug for the same disease, except in very limited circumstances, for seven years. These very limited
circumstances are (i) an inability to supply the drug in sufficient quantities or (ii) a situation in which a new formulation of
the drug has shown superior safety or efficacy. This exclusivity, however, also could block the approval of our product for seven
years if a competitor obtains earlier approval of the same drug for the same indication.
Foreign Regulation
In addition to regulations in the United States,
we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products
in foreign countries. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable
regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries.
The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country
to country.
Under European Union regulatory systems, we
may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure,
which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing
authorization that is valid for all EU member states. This authorization is a marketing authorization application. The decentralized
procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing
authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment
report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.
The policies of the FDA and foreign regulatory
authorities may change and additional government regulations may be enacted which could prevent or delay regulatory approval of
our products and could also increase the cost of regulatory compliance. We cannot predict the likelihood, nature or extent of adverse
governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.
Other Government Regulation
Our research and development activities use
biological and hazardous materials that are dangerous to human health and safety or the environment. We are subject to a variety
of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of
these materials and wastes resulting from these materials. We are also subject to regulation by the Occupational Safety and Health
Administration and federal and state environmental protection agencies and to regulation under the Toxic Substances Control Act.
In addition, once our products are marketed
commercially, we will have to comply with the various laws relating to the Medicare, Medicaid and other federal healthcare programs.
These federal laws include, by way of example, the following:
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The anti-kickback statute (Section 1128B(b) of the Social Security Act) prohibits certain business
practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid
and other federal healthcare programs, including, among other things, the payment or receipt of remuneration for the referral of
patients whose care or services will be paid by Medicare or other governmental programs;
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The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as amended, commonly
referred to as the Stark Law, Section 1877 of the Social Security Act), which prohibits referrals by physicians of Medicare or
Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family
members) have ownership interests or with which they have certain other financial arrangements;
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The anti-inducement law (Section 1128A(a)(5) of the Social Security Act), which prohibits providers
from offering anything of value to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered
by either program;
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The False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person from knowingly
presenting or causing to be presented false or fraudulent claims for payment to the federal government (including the Medicare
and Medicaid programs);
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The Civil Monetary Penalties Law (Section 1128A of the Social Security Act), which authorizes the
United States Department of Health and Human Services to impose civil penalties administratively for various fraudulent or abusive
acts; and
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The Physician Payment Sunshine Act (Section 1128G of the Social Security Act), which requires manufacturers
of drugs, medical devices and biologicals that participate in U.S. federal health care programs to report certain payments and
items of value given to physicians and teaching hospitals.
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Sanctions for violating these federal laws
include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial
of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. These laws also impose an affirmative
duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from the
Medicare and other government programs. Additionally, many states have laws and regulations that contain prohibitions that are
similar to, and in many cases broader than, these federal laws and once our products are marketed commercially, we will have to
comply with these various state laws as well.
Competition
We compete
with many companies, research institutes, hospitals, governments and universities that are working to develop products and processes
to treat AD. Many of these entities have substantially greater financial, technical, manufacturing, marketing, distribution and
other resources than we do. However, there has been a dearth of new product introductions in the last 20 years for the treatment
of AD symptoms in patients who begin exhibiting the memory and cognitive disorders associated with the disease. All of the products
introduced to date for the treatment of AD have yielded negative or marginal results with little effect on the progression of AD
and no improvement in the memory or cognitive performance of the patients receiving these therapies. We believe we are the only
company currently pursuing PKCε activation (with consequent prevention of neuronal death and induction synaptic network
growth) as a mechanism to treat AD and neurodegenerative disease. Although we believe that we have no direct competitors working
in this same field at the present time, we cannot provide assurance that our competitors will not discover compounds or processes
that may be competitive with our products and introduce such products or processes before us.
Employees
As of the date of this Annual
Report on Form 10-K, we have five full-time personnel. We have no part-time employees.
Item 1A. Risk Factors.
An investment in shares of our common
stock is highly speculative and involves a high degree of risk. We face a variety of risks that may affect our operations and financial
results and many of those risks are driven by factors that we cannot control or predict. Before investing in our common stock you
should carefully consider the following risks, together with the financial and other information contained in this report. If any
of the following risks actually occurs, our business, prospects, financial condition and results of operations could be materially
adversely affected. In that case, the trading price of our common stock would likely decline and you may lose all or a part of
your investment. Only those investors who can bear the risk of loss of their entire investment should invest in our common stock.
Risks Related to Our Business and Financial
Condition
We will need additional financing to
fund our operations in the future. If we are unable to obtain additional financing on acceptable terms, we will need to curtail
or cease our development plans and operations.
As of December 31, 2016, we had approximately
$25.8 million of available cash and cash equivalents. We raised approximately $24.5 million of gross proceeds in the November 2016
Private Placement. We are currently reviewing our current operating plans, and we will require additional capital in the future.
Additional funds may be raised through the issuance of equity securities and/or debt financing, there being no assurance that any
type of financing on terms acceptable to us will be available or otherwise occur. Debt financing must be repaid regardless of whether
we generate revenues or cash flows from operations and may be secured by substantially all of our assets. Any equity financing
or debt financing that requires the issuance of warrants or other equity securities to the lender would cause the percentage ownership
by our current stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may
have rights, preferences or privileges senior to those of existing stockholders. If such financing is not available when required
or is not available on acceptable terms, we may be required to reduce or eliminate certain product candidates and development activities,
including those related to bryostatin, the “bryologs” or polyunsaturated fatty acid analogs, and it may ultimately
require us to suspend or cease operations, which could cause investors to lose the entire amount of their investment.
Our ongoing viability as a company depends
on our ability to successfully develop and commercialize our licensed technology.
We are principally focused on developing a
drug, bryostatin, for the treatment of AD and other diseases, which is still in the clinical testing stage and has not yet been
fully developed. Our potential success is highly uncertain since our principal product candidate (bryostatin to treat AD) is in
Phase 2 of development. Our other product candidates (use of bryostatin to treat Niemann Pick Type-C and Fragile X Syndrome) are
even earlier in their development cycles. Bryostatin is also subject to regulatory approval. Our potential success depends upon
our ability to raise more capital, complete development of and successfully commercialize bryostatin in a timely manner for the
treatment of AD or other diseases. We must develop bryostatin, successfully test it for safety and efficacy in the targeted patient
population, and manufacture the finished dosage form on a commercial scale to meet regulatory standards and receive regulatory
approvals. The development and commercialization process is both time-consuming and costly, and involves a high degree of business
risk. Bryostatin is still at an early stage in its product development cycle, and any follow-on product candidates are still at
the concept stage. The results of pre-clinical and clinical testing of our product candidates are uncertain and we cannot assure
anybody that we will be able to obtain regulatory approvals of our product candidates. If obtained, regulatory approval may take
longer or be more expensive than anticipated. Furthermore, even if regulatory approvals are obtained, our products may not perform
as we expect and we may not be able to successfully and profitably produce and market any products. Delays in any part of the process
or our inability to obtain regulatory approval of our products could adversely affect our future operating results by restricting
(or even prohibiting) the introduction and sale of our products.
If the CRE License were terminated, we
may be required to cease operations.
Our rights to develop, commercialize and sell
certain of our proposed products, including bryostatin, is, in part, dependent upon the CRE License. CRE has the right to terminate
this agreement after 30 days prior notice in certain circumstances, including if we were to materially breach any provisions of
the agreement after a 60-day cure period for breaches that are capable of being cured, in the event of certain bankruptcy or insolvency
proceedings. Additionally, the CRE License provides that the license may not be assigned, including by means of a change of control
of the Company, or sublicensed without the consent of CRE. For additional information regarding the CRE License, see “Business
– Intellectual Property – Technology License and Services Agreement.” If the CRE License were terminated, we
would lose rights to a substantial portion of the intellectual property currently being developed by us and no longer have the
rights to develop, commercialize and sell some of our proposed products. As a result, we may be required to cease operations under
such circumstance.
We rely on independent third-party
contract research organizations to perform clinical and non-clinical studies of our drug candidate and to perform other research
and development services.
The CRE License requires us to use CRE to provide
research and development services and other scientific assistance and support services, including clinical trials, under certain
conditions. The CRE License limits our ability to make certain decisions, including those relating to our drug candidate, without
CRE’s consent. See “Business – Intellectual Property – Technology License and Services Agreement.”
Under certain conditions, we may, however, also rely on independent third-party contract research organizations (“CROs”),
to perform clinical and non-clinical studies of our drug candidate. Many important aspects of the services that may be performed
for us by CROs would be out of our direct control. If there were to be any dispute or disruption in our relationship with such
CROs, the development of our drug candidate may be delayed. Moreover, in our regulatory submissions, we would expect to rely on
the quality and validity of the clinical work performed by our CROs. If any of our CROs’ processes, methodologies or results
were determined to be invalid or inadequate, our own clinical data and results and related regulatory approvals could be materially
adversely impacted.
We have relied on the representations
and materials provided by CRE, including scientific, peer-reviewed and non-peer reviewed publications, abstracts, slides, internal
documents, verbal communications, patents and related patent filings, with respect to the results of its research related to our
proposed products.
BRNI (now known as CRE) began the
development of the intellectual property that forms the basis for our proposed products in 1999. We have relied on the
quality and validity of the research results obtained by CRE with respect to this intellectual property, and we have
conducted limited verification of the raw preclinical and clinical data produced by CRE. No independent third-party has
verified any such data. If any of CRE’s basic processes, methodologies or results were determined to be invalid or
inadequate, our own clinical data and results and related regulatory approvals, could be materially adversely impacted.
We have a limited operating history upon
which investors can evaluate our future prospects.
Our drug product, bryostatin, is in an early
development stage and we are subject to all of the risks inherent in the establishment of a new business enterprise. While development
of our product candidates was started in 1999 by BRNI (now known as CRE), Neurotrope BioScience was incorporated on October 31, 2012 and on that same
date entered into the Technology License and Services Agreement with CRE and NRV II, LLC for the continuing development and commercialization
of our product candidates, and, therefore, we have a limited operating history. Our proposed products are currently in the research
and development stage and we have not generated any revenues, nor do we expect our products to generate revenues for the near term,
if ever. As a result, any investment in our securities must be evaluated in light of the potential problems, delays, uncertainties
and complications encountered in connection with a newly established pharmaceutical development business. The risks include, but
are not limited to, the possibilities that any or all of our potential products will be found to be unsafe, ineffective or, that
the products once developed, although effective, are not economical to market; that our competitors hold proprietary rights that
preclude us from marketing such products; that our competitors market a superior or equivalent product; or the failure to receive
necessary regulatory clearances for our proposed products. To achieve profitable operations, we must successfully develop, obtain
regulatory approval for, introduce and successfully market, sell or license at a profit product candidates that are currently in
the research and development phase. We only have one product candidate in clinical development, i.e., bryostatin to treat AD. Much
of the clinical development work and testing for our product candidates remains to be completed. No assurance can be given that
our research and development efforts will be successful, that required regulatory approvals will be obtained, that any of our candidates
will be safe and effective, that any products, if developed and introduced, will be successfully marketed, sold or licensed or
achieve market acceptance or that products will be marketed at prices necessary to generate profits. Failure to successfully develop,
obtain regulatory approvals for, or introduce and market, sell or license our products would have material adverse effects on our
business prospects, financial condition and results of operations.
If we do not obtain the necessary regulatory approvals in
the United States and/or other countries, we will not be able to sell our drug candidates.
We cannot assure you that we will receive the
approvals necessary to commercialize bryostatin, or any other potential drug candidates we acquire or attempt to develop in the
future. We will need approval from the FDA to commercialize our drug candidates in the U.S. and approvals from similar regulatory
authorities in foreign jurisdictions to commercialize our drug candidates in those jurisdictions. In order to obtain FDA approval
of bryostatin or any other drug candidate for the treatment of AD, we must submit first an Investigational New Drug (“IND”)
application and then a New Drug Application (“NDA”) to the FDA, demonstrating that the drug candidate is safe, pure
and potent, and effective for its intended use. This demonstration requires significant research including completion of clinical
trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depending upon the type, complexity
and novelty of the drug candidate and requires substantial resources for research, development and testing. We cannot predict whether
our clinical trials will demonstrate the safety and efficacy of our drug candidates or if the results of any clinical trials will
be sufficient to advance to the next phase of development or for approval from the FDA. We also cannot predict whether our research
and clinical approaches will result in drugs or therapeutics that the FDA considers safe and effective for the proposed indications.
The FDA has substantial discretion in the drug approval process. The approval process may be delayed by changes in government regulation,
future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays
in obtaining regulatory approvals may prevent or delay commercialization of, and our ability to derive revenues from, our drug
candidates and diminish any competitive advantages that we may otherwise believe that we hold. Even if we comply with all FDA requests,
the FDA may ultimately reject one or more of our applications. We may never obtain regulatory clearance for any of our drug candidates.
Failure to obtain FDA approval of our drug candidates will leave us without a saleable product and therefore without any source
of revenues. In addition, the FDA may require us to conduct additional clinical testing or to perform post-marketing studies, as
a condition to granting marketing approval of a drug product or permit continued marketing, if previously approved. If conditional
marketing approval is obtained, the results generated after approval could result in loss of marketing approval, changes in product
labeling, and/or new or increased concerns about the side effects or efficacy of a product. The FDA has significant post-market
authority, including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety
information and compliance with FDA-approved risk evaluation and mitigation strategies. The FDA’s exercise of its authority
has in some cases resulted, and in the future could result, in delays or increased costs during product development, clinical trials
and regulatory review, increased costs to comply with additional post-approval regulatory requirements and potential restrictions
on sales of approved drugs. In foreign jurisdictions, the regulatory approval processes generally include the same or similar risks
as those associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary
to commercialize our drug candidates for sale either within or outside the United States.
We have not generated any revenues since
our inception and we do not expect to generate revenue for the foreseeable future. If we do not generate revenues and achieve profitability,
we will likely need to curtail or cease our development plans and operations.
Our ability to generate revenues depends upon
many factors, including our ability to complete our currently planned clinical study and development of our proposed products,
our ability to obtain necessary regulatory approvals for our proposed products and our ability to successfully commercialize market
and sell our products. We have not generated any revenues since we began operations on October 31, 2012. We expect to incur significant
operating losses over the next several years. If we do not generate revenues, do not achieve profitability and do not have other
sources of financing for our business, we will likely need to curtail or cease our development plans and operations, which could
cause investors to lose the entire amount of their investment.
Our commercial success will depend, in
part, on our ability, and the ability of our licensors, to obtain and maintain patent protection. Our licensors’ failure
to obtain and maintain patent protection for our products may have a material adverse effect on our business.
Pursuant to the CRE License, we have obtained
rights to certain patents owned by CRE or licensed to NRV II, LLC by CRE as of or subsequent to October 31, 2012. For additional
information regarding the CRE License, see “Business – Intellectual Property – Technology License and Services
Agreement.” In the future, we may seek rights from third parties to other patents or patent applications. Our success will
depend, in part, on our ability and the ability of our licensors to maintain and/or obtain and enforce patent protection for our
proposed products and to preserve our trade secrets, and to operate without infringing upon the proprietary rights of third parties.
Patent positions in the field of biotechnology and pharmaceuticals are generally highly uncertain and involve complex legal and
scientific questions. We cannot be certain that we or our licensors were the first inventors of inventions covered by our licensed
patents or that we or they were the first to file. Accordingly, the patents licensed to us may not be valid or afford us protection
against competitors with similar technology. The failure to maintain and/or obtain patent protection on the technologies underlying
our proposed products may have material adverse effects on our competitive position and business prospects.
Changes in our ownership could limit
our ability to utilize net operating loss carryforwards.
As of December 31, 2016, we had aggregate federal
and state net operating loss carryforwards of approximately $32.5 million, which begin to expire in fiscal 2032. Under Section
382 of the Internal Revenue Code of 1986, as amended, or the Code, changes in our ownership may limit the amount of our net operating
loss carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally
apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation
may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire.
Any such limitation, whether as the result of future offerings, prior private placements, sales of our common stock by our existing
stockholders or additional sales of our common stock by us in the future (through the conversion of preferred stock, the exercise
of outstanding warrants, or otherwise), could have a material adverse effect on our results of operations in future years. We have
not completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been
multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.
Our licensed patented technologies may
infringe on other patents, which may expose us to costly litigation.
It is possible that our licensed patented technologies
may infringe on patents or other rights owned by others. We may have to alter our products or processes, pay additional licensing
fees, pay to defend an infringement action or challenge the validity of the patents in court or cease activities altogether because
of patent rights of third parties, thereby causing additional unexpected costs and delays to us. Patent litigation is costly and
time consuming, and we may not have sufficient resources to pay for such litigation. Pursuant to the CRE License, CRE has the exclusive
right (but not the obligation) to apply for, file, prosecute or maintain patents and patent applications for our licensed technologies.
However, in order to maintain our rights to use our licensed technologies, we must reimburse CRE for all of the attorney’s
fees and other costs and expenses related to any of the foregoing. For additional information regarding the CRE License, see “Business
– Intellectual Property – Technology License and Services Agreement.” If the patents licensed to us are determined
to infringe a patent owned by a third party and we do not obtain a license under such third-party patents, or if we are found liable
for infringement or are not able to have such third-party patents declared invalid, we may be liable for significant money damages,
we may encounter significant delays in bringing products to market or we may be precluded from participating in the manufacture,
use or sale of products or methods of treatment requiring such licenses.
We may not be able to protect our trade
secrets and other unpatented proprietary technologies, which could give our competitors an advantage over us.
In addition to our reliance on patents and
pending patents owned by CRE, we rely upon trade secrets and other unpatented proprietary technologies. We may not be able to adequately
protect our rights with regard to such unpatented proprietary technologies or competitors may independently develop substantially
equivalent technologies. We seek to protect trade secrets and proprietary knowledge, in part through confidentiality agreements
with our employees, consultants, advisors and collaborators. Nevertheless, these agreements may not effectively prevent disclosure
of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such
information and, as a result, our competitors could gain a competitive advantage over us.
If we are unable to hire additional qualified
personnel, our business prospects may suffer.
Our success and achievement of our business
plans depend upon our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition
for qualified employees among pharmaceutical and biotechnology companies is intense, and the loss of any of such persons, or an
inability to attract, retain and motivate any additional highly skilled employees required for the implementation of our business
plans and activities could have a material adverse effect on us. Our inability to attract and retain the necessary technical and
managerial personnel and consultants and scientific and/or regulatory consultants and advisors could have a material adverse effect
on our business prospects, financial condition and results of operations.
We may not be able to in-license or acquire
new development-stage products or technologies.
Our product commercialization strategy relies,
to some extent, on our ability to in-license or acquire product formulation techniques, new chemical entities, or related know-how
that has proprietary protection. If resources permit, we may also seek to acquire, by license or otherwise, other development stage
products that are consistent with our product portfolio objectives and commercialization strategy. The acquisition of products
requires the identification of appropriate candidates, negotiation of terms of acquisition, and financing for the acquisition and
integration of the candidates into our portfolio. Failure to accomplish any of these tasks may diminish our growth rate and adversely
alter our competitive position.
We are partly dependent upon the NCI
to supply bryostatin for our clinical trials.
CRE has entered into a material transfer agreement
with the NCI, pursuant to which the NCI has agreed to supply bryostatin required for our pre-clinical research and clinical trials.
This agreement does not provide for a sufficient amount of bryostatin to support the completion of our clinical trials that we
are required to conduct in order to seek FDA approval of bryostatin for the treatment of AD. Therefore, CRE or we will have to
enter into one or more subsequent agreements with the NCI for the supply of additional amounts of bryostatin. If CRE or we are
unable to secure such additional agreements or if the NCI otherwise discontinues for any reason supplying us with bryostatin, then
we would have to either secure another source of bryostatin or discontinue our efforts to develop and commercialize bryostatin
for the treatment of AD. We have entered into license agreements with Stanford for the development of bryostatin structural derivatives
known as “bryologs” and an accelerated synthesis of bryostatin-1 as alternative potential sources of bryostatin. There
can be no assurance that we will be able to secure future bryostatin supplies from any source on commercially reasonable terms,
if at all.
We expect to rely on third parties to
manufacture our proposed products and, as a result, we may not be able to control our product development or commercialization.
We currently do not have an FDA approved manufacturing
facility. We expect to rely on contract manufacturers to produce quantities of products and substances necessary for product commercialization.
See also the risk factor above captioned “We are partly dependent upon the NCI to supply bryostatin for our clinical trials.”
Contract manufacturers that we use must adhere to current good manufacturing practice regulations enforced by the FDA through its
facilities inspection program. If the facilities of such manufacturers cannot pass a pre-approval plant inspection, the FDA pre-market
approval of our products will not be granted. As a result:
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there are a limited number of manufacturers that could produce the products for us and we may not
be able to identify and enter into acceptable agreements with any manufacturers;
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the products may not be produced at costs or in quantities necessary to make them commercially
viable;
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the quality of the products may not be acceptable to us and/or regulatory authorities;
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our manufacturing partners may go out of business or file for bankruptcy;
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our manufacturing partners may decide not to manufacture our products for us;
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our manufacturing partners could fail to manufacture to our specifications;
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there could be delays in the delivery of quantities needed;
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we could be unable to fulfill our commercial needs in the event we obtain regulatory approvals
and there is strong market demand; or
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ongoing inspections by the FDA or other regulatory authorities may result in suspensions, seizures,
recalls, fines, injunctions, revocations and/or criminal prosecutions.
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If we are unable to engage contract manufacturers
or suppliers to manufacture or package our products, or if we are unable to contract for a sufficient supply of required products
and substances on acceptable terms, or if we encounter delays or difficulties in our relationships with these manufacturers, or
with a regulatory agency, then the submission of products for regulatory approval and subsequent sales of such products would be
delayed. Any such delay may have a material adverse effect on our business prospects, financial condition and results of operations.
We may rely on third parties for marketing
and sales and our revenue prospects may depend on their efforts.
We currently have no experience in sales, marketing
or distribution. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of
our proposed products. As a result, if our product development is successful, our future success will likely depend, in part, on
our ability to enter into and maintain collaborative relationships with one or more third parties for sales, marketing or distribution,
on the collaborator’s strategic interest in the products we have under development and on such collaborator’s ability
to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the sales and marketing
of our products as appropriate. However, we may not be able to establish or maintain such collaborative arrangements or, if we
are able to do so, they may not have effective sales forces. To the extent that we decide not to, or are unable to, enter into
collaborative arrangements with respect to the sales and marketing of our proposed products, significant capital expenditures,
management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise.
To the extent that we depend on third parties for marketing and distribution, any revenues received by us will depend upon the
efforts of such third parties, which may not be successful.
If our products are not accepted by patients,
the medical community or health insurance companies, our business prospects will suffer.
Commercial sales of any products we successfully
develop will substantially depend upon the products’ efficacy and on their acceptance by patients, the medical community,
providers of comprehensive healthcare insurance, healthcare benefit plan managers, the Centers for Medicare and Medicaid Services
(“CMS”) (which is the U.S. federal agency which administers Medicare, Medicaid and the State Children’s Health
Insurance Program), and other organizations. Widespread acceptance of our products will require educating patients, the medical
community and third-party payors of medical treatments as to the benefits and reliability of the products. Our proposed products
may not be accepted, and, even if they are accepted, we are unable to estimate the length of time it would take to gain such acceptance.
The branded prescription segment of the
pharmaceutical industry in which we operate is competitive, and we are particularly subject to the risks of such competition.
The branded prescription segment of the pharmaceutical
industry in which we operate is competitive, in part, because the products that are sold require extensive sales and marketing
resources invested in their commercialization. The increasing cost of prescription pharmaceuticals has caused providers of comprehensive
healthcare insurance, healthcare benefit plan managers, CMS, as well as other organizations, collectively known as third-party
payors, to tightly control and dictate their drug formulary plans to control the costs associated with the use of prescription
pharmaceutical products by enrollees in these plans. Our ability to gain formulary access to drug plans supported by these third-party
payors is substantially dependent on the differentiated patient benefit that our proposed products can provide, compared closely
to similar products claiming the same benefits or advantages. We may not be able to differentiate our proposed products from those
of our competitors, successfully develop or introduce new products that are less costly or offer better performance than those
of our competitors, or offer purchasers of our proposed products payment and other commercial terms as favorable as those offered
by our competitors. We expect that some of our proposed products, even if successfully developed and commercialized, will eventually
face competition from a significant number of biotechnology or large pharmaceutical companies. Because most of our competitors
have substantially greater financial and other resources than we have, we are particularly subject to the risks inherent in competing
with them. The effects of this competition could materially adversely affect our business prospects, financial condition and results
of operations.
We compete with many companies, research institutes,
hospitals, governments and universities that are working to develop products and processes to treat or diagnose AD. We believe
that others are doing research on Fragile X Syndrome and Niemann Pick disease. Many of these entities have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources than we do. However, there has been a dearth of
new product introductions in the last 20 years for the treatment of AD symptoms in patients who begin exhibiting the memory and
cognitive disorders associated with the disease. All of the products introduced to date for the treatment of AD have yielded negative
or marginal results with little effect on the progression of AD and no improvement in the memory or cognitive performance of the
patients receiving these therapies. The absolute determination of AD in patients is currently achieved only upon autopsy. We believe
we are the only company currently pursuing PKCε activation as a mechanism to treat AD and neurodegenerative diseases. Although
we believe that we have no direct competitors working in this same field on product candidates using the same mechanism of action,
we cannot provide assurance that our competitors will not discover compounds or processes that may be competitive with our products
and introduce such products or processes before us.
We are developing our product candidates to
address unmet medical needs in the treatment of AD and other neurodegenerative diseases. Our competition will be determined in
part by the potential indications for which drugs are developed and ultimately approved by regulatory authorities. Additionally,
the timing of market introduction of some of our potential products or of competitors’ products may be an important competitive
factor. Accordingly, the relative speed with which we can develop our product candidates, complete preclinical testing, clinical
trials and approval processes and supply commercial quantities to market are expected to be important competitive factors. We expect
that competition among products approved for sale will be based on various factors, including product efficacy, safety, reliability,
availability, price and patent position.
Our business will expose us to potential
product liability risks, which could result in significant product liability exposure.
Our business will expose us to potential product
liability risks that are inherent in the testing, designing, manufacturing and marketing of human therapeutic products. Product
liability insurance in the pharmaceutical industry is generally expensive, and we may not be able to obtain or maintain product
liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities, if at all. A successful
products liability claim brought against us could have a material adverse effect on our business prospects, financial condition
and results of operations.
A successful clinical trial liability
claim against us could have a material adverse effect on our financial condition even with such insurance coverage.
Our business will expose us to potential liability
that results from risks associated with conducting clinical trials of our product candidates. Although we have procured clinical
trial product liability insurance coverage for our bryostatin product candidate with coverages and deductibles we believe are adequate,
there is no guarantee that our coverage will be adequate to satisfy any liability we may incur. We do not currently have insurance
with respect to any other drug product. A successful clinical trial liability claim brought against us could have a material adverse
effect on our business prospects, financial condition and results of operations even if we successfully obtain clinical trial insurance.
A successful liability claim against
us could have a material adverse effect on our financial condition.
Our business and actions can expose us to potential
liability risks that are inherent in business, generally, and in the pharmaceutical industry, specifically. While we maintain commercial
general liability insurance with coverages and deductibles we believe are adequate, there is no guarantee that our coverage will
be adequate to satisfy any liability we may incur. A successful liability claim brought against us could have a material adverse
effect on our business prospects, financial condition and results of operations.
Reforms in the health care industry and
the uncertainty associated with pharmaceutical and laboratory test pricing, reimbursement and related matters could adversely affect
the marketing, pricing and demand for our products.
Public and private entities are seeking ways
to reduce or contain increasing health care costs. All generic pharmaceutical manufacturers whose products are covered by the Medicaid
program are required to rebate to each state a percentage of their “average manufacturer price” for the products in
question. The extension of prescription drug coverage to all Medicare recipients was approved by Congress several years ago. Numerous
other proposals to curb rising pharmaceutical prices have also been introduced or proposed in Congress and in some state legislatures.
We cannot predict the nature of the measures that may be adopted or their effect on our competitive position. Our ability to market
our products depends, in part, on reimbursement levels for them and related treatment established by health care providers, private
health insurers and other organizations, including health maintenance organizations and managed care organizations. In the event
that governmental authorities enact additional legislation or adopt regulations that affect third party coverage and reimbursement,
demand for our products may be reduced, which may materially adversely affect our business prospects, financial condition and results
of operations.
Consolidation in the pharmaceutical industry
could materially affect our ability to operate as an independent entity.
The pressure to grow revenues while containing
the escalating costs of basic research and development has resulted in an increase in mergers and acquisitions in our industry.
More consolidation in the pharmaceutical industry is expected over the next five years. We could become an acquisition target by
a larger competitor and, as a consequence, suffer serious disruptions to our business model or even lose control of our ability
to operate as an independent entity. Such events could have a material adverse effect on our product development efforts or the
commercialization of our proposed products.
Risks Related to Our Common Stock
There currently is a limited public market
for our common stock. Failure to develop or maintain an active trading market could negatively affect the value of our common stock
and make it difficult or impossible for you to sell your shares.
There is currently a limited public market
for shares of our common stock, and an active trading market may never develop or, if developed, may not be maintained. Our common
stock is not listed on a stock exchange. Our common stock is quoted on the OTC Market. The OCT Market is a thinly traded market
and lacks the liquidity of certain other public markets with which some investors may have more experience. The average daily trading
volume in our common stock was approximately 55,000 shares during the 90-day period ended March 6, 2017. We may not ever be able
to satisfy the listing requirements for our common stock to be listed on a national securities exchange, which are often a more
widely-traded and liquid market. Some, but not all, of the factors which may delay or prevent the listing of our common stock on
a more widely-traded and liquid market include the following: our stockholders’ equity may be insufficient; the market value
of our outstanding securities may be too low; our net income from operations may be too low; our common stock may not be sufficiently
widely held; we may not be able to secure market makers for our common stock; and we may fail to meet the rules and requirements
mandated by the several exchanges and markets to have our common stock listed. Should we fail to satisfy the initial listing standards
of the national exchanges, or our common stock is otherwise rejected for listing and remains listed on the OTC Market or suspended
from the OTC Market, the trading price of our common stock could suffer and the trading market for our common stock may be less
liquid and our common stock price may be subject to increased volatility.
We cannot assure you that our common
stock will become liquid or that it will be listed on a securities exchange.
Until our common stock is listed on a national
securities exchange, such as The New York Stock Exchange or The Nasdaq Stock Market, we expect our common stock to remain eligible
for quotation on the OTC Market, or on another over-the-counter quotation system, or in the “pink sheets.” In those
venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of our common stock. In
addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers
who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may
deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock.
This would also make it more difficult for us to raise capital.
Our common stock may be subject to the
“penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the
stock cumbersome and may reduce the value of an investment in our common stock.
The SEC has adopted Rule 15g-9 which establishes
the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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that the broker or dealer receive from the investor a written agreement to the transaction, setting
forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person
and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions
in penny stocks.
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The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in
highlight form sets forth:
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the basis on which the broker or dealer made the suitability
determination; and
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that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
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Generally, brokers and potential investors
may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more
difficult for existing stockholders to dispose of such securities and cause a decline in the market value of such securities.
Rule 15g-2 requires that disclosure has to
be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks. If we remain
subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.
If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Volatility in the price of our common
stock could lead to losses by investors and costly securities litigation.
The trading price of our common stock is likely
to be highly volatile and could fluctuate in response to factors such as:
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additions or departures of key personnel;
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actual or anticipated variations in our operating results;
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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sales of our common stock or other securities in the open market or in any publicized transaction;
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changes in our industry;
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regulatory and economic developments, including our ability to obtain working capital financing;
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shares of our common stock are saleable under Rule 144 of the Securities Act of 1933, as amended,
or the Securities Act, and as a result, potential and actual sales of our common stock by our present stockholders may have a depressive
effect on the price of our common stock in the marketplace;
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potential and actual sales of our common stock by our present stockholders pursuant to registration
statements may have a depressive effect on the price of our common stock in the marketplace;
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our ability to execute our business plan;
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other events or factors, many of which are beyond our control; and
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announcement of clinical trial results.
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The stock market is subject to significant
price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been initiated against the public company. Litigation initiated against us, whether
or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could
harm our business and financial condition.
We do not anticipate dividends to be paid on our common stock,
and investors may lose the entire amount of their investment.
Cash dividends have never been declared or
paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future
earnings, if any, to fund business growth. Therefore, stockholders will not likely receive any funds absent a sale of their shares.
If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock
price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can
we assure that stockholders will not lose the entire amount of their investment.
If securities analysts do not initiate
coverage or continue to cover our common stock or if they publish unfavorable research or reports about our business, there could
be a negative impact on the market price of our common stock.
The trading market for our common stock may
depend, in part, on the research and reports that securities analysts publish about our business and the Company. It is often more
difficult to obtain analyst coverage for companies whose securities are traded on the OTC Market. We do not have any control over
securities analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not
cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts,
and our stock is the subject of an unfavorable report, our stock price and trading volume would likely decline. If one or more
of these analysts ceases to cover the Company or fails to publish regular reports on the Company, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to decline.
Because state securities “Blue
Sky” laws prohibit trading absent compliance with individual state laws, state Blue Sky registration requirements could limit
resale of the shares.
Transfer of our common stock may be restricted
under the securities laws and regulations promulgated by various states and foreign jurisdictions, commonly referred to as “Blue
Sky” laws. Absent compliance with such individual “Blue Sky” laws, our common stock may not be traded in such
jurisdictions. We currently maintain information which permits sales of securities pursuant to the “manuals exemption.”
This manuals exemption permits a security to be sold by stockholders in a particular state without being registered if the company
issuing the security has a listing for that security in a securities manual recognized by that state. The listing entry must contain
(i) the names of issuers, officers, and directors, (ii) an issuer’s balance sheet, and (iii) a profit and loss statement
for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations. The principal accepted
manuals are those published by Standard and Poor’s, and Mergent, Inc. Many states expressly recognize these manuals. Certain
states either do not recognize principal accepted manuals or do not expressly recognize the manuals exemption. These states include:
Alabama, California, Illinois, Kentucky, Louisiana, Missouri, New Hampshire, New York, Tennessee and Virginia. Registration of
the securities is required in these states in order for such securities to be sold by stockholders in such states. As a result,
it will not be possible for persons to resell shares of our common stock pursuant to this registration statement in these states
without such registration. There is no assurance that the state securities divisions will approve these registrations. Accordingly,
investors should consider the secondary market for our securities to be a limited one.
You may experience dilution of your ownership
interests because of the future issuance of additional shares of our common stock.
Any future issuance of our equity or equity-backed
securities will dilute then-current stockholders’ ownership percentages and could also result in a decrease in the fair market
value of our equity securities, because our assets would be owned by a larger pool of outstanding equity. As described above, we
will need additional financing to continue our operations and may raise additional capital through public or private offerings
of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.
We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options and
other equity compensation issued under our equity incentive plans), as payment to providers of goods and services, in connection
with future acquisitions or for other business purposes. Our Board of Directors (the “Board”) may at any time authorize
the issuance of additional common or preferred stock without common stockholder approval, subject only to the total number of authorized
common and preferred shares set forth in our Articles of Incorporation. The terms of equity securities issued by us in future transactions
may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the
issuance of warrants or other derivative securities, which may have a further dilutive effect. Also, the future issuance of any
such additional shares of our common or preferred stock or other securities may create downward pressure on the trading price of
our common stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the
price at which shares of our common stock are then traded.
We may obtain additional capital through
the issuance of preferred stock, which may limit your rights as a holder of our common stock.
Without any stockholder vote or action, our
Board may designate and approve for issuance shares of our preferred stock. The terms of any preferred stock may include priority
claims to assets and dividends and special voting rights which could limit the rights of the holders of our common stock. The designation
and issuance of preferred stock favorable to current management or stockholders could make any possible takeover of us or the removal
of our management more difficult.
Being a public company is expensive and
administratively burdensome.
Public reporting companies are subject to the
information and reporting requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, or the Exchange
Act, and other federal securities laws, rules and regulations related thereto, including compliance with the Sarbanes-Oxley Act.
Complying with these laws and regulations requires the time and attention of our Board and management, and increases our expenses.
Among other things, public reporting companies must:
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maintain and evaluate a system of internal controls over financial reporting in compliance with
the requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”) and the related rules and regulations of
the SEC and the Public Company Accounting Oversight Board;
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maintain policies relating to disclosure controls and procedures;
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prepare and distribute periodic reports in compliance with our obligations under federal securities
laws;
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institute a more comprehensive compliance function, including with respect to corporate governance;
and
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involve, to a greater degree, our outside legal counsel and accountants in the above activities.
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The costs of preparing and filing annual and
quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders is expensive
and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire
additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory,
legal and accounting expenses and the attention of management. We currently do not comply with all of these regulations. See below
Risk Factor entitled “Any failure to maintain
effective internal control over our financial reporting could
materially adversely affect us.” There can be no assurance that we will be able to comply with the applicable regulations
in a timely manner, if at all. In addition, being a public company has made it more expensive for us to obtain director and officer
liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain
this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of
our Board, particularly directors willing to serve on the audit and compensation committees.
Any failure to maintain effective internal
control over our financial reporting could materially adversely affect us.
Section 404 of the Sarbanes-Oxley Act (“Section
404”) requires us to include in our annual reports on Form 10-K an assessment by management of the effectiveness of our internal
control over financial reporting. In addition, at such time, if any, as we are no longer a “smaller reporting company,”
our independent auditors will have to attest to and report on management’s assessment of the effectiveness of such internal
control over financial reporting. We have limited experience operating as a public reporting company under the level of internal
control over financial reporting required by the Sarbanes-Oxley Act. We performed an evaluation under the supervision and with
the participation of our Chief Executive Officer and our Chief Financial Officer, our principal executive officer and principal
financial officer, respectively, of the effectiveness of our disclosure controls and procedures and internal controls over financial
reporting. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures and internal controls over financial reporting are not effective due to the material weakness resulting
from a limited segregation of duties among our employees with respect to our control activities. This deficiency is the result
of our limited number of employees. This deficiency may affect management’s ability to determine if errors or inappropriate
actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible
changes in our disclosure controls and procedures.
Even in the event that our management concludes
that our internal control over financial reporting becomes effective, if our independent auditors are not satisfied with the adequacy
of our internal control over financial reporting, or if the independent auditors interpret the requirements, rules or regulations
differently than we do, then (to the extent we are no longer a “smaller reporting company”) they may decline to attest
to management’s assessment or may issue a report that is qualified. Any of these events could result in a loss of investor
confidence in the reliability of our financial statements, which in turn could negatively impact the price of our common stock.
We must perform system and process evaluation
and testing of our internal control over financial reporting to allow management and (if required in the future) our independent
registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required
by Section 404. Our compliance with Section 404 may require that we incur substantial accounting expense and expend significant
management efforts. We currently do not have an internal audit group, and we will need to retain the services of additional accounting
and financial staff or consultants with appropriate public company experience and technical accounting knowledge to satisfy the
ongoing requirements of Section 404.