BUSINESS
We are a biotechnology company developing
bioengineered organ implants based on our novel Cellframe
TM
technology. Our Cellframe
technology is comprised of a biocompatible scaffold seeded with the patient’s own stem cells. Our platform technology is
being developed to treat life-threatening conditions of the esophagus, bronchus and trachea. By focusing on these underserved patients,
we hope to dramatically improve the treatment paradigm for these patients. Our unique Cellframe technology combines the clinically
proven principles of tissue engineering, cell biology and material science.
We believe that our Cellframe technology
may provide surgeons a new paradigm to address life-threatening conditions of the esophagus, bronchus, and trachea due to cancer,
infection, trauma or congenital abnormalities. Our novel technology harnesses the body’s response and modulates it toward
the healing process to restore the continuity and integrity of the organ. We are pursuing the Cellspan
TM
esophageal implant as our first product candidate to address esophageal atresia and esophageal cancer, and we are also developing
our technology’s applications to address conditions of the bronchus and trachea.
In collaboration with world-class institutions,
such as Mayo Clinic and Connecticut Children’s Medical Center, we are expecting to transition from a pre-clinical company
to a clinical company in 2017. We plan to file an Investigational New Drug application, (IND) with the U.S. Food and Drug Administration
(FDA) for our Cellspan esophageal implant in the third quarter of 2017 and expect to begin first in human clinical trials in the
fourth quarter of 2017.
Our Cellframe technology platform: how
it works
Our Cellframe process begins with the collection
of an adipose (fat) tissue biopsy from the patient followed by the use of standard tissue culture techniques to isolate and expand
the patient’s own (autologous) mesenchymal (multipotent) stem cells, or MSC. The cells are seeded onto a biocompatible, synthetic
scaffold, produced to mimic the dimensions of the organ to be regenerated, and incubated in a proprietary organ bioreactor. The
scaffold is electrospun from polyurethane (PU) to form a non-woven, hollow tube. The specific microstructures of the Cellspan implants
are designed to allow the cultured cells to attach to and cover the scaffold fibers.
We have conducted large-animal studies
to investigate the use of the Cellspan implants for the reconstitution of the continuity and integrity of tubular shape organs,
such as the esophagus and the large airways, following a full circumferential resection of a clinically relevant segment, just
as would occur in a clinical setting. We announced favorable preliminary preclinical results of large-animal studies for the esophagus,
bronchus and trachea in November 2015. Based on the results of those studies, we chose the esophagus to be the initial focus for
our organ regeneration technology.
Illustration
of intersection of Cellspan esophageal implant and native
esophagus
at time of implant and proposed mechanism of action
In May 2016, we reported an update of results
from additional, confirmatory pre-clinical large-animal studies. We disclosed that the studies had demonstrated in a predictive
large-animal model the ability of our Cellspan organ implant to successfully stimulate the regeneration of a section of esophagus
that had been surgically removed. Cellspan esophageal implants, consisting of a proprietary biocompatible synthetic scaffold seeded
with the recipient animal’s own stem cells, were surgically implanted in place of the esophagus section that had been removed.
After the surgical full circumferential resection of a portion of the thoracic esophagus, the Cellspan implant stimulated the reconstitution
of full esophageal structural integrity and continuity.
Illustration
of esophageal reconstitution over Cellspan esophageal
implant
following time of implant and proposed mechanism of action
Study animals were returned to a solid
diet three weeks after the implantation surgery. The scaffold portions of the Cellspan implants, which are intended to be in place
only temporarily, were retrieved approximately three weeks post-surgery via the animal’s mouth in a non-surgical endoscopic
procedure. Within 2.5 to
3 months, a complete inner epithelium layer and other specialized esophagus tissue layers were regenerated. As of March 1, 2017,
two animals in the study have not been sacrificed and are alive at eleven months and one year, respectively. These animals have
demonstrated significant weight gain, appear healthy and free of any significant side effects and are receiving no specialized
care.
Platform technology in life-threatening orphan indications
In November 2016, we were granted Orphan
Drug Designation for our Cellspan esophageal implant by the FDA to restore the structure and function of the esophagus subsequent
to esophageal damage due to cancer, injury or congenital abnormalities. Orphan drug designation provides a seven-year marketing
exclusivity period against competition in the U.S. from the date of a product’s approval for marketing. This exclusivity
would be in addition to any exclusivity we may obtain from our patents. Additionally, orphan designation provides certain incentives,
including tax credits and a waiver of the Biologics License Application fee. We also plan to apply for orphan drug designation
for our Cellspan esophageal implant in Europe. Orphan drug designation in Europe provides market exclusivity in Europe for ten
years from the date of the product’s approval for marketing.
We are now advancing the development of
our Cellframe technology, specifically a Cellspan esophageal implant, in large-animal studies with collaborators. As we believe
that our recent studies provided sufficient confirmatory proof of concept data, we have initiated the Good Laboratory Practice
(GLP) studies to demonstrate that our technology, personnel, systems and practices are sufficient for advancing into human clinical
trials. In order to seek approval for the initiation of clinical trials for Biostage Cellspan esophageal implants in humans, GLP
studies to support the safety of the Cellspan esophageal implant are required to submit an Investigational New Drug (IND) application
with the FDA.
Our goal is to submit an IND filing in
the third quarter of 2017.
Our product candidates are currently in
development and have not yet received regulatory approval for sale anywhere in the world.
Changing the surgical treatment of Esophageal
Cancer
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Illustration of esophageal cancer site
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Illustration of potential human application of Cellspan esophageal implant at site of esophageal cancer (depicting implant prior to esophageal tissue reconstitution over implant)
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According to the World Health Organization’s
International Agency for Research on Cancer, there are approximately 450,000 new cases of esophageal cancer worldwide each year.
A portion of all patients diagnosed with esophageal cancer are treated via a surgical procedure known as an esophagectomy. The
current standard of care for an esophagectomy requires a complex surgical procedure that involves moving the patient’s stomach
or a portion of their colon into the chest to replace the portion of esophagus resected by the removal of the tumor. These current
procedures have high rates of complications, and can lead to a severely diminished quality of life and require costly ongoing care.
Our Cellspan esophageal implants aim to provide a simpler surgical procedure, with reduced complications, that may result in a
better quality of life after the operation and reduce the overall cost of these patients to the healthcare system.
Congenital Abnormalities - Esophageal
Atresia: a much needed focus on children
Each year, several thousand children worldwide
are born with a congenital abnormality known as esophageal atresia, a condition where the baby is born with an esophagus that does
not extend completely from the mouth to the stomach. When a long segment of the esophagus is lacking, the current standard of care
is a series of surgical procedures where surgical sutures are applied to both ends of the esophagus in an attempt to stretch them
and pull them together so they can be connected at a later date. This process can take weeks and the procedure is plagued by serious
complications and may carry high rates of failure. Such approach also requires, in time, at least two separate surgical interventions.
Other options include the use of the child’s stomach or intestine that would be pulled up into the chest to allow a connection
to the mouth. We are working to develop a Cellspan esophageal implant solution to address newborns’ esophageal atresia, that
could potentially be life-saving or organ-sparing, or both.
Our Mission and Our Strategy
Our mission is to be the leading developer and supplier of bioengineered
organ implants for restoring organ function for patients with life-threatening conditions of the esophagus, the bronchus and the
trachea. Our business strategy to accomplish this mission includes:
Targeting life-threatening medical conditions.
We are focused on creating products to help physicians treat life-threatening conditions like esophageal cancer, central
lung cancer and damage to the trachea caused by cancer, trauma or infection. We are also developing products for the treatment
of congenital abnormalities of the esophagus and the airways. We are not targeting less severe conditions that have reasonable
existing treatment options. Solutions for life-threatening medical conditions present a favorable therapeutic index, or risk/benefit
relationship, by providing the opportunity of a significant medical benefit for patients who have poor or no treatment alternatives.
We believe that product candidates targeting life-threatening medical conditions may be eligible for review and approval by regulatory
authorities under established expedited review programs, which may result in savings of time in the regulatory approval process.
Also, we believe that products targeting life-threatening medical conditions may be more likely to receive favorable reimbursement
compared with treatments for less critical medical conditions.
Developing products that have a relatively
short time to market.
Since the number of patients diagnosed with esophageal cancer in the U.S. each year is relatively
small, we expect the number of patients that we would likely need to enroll in a clinical trial will also be relatively small.
A small number of patients implies a relatively fast enrollment time and a less expensive clinical development program. Therefore,
we expect to be able to conduct a clinical trial in a relatively short period of time compared to clinical trials in indications
with larger patient populations. We intend to work closely with regulatory agencies and clinical experts to design and size the
clinical studies appropriately based on the specific conditions our products are intended to treat.
Using our Cellframe technology as a
platform to address multiple organs.
We believe that pre-clinical data we have produced to date may suggest that our
Cellframe technology is a novel and innovative approach to restoring organ function that may provide an ability to develop products
that would address life-threatening conditions impacting organs like the esophagus, bronchus and trachea, and perhaps lower portions
of the gastrointestinal (GI) tract. We believe that our Cellframe technology may allow physicians to treat certain life-threatening
conditions in ways not currently possible, and in some combination, to save patients’ lives, avoid or reduce complications
experienced in the current standard of care, and improve the patients’ quality of life, while at the same time reducing the
overall cost of patient care to the healthcare system.
Supplying the finished organ implant
to the surgeon.
Our technology includes our proprietary organ bioreactor, as well as our proprietary biocompatible scaffold
that is seeded with the patient’s own cells. We believe there is considerable value in supplying the final cell-seeded scaffold
implant to the surgeon so that the hospital and surgeon may focus solely on performing the implantation.
Collaborating with leading medical and
research institutions.
We have and will continue to collaborate with leading medical and research institutions. We have
a co-development initiative with Mayo Clinic for regenerative medicine organ implant products for the esophagus and airways, and
we are currently conducting large-animal studies with Mayo Clinic to develop our Cellframe technology. We are also collaborating
with Connecticut Children’s Medical Center on a co-development project to research regenerative medicine-based solutions
to esophageal atresia. We believe the use of our product candidates by leading surgeons and institutions will increase the likelihood
that other surgeons and institutions will use our products.
Our Technology
Our Cellframe technology is comprised of
our proprietary bioengineered organ scaffold seeded with the patient’s own stem cells in our proprietary organ bioreactor
prior to implantation. We believe that our Cellframe technology combines a highly-engineered, biocompatible scaffold and a robust
population of cells that, by tapping into the stem cell niche of the surrounding native tissue after implantation, may potentially
enable a tubular organ to remodel or regenerate tissue to close the gap created by a surgical resection of a portion of that organ.
This unique combination of technologies, developed through our extensive testing performed during the last two years, may potentially
provide solutions to life-threatening conditions for patients with unmet medical needs.
We believe that our new technology is unique,
in that its mode of action appears to be different from other tissue engineering organ scaffold products developed previously,
of which we are aware. Prior to our development of the Cellframe technology, our approach attempted to implant an organ scaffold
that would be incorporated into the patient’s body by the surrounding native tissue growing into the scaffold. To our knowledge,
all previous research and development efforts by other investigators were based on that same concept. Our Cellframe technology
appears to work very differently. We believe that the unique combination of our highly-engineered organ scaffold with a population
of the patient’s own mesenchymal stem cells enables an organ to develop new native tissue around our scaffold, but not into
it, so the scaffold acts as a type of frame or staging for the new tissue. As a result, our scaffold is not incorporated into the
body. Instead, it is retrieved from the body via an endoscopic or bronchoscopic procedure, not surgically, after sufficient tissue
remodeling and regeneration has occurred to restore the organ’s integrity and function.
A Cellframe technology-based organ implant
includes two key components: a biocompatible synthetic scaffold and the patient’s own stem cells.
Biocompatible Scaffold Component
Our proprietary biocompatible scaffold
component of the Cellspan esophageal implant is constructed primarily of polyurethane (PU; a plastic polymer). This material was
chosen based on extensive testing of various materials. The scaffold is made using a manufacturing process known as electrospinning.
The combination of the electrospinning process, which provides control over the desired microstructure of the scaffold fabric,
with the PU results in a scaffold that we believe has favorable biocompatibility characteristics.
The Patient’s Cells
Based on current pre-clinical development
efforts, the cells we seed onto the scaffold are obtained from the patient’s adipose tissue (abdominal fat). This fat tissue
is obtained from a standard biopsy before the implant surgery. Mesenchymal stem cells are extracted and isolated from the adipose
tissue biopsy. The isolated cells are then expanded, or grown, for a short period prior to surgery in order to derive a sufficient
cell population to be seeded on the scaffold. The cells are then seeded on the scaffold in our proprietary organ bioreactor and
incubated there before the implant surgery.
We believe the Cellspan esophageal implant
has the potential to provide a major advance over the current therapeutic options for treating esophageal cancer, damage from infection
or trauma and congenital abnormalities. We believe our Cellframe technology has the potential to overcome the major challenges
in restoring organ function for a damaged esophagus. With our Cellspan esophageal implant we are developing a surgical procedure
that has the objective of reconstituting the continuity of the patient’s esophagus without having to relocate another organ
in its place. In addition, by reducing or eliminating complications that occur in the current standard of care, we expect to reduce
the costs of addressing and treating those additional complications. Because these substantial costs can be reduced or even eliminated
with our technology, we believe our products, if successfully developed, can help save lives, improve the quality of life for patients
and reduce overall healthcare costs.
Further, human embryonic stem cells are
not part of any of our implant product candidates. This eliminates both the medical risks and ethical controversy associated with
regenerative medicine approaches that use human embryonic stem cells.
Unmet Patient Needs and Cellspan Implant
Solutions
Esophageal Cancer
There are approximately 456,000 new diagnoses
of esophageal cancer globally each year, according to the World Health Organization’s International Agency for Research on
Cancer. According to the American Cancer Society, there are approximately 17,000 new diagnoses of esophageal cancer in the U.S.
each year, and there are more than 15,000 deaths from esophageal cancer each year. Esophageal cancer is very deadly - the five-year
survival rate for people with esophageal cancer is 18% in the U.S. Approximately 5,000 esophagectomy surgeries occur in the U.S.
annually to treat esophageal cancer, and approximately 10,000 esophagectomies occur in Europe annually. We believe that our Cellspan
esophageal implant, if approved, has the potential to provide a major advance over the current esophagectomy procedures for addressing
esophageal cancer, which have high complication and morbidity rates.
The current standard of care for the esophagectomy
requires either (A) a gastric pull-up, where the stomach is cut and sutured into a tubular shape, then pulled up through the diaphragm
to replace a portion of the esophagus resected by the removal of the cancerous tumor; or (B) a colon interposition, where a portion
of the colon is resected and used to replace the portion of the esophagus resected by the removal of the cancerous tumor. Esophagectomies
have 90-day mortality rates of up to 19%. Serious complications, such as leakage at the anastomoses, which can lead to infections
and sepsis, and pulmonary complications, such as impaired pulmonary function or pneumonia, occur in up to 30% of esophagectomy
cases. Other complications from esophagectomies, such as a narrowing of the esophagus post-surgery, gastroesophageal reflux and
dumping syndrome (repetitive nausea, dizziness and vomiting) can also pose significant quality of life issues for patients.
We believe that the Cellspan esophageal
implant has the potential to provide physicians a new, simpler procedure to restore organ function while significantly reducing
complication and morbidity rates compared with the current standard of care, and without creating significant quality of life issues
for patients.
Esophageal Atresia
Esophageal Atresia (EA) is a rare congenital
abnormality in which a baby is born without part of the esophagus. About 1 in 4,000 babies in the U.S. is born with EA. In some
cases, the two sections can be connected surgically. However, in cases where the gap is too great for a simple surgical reconnection,
the current standard of care is a gastric pull-up, a colon interposition, or a procedure known as the Foker process. In the Foker
process, traction devices are surgically attached to the two ends of the esophagus. Traction is then applied, usually for several
weeks during which time the baby remains in an Intensive Care Unit, to stimulate the ends of the esophagus to grow and narrow the
gap. If the Foker process is successful in narrowing the gap sufficiently, a second surgery is necessary to connect the two ends
of the esophagus. In addition to the Foker process being complex, it is also a very expensive procedure, because the baby will
normally be several months in hospital for the process.
We believe that a pediatric Cellspan esophageal
implant may provide pediatric surgeons with a better procedure to treat EA that would result in a connected esophagus with higher
success rates, lower complications and lower overall costs to the healthcare system.
Central Lung Cancer
Lung cancer is the most common form of
cancer and the most common cause of death from cancer worldwide. There are more than 450,000 new lung cancer diagnoses annually
in the U.S. and Europe. In approximately 25% of all lung cancer cases, the cancerous tumor resides only in a bronchus and not in
the lobes of the lungs, and is known as central lung cancer. Approximately 33,000 central lung cancer cases diagnosed in the U.S.
and Europe are Stage I and II and are considered eligible for surgical resection, often with adjuvant chemotherapy and radiation.
Approximately 5,000 of those patients are treated via pneumonectomy, a surgical procedure involving the resection of the cancer
tumor, the whole bronchus below the tumor and the entire lung to which it is connected. It is a complex surgery and, due to the
removal of a lung, results in a 50% reduction in the patient’s respiratory capacity. The procedure has reported rates of
post-surgical (in hospital) mortality of 8% to 15%. Complication rates associated with pneumonectomy are reported as high as 50%,
and include post-operative pneumonia, supraventricular arrhythmias and anastomotic leakage, placing patients at significant mortality
risk post-discharge.
We believe that a Cellspan bronchial implant,
once developed and approved for marketing, has the potential to provide physicians a treatment alternative superior to the sleeve
pneumonectomy to address central lung cancer, a simpler procedure to restore organ function of the bronchus without sacrificing
one of the patient’s lungs, resulting in fewer post-surgery complications, improved mortality rates and improved quality
of life for the patient.
Life-threatening conditions of the Trachea
There are approximately 8,000 patients
per year in the U.S. and Europe who suffer from a condition of the trachea that put the patient at high risk of death. These conditions
can be due to tracheal trauma, tracheal stenosis or trachea cancer. There are approximately 40,000 tracheal trauma patients diagnosed
each year in the U.S. Of those, approximately 1,000 are severe enough to need surgical resection procedures. Tracheal stenosis
is a rare complication from tracheostomies, but may have a devastating impact on respiratory function for patients. Approximately
2,000 patients are diagnosed with stenosis from tracheostomy in the U.S. each year. Trachea cancer is a very rare but extremely
deadly cancer. Trachea cancer patients in the U.S. have a median survival of 10 months from diagnosis and a 5-year survival of
only 27%. There were approximately 200 cases of primary trachea cancer diagnosed in the U.S. in 2013. Based on these facts, we
estimate that there are approximately 8,000 patients in the U.S. and Europe with conditions of the trachea that put them at high
risk of death, but for whom there is currently no clinically effective tracheal implant or replacement method currently available.
We believe that a Cellspan
tracheal implant may potentially provide physicians a treatment to re-establish the structural integrity and function of a damaged
or diseased trachea to address life-threatening conditions due tracheal trauma, stenosis or cancer.
Our History
We were incorporated under the laws of the State of Delaware
on May 3, 2012 by Harvard Bioscience, Inc. (“Harvard Bioscience”) to provide a means for separating its regenerative
medicine business from its other businesses. Harvard Bioscience decided to separate its regenerative medicine business into our
company, a separate corporate entity (the “Separation”), and it spun off its interest in our business to its stockholders
in November 2013. Since the Separation we have been a separately-traded public company and Harvard Bioscience has not been a stockholder
of our common stock or controlled our operations. Following the Separation, we continued to innovate our bioreactors based on our
physiology expertise, we developed our materials science capabilities and we investigated and developed a synthetic tracheal scaffold.
In April 2014, Saverio LaFrancesca, M.D., joined our company as Chief Medical Officer. By that time we had built and staffed
cell biology laboratories at our Holliston facility, to give ourselves the ability to perform and control our scientific investigation
and developments internally. At that point, we began the second phase of our company’s development.
In mid-2014, under Dr. LaFrancesca’s leadership, we increased
the pace of our scientifically-based internal analysis and development of our first-generation tracheal implant product, the HART-Trachea.
From large-animal studies conducted thereafter we found that the product elicited an unfavorable inflammatory response after implantation,
which required additional development and testing. These requirements extended our expectations regarding our regulatory milestones
and we announced the additional testing and extended milestone expectations in January 2015. During 2015 we isolated and tested
all major variables of the organ scaffold and the cell source and protocols, examining the effects of alternatives against the
then-existing product approach. Through extensive
in vitro
preclinical studies, and small-animal and large-animal studies,
we made dramatic improvements, and discovered that the mechanism of action of this new approach was very different from our hypothesis
regarding that of the first-generation product. We call this new implant approach our Cellframe technology. Our Cellframe technology
uses a different scaffold material and microstructure, a different source and concentration of the patient’s cells and several
other changes from our earlier trachea initiative. We believe that our Cellframe technology, although built on learnings from our
earlier-generation product initiative, represents a new technology platform resulting from our rigorous science and development.
We see the development of our Cellframe technology platform as the beginning of a new, third phase in our company’s progression.
We discontinued development of our earlier initiative in 2014;
that first-generation product approach was significantly different from our new Cellframe technology and Cellspan product candidates
currently in development. We have focused our development efforts on our Cellframe technology and Cellspan product candidates,
which we have and will continue to develop internally, and with our collaborators, via a rigorous scientific development process.
As a result, we believe that prior statements by others regarding the patients whose surgeries utilized our HART bioreactor or
HART-Trachea scaffold, or such products, are not pertinent to our Cellframe technology or Cellspan products, or their respective
future development.
Clinical Trials
In order to market our product candidates, we will need to successfully
complete clinical trials. The initial indication for which we intend to seek FDA approval will be to restore the function of the
esophagus subsequent to esophageal damage or stenosis due to cancer, injury or infection.
Because esophageal cancer affects only approximately 17,000
patients per year in the U.S. we anticipate that our clinical trials will involve relatively few patients. Therefore, once commenced,
we expect to be able to conduct a clinical trial in a relatively short period of time compared to clinical trials in indications
with larger patient populations. We intend to work closely with regulatory agencies and clinical experts to design and size the
clinical studies appropriately based on the specific conditions our products are intended to treat. We also intend to request expedited
review from the FDA for the Cellspan esophageal implant product. Receipt of expedited review would reduce the overall time through
the regulatory approval process.
We intend to pursue regulatory approval for the Cellspan esophageal
implant in the U.S., Canada and Europe initially. Following clinical trials in other foreign markets, we expect to pursue regulatory
approval for the Cellspan esophageal implant in those foreign markets, as well.
Research and Development
Our primary research and development activities
are focused in three areas: materials science, cell biology and engineering. In materials science, we focus on designing and testing
biocompatible organ scaffolds, testing the structural integrity and the cellularization capacities of the scaffolds. In cell biology,
we focus on developing and testing isolation and expansion protocols, cell characterization and fate studies, investigating the
effects of various cell types and concentrations, evaluating the biocompatibility of scaffolds, experimenting with different cell
seeding methodologies, and developing protocols for implantation experiments. Our engineering group supports the materials science
and cell biology groups across an array of their activities, i.e. designing, engineering and making our proprietary organ bioreactors.
All three of our R&D groups combine to plan and execute the in vitro studies. A fundamental part of our R&D effort in developing
the Cellframe technology has been dedicated to the discovery and development of small and large animal model studies. The large-animal
model employs the use of Yucatan mini-pigs. Our Cellspan scaffolds were implanted in the cervical portion as well as the thoracic
portion of the esophagus and the airways in studies to date. As of December 31, 2016, we employed 14 full-time scientists and engineers
and we also hire other consultants and part-time employees from time to time.
In addition to our in-house engineering
and scientific development team, we collaborate with leaders in the field of regenerative medicine who are performing the fundamental
research and surgeries in this field to develop and test new products that will advance and improve the procedures being performed.
As these procedures become more common, we will work with our collaborators to further enhance our products to make them more efficient
and easier to use by surgeons. In the U.S., our principal collaborations have been with Mayo Clinic and Connecticut Children’s
Medical Center. Collaboration typically involves us developing new technologies specifically to address issues these researchers
and clinicians face. In certain instances, we have entered into agreements that govern the ownership of the technologies developed
in connection with these collaborations.
We incurred approximately $4.8 million and $7.6 million of research
and development expenses in 2015 and 2016, respectively. As we have not yet applied for or received regulatory approval to market
any clinical products and sales of our research bioreactor products have not been significant in relation to our operating costs,
no significant amount of these research and development costs have been passed on to our customers.
Manufacturing
For our scaffolds we use a process called
electrospinning to create the fabric part of the scaffold. Electrospinning is a well-known fabrication process. It is useful for
cell culture applications as it can create extremely thin fibers (much thinner than a human hair) that can make a fabric with pores
approximately the same size as a cell. The electrospinning process parameters can be tuned to create a structure that is very similar
to the natural structure of the collagen fibers in human extracellular matrix. Our Cellspan scaffolds are made from polyurethane,
an inert polymer that is not bioresorbable. However, we also perform studies on the use of scaffolds made from bioresorbable materials.
While we do not manufacture the cells, as they will come from the patient’s adipose tissue, for regulatory purposes we are
responsible for the quality control of the cells and the seeding of the cells onto the scaffold in the bioreactor. For this we
have, in collaboration with our partners, developed standard operating procedures for the seeding of cells on the scaffold. For
U.S. clinical trials we anticipate that the seeding will be performed in an automated version of our bioreactor at a pre-qualified
third-party contract manufacturer using current Good Manufacturing Procedures (cGMP) using our proprietary protocol and under the
supervision of our staff.
For our scaffolds, our primary materials
are medical-grade plastic resins and solvents used to liquefy the resins in our manufacturing process. These materials are readily
available from a variety of suppliers and do not currently represent a large proportion of our total costs. For our bioreactors,
we perform final assembly and testing of components that we buy from third parties like machine shops, parts distributors, molding
facilities and printed circuit board manufacturers. These operations are performed primarily at our Holliston, MA headquarters.
Sales and Marketing
We expect that most surgeries using the Cellspan esophageal
implant product will be performed at a relatively small number of major hospitals in the U.S., Canada and European countries that
will establish themselves as specialized centers of excellence. We believe that a relatively small number of centers of excellence
in each country would be able to treat a very large percentage of that country’s patients annually, given the expected number
of patients to be treated each year. So, we expect our markets to be served by a concentrated number of treatment centers. Further,
our three Cellspan product candidates are for the esophagus, the bronchi and the trachea, three organs all treated by thoracic
surgeons. Therefore, all three products, once approved, would be marketed primarily to physicians practicing in a single surgical
specialty, so we expect that the total number of physicians using our products will be a much smaller population than if our products
were to be used by physicians in multiple areas of surgical specialties. Due to our expectation of a population of physicians in
one surgical specialty being the primary users of our products in a concentrated number of centers of excellence in each national
market, we expect to be able to support our markets with a fairly small field sales force.
We expect to price the product commensurate with the medical
value created for the patient and the costs avoided with the use of our product. We further expect to be paid by the hospital that
buys the product from us. Finally, we expect that the hospital would seek reimbursement from payers for the entire transplant procedure,
including the use of our products.
Harvard Bioscience is the exclusive distributor for the research
versions of our organ bioreactors. Harvard Bioscience can only sell those products to the research markets in accordance with the
terms of our distribution agreement. We retain all rights to manufacture and sell all our products for clinical use.
Intellectual Property and Related Agreements
We actively seek to protect our products and proprietary information
by means of U.S. and foreign patents, trademarks and contractual arrangements. Our success will depend in part on our ability to
obtain and enforce patents on our products, processes and technologies to preserve our trade secrets and other proprietary information
and to avoid infringing on the patents or proprietary rights of others.
We have rights in the patent and the patent applications listed
below. The patent or patents that may issue based on the patent applications are scheduled to expire as provided below:
Patent/Technology
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Jurisdiction
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Expiration
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Patent application covering aspects of synthetic scaffolds and organ and tissue transplantation
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U.S.
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2032
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Patent application relating to methods and compositions for producing elastic scaffolds for use in tissue engineering
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U.S.
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2033
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Patent application relating to support configurations for tubular tissue scaffolds, and airway scaffold configurations
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U.S., Europe
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2033
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Patent application relating to methods and compositions for promoting the structural integrity of scaffolds for tissue engineering
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U.S.
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2033
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Issued Patent covering methods for analyzing engineered tissues
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U.S.
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2033
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Patent application covering aspects of clinical scale bioreactors and tissue engineering
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U.S., Europe
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2030
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Issued Patent covering aspects of liquid distribution in a rotating bioreactor
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Germany
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2031
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Issued Patent covering aspects of liquid distribution in a rotating bioreactor
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Germany
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2021
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Patent application covering aspects of liquid distribution in a rotating bioreactor
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U.S.
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2032
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Patent application relating to bioreactors with supports to facilitate culturing organs
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U.S.
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2034
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Patent application relating to bioreactor adaptors for tubular tissue scaffolds
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U.S.
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2034
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Patent applications relating to engineered hybrid organs
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U.S.
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2034
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Patent applications relating to infrared-based methods for evaluating tissue health including methods for evaluating burns
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U.S.
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2033
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Patent applications relating to methods and compositions for esophageal repair
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U.S.
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2036
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We also rely on unpatented proprietary technologies in the development
and commercialization of our products. We also depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors. To help protect our proprietary know-how that may
not be patentable, and our inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality
agreements to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that
prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements
require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s
proprietary technology.
Exclusive License Agreement and Sponsored Research Agreement - InBreath
Bioreactor
We had an exclusive license agreement with Sara Mantero and
Maria Adelaide Asnaghi to intellectual property rights relating to our earlier generation InBreath Bioreactor. Under this agreement,
we had worldwide rights to intellectual property (including patents, data, and know-how) relating to the hollow organ bioreactor,
related techniques, and improvements thereof. We had exclusive worldwide rights to make, use and sell the hollow organ bioreactor,
and the right to grant sublicenses and distribution rights. Under this agreement, we were obligated to pay the licensor royalties
at various percentage rates in the low to mid-single digits pertaining to any applicable bioreactors we sell. This agreement terminated
on August 6, 2016.
We have entered into a sponsored research agreement with Sara
Mantero, Maria Adelaide Asnaghi, and the Department of Bioengineering of the Politecnico Di Milano, or PDM. Under the terms of
this agreement, PDM is required to use its facilities and best efforts to conduct a research program relating to the development
of bioreactors, clinical applications, and automated seeding processes. We are required to provide engineering support to PDM with
respect to bioreactor designs. Intellectual property developed by PDM or its employees, including Dr. Mantero or Ms. Asnaghi, under
this sponsored research agreement will be owned by Dr. Mantero or Ms. Asnaghi and covered by our exclusive license agreement described
above. In addition, we have an option to an exclusive license for intellectual property relating to new technology that may not
be covered by the exclusive license agreement. We will own any inventions and discoveries that we solely develop in connection
with the research program and any inventions and discoveries that are jointly developed in connection with the research program
will be owned jointly by the parties. On February 28, 2017, we provided 90 days’ prior written notice to terminate the sponsored
research agreement.
Sublicense Agreement with Harvard Bioscience
We have entered into a sublicense agreement with Harvard Bioscience
pursuant to which Harvard Bioscience has granted us a perpetual, worldwide, royalty-free, exclusive, except as to Harvard Bioscience
and its subsidiaries, license to use the mark “Harvard Apparatus” in the name Harvard Apparatus Regenerative Technology.
The mark “Harvard Apparatus” is used under a license agreement between Harvard Bioscience and Harvard University, and
we have agreed to be bound by such license agreement in accordance with our sublicense agreement. We currently have no affiliation
with Harvard University.
Separation Agreements with Harvard Bioscience
On November 1, 2013, to effect the Separation, Harvard Bioscience
distributed all of the shares of our common stock to the Harvard Bioscience stockholders (the “Distribution”). Prior
to the Distribution Harvard Bioscience contributed the assets of its regenerative medicine business, and approximately $15 million
in cash, to our company to fund our operations following the Distribution.
In connection with the Separation and immediately prior to the
Distribution, we entered into a Separation and Distribution Agreement, Intellectual Property Matters Agreement, Product Distribution
Agreement, Tax Sharing Agreement, Transition Services Agreement, and Sublicense Agreement with Harvard Bioscience to effect the
Separation and Distribution and provide a framework for our relationship with Harvard Bioscience after the Separation. These agreements
govern the current relationships among us and Harvard Bioscience and provided for the allocation among us and Harvard Bioscience
of Harvard Bioscience’s assets, liabilities and obligations (including employee benefits and tax-related assets and liabilities)
attributable to periods prior to the Separation.
Government Regulation
Any product that we may develop based on
our Cellframe technology, and any other clinical products that we may develop, will be subject to considerable regulation by governments.
We were in the past informed by the FDA that our previous-generation tracheal product candidate would be regulated under the Biologics
License Application, or BLA, pathway in the U.S. and we were informed by the European Medicines Agency (EMA) that the previous
generation tracheal product would be regulated under the Advanced Therapy Medicinal Products(ATMP), pathway in the EU. On October
18, 2016, we also received written confirmation from FDA’s Center for Biologics Evaluation and Research(CBER), that FDA intends
to regulate our Cellspan esophageal implant as a combination product under the primary jurisdiction of CBER. We further understand
that CBER may choose to consult or collaborate with the FDA’s Center for Devices and Radiological Health (CDRH), with respect
to the characteristics of the synthetic scaffold component of our product based on CBER’s determination of need for such
assistance. Although our Cellframe technology differs in design and performance from the first generation product candidate, we
expect that Cellframe-based products will be regulated by the FDA and EMA under the same pathways as the first generation tracheal
product candidate. This expectation is based on the fact that the Cellframe technology is centered on the delivery of the patient’s
own cells seeded on an implanted synthetic scaffold in order to restore organ function and our belief that the cells provide the
primary mode of action. Of course, it is possible that some of our current and future products may use alternative regulatory pathways.
Combination Product/Biologic
Government Regulation Combination Products/Biologics
We believe that products derived from our
Cellframe technology may be defined as combination products consisting of two or more regulated components, a biologic and a medical
device. In the U.S., a combination product usually is assigned by the FDA to one of the agency’s centers, such as CBER, or
CDRH, with the chosen center to take the lead in pre-marketing review and approval of the combination product. Other FDA centers
also may review the product in regard to matters that are within their expertise. The FDA selects the lead center based on an assessment
of the combination product’s “primary mode of action.” Some products also may require approval or clearance from
more than one FDA center.
To determine which FDA center or centers
will review a combination product submission, companies may submit a Request for Designation to the FDA. Those requests may be
handled formally or informally. In some cases, jurisdiction may be determined informally based on FDA experience with similar products.
However, informal jurisdictional determinations are not binding on the FDA. Companies also may submit a formal Request for Designation
to the FDA Office of Combination Products. The Office of Combination Products will review the request and make its jurisdictional
determination within 60 days of receiving a Request for Designation. We believe that regenerative medicine products containing
cells will be reviewed by CBER, possibly with CBER’s consultation with CDRH.
Domestic Regulation of Our Products
and Business
The testing, manufacturing, and potential
labeling, advertising, promotion, distribution, import and marketing of our products are subject to extensive regulation by governmental
authorities in the U.S. and in other countries. In the U.S., the FDA, under the Public Health Service Act, the Federal Food, Drug
and Cosmetic Act, and its implementing regulations, regulates biologics and medical device products.
The labeling, advertising, promotion, marketing
and distribution of biopharmaceuticals, or biologics and medical devices also must be in compliance with the FDA and U.S. Federal
Trade Commission (FTC), requirements which include, among others, standards and regulations for off-label promotion, industry sponsored
scientific and educational activities, promotional activities involving the internet, and direct-to-consumer advertising. The FDA
and FTC have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the
issuance of a warning letter directing us to correct deviations from regulatory standards and enforcement actions that can include
seizures, injunctions and criminal prosecution. Recently, promotional activities for FDA-regulated products of other companies
have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition,
under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims.
Further, we are required to meet regulatory requirements in countries outside the U.S., which can change rapidly with relatively
short notice.
The FDA has broad post-market and regulatory
enforcement powers. Manufacturers of biologics and medical devices are subject to unannounced inspections by the FDA to determine
compliance with applicable regulations, and these inspections may include the manufacturing facilities of some of our subcontractors.
Failure by manufacturers or their suppliers to comply with applicable regulatory requirements can result in enforcement action
by the FDA or other regulatory authorities. Potential FDA enforcement actions include:
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untitled letters, warning letters, fines, injunctions,
consent decrees and civil penalties;
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unanticipated expenditures to address or defend such actions;
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customer notifications for repair, replacement, refunds;
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recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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operating restrictions;
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refusal to grant export approval for our products; or
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In addition, other government authorities
influence the success of our business, including the availability of adequate reimbursement from third party payers, including
government programs such as Medicare and Medicaid. Medicare and Medicaid reimbursement policies can also influence corresponding
policies of private insurers and managed care providers, which can further affect our business.
Biologics Regulation
Biological products must satisfy the requirements
of the Public Health Services Act and the Food, Drug and Cosmetics Act and their implementing regulations. In order for a biologic
product to be legally marketed in the U.S., the product must have a BLA approved by the FDA.
The BLA Approval Process
The steps for obtaining FDA approval of
a BLA to market a biopharmaceutical, or biologic product in the U.S. include:
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completion of pre-clinical laboratory tests, animal studies
and formulation studies under the FDA’s GLP regulations;
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submission to the FDA of an IND application, for human
clinical testing, which must become effective before human clinical trials may begin and which must include Institutional Review
Board (IRB), approval at each clinical site before the trials may be initiated;
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performance of adequate and well-controlled clinical trials
in accordance with Good Clinical Practices (GCP), to establish the safety and efficacy of the product for each indication;
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submission to the FDA of a BLA, which contains detailed
information about the chemistry, manufacturing and controls for the product, extensive pre-clinical information, reports of the
outcomes of the clinical trials, and proposed labeling and packaging for the product;
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the FDA’s acceptance of the BLA for filing;
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satisfactory review of the contents of the BLA by the FDA,
including the satisfactory resolution of any questions raised during the review or by the advisory committee, if applicable;
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satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities,
methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and
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FDA approval of the BLA.
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Pre-clinical studies include laboratory
evaluations of product toxicity, as well as animal studies.
An IND will automatically become effective
30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct
of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed.
Clinical trials are subject to extensive
monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB for the relevant
clinical trial sites and must comply with FDA regulations, including but not limited to those relating to GCP. Adverse events must
be reported and investigated in a timely manner. To conduct a clinical trial, a company is also required to obtain the patients’
informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject
protection regulations. The sponsor, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including
a belief that the risks to trial subjects outweigh the anticipated benefits. A protocol for each clinical trial and any subsequent
protocol amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each site at which the trial is conducted
must approve the protocol and any amendments. If foreign clinical trials are intended to be considered by the FDA for approval
of a product in the U.S. then those foreign clinical trials performed under an IND must meet the same requirements that apply to
U.S. studies. The FDA will accept a foreign clinical trial not conducted under an IND only if the trial is well-designed, well-conducted,
performed by qualified investigators in accordance with international principles for GCP, or with the laws and regulations of the
country in which the research was conducted, whichever provides greater protection of the human subjects. The FDA, however, has
substantial discretion in deciding whether to accept data from foreign non-IND clinical trials.
Clinical trials involving biopharmaceutical
products are typically conducted in three sequential phases. The phases may overlap or be combined. A fourth, or post-approval,
phase may include additional clinical trials. These phases are described generally below. We note, however, that the exact number
of study subjects required for each specific intended use, and our intent to combine or “telescope” various study phases
together, are both areas where we will actively seek FDA feedback to streamline the clinical evaluation process. Briefly, the phases
of clinical development generally include the following:
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Phase I. Phase I clinical trials involve the initial introduction
of the product into human subjects to determine the adverse effects associated with increasing doses. Such Phase I studies frequently
are highly abbreviated or combined with Phase II studies (as outlined below), when the product involves the patient’s own
cells.
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Phase II. Phase II clinical trials usually involve studies
in a limited patient population to evaluate the efficacy of the product for specific, targeted indications, to determine dosage
tolerance and optimal dosage, and to identify possible adverse effects and safety risks. Products that contain the patient’s
own cells frequently are studied for initial safety and effectiveness determinations in combined or “telescoped” Phase
I/II clinical studies.
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Phase III. If the product is found to be potentially effective
and to have an acceptable safety profile in Phase II (or sometimes Phase I) trials, the clinical trial program will be expanded
to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed
clinical trial sites. As noted, the exact number of subjects needed, the duration of clinical follow-up, and the endpoints by
which safety and efficacy are demonstrated are based on the condition being treated.
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Post-Approval (Phase IV). Post-approval clinical trials
may be required of or agreed to by a sponsor as a condition of, or subsequent to marketing approval. Further, if the FDA becomes
aware of new safety information about an approved product, it is authorized to require post approval trials of the biological
product. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication
and to document a clinical benefit in the case of biologics approved under accelerated approval regulations. If the FDA approves
a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data
from these clinical trials to meet all or part of any Phase IV clinical trial requirement. These clinical trials are often referred
to as Phase III/IV post approval clinical trials. Failure to promptly conduct Phase IV clinical trials could result in withdrawal
of approval for products approved under accelerated approval regulations.
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Clinical testing may not be completed successfully
within any specified time period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials
that are conducted under an IND and may, at its discretion, reevaluate, alter, suspend, or terminate the testing based upon the
data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA or the sponsor
may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. The FDA can also request that additional pre-clinical studies or clinical trials
be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay
or prevent regulatory approval of our products under development. Furthermore, IRBs have the authority to suspend clinical trials
in their respective institutions at any time for a variety of reasons, including safety issues.
Certain information about clinical trials,
including a description of the trial, participation criteria, location of trial sites, and contact information, is required to
be sent to the National Institute of Health, or NIH for inclusion in a publicly-assessable database. Sponsors also are subject
to certain state laws imposing requirements to make publicly available certain information on clinical trial results. In addition,
the FDA Amendments Act of 2007 directs the FDA to issue regulations that will require sponsors to submit to the NIH the results
of certain controlled clinical trials, other than Phase I studies.
Assuming successful completion of the required
clinical testing, the results of the pre-clinical studies and of the clinical trials, together with other detailed information,
including information on the chemistry, manufacture and composition of the product, are submitted to the FDA in the form of a BLA
requesting approval to market the product for one or more indications. In most cases, the BLA must be accompanied by a substantial
user fee. The FDA will initially review the BLA for completeness before it accepts the BLA for filing. There can be no assurance
that the submission will be accepted for filing or that the FDA may not issue a refusal-to-file, or RTF. If a RTF is issued, there
is opportunity for dialogue between the sponsor and the FDA in an effort to resolve all concerns. If the BLA submission is accepted
for filing, the FDA will begin an in-depth review of the BLA to determine, among other things, whether a product is safe and effective
for its intended use and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s
identity, strength, quality and purity.
Companies also may seek Fast Track or Breakthrough
Therapy designation for their products. Fast Track or Breakthrough Therapy products are those that are intended for the treatment
of a serious or life-threatening condition and that demonstrate the potential to address unmet medical needs for such a condition.
If awarded, the Fast Track or Breakthrough Therapy designation applies to the product only for the indication for which the designation
was received.
If the FDA determines after review of preliminary
clinical data submitted by the sponsor that a Fast Track or Breakthrough Therapy product may be effective, it may begin review
of portions of a BLA before the sponsor submits the complete BLA (rolling review), thereby accelerating the date on which review
of a portion of the BLA can begin. There can be no assurance that any of our products will be granted Fast Track or Breakthrough
Therapy designation. And even if they are designated as Fast Track or Breakthrough Therapy products, we cannot assure you that
our products will be reviewed or approved more expeditiously for their Fast Track or Breakthrough Therapy indications than would
otherwise have been the case or will be approved promptly, or at all. Furthermore, the FDA can revoke Fast Track or Breakthrough
Therapy designation at any time.
In addition, products studied for their
safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over
existing treatments may receive Accelerated Approval and may be approved on the basis of adequate and well-controlled clinical
trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit
or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval,
the FDA may require that a sponsor of a product receiving Accelerated Approval perform adequate and well-controlled post-approval
clinical trials to verify and further define the product’s clinical benefit and safety profile. There can be no assurance
that any of our products will receive Accelerated Approval. Even if Accelerated Approval is granted, the FDA may withdraw such
approval if the sponsor fails to conduct the required post-approval clinical trials, or if the post-approval clinical trials fail
to confirm the early benefits seen during the accelerated approval process.
Fast Track or Breakthrough Therapy designation
and Accelerated Approval should be distinguished from Priority Review designation although products awarded Fast Track or Breakthrough
Therapy designation may also be eligible for Priority Review designation. Products regulated by the CBER may receive Priority Review
designation if they provide significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of
a serious or life-threatening disease. The agency has agreed to the performance goal of reviewing products awarded Priority Review
designation within six months, whereas products under standard review receive a ten-month target. The review process, however,
can be significantly extended by FDA requests for additional information or clarification regarding information already provided
in the submission. Priority Review designation is requested at the time the BLA is submitted, and the FDA makes a decision as part
of the agency’s review of the application for filing. We intend to seek Priority Review designation for the Cellspan esophageal
implant as a biologic through the BLA process. We cannot guarantee that the FDA will grant the designation and cannot predict if
awarded, what impact, if any, it will have on the review time for approval of our product.
If granted, Fast Track or Breakthrough
Therapy designation, Accelerated Approval and Priority Review designation may expedite the approval process, but they do not change
the standards for approval.
Before approving a BLA, the FDA will generally
inspect the facility or the facilities at which the finished product and its components are manufactured to ensure compliance with
cGMP.
Separate approval is required for each
proposed indication. If we want to expand the use of an approved product, we will have to design additional clinical trials, submit
the trial designs to the FDA for review and complete those trials successfully.
The testing and approval process requires
substantial time, effort and financial resources, and each may take several years to complete. Data obtained from clinical activities
are not always conclusive, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely
basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals,
which could delay or preclude us from marketing our products. The FDA may limit the indications for use or place other conditions,
such as post-approval studies, on any approvals that could restrict the commercial application of the products. After approval,
some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims,
are subject to further testing requirements and FDA review and approval.
Post-Approval Requirements
After regulatory approval of a product
is obtained, companies are required to comply with a number of post-approval requirements relating to manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping. For example, as a condition
of approval of a BLA, the FDA may require post-approval testing and surveillance to monitor the product’s safety or efficacy.
In addition, holders of an approved BLA are required to keep extensive records, to report certain adverse reactions and production
deviations and problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning
advertising and promotional labeling for their products. If we fail to comply with the regulatory requirements of the FDA and other
applicable U.S. and foreign regulatory authorities, or previously unknown problems with any approved commercial products, manufacturers
or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions or other setbacks.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
Specifically, our products could be subject
to voluntary recall if we or the FDA determine, for any reason, that our products pose a risk of injury or are otherwise defective.
Moreover, the FDA can order a mandatory recall if there is a reasonable probability that our device would cause serious adverse
health consequences or death. In addition, the FDA could suspend the marketing of or withdraw a previously approved product from
the market upon receipt of newly discovered information regarding the product’s safety or effectiveness.
Orphan Drug Designations
The Orphan Drug Act provides incentives
to manufacturers to develop and market drugs and biologics for rare diseases and conditions affecting fewer than 200,000 persons
in the U.S. at the time of application for orphan drug designation, or more than 200,000 individuals in the U.S. and for which
there is no reasonable expectation that the cost of developing and making a drug or biological product available in the U.S. for
this type of disease or condition will be recovered from sales of the product. Orphan Product designation must be requested before
submitting a New Drug Application (NDA), Biologics License Application (BLA). After the FDA grants orphan product designation,
the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. In September 2014 the FDA
granted orphan designation to our HART-Trachea product in the U.S. In November 2016, we were granted Orphan Drug Designation for
our Cellspan esophageal implant by the FDA to restore the structure and function of the esophagus subsequent to esophageal damage
due to cancer, injury or congenital abnormalities. Orphan product designation does not convey any advantage in or shorten the duration
of the regulatory review and approval process. The first developer to receive FDA marketing approval for an orphan biologic is
entitled to a seven year exclusive marketing period in the U.S. for that product as well as a waiver of the BLA user fee. The exclusivity
prevents FDA approval of another application for the same product for the same indication for a period of seven years, except in
limited circumstances where there is a change in formulation in the original product and the second product has been proven to
be clinically superior to the first.
International
We plan to seek required regulatory approvals
and comply with extensive regulations governing product safety, quality, manufacturing and reimbursement processes in order to
market our products in other major foreign markets. The regulation of our products in the EU and in other foreign markets varies
significantly from one jurisdiction to another. The classification of the particular products and related approval or CE marking
procedures can involve additional product testing and additional administrative review periods. The time required to obtain these
foreign approvals or to CE mark our products may be longer or shorter than that required in the U.S., and requirements for approval
may differ from the FDA requirements. Regulatory approval in one country does not ensure regulatory approval in another, but a
failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
The marketing authorization of products
containing viable human tissues or cells in the EU is governed by Regulation 1394/2007/EC on advanced therapy medicinal products,
read in combination with Directive 2001/83/EC of the European parliament and of the Council, commonly known as the Community code
on medicinal products. Regulation 1394/2007/EC lays down specific rules concerning the authorization, supervision and pharmacovigilance
of medicinal products, cell therapy medicinal products and tissue engineered products. Manufacturers of advanced therapy medicinal
products must demonstrate the quality, safety and efficacy of their products to the European Medicines Agency which is required
to provide an opinion regarding the application for marketing authorization. The European Commission grants or refuses marketing
authorization in light of the opinion delivered by the European Medicines Agency. Regulation 1394/2007/EC also applies to combination
products which consist of medical devices and advanced therapy medicinal products. In light of Regulation 1394/2007/EC, a medical
device which forms part of a combined advanced therapy medicinal product must meet the Essential Requirements laid down in Annex
I to Directive 93/42/EEC. The manufacturer of the combination product must include evidence of such compliance in its marketing
authorization application. The application for a marketing authorization for a combined advanced therapy medicinal product must
also, where available, include the results of the assessment of the medical device part by a notified body in accordance with Directive
93/42/EEC.
Legislation similar to the Orphan Drug
Act has been enacted in other jurisdictions, including the EU. The orphan legislation in the EU is available for therapies addressing
conditions that affect five or fewer out of 10,000 persons. The marketing exclusivity period is for ten years, although that period
can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable
not to justify maintenance of market exclusivity.
Employees
At December 31, 2016, we had 28 employees working in our business,
of whom 27 were full-time and one was part-time. At that date, all of our employees were based in the U.S. None of our employees
are unionized. In general, we consider our relations with our employees to be good.
Competition
We are not aware of any companies whose
products are directly competitive with our cell-seeded biocompatible synthetic scaffold system. However, in our key markets we
may in the future compete with multiple pharmaceutical, biotechnology, and medical device, including, among others, Aldagen, Asterias
Biotherapeutics, Athersys, BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours and Company,
InVivo Therapeutics, Mesoblast, Miramatrix Medical, Nanofiber Solutions, Neuralstem, Organovo, Osiris Therapeutics, Pluristem,
Smiths Medical, Tissue Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation and W.L. Gore and Associates.
In addition, there are many academic and clinical centers that are developing regenerative technologies that may one day become
competitors with us.
Many of our potential competitors have substantially greater
financial, technological, research and development, marketing, and personnel resources than we do. We cannot forecast if or when
these or other companies may develop competitive products.
We expect that other products will compete with products and
potential products based on efficacy, safety, cost, and intellectual property positions. While we believe that these will be the
primary competitive factors, other factors include, in certain instances, obtaining marketing exclusivity under the Orphan Drug
Act, availability of supply, manufacturing, marketing and sales expertise and capability, and reimbursement coverage.
Executive Officers of the Registrant
The following table shows information about our executive officers
as of December 31, 2016.
Name
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Position(s)
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James McGorry
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60
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Chief Executive Officer and Member of the Board of Directors
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Thomas McNaughton
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56
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Chief Financial Officer
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Saverio LaFrancesca, M.D.
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55
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President and Chief Medical Officer
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James McGorry - Chief Executive Officer
and Director
Mr. McGorry has served as our President and Chief Executive
Officer (CEO) since July 6, 2015. He has served as a Member of our Board of Directors since February 2013. Mr. McGorry has more
than 30 years of experience as a life science business leader in biologics, personalized medicine and medical devices, including
multiple product launches. Prior to becoming President and CEO at Biostage, Mr. McGorry most recently served as Executive Vice
President and General Manager, Translational Oncology Solutions for Champions Oncology and previously was Executive Vice President
of Commercial Operations at Accellent. During a 12-year tenure at Genzyme, he held leadership positions across several therapeutic
areas, including Bio Surgery, Cardiac Surgery, Oncology and Transplant. Mr. McGorry also was President of Clineffect Systems, an
electronic medical records company. He began his life sciences career with Baxter Healthcare Corporation, where he spent 11 years
in positions of increasing responsibility. Mr. McGorry also served as an officer in the United States Army for six years, including
commanding a special operations Green Beret SCUBA detachment. Mr. McGorry has an MBA with a concentration in healthcare from Duke
University, Fuqua School of Business, and a B.S. in engineering from the United States Military Academy at West Point where he
was the president of his class. We believe Mr. McGorry’s qualifications to sit on our Board of Directors include his extensive
executive leadership positions at several biotechnology and healthcare companies over the past 25 years.
Thomas McNaughton - Chief Financial Officer
Mr. McNaughton has served as our Chief Financial Officer since
May 3, 2012. Mr. McNaughton joined Harvard Bioscience as its Chief Financial Officer in November 2008, and served in that role
until the spin-off of our company from Harvard Bioscience on November 1, 2013. During 2008 and prior to joining Harvard Bioscience,
Mr. McNaughton was a consultant providing services primarily to an angel-investing group and a silicon manufacturing start-up.
From 2005 to 2007, he served as Vice President of Finance and Chief Financial Officer for Tivoli Audio, LLC, a venture capital-backed
global manufacturer of premium audio systems. From 1990 to 2005, Mr. McNaughton served in various managerial positions in the areas
of financial reporting, treasury, investor relations, and acquisitions within Cabot Corporation, a global manufacturer of fine
particulate products, and served from 2002 to 2005 as Finance Director, Chief Financial Officer of Cabot Supermetals, a $350 million
Cabot division that provided high purity tantalum and niobium products to the electronics and semiconductor industries. Mr. McNaughton
practiced from 1982 to 1990 as a Certified Public Accountant in the audit services group of Deloitte & Touche, LLP. He holds
a B.S. in accounting and finance with distinction from Babson College.
Saverio LaFrancesca, M.D.- President and Chief
Medical Officer
Dr. LaFrancesca has served as our Chief Medical
Officer since April 14, 2014 and President since March 15, 2017. Dr. LaFrancesca has a unique combination of experience that
features more than 25 years of academic clinical surgical practice and innovative research, with a foundation in
the cardiovascular, thoracic transplantation, cardiac assist device and regenerative medicine fields. He joined our
company from the Department of Cardiovascular Surgery and Transplantation at the DeBakey Heart and Vascular Center at the
Houston Methodist Hospital, where he developed the current surgical and perfusion techniques for thoracic organ procurement
and preservation and where he was also the Director of the Exvivo lung perfusion laboratory. Previously Dr. LaFrancesca was
an attending surgeon at the Department of Cardiopulmonary Transplantation at the Texas Heart Institute in Houston, Texas.
He also previously held an appointment as Associate Professor of Surgery at the “Sapienza” University of Rome
in Rome, Italy. Dr. LaFrancesca received his M.D. in medicine and surgery in 1985 at the University of Palermo. He
did his Residency in Cardiovascular Surgery in the Department of Cardiovascular Surgery at the “Sapienza”
University of Rome. He then completed his postdoctoral training with fellowships at the Texas Heart Institute under the
supervision of pioneer heart surgeon Dr. Denton Cooley. He was also a Clinical/ Research fellow at McGill University in
Montréal, Québec, Canada and at the Baylor College of Medicine in Houston. He holds UNOS certifications as
heart transplant surgeon and lung transplant surgeon. He is also certified as surgeon for the use of the HeartMate and the
Jarvik 2000 left ventricular assist devices.
Available Information and Website
Our website address is
www.biostage.com
. Our Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and exhibits and amendments to those reports filed or furnished with the Securities
and Exchange Commission pursuant to Section 13(a) of the Exchange Act are available for review on our website and the Securities
and Exchange Commission’s (“SEC”) website at www.sec.gov. Any such materials that we file with, or furnish to,
the SEC in the future will be available on our website as soon as reasonably practicable after they are electronically filed with,
or furnished to, the SEC. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
The following factors should be reviewed carefully, in conjunction
with the other information contained in this Annual Report on Form 10-K. As previously discussed, our actual results could differ
materially from our forward-looking statements. Our business faces a variety of risks. We describe below what we believe are currently
the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties
of which we are unaware, or that we currently believe are not material, may also become important factors that adversely affect
our business. In addition, past financial performance may not be a reliable indicator of future performance and historical trends
should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops
into actual events, these events could have a material adverse effect on our business, financial condition or results of operations.
In such case, the trading price of our common stock could decline, and you may lose all or part of your investment in our securities.
The risk factors generally have been separated into three groups: (i) risks relating to our business, (ii) risks relating to the
Separation and (iii) risks relating to our common stock. These risk factors should be read in conjunction with the other information
in this Annual Report on Form 10-K.
Risks Relating To Our Business
Risks Associated with Clinical Trials and Pre-Clinical Development
The results of our clinical trials
or pre-clinical development efforts may not support our product claims or may result in the discovery of adverse side effects.
Even if our pre-clinical development efforts
or clinical trials are completed as planned, we cannot be certain that their results will support our product claims or that the
FDA, foreign regulatory authorities or notified bodies will agree with our conclusions regarding them. Although we have obtained
some positive results from the use of our scaffolds and bioreactors for trachea transplants performed to date, we also discovered
that our first generation trachea product design encountered certain body response issues that we have sought to resolve with our
ongoing development of our Cellframe implant design. We cannot be certain that our Cellframe implant design or any future modifications
or improvements with respect thereto will support our claims, and any such developments may result in the discovery of further
adverse side effects. We also may not see positive results when our products undergo clinical testing in humans in the future.
Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we
cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. Our pre-clinical development
efforts and any clinical trial process may fail to demonstrate that our products are safe and effective for the proposed indicated
uses, which could cause us to abandon a product and may delay development of others. Also, patients receiving surgeries using our
products under compassionate use or in clinical trials may experience significant adverse events following the surgeries, including
serious health complications or death, which may or may not be related to materials provided by us. Our current Cellframe technology
has never been used in humans. We provided a previous generation trachea implant that was used in human patients under compassionate
use. To date, we believe that at least four of the six patients who received that first generation implant have died. While we
believe that none of them have died because of a failure of the first generation implant, these and any other such adverse events
have and may cause or contribute to the delay or termination of our clinical trials or pre-clinical development efforts. Any delay
or termination of our pre-clinical development efforts or clinical trials will delay the filing of our product submissions and,
ultimately, our ability to commercialize our products and generate revenues. It is also possible that patients enrolled in clinical
trials will experience adverse side effects that are not currently part of the product’s profile.
Clinical trials necessary to support
a biological product license or other marketing authorization for our products will be expensive and will require the enrollment
of sufficient patients to adequately demonstrate safety and efficacy for the product’s target populations. Suitable patients
may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any products
and will adversely affect our business, operating results and prospects.
In the U.S., initiating and completing
clinical trials necessary to support Biological License Applications (BLAs), will be time consuming, expensive and the outcome
uncertain. Moreover, the FDA may not agree that clinical trial results support an application for the indications sought in the
application for the product. In other jurisdictions such as the EU, the conduct of extensive and expensive clinical trials may
also be required in order to demonstrate the quality, safety and efficacy of our products, depending on each specific product,
the claims being studied, and the target condition or disease. The outcome of these clinical trials, which can be expensive and
are heavily regulated, will also be uncertain. Moreover, the results of early clinical trials are not necessarily predictive of
future results, and any product we advance into clinical trials following initial positive results in early clinical trials may
not have favorable results in later clinical trials.
Conducting successful clinical trials will require the
enrollment of a sufficient number of patients to support each trial’s claims, and suitable patients may be difficult to identify
and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors,
including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomfort and risks
associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support
staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation
in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness
of our products, or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable
risks or discomfort. Also, patients may not participate in our clinical trials if they choose to participate in contemporaneous
clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the
trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate
clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support
clearance and approval. Further, the FDA and foreign regulatory authorities may require us to submit data on a greater number of
patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data
analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a
clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result
in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA
and foreign regulatory authorities may not consider our data adequate to demonstrate safety and efficacy. Although FDA regulations
allow submission of data from clinical trials outside the U.S., there can be no assurance that such data will be accepted or that
the FDA will not apply closer scrutiny to such data. Increased costs and delays necessary to generate appropriate data, or failures
in clinical trials could adversely affect our business, operating results and prospects. In the U.S., clinical studies for our
products will be reviewed through the Investigational New Drug, or IND, pathway for biologics or combination products.
If the third parties on which we
rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually-required or
expected, we may not be able to obtain regulatory approval for or commercialize our products.
We do not have the ability to independently
conduct our pre-clinical and clinical trials for our products and we must rely on third parties, such as contract research organizations,
medical institutions, clinical investigators and contract laboratories to conduct, or assist us in conducting, such trials, including
data collection and analysis. We do not have direct control over such third parties’ personnel or operations. If these third
parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third
parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere
to our clinical protocols or any regulatory requirements, or for other reasons, our pre-clinical development activities or clinical
trials may be extended, delayed, suspended or terminated, and we may not be able to seek or obtain regulatory approval for, or
successfully commercialize, our products on a timely basis, if at all. Our business, operating results and prospects may also be
adversely affected. Furthermore, any third-party clinical trial investigators pertaining to our products may be delayed in conducting
our clinical trials for reasons outside of their control.
Risks Associated with Regulatory Approvals
If we fail to obtain, or experience
significant delays in obtaining, regulatory approvals in the U.S. and the EU for our products, including those for the esophagus
and airways, or are unable to maintain such clearances or approvals for our products, our ability to commercially distribute and
market these products would be adversely impacted.
We currently do not have regulatory approval
to market any of our implant products, including those for the esophagus and airways (trachea and bronchus). Our products are subject
to rigorous regulation by the FDA, and numerous other federal and state governmental authorities in the U.S., as well as foreign
governmental authorities. In the U.S., the FDA permits commercial distribution of new medical products only after approval of a
Premarket Approval (PMA), NDA or BLA, unless the product is specifically exempt from those requirements. A PMA, NDA or BLA must
be supported by extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling
data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the product for its intended use. There are similar
approval processes in the EU and other foreign jurisdictions. Our failure to receive or obtain such clearances or approvals on
a timely basis or at all would have an adverse effect on our results of operations.
The first bioengineered trachea
implant approved in the U.S. using our first-generation trachea implant was approved under the IND pathway through CBER for a
compassionate use. Such initial U.S. surgery was led by Professor Paolo Macchiarini, M.D., a surgeon pioneering tracheal
replacement techniques. Dr. Macchiarini was not employed or affiliated with our company, and we did no pay him any
compensation or consulting fees. In June 2014, shortly after our Chief Medical Officer joined our company, we ceased support
of any human surgeries with Dr. Macchiarini. Since the time we withdrew from involvement with Dr. Macchiarini, allegations that
Dr. Macchiarini had failed to obtain informed consent and accurately report patient conditions, among other things, for
surgeries performed at the Karolinska Institutet in Stockholm, Sweden, were made public.
The Karolinska Institutet investigated
the allegations and concluded that while in some instances Dr. Macchiarini did act without due care, his actions did not qualify
as scientific misconduct. Subsequent to this investigation, further negative publicity and claims continued to be released questioning
the conduct of Dr. Macchiarini, the Karolinska Institutet, the Krasnodar Regional Hospital in Krasnodar, Russia as well as our
company relating to surgeries performed by Dr. Macchiarini and other surgeons at such facilities. In February 2015, the Karolinska
Institutet announced that it would conduct an additional investigation into the allegations made about Dr. Macchiarini and the
Karolinska Institutet’s response and actions in the earlier investigation. In March 2015, the Karolinska Institutet announced
that it was terminating Dr. Macchiarini’s employment, and in December 2016 the Karolinska Institutet found Dr. Macchiarini,
along with three co-authors, guilty of scientific misconduct. These allegations, the results of the investigation and any further
actions that may be taken in connection with these matters, have and may continue to harm the perception of our products or company
and make it difficult to recruit patients for any clinical trials.
The FDA has informed us that our
first generation trachea product and our Cellspan esophageal implant would be viewed by the FDA as a combination product comprised
of a biologic (cells) and a medical device component. Nevertheless, we cannot be certain how the FDA will regulate our products.
The FDA may require us to obtain marketing clearance and approval from multiple FDA centers. The review of combination products
is often more complex and more time consuming than the review of products under the jurisdiction of only one center within the
FDA.
While the FDA has informed us that our
first generation trachea product and our Cellspan esophageal implant would be regulated by the FDA as a combination product, we
cannot be certain that any of our other products would also be regulated by the FDA as a combination product. For a combination
product, the Office of Combination Products, or OCP, within FDA can determine which center or centers within the FDA will review
the product and under what legal authority the product will be reviewed. Generally, the center within the FDA that has the primary
role in regulating a combination product is determined based on the primary mode of action of the product. Generally, if the primary
mode of action is as a device CDRH takes the lead. Alternatively, if the primary mode of action is cellular, then the Center for
Biologics Evaluation and Research takes the lead. On August 29, 2013, we received written confirmation from FDA’s Office
of Combination Products that FDA intends to regulate our first generation trachea product as a combination product under the primary
jurisdiction of CBER. On October 18, 2016, we also received written confirmation from FDA’s Center for Biologics Evaluation
and Research, or CBER, that FDA intends to regulate our Cellspan esophageal implant as a combination product under the primary
jurisdiction of CBER. We further understand that CBER may choose to consult or collaborate with CDRH with respect to the characteristics
of the synthetic scaffold component of our product based on CBER’s determination of need for such assistance.
The process of obtaining FDA marketing
approval is lengthy, expensive, and uncertain, and we cannot be certain that our products, including products pertaining to the
esophagus, airways, or otherwise, will be cleared or approved in a timely fashion, or at all. In addition, the review of combination
products is often more complex and can be more time consuming than the review of a product under the jurisdiction of only one center
within the FDA.
We cannot be certain that the FDA will
not elect to have our combination products reviewed and regulated by only one FDA center and/or different legal authority, in which
case the path to regulatory approval would be different and could be more lengthy and costly.
If the FDA does not approve or clear our
products in a timely fashion, or at all, our business and financial condition will be adversely affected.
In the EU, our esophagus product
will likely be regulated as a combined advanced therapy medicinal product and our other products, including for the trachea or
bronchus, may also be viewed as advanced therapy medicinal products, which could delay approvals and clearances and increase costs
of obtaining such approvals and clearances.
On May 28, 2014, we received notice from
the European Medicines Agency (EMA) that our first generation trachea product would be regulated as a combined advanced therapy
medicinal product. While we have not had any formal interaction with the EMA with respect to our Cellframe implant technology,
including pertaining to the esophagus, we believe that such implant technology would likely be regulated as a combined advanced
therapy medicinal product. In the event of such classification, it would be necessary to seek a marketing authorization for these
products granted by the European Commission before being marketed in the EU.
Other products we may develop, including
any products pertaining to the airways or otherwise, may similarly be regulated as advanced therapy medicinal products or combined
advanced therapy medicinal products. The regulatory procedures leading to marketing approval of our products vary among jurisdictions
and can involve substantial additional testing. Compliance with the FDA requirements does not ensure clearance or approval in other
jurisdictions, and the ability to legally market our products in any one foreign country does not ensure clearance, or approval
by regulatory authorities in other foreign jurisdictions. The foreign regulatory process leading to the marketing of the products
may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required
to comply with foreign regulations and market products may differ from that required to obtain FDA approval, and we may not obtain
foreign approval or clearance on a timely basis, if at all.
The United Kingdom’s vote to
leave the European Union will have uncertain effects and could adversely affect us.
On June 23, 2016, eligible members
of the electorate in the United Kingdom decided by referendum to leave the European Union, commonly referred to as "Brexit".
The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional
period or more permanently. Since a significant proportion of the regulatory framework in the United Kingdom is derived from European
Union directives and regulations, the referendum could materially change the regulatory regime applicable to the approval of any
product candidates in the United Kingdom. In addition, since the EMA is located in the U.K., the implications for the regulatory
review process in the European Union has not been clarified and could result in relocation of the EMA or a disruption in the EMA
review process.
Further, Brexit could adversely affect
European and worldwide economic or market conditions and could contribute to instability in global financial markets. Brexit is
likely to lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws
to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business and
financial condition.
Risk Associated with Product Marketing
Even if our products are cleared
or approved by regulatory authorities, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority
requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or
withdrawal from the market.
Any product for which we obtain clearance
or approval in the U.S. or the EU, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and
other domestic and foreign regulatory authorities or notified bodies. In particular, we and our suppliers are required to comply
with the FDA’s Quality System Regulations, or QSR, and Good Manufacturing Practices, or GMPs, for our medical products, and
International Standards Organization, or ISO, regulations for the manufacture of our products and other regulations which cover
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and
shipping of any product for which we obtain clearance or approval. Manufacturing may also be subject to controls by the FDA for
parts of the system or combination products that the FDA may find are controlled by the biologics regulations. Equivalent regulatory
obligations apply in foreign jurisdictions. Regulatory authorities, such as the FDA, the competent authorities of the EU Member
States, the European Medicines Agency and notified bodies, enforce the QSR, GMP and other applicable regulations in the U.S. and
in foreign jurisdictions through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes
and regulations administered by the FDA and other regulatory authorities or notified bodies in the U.S. or in foreign jurisdictions,
or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result
in, among other things, any of the following enforcement actions:
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untitled letters, warning letters, fines, injunctions,
consent decrees and civil penalties;
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unanticipated expenditures to address or defend such actions;
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customer notifications for repair, replacement, refunds;
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recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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withdrawing BLA or NDA approvals that have already been
granted;
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withdrawal of the marketing authorization granted by the
European Commission or delay in obtaining such marketing authorization;
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withdrawal of the CE Certificates of Conformity granted
by the notified body or delay in obtaining these certificates;
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refusal to grant export approval for our products; and
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Post-market enforcement actions can
generate adverse commercial consequences.
Even if regulatory approval of a product
is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed
and reduce our potential to successfully commercialize the product and generate revenue from the product. If the FDA or a foreign
regulatory authority determines that our promotional materials, labeling, training or other marketing or educational activities
constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject
us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take
action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result
in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In
addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our
products, and we must comply with medical products reporting requirements, including the reporting of adverse events and malfunctions
related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events
or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements
such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products
from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture
or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal
penalties which would adversely affect our business, operating results and prospects.
Extensive governmental regulations
that affect our business are subject to change, and we could be subject to penalties and could be precluded from marketing our
products and technologies if we fail to comply with new regulations and requirements.
As a manufacturer and marketer of biotechnology
products, we are subject to extensive regulation that is subject to change. In March 2010, President Obama signed into law a legislative
overhaul of the U.S. healthcare system, known as the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare
and Education Affordability Reconciliation Act of 2010, or the PPACA, which may have far-reaching consequences for most healthcare
companies, including biotechnology companies. The PPACA could substantially change the structure of the health insurance system
and the methodology for reimbursing medical services, laboratory tests, drugs and devices. These structural changes, as well as
those relating to proposals that may be made in the future to change the health care system, could entail modifications to the
existing system of private payers and government programs, as well as implementation of measures to limit or eliminate payments
for some medical procedures and treatments or subject the pricing of medical products to government control. Government and other
third-party payers increasingly attempt to contain health care costs by limiting both coverage and the level of payments of newly
approved health care products. In some cases, they may also refuse to provide any coverage of uses of approved products for disease
indications other than those for which the regulatory authorities have granted marketing approval. Governments may adopt future
legislative proposals and federal, state, foreign or private payers for healthcare goods and services may take action to limit
their payments for goods and services. In addition, it is possible that changes in administration and policy, including the potential
repeal of all or parts of the PPACA, resulting from the recent U.S. presidential election could result in additional proposals
and/or changes to health care system legislation.
Any of these regulatory changes and events
could limit our ability to form collaborations and our ability to commercialize our products, and if we fail to comply with any
such new or modified regulations and requirements it could adversely affect our business, operating results and prospects.
If we fail to complete the required
IRS forms for exemptions, make timely semi-monthly payments of collected excise taxes, or submit quarterly reports as required
by the Medical Device Excise Tax, we may be subject to penalties, such as Section 6656 penalties for any failure to make timely
deposits.
Section 4191 of the Internal Revenue Code,
enacted by Section 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)),
in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), imposed as of January
1, 2013, an excise tax on the sale of certain medical devices. The excise tax imposed by Section 4191 is 2.3% of the price for
which a taxable medical device is sold within the U.S.
While the provision for a medical device
excise tax has been suspended for 2016 and 2017, there is no guarantee that the moratorium will be approved for subsequent years.
The excise tax will apply to future sales of any company medical device listed with the FDA under Section 510(j) of the Federal
Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, unless the device falls within an exemption from the tax, such as the exemption
governing direct retail sale of devices to consumers or for foreign sales of these devices. We will need to assess to what extent
this excise tax may impact the sales price and distribution agreements under which any of our products are sold in the U.S. We
also expect general and administrative expense to increase due to the medical device excise tax. We will need to submit IRS forms
applicable to relevant exemptions, make semi-monthly payments of any collected excise taxes, and make timely (quarterly) reports
to the IRS regarding the excise tax. To the extent we do not comply with the requirements of the Medical Device Excise Tax we may
be subject to penalties.
Financial and Operating Risks
Our audited financial statements for the year ended December
31, 2016 contain a going concern qualification. Our financial status creates doubt whether we will continue as a going concern.
We will need additional funds in the near future and our operations will be adversely affected if we are unable to obtain needed
funding.
In their audit report dated March 16, 2017 included in this
Form 10-K, our independent registered public accounting firm included a “going concern” qualification as to our ability
to continue as a going concern. We believe that if we do not raise additional capital from outside sources in the very near future,
we may be forced to curtail or cease our operations. We believe that our existing cash resources will be sufficient to fund our
planned operations through the third quarter of 2017. Our cash requirements and cash resources will vary significantly depending
upon the timing, financial and other resources that will be required to complete ongoing development and pre-clinical and clinical
testing of our products as well as regulatory efforts and collaborative arrangements necessary for our products that are currently
under development. In addition to development and other costs, we expect to incur capital expenditures from time to time. These
capital expenditures will be influenced by our regulatory compliance efforts, our success, if any, at developing collaborative
arrangements with strategic partners, our needs for additional facilities and capital equipment and the growth, if any, of our
business in general. We will require additional funding by the third quarter of 2017 to continue our anticipated operations and
support our capital needs. We may seek to raise necessary funds through a combination of public or private equity offerings, debt
financings, other financing mechanisms, strategic collaborations and licensing arrangements. We may not be able to obtain additional
financing on terms favorable to us, if at all. In addition, general market conditions may make it difficult for us to seek financing
from the capital markets.
Any additional equity financings could result in significant
dilution to our stockholders and possible restrictions on subsequent financings. Debt financing, if available, could result in
agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt,
making capital expenditures or paying dividends. Other financing mechanisms may involve selling intellectual property rights, payment
of royalties or participation in our revenue or cash flow. In addition, in order to raise additional funds through strategic collaborations
or licensing arrangements, we may be required to relinquish certain rights to some or all of our technologies or products. If we
cannot raise funds or engage strategic partners on acceptable terms when needed, we may not be able to continue our research and
development activities, develop or enhance our products, take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements.
We have generated insignificant revenue to date and have
an accumulated deficit. We anticipate that we will incur losses for the foreseeable future. We may never achieve or sustain profitability.
We have generated insignificant revenues to date and we have
generated no revenues from sales of any clinical products, and as of December 31, 2016, we had an accumulated deficit of approximately
$36.3 million. We expect to continue to experience losses in the foreseeable future due to our limited anticipated revenues and
significant anticipated expenses. We do not anticipate that we will achieve meaningful revenues for the foreseeable future. In
addition, we expect that we will continue to incur significant operating expenses as we continue to focus on additional research
and development, preclinical testing, clinical testing and regulatory review and/or approvals of our products and technologies.
As a result, we cannot predict when, if ever, we might achieve profitability and cannot be certain that we will be able to sustain
profitability, if achieved.
Our products are in an early stage of development. If
we are unable to develop or market any of our products, our financial condition will be negatively affected, and we may have to
curtail or cease our operations.
We are in the early stage of product development. One must evaluate
us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our products require additional
research and development, preclinical testing, clinical testing and regulatory review and/or approvals or clearances before marketing.
In addition, we may not succeed in developing new products as an alternative to our existing portfolio of products. If we fail
to successfully develop and commercialize our products, including our esophageal or airway products, our financial condition may
be negatively affected, and we may have to curtail or cease our operations.
We have a limited operating history and it is difficult
to predict our future growth and operating results.
We have a limited operating history and limited operations and
assets. Accordingly, one should consider our prospects in light of the costs, uncertainties, delays and difficulties encountered
by companies in the early stage of development. As such, our development timelines have been and may continue to be subject to
delay that could negatively affect our cash flow and our ability to develop or bring products to market, if at all. Our estimates
of patient population are based on published data and analysis of external databases by third parties and are subject to uncertainty
and possible future revision as they often require inference or extrapolations from one country to another or one patient condition
to another.
Our prospects must be considered in light of inherent risks,
expenses and difficulties encountered by all early stage companies, particularly companies in new and evolving markets, such as
bioengineered organ implants, and regenerative medicine. These risks include, but are not limited to, unforeseen capital requirements,
delays in obtaining regulatory approvals, failure to gain market acceptance and competition from foreseen and unforeseen sources.
If we fail to retain key personnel, we may not be able
to compete effectively, which would have an adverse effect on our operations.
Our success is highly dependent on the continued
services of key management, technical and scientific personnel and collaborators. Our management and other employees may
voluntarily terminate their employment at any time upon short notice. The loss of the services of any member of our senior
management team, including our Chief Executive Officer, James McGorry, our Chief Financial Officer, Thomas McNaughton, our
President and Chief Medical Officer, Dr. Saverio La Francesca, our Vice President of Regulatory Affairs, Laura Mondano, and
our other key scientific, technical and management personnel, may significantly delay or prevent the achievement of product
development and other business objectives.
If our collaborators do not devote sufficient time and
resources to successfully carry out their duties or meet expected deadlines, we may not be able to advance our products in a timely
manner or at all.
We are currently collaborating with multiple academic researchers
and clinicians at a variety of research and clinical institutions. Our success depends in part on the performance of our collaborators.
Some collaborators may not be successful in their research and clinical trials or may not perform their obligations in a timely
fashion or in a manner satisfactory to us. Typically, we have limited ability to control the amount of resources or time our collaborators
may devote to our programs or potential products that may be developed in collaboration with us. Our collaborators frequently depend
on outside sources of funding to conduct or complete research and development, such as grants or other awards. In addition, our
academic collaborators may depend on graduate students, medical students, or research assistants to conduct certain work, and such
individuals may not be fully trained or experienced in certain areas, or they may elect to discontinue their participation in a
particular research program, creating an inability to complete ongoing research in a timely and efficient manner. As a result of
these uncertainties, we are unable to control the precise timing and execution of any experiments that may be conducted.
Although we have formal co-development collaboration agreements
with Mayo Clinic and Connecticut Children’s Medical Center, we do not have formal agreements in place with other collaborators,
and most of our collaborators retain the ability to pursue other research, product development or commercial opportunities that
may be directly competitive with our programs. If any of our collaborators elect to prioritize or pursue other programs in lieu
of ours, we may not be able to advance product development programs in an efficient or effective manner, if at all. If a collaborator
is pursuing a competitive program and encounters unexpected financial or capability limitations, they may be motivated to reduce
the priority placed on our programs or delay certain activities related to our programs. Any of these developments could harm or
slow our product and technology development efforts.
Public perception of ethical and social issues surrounding
the use of cell technology may limit or discourage the use of our technologies, which may reduce the demand for our products and
technologies and reduce our revenues.
Our success will depend in part upon our collaborators’
ability to develop therapeutic approaches incorporating, or discovered through, the use of cells. If either bioengineered organ
implant technology is perceived negatively by the public for social, ethical, medical or other reasons, governmental authorities
in the U.S. and other countries may call for prohibition of, or limits on, cell-based technologies and other approaches to bioengineering
and tissue engineering. Although the surgeons using our products have not, to date, used the more controversial stem cells derived
from human embryos or fetuses in the human transplant surgeries using our products, claims that human-derived stem cell technologies
are ineffective or unethical may influence public attitudes. The subject of cell and stem cell technologies in general has at times
received negative publicity and aroused public debate in the U.S. and some other countries. Ethical and other concerns about such
cells could materially harm the market acceptance of our products.
Our products will subject us to liability exposure.
We face an inherent risk of product liability claims, especially
with respect to our products that will be used within the human body, including the scaffolds we manufacture. Product liability
coverage is expensive and sometimes difficult to obtain. We may not be able to obtain or maintain insurance at a reasonable cost.
We may be subject to claims for liabilities for unsuccessful outcomes of surgeries involving our products, which may include claims
relating to patient death. We may also be subject to claims for liabilities relating to patients that suffer serious complications
or death during or following transplants involving our products, including the patients who had surgeries utilizing our first generation
scaffold product or our bioreactor technology, or patients that may have surgeries utilizing any of our products in the future.
Our current product liability coverage is $15 million per occurrence and in the aggregate. We will need to increase our insurance
coverage if and when we begin commercializing any of our products. There can be no assurance that existing insurance coverage will
extend to other products in the future. Any product liability insurance coverage may not be sufficient to satisfy all liabilities
resulting from product liability claims. A successful claim may prevent us from obtaining adequate product liability insurance
in the future on commercially desirable items, if at all. If claims against us substantially exceed our coverage, then our business
could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation, such litigation
could consume substantial amounts of our financial and managerial resources and could result in, among others:
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significant awards against us;
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substantial litigation costs;
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injury to our reputation and the reputation of our products;
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withdrawal of clinical trial participants; and
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adverse regulatory action.
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Any of these results would substantially harm our business.
If restrictions on reimbursements or other conditions
imposed by payers limit our customers’ actual or potential financial returns on our products, our customers may not purchase
our products or may reduce their purchases.
Our customers’ willingness to use our products will depend
in part on the extent to which coverage for these products is available from government payers, private health insurers and other
third-party payers. These payers are increasingly challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved treatments and products in the fields of biotechnology and regenerative
medicine, and coverage and adequate payments may not be available for these treatments and products. In addition, third-party payers
may require additional clinical trial data to establish or continue reimbursement coverage. These clinical trials, if required,
could take years to complete and could be expensive. There can be no assurance that the payers will agree to continue reimbursement
or provide additional coverage based upon these clinical trials. Failure to obtain adequate reimbursement would result in reduced
sales of our products.
We depend upon a single-source supplier for the hardware
used for our organ bioreactor control and acquisition system. The loss of this supplier, or future single-source suppliers we may
rely on, or their failure to provide us with an adequate supply of their products or services on a timely basis, could adversely
affect our business.
We currently have a single supplier for
certain components that we use for our organ bioreactor control and acquisition systems as well as materials used in scaffolds.
We may also rely on other single-source suppliers for critical components of our products in the future. If we were unable to acquire
hardware or other products or services from applicable single-source suppliers, we could experience a delay in developing and manufacturing
our products.
We use and generate hazardous materials in our business
and must comply with environmental laws and regulations, which can be expensive.
Our research, development and manufacturing involve the controlled
use of hazardous chemicals, and we may incur significant costs as a result of the need to comply with numerous laws and regulations.
For example, certain volatile organic laboratory chemicals we use, such as fluorinated hydrocarbons, must be disposed of as hazardous
waste. We are subject to laws and regulations enforced by the FDA, foreign health authorities and other regulatory requirements,
including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, and other current and potential federal, state, local and foreign laws and regulations governing
the use, manufacture, storage, handling and disposal of our products, materials used to develop and manufacture our products, and
resulting waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, our operations could be interrupted. Further, we could be held
liable for any damages that result and any such liability could exceed our resources.
Our products are novel and will require market acceptance.
Even if we receive regulatory approvals for the commercial use
of our products, their commercial success will depend upon acceptance by physicians, patients, third party payers such as health
insurance companies and other members of the medical community. Market acceptance of our products is also dependent upon our ability
to provide acceptable evidence and the perception of the positive characteristics of our products relative to existing or future
treatment methods, including their safety, efficacy and/or other positive advantages. If our products fail to gain market acceptance,
we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we
may develop and commercialize will depend on many factors, both within and outside of our control. If our products receive only
limited market acceptance, our business, financial condition and results of operations would be materially and adversely affected.
Our long-term growth depends on our ability to develop
products for other organs.
Our growth strategy includes expanding the use of our products
in treatments pertaining to organs other than the esophagus and airways, such as the lungs, GI tract, among others. These other
organs are more complex than the esophagus and airways. There is no assurance that we will be able to successfully apply our technologies
to these other more complex organs, which might limit our expected growth.
Our success will depend partly on our ability to operate
without infringing on, or misappropriating, the intellectual property or confidentiality rights of others.
We may be sued for infringing on the intellectual
property or confidentiality rights of others, including the patent rights, trademarks and trade names and confidential information
of third parties. We have received correspondence from legal counsel to Nanofiber Solutions, Inc., or NFS, claiming that in developing
our scaffold product and related intellectual property, we may have committed misappropriation, unauthorized use and disclosure
of confidential information, and possible infringement of intellectual property rights of NFS. We have received correspondence
from legal counsel to UCL Business PLC, or UCLB, challenging the validity of the assignment of certain patent applications that
have been assigned to us by Dr. Macchiarini. We have also received correspondence from an academic researcher implying that one
of our research bioreactor products may violate an issued patent. We do not believe that our current products violate this patent.
To the extent that any of such claims are valid, if we had utilized, or were to utilize, such patent applications or patents without
an agreement from the owner thereof, it could result in infringement of the intellectual property rights of the respective owner.
Intellectual property and related litigation is costly and the outcome is uncertain. If we do not prevail in any such intellectual
property or related litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity,
or obtain a license to or design around the intellectual property or confidential information in question. If we are unable to
obtain a required license on acceptable terms, or are unable to design around any third party patent, we may be unable to sell
some of our products and services, which could result in reduced revenue.
We may be involved in lawsuits to protect or enforce our
patents that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate
patent litigation against third parties. We may also become subject to interference proceedings conducted in the patent and trademark
offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual
property suits, interference proceedings and related legal and administrative proceedings would be costly, and may divert our technical
and management personnel from their normal responsibilities. We may not prevail in any of these suits should they occur. An adverse
determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly
and could put our patent applications at risk of being rejected and patents not being issued.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation, there is a risk that some of our confidential information could be
compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, there could
be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. Securities
analysts or investors may perceive these announcements to be negative, which could cause the market price of our stock to decline.
If we are unable to effectively protect our intellectual
property, third parties may use our technology, which would impair our ability to compete in our markets.
Our continued success will depend significantly on our ability
to obtain and maintain meaningful patent protection for certain of our products throughout the world. Patent law relating to the
scope of claims in the biotechnology, regenerative medicine, and medical device fields in which we operate is still evolving. The
degree of future protection for our proprietary rights is uncertain. We may rely on patents to protect a significant part of our
intellectual property and to enhance our competitive position. However, our presently pending or future patent applications may
not be accepted and patents might not be issued, and any patent previously issued to us may be challenged, invalidated, held unenforceable
or circumvented. Furthermore, the claims in patents which have been issued or which may be issued to us in the future may not be
sufficiently broad to prevent third parties from producing competing products similar to our products. We may also operate in countries
where we do not have patent rights and in those countries we would not have patent protection. We also rely on trademarks and trade
names in our business. The laws of various foreign countries in which we compete may not protect our intellectual property to the
same extent as do the laws of the U.S. If we fail to obtain adequate patent protection for our proprietary technology, our ability
to be commercially competitive could be materially impaired. It is also possible that our intellectual property may be stolen via
cyber-attacks or similar methods.
In addition to patent protection, we also rely on protection
of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade-secrets and proprietary
information, we generally seek to enter into confidentiality agreements with our employees, consultants and strategic partners
upon the commencement of a relationship. However, we may not be able to obtain these agreements in all circumstances in part due
to local regulations. In the event of unauthorized use or disclosure of this information, these agreements, even if obtained, may
not provide meaningful protection for our trade-secrets or other confidential information. In addition, adequate remedies may not
exist in the event of unauthorized use or disclosure of this information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a material adverse effect on our operating results, financial
condition and future growth prospects.
Our competitors and potential competitors may have greater
resources than we have and may develop products and technologies that are more effective or commercially attractive than our products
and technologies or may develop competing relationships with our key collaborators.
We expect to compete with multiple pharmaceutical,
biotechnology, medical device and scientific research product companies. Companies working in competing areas include, among others,
Aldagen, Asterias Biotherapeutics, Athersys, BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours
and Company, InVivo Therapeutics, Mesoblast, Miramatrix Medical, Nanofiber Solutions, Neuralstem, Organovo, Osiris Therapeutics,
Pluristem Therapeutics, Smiths Medical, Tissue Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation,
and W.L. Gore and Associates. In addition, there are many academic and clinical centers that are developing bioengineered or regenerative
organ technologies that may one day become competitors for us. Many of our competitors and potential competitors have substantially
greater financial, technological, research and development, marketing, and personnel resources than we do. We cannot, with any
accuracy, forecast when or if these companies are likely to bring bioengineered organ or regenerative medicine products to market
for indications that we are also pursuing. Many of these potential competitors may be further along in the process of product development
and also operate large, company-funded research and development programs.
We expect that other products will compete
with our current and future products based on efficacy, safety, cost, and intellectual property positions. While we believe that
these will be the primary competitive factors, other factors include obtaining marketing exclusivity under certain regulations,
availability of supply, manufacturing, marketing and sales expertise and capability, and reimbursement coverage. Our competitors
may develop or market products that are more effective or commercially attractive than our current or future products and may also
develop competing relationships with our key collaborators. In addition, we may face competition from new entrants into the field.
We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully
in the future. The effects of any such actions of our competitors may have a material adverse effect on our business, operating
results and financial condition.
If we do not successfully manage our growth, our business
goals may not be achieved.
To manage growth, we will be required to continue to improve
existing, and implement additional, operational and financial systems, procedures and controls, and hire, train and manage additional
employees. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth
and we may not be able to hire, train, retain, motivate and manage required personnel. Competition for qualified personnel in the
biotechnology and regenerative medicine area is intense, and we operate in several geographic locations where labor markets are
particularly competitive, including Boston, Massachusetts, where demand for personnel with these skills is extremely high and is
likely to remain high. As a result, competition for qualified personnel is intense and the process of hiring suitably qualified
personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient
number of qualified employees or otherwise manage our growth effectively, our ability to conduct and expand our business could
be seriously reduced.
We are exposed to a variety of risks relating to our international
sales and operations, including fluctuations in exchange rates, local economic conditions and delays in collection of accounts
receivable.
We intend to generate significant revenues outside the U.S.
in multiple foreign currencies including Euros, British pounds, and in U.S. dollar-denominated transactions conducted with customers
who generate revenue in currencies other than the U.S. dollar. For those foreign customers who purchase our products in U.S. dollars,
currency fluctuations between the U.S. dollar and the currencies in which those customers do business may have a negative impact
on the demand for our products in foreign countries where the U.S. dollar has increased in value compared to the local currency.
Since we have vendors and customers outside the U.S. and we
may generate revenues and incur operating expenses in multiple foreign currencies, we will experience currency exchange risk with
respect to any foreign currency-denominated revenues and expenses. We cannot predict the consolidated effects of exchange rate
fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposure
and the potential volatility of currency exchange rates. Our international activities subject us to laws regarding sanctioned countries,
entities and persons, customs, import-export, laws regarding transactions in foreign countries, the U.S. Foreign Corrupt Practices
Act and local anti-bribery and other laws regarding interactions with healthcare professionals. Among other things, these laws
restrict, and in some cases prohibit, U.S. companies from directly or indirectly selling goods, technology or services to people
or entities in certain countries. In addition, these laws require that we exercise care in structuring our sales and marketing
practices in foreign countries.
Local economic conditions, legal, regulatory or political considerations,
disruptions from strikes, the effectiveness of our sales representatives and distributors, local competition and changes in local
medical practice could also affect our sales to foreign markets. Relationships with customers and effective terms of sale frequently
vary by country, often with longer-term receivables than are typical in the U.S.
Risks Related To Our Separation From
Harvard Bioscience
If the Separation and related distribution of all of the
shares of our common stock by Harvard Bioscience, together with certain related transactions, does not qualify as a transaction
that is generally tax-free for U.S. federal income tax purposes, Harvard Bioscience could be subject to significant tax liability
and, in certain circumstances, we could be required to indemnify Harvard Bioscience for material taxes pursuant to indemnification
obligations under the tax sharing agreement.
Harvard Bioscience has informed us that on June 28, 2013 it
received a Supplemental Ruling to the Private Letter Ruling dated March 22, 2013 from the IRS to the effect that, among other things,
the Separation and related distribution of all of the shares of our common stock by Harvard Bioscience, or the Distribution, will
qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Internal
Revenue Code continuing in effect. The private letter and supplemental rulings and the tax opinion that Harvard Bioscience received
from Burns & Levinson LLP, special counsel to Harvard Bioscience, rely on certain representations, assumptions and undertakings,
including those relating to the past and future conduct of our business, and neither the private letter and supplemental rulings
nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter
and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for
tax-free treatment. Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution
should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the
representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings
are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.
If the Distribution fails to qualify for tax-free treatment,
in general, Harvard Bioscience would be subject to tax as if it had sold our common stock in a taxable sale for its fair market
value, and Harvard Bioscience stockholders who receive shares of our common stock in the Distribution would be subject to tax as
if they had received a taxable Distribution equal to the fair market value of such shares.
Under the tax sharing agreement between Harvard Bioscience and
us, we would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the extent
that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (ii)
other actions or failures to act by us, or (iii) any of our representations or undertakings being incorrect or violated. Our indemnification
obligations to Harvard Bioscience and its subsidiaries, officers and directors are not limited by any maximum amount. If we are
required to indemnify Harvard Bioscience or such other persons under the circumstances set forth in the tax sharing agreement,
we may be subject to substantial liabilities.
We may have received better terms from unaffiliated third
parties than the terms we received in our agreements with Harvard Bioscience.
The agreements related to the Separation, including the separation
and distribution agreement, tax sharing agreement, transition services agreement and the other agreements, were negotiated in the
context of the Separation while we were still part of Harvard Bioscience and, accordingly, may not reflect terms that would have
resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the
context of the Separation related to, among other things, allocation of assets, liabilities, rights, indemnifications and other
obligations among Harvard Bioscience and us. We may have received better terms from third parties because third parties may have
competed with each other to win our business. One of the members of our Board of Directors is also a member of the Harvard Bioscience
Board of Directors.
The ownership by one of our executive officers and one
of our directors of shares of common stock, options, or other equity awards of Harvard Bioscience, as well as the continued role
of our director with Harvard Bioscience may create, or may create the appearance of, conflicts of interest.
The ownership by one of our executive officers and one of our
directors of shares of common stock, options, or other equity awards of Harvard Bioscience may create, or may create the appearance
of, conflicts of interest. Because of their current or former positions with Harvard Bioscience, one of our executive officers,
and one of our directors, own shares of Harvard Bioscience common stock, options to purchase shares of Harvard Bioscience common
stock or other equity awards. The individual holdings of common stock, options to purchase common stock of Harvard Bioscience or
our company or other equity awards, may be significant for some of these persons compared to such persons’ total assets.
Ownership by our directors and officers of common stock or options to purchase common stock of Harvard Bioscience, or any other
equity awards, creates, or, may create the appearance of, conflicts of interest when these directors and officers are faced with
decisions that could have different implications for Harvard Bioscience than the decisions have for us. In addition, one of our
directors, John F. Kennedy, is a member of the Board of Directors of Harvard Bioscience. The continued service at both companies
creates, or, may create the appearance of, conflicts of interest when Mr. Kennedy is faced with decisions that could have different
implications for Harvard Bioscience than the decisions have for us.
Third parties may seek to hold us responsible for liabilities
of Harvard Bioscience that we did not assume in our agreements.
In connection with the Separation, Harvard Bioscience has generally
agreed to retain all liabilities that did not historically arise from our business. Third parties may seek to hold us responsible
for Harvard Bioscience’s retained liabilities. Under our agreements with Harvard Bioscience, Harvard Bioscience has agreed
to indemnify us for claims and losses relating to these retained liabilities. However, if those liabilities are significant and
we are ultimately liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Harvard
Bioscience.
Any disputes that arise between us and Harvard Bioscience
with respect to our past and ongoing relationships could harm our business operations.
Disputes may arise between Harvard Bioscience and us in a number
of areas relating to our past and ongoing relationships, including:
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intellectual property, technology and business matters,
including failure to make required technology transfers and failure to comply with non-compete provisions applicable to Harvard
Bioscience and us;
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labor, tax, employee benefit, indemnification and other
matters arising from the Separation;
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distribution and supply obligations;
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employee retention and recruiting;
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business combinations involving us;
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sales or distributions by Harvard Bioscience of all or
any portion of its ownership interest in us; and
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business opportunities that may be attractive to both Harvard
Bioscience and us.
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We may not be able to resolve any potential conflicts, and even
if we do, the resolution may be less favorable than if we were dealing with a different party.
Risks Relating To Our Common Stock
Substantial sales of common stock have and may continue
to occur, or may be anticipated, which have and could continue to cause our stock price to decline.
We expect that we will seek to raise additional
capital from time to time in the future, which may involve the issuance of additional shares of common stock, or securities convertible
into common stock. Since our February 2015 public offering, the holders of the shares of Series B Convertible Preferred Stock issued
in that offering have converted all such shares and have sold substantially all of the common stock they received upon such conversion.
We believe that the effect of these conversions and sales contributed, at that time, to a decline in the price of our common stock.
On February 10, 2017, we completed a public offering of 20,000,000 shares of common stock and the issuance of warrants to purchase
20,000,000 shares of common stock. Additionally, we issued to the placement agent warrants to purchase 1,000,000 shares of common
stock to the placement agent for the offering. The purchasers of the shares of common stock and warrants to purchase shares of
common stock from that offering may sell significant quantities of our common stock in the market, which may cause a decline in
the price of our common stock. Further, we cannot predict the effect, if any, that any additional market sales of common stock,
or anticipation of such sales, or the availability of those shares of common stock for sale will have on the market price of our
common stock. Any future sales of significant amounts of our common stock, or the perception in the market that this will occur,
may result in a decline in the price of our common stock.
A trading market that will provide you with adequate liquidity
may not develop for our common stock.
The current public market for our common stock has limited trading
volume and liquidity. We cannot predict the extent to which investor interest in our company will lead to the development of a
more active trading market in our common stock, or how liquid that market might be.
Our revenues, operating results and cash flows may fluctuate
in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.
Variations in our quarterly and year-end operating results are
difficult to predict and may fluctuate significantly from period to period. If our revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the
other factors discussed under these “Risk Factors,” specific factors that may cause fluctuations in our operating results
include:
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demand and pricing for our products;
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government or private healthcare reimbursement policies;
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adverse events or publicity related to our products, our
research or investigations, or our collaborators or other partners;
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physician and patient acceptance of any of our current
or future products;
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manufacturing stoppages or delays;
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introduction of competing products or technologies;
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our operating expenses which fluctuate due to growth of
our business; and
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timing and size of any new product or technology acquisitions
we may complete.
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The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending
upon many factors, some of which may be beyond our control, including:
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the success and costs of preclinical and clinical testing
and obtaining regulatory approvals or clearances for our products;
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the success or failure of surgeries and procedures involving
the use our products;
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a shift in our investor base;
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our quarterly or annual results of operations, or those
of other companies in our industry;
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actual or anticipated fluctuations in our operating results
due to factors related to our business;
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changes in accounting standards, policies, guidance, interpretations
or principles;
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announcements by us or our competitors of significant acquisitions,
dispositions or intellectual property developments or issuances;
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the failure to maintain our NASDAQ listing or failure of
securities analysts to cover our common stock;
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changes in earnings estimates by securities analysts or
our ability to meet those estimates;
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the operating and stock price performance of other comparable
companies; our issuance of equity, debt or other financing instruments;
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overall market fluctuations; and
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general macroeconomic conditions.
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Stock markets in general have experienced volatility that has
often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect
the trading price of our common stock.
Your percentage ownership will be diluted in the future.
Your percentage ownership will be diluted in the future because
of equity awards that we expect will be granted to our directors, officers and employees, as well as shares of common stock, or
securities convertible into common stock, we issue in connection with future capital raising or strategic transactions. Our 2013
Equity Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock
options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants.
In addition, your percentage ownership will be diluted by our issuance of common stock following the exercise of options, or vesting
of restricted stock units, we issued pertaining to the adjustment and conversion of outstanding Harvard Bioscience equity awards
as a result of the Separation. The issuance of any shares of our stock would dilute the proportionate ownership and voting power
of existing security holders.
Provisions of Delaware law, of our amended and restated
charter and amended and restated bylaws and our Shareholder Rights Plan may make a takeover more difficult, which could cause our
stock price to decline.
Provisions in our amended and restated certificate of incorporation
and amended and restated bylaws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue
a tender offer, change in control or takeover attempt, which is opposed by management and the Board of Directors. Public stockholders
who might desire to participate in such a transaction may not have an opportunity to do so. Our Board of Directors has adopted
a Shareholder Rights Plan that could make it more difficult for a third party to acquire, or could discourage a third party from
acquiring, our company or a large block of our common stock. A third party that acquires 20% or more of our common stock could
suffer substantial dilution of its ownership interest under the terms of the Shareholder Rights Plan through the issuance of common
stock to all stockholders other than the acquiring person. We also have a staggered Board of Directors that makes it difficult
for stockholders to change the composition of the Board of Directors in any one year. Any removal of directors will require a super-majority
vote of the holders of at least 75% of the outstanding shares entitled to be cast on the election of directors which may discourage
a third party from making a tender offer or otherwise attempting to obtain control of us. These anti-takeover provisions could
substantially impede the ability of public stockholders to change our management and Board of Directors. Such provisions may also
limit the price that investors might be willing to pay for shares of our common stock in the future.
Any issuance of preferred stock in the future may dilute
the rights of our common stockholders.
Our Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, privileges and other terms of these shares. Our Board of Directors is empowered
to exercise this authority without any further approval of stockholders. The rights of the holders of common stock may be adversely
affected by the rights of future holders of preferred stock.
We have in the past issued, and we may at any time in the future
issue, additional shares of authorized preferred stock. For example, in connection with our February 2015 public offering, we issued
695,857 shares of Series B Convertible Preferred Stock and each preferred share was subsequently converted into 5 shares of our
common stock.
We do not intend to pay cash dividends on our common stock.
Currently, we do not anticipate paying any cash dividends to
holders of our common stock. As a result, capital appreciation, if any, of our common stock will be a stockholder’s sole
source of gain.
The JOBS Act allows us to postpone the date by which we
must comply with certain laws and regulations and to reduce the amount of information provided in reports filed with the SEC. We
cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less
attractive to investors.
We are and we will remain an “emerging growth company”
until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion
(subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of our
first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which we have, during
the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a
“large accelerated filer” under the Securities and Exchange Act of 1934, as amended, or the Exchange Act. For so long
as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely
on some or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from
various reporting requirements, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate
us to a level acceptable by them and may result in less investor confidence.
We have received notices from NASDAQ
of non-compliance with its continuing listing rules.
On July 16, 2015, we received a notice
from NASDAQ of non-compliance with its continuing listing rules, namely that the audit committee of our Board of Directors had
two members following James McGorry’s appointment as our President and Chief Executive Officer instead of the required minimum
of three members. In accordance with NASDAQ continued listing rules, we were given until the earlier of our next annual shareholders’
meeting or July 6, 2016 to add a third audit committee member. On March 10, 2016, Blaine McKee, Ph.D. was appointed as a member
of the Board of Directors and its audit committee, and we regained compliance with that requirement.
On November 10, 2015, we received a notice
from NASDAQ of non-compliance with its listing rules regarding the requirement that the listed securities maintain a minimum bid
price of $1 per share. Based upon the closing bid price for the 30 consecutive business days preceding the notice, the Company
no longer met this requirement. However, the NASDAQ rules also provide the Company a period of 180 calendar days in which to regain
compliance and, in some circumstances, a second 180-day compliance period. On November 25, 2015, we regained compliance with the
minimum bid price requirement when the closing price of our common stock was at least $1 per share for ten consecutive business
days.
On November 18, 2016, we received a notice
from NASDAQ of non-compliance with its listing rules regarding the minimum bid price requirement. As noted above, the NASDAQ rules
provide the Company a period of 180 calendar days in which to regain compliance and, in some circumstances, a second 180-day compliance
period. We are monitoring the closing bid price of our common stock and will consider available options to resolve the non-compliance
with the minimum bid price requirement as may be necessary, including the possibility of seeking stockholder approval of a reverse
stock split. There can be no assurance that we would be successful in receiving such stockholder approval.
The failure to meet continuing compliance
standards subjects our common stock to a possible delisting. A delisting of our common stock would have an adverse effect on the
market liquidity of our common stock and, as a result, the market price for our common stock could become more volatile. Further,
a delisting also could make it more difficult for us to raise additional capital.