ECYT Endocyte, Inc. (delisted)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.  )

March 24, 2017

Dear Fellow Stockholder:

It is my pleasure to invite you to the 2017 Annual Meeting of Stockholders of Endocyte, Inc. on Thursday, May 4, 2017 at 12:00 p.m. (EDT), at the offices of Faegre Baker Daniels LLP, 600 East 96 th Street, Suite 600, Indianapolis, Indiana 46240. At the meeting, stockholders will vote on the business items listed in the notice of the meeting, which follows on the next page.

Again this year, we are furnishing proxy materials to our stockholders over the Internet. We believe that this e-proxy process expedites stockholders’ receipt of proxy materials, helps keep our costs low and reduces the environmental impact of our annual meeting. On or about March 24, 2017, we are mailing to our stockholders a Notice of Internet Availability containing instructions on how to access our Proxy Statement and our 2016 Annual Report to Stockholders and vote online. The Notice also contains instructions on how you can receive a paper copy of the proxy statement and annual report.

Whether or not you plan to attend the meeting, your vote is important and we encourage you to vote promptly.

You may vote your shares via a toll-free telephone number or over the Internet. If you received a paper copy of the proxy card by mail, you may sign, date and mail the proxy card in the envelope provided. Instructions regarding all three methods of voting are contained in the proxy statement and on the proxy card.

I look forward to seeing you at the annual meeting.

Endocyte, Inc.

3000 Kent Avenue, Suite A1-100

West Lafayette, Indiana 47906

TABLE OF CONTENTS

Endocyte, Inc.

3000 Kent Avenue, Suite A1-100

West Lafayette, Indiana 47906

Can I vote in person at the meeting?

If you are a “stockholder of record,” you may vote your shares in person at the meeting. If you hold your shares in “street name,” you must obtain a written legal proxy from your broker, bank, trustee or nominee, giving you the right to vote the shares at the meeting.

What do I need to do to attend the meeting in person?

Proof of stock ownership and some form of government-issued photo identification (such as a valid driver’s license or passport) will be required for admission to the meeting. Only stockholders who owned Endocyte, Inc. common stock as of the close of business on March 10, 2017 are entitled to attend the meeting.

What are the Board’s recommendations on how I should vote my shares?

The Board recommends that you vote your shares as follows:

How would my shares be voted if I do not specify how they should be voted?

If you sign and return a proxy card without indicating how you want your shares to be voted, the persons named as proxies will vote your shares as follows:

What are broker non-votes?

A broker non-vote occurs when a broker, bank, trustee or nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary authority to vote for that particular proposal and has not received instructions from the beneficial owner as to how to vote its shares. Proposals 1, 3 and 4 fall into this category. If you do not provide your broker with voting instructions, your shares will not be voted on any of Proposals 1, 3, or 4.

What vote is required to approve each proposal?

The following votes are required from the holders of common stock to approve each of the proposals:

Why did I receive more than one Notice or proxy card?

You will receive multiple Notices or proxy cards if you hold your shares in different ways (e.g., joint tenancy, trusts, custodial accounts) or in multiple accounts. If your shares are held by a broker ( i.e. in “street name”), you will receive your proxy card(s) or other voting information from your broker, and you will return your proxy card(s) to your broker. You should vote on and sign each proxy card you receive.

What is “householding”?

Stockholders who share the same address may receive only one copy of the proxy materials unless we receive contrary instructions from any stockholder at that address. This is referred to as “householding.” If you prefer to receive multiple copies of the proxy materials at the same address, additional copies will be provided to you promptly upon written or oral request, and if you are receiving multiple copies of the materials, you may request that you receive only one copy. Please address such requests to our Corporate Secretary, Endocyte, Inc., 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268. Stockholders who hold shares in street name may contact their broker, bank or similar organization to request information about householding.

Can I change my vote after I have submitted a proxy?

You may revoke your proxy by doing one of the following:

What happens if additional matters are presented at the annual meeting?

We know of no matters other than the items of business described in this proxy statement that are to be considered at the meeting. If other matters requiring a vote do arise, the persons named as proxies will have the discretion to vote on those matters for you.

Who will count the votes?

Our chief accounting officer has been appointed by our board of directors as the inspector of election for the annual meeting. She will count the votes and later certify such action. The inspector will be present at the meeting.

Will the meeting be accessible to disabled persons?

The location of the meeting is accessible to disabled persons. Please call Joye Fisher at least five days in advance at 765-463-7175 if you require any special accommodations.

How can I review the list of stockholders entitled to vote at the meeting?

A list of stockholders entitled to vote at the meeting will be available at the meeting and for ten days prior to the meeting, between the hours of 8:45 a.m. and 4:30 p.m., at our offices at 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268. If you would like to view the stockholder list, please contact our Corporate Secretary to schedule an appointment.

Who pays the cost of this proxy solicitation?

We will pay the cost of preparing, assembling and mailing the proxy materials. We will also request banks, brokers and other holders of record to send the proxy materials to, and obtain proxies from, beneficial owners and will reimburse them for their reasonable expenses in doing so.

Is this proxy statement the only way that proxies are being solicited?

Certain employees or other representatives of the company may also solicit proxies by telephone, facsimile, e-mail or personal contact. They will not be specifically compensated for doing so.

BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN
STOCKHOLDERS AND MANAGEMENT

The following table sets forth information concerning the beneficial ownership of our common stock as of March 10, 2017, of (1) each person (including any group) known to us to beneficially own more than five percent (5%) of any class of our voting securities as of March 10, 2017, (2) our directors and nominees for election as directors, (3) our named executive officers and (4) all of our directors and executive officers as of March 10, 2017 as a group. Unless otherwise indicated in the footnotes, shares are owned directly and the indicated person has sole voting and investment power. Also, unless otherwise noted below, the address of each person listed on the table is c/o Endocyte, Inc., 3000 Kent Avenue, Suite A1-100, West Lafayette, Indiana 47906.

* Less than 1%.

CORPORATE GOVERNANCE MATTERS

Policies on Corporate Governance

Our Board of Directors recognizes that good corporate governance is important to ensure that the company is managed for the long-term benefit of stockholders. The Board has adopted Corporate Governance Principles, written charters for each of its standing committees and a Code of Ethics and Business Conduct and will amend them as appropriate to reflect new policies or practices. The current version of each of these documents is available on our website, www.endocyte.com , in the Investors & News section, and will be provided in print without charge upon written request to our Corporate Secretary at 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268.

We will also either disclose on Form 8-K or post on our Internet website any substantive amendment to, or waiver from, a provision of the Code of Ethics and Business Conduct that applies to any of our directors or executive officers.

Board Composition

Our Board of Directors is currently composed of ten members, divided into three staggered classes of directors. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the Annual Meeting of Stockholders to be held during the years 2017 for the Class I directors, 2018 for the Class II directors and 2019 for the Class III directors.

Our amended and restated certificate of incorporation and bylaws provide that the number of our directors, which is currently ten members, shall be fixed from time to time by a resolution of the majority of our Board of Directors.

Board Leadership Structure

John C. Aplin, one of our independent directors, currently serves as the non-executive Chairman of the Board. Michael A. Sherman is our President and Chief Executive Officer. Mr. Sherman focuses on the day-to-day developments of the company and establishes the company’s growth strategy and strategic plan. Mr. Aplin chairs the Board and, in that capacity, can impact the issues that are brought before the Board. The Board of Directors believes that these complementary roles provide an appropriate leadership structure for the company at this time.

The Board of Directors expects to re-evaluate its leadership structure on an ongoing basis and may change it as circumstances warrant. The Board believes that the current leadership structure of separate individuals holding the Chairman and Chief Executive Officer roles allows the Board to function efficiently and effectively. If the Chairman and the Chief Executive Officer roles are held by one person in the future, the Board will designate one of its independent directors as “Lead Independent Director” with the responsibilities described in our Corporate Governance Principles.

Board’s Role in Oversight of Risk Management

While risk management is primarily the responsibility of our management, the Board of Directors, acting primarily through the Audit Committee, provides overall risk oversight with a focus on the most significant risks facing us. We use a risk management process to identify and assess the major risks we face and develop strategies for controlling, mitigating and monitoring risk. As part of this process, we gather information throughout the company to identify and prioritize major risks. The identified risks and mitigation strategies are validated with management and presented to the Audit Committee on an ongoing basis.

Examples of major risks we have identified are our ability to achieve regulatory milestones, enter into license or other business development transactions, access capital and execute clinical trials in a timely manner.

Information concerning risks relating to our compensation policies and practices is provided on page 31 of this proxy statement. Additional review or reporting on risks is conducted as needed or as requested by the Board or Audit Committee.

Director Independence

Our common stock is listed on The Nasdaq Global Market. Under the listing rules of The Nasdaq Stock Market LLC (“Nasdaq”), independent directors must comprise a majority of a listed company’s board of directors and, subject to specified exceptions, independent directors must be the members of a listed company’s audit, compensation and nominating and corporate governance committees. Audit committee and compensation committee members must also satisfy additional independence criteria. Under the Nasdaq listing rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

In order to be considered to be independent for purposes of audit committee membership, a director may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

In order to be considered to be independent for purposes of compensation committee membership, a listed company’s board of directors must consider all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: (1) the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the listed company to such director; and (2) whether such director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

After reviewing the composition of the Board of Directors, the composition of its committees and the independence of each director, our Board of Directors has determined that none of Messrs. Brauer, Kozin, Meldrum and Middleton and Drs. Aplin, Goddard, Hanham and Russell, representing eight of our ten directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the Nasdaq listing rules. Our Board of Directors also determined that Messrs. Brauer and Middleton and Dr. Aplin, who comprise our Audit Committee, Messrs. Kozin and Meldrum and Dr. Goddard, who comprise our Compensation Committee, and Drs. Hanham and Russell and Mr. Kozin, who comprise our Nominating and Corporate Governance Committee, satisfy the independence standards for those committees established by applicable Securities and Exchange Commission rules and the Nasdaq listing rules.

Mr. Sherman and Dr. Low are executive officers and employees of the company. Consequently, Mr. Sherman and Dr. Low are not considered independent directors.

Nominations for Directors

The Nominating and Corporate Governance Committee screens candidates and recommends candidates for nomination to the Board. In seeking and evaluating director candidates, the Nominating and Corporate Governance Committee considers individuals in accordance with the criteria described below under “— Director Qualifications.” Director candidates may be recommended by Board members, a third-party search firm or stockholders. From time to time since 2012, the Nominating and Corporate Governance Committee has utilized Levin & Company, Inc., a third-party search firm, to assist it in identifying and evaluating potential candidates for director.

The Nominating and Corporate Governance Committee will consider director nominees recommended by stockholders. A stockholder who wishes to recommend a director candidate should send such recommendation to our Corporate Secretary at 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268, who will forward it to the committee. Any such recommendation should include a description of the candidate’s qualifications for Board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected, and addresses and telephone numbers for contacting the stockholder and the candidate for more information. A stockholder who wishes to nominate an individual as a director candidate at the annual meeting of stockholders, rather than recommend the individual to the Nominating and Corporate Governance Committee as a nominee, must comply with the advance notice requirements for stockholder nominations set forth in our Amended and Restated By-Laws.

Director Qualifications

The Board of Directors believes that its members should exhibit high standards of independent judgment and integrity, have a strong record of achievement, have an understanding of our business and the competitive environment

in which we operate, and bring the benefits of their experiences and backgrounds to the Board and committee functions. Directors should be committed to enhancing stockholder value on a long-term basis and have sufficient time to carry out their duties.

In considering director nominees, the Nominating and Corporate Governance Committee reviews the current composition of the Board, including issues of character, judgment, diversity, age, independence, corporate experience, length of service, understanding of the Company’s business, other commitments and any specialized areas of expertise needed by the Board or any of its committees. Although the Board does not have a policy requiring the consideration of diversity as a principal factor in identifying director candidates, the committee is expected to evaluate a candidate’s background, age, education, professional accomplishments and experiences and the effect that the candidate’s election would have on the composition of the Board as a whole.

Board Evaluations

On an annual basis, the Nominating and Corporate Governance Committee leads a comprehensive evaluation process of the Board. In 2016, each director completed a performance questionnaire, which contained questions regarding the performance of the full Board and each standing committee. The chairman of the committee reviewed and prepared a summary of the completed questionnaires. The committee reviewed and discussed the results of the questionnaires. The committee reported those results to the full Board, and the full Board further reviewed and discussed the results of the evaluations.

Communications with the Independent Directors of the Board

The Board has implemented a process by which our stockholders and other interested parties may communicate with the Board or one or more members of our Board in a written communication addressed to Corporate Secretary, Endocyte, Inc., 8910 Purdue Road, Suite 250, Indianapolis, Indiana 46268. The Board has instructed our Corporate Secretary to promptly forward all such communications to the specified addressees thereof. However, certain items which are unrelated to the duties and responsibilities of the Board will be excluded, such as: product complaints, product inquiries, new product suggestions, resumes, surveys and advertisements. In addition, material that is unduly hostile, threatening, illegal or similarly unsuitable will be excluded, with the provision that any communication that is filtered out must be made available to any non-management director upon request.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based on our records, we believe that during 2016 all applicable Section 16(a) filing requirements were met.

TRANSACTIONS WITH RELATED PERSONS

Policy

We have adopted a formal policy that our executive officers, directors, holders of more than five percent of any class of our voting securities, and any member of the immediate family of and any entity affiliated with any of the foregoing persons, are not permitted to enter into a related party transaction with us without the prior consent of our audit committee, or other independent members of our Board of Directors in the case it is inappropriate for our audit committee to review such transaction due to a conflict of interest. In approving or rejecting any such proposal, our audit committee is to consider the relevant facts and circumstances available and deemed relevant by the audit committee, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction.

Related Party Transactions

Since January 1, 2016, we have been a party to the following arrangements, in which the amount involved exceeded or will exceed $120,000, and in which any director, executive officer or holder of more than five percent of any class of our voting stock, or any member of the immediate family of or entities affiliated with any of them, had or will have a material interest.

Transactions with Our Founders and Entities Affiliated with Our Founders

Philip S. Low, Ph.D., our Chief Science Officer and one of our founders and directors, conducts research at Purdue University. We entered into an exclusive license agreement dated October 21, 1998, as amended, an exclusive license agreement effective March 1, 2010 and a master license agreement effective July 1, 2013 with Purdue Research Foundation to license certain intellectual property and methods that were invented in Dr. Low’s laboratory. We fund research at Purdue University and paid $1,000,000 in 2016. Additionally, we are a party to a lease with Purdue Research Foundation, pursuant to which we paid $598,040 in 2016.

In September 2011, we entered into an agreement with On Target Laboratories, L.L.C., or On Target, to develop and commercialize products relating to the compound comprising our Folate and DUPA ligands and certain other licensed patents. The chief executive officer of On Target is the brother of Dr. Low, one of our directors and Chief Science Officer. Dr. Low also owns more than 10% of the equity of On Target. We believe the terms of the On Target agreement are no less favorable to us than terms that would be available in an arm’s-length transaction. On Target is solely responsible for conducting research and development, seeking regulatory approval and commercialization of products. If On Target fails to meet minimum spend requirements on research and development, we have the right to terminate the agreement. We will be entitled to receive minimum royalty payments annually based on net sales, but there is no guarantee that a commercial product will be developed and approved for commercial sales. We will also be entitled to reimbursement of expenses relating to patent expenses and payments to the inventors and Purdue University as certain milestones are met. During 2016, we received $20,000 in license payments and $14,397 in reimbursed research and development expenses, and we expect to receive approximately $20,000 during 2017 for license payments.

MEETINGS AND COMMITTEES OF THE BOARD

Meetings and Attendance

Our business, property and affairs are managed under the direction of our Board of Directors. Members of our Board of Directors are kept informed of our business by our President and Chief Executive Officer, other officers and the Chairman of the Board, by reviewing materials provided to them, and by participating in meetings of the Board and its committees. Directors are also expected to use reasonable efforts to attend the annual meeting of stockholders. During 2016, the Board of Directors met six times. The Board conducts many of its oversight responsibilities through three standing committees, including an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. During 2016, all directors participated in 75% or more of the aggregate number of meetings of the Board and the committees on which they served. All directors at that time attended the 2016 annual meeting of stockholders in person.

Executive Sessions of Independent Directors

The independent directors meet in executive session without management present and the Chairman of the Board presides over these executive sessions. He also helps to set agendas for Board meetings and serves as a liaison between the independent directors and the senior management team.

The Audit Committee

The members of our Audit Committee are Messrs. Brauer and Middleton and Dr. Aplin, each of whom is a non-employee member of our Board of Directors. Mr. Brauer is the chairman of the committee. Each of the members of the committee has been determined by the Board to be an audit committee financial expert, as that term is defined under the Securities and Exchange Commission rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and possesses financial sophistication, as defined under the Nasdaq listing rules. Our Audit Committee is responsible for, among other things:

The Compensation Committee

The members of our Compensation Committee are Messrs. Kozin and Meldrum and Dr. Goddard. Mr. Meldrum is the chairman of the committee. The Compensation Committee is responsible for, among other things:

PROPOSAL 4   —  advisory vote regarding the frequency OF future advisory votes on executive compensation

In Proposal Three, we are providing our stockholders the opportunity to vote to approve, on an advisory, non-binding basis, the compensation of our named executive officers. In this Proposal Four, we are asking our stockholders to cast a non-binding advisory vote regarding the frequency of future executive compensation advisory votes. Stockholders may vote for a frequency of every one, two, or three years, or may abstain.

Our Board of Directors will take into consideration the outcome of this vote in making a determination about the frequency of future executive compensation advisory votes. However, because this vote is advisory and non-binding, the Board of Directors may decide that it is in the best interests of our stockholders and the company to hold the advisory vote to approve executive compensation more or less frequently.

After careful consideration, the Board of Directors believes that an executive compensation advisory vote should be held every year, and therefore our board of directors recommends that you vote for a frequency of every ONE YEAR for future executive compensation advisory votes.

The board of directors believes that an annual executive compensation advisory vote will facilitate more direct stockholder input about executive compensation. An annual executive compensation advisory vote is consistent with our policy of reviewing our compensation program annually, as well as seeking frequent input from our stockholders on corporate governance and executive compensation matters. We believe an annual vote would be the best governance practice for our company at this time.

The Board of Directors Unanimously Recommends that Stockholders Vote “ONE YEAR” for the Advisory Proposal Regarding  the Frequency of Future Advisory Votes on Executive Compensation.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

The following discussion and analysis is intended to supplement the more detailed information concerning executive compensation that appears in the rest of this section and in the compensation tables and accompanying narrative which follow this section. Our goal is to provide an understanding of our compensation practices and the decisions that affected the compensation payable for 2016 to our executive officers, including the individuals who served as our President and Chief Executive Officer during 2016 (P. Ron Ellis and Michael A. Sherman), the individual who served as our Chief Financial Officer during 2016 (Michael A. Sherman) and the other executive officers named in the Summary Compensation Table (Alison A. Armour, Christopher P. Leamon, Katherine Parker and Scot L. Harper), whom we refer to in this discussion as the named executive officers, or NEOs. Two of the NEOs are no longer with our company: Mr. Ellis resigned in June 2016, and Dr. Harper’s employment terminated in October 2016.  This discussion and analysis provides information regarding those NEOs to the extent it applies based on their status with our company at the applicable time.

The Compensation Committee of our Board of Directors, referred to in this section as the committee, plays a key role in designing and administering our executive compensation program. All principal elements of compensation paid to our executive officers are subject to approval by the committee. The Compensation Committee Report immediately precedes this discussion.

During 2016 we achieved significant accomplishments, including the following:

The committee also considered the fact that enrollment for the phase 1b trial to evaluate EC1456 in non-small cell lung cancer patients was behind target.

As a result of Mr. Ellis’ resignation as our President and Chief Executive Officer, and Mr. Sherman’s appointment to that position, in June 2016, the committee considered comparative data relating to base salary, target bonus and equity awards related to that position.  The committee also discussed the differences in our severance benefits for the Chief Executive Officer versus the other executive officers.  Following discussion, the committee took the following actions with respect to Mr. Sherman, effective June 16, 2016:

Advisory Votes on Compensation

We submitted two non-binding proposals to our stockholders at the 2011 annual meeting. These proposals consisted of an advisory vote to approve the compensation of the NEOs as disclosed in the proxy statement, or a say-on-pay vote, and an advisory vote on the frequency of future say-on-pay votes, or a frequency vote. In accordance with the results of the 2011 frequency vote, we have been conducting say-on-pay votes every three years. As a result, we held our second advisory say-on-pay vote at the 2014 annual meeting.  The frequency vote is required to be held every six years, and therefore the next frequency vote will be held at the 2017 annual meeting, as discussed in this proxy statement.

Approximately 93% of the votes cast were cast in favor of the advisory say-on-pay vote at the 2014 annual meeting. As a result of the high level of support in 2014, the committee did not make significant changes to our executive compensation programs and policies for 2014, 2015 or 2016. However, the committee has made certain incremental changes related to NEO compensation, which are described in this Compensation Discussion and Analysis. The committee intends to continue to monitor stockholder concerns, including the results of the say-on-pay votes, in making future decisions affecting the compensation of the NEOs.

Compensation Philosophy

Our executive compensation program seeks to attract and retain our senior executives and motivate them to pursue our corporate objectives while encouraging the creation of long-term value for our stockholders. Through our annual goal-setting process, organizational objectives are established for our company and employees, including the NEOs. We evaluate and reward our NEOs through compensation intended to motivate them to identify and capitalize on the opportunities that result in our growth and success.

The main elements of our NEO compensation program are:

The committee believes that each of these compensation components is necessary to help us attract and retain the executive talent on which we depend. We target cash and equity compensation at a competitive level relative to our peers to fuel both near term execution and long term innovation intended to generate returns for our stockholders over the long term.

Compensation Decision Process

Role of Committee

All compensation decisions affecting our executive officers, including the NEOs, are solely determined by the committee.

Role of Management

Our Chief Executive Officer, or CEO, and our Vice President of Human Resources typically attend meetings of the committee, except for executive sessions. However, in some instances, the committee may request the attendance of the Vice President of Human Resources in a separate executive session to provide perspective regarding officer performance. At the request of the committee, our CEO provides his assessment of the performance of our NEOs, other than himself. Our CEO also takes an active part in the discussions of the committee at which the compensation of NEOs other than himself is discussed. The committee may agree with our CEO’s recommendations or may reach a different conclusion as to the compensation of such NEOs. Our CEO oversees major operational, financial, and human resources aspects of the company, including officer compensation practices. He substantially contributes to the committee’s consideration of the overall design and function of our compensation system. The Vice President of Human Resources oversees the human resources function at our company and contributes to the committee’s consideration of the design and function of our compensation practices overall, including those applicable to executive

officers. All decisions regarding our CEO’s and Vice President of Human Resources’ compensation are made by the committee in executive closed sessions outside of such officer’s presence.

Role of Compensation Consultant

The committee has the authority to engage its own advisers to assist it in carrying out its responsibilities. The committee has engaged Radford, an Aon Hewitt Consulting Company, or Radford, as its consultant. The consultant reports directly to the committee and interacts with management, as necessary. For 2016, Radford provided us with market data derived from surveys and the peer comparator group discussed below. Radford also provides advisory services supporting the committee in developing and executing elements of compensation plans for all employees.

The committee considered various factors to help it determine whether Radford’s work has raised any conflicts of interest. One of those factors related to the amount of fees paid by us to Radford, a division of AON plc, during 2016.  In 2016, we paid Radford $60,000 for professional fees for committee support and $150,533 in net commission fees for Aon Risk Services which includes advisory services related to the procurement of various forms of insurance. The decision to engage other divisions of AON in non-compensation services was reviewed by the committee, and the committee determined that the work performed by Radford in 2016 did not raise any conflicts of interest.

Market Competitive Data

The committee believes that compensation decisions are complex and should be made after a review of the compensation levels paid to executives in the same or similar positions at other comparator companies. Although the committee does not rely solely on benchmarking to determine any element of compensation or overall compensation, the committee does believe that compensation data are important to the competitive positioning of the company’s compensation levels.

The companies used for the comparisons vary from time to time. For 2016 compensation determinations, the committee reviewed, with the assistance of Radford, the competitive pay levels and compensation practices of a group of peer companies, as disclosed pursuant to such companies’ publicly filed compensation data. The peer group for 2016 compensation assessments were determined using the following criteria:

The peer group utilized in connection with 2016 compensation determinations consisted of:

In addition to the public proxy data for the peer group companies, Radford gathered competitive market data from the Radford 2015 Global Life Sciences Survey with respect to public biopharmaceutical companies with between 30 and 260 employees and $75 million to $700 million in market value, as well as the companies from our peer group that participated in that survey. To arrive at competitive market compensation for comparator purposes, Radford blended survey data using a special cut specific to our peer group companies that participated, and a broader survey cut, where possible. The survey composite was then blended with the public proxy data for the peer group companies to form a market composite. Radford also aged all cash compensation data by a 3% annual rate to reflect prevailing life sciences merit budgeting.

The committee utilized this data to assess whether our executive compensation falls within a competitive range against industry norms. Generally, for 2016 NEO compensation, the committee targeted base salary, cash bonus

opportunities, and equity award opportunities at the 50 th percentile of the comparator data. The aggregate 2016 target total cash compensation (base salary and target cash bonus for 2016) for all of the NEOs was approximately at the 50 th percentile of the comparator data.

Performance-Driven Compensation

The committee emphasizes performance in annually reviewing and setting our NEOs’ base salary, bonuses and equity awards. This emphasis on performance with respect to a substantial portion of compensation is intended to motivate our NEOs to pursue our business objectives, reward them for achievement of these objectives and align their interests with those of our stockholders.

Our annual bonus program provides participants, including NEOs, with opportunities to earn cash bonuses that relate to specific goals for company and individual performance. Bonuses are paid in the following year after the committee determines the payouts to the participants. We also use equity awards to motivate performance. Stock options only have value to the extent our stock price improves over the term of the options. The value of restricted stock units, or RSUs, to a grantee will depend on our stock price at the time the RSUs vest. During 2011, the committee also made awards of performance-based restricted stock units, or PRSUs, that were subject to objective performance conditions. Based on the performance conditions and the stage of development of our potential products, however, we have concluded that the performance conditions will not be achieved before the performance deadline and, as a result, the PRSUs were cancelled and forfeited on May 26, 2016 without vesting.

Elements of Executive Compensation

Base Salary

We provide base salaries to our NEOs and other employees to compensate them for services rendered on a day-to-day basis during the year. Generally, the base salary element of compensation is used to recognize the experience, skills, knowledge and responsibilities required of each NEO and over time reflects an NEO’s overall sustained performance and contributions to our business. The reviews of NEO base salary levels conducted by our CEO, except with respect to his own salary, and by the committee are subjective, based on their general experience with respect to setting salary levels and supplemented by survey data and assessments of the experience and performance of our NEOs. Survey and comparator group data also is used to validate that determinations fall within acceptable parameters relative to the market.

The following table sets forth information regarding the base salaries for 2016 for the NEOs, as well as the percentage increase from the prior year.

In February 2016, the committee approved 3% merit increases for the executive officers (other than Mr. Leamon) to align with peer company benchmarks and in consideration of our employee engagement and retention. The committee had previously, in November 2015, approved a 10% increase for Mr. Leamon’s 2016 base salary due to Mr. Leamon’s performance during 2015, excellent progress on a significant Key Results Area applicable to Mr. Leamon and internal equity and retention considerations.  The committee further increased Mr. Sherman’s base salary effective June 16, 2016 from $344,729 to $400,000, after the resignation of Mr. Ellis, and Mr. Sherman’s promotion to President and CEO.

Short-Term Incentives (Cash Bonuses)

NEOs are eligible to earn annual cash bonuses that relate to goals set by the committee for company and individual performance. For the 2016 bonus program, the committee approved a target cash bonus opportunity for Mr. Sherman equal to 50% for the first half of 2016 and 60% for the second half of 2016, due to his promotion to President and Chief Executive Officer in June 2016; Drs. Leamon and Armour equal to 40%; and Ms. Parker equal to 35% of his or her 2016 base salary. The committee established a maximum limit, such that an executive could not receive more than 150% of his or her target bonus percentage opportunity.

For purposes of determining the cash bonuses for our NEOs related to 2016 performance, the committee established Key Results Areas, or KRAs, for each NEO, with weightings assigned to each KRA. The committee selected four KRAs that it applied to all of the NEOs with varying weights depending on each NEO’s involvement in that KRA, which were in the following areas:

In addition to the aforementioned KRAs applicable to each NEO, the committee established additional KRAs in their functional areas which applied to individual NEOs, as follows:

Mr. Ellis’ and Dr. Harper’s individual KRAs are not included in the above list, because they did not receive a cash bonus related to actual 2016 performance due to the fact that they were no longer with our company when the

cash bonuses were paid. Mr. Ellis did, however, receive payment of an amount equal to 50% of his target bonus for 2016 pursuant to the Ellis Separation Agreement (as defined below) in connection with his resignation.

In February 2017, the committee reviewed the 2016 performance of the NEOs (other than Mr. Ellis and Dr. Harper) and made a determination of the extent to which the 2016 KRAs were accomplished by the NEOs. The committee assigned a score to each 2016 KRA for each NEO, based on the extent to which the committee determined the KRA was accomplished. The assigned score was multiplied by the weight associated with that 2016 KRA for each NEO, resulting in a weighted number for each 2016 KRA. The weighted number for all of the 2016 KRAs for each NEO were added together, resulting in a total score for each NEO.

The committee then applied the total score of each NEO to his or her target cash bonus opportunity to arrive at the cash bonus payout for that NEO. The following table indicates the total KRA score, bonus amount and corresponding percentage of base salary, related to 2016 performance that was paid to each NEO:

For 2017, the committee identified three KRAs which apply to all NEOs with varying weights depending on each NEO’s involvement in that KRA, which were in the following areas:

The scores for each of these KRAs will be determined by the quality of the data or collaboration and the impact on stockholder return relative to peer companies during the year.

Long-Term Incentives (Equity Awards)

We believe that strong corporate performance over the long term is achieved with a corporate culture that encourages a long-term focus by our NEOs through the use of equity awards, the value of which depends on our stock performance. We use equity awards to provide certain of our employees, including our NEOs, with incentives to help align those employees’ interests with the interests of our stockholders and to enable them to participate in the long-term appreciation of our stockholder value. Additionally, equity awards provide an important retention tool for key employees, as the awards generally are subject to vesting over an extended period of time based on continued service with us.

Typically, we have made equity awards annually at the beginning of each year based primarily on corporate performance as a whole during the preceding year. In 2016, we granted annual equity awards in February. In addition, we may grant equity awards upon the occurrence of certain events during the year, for example, upon an employee’s hire, promotion or achievement of a significant business objective.

All 2016 equity awards were made under our 2010 Equity Incentive Plan, or EIP. The EIP permits the grant of incentive stock options to our employees and the grant of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants.

The EIP is administered by the committee which has the authority to determine who among the eligible participants will receive awards and the terms of those awards, to prescribe rules and to construe and interpret the EIP and awards granted under the EIP.

For 2016, the equity awards were designed to provide an aggregate compensation comparable to or competitive with the peer group annual equity market value. The committee granted 75% of the value of the equity awards to each NEO in the form of stock options and 25% in the form of RSUs. In an effort to reduce shareholder dilution and be

consistent with industry trends and peer group benchmarks, the committee decided to grant equity-based compensation in a combination of stock options and RSUs.

The committee made the following stock option and RSU awards to the NEOs under the EIP in 2016. Each option and RSU grant vests in four equal annual installments, subject to maintaining continued service. Pursuant to a Separation Agreement and Release of Claims (the “Ellis Separation Agreement”) that we entered into with Mr. Ellis in connection with his resignation, the vesting of 80,625 of the following stock options and 13,437 of the following RSUs granted to Mr. Ellis were accelerated and those shares vested on June 16, 2016.  Pursuant to a Separation Agreement and Release of Claims (the “Harper Separation Agreement”) between us and Dr. Harper, as a result of his termination of employment, the vesting of 13,125 of the following stock options and 2,187 of the following RSUs granted to Dr. Harper were accelerated and those shares vested on October 28, 2016. The remaining portion of the following stock options and RSU awards made to Mr. Ellis and Dr. Harper were cancelled and forfeited upon their respective terminations of employment.

The grant date fair value of the stock option and RSU grants are included in the Summary Compensation Table on page 32 and the Grants of Plan-Based Awards in 2016 table on page 35.  

Broad-based Employee Benefits

Our NEOs are eligible to participate in the same group insurance and employee benefit plans as our other salaried employees. We provide employee benefits to all eligible employees, including our NEOs, which our Board of Directors and the committee believe are reasonable and consistent with its overall compensation objective to better enable us to attract and retain employees. These benefits include medical, dental, vision, and disability benefits and life insurance. We do not provide special plans or programs for our NEOs.

We sponsor a 401(k) tax-qualified retirement savings plan pursuant to which employees are entitled to participate. Employees can make contributions to the plan on a before-tax basis to the maximum amount prescribed by the U.S. Internal Revenue Service. In January 2014, we began providing matching contributions of 50% of the amount contributed by an employee, up to 6% of the employee’s salary that he or she contributes to the plan. Other than this plan, we do not maintain any other deferred savings plans in which our NEOs participate. We do not maintain or provide any defined benefit plans for our employees.

We implemented the 2010 Employee Stock Purchase Plan, or the ESPP, effective as of January 1, 2014. The ESPP is intended to comply with Section 423 of the Internal Revenue Code of 1986, as amended, or the Code, and to provide employees with an opportunity to acquire a stock ownership interest in us. The ESPP is administered by the committee, which has complete discretion to interpret and administer the ESPP, including the terms of each offering that permits purchases of our common stock. In 2016, participants purchased 86,571 shares of common stock under the ESPP. As of January 1, 2017, 825,154 shares of our common stock were available for issuance and purchase by our employees.

Change in Control and Severance Benefits

The committee considers maintaining a stable and effective management team to be essential to maximizing stockholder return. We have entered into change in control and severance arrangements with certain key executives, including our NEOs, that provide additional benefits in the event of a change in control. For more detail on the change

in control and severance agreements, see “— Estimated Post-Employment Payments Under Alternative Termination Scenarios.”

In connection with Mr. Ellis’ resignation in June 2016, the committee reviewed data on industry standards provided by Radford, recommendations from our Vice President of Human Resources and the provisions of the Change in Control and Severance Agreement between Mr. Ellis and us.  The committee discussed at length each element of a typical severance package, taking into account all of the data that had been provided, as well as Mr. Ellis’ long tenure with our company.  Based on such reviews and discussion, the committee approved, and we entered into, the Ellis Separation Agreement, which provided for the modification of certain severance benefits that Mr. Ellis was entitled to under his Change in Control and Severance Agreement, dated May 15, 2015 (the “Ellis Severance Agreement”).  The Ellis Separation Agreement provided for the following payments and benefits to Mr. Ellis:

The Ellis Separation Agreement also included a mutual release of claims and provided for Mr. Ellis, for a period of 90 days following the effectiveness of the Ellis Separation Agreement and without additional compensation, to provide advice and assistance, in the capacity of a consultant, with respect to our operations and other matters within his experience and expertise, as requested by his successor.

In connection with Dr. Harper’s termination of employment, the Harper Separation Agreement provided for, and he received, the same benefits as were provided for in his Change in Control and Severance Agreement, dated May 15, 2015 (the “Harper Severance Agreement”), which had been previously approved by the committee.  See “— Estimated Post-Employment Payments Under Alternative Termination Scenarios.”

Other Policies

In addition, we have adopted policies and practices that the committee believes help further its goals and objectives related to executive compensation, including:

Tax and Accounting Considerations

We have not provided any executive officer or director with a gross-up or other reimbursement for tax amounts the executive officer or director might pay pursuant to Section 280G or Section 409A of the Code. Section 280G and related Code sections provide that executive officers, directors who hold significant stockholder interests and certain other service providers could be subject to significant additional taxes if they receive payments or benefits in connection with a change in control of our company that exceeds certain limits, and that we or our successor could lose a deduction on the amounts subject to the additional tax.

Section 409A also imposes additional significant taxes on the individual in the event that an executive officer, director or service provider receives “deferred compensation” that does not meet the requirements of Section 409A.

Section 162(m) of the Code limits the allowable deduction for compensation paid or accrued with respect to the chief executive officer and each of the three other most highly compensated executive officers (other than the chief financial officer) of a publicly held corporation to no more than $1,000,000 per year. This limitation does not apply to compensation that meets the requirements of Section 162(m) for performance-based compensation. Additionally, under a special Code Section 162(m) exception, any compensation paid by us pursuant to a compensation plan in existence before February 9, 2011, the date we closed our initial public offering, was not subject to the $1,000,000 limitation until our 2015 annual meeting of stockholders. Because the EIP was not presented to stockholders at the 2015 annual meeting for approval, grants made under the EIP after that meeting date do not satisfy the performance-based exception to Section 162(m). As a result, any taxable compensation attributable to those later awards would count against the $1,000,000 annual limit on deductibility. However, at December 31, 2016, we had net operating loss carryforwards for federal income taxes totaling approximately $212.4 million. These loss carryforwards defer the impact of any tax return deduction that we might lose under Section 162(m) for one or more of the carryforward years. Although the committee cannot predict how the deductibility limit may impact our compensation program in future years, the committee believes that the potential deductibility of compensation payable to our executives should be only one of a number of relevant factors taken into consideration. The committee intends to maintain an approach to executive compensation that strongly links pay to performance.

ASSESSMENT OF COMPENSATION-RELATED RISKS

We believe that our compensation policies and practices are designed to encourage our employees to act in the long-term best interests of the company and are not reasonably likely to have a material adverse effect on our business. We believe that the following factors reduce the likelihood that our employees would be encouraged to take excessive risks:

SUMMARY COMPENSATION TABLE

The following table provides information regarding the compensation of the two individuals who served as our principal executive officer in 2016, the individual who served as our principal financial officer in 2016, each of the next three most highly compensated executive officers who were serving as executive officers at the end of 2016, and a former executive officer who would have been included as one of the other three most highly compensated except that he was not serving as an executive officer at the end of 2016. We refer to these persons as our named executive officers, or NEOs. 

The Ellis Separation Agreement provided that the unvested RSUs held by Mr. Ellis that, absent his termination of employment, otherwise would have vested on or before February 15, 2018, would vest on the last day of his employment, June 16, 2016. The incremental fair value of this modification was calculated at $167,496 and is included in the amount in the Stock Awards column.

The Harper Separation Agreement provided that the unvested RSUs held by Dr. Harper that, absent his termination of employment, otherwise would have vested on or before July 28, 2017, would vest on the last day of his employment, October 28, 2016. The incremental fair value of this modification was calculated at $16,745 and is included in the amount in the Stock Awards column.

The Ellis Separation Agreement provided that the unvested stock options held by Mr. Ellis that, absent his termination, otherwise would have vested on or before February 15, 2018, would vest and become exercisable on the last day of his employment, June 16, 2016. The incremental fair value of this modification was calculated at $671,214 and is included in the amount in the Option Awards column. The Ellis Separation Agreement also

provided that each award agreement governing Mr. Ellis’ outstanding stock option awards would be amended to permit the exercise of the vested portion of each such option at any time up to the earlier of  June 15, 2019, or the expiration date of such option. The incremental fair value of this modification was calculated at $1,701,252 and is included in the amount in the Option Awards column.

The Harper Separation Agreement provided that the unvested stock options held by Dr. Harper that, absent his termination of employment, otherwise would have vested on or before July 28, 2017, would vest and become exercisable on the last day of his employment, October 28, 2016.  The incremental fair value of this modification was calculated at $191,483 and is included in the amount of the Option Awards column.

The amount in 2016 for Mr. Ellis also includes payments of (i) $760,644 (equal to 150% of his annualized base salary), (ii) $152,129 (equal to 50% of his target bonus for 2016), and (iii) $31,944 (equal to 12 months of COBRA payments), made to him in connection with his resignation in June 2016.

The amount in 2016 for Dr. Harper also includes payments of (i) $232,160 in special severance compensation (representing 75% of his base salary), and (ii) $21,198 (representing nine months of COBRA premiums), made to him in connection with his termination of employment in October 2016.