ITEM 1 - Business.
Overview
We are a clinical stage biopharmaceutical company
with an emphasis on identifying the genetic drivers of disease and applying this understanding to the pursuit of differentiated
novel therapies primarily for pediatric onset, life-altering diseases, including rare and orphan diseases. We look to find treatments
for genetically defined diseases for which there are limited therapeutic options currently available, with a primary focus on pediatric
patients. This strategy begins with identifying and genetically validating a therapeutic target and using genomics to guide product
development. The strategy also involves identifying and acquiring otherwise abandoned or overlooked drug candidates and matching
targets and mechanisms of action to novel genetic discoveries.
We have partnered with the Center for Applied
Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomic medicine driven approach to
drug development. Included in the assets at CAG is a fully automated biorepository containing specimens from more than 75,000 pediatric
patients and 150,000 relatives of those patients. The sample is highly enriched for rare and orphan diseases and the large majority
of patients have been genotyped. Their phenotypes are recorded in a modern electronic health record that is linked to the genomics
database and biorepository. The patients in the database have consented to anonymized use of their data for research and follow
up contact if needed.
CAG’s efforts focus on the discovery of
important and novel genetic biomarkers by both genome-wide association studies and exome sequencing and analysis of affected individuals
and their family members. Such markers not only identify patients with the disease but frequently point to the potential cause
of the disease and suggest targets and feasible intervention strategies that include protein or peptide therapy, monoclonal antibodies,
drugs or gene therapy. By working initially in pediatric populations of specific diseases, we can try to minimize the confounding
environmental factors seen in older patients. In addition, the availability of robust genetic biomarkers allows us to design trials
that focus on a highly-enriched patient population that we believe is more likely to respond to targeted therapies and further
enhance the likelihood of clinical and regulatory success. We believe this will allow us to implement clinical development programs
that will lead to medicines that can address critical needs in patients suffering from rare and orphan diseases.
Our Product Pipeline
The following table summarizes the status of
our development programs as of the date of this Annual Report:
AEVI-001 (mGluR+ Genetic Subset ADHD)
The initial program from our genomic research
collaboration with CHOP was the development candidate AEVI-001, an oral, non-stimulant glutamatergic neuromodulator. Through our
acquisition of neuroFix, LLC, or neuroFix, in September 2015, we acquired the rights to develop AEVI-001 (then known as NFC-1),
as well as the rights to certain data derived from a clinical trial and other studies of AEVI-001.
The selection of AEVI-001 for development in
the mGluR+ ADHD patients was the result of a rational search process conducted to specifically identify therapeutic candidates
with a demonstrated ability to modulate glutamate signaling via the mGluR network. The role of glutamate in ADHD and other CNS
disorders is supported by recent neuroimaging studies that suggest glutamate levels are abnormal in children with ADHD. These abnormalities
appear to be concentrated in the anterior singular cortex region of the brain, as evidenced by volumetric and functional magnetic
resonance imagery studies, as well as targeted studies of magnetic resonance spectroscopy. Additional supportive evidence for targeting
glutamate modulation is provided by genetic studies that have identified mutations in glutamatergic genes that are enriched in
children with ADHD.
Development of AEVI-001 in mGluR+ Genetic Subset ADHD
We completed an AEVI-001 Phase 2/3 trial (which
we refer to as the SAGA trial) in adolescent ADHD patients with specific mutations in their mGluR gene network, which we refer
to as mGluR+ ADHD, in the first quarter of 2017. Although AEVI-001 did not meet the primary endpoint of reduction on the ADHD rating
scale (ADHD-RS) compared to placebo, in the SAGA trial, the drug did demonstrate statistically significant and clinically meaningful
improvement compared to placebo in a pre-specified responder analysis of ADHD-RS improvement of 30% or more [ADHD-RS reduction
of 17.6, p < .005]. In a second pre-specified responder analysis of Clinical Global Impression of Improvement scale (CGI-I),
a key secondary endpoint, AEVI-001 demonstrated a statistically significant and clinically meaningful improvement compared to placebo
[57% of patients treated with AEVI-001 achieved a score of much improved or very much improved compared to 33% on placebo, p=0.0155].
Additionally, the safety analysis demonstrated that AEVI-001 was well tolerated at all doses and the majority of adverse events
were generally mild to moderate in severity. There were no serious adverse events.
Our subsequent analysis of responder data from
a subset of genomically identified patients in the SAGA trial identified eight genes (genetic subset) that appeared to be predictive
of a clinically meaningful and statistically significant response on the ADHD-RS scales and CGI-I scales. These genes include certain
glutamate metabotropic receptors and neurodevelopmental genes that are found in approximately 10% of pediatric ADHD patients.
We believed that these results clarified a path
forward for the continued development of AEVI-001 in ADHD. As a result, we initiated a Phase 2 trial (the ASCEND trial) during
the third quarter of 2017 to confirm genetic responders to AEVI-001. On January 2, 2019, we announced that the ASCEND trial, a
genomically-guided Phase 2 double-blind, placebo-controlled clinical trial of orally-administered AEVI-001 (100 – 400 mg
BID) in children aged 6 – 17 with Attention Deficit Hyperactivity Disorder (ADHD) with an mGluR copy number variant (Part
A) or without an mGluR copy number variant (Part B), did not achieve statistical significance on the primary endpoint of reduction
of ADHD-RS in either Part A or Part B after 6 weeks of treatment with AEVI-001. AEVI-001 was safe and well tolerated. Reported
adverse events were minimal and similar across both Part A and Part B treatment groups. Given the negative outcomes of the ASCEND
trial, we have terminated the AEVI-001 program.
AEVI-004 (novel co-crystal version of AEVI-001)
In July 2018, we announced the receipt of positive
feedback from the United States Food and Drug Administration, which we refer to as the FDA, on an improved version of AEVI-001,
identified as AEVI-004.
Following 2016 FDA regulatory guidance
on co-crystalization of active drugs, we created a co-crystal of fasoracetam (AEVI-001) with enhanced physical and chemical properties.
The new molecule, AEVI-004, has comparatively greater stability and a higher melting point than AEVI-001. The molecule was
engineered to maintain solubility, dissolution and pharmacokinetics substantially similar to AEVI-001.
In July 2018, we announced the receipt of feedback
from the FDA provisionally indicating that AEVI-004 is a co-crystal of AEVI-001 and eligible for new chemical entity
(NCE) status. The FDA also provisionally indicated that existing toxicology and pathology studies would support clinical development
with AEVI-004 with minimal preclinical bridging studies.
AEVI-004 is expected to have composition of
matter patents extending to 2039 and should be listed as a NCE in the FDA Orange Book.
Given the negative outcomes of the ASCEND trial,
there are no current clinical development plans for AEVI-004 in ADHD. However, the company is in discussions with the National
Institutes of Health (NIH) regarding evaluating the potential anti-seizure activity of AEVI-004 in a preclinical model as part
of the NIH Epilepsy Treatment Screening Program.
AEVI-002 (Anti-LIGHT Monoclonal Antibody)
AEVI-002, a first-in-class anti-LIGHT monoclonal
antibody, or the Antibody, is in development for use in Pediatric Onset Crohn’s disease. Pediatric Onset Crohn’s disease
has a more aggressive phenotype at younger ages. The genomic rationale for the use of anti-LIGHT antibody in Crohn’s disease
was validated by CAG research showing the association to a loss of function mutation in decoy receptor 3 (DcR3).
In June 2016, we entered into a Clinical Development
and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, pursuant to which we acquired
certain rights with respect to the development and potential commercialization of the Antibody. Under the Development and Option
Agreement, we received an exclusive option for exclusive rights to develop products containing the Antibody, or an Antibody Licensed
Product, exclusive rights to commercialize Antibody Licensed Product in various countries and to conduct various development activities
with respect to the Antibody Licensed Product, including the conduct of a signal finding study testing the Antibody in Severe Pediatric
Onset Inflammatory Bowel Disease, or the Study. The terms of the Development and Option Agreement with KHK are more fully described
under the section entitled “Licenses.”
A submission to reactivate the IND for AEVI-002
in Pediatric Crohn’s Disease was filed with the FDA in 2017 and has passed the 30-day waiting period. An 8-week Phase Ib
proof-of-concept study has been initiated, with the goal of enrolling up to 12 patients with a Pediatric Onset Crohn’s disease
diagnosis, with most patients being refractory to treatment with TNF-α inhibitors, with or without a DcR3 mutation. The endpoints
of the trial will include endoscopic evaluation, Crohn’s Disease Activity Index ratings and safety. Initial data from the
proof-of-concept study is expected by mid-year 2019, at the earliest, at which point we will make a determination on our option
to license exclusive rights to the Antibody for further development. Active recruitment for the trial is underway, although the
identification and recruitment of patients into the proof-of-concept study has been extremely challenging, and to date no patients
have been enrolled. The ability to produce initial data by mid-year 2019 is highly dependent on timely recruiting; thus, continued
difficulties in recruitment could cause an extended delay or an inability to deliver initial data for the program.
AEVI-005 (Monoclonal Antibody)
AEVI-005 is the second monoclonal antibody we
are developing as part of our ongoing collaboration with KHK. We are studying AEVI-005 in an undisclosed ultra-orphan auto-immune
pediatric disease. We initiated a preclinical research program with AEVI-005 in the second quarter of 2018.
Business Strategy
Our goal is to translate key scientific insights
relating to underlying genomic drivers of disease into the development of effective and highly selective therapeutics. To execute
our strategy, we intend to:
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Advance our clinical candidate, AEVI-002, through clinical development.
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a first-in-class anti-LIGHT monoclonal antibody being developed
for use in Pediatric Onset Crohn’s disease. An 8-week signal finding study at CHOP has been initiated with the intent of
enrolling up to 12 patients with a Pediatric Onset Crohn’s disease diagnosis, with most subjects being refractory to treatment
with TNF-α inhibitors. Initial data from the proof-of-concept study is expected by mid-year 2019, at the earliest, at which
point we will make a determination on our option to license exclusive rights to the antibody for further development.
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Leverage our strategic collaborations to continue to implement a genomic medicine driven approach to drug development.
Our strategy is to work closely with our collaborators at CAG to identify populations of need with well-characterized, novel, genetically-defined
targets. We then designate an actionable therapeutic development approach based upon the target and the biology and human pathophysiology
of the relevant disease and likely clinical and regulatory pathways. The collaboration affords us with unique and proprietary insight
into these diseases and allows us to better select therapeutic approaches.
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Work with experienced third parties in the field of diagnostics.
Because we often target genetic alterations that are
detectable, companion diagnostics can be developed to identify these alterations. Once we have identified a target, we will initially
use existing diagnostic tools to identify patient subsets that we believe will derive increased benefit from our product candidates.
As we advance our targets clinically and determine the most important screening criteria, we will develop companion diagnostics
as appropriate, with the help of technology partners, to identify patients and support registration and marketing of our product
candidates.
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Opportunistically in-license and acquire novel therapies for the treatment of rare and orphan disease.
We plan to leverage
our clinical drug development expertise and our relationships in the rare and orphan diseases community to identify and in-license
or acquire additional product candidates that we believe have the potential to become novel treatments for diseases with significant
unmet medical needs.
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Potentially seek strategic collaborative relationships while maintaining flexibility in commercializing and maximizing the
value of our development programs.
We plan to develop and seek regulatory approval for multiple product candidates in our development
pipeline. While we may develop these products independently, we still may enter into strategic relationships with biotechnology
or pharmaceutical companies to realize the full value of these products.
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In light of our decision to discontinue the
AEVI-001 program in ADHD, our board of directors has commenced a review to explore and evaluate potential strategic alternatives
to enhance stockholder value. These alternatives could include, among others, continuing to execute the Company’s business
plan, issuing or transferring shares of our common stock or other equity securities, the license, sale or disposition of certain
assets or programs, the formation of a joint venture, a strategic business combination, a transaction that results in private ownership
or the sale of the Company, or some combination of these. There can be no assurance that the review of strategic alternatives will
result in the identification or consummation of any transaction or that our board of directors will determine that continuing our
current business operations is in the best interests of our stockholders.
Intellectual Property
Our goals are to obtain, maintain, and enforce
patent and trademark protection for our products, processes, methods, and other proprietary technologies, including the platform
collaboration with CHOP and to preserve our trade secrets both in the United States and elsewhere in the world. Our policy is to
actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our products, processes
and methods that arise from our genomics platform collaboration with CHOP through a combination of contractual arrangements, trade
secrets, patents, and trademarks both in the United States and abroad.
Our ability to compete depends on our ability
to maintain and enforce our intellectual property rights and operating without infringing the intellectual property of others and
our ability to enforce our licenses. Our business could be materially harmed, and we could be subject to liabilities, because of
lawsuits brought by others against us or our licensors and licensees. We will be able to protect our technology from unauthorized
use by third parties only to the extent it is covered by valid and enforceable patents or is effectively maintained as trade secrets.
Patents and other proprietary rights are an essential and material element of our business. Applications for patents and other
intellectual property rights capable of being registered have been, and will be, filed in certain key jurisdictions. As we identify
additional rare and orphan disease targets, we will seek protection for the related intellectual property rights in the United
States and other relevant jurisdictions. There can be no assurance that the pending applications will result in patents ultimately
being issued.
Our patent portfolio for AEVI-001, AEVI-002
and AEVI-005 consists of licensed patents and patent applications. The applicable licenses are discussed below.
We also depend upon the skills, knowledge and
experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors, none
of which is patentable. To help protect our proprietary knowledge and experience that is not patentable, and for inventions for
which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements with our employees,
consultants, vendors, collaborators, advisors, customers and other third parties to protect our interests. To this end, we require
all employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure
of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business. We also require confidentiality or material transfer agreements from third parties that
receive our confidential data or materials. We intend to continue to take all appropriate steps to protect our intellectual property,
including maintaining an active program for patent protection for novel elements in the development of our products and technology.
Licenses
CHOP License Agreement and Sponsored Research
Agreement
In November 2014, we entered into a license
agreement, or the License Agreement, and a sponsored research agreement, or the Research Agreement, each with CHOP. Under the terms
of the License Agreement, CHOP granted us (i) an exclusive, sublicensable license to use certain patent rights covering potential
diagnostic and therapeutic targets and (ii) an exclusive, non-sublicensable license to use certain biospecimen and phenotypic data
collected from patients with rare and orphan diseases and their family members, or the Biobank. In February 2017, we amended the
License Agreement. The amendment allows us to extend the period of our exclusive commercial access to the Biobank for rolling two-year
periods. The cost of the first extension was $197,603 with each subsequent extension costing $125,000. We have exercised such option
in each of 2017 and 2018. The amendment also (1) granted us the first right to defend challenges to the patent rights licensed
under the License Agreement, (2) clarified termination rights in favor of CHOP if we enter liquidation, have a receiver or administrator
appointed over any assets related to the License Agreement, make any voluntary assignment of our assets for the benefit of creditors,
cease to carry on business, file for bankruptcy under Chapter 7 of the US Bankruptcy Code or have an involuntary petition under
Chapter 7 of the US Bankruptcy Code filed against us and (3) added a provision that tolls the right to terminate the License Agreement
for default until completion of dispute resolutions proceedings concerning the alleged default and any remaining cure period, if
any.
In December 2015, we entered into an amendment
to the Research Agreement, which amendment (i) set the payment schedule under such agreement through March 2017 and (ii) granted
us the right to extend the term of the Research Agreement until November 12, 2017
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In February 2017, we entered into a second
amendment to the Research Agreement, which extended the term of the Research Agreement through June 30, 2018. This amendment also
granted us rights to continually extend the term of the Research Agreement by one year by giving CHOP written notice of extension
no later than one year prior to the expiration of the then-current term of the Research Agreement. In June 2017, we extended the
term of the Research Agreement through June 30, 2019, and in June 2018, we extended the term of Research Agreement through June
30, 2020.
For the year ended December 31,
2018, $5.94 million was due under the Research Agreement and $4.75 million will be due under the Research Agreement in 2019.
In the first half of 2020, $2.38 million will be due under Research Agreement.
On March 25, 2019, we and CHOP agreed to, and on March 29, 2019 we and CHOP entered into definitive agreements
to, further amend the Research Agreement and the License Agreement, or the CHOP Amendments. The CHOP
Amendments allow us to defer the monthly payments due under the Research Agreement for the period from February 1, 2019 through September 30, 2019 in exchange for a non-interest bearing
note in the amount of such deferral. Such note matures September 30, 2019 and is secured by all of Aevi’s intellectual property
and other assets, or the Note. At maturity, and at CHOP’s option, the Note will be payable in cash
or a number of shares of our common stock calculated based on the price of our common stock at
such time; provided, however, if conversion upon such election would cause CHOP and its affiliates including the CHOP Foundation
to own, in the aggregate, in excess of 47.5% of the then-outstanding shares of our common stock (after giving
effect to such conversion), then CHOP would only receive the number of shares of our common stock such that CHOP and its
affiliates including the CHOP Foundation would own, in the aggregate, 47.5% of the then outstanding shares of our
common stock (after giving effect to such conversion), and the balance of the Note would be payable to CHOP in cash.
The CHOP Amendments with respect to the
Research Agreement and the License Agreement prohibits the assignment or sublicense of CHOP’s intellectual property without
CHOP’s prior written consent, allows CHOP to terminate the Research Agreement and the License Agreement upon a change of
control without CHOP’s prior written consent, reduces the period of time during which we have to exercise its options
to license new intellectual property of CHOP and to negotiate the terms of any such license and requires us to meet certain
diligence requirements related to acquiring rights to and commencing a clinical trial for a viable molecule that addresses the
optioned intellectual property.
Furthermore, we have agreed that
until and including June 23, 2019 the Company will not undertake any equity financing (including convertible notes) that
would have a dilutive effect on the stockholders of Aevi. Thereafter, and until the later of repayment in full of the Note
or June 30, 2020, Aevi has agreed to only undertake an equity financing (including convertible notes) if the net proceeds of such
financing provide at least six month of cash to sustain our operations; provided, that CHOP will have a right
of first refusal to purchase any or all equity proposed to be issued in such financing on equivalent terms.
Development and Option Agreement with Kyowa
Hakko Kirin Co., Ltd. (KHK) related to AEVI-002
In June 2016, we entered into the Development
and Option Agreement with KHK pursuant to which we acquired certain rights with respect to the development and potential commercialization
of AEVI-002.
Regarding AEVI-002, if we exercise our option
under the Development and Option Agreement, KHK has 60 days to select one of two development and commercialization structures as
follows:
PLAN A (AEVI-002): Co-Development/Co-Commercialization
Arrangement
If KHK selects the co-development/co-commercialization
arrangement (Plan A), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products
in the treatment, prevention, and diagnosis of specified pediatric onset rare and orphan inflammatory diseases (including severe
pediatric onset inflammatory bowel diseases such as Crohn’s disease and ulcerative colitis, or IBD) and other specified pediatric
onset rare and orphan auto-immune diseases, or collectively, the Field, in the United States and Canada. We will also be responsible
for development and regulatory approval of the first Antibody Licensed Product in the European Union and then transferring such
regulatory approval to KHK or its designee. We will be responsible for the manufacture of the Antibody Licensed Products for use
by the parties in clinical trials as well as for commercialization in their respective fields and/or territories, with KHK purchasing
the Antibody Licensed Products from us.
We will be required to pay KHK an initial license
fee in the low single-digit millions of dollars upon the co-development/co-commercialization arrangement becoming effective. We
may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Antibody Licensed
Products. The parties will share the anticipated costs of development of the first Antibody Licensed Product in the Field in the
United States, Canada and the European Union with us being responsible for any costs in excess of an agreed cap. The parties will
split profits from our sales of Antibody Licensed Products in the United States and Canada equally. KHK will pay us low double-digit
royalties for sales of Antibody Licensed Products outside the United States and Canada and outside the Field in the United States
and Canada.
PLAN B (AEVI-002): Licensing Arrangement
If KHK selects the licensing arrangement (Plan
B), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products in the Field in the
United States, Canada and the European Union. We will be responsible for the manufacture of the Antibody Licensed Products for
use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories.
We will be required to pay KHK an initial license
fee in the low single-digit millions of dollars upon the licensing arrangement becoming effective. We may pay KHK up to an additional
$28 million upon the achievement of certain regulatory milestones related to the Antibody Licensed Products. The parties will split
profits from our sales of Antibody Licensed Products in the United States, Canada and the European Union with us being entitled
to approximately 74% of such profits and KHK being entitled to approximately 26% of such profits. KHK will pay us low double-digit
royalties for sales of Antibody Licensed Products outside the United States, Canada and the European Union and outside the Field
in the United States, Canada and the European Union. We will be responsible for costs of development of Licensed Products in the
United States, Canada and the European Union. KHK will have the right to purchase the Antibody Licensed Products from us.
Research Collaboration and Option Agreement
with Kyowa Hakko Kirin Co., Ltd. (KHK) related to AEVI-005
During 2018, we expanded our collaboration with
KHK by entering a Research Collaboration and Option Agreement related to AEVI-005. AEVI-005 is the second monoclonal antibody we
are developing as part of our ongoing collaboration with KHK. We are studying AEVI-005 in an undisclosed ultra-orphan auto-immune
pediatric disease. We initiated a preclinical research program with AEVI-005 in the second quarter of 2018.
Trademarks
Certain names utilized for our products and
tools are trademarked, and certain names utilized for our products and tools are the subject of trademark registrations and applications
in certain jurisdictions. The final choice of names for products and tools has not yet been made and will be subject to marketing
considerations and other factors.
There can be no assurance that a third party
will not oppose any registration, that the respective Trademark Offices will issue a registration certificate or that we will otherwise
be successful in perfecting trademark rights for the marks in the United States or in foreign countries, the results of any of
which would likely have a material adverse effect on our company.
Government Regulation
General
The production, distribution, and marketing
of products employing our technology, and our development activities, are subject to extensive governmental regulation in the United
States and in other countries. In the United States, our products are subject to the Federal Food, Drug, and Cosmetic Act, as amended,
or FDCA, and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations. These laws, and
similar laws outside the United States, govern the research, clinical and preclinical testing, manufacture, quality control, safety,
effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion
of our products. Although the discussion below focuses on regulation in the United States, we anticipate seeking approval for,
and marketing of, our products in other countries. Generally, our activities in other countries will be subject to regulation that
is similar in nature and scope as that imposed in the United States, although there can be important differences. Product development
and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial time
and financial resources. Violations of regulatory requirements at any stage may result in various adverse consequences, including
the FDA’s and other regulatory health agencies’ delay in approving or refusal to approve a product. Violations of regulatory
requirements also may result in enforcement actions.
The following paragraphs provide further information
on certain legal and regulatory issues with a particular potential to affect our operations or future marketing of products employing
our technology.
FDA Approval Process
To obtain approval of a new product from the
FDA, we must, among other requirements, submit data demonstrating the product’s safety and efficacy as well as detailed information
on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical
and clinical trials. This testing and the preparation of necessary applications and processing of those applications by the FDA
are expensive and typically take many years to complete. The FDA may deny our applications or may not act quickly or favorably
in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals
that could delay or preclude us from marketing any products we may develop. The FDA also may require post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial
applications of these products. Regulatory authorities may withdraw product approvals if we fail to comply with regulatory standards
or if we encounter problems following initial marketing. With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which we may have the exclusive right to exploit the products
or technologies.
Currently all of our product candidates as well
as other therapies we are exploring, regardless of therapeutic modality, will be considered to be a drug or biologic from a regulatory
standpoint. The process required by the FDA before a new drug or biologic may be marketed in the United States generally involves
the following:
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completion of pre-clinical laboratory tests or studies and formulation studies in compliance with good laboratory practices,
or GLP, and other regulations;
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submission to the FDA of an Investigational New Drug Application, or IND, for a new drug or biologic, which must become effective
before human clinical trials may begin;
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approval by an Institutional Review Board, or IRB, before each trial may be initiated;
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performance of adequate and well-controlled human clinical trials in accordance with federal regulations and with current Good
Clinical Practices, or GCPs, to establish the safety and efficacy of the proposed drug or biologic for its intended use;
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detailed information on product characterization and manufacturing process;
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satisfactory completion of an FDA inspection of the manufacturing facilities at which the investigational product candidate
is produced to assess compliance with cGMP, and to assure that the facilities, methods and controls are adequate;
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submission of a New Drug Application, or NDA, for a drug or a Biologics License Application, or BLA, for a biologic;
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satisfactory completion of an FDA Advisory Committee review, if applicable; and
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review and approval of an NDA or a BLA.
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Pre-clinical tests include laboratory evaluation
of product chemistry formulation and stability, as well as animal and other studies to evaluate toxicity. Under FDA regulations,
the results of any pre-clinical testing, together with manufacturing information and analytical data, are submitted to the FDA
as part of an IND. Additionally, for certain pediatric products, the sponsor may be required to submit an initial Pediatric Study
Plan (discussed below) as a pre-IND submission. The FDA requires a 30-day waiting period after the filing of each IND before clinical
trials may begin, in order to ensure that human research patients will not be exposed to unreasonable health risks. At any time
during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, may authorize trials
only on specified terms, or may require additional trials. The IND process may become extremely costly and substantially delay
development of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in
clinical trials.
Clinical trials involve the administration of
the investigational product candidate to healthy volunteers or patients under the supervision of qualified investigators. Clinical
trials are conducted under protocols that detail, among other things, the parameters to be used in monitoring safety and the efficacy
criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted
to the FDA as part of the IND. Clinical trials must be reviewed, approved and conducted under the auspices of an IRB. The sponsor,
investigators, and IRB must, as applicable, obtain the informed written consent of each participating subject, comply with the
protocol and investigational plan, adequately monitor the clinical trial, and timely report adverse events.
The sponsor typically conducts human clinical
trials in three sequential phases, which may overlap. These phases generally include the following:
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Phase 1: The product candidate is usually first introduced into healthy humans or, on occasion, into patients with the target
disease or condition, and is tested for safety, dosage tolerance, absorption, distribution, excretion and metabolism;
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Phase 2: The product candidate is introduced into a limited patient population to:
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assess its efficacy in specific, targeted indications;
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assess dosage tolerance and optimal dosage; and
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identify possible adverse effects and safety risks.
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Phase 3: These are commonly referred to as pivotal studies. If a product candidate is found to have an acceptable safety profile
and to be potentially effective in Phase 2 clinical trials, clinical trials in Phase 3 will be initiated to further demonstrate
clinical efficacy, optimal dosage and safety within an expanded and diverse patient population at geographically dispersed clinical
trial sites; and
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If the FDA does ultimately approve the product candidate, it may require post-marketing testing, including potentially expensive
Phase 4 studies, to confirm or further evaluate its safety and effectiveness. Continued ability to commercialize the product may
be based on the successful completion of these additional studies.
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Before proceeding with a trial, the sponsor
may seek a written agreement from the FDA regarding the design, size, and conduct of a clinical trial. This is known as a Special
Protocol Assessment, or SPA. Among other things, SPAs can cover clinical trials for pivotal studies whose data will form the primary
basis to establish a product’s efficacy. SPAs thus help establish up-front concurrence with the FDA about the adequacy of
a clinical trial design to support a regulatory approval, but the agreement is not binding if new circumstances arise. Even if
the FDA agrees to a SPA, the agreement may be changed by the sponsor or the FDA on written agreement by either parties, or if a
senior FDA official determines that a substantial scientific issue essential to determining the safety or effectiveness of the
product was identified after the testing began. There is no guarantee that a study will ultimately be adequate to support an approval,
even if the study is subject to a SPA. The FDA retains significant latitude and discretion in interpreting the terms of the SPA
and the data and results from any study that is the subject of the SPA.
Pediatric product development is subject to
additional FDA regulations, including the Best Pharmaceuticals for Children Act and the Pediatric Research Equity Act, as amended
by the FDA Reauthorization Act of 2017, which may impact whether FDA grants orphan designation for pediatric subpopulations of
common diseases (discussed below) and could require pediatric studies. Sponsors may be required to submit an initial Pediatric
Study Plan (iPSP) before the initiation of any phase 3 studies unless certain exemptions apply. Where a sponsor is required to
submit an iPSP, the sponsor must reach an agreement with FDA before submitting a marketing application or supplement. FDA agreement
on a iPSP does not guarantee that the study will ultimately be adequate to support an approval.
The FDA or the IRB at each institution at which
a clinical trial is being performed may order the temporary or permanent discontinuation of a clinical trial at any time if it
believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to
the clinical trial patients. Data safety monitoring committees, which monitor certain studies to protect the welfare of study patients,
may also require that a clinical trial be discontinued or modified. In addition, there are requirements for the registration of
certain ongoing clinical trials of product candidates on public registries and the disclosure of certain information pertaining
to the trials as well as clinical trial results after completion. In the United States, sponsors are required to register this
information on a website maintained by the U.S. National Institutes of Health, or NIH, at www.clinicaltrials.gov.
The sponsor must submit to the FDA the results
of the pre-clinical and clinical trials, together with, among other things, detailed information on the manufacturing and composition
of the product, and proposed labeling, in the form of an NDA, or, in the case of a biologic, a BLA. The applicant must also submit
with the NDA or BLA a substantial user fee payment, unless a waiver or reduction applies. In some cases, a sponsor may be able
to expand the indications in an approved NDA or BLA through a submission of a Prior Approval Supplement. Each NDA or BLA submitted
for FDA approval is usually reviewed for administrative completeness and reviewability within 60 days following submission of the
application. If deemed complete, the FDA will “file” the NDA or BLA, thereby triggering substantive review of the application.
The FDA can refuse to file any NDA or BLA that it deems incomplete or not properly reviewable. Once the submission has been accepted
for filing, the FDA will review the application and will usually respond to the applicant in accordance with performance goals
the FDA has established for the review of NDAs and BLAs - six months from the receipt of the application for priority applications
and ten to twelve months for regular applications. The review process is often significantly extended by FDA requests for additional
information, pre-clinical studies or clinical trials, clarification, or a risk evaluation and mitigation strategy, or REMS, or
by changes to the application submitted by the applicant in the form of amendments. The FDA may refer applications for novel product
candidates which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians
and other experts, for review, evaluation, and a recommendation as to whether the application should be approved and under what
conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully
when making decisions.
Before approving an NDA or BLA, the FDA will
often inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facilities
are in compliance with current cGMP requirements which govern the manufacture, holding and distribution of a product.
It is possible that our product candidates will
not successfully proceed through this approval process or that the FDA will not approve them in any specific period of time, or
at all. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria, or if the FDA determines
that the clinical data does not adequately establish the safety and efficacy of the product. Satisfaction of FDA pre-market approval
requirements for a new product candidate is a process that may take a number of years and the actual time required may vary substantially
based upon the type, complexity and novelty of the product or disease. The FDA reviews these applications and, when and if it decides
that adequate data is available to show that the product is both safe and effective and that other applicable requirements have
been met, approves the product candidate for marketing. Government regulation may delay or prevent marketing of potential products
for a considerable period of time and imposes costly procedures upon our activities. Success in early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible
to varying interpretations that could delay, limit or prevent regulatory approval. Upon approval, a product candidate may be marketed
only for those indications approved in the NDA or BLA and will be subject to labeling and promotional requirements or limitations,
including warnings, precautions, contraindications and use limitations, which could materially impact profitability. Once approved,
the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards and requirements are not
maintained or if safety, efficacy or other problems occur after the product reaches the marketplace.
The FDA may, during its review of an NDA or
BLA, ask for additional study data. If the FDA does ultimately approve the product, approval may be subject to limitations based
on the FDA’s interpretation of the existing pre-clinical and clinical data and the FDA may require post-marketing testing,
including potentially expensive Phase 4 studies, to confirm or otherwise further evaluate the safety and effectiveness of the product.
The FDA also may require, as a condition to approval or continued marketing of a drug, a REMS to ensure that the benefits of a
drug or biologic product outweigh its risks. REMS can include additional educational materials for healthcare professionals and
patients such as Medication Guides and Patient Package Inserts, a plan for communicating information to healthcare professionals,
and elements to assure safe use, or ETASU, such as restricted distribution of the product. In addition, the FDA may, in some circumstances,
impose restrictions on the use of the product, which may be difficult and expensive to administer and may require prior approval
of promotional materials. Following approval, the FDA may require labeling changes or impose new post-approval study, risk management,
or distribution restriction requirements.
From time to time, legislation is drafted, introduced
and passed in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacturing
and marketing of products regulated by the FDA. In addition to new legislation, the FDA regulations and policies are often revised
or reinterpreted by the agency in ways that may significantly affect our business and our product candidates. It is impossible
to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of
such changes, if any, may be. For example, in December 2016, the 21st Century Cures Act, or the Cures Act, became law. The Cures
Act contains numerous provisions, including provisions designed to speed development of innovative therapies and encourage greater
use of real-world evidence to support regulatory decision making for drugs.
The FDA has developed four distinct approaches
intended to make drugs that address unmet medical needs for serious or life-threatening conditions available as rapidly as possible,
especially when the drugs are the first available treatment or have advantages over existing treatments: accelerated approval,
fast track, breakthrough therapy, and priority review. The FDA requires a manufacturer who receives certain designations to make
publicly available its policy for responding to requests for individual patient expanded access.
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Accelerated Approval. The FDA may grant “accelerated approval” status to drugs or biologics that treat serious
or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. Under this
pathway, the FDA may approve a product based on surrogate endpoints, or clinical endpoints other than survival or irreversible
morbidity. When approval is based on surrogate endpoints or clinical endpoints other than survival or morbidity, the sponsor will
be required to conduct additional post-approval clinical trials to verify and describe clinical benefit. Under the agency’s
accelerated approval regulations, if the FDA concludes that a product that has been shown to be effective can be safely used only
if distribution or use is restricted, it may require certain post-marketing restrictions as necessary to assure safe use. In addition,
for products approved under accelerated approval, sponsors will be required to submit all copies of their promotional materials,
including advertisements, to the FDA at least thirty days prior to initial dissemination unless otherwise informed by the FDA.
After a hearing, the FDA may withdraw a previously granted accelerated approval if, for instance, post-marketing studies fail to
verify any clinical benefit, it becomes clear that restrictions on the distribution of the product are inadequate to ensure its
safe use, or if a sponsor fails to comply with the conditions of the accelerated approval.
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Breakthrough Therapy. The FDA may grant “breakthrough therapy” status to drugs or biologics designed to treat,
alone or in combination with another drug(s) or biologic(s), a serious or life-threatening disease or condition and for which preliminary
evidence suggests a substantial improvement on clinically-meaningful endpoints over existing therapies. Such products need not
address an unmet need, but are nevertheless eligible for expedited review if they offer the potential for an improvement over existing
therapies. Breakthrough therapy status entitles the sponsor to earlier and more frequent meetings with the FDA regarding the development
of nonclinical and clinical data and permits the FDA to offer product development or regulatory advice for the purpose of shortening
the potential time to product approval. Breakthrough therapy status does not guarantee that a product will be developed or reviewed
more quickly and does not ensure FDA approval.
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Fast Track. The FDA may grant “fast track” status to drugs or biologics that treat serious diseases or illness
and fill an unmet medical need. Fast track is a process designed to expedite the review of such products by providing, among other
things, more frequent meetings with the FDA to discuss the product’s development plan, more frequent written correspondence
from the FDA about trial design, eligibility for accelerated approval if certain criteria are met, and rolling review, which allows
submission of individually completed sections of a NDA or BLA for the FDA’s review before the entire filing is completed.
Fast track status does not ensure that a product will be developed more quickly or receive FDA approval more quickly, if at all.
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Priority Review. The FDA may grant “priority review” status to products that, if approved, would be significant
improvements in safety or effectiveness of the treatment, diagnosis or prevention of serious conditions. Priority review is intended
to reduce the time it takes for the FDA to review a NDA or BLA.
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Additionally, there are various designations
available to drugs and biologics which provide a sponsor with incentives to support approval of the product candidate, including,
but is not limited to, orphan drug designation and rare pediatric disease designation.
Orphan Drug Designation
Under the U.S. Orphan Drug Act, as amended by
the FDA Reauthorization Act of 2017, the FDA may grant orphan drug designation to drugs or biologics intended to treat a “rare
disease or condition,” which is defined as having a prevalence of less than 200,000 individuals in the United States. FDA
is currently implementing a modernization plan which may include new requirements or procedures that could impact the success of
an orphan drug designation request. In certain circumstances, a sponsor may need to demonstrate that the product is clinically
superior to a previously-approved drug in order to obtain orphan drug status, and FDA may issue regulations to implement this requirement.
These regulations will also affect Rare Pediatric Disease Designation Requests, which were previously exempted from the clinical
trial requirements of the Pediatric Research Equity Act; FDA may now require clinical studies in pediatric populations for these
requests to obtain orphan drug designation. Orphan drug designation must be requested before submitting a NDA or BLA for the product.
The FDA aims to respond to all orphan drug designation requests within 90 days of submission. Orphan drug designation does not
shorten the regulatory review and approval process, nor does it provide any advantage in the regulatory review and approval process.
However, if an orphan drug later receives approval for the indication for which it has designation, the relevant regulatory authority
may not approve any other applications to market the same drug for the same indication, except in very limited circumstances, for
seven years in the United States. Although obtaining approval to market a product with orphan drug exclusivity may be advantageous,
we cannot be certain:
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that we will be the first to obtain approval for any drug for which we obtain orphan drug designation;
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that orphan drug designation will result in any commercial advantage or reduce competition; or
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that the limited exceptions to this exclusivity will not be invoked by the relevant regulatory authority.
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Additionally, orphan drug exclusive marketing
rights may be lost under certain conditions, such as if the request for designation was materially defective or if the manufacturer
is unable to assure sufficient quantity of the drug.
In August 2017, President Trump signed into
law the Food & Drug Administration Reauthorization Act. This legislation imposes significant new requirements for clinical
trial sponsors which will affect, among other things, obtaining orphan drug designation, and the development of drugs and biological
products for pediatric use.
Ongoing FDA Requirements and Post-Marketing
Obligations
The Food and Drug Administration Amendments
Act of 2007 expanded FDA authority over drug products after approval. All approved drug products are subject to continuing regulation
by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, sampling and distribution
requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic
records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy
information to the FDA, and complying with FDA promotion and advertising requirements. Failure to comply with the statutory and
regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension
of manufacturing, seizure of product, injunctive action, criminal prosecution, or civil penalties.
The FDA may require post-marketing studies or
clinical trials to develop additional information regarding the safety of a product. These studies or trials may involve continued
testing of a product and development of data, including clinical data, about the product’s effects in various populations
and any side effects associated with long-term use. The FDA may require post-marketing studies or trials to investigate possible
or known serious risks or signals of serious risks, or to identify unexpected serious risks, and may require periodic status reports
if new safety information develops. Failure to conduct these studies in a timely manner may result in substantial civil fines,
or withdrawal of product approval.
Also, newly discovered or developed safety or
efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications,
additional pre-clinical studies or clinical trials, or even in some instances, withdrawal of the approval. Violations of regulatory
requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s withdrawal
of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing,
and the imposition of civil fines and criminal penalties against the manufacturer and NDA or BLA holder. In addition, later discovery
of previously unknown problems may result in restrictions on the product, manufacturer or NDA or BLA holder, including withdrawal
of the product from the market.
The labeling, advertising, promotion, marketing
and distribution of a drug or biologic product also must be in compliance with FDA requirements which include, among others, promotional
activities, standards and regulations for direct-to-consumer advertising, promotional activities involving the internet, and industry
sponsored scientific and educational activities. A product cannot be commercially promoted before it is approved. After approval,
all product promotion must be consistent with the labeling approved by the FDA for such product, contain a balanced presentation
of information on the product’s uses, benefits, risks, and important safety information and limitations on use, and otherwise
not be false or misleading. The FDA has very broad enforcement authority, and failure to abide by these regulations can result
in penalties, including the issuance of a warning letter directing a company to correct deviations from regulatory standards and
enforcement actions that can include seizures, injunctions and criminal prosecution. Failure to comply with applicable FDA requirements
and restrictions also may subject a company to adverse publicity and enforcement action by the FDA, the U.S. Department of Justice,
or DOJ, or the Office of the Inspector General of the U.S. Department of Health and Human Services, or HHS, as well as state authorities.
This could subject the company to a range of penalties that could have a significant commercial impact, including civil and criminal
fines and agreements that materially restrict the manner in which a company promotes or distributes its products. In addition to
FDA restrictions on marketing of pharmaceutical products, state and federal fraud and abuse and consumer protection laws have been
applied to restrict certain marketing practices in the pharmaceutical industry in recent years. Some of the pertinent laws have
not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.
In addition, these laws and their interpretations are subject to change.
Drug and biologic manufacturers and their subcontractors
are required to register their establishments with the FDA and certain state agencies, and to list their products with the FDA.
The FDA periodically inspects manufacturing facilities in the United States and abroad in order to assure compliance with the applicable
cGMP regulations and other requirements. Facilities also are subject to inspections by other federal, foreign, state or local agencies.
In complying with the cGMP regulations, manufacturers must continue to assure that the product meets applicable specifications,
regulations and other post-marketing requirements. Failure to comply with these requirements subjects the manufacturer to possible
legal or regulatory action, such as suspension of manufacturing or recall or seizure of product.
Sponsors and their third-party contractors are
also subject to various laws and regulations governing laboratory practices, the experimental use of animals and the use and disposal
of hazardous or potentially hazardous substances in connection with their research. In each of the above areas, the FDA has broad
regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals,
seize or recall products and deny or withdraw approvals.
Furthermore, new government requirements may
be established that could delay or prevent regulatory approval of our products under development, or effect the conditions under
which approved products are marketed.
Potential Competition with “Biosimilar”
Products
The Biologics Price Competition and Innovation
Act, or BPCIA, was enacted as part of the Affordable Care Act. The BPCIA authorizes the FDA to approve “abbreviated”
BLAs for products whose sponsors demonstrate they are “biosimilar” to reference products previously approved under
BLAs. The FDA may also separately determine whether “biosimilar” products are “interchangeable” with their
reference products. However, the FDA may not approve an “abbreviated” BLA for a biosimilar product until at least twelve
years after the date on which the BLA for the reference product was approved. FDA approval could be further delayed if the reference
products are subject to unexpired and otherwise valid patents.
Prior to the enactment of the BPCIA, information
in approved BLAs could not be relied upon by other manufacturers to establish the safety and efficacy of their products for which
they were seeking FDA approval. (In contrast, since at least 1984, pharmaceutical manufacturers have been able to submit Abbreviated
New Drug Applications for “generic drugs” that are materially identical to reference drugs approved under NDAs.) Accordingly,
if our products are approved under a BLA, other manufacturers potentially could develop and seek FDA approval of “biosimilar”
products at some point in the future.
In Vitro Companion Diagnostics
FDA defines an In Vitro, or IVD, companion diagnostic
device as an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding
therapeutic product. The use of an IVD companion diagnostic device with a therapeutic product is stipulated in the instructions
for use in the labeling of both the diagnostic device and the corresponding therapeutic product, including the label. Such tests
include genetic diagnostic tests. Approval of such of treatment with the therapeutic product may be dependent on the approval of
an IVD to:
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Monitor response to treatment with the therapeutic product for the purpose of adjusting treatment (e.g., schedule, dose, discontinuation)
to achieve improved safety or effectiveness; and/or
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Identify patients in the population for whom the therapeutic product has been adequately studied and found safe and effective,
i.e., there is insufficient information about the safety and effectiveness of the therapeutic product in any other population.
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Applications for an IVD companion diagnostic
device and its corresponding therapeutic product will be reviewed and approved according to applicable regulatory requirements.
The IVD companion diagnostic device application will be reviewed and approved or cleared under the device authorities of the Federal
Food, Drug, and Cosmetic Act (FD&C Act) and relevant medical device regulations; the therapeutic product application will be
reviewed and approved under section 505 of the FD&C Act (i.e., drug products) or section 351 of the Public Health Service Act
(i.e., biological products) and relevant drug and biological product regulations. FDA intends to review each IVD companion diagnostic
device submission within the context of, or in conjunction with, its corresponding therapeutic product, and FDA review of the IVD
companion diagnostic device and the therapeutic product will be carried out collaboratively among relevant FDA offices.
Ideally, a therapeutic product and its corresponding
IVD companion diagnostic device should be developed contemporaneously, with the clinical performance and clinical significance
of the IVD companion diagnostic device established using data from the clinical development program of the corresponding therapeutic
product. Many of our current and future product development candidates, including AEVI-002, may depend upon co-development of accurate
genetic and potentially other IVDs. Thus, we will likely need to comply with both FDA drug and medical device regulations. This
adds additional cost and complexity to our development programs. The availability of IVD companion diagnostics can allow more efficient
development programs and more appropriate use of products in the marketplace with more predictable outcomes for patients and higher
value medicines.
Ultimately FDA approval of the IVD will be required
to allow approval of many of our products. However, technical difficulties or other issues could delay or disrupt the development
of our products.
HIPAA Requirements
Other federal legislation may affect our ability
to obtain certain health information in conjunction with our research activities. We may be subject to data privacy and security
regulation by both the federal government and the states in which we conduct our business. The Health Insurance Portability and
Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009,
or HITECH, and its implementing regulations, imposes requirements relating to the privacy, security and transmission of individually
identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable
to “business associates”— independent contractors or agents of covered entities that receive or obtain protected
health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal
penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys
general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and
seek attorney’s fees and costs associated with pursuing federal civil actions. The 21
st
Century Cares Act, Pub.
L. 114-255, signed into law on December 13, 2016, among other changes, directs HHS to issue new HIPAA guidance which might differ
from current regulations. In addition, state laws govern the privacy and security of health information in specified circumstances,
many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Other U.S. Regulatory Requirements
In the United States, the research, manufacturing,
distribution, sale, and promotion of drug and biologic products are potentially subject to regulation by various federal, state
and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care
Financing Administration), other divisions of the HHS (e.g., the Office of Inspector General), the DOJ and individual U.S. Attorney
offices within the DOJ, and state and local governments. For example, sales, marketing and scientific/educational grant programs
must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, and similar state laws,
each as amended.
If a drug or biologic product is reimbursed
by Medicare or Medicaid, pricing and rebate programs must comply with, as applicable, the Medicare Modernization Act as well as
the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, or OBRA, and the Veterans Health Care Act of
1992, or VHCA, each as amended. Among other things, the OBRA imposes certain reporting requirements on pharmaceutical manufacturers
and requires pharmaceutical manufacturers to pay rebates on prescription products to state Medicaid programs and empowers states
to negotiate rebates on pharmaceutical prices, which may result in prices for our future products that will likely be lower than
the prices we might otherwise obtain. If products are made available to authorized users of the Federal Supply Schedule of the
General Services Administration, additional laws and requirements apply. Under the VHCA, drug companies are required to offer some
products at a reduced price to a number of federal agencies including the U.S. Department of Veterans Affairs and the U.S. Department
of Defense, the Public Health Service and some private Public Health Service designated entities in order to participate in other
federal funding programs including Medicaid. Participation under the VHCA requires submission of pricing data and calculation of
discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed
by the Federal Acquisition Regulation. All of these activities are also potentially subject to federal and state consumer protection,
unfair competition, and other laws.
In March 2010, President Obama signed the Affordable
Care Act, which substantially changes the way healthcare will be financed by both governmental and private insurers, and significantly
impacts the pharmaceutical industry. The Affordable Care Act was a sweeping law intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements
for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health
policy reforms. The Affordable Care Act has resulted in downward pressure on coverage and the price of products covered by Medicare
and other government programs. Any reduction in reimbursement from Medicare and other government programs may result in a similar
reduction in payments and coverage from private payors. The implementation of cost containment measures or other healthcare reforms
may prevent us from being able to generate revenue, attain profitability, or commercialize our products. In addition, it is possible
that there will be further legislation or regulation that could harm our business, financial condition and results of operations.
Other legislative changes have been proposed and adopted since passage of the Affordable Care Act, and there have been significant
ongoing efforts to modify or eliminate the under the current administration. Further legislation to repeal or revise Affordable
Care Act, if enacted, may have a significant impact on the health care system.
The federal Anti-Kickback Statute prohibits,
among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing,
leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare,
Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on one hand and prescribers, purchasers, and formulary managers on the other. Although there are a number of statutory
exemptions and regulatory safe harbors protecting some business arrangements from prosecution, the exemptions and safe harbors
are drawn narrowly and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject
to scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria
for safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by
the Affordable Care Act, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute.
Pursuant to the statutory amendment, a person
or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed
a violation. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil
False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined
to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an
item or service that was not provided as claimed or is false or fraudulent.
The federal False Claims Act prohibits any person
from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making,
using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government.
As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand”
for money or property presented to the U.S. government. Recently, several pharmaceutical and other healthcare companies have been
prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill
federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the
companies’ marketing of the product for unapproved, and thus non-reimbursable, uses. The False Statements Statute prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection
with the delivery of or payment for healthcare benefits, items or services.
HIPAA, as amended by HITECH, created new federal
criminal statutes that prohibit knowingly and willfully executing a scheme to defraud any healthcare benefit program, including
private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially
false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
Many states have similar fraud and abuse statutes
or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply
regardless of the payor. Some state laws also require pharmaceutical companies to report expenses relating to the marketing and
promotion of pharmaceutical products and to report gifts and payments to certain health care providers in those states. Some of
these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain
health care providers
The federal Physician Payment Sunshine Act,
being implemented as the Open Payments Program, requires certain pharmaceutical and biological manufacturers to engage in extensive
tracking of payments or transfers of value to physicians and teaching hospitals and public reporting of the payment data. Pharmaceutical
and biological manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s
Health Insurance Program are required to track such payments, and must submit a report on or before the 90th day of each calendar
year disclosing reportable payments made in the previous calendar year.
Moreover, we are subject to data protection
laws and regulations (i.e., laws and regulations that address privacy and data security). In the U.S., numerous federal and state
laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state
consumer protection laws govern the collection, use, disclosure and protection of health-related and other personal information.
Failure to comply with data protection laws and regulations could result in government enforcement actions and create liability
for us (which could include civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively
affect our operating results and business. HIPAA, as amended by HITECH, and its implementing regulations imposes obligations, including
mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health
information. Although we are not directly subject to HIPAA other than with respect to providing certain employee benefits, we potentially
could be subject to criminal penalties if we knowingly obtain or disclose individually identifiable health information maintained
by a HIPAA-covered entity (e.g., a healthcare provider or a health plan) in a manner that is not authorized or permitted by HIPAA.
Foreign Regulatory Requirements
We may be subject to widely varying foreign
regulations, which may be quite different from those of the FDA, governing clinical trials, manufacturing, product registration
and approval, pharmaceutical sales and data protection.
Whether or not FDA approval has been obtained,
we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement
of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement
criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA
approval.
In addition, pharmaceutical products may not
be imported into, or manufactured or marketed in, the State of Israel absent drug registration or the appropriate license/approval
to import/manufacture for clinical trials use.
Reimbursement and Pricing Controls
Third-party payers (Medicare, Medicaid, private
health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates
by regulating the level of reimbursement provided to the physicians and clinic utilizing our product candidates or by refusing
reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability
to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement
by private third-party medical insurance providers, including government insurers and independent providers, varies from country
to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party
government reimbursement.
In many of the markets where we or our collaborative
partners would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject, by law,
to direct price controls and to drug reimbursement programs with varying price control mechanisms. Public and private health care
payers control costs and influence drug pricing through a variety of mechanisms, including the setting of reimbursement amounts
for drugs and biological products covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in
accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2010, Pub. L. No. 108-173 (2003), as amended,
through negotiating discounts with the manufacturers, and through the use of tiered formularies and other mechanisms that provide
preferential access to certain drugs over others within a therapeutic class. Drug manufacturers also may be subject to drug rebate
agreements with public or private health care payers in exchange for the manufacturers’ products being included on plan formularies.
Payers also set other criteria to govern the
uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. If a payer concludes that
a drug is experimental or investigational, in many cases it will deny coverage on that basis alone. Further, many public and private
health care payers limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported
by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia
are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are
supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For example, in the
case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993, with certain
exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved use is
supported by one or more citations in the American Hospital Formulary Service Drug Information the American Medical Association
Drug Evaluations, or the United States Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid,
is the DRUGDEX Information System.
Employees
We currently employ 14 full-time employees.
None of our employees are represented by a labor union and we have not experienced any strikes or work stoppages. We generally
provide our employees with benefits and working conditions beyond the required minimums. We believe our relations with our employees
are good.
Additional Information
Aevi Genomic Medicine, Inc., a Delaware corporation
was organized on January 27, 2000. Our principal executive offices are located at 435 Devon Park Drive, Suite 715, Wayne, Pennsylvania
19087. Our telephone number is (610) 254-4201.
Our website address is
www.aevigenomics.com
.
The information on or accessible through our website is not part of this Annual Report on Form 10-K. Copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without
charge on our website or upon request to us. In addition, our Code of Business Conduct and Ethics, Audit Committee Charter, Compensation
Committee Charter and Nominating and Corporate Governance Committee Charter are all available without charge on our website or
upon request to us. All such requests should be sent to Aevi Genomic Medicine, Inc., Corporate Secretary, 435 Devon Park Drive,
Suite 715, Wayne, Pennsylvania 19087, or by email request from our website at
www.aevigenomics.com
. Amendments to, or waivers
from, our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post
or otherwise make available on our website from time to time other information that may be of interest to our investors.
ITEM 1A - Risk Factors.
Business-Related Risks
Our recurring losses from operations raise substantial doubt
regarding our ability to continue as a going concern.
Our recurring losses from operations raise substantial
doubt about our ability to continue as a going concern. There is no assurance that sufficient financing will be available when
needed to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may cause
others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
We are reviewing strategic alternatives and there can be no assurance
that we will be successful in identifying or completing any strategic transaction, that any such strategic transaction will result
in additional value for our stockholders or that the process will not have an adverse impact on our business.
As a result of the negative outcomes of
our ASCEND trial with AEVI-001 and our limited financial resources, we have begun exploring strategic alternatives, which
could include, but are not limited to, issuing or transferring shares of our common stock or other equity securities, the
license, sale or disposition of certain assets or programs, the formation of a joint venture, a strategic business
combination, a transaction that results in private ownership or the sale of the Company, or some combination of these, in
addition to other potential actions aimed at increasing stockholder value. There can be no assurance that the review of
strategic alternatives will result in the identification or consummation of any transaction. Our board of directors may also
determine that our most effective strategy is to continue to execute on our current development strategy or to cease our
current drug development activities altogether. The process of reviewing strategic alternatives may be time consuming and
disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial
condition and results of operations could be adversely affected. We could incur substantial expenses associated with
identifying, evaluating and negotiating potential strategic alternatives. There can be no assurance that any potential
transaction or other strategic alternative, if consummated, will provide greater value to our stockholders than that
reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related to
our future may result in the loss of potential business opportunities and volatility in the market price of our common stock
and may make it more difficult for us to attract and retain qualified personnel and business partners.
Additionally, we continue to pursue discussions related to potentially
expanding the company’s pipeline of development programs via the in-license or acquisition of future product development
candidates. There can be no assurance that these discussions will results in completed transactions.
We are a clinical stage biopharmaceutical company and have a
history of significant and continued operating losses and a substantial accumulated earnings deficit and we may continue to incur
significant losses and may never achieve or maintain profitability.
We are a clinical stage biopharmaceutical
company and since our inception have been focused on research and development and have not generated any substantial
revenues. We have incurred net losses of approximately $30.78 million and $34.71 million for the years ended December 31,
2018 and 2017, respectively. As of December 31, 2018, we had stockholders’ equity of approximately $7.93 million. We
expect to incur significant expenses and increasing operating losses, as well as negative cash flow from operations, for the
foreseeable future, as we continue to fund the CHOP Research Agreement and continue our research and development and
commence commercialization of our potential product candidates. The net losses we incur may fluctuate significantly from
quarter to quarter and year to year. It could be several years, if ever, before we have a commercialized product. Our ability
to raise working capital or generate revenues from sales of our potential products will depend on:
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successful completion of necessary clinical trials;
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commercialization (through partnership or licensing deals or through internal development) and market acceptance of new technologies and product candidates under development;
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medical community awareness; and
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changes in regulation or regulatory policy.
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We will need substantial additional capital for the continued
development of our product candidates and for our long-term operations.
As of December 31, 2018, our cash and
cash equivalents were approximately $12.08 million. As of February 28, 2019, our cash and cash equivalents were
approximately $8.34 million. Based upon current management projections, we expect the current cash balance to fund operations
into early in the third quarter of 2019. However, changes in our business, whether or not initiated by us, may affect the
rate at which we deplete our cash and cash equivalents. Our present and future capital requirements depend on many factors,
including:
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the failure of our AEVI-001 trials in ADHD, which has caused us to terminate all activities related to this program. Those terminations could result in additional wind-down costs;
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the rate and level of patient recruitment into our clinical trials, particularly those in Phase 2 and Phase 3 stages of development, including those trials for which we are currently recruiting; for example, the identification and recruitment of patients into the ongoing AEVI-002 proof-of-concept clinical trial in pediatric onset Crohn’s Disease has been challenging. No patients have yet been recruited into the clinical trial. The ability to produce initial data by mid-year 2019 is directly based on timely recruiting; thus, continued difficulties in recruitment could further impact the Company’s ability to generate initial data for the program, and potentially result in increased costs to complete the study;
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the level of research and development investment required to develop our product candidates;
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changes in product development plans needed to address any difficulties that may arise in manufacturing, pre-clinical activities, clinical trials or commercialization;
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our ability and willingness to enter into new agreements with strategic partners, and the terms of these agreements;
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our success rate in pre-clinical and clinical efforts;
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the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
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the effect of competing product and market developments;
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costs of recruiting and retaining qualified personnel;
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the timing and amount of milestone payments we are required to make under our license agreements;
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in-licensing and/or acquisition transaction costs (if any) for potential product development candidates;
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time and costs involved in obtaining regulatory approvals; and
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costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights.
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We will require significant amounts of additional
capital in the future, and such capital may not be available when we need it on terms that we find favorable, if at all. Identifying
potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain
process that takes years to complete. We may never progress to the point where we have commercially successful product sales which
generate sufficient commercial revenue or such revenue may not be achieved for many years. Accordingly, we may seek to raise these
funds through public or private equity offerings, debt financings, credit facilities, or partnering or other corporate collaborations
and licensing arrangements. If adequate funds are not available or are not available on acceptable terms, our ability to fund our
operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures
could be significantly delayed or limited, and we may need to downsize or halt our operations.
If our process to identify and evaluate potential business alternatives
is not successful, our board of directors may decide to pursue a restructuring, which may include a reorganization or bankruptcy
under federal bankruptcy laws, or a dissolution, liquidation and/or winding up of the Company.
There can be no assurance that the process to
identify and evaluate potential business alternatives will result in a successful alternative for our business. If no transactions
with respect to potential business alternatives are identified and completed, our board of directors may decide to pursue a restructuring,
which may include a reorganization or bankruptcy under federal bankruptcy laws, or a dissolution, liquidation and/or winding up
of our company. If our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and
liquidation of the Company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to
make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders.
Our commitments and contingent liabilities may include (i) obligations under our employment and separation agreements with certain
members of its management that provide for severance and other payments following a termination of employment occurring for various
reasons, including a change in control of our company, (ii) various claims and legal actions arising in the ordinary course of
business, (iii) obligations to CHOP pursuant to the Research Agreement, and (iv) non-cancelable lease obligations. As a result
of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we
may be subject to litigation or other claims related to a dissolution and liquidation of the Company. If a dissolution and liquidation
were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination
about a reasonable amount to reserve. Accordingly, holders of our common stock may lose their entire investment in the event of
a reorganization, bankruptcy, liquidation, dissolution or winding up of the Company.
If we are successful in completing a strategic transaction, we
may be exposed to other operational and financial risks.
Although there can be no assurance that a strategic transaction
will result from the process we have undertaken to identify and evaluate strategic alternatives, the negotiation and consummation
of any such transaction will require significant time on the part of our management, and the diversion of management’s attention
may disrupt our business.
The negotiation and consummation of any such transaction may also
require more time or greater cash resources than we anticipate and expose us to other operational and financial risks, including:
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increased near-term and long-term expenditures;
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exposure to unknown liabilities;
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higher than expected acquisition or integration costs;
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incurrence of substantial debt or dilutive issuances of equity securities to fund future operations;
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write-downs of assets or goodwill or incurrence of non-recurring, impairment or other charges;
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increased amortization expenses;
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difficulty and cost in combining the operations and personnel of any acquired business with our operations and personnel;
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impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership; and
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inability to retain key employees of our company or any acquired business.
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Any of the foregoing risks could have a material adverse effect
on our business, financial condition and prospects.
Raising additional capital may cause dilution to our existing
stockholders, restrict our operations or require us to relinquish rights.
Until such time, if ever, as we can generate
substantial product revenues, we expect to finance our cash needs through a combination of equity offerings and debt financings.
We do not have any committed external source of funds. We may seek additional capital through a combination of private and public
equity offerings, debt financings, collaborations and strategic and licensing arrangements. To the extent that we raise additional
capital through the sale of common stock or securities convertible or exchangeable into common stock, the ownership interest of
our stockholders in our company will be diluted. In addition, the terms of any such securities may include liquidation or other
preferences that materially adversely affect the rights of our stockholders. Debt financing, if available, would increase our fixed
payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring dividends.
We cannot be certain that additional funding
will be available on acceptable terms, or at all. If we raise additional funds through collaboration, strategic partnerships and
licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our intellectual
property, future revenue streams or grant licenses on terms that are not favorable to us.
We are still in the process of clinical trials and do not have
a commercialized product and may never be able to commercialize our product candidates.
Only a small number of research and development
programs ultimately result in commercially successful drugs and drug delivery systems. Potential products that appear to be promising
at early stages of development may not reach the market for a number of reasons, including:
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failure to obtain regulatory approvals for AEVI-002 or any of our product candidates or companion products;
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lack of familiarity of health care providers and patients;
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low market acceptance as a result of lower demonstrated clinical safety or efficacy compared to other products or other potential disadvantages relative to alternative treatment methods;
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inability to obtain favorable coverage determinations from health plans and third-party payers;
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insufficient or unfavorable levels of reimbursement from government or third-party payers;
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infringement on proprietary rights of others for which we (or our licensees, if any) have not received licenses;
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incompatibility with other therapeutic products;
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potential advantages of alternative treatment methods;
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ineffective marketing and distribution support;
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lack of cost-effectiveness; or
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timing of market introduction of competitive products.
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If any of these potential problems occur, we
may never successfully commercialize our product candidates, including AEVI-002. If we are unable to develop commercially viable
products, our business, results of operations and financial condition will be materially and adversely affected.
We have limited history as an organization in conducting clinical
trials.
We have limited history as an organization in
conducting advanced clinical trials and may not possess the necessary resources and expertise to complete such trials, and we may
need to seek additional partnerships or collaborations with third parties to advance these trials. Our most advanced clinical program
is an 8-week Phase Ib proof-of-concept study of AEVI-002 in subjects with a diagnosis of severe pediatric-onset Crohn’s disease.
For potential marketing application approval, additional clinical testing will be required, which involves significantly greater
resources, commitments and expertise and so it is likely that we would need to enter into a collaborative relationship with a pharmaceutical
company that could assume responsibility for late-stage development and commercialization.
Our product candidates are still being developed and have not
been tested on a large patient population, and, therefore, we do not know all of the possible adverse events and may not be able
to commercialize our product candidates as planned.
Our product candidates have not been tested
on a large number of patients, and are still in an early stage of development. Our product candidates are not yet fully developed
or proven, and disappointing results and problems could delay or prevent the completion of our development programs and commercialization
of our product candidates.
Our previous safety tests and results obtained
in previous clinical trials of our product candidates may not be representative of either a larger multi-centric test or the commercial
version of the technology in the general population. The basis may have been subject to bias and such results may not be replicated
in a double-blinded clinical trial. In addition, the full impact of our product candidates, and their many possible variations,
on the body is, as yet, unknown.
Treatment-related adverse events or complications
in clinical trials, or post-approval, could result in limitations on the use of our product candidates and may also result in financial
claims and losses against us, damage our reputation, and increase our expenses and reduce our assets. In addition, our product
candidates may not gain commercial acceptance or ever be commercialized.
We are currently dependent upon the successful development of
our lead product candidate, AEVI-002. If we or our strategic partners, licensees and sublicensees fail to successfully complete
their development and commercialization, we will not generate operating revenues.
A substantial portion of our
historical efforts and expenses were focused on the development of AEVI-001, which was unsuccessful. A substantial portion of
our efforts and expenses are currently focused on the development of AEVI-002. Our ability to generate product revenues,
which we do not expect will occur for many years, if ever, will depend heavily on the successful development and
eventual commercialization of AEVI-002, AEVI-005 and other product candidates we are in the early stages of developing. There
is no guarantee that we will succeed in developing AEVI-002, AEVI-005 or any of our product candidates. If the development of AEVI-002
or other product candidates fails, we may be unable to generate any revenues. There is no certainty as to our success,
whether within a given time frame or at all. Any delays in our schedule for clinical trials, regulatory approvals or other
stages in the development of our technology are likely to cause us additional expense and may even prevent the successful
commercialization of any or all of our product candidates. Delays in the timing for development of our technology may also
have a material adverse effect on our business, financial condition and results of operations due to the possible absence of
financing sources for our operations during such additional periods of time. Although we may pursue other technologies
(either developed in-house or acquired), there is no assurance that any other technology will be successfully identified
or exploited.
Clinical trials involve lengthy and expensive processes with
uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.
The risk of failure of our product candidates
is high. We cannot predict whether we will encounter problems with any of our completed, ongoing, planned or future clinical trials,
which would cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from completed
or ongoing clinical trials. The FDA Reauthorization Act, signed into law in August 2017, authorizes FDA to impose additional clinical
trial requirements on manufacturers seeking orphan drug designation and/or pediatric indications. The impact of these future regulations
is uncertain and could result in the need for additional clinical trials. We estimate that clinical trials involving AEVI-002 will
continue for several years; however, such trials may also take significantly longer to complete and may cost more money than we
expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of,
the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of
our product candidates, including but not limited to:
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delays in obtaining regulatory approvals to commence a clinical trial;
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failure or inability to recruit qualified investigators;
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difficulty finding qualified patients for clinical studies, including slower than anticipated patient recruitment and enrollment;
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negative or inconclusive results from clinical trials;
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inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may already be engaged in other clinical programs;
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lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical studies and increased expenses associated with the services of our clinical research organizations, or CROs, and other third parties;
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clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
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our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
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there may be changes in governmental regulations or administrative actions;
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unforeseen safety issues;
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an inability to monitor patients adequately during or after treatment; and
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problems with investigator or patient compliance with the trial protocols.
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A number of companies in the biopharmaceutical
and pharmaceutical industries including those with greater resources and experience than us have suffered significant setbacks
in advanced clinical trials, even after seeing promising results in earlier clinical trials. We do not know whether any clinical
trials we or any future clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval
to market AEVI-002 or any other product development candidates. If subsequent clinical trials involving AEVI-002 or other product
development candidates do not produce favorable results, we may be required to perform additional clinical trials or our ability
to obtain regulatory approval may be adversely impacted, either of which would have an adverse material effect on our business,
financial condition and the results of our operations.
Potential difficulty with, and delays in, recruiting patients
for human clinical trials may adversely affect the timing of our clinical trials and our working capital requirements.
Our research and development is highly dependent
on timely recruitment of the requisite number and type of patients for our clinical trials. We have previously found it very difficult
to recruit such patients, and the increased volume and ethnic backgrounds required for future testing may render such testing even
more difficult. Such larger studies will likely be based on the use of multicenter, multinational design, which can prove difficult
to manage and could result in delays in patient recruitment. In addition, as we pursue development of our product candidates in
orphan and rare disease applications, including for pediatric populations, we may find it difficult to find sufficient treatment-naïve
patients needed for initial trials, especially within commercially-reasonable geographical regions. Delays in the recruitment of
such patients could delay our trials and negatively impact our working capital requirements and ability to raise capital.
We may not successfully establish and maintain relationships
with third-party service providers and collaborators, which could adversely affect our ability to develop, manufacture and commercialize
our product candidates.
Our ability to develop and commercialize our
product candidates is dependent on our ability to reach strategic licensing and other development agreements with appropriate partners,
including biopharmaceutical and pharmaceutical companies and CROs. If we are unable to successfully negotiate such agreements,
we may not be able to continue to develop our product candidates, including AEVI-002, without raising significant additional capital
for development and commercialization.
Our core business strategy is to develop our
product candidates for use in specific indications and disease markets that we would internally develop and launch. However, we
do plan to explore collaborative relationships or strategic partnerships and/or license our product candidates. We may not be able
to identify such collaborators and partners on a timely basis, and we may not be able to enter into relationships with any future
collaborator(s) or partner(s) on terms that are commercially beneficial to us or at all. In addition, such relationships and partnerships
may not come to fruition or may not be successful. Our agreements with these third parties may also contain provisions that restrict
our ability to develop and test our product candidates or that give third parties rights to control aspects of our product development
and clinical programs.
The third-party contractors may not assign as
great of a priority to our clinical development programs or pursue them as diligently as we would if we were undertaking such programs
directly and, accordingly, may not complete activities on schedule, or may not conduct the studies or our clinical trials in accordance
with regulatory requirements or with our trial design. If these third parties do not successfully carry out their contractual duties
or meet expected deadlines, or if their performance is substandard, we may be required to replace them.
In addition, conflicts may arise with our collaborators
(e.g. those concerning the interpretation of clinical data), the achievement of milestones, the interpretation of financial provisions
or the ownership of intellectual property developed during the collaboration. If any conflicts arise with our existing or future
collaborators, they may act in their self-interest, which may be adverse to our best interests. The third-party contractors may
also have relationships with other commercial entities, some of whom may compete with us. If the third-party contractors work with
our competitors, our competitive position may be harmed.
In addition, although we attempt to audit and
control the quality of third-party data, we cannot guarantee the authenticity or accuracy of such data, nor can we be certain that
such data has not been fraudulently generated. The failure of third parties to carry out their obligations towards us would materially
adversely affect our ability to develop and market product candidates.
We have no medical affairs, marketing experience, sales force
or distribution capabilities. If our product candidates are approved, and we are unable to recruit key personnel to perform these
functions, we may not be able to successfully commercialize the products.
Although we do not currently have any marketable
products, our ability to produce revenues ultimately depends on our ability to commercialize our product candidates if and when
they are approved by the FDA and/or other regulatory health agencies. We currently do not have a medical affairs, marketing and
sales staff or distribution capabilities. Developing medical affairs as well as a marketing and sales force is also time-consuming
and expensive and these costs may be incurred in advance of any approval of our product candidates. Failure to develop these capabilities
could delay the launch of new products or expansion of existing product sales. In addition, we will compete with many companies
that currently have extensive and well-funded medical affairs, marketing, sales and distribution operations. If we fail to establish
successful medical affairs, marketing, sales and distribution capabilities or fail to enter into successful marketing sales or
distribution arrangements with third parties, our ability to generate revenues will suffer.
Furthermore, even if we enter into medical affairs,
marketing, sales and distributing arrangements with third parties, these third parties may not be successful or effective in marketing,
selling or distributing our product candidates. If we fail to create successful and effective medical affairs, marketing, sales
and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these
distributors experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition
and results of operations could be harmed.
We are subject to intense government regulation and we may not
be able to successfully complete the necessary clinical trials.
Approval for clinical trials depends, among
other things, on data obtained from our pre-clinical and clinical activities, including completion of pre-clinical animal and
in
vitro
studies in a timely manner. These pre-clinical and clinical activities must meet stringent quality assurance and
compliance requirements. Data obtained from such activities are susceptible to varying interpretations, which could delay, limit
or prevent regulatory approvals.
We currently have limited experience in and
resources for conducting the large-scale clinical trials which may hamper our ability to obtain or comply with regulatory approval.
The failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties, product recalls,
withdrawal of product approval, mandatory restrictions and other actions, which could impair our ability to conduct business.
Use of third parties to manufacture our product candidates or
diagnostics may increase the risk that we will not have sufficient quantities of our product candidates or such quantities at an
acceptable cost or that development of the diagnostics will be delayed. Clinical development and commercialization of our product
candidates could be delayed, prevented or impaired.
We do not own or operate manufacturing facilities
for production of our product candidates or diagnostics. We lack the resources and the capabilities to manufacture any of our product
candidates or diagnostics on a clinical or commercial scale. We currently outsource the manufacturing and packaging of our pre-clinical
and clinical product candidates to third parties and if we pursue a diagnostic product, we anticipate that we would outsource manufacturing
to a third party. The manufacture of pharmaceutical products requires significant expertise and capital investment, including the
development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter
difficulties in production, particularly in scaling up initial production. These problems include difficulties with production
costs and yields and quality control, including stability of the product candidate. The occurrence of any of these problems could
significantly delay our clinical trials or the commercial availability of our products.
We do not currently have any agreements with
third party manufacturers for the long-term commercial supply of any of our product candidates or agreements with any third party
for development of diagnostics. We may be unable to enter into agreements for development and commercial supply with third party
manufacturers or with a third party for development of diagnostics, or may be unable to do so on acceptable terms. Even if we enter
into these agreements, the manufacturers of each product candidate and developer of diagnostics will likely be single source suppliers
to us for a significant period of time.
Reliance on third party manufacturers entails
risks, to which we would not be subject if we manufactured product candidates or products ourselves, including:
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reliance on the third party for regulatory compliance and quality assurance;
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limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
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impact on our reputation in the marketplace if manufacturers of our products, once commercialized, fail to meet the demands of our customers;
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the quality or stability of the product candidates falling below acceptable standards;
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the inability to produce sufficient quantities of our product candidates;
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the timely development of the required diagnostics;
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exceeding budgeted costs due to difficulties in accurately predicting such costs or other factors impacting the cost of manufacturing our product candidates or developing diagnostics;
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the possible breach of the manufacturing agreement by the third party because of factors beyond our control; and
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the possible termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.
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The failure of any of our contract manufacturers
to maintain high manufacturing standards could result in injury or death of clinical trial participants or patients using products.
Such failure could also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures
in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability.
Our contract manufacturers are required to adhere
to FDA regulations setting forth cGMP. These regulations cover all aspects of the manufacturing, testing, quality control and recordkeeping
relating to our product candidates and any products that we may commercialize. Our manufacturers may not be able to comply with
cGMP regulations or similar regulatory requirements outside the United States. Our failure or the failure of our third-party manufacturers,
to comply with applicable regulations could significantly and adversely affect regulatory approval and supplies of our product
candidates.
Our product candidates and any products that
we may develop or acquire may compete with other product candidates and products for access to manufacturing facilities. There
are a limited number of manufacturers that operate under cGMP regulations and that are both capable of manufacturing for us and
willing to do so. If the third parties that we engage to manufacture products for our pre-clinical tests and clinical trials should
cease to continue to do so for any reason, we likely would experience delays in advancing these trials while we identify and qualify
replacement suppliers and we may be unable to obtain replacement supplies on terms that are favorable to us. Later relocation to
another manufacturer will also require notification, review and other regulatory approvals from the FDA and other regulators and
will subject our production to further cost and instability in the availability of our product candidates. In addition, if we are
not able to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more
difficult for us to develop our product candidates and compete effectively.
Our current and anticipated future dependence
upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop
product candidates and commercialize any products that obtain regulatory approval on a timely and competitive basis.
Materials necessary to manufacture our product candidates may
not be available on commercially reasonable terms, or at all, which may delay the development and commercialization of our product
candidates.
We rely on the manufacturers of our product
candidates to purchase from third party suppliers the materials necessary to produce the compounds for our preclinical and clinical
studies and will rely on these other manufacturers for commercial distribution if we obtain marketing approval for any of our product
candidates. Suppliers may not sell these materials to our manufacturers at the time we need them or on commercially reasonable
terms and all such prices are susceptible to fluctuations in price and availability due to transportation costs, government regulations,
price controls and changes in economic climate or other foreseen circumstances. We do not have any control over the process or
timing of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial
production of these materials. If our manufacturers are unable to obtain these materials for our preclinical and clinical studies,
product testing and potential regulatory approval of our product candidates would be delayed, significantly impacting our ability
to develop our product candidates. If our manufacturers or we are unable to purchase these materials after regulatory approval
has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be
a shortage in supply, which would materially affect our ability to generate revenues from the sale of our product candidates.
We may not be successful in our efforts to in-license or acquire
additional product candidates.
A significant element of our strategy is to
build and expand our pipeline of product candidates through in-licensing or acquiring additional product candidates. Currently,
we do not have the internal expertise, nor do we intend to develop the internal expertise, necessary to discover new chemical entities
for therapeutic purposes. As a result, if we are not able to identify and acquire additional product candidates, we will not be
able to expand our pipeline. Even if we are successful in continuing to build our pipeline through in-licensing or acquisitions,
the potential product candidates that we in-license or acquire may not be suitable for clinical development, including as a result
of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to be drugs that will
receive marketing approval and achieve market acceptance.
Our business activities involve the use of hazardous materials,
which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these
laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our research and development programs involve
the controlled use of hazardous materials, including microbial agents and other hazardous compounds in addition to certain biological
hazardous waste. Ultimately, the activities of our third-party product manufacturers when a product candidate reaches commercialization
will also require the use of hazardous materials. Accordingly, we are subject to federal, state and local laws governing the use,
handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials
comply in all material respects with the standards prescribed by local, state and federal regulations, we cannot completely eliminate
the risk of accidental contamination or injury from these materials. In addition, our collaborators may not comply with these laws.
In the event of an accident or failure to comply with environmental laws, we could be held liable for damages that result, and
any such liability could exceed our assets and resources or we could be subject to limitations or stoppages related to our use
of these materials which may lead to an interruption of our business operations or those of our third-party contractors. While
we believe that our existing insurance coverage is generally adequate for our normal handling of these hazardous materials, it
may not be sufficient to cover pollution conditions or other extraordinary or unanticipated events. Furthermore, an accident could
damage or force us to shut down our operations. Changes in environmental laws may impose costly compliance requirements on us or
otherwise subject us to future liabilities and additional laws relating to the management, handling, generation, manufacture, transportation,
storage, use and disposal of materials used in or generated by the manufacture of our products or related to our clinical trials.
In addition, we cannot predict the effect that these potential requirements may have on us, our suppliers and contractors or our
customers.
We intend to expend our limited resources to pursue AEVI-002
for pediatric onset Crohn’s disease and may fail to capitalize on other product candidates or other indications for AEVI-002
that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial
resources, we are focusing on research programs relating to AEVI-002 for pediatric Crohn’s disease, which concentrates the
risk of product failure in the event it proves to be unsafe or ineffective or inadequate for clinical development or commercialization.
As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications for AEVI-002
that could later prove to have greater commercial potential. We may also deem it advisable to refocus our clinical development
programs based on clinical trial results. Our resource allocation decisions may cause us to fail to capitalize on viable commercial
products or profitable market opportunities. Our spending on proprietary research and development programs relating to AEVI-002
may not yield any commercially viable products.
The FDA and other regulatory health agencies will regulate our
product candidates and we may never receive regulatory approval to market and sell our product candidates.
Our product candidates will require regulatory
approvals prior to sale. In particular, our product candidates are subject to stringent approval processes, prior to commercial
marketing, by the FDA and other regulatory health agencies in all countries where we operate and desire to introduce our product
candidates, whether sold via a strategic partner or directly by us. These requirements range from efficacy and safety assessments
in multiple clinical trials to long-term follow-up assessments on treated patients in clinical trials for product approval for
sale. The process of obtaining FDA and corresponding foreign approvals is costly and time-consuming, and we cannot assure that
such approvals will be granted. Also, the regulations we are subject to change frequently and such changes could cause delays in
the development of our product candidates.
It typically takes a company several years or
longer to satisfy the substantial requirements imposed by the FDA and other regulatory health agencies in other countries for the
introduction of therapeutic pharmaceutical and biological products. Pharmaceutical or biological products must be registered in
accordance with applicable law before they can be manufactured, marketed and distributed. This registration must include medical
data proving the product’s safety, efficacy and clinical testing. Also included in product registration should be references
to medical publications and information about the production methods and quality control.
To obtain regulatory approvals in the United
States or other jurisdictions, we or a collaborator must ultimately demonstrate to the satisfaction of the FDA and other health
regulatory agencies that our product candidates are sufficiently safe and effective for their proposed administration to humans.
Many factors, both known and unknown, can adversely impact the development of our product candidates and our ability to obtain
regulatory approval for our product candidates, including:
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the FDA or other health regulatory authorities or instructional review boards decision(s) not to approve a clinical trial protocol or place a clinical trial on hold;
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suitable patients not enrolling in a clinical trial in sufficient numbers or at the expected rate, for reasons such as the size of the prospective patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the perceptions of investigators and patients regarding safety, and the availability of other treatment options;
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clinical trial data being adversely affected by trial conduct or patient withdrawal prior to completion of the trial;
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competition with ongoing clinical trials and scheduling conflicts with participating clinicians;
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patients that experience adverse events, including treatment-related adverse events of our product candidates, for a variety of reasons that may or may not be related to our product candidates, including the advanced stage of their disease and other medical problems;
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patients in the placebo or untreated control group exhibiting greater than expected improvements or fewer than expected adverse events;
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third-party clinical investigators not performing the clinical trials on the anticipated schedule or consistently with the clinical trial protocol and GCP, or other third-party organizations not performing data collection and analysis in a timely or accurate manner;
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service providers, collaborators or co-sponsors not adequately performing their obligations in relation to the clinical trial or cause the trial to be delayed or terminated;
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being unable to obtain a sufficient supply of manufactured clinical trial materials;
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regulatory inspections of manufacturing facilities requiring us or a co-sponsor to undertake corrective action or suspend the clinical trials;
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interim results of the clinical trial being inconclusive or negative;
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clinical trials, although approved and completed, generating data that are not considered by the FDA or other health regulatory agencies to be sufficient to demonstrate safety and efficacy;
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clinical trials, although approved and completed outside the United States, not considered by the FDA or others outside the jurisdiction hosting such clinical trials to be sufficient to demonstrate safety and efficacy; and
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changes in governmental regulations or administrative actions affecting the conduct of the clinical trial or the interpretation of its results.
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There can be no assurance that our clinical
trials will in fact demonstrate, to the satisfaction of the FDA and others, that our product candidates are sufficiently safe or
effective. The FDA or we may also restrict or suspend our clinical trials at any time if either believes that we are exposing the
subjects participating in the trials to unacceptable health risks.
Delays in obtaining such clearances and/or changes
in existing requirements could have a material adverse effect on our company by making it difficult to advance product candidates
or by reducing or eliminating their potential or perceived value and, therefore, our ability to conduct our business as currently
planned could materially suffer. Failure to obtain required regulatory approvals could require us to delay, curtail or cease our
operations. Even if we invest the necessary time, money and resources required to advance through the FDA approval process, there
is no guarantee that we will receive FDA approval of our product candidates.
Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA or other regulatory health agencies, which may include any of the following
sanctions:
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warning letters, fines, injunctions, consent decrees and civil penalties;
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repairs, replacements, refunds, recalls, or seizures of our products;
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operating restrictions, partial suspension, or total shutdown of production;
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refusing our requests for regulatory clearance or premarket approval of new products, new intended uses, or modifications to existing products;
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withdrawing regulatory clearance or premarket approvals that have already been granted; and
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If any of these events were to occur, it could
adversely affect our business, financial condition and results of operations.
Even if we obtain regulatory approvals, our products will be
subject to ongoing regulatory review and if we fail to comply with continuing regulations, we could lose those approvals and our
business, financial condition and results of operations would be seriously harmed.
Even if our product candidates receive initial
regulatory approval or clearance for specific therapeutic applications, we will still be subject to ongoing reporting obligations,
and such product and the related manufacturing operations will be subject to continuing regulatory review, including FDA and other
health regulatory inspections. This ongoing review may result in the withdrawal of our product from the market, the interruption
of manufacturing operations and/or the imposition of labeling and/or marketing limitations related to specific applications of
our product. Since many more patients will be exposed to our product candidates following their marketing approval, serious but
infrequent adverse events that were not observed in clinical trials may be observed during the commercial marketing of such product.
In addition, the manufacturer(s) and the manufacturing facilities that we will use to produce our product candidates will be subject
to periodic review and inspection by the FDA and other health regulatory agencies. Late discovery of previously unknown problems
with any product, manufacturer or manufacturing process, or failure to comply with regulatory requirements, may result in actions,
such as:
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restrictions on such product, manufacturer or manufacturing process;
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warning letters from the FDA or other regulatory authorities;
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withdrawal of the product from the market;
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suspension or withdrawal of regulatory approvals;
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refusal by such regulator to approve pending applications or supplements to approved applications that we or our licensees (if any) submit;
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voluntary or mandatory recall;
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refusal to permit the import or export of our product;
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product seizures or detentions;
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injunctions or the imposition of civil or criminal penalties; and
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In addition, from time to time, legislation
is drafted and introduced in the United States that could significantly change the statutory provisions governing any regulatory
clearance or approval that we receive from the U.S. regulatory authorities. FDA regulations and guidance are often revised or reinterpreted
by the FDA in ways that may significantly affect our business and our product. We cannot predict what these changes will be, how
or when they will occur or what effect they will have on the regulation of our product. If we, or our licensees, suppliers, collaborative
research partners or clinical investigators are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements
or the adoption of new regulatory requirements or policies, we may lose marketing approval for any of the therapeutic applications
of our product (to the extent that such applications are initially approved), resulting in decreased or lost revenue from milestones,
product rental or usage fees, or royalties.
Off-label use is common in the indications for
which our product candidates are under development, which may result in enforcement actions by the FDA and other regulatory health
agencies for violations of the laws and regulations prohibiting the promotion of off-label uses.
Although physicians, in the practice of medicine,
may prescribe approved drugs for unapproved indications, pharmaceutical companies are prohibited from marketing or promoting their
drug products for uses outside the approved label, a practice known as off-label promotion. Certain of our product candidates,
including AEVI -002, are under development for indications for which off-label use is possible. To the extent the price of our
product candidates, if approved, is significantly higher than the prices of commercially available products that are frequently
prescribed off-label, physicians may recommend and prescribe these commercial alternatives instead of writing prescriptions for
our products. Either of these outcomes may adversely impact our results of operations by limiting how we price our product and
increasing our competition.
In addition, if any of our product candidates
are approved, our product labeling, advertising and promotional materials would be subject to regulatory requirements and continuing
review by the FDA, Department of Justice, Department of Health and Human Services’ Office of Inspector General, state attorneys
general, members of Congress and the public. If we are found to have improperly promoted off-label uses of our product candidates,
if approved, we may become subject to significant liability. Such enforcement has become more common in the industry. If we are
found to have promoted our products for any such off-label uses, the federal government could levy civil, criminal or administrative
penalties, and seek fines against us. The FDA or other regulatory authorities could also request that we enter into a consent decree
or a corporate integrity agreement, or seek a permanent injunction against us under which specified promotional conduct is monitored,
changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject
to significant liability, which would materially adversely affect our business and financial condition.
In the United States, engaging in the impermissible
promotion of our products, following approval, for off-label uses can also subject us to false claims litigation under federal
and state statutes, which can lead to civil and criminal penalties and fines, agreements with governmental authorities that materially
restrict the manner in which we promote or distribute drug products through, for example, corporate integrity agreements, and debarment,
suspension or exclusion from participation in federal and state healthcare programs. These false claims statutes include, among
others, federal civil False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf
of the federal government alleging submission of false or fraudulent claims, or causing others to present such false or fraudulent
claims, for payment by a federal program such as Medicare or Medicaid. If the government decides to intervene and prevails in the
lawsuit, the individual will share in the proceeds from any fines or settlement funds. If the government declines to intervene,
the individual may pursue the case alone. These false claims lawsuits against pharmaceutical companies have increased significantly
in volume and breadth, leading to several substantial civil and criminal settlements regarding certain sales practices promoting
off-label drug uses. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false
claim action, pay settlement fines or restitution, as well as criminal and civil penalties, agree to comply with burdensome reporting
and compliance obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not
lawfully promote our approved products, if any, we may become subject to such litigation and, if we do not successfully defend
against such actions, those actions may have an adverse effect on our business, financial condition, results of operations and
prospects.
If we receive regulatory approvals, we intend to market AEVI-002
in multiple jurisdictions where we have limited or no operating experience and may be subject to increased business and economic
risks that could affect our financial results.
If we receive regulatory approvals, we may plan
to market AEVI-002 in jurisdictions where we have limited or no experience in marketing, developing and distributing our products.
Certain markets have substantial legal and regulatory complexities that we may not have experience navigating. We are subject to
a variety of risks inherent in doing business internationally, including risks related to the legal and regulatory environment
in non-U.S. jurisdictions, including with respect to privacy and data security, trade control laws and unexpected changes in laws,
regulatory requirements and enforcement, as well as risks related to fluctuations in currency exchange rates and political, social
and economic instability in foreign countries. If we are unable to manage our international operations successfully, our financial
results could be adversely affected.
Even if any of our product candidates receives marketing approval,
it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community
necessary for commercial success.
Even if the FDA or any other regulatory health
agency approves the marketing of any product candidates that we develop, physicians, patients, third-party payors or the medical
community may not accept or use them. Efforts to educate the medical community and third-party payors on the benefits of our product
candidates may require significant resources and may not be successful. If AEVI-002 or any future product candidate that we develop
does not achieve an adequate level of acceptance, we may not generate significant product revenue or any profits from operations.
The degree of market acceptance of, AEVI-002 or any of our future product candidates that are approved for commercial sale will
depend on a variety of factors, including:
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the efficacy and potential advantages compared to alternative treatments;
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effectiveness of sales and marketing efforts;
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the cost of treatment in relation to alternative treatments, including any similar generic treatments;
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our ability to offer our products, if approved, for sale at competitive prices;
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the convenience and ease of administration compared to alternative treatments;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support;
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the availability of third-party coverage and adequate reimbursement, and patients’ willingness to pay out-of-pocket in the absence of third-party coverage or adequate reimbursement;
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the prevalence and severity of any side effects;
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any restrictions on the use of our products, if approved, together with other medications; and
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other potential advantages over alternative treatment methods.
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Our efforts to educate physicians, patients,
third-party payors and others in the medical community on the benefits of our products, if approved, may require significant resources
and may never be successful. Such efforts may require more resources than are typically required due to the complexity and uniqueness
of our product candidates. Because we expect sales of our product candidates, if approved, to generate substantially all of our
product revenue for the foreseeable future, the failure of our product candidates to find market acceptance would harm our business
and could require us to seek additional financing.
Our efforts to comply with fraud and abuse laws could be costly,
and, if we are unable to fully comply with such laws, we could face substantial penalties.
We are subject to extensive federal and state
healthcare fraud and abuse laws and regulations, including, but not limited to, the following:
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federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs, such as Medicare and Medicaid;
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federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
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HIPAA, which creates federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations on entities with respect to the privacy, security and transmission of individually identifiable health information;
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federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;
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federal Foreign Corrupt Practices Act, which prohibits, among other things, making payments to foreign officials of any country outside of the United States for the purpose of obtaining or retaining business; and
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state laws analogous to each of the above federal laws, such as state anti-kickback and false claims laws (some of which may apply to healthcare items or services reimbursed by any third-party payer, including commercial insurers), as well as certain state laws that require pharmaceutical and medical device companies to comply with industry voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.
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If our past or present operations are found
to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant
civil, criminal and administrative penalties, damages, fines, exclusion from third-party payer programs such as Medicare and Medicaid
and/or the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we
may do business are found to be non-compliant with applicable laws, they may be subject to criminal, civil or administrative sanctions
including exclusions from government-funded health care programs, which could also negatively impact our operations. Our ongoing
efforts to comply with these laws may be costly, and our failure to comply with these laws could have a material adverse effect
on our business, financial condition and results of operations. The risk of our being found in violation of these laws is increased
by the fact that many of them have not been definitively interpreted by the regulatory authorities or the courts, and their provisions
are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Any
action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal
expenses, divert our management’s attention from the operation of our business and damage our reputation.
Comparable laws and regulations exist in countries
within the European Economic Area, or EEA. Although such laws are partially based upon European Union law, they may vary from country
to country. Healthcare specific, as well as general European Union and national laws, regulations and industry codes constrain,
for example, our interactions with government officials and healthcare professionals, and the collection and processing of personal
health data. Non-compliance with any of these laws or regulations could lead to criminal or civil liability.
Governments outside the United States tend to impose strict price
controls, which may adversely affect our revenues, if any.
In some countries, particularly the countries
of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To
obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness
of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, our business could be harmed, possibly materially.
We expect to rely on third-party contractors and organizations
to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for
the completion of such trials.
We rely and expect to continue to rely on third-party
contractors, clinical data management organizations, independent contractors, medical institutions and clinical investigators to
conduct our clinical trials of AEVI-002 and for our other development candidate programs. These agreements may terminate for a
variety of reasons, including a failure to perform by the third parties. If we needed to enter into alternative arrangements, our
product development activities could be delayed.
We compete with many other companies, some of
which may be our competitors, for the resources of these third parties. Large pharmaceutical companies often have significantly
more extensive agreements and relationships with such third-party providers, and such third-party providers may prioritize the
requirements of such large pharmaceutical companies over ours. The third parties on whom we rely may terminate their engagements
with us at any time, which may cause delay in the development and commercialization of our product candidates. If any such third
party terminates its engagement with us or fails to perform as agreed, we may be required to enter into alternative arrangements,
which would result in significant cost and delay to our product development program. Moreover, our agreements with such third parties
generally do not provide assurances regarding employee turnover and availability, which may cause interruptions in the research
on our product candidates by such third parties.
Our reliance on these third parties to conduct
our clinical trials will reduce our control over these activities but will not relieve us of our responsibilities. For example,
we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational
plan and protocols for the trial. Moreover, the FDA and other regulatory authorities require us to comply with standards, commonly
referred to as GCPs for conducting, recording and reporting the results of clinical trials to assure that data and reported results
are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We are also required
to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov,
within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
If these third parties do not successfully carry
out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements
or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates
and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
Even if AEVI-002 advances through pre-clinical studies and
clinical trials, we may experience difficulties in managing our growth and expanding our operations.
We have limited resources to carry out objectives
for our current and future pre-clinical studies and clinical trials. In addition, while we have experienced management and expect
to contract out many of the activities related to conducting these programs, we are a small company with only 14 employees and
therefore have limited internal resources both to conduct pre-clinical studies and clinical trials and to monitor third-party providers.
As our product candidates advance through pre-clinical studies and clinical trials, we will need to expand our development, regulatory
and manufacturing operations, either by expanding our internal capabilities or contracting with other organizations to provide
these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators or partners,
suppliers and other organizations. Our ability to manage our operations and future growth will require us to continue to improve
our operational, financial and management controls, reporting systems and procedures.
If any of our key employees discontinue his or her services with
us, our efforts to develop our business may be delayed.
Our success will depend on the retention of
our directors and other current and future members of our management and technical team, including Michael F. Cola, our President
and Chief Executive Officer, Brian D. Piper, our Chief Financial Officer, and Garry A. Neil, our Chief Scientific Officer, and
on our ability to continue to attract and retain highly skilled and qualified personnel. There can be no assurance that we will
retain the services of any of our directors, officers or employees, or attract or retain additional senior managers or skilled
employees. Furthermore, we do not carry key man insurance with respect to any of such individuals.
Our lead product candidate, AEVI-002, is still
in development and is dependent on further development and testing. We currently employ a small number of key personnel, including
top managers, scientists, engineers and clinical experts, who are important to developing AEVI-002, AEVI-005 and other product
development candidates we are in the early stages of pursuing. These personnel have a high level of accumulated knowledge, which
would be lost if they left our Company. If these employees leave our Company or otherwise are unable to provide services, there
could be significant implications on the timing and cost of future development of the technology. Because competition for qualified
personnel in our industry is intense, we may be unable to timely find suitable replacements with the necessary scientific expertise.
We cannot assure you that our efforts to attract or retain such personnel will be successful.
Our employees may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and requirements, which could subject us to significant liability and harm our
reputation.
We are exposed to the risk of employee fraud
or other misconduct. Misconduct by employees could include intentional failures to comply with FDA or to provide accurate information
to the FDA. In addition, misconduct by employees could include intentional failures to comply with certain manufacturing standards,
to comply with U.S. federal and state healthcare fraud and abuse laws and regulations, to report financial information or data
accurately or to disclose unauthorized activities to us. Employee misconduct could also involve the improper use of information
obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have
implemented, and will enforce, a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee
misconduct, and the precautions we take to detect and prevent this activity, such as employee training on enforcement of the Code
of Business Conduct and Ethics, may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those
actions could have a significant impact on our business and results of operations, including the imposition of significant fines
or other sanctions.
We are subject to intense competition from companies with greater
resources and more mature products, which may result in our competitors developing or commercializing products before or more successfully
than us.
While we believe our product candidates have
significant advantages, there are a number of well-established and sizeable companies engaged in the development, production, marketing,
sale and distribution of products and product candidates that may potentially be competitive with our product candidates. Many
of these companies are more experienced than our company and represent significant competition. It is also possible that other
parties have in development product candidates substantially similar to or with properties that are more efficacious, less invasive
and more cost effectively delivered than our product candidates. The success of our competitors in developing, bringing to market,
selling and distributing their products could negatively affect our result of operations and/or general acceptance of our product
candidates.
We face risks related to the general economic conditions that
may adversely affect our business.
In general, our operating results can be significantly
and adversely affected by negative economic conditions, high labor, material and commodity costs, and unforeseen changes in demand
for our potential products. These conditions have resulted and could continue to result in slower adoption of new technologies
and cost containment efforts by governments and other payers for healthcare research and development, products and services.
Health care policy changes may have a material adverse effect
on us.
Health care reform is often a subject of attention
in governments that are trying to control health care expenditures. Health care reform proposals have been the subject of much
debate in the U.S. Congress and some state legislatures, as well as in other countries. There is no assurance that legislation
or underlying rules and guidelines resulting in adverse effects on our company or our product candidates will not be adopted in
a country in which we intend to operate and/or upon the distribution of our product candidates in the United States.
In March 2010, President Obama signed into law
the ACA and the Health Care and Education Reconciliation Act of 2010. The legislation imposes significant new taxes on medical
device makers in the form of a 2.3% excise tax on all U.S. medical device sales that began January 1, 2013. The FDA classifies
IVD companion diagnostics as medical devices. Under the law, the total cost to the medical device industry from the tax is expected
to be approximately $29 billion over ten years. This significant increase in the tax burden on our industry could have a material,
negative impact on our results of operations and our cash flows, especially if any of our product candidates were determined to
be a medical device. Other elements of this legislation, such as comparative effectiveness research, an independent payment advisory
board, payment system reforms, including shared savings pilots, and other provisions, could meaningfully change the way health
care is developed and delivered, and may materially impact numerous aspects of our business. Finally, there are ongoing efforts
to modify or eliminate the ACA. It is unknown what form any such modifications or any law proposed to replace the ACA would take,
and how or whether it may affect our business in the future.
In August 2017, President Trump signed FDARA
into law, imposing significant new requirements for clinical trial sponsors which will affect, among other things, obtaining orphan
drug designation, and the development of drugs and biological products for pediatric use. This legislation will result in new regulations
which might materially impact our business.
Reimbursement policies of third-party payers may negatively affect
the acceptance of our product candidates by subjecting the product candidates to sales and pharmaceutical pricing controls.
Third-party payers (Medicare, Medicaid, private
health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates
by regulating the level of reimbursement provided to the physicians and clinics utilizing our product candidates or by refusing
reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability
to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement
by private third-party medical insurance providers, including government insurers and independent providers, varies from country
to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party
government reimbursement. Pharmaceutical pricing is also subject to regulation in other countries within which we may wish to distribute
our product candidates.
The ACA reduces Medicare and Medicaid payments
to hospitals, clinical laboratories and pharmaceutical companies, and could otherwise reduce the volume of medical procedures.
Further, the Budget Control Act enacted in August 2011 committed the U.S. federal government to significantly reduce the federal
deficit over ten years. In addition to placing caps on discretionary spending through 2021, the Budget Control Act also established
a budget sequestration that calls for automatic spending cuts over a nine-year period. Across-the-board spending cuts went into
effect on March 1, 2013, and Medicare spending cuts that reduce Part A and Part B payments by 2% went into effect on April 1, 2013.
Further, the Bipartisan Budget Act of 2013, passed in December 2013, extends the sequestration automatic Medicare spending cuts
to 2023 from 2021. Although we cannot predict the full effect on our business of the implementation of existing legislation such
as the ACA and the Budget Control Act, or the enactment of additional legislation, we believe that legislation or regulation that
reduces reimbursement for our products could adversely affect how much or under what circumstances health care providers will prescribe
or administer our products. This could materially and adversely impact our business by reducing our ability to generate revenue,
raise capital, obtain additional collaborators and market our products. In addition, we believe the increasing emphasis on managed
care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely
impact product sales.
The pricing of pharmaceutical products, in general,
and specialty drugs, in particular, has also been a topic of concern in the U.S. government. There can be no assurance as to how
this scrutiny on pricing of pharmaceutical products will impact future pricing of our products or orphan drugs or pharmaceutical
products generally.
We may experience product liability claims, which could adversely
affect our business and financial condition.
We may become subject to product liability claims.
We have not experienced any product liability claims to date; however, the production at commercial scale, distribution, sale and
support of our product candidates may entail the risk of such claims, which is likely to be substantial in light of the use of
our product candidates in the treatment of medical conditions. We carry product liability insurance coverage in connection with
the clinical trials of our product candidates. If we are unable to obtain a renewal or if we suffer a successful product liability
claim in excess of our insurance coverage, such claim could result in significant monetary liability and could have a material
adverse impact on our business, operations, financial position and/or reputation.
Regardless of merit or eventual outcome, product liability claims
may result in, among other things:
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withdrawal of patients from our clinical trials;
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substantial monetary awards to patients or other claimants;
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decreased demand for our product candidates following marketing approval, if obtained;
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damage to our reputation and exposure to adverse publicity;
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increased warnings on product labels imposed by regulators;
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distraction of management’s attention from our primary business;
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the inability to successfully commercialize our product candidates following approval, if approved.
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Failure to maintain effective internal controls could have a
material adverse effect on our business and operating results. In addition, current and potential stockholders could lose confidence
in our financial reporting, which could have a material adverse effect on the price of our common stock.
Effective internal controls are necessary for
us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent
fraud, our results of operation could be harmed.
Section 404 of the Sarbanes-Oxley Act of 2002
requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our
independent registered public accounting firm addressing these assessments. We continuously monitor our existing internal controls
over financial reporting systems to confirm that they are effective, and we may identify deficiencies that we may not be able to
remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act. This process may divert internal resources and will
take a significant amount of time and effort to complete.
If at any time it is determined that our internal
controls are not effective, we may be required to implement new internal control procedures and reevaluate our financial reporting.
We may experience higher than anticipated operating expenses as well as increased independent auditor fees during the implementation
of these changes and thereafter. Further, we may need to hire additional qualified personnel. If we fail to maintain the adequacy
of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act, which could result in our being unable to obtain an unqualified report on internal controls from our independent auditors.
Failure to maintain an effective internal control environment could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the price of our common stock.
Compliance with changing regulation of corporate governance and
public disclosure may result in additional expenses, divert management’s attention from operating our business which could
have a material adverse effect on our business.
There have been changing laws, regulations and
standards relating to corporate governance and public disclosure, as well as new regulations promulgated by the SEC and rules promulgated
by the national securities exchanges, including the Nasdaq Global Market. These new or changed laws, regulations and standards
are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result,
our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Our board
members, principal executive officer and principal financial officer could face an increased risk of personal liability in connection
with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and
executive officers, which could have a material adverse effect on our business. If our efforts to comply with new or changed laws,
regulations and standards differ from the activities intended by regulatory or governing bodies, we may incur additional expenses
to comply with standards set by regulatory authorities or governing bodies which would have a material adverse effect on our business,
financial condition and results of operations.
Security breaches and other disruptions to our information technology
infrastructure could interfere with our operations or clinical trials, compromise information belonging to us and our suppliers
and expose us to liability, which could adversely impact our business and reputation.
In the ordinary course of business, we rely
on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic
information, and to manage or support a variety of business processes and activities, including the conduct of our clinical trials.
Additionally, we collect and store sensitive data, including proprietary business information and confidential patient health information.
Despite security measures and business continuity plans, our information technology networks and infrastructure may be vulnerable
to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer
viruses, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. Cyber-attacks
are becoming more sophisticated and frequent, and our systems could be the target of malware and other cyber-attacks. We have invested
in our systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on
an ongoing basis for any current or potential threats. We can give no assurances that these measures and efforts will prevent interruptions
or breakdowns. If we are unable to detect or prevent a security breach or cyber-attack or other disruption from occurring, then
we could incur losses or damage to our data, or inappropriate disclosure of our confidential information or that of others; and
we could sustain damage to our reputation, suffer disruptions to our research and development and incur increased operating costs
including costs to mitigate any damage caused and protect against future damage, and be exposed to additional regulatory scrutiny
or penalties and to civil litigation and possible financial liability. For instance, the loss of preclinical or clinical data could
result in delays in our development and regulatory filing efforts and significantly increase our costs. Any such event could result
in legal claims or proceedings, liability or significant penalties under privacy laws, disruption in operations and damage to our
reputation, which could adversely affect our business.
The recently passed comprehensive tax reform bill could adversely
affect our business and financial condition.
On December 22, 2017, President Trump signed
into law the final version of the tax reform bill commonly known as the “Tax Cuts and Jobs Act,” or the TCJA, that
significantly reforms the Internal Revenue Code of 1986, as amended, with many of its provisions effective for tax years beginning
on or after January 1, 2018. The TCJA, among other things, contains significant changes to corporate taxation, including a permanent
reduction of the corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation
of the deduction for net operating loss carryforwards to 80% of current year taxable income, an indefinite net operating loss carryforward
and the elimination of the two-year net operating loss carryback, temporary, immediate expensing for certain new investments, and
the modification or repeal of many business deductions and credits.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain sufficient intellectual
property protection for our product candidates, or if the scope of the intellectual property protection obtained is not sufficiently
broad, our competitors could develop and commercialize product candidates similar or identical to ours, and our ability to successfully
commercialize our product candidates may be impaired.
As is the case with
other biopharmaceutical companies, our success depends in large part on our ability to obtain and maintain protection of the intellectual
property we may own solely and jointly with others, particularly patents, in the United States and other countries with respect
to our product candidates and technology. We seek to protect our proprietary position by in-licensing AEVI-002 IP, and by filing
patent applications in the United States and abroad related to AEVI-004 or other product candidates that we may identify.
Obtaining and enforcing
biopharmaceutical patents is costly, time consuming and complex, and we may not be able to file and prosecute all necessary or
desirable patent applications, or maintain, enforce and license any patents that may issue from such patent applications, at a
reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and
development output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing
and prosecution of patent applications, or to maintain the rights to patents licensed to third parties. Therefore, these patents
and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.
The patent position
of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal, technological and factual
questions and has in recent years been the subject of much litigation. Applications for patents and other intellectual property
rights capable of being registered have been, and will be, filed in certain key jurisdictions. We may not successfully obtain patents
in the countries in which patent applications have been or will be filed, and we may not develop other patentable products or processes.
In addition, the patents we own and license, or any further patents we may own or license, may not prevent other persons or companies
from developing similar or therapeutically equivalent products, and other persons or companies may be issued patents that may prevent
the sale of our products or that will require us to license or pay significant fees or royalties. Patents also will not protect
our product candidates if competitors devise ways of making or using these product candidates without legally infringing our patents.
Furthermore, our own issued and in-licensed patents may not be valid or enforceable or be able to provide our company with meaningful
protection. In recent years, several companies have been extremely aggressive in challenging patents covering pharmaceutical products,
and the challenges have often been successful. We cannot be assured that our patents will not be challenged by third parties or
that we will be successful in any defense we undertake. Patent litigation is costly and time-consuming, and there can be no assurance
that we will have, or will be able to devote, sufficient resources to pursue such litigation. In addition, potentially unfavorable
outcomes in such proceedings could limit our intellectual property rights and activities and have an adverse effect on our business.
In addition, the laws
of foreign countries may not protect our rights to the same extent as the laws of the United States, or vice versa. Further,
we may not be aware of all third-party intellectual property rights potentially relating to our product candidates. Publications
of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States
and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, we cannot
know with certainty whether we were the first to make the inventions claimed in our patents or pending patent applications, or
that we were the first to file for patent protection of such inventions. Moreover, we may be subject to a third-party preissuance
submission of prior art to the United States Patent and Trademark Office, or the USPTO. As a result, the issuance, scope, validity,
enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not
result in patents being issued that protect our product candidates, in whole or in part, or which effectively prevent others from
commercializing competitive product candidates. Even if our patent applications issue as patents, they may not issue in a form
that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any
competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative product candidates
in a non-infringing manner.
In addition, even if
patents do issue to us or our licensors covering embodiments of our product candidates, devices, or methods of using them, the
issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and those patents can be challenged
by our competitors or other third parties in the courts or patent offices in the United States and abroad. For example, we may
become involved in opposition, derivation, reexamination,
inter partes
review, post-grant review or interference
proceedings challenging our patent rights or the patent rights of others. Such challenges may result in loss of exclusivity or
freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit
our ability to stop others from using or commercializing similar or identical product candidates, or limit the duration of the
patent protection of our product candidates. An adverse determination in any such submission, proceeding or litigation could reduce
the scope of, or invalidate, our patent rights, allow third parties to commercialize our product candidates and compete directly
with us, without payment to us, or result in our inability to manufacture or commercialize drugs without infringing third-party
patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened,
regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current
or future product candidates.
If we fail to comply with our obligations
in the agreements under which we license intellectual property rights from third parties or these agreements are terminated or
we otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property rights
that are important to our business.
We are party to several license agreements under
which we in-license patent rights and other intellectual property related to our business. For example, we are party to a Development
and Option Agreement with KHK under which we may license certain technology related AEVI-002. We may need to obtain additional
licenses from others in the future to advance our research and development activities or allow the commercialization of AEVI-002
or any other product candidates we may identify and pursue. See the section entitled “Business” for a more detailed
description of our current license agreements.
Our license agreements impose, and we expect
that future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us.
In spite of our efforts, our licensors might conclude that we have materially breached our obligations under such license agreements
and might therefore terminate the license agreements, thereby removing or limiting our ability to develop and commercialize products
and technology covered by these license agreements. Any uncured, material breach under these license agreements could result in
our loss of rights to practice the patent rights and other intellectual property licensed to us under these agreements, and could
compromise our development and commercialization efforts for AEVI-002, AEVI-005 or any future product development candidates. If
any of our current or future licenses or material relationships or any in-licenses upon which our current or future licenses are
based are terminated, competitors or other third parties would have the freedom to seek regulatory approval of, and to market,
products identical to AEVI-002 and we may be required to cease our development and commercialization of AEVI-002, AEVI-005 or any
future product development candidates. Any of the foregoing could have a material adverse effect on our competitive position, business,
financial conditions, results of operations and prospects.
If any of our current or future licenses or
material relationships or any in-licenses upon which our current or future licenses are based are terminated or breached, we may:
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Lose our rights to develop and market AEVI-002, AEVI-005 or any future product development candidates;
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Lose patent protection for AEVI-002, AEVI-005 or any future product development candidates;
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experience significant delays in the development or commercialization of AEVI-002, AEVI-005 or any future product development candidates;
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not be able to obtain any other licenses on acceptable terms, if at all; or
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incur liability for damages.
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If we experience any of the foregoing, it could
harm our business, financial condition and results of operations.
Our intellectual property in-licenses with third parties may
be subject to disagreements over contract interpretations, which could narrow the scope of our rights to the relevant intellectual
property or technology or increase our financial or other obligations to our licensors.
The agreements under
which we currently in-license intellectual property or technology from third parties are complex, and certain provisions in such
agreements may be susceptible to multiple interpretations. Disputes may arise regarding intellectual property subject to a licensing
agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
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the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
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the sublicensing of patent and other rights under our collaborative development relationships;
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our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
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the priority of invention of patented technology.
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The resolution of any
contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant
intellectual property or technology, or increase what we believe to be our financial or other obligations under the agreement,
either of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover, if disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing
arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product
candidates, which could have a material adverse effect on our business, financial conditions, results of operations and prospects.
As we develop our product candidates, we may
need to obtain additional licenses to protect our rights to make and use our technology. These licenses may not be available on
acceptable terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or
royalties or both, and the rights granted to us might be non-exclusive, which could result in our competitors gaining access to
the same intellectual property. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect
of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses
on acceptable terms. All of the issues described above could also impact our collaborators, which would also impact the success
of the collaboration and therefore us. Under certain of our in-licensed patents, the licensor is responsible for maintaining, controlling
or enforcing the licensed intellectual property portfolio. Thus, we cannot ensure that the patent rights licensed to us will be
adequately maintained, controlled or enforced by our licensor. In addition, even when we have the right to control patent prosecution
of licensed patents and patent applications, enforcement of licensed patents, or defense of claims asserting the invalidity of
those patents, we may still be adversely affected or prejudiced by actions or inactions of our licensors and their counsel that
took place prior to or after our assuming control.
We may be required to make significant payments in connection
with our license and development agreements.
We are party to license agreements and sponsored
research agreements with CHOP and CAG, and a Development and Option Agreement with KHK pursuant to which we exclusively license
certain technology related to the development of AEVI-002 and AEVI-005. Under our license agreements and sponsored research agreements
with CHOP, we may be required to make significant payments in connection with the achievement of certain milestones and royalties
on the sale of resulting products and have certain ongoing payment obligations with respect to our sponsored research agreement.
If we exercise our option under the terms of KHK Development and Option Agreement, we will be obligated to cover significant development
costs for AEVI-002 and make significant payments in connection with certain milestones and the sale of resulting products. If the
obligations become due under the terms of the CHOP license agreements or the Development and Option Agreement, we may not have
sufficient funds available to meet our obligations and our development efforts may be negatively impacted. In addition, if we do
not have sufficient funds to pay our ongoing obligations under the CHOP development agreement, we may lose our rights under that
agreement, which would negatively impact our development capabilities.
Third-party claims of intellectual property
infringement may prevent or delay our development and commercialization efforts.
Our commercial success
depends in part on our avoiding infringement of the patents and proprietary rights of third parties. However, our research, development
and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property
rights owned or controlled by third parties. There is a substantial amount of litigation, both within and outside the United States,
involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement
lawsuits, interferences, oppositions and
inter partes
review and reexamination proceedings before the USPTO, and
corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned
by third parties, exist in the fields in which we are pursuing development candidates. As the biotechnology and pharmaceutical
industries expand and more patents are issued, the risk increases that AEVI-002, AEVI-005 or other product development candidates
that we may identify may be subject to claims of infringement of the patent rights of third parties.
Third parties may bring
patent infringement or other intellectual property claims against us, which would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial damages. There may be third-party patents or patent applications with
claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of AEVI-002,
AEVI-005 or other product development candidates that we may identify. Because patent applications can take many years to issue,
there may be currently pending patent applications which may later result in issued patents that AEVI-002, AEVI-005 or other product
development candidates that we may identify may infringe. In addition, third parties may obtain patents in the future and claim
that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction
to cover the manufacturing process of AEVI-002, AEVI-005 or other product development candidates that we may identify, any molecules
formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability
to commercialize such product candidate unless we obtained a license under the applicable patents, or until such patents expire.
Similarly, if any third-party patents were held
by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of use, including
combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize the applicable
product candidate unless we obtained a license or until such patent expires. In either case, such a license may not be available
on commercially reasonable terms or at all, or it may be non-exclusive, which could result in our competitors gaining access to
the same intellectual property.
Parties making claims against us may obtain
injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize AEVI-002,
AEVI-005 or other product development candidates that we may identify. Defense of these claims, regardless of their merit, would
involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event
of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’
fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties,
which may be impossible or require substantial time and monetary expenditure.
If a patent infringement suit were brought against
us, we could be forced to stop or delay research, development, manufacturing or sales of the product candidate that is the subject
of the suit. Additionally, if it is determined that our product candidates infringe third-party patents or other intellectual property
rights, there can be no assurance that we can successfully develop non-infringing alternatives on a timely basis or license non-infringing
alternatives, if any exist, on commercially reasonable terms. A significant intellectual property impediment to our ability to
develop and commercialize our product candidates could materially adversely affect our business prospects.
Parties making claims
against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater resources. Furthermore, because of the substantial amount of discovery required in connection with intellectual property
litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure.
In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect
on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial
condition and prospects.
Patent terms may be inadequate to protect
our competitive position on our product candidates for an adequate amount of time.
Even if our product
candidates and the methods for treating patients for prescribed indications using these product candidates are covered by valid
and enforceable patents and have claims with sufficient scope, disclosure, and support in the specification, the patents will provide
protection only for a limited amount of time. In the United States, if all maintenance fees are timely paid, the natural expiration
of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but
the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained,
once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given
the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent
portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
If we are not able to obtain patent
term extension or non-patent exclusivity in the United States under the Hatch-Waxman Act and in foreign countries under similar
legislation, thereby potentially extending the term of our marketing exclusivity for AEVI-002, AEVI-005 or other product development
candidates that we may identify, our business may be materially harmed.
Depending upon the
timing, duration and specifics of FDA marketing approval of AEVI-002, AEVI-005 or other product development candidates that we
may identify, one of the U.S. patents covering each of such product candidates or the use or manufacturing method thereof may be
eligible for up to five years of patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one
patent to be extended per FDA approved product as compensation for the patent term lost during the FDA regulatory review process.
A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval
and only those claims covering such approved drug product, a method for using it or a method for manufacturing it may be extended.
Patent term extension also may be available in certain foreign countries upon regulatory approval of our product candidates. Nevertheless,
we may not be granted patent term extension either in the United States or in any foreign country because of, for example, failing
to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines,
failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the
term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority
could be less than we request.
If we are unable to
obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which
we will have the right to exclusively market our product may be shortened and our competitors may obtain approval of competing
products following our patent expiration sooner, and our revenue could be reduced, possibly materially.
It is possible that
we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering AEVI-002 or other product candidates
that we may identify even where that patent is eligible for patent term extension, or if we obtain such an extension, it may be
for a shorter period than we had sought. Further, for certain of our licensed patents, we do not have the right to control prosecution,
including filing with the USPTO, a petition for patent term extension under the Hatch-Waxman Act. Thus, if one of our licensed
patents is eligible for patent term extension under the Hatch-Waxman Act, we may not be able to control whether a petition to obtain
a patent term extension is filed, or obtained, from the USPTO.
Also, there are detailed
rules and requirements regarding the patents that may be submitted to the FDA for listing in the Approved Drug Products with Therapeutic
Equivalence Evaluations, or the Orange Book. We may be unable to obtain patents covering our product candidates that contain one
or more claims that satisfy the requirements for listing in the Orange Book. Even if we submit a patent for listing in the Orange
Book, the FDA may decline to list the patent, or a manufacturer of generic drugs may challenge the listing. If one of our product
candidates is approved and a patent covering that product candidate is not listed in the Orange Book, a manufacturer of generic
drugs would not have to provide advance notice to us of any abbreviated new drug application filed with the FDA to obtain permission
to sell a generic version of such product candidate.
If we are unable to protect the confidentiality
of our trade secrets, the value of our technology could be materially adversely effected and our business would be harmed.
Our business is dependent on proprietary rights
that may be difficult to protect and such dependence could affect our ability to effectively compete. In addition to patents, we
also rely on trade secrets, technical know-how, licensing opportunities, and continuing innovation to develop and maintain our
competitive position especially where we do not believe that patent protection is appropriate or obtainable. Trade secrets are
by nature difficult to protect. We seek to protect our proprietary information by requiring our employees, consultants, contractors,
outside scientific collaborators and other advisors to execute non-disclosure and confidentiality agreements and our employees
to execute assignment of invention agreements to us. We also require confidentiality or material transfer agreements from third
parties that receive our confidential data or materials. These agreements are designed to protect our proprietary information.
However, we cannot be certain that such agreements have been entered into with all relevant parties, and even if they are all in
place, there can still be no guarantee that agreements have not been or will not be violated or that there will be an adequate
remedy available for a violation of an agreement. Accordingly, we cannot be certain that our trade secrets and other confidential
proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently
develop substantially equivalent information and techniques. For example, if our employees, consultants, contractors, outside scientific
collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors, and confidentiality
agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a
claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is
unpredictable. Moreover, others, including our competitors, may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or technology.
We also seek to preserve the integrity and confidentiality
of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security
of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential
proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent
such competitor from using that technology or information to compete with us, which could harm our competitive position.
We anticipate that we will spend both time and
management resources to develop and file trademark applications in the future. However, third parties may have trademarks or pending
trademark applications on our contemplated marks, similar marks, or in confusingly similar fields of use (or may be using our contemplated
marks or similar marks). We may have to change our use of certain marks which could have an adverse impact on our business and
may require us to spend additional funds to develop new marks.
Although we are not currently involved
in any intellectual property litigation, we may become involved in lawsuits to protect or enforce our patents or other intellectual
property, which could be expensive, time consuming and unsuccessful.
Unauthorized parties may infringe our patents
or other intellectual property, try to copy aspects of our product candidates and technologies, or obtain and use information we
consider proprietary. Policing the unauthorized use of our proprietary rights is difficult. We cannot guarantee that no harm or
threat will be made to our or our collaborators’ intellectual property. In addition, changes in, or different interpretations
of, patent laws in the United States and other countries may also adversely affect the scope of our patent protection and our competitive
situation. Further, we may not have sufficient rights under our license agreements with collaborators to enforce the intellectual
property licensed to us against third-party infringers.
Although we are not
currently involved in any litigation, if we were to initiate legal proceedings against a third party to enforce a patent covering
product candidates that we may identify, the defendant could counterclaim that the patent covering our product candidate is invalid
and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability
are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness, written description or non-enablement. Grounds for an unenforceability assertion could be an allegation
that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement,
during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable. Interference or
derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the
priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using
the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing
party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive license is offered and our
competitors gain access to the same technology. Our defense of litigation or interference or derivation proceedings may fail and,
even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties
associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical
trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships
that would help us bring AEVI-002 or other product candidates that we may identify to market. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. There could also be public announcements of the
results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could have a material adverse effect on the price of our common stock.
We may be subject to claims challenging
the inventorship of our patents and other intellectual property.
We or our licensors
may be subject to claims that former employees, collaborators or other third parties have an interest in our owned or in-licensed
patents, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we or our licensors may have
inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing our
product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or our or our
licensors’ ownership of our owned or in-licensed patents, trade secrets or other intellectual property. If we or our licensors
fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such
as exclusive ownership of, or right to use, intellectual property that is important to our product candidates. Even if we are successful
in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.
Any issued patents that may cover
our product candidates could be found invalid or unenforceable if challenged in court.
Third parties may
claim that our owned or in-licensed patents relating to AEVI-004 or other product candidates that we may identify, are invalid
and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability
are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected
with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution.
Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context
of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g.,
opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer
cover AEVI-002 or other product candidates that we may identify. The outcome following legal assertions of invalidity and unenforceability
is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior
art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of
invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates.
Such a loss of patent protection would have a material adverse impact on our business.
We may be subject to claims that
our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties
or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in
the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at universities or other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. Agreements with our employees aim to prevent employees
from bringing any proprietary rights of third parties to us. Although we try to ensure that our employees, consultants and independent
contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that
we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property,
including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties.
Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary
damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we
are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management
and other employees.
Obtaining and maintaining our patent
protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance
fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the
USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents
and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside agency and rely on our outside
agency to pay these fees due to U.S. and non-U.S. patent agencies. The USPTO and various non-U.S. governmental patent agencies
require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application
process. We employ reputable professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of
a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can
result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material
adverse effect on our business.
We may not be able to protect our
intellectual property rights throughout the world.
Filing, prosecuting and defending patents
on our product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property
rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws
of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
For example, there is certain subject matter that is patent eligible in the United States but not generally patent eligible outside
of the United States and vice versa. Differences in what constitutes patent eligible subject matter in various countries may limit
the protection we can obtain in the United States and outside of the United States. Furthermore, different countries have different
procedures for obtaining patents, and patents issued in different countries provide different degrees of protection against the
use of a patented invention by others. Therefore, if the issuance to us or our licensors, in a given country, of a patent covering
an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation
of the validity, enforceability, or scope of the claims in, or the written description or enablement in, a patent issued in one
country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect
our intellectual property in those countries may be limited.
Consequently, we
may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies
in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products
to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may
compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them
from competing.
Many companies
have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets,
and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult
for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally.
Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs
and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or
interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against
us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a
significant commercial advantage from the intellectual property that we develop or license.
Changes in U.S. and foreign patent
law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either
the patent laws or interpretation of the patent laws in the United States and abroad could increase the uncertainties and costs
surrounding the prosecution of patent applications and the enforcement or defense of issued patents. For example, assuming that
other requirements for patentability are met, prior to March 2013, in the United States, in general, the first to invent was entitled
to the patent. After March 2013, under the Leahy-Smith America Invents Act, enacted in September 2011, the United States transitioned
to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to
file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent
the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore
be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This
will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the
United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain
that we or our licensors were the first to either (i) file any patent application related to our product candidates or (ii) invent
any of the inventions claimed in our or our licensor’s patents or patent applications.
The America Invents
Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect
patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional
procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review,
inter
partes
review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the
evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide
evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient
to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO
procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant
in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs
surrounding the prosecution of our owned or in-licensed patent applications and the enforcement or defense of our owned or in-licensed
issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations,
and prospects.
In addition, the patent positions of companies
in the development and commercialization of pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have
narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain
situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once
obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing
patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability
to protect and enforce our intellectual property in the future.
Risk Related to our Securities
Our securities are thinly traded, resulting in relative illiquidity
and price volatility, and there may not ever be an active market for our securities.
Although our common stock has been traded
on the Nasdaq Global Market since October 21, 2016 and, prior to that on the NYSE MKT since April 8, 2011, the volumes and trading
in our securities have been extremely sporadic. As a result, the ability of holders to purchase or sell our securities is limited,
with low-volume trading creating wide shifts in price. For our securities to continue to be listed on the Nasdaq Global Market,
we must meet the current listing requirements of that exchange. If we were unable to meet these requirements, our securities could
be delisted from the Nasdaq Global Market. Any such delisting of our securities could have an adverse effect on the market price
of, and the efficiency of the trading market for, our securities, not only in terms of the number of shares that can be bought
and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts,
if any. Also, if in the future we were to determine that we need to seek additional equity capital, it could have an adverse effect
on our ability to raise capital in the public or private equity markets.
Further, the share prices of public companies,
particularly those operating in high growth sectors, are often subject to significant fluctuations. The market price of our common
stock on the Nasdaq Global Market has been volatile, ranging from $0.17 per share to $2.29 per share during the 52-week trading
period ending March 26, 2019. We expect that the market price of our common stock will continue to fluctuate significantly due
to factors including, but not limited to, the following:
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results of our clinical trials, specifically the 8-week signal finding study of AEVI-002 in patients with severe pediatric onset Crohn’s disease, for which initial data from a small number of patients is expected by mid-year 2019, if enrollment in the trial is successful, although enrollment into the study has been extremely challenging and no patients have been enrolled to date,
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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introduction of new products by us or our competitors;
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changes in market valuations of companies in our industry;
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actual or anticipated variations in our operating results;
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future issuances of our common stock or other securities;
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other events or factors, including those beyond our control; and
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general market or economic conditions.
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Securities analysts may not initiate coverage or continue
to cover our common stock, and this may have a negative impact on its market price.
The trading market for our securities could
depend in part on the research and reports that securities analysts publish about our business and us. We do not have any control
over these analysts. There is no guarantee that securities analysts will cover our securities. If securities analysts do not cover
our securities, the lack of research coverage may adversely affect their market prices. If we are covered by securities analysts,
and our securities are the subject of an unfavorable report, the prices for our securities would likely decline. If one or more
of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets,
which could cause our stock price and/or trading volume to decline.
The exercise of options and other issuances of shares of
common stock or securities convertible into or exercisable for shares of common stock will dilute the ownership interests of our
current stockholders and may adversely affect the future market price of our common stock.
Sales of our common stock in the public
market, either by us or by our current stockholders, or the perception that these sales could occur, could cause a decline in the
market price of our securities. Nearly all of the shares of our common stock held by those of our current stockholders who are
not affiliates may be immediately eligible for resale in the open market either in compliance with an exemption under Rule 144
promulgated under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to an effective resale registration
statement that we have previously filed with the SEC. Such sales, along with any other market transactions, could adversely affect
the market price of our common stock.
In addition, as of December 31, 2018, there
were outstanding options and warrants to purchase an aggregate of 10,177,118 and 3,953,904 shares, respectively. Of the 10,177,118
outstanding options, ranging in exercise price from $1.07 per share to $8.80 per share, 6,027,586 shares were exercisable as of
December 31, 2018. The exercise of options at prices below the market price of our common stock could adversely affect the price
of shares of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection with
collaborations or manufacturing arrangements or in connection with other financing efforts.
Any issuance of our common stock that is
not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock
split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares.
Moreover, if we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised,
stockholders may experience further dilution. Delaware law and our corporate governance documents do not prohibit the number of
options or other securities that are convertible into, exchangeable for or represent the right to receive common stock that we
may issue in the future, except to the extent we are limited by the number of our authorized shares of common stock which is currently
200,000,000 shares. Holders of shares of our common stock have no preemptive rights that entitle them to purchase their pro rata
share of any offering of shares of any class or series.
We have a significant stockholder, which will limit your
ability to influence corporate matters and may give rise to conflicts of interest.
The Children’s Hospital of
Philadelphia Foundation, or the CHOP Foundation, is our largest stockholder. As of March 26, 2019, the CHOP Foundation
and certain of its related parties beneficially owned 21,311,586 shares of our common stock. The shares of common
stock beneficially owned by the CHOP Foundation and certain of its related parties represent approximately 31.5% of our
outstanding shares of common stock. Accordingly, the CHOP Foundation exerts significant influence over us and any action
requiring the approval of the holders of our common stock, including the election of directors and approval of significant
corporate transactions. This concentration of voting power makes it less likely that any other holder of common stock or
directors of our business will be able to affect the way we are managed and could delay or prevent an acquisition of us on
terms that other stockholders may desire. In addition, if the CHOP Foundation obtains a majority of our common stock, the
CHOP Foundation would be able to control all matters submitted to our stockholders for approval, as well as our management
and affairs. For example, the CHOP Foundation would be able to control the election of directors, amendments to
our organizational documents and approval of any merger, consolidation, sale of all or substantially all of our assets or
other business combination or reorganization. In addition, if the CHOP Foundation obtains a majority of our common stock, we
would be deemed a “controlled company” for purposes of NASDAQ listing requirements. Under NASDAQ rules, a
“controlled company” may elect not to comply with certain NASDAQ corporate governance requirements, including
(i) the requirement that a majority of our board of directors consist of independent directors, (ii) the
requirement that the compensation of our officers be determined or recommended to the board by a majority of independent
directors or a compensation committee that is composed entirely of independent directors and (iii) the requirement that
director nominees be selected or recommended to the board by a majority of independent directors or a nominating committee
that is composed of entirely independent directors.
Furthermore, the interests of the CHOP Foundation
may not always coincide with your interests or the interests of other stockholders and the CHOP Foundation may act in a manner
that advances its best interests and not necessarily those of other stockholders, including seeking a premium value for its common
stock, and might affect the prevailing market price for our common stock. Our board of directors, which currently consists of eight
directors, including one designated by the CHOP Foundation, has the power to set the number of directors on our board from time
to time. Matthew D. Bayley, who currently serves as the Senior Vice President and Chief Strategy Officer at the CHOP Foundation,
is a member of our board of directors and some of its committees.
If we fail to comply with the continued listing requirements
of the Nasdaq Global Market, our common stock may be delisted and the price of our common stock and our ability to access the capital
markets could be negatively impacted.
Our common stock is listed for trading on
the Nasdaq Global Market. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum
closing bid price requirement of $1.00 per share for our common stock. On February 6, 2019, we received a notification from Nasdaq
that the closing bid price for our common stock had been below $1.00 for 30 consecutive business days.
If a company trades for 30 consecutive business
days below the $1.00 minimum closing bid price requirement, Nasdaq will send a deficiency notice to the company, advising that
it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.
Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may
be available. If Nasdaq does not grant such a company a second 180-day compliance period or such company does not regain compliance
with the bid price requirement, such company may be delisted from the Nasdaq Global Market.
A delisting of our common stock from Nasdaq
could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our
common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable
to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
We have never declared or paid dividends on our capital stock
and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid dividends
on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain
future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends will be
at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements,
applicable contractual restrictions and other such factors as our Board of Directors may deem relevant.
Provisions of Delaware law may delay or prevent efforts to
acquire a controlling interest in us, even if such acquisition were in the best interests of our stockholders.
We are subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage
potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of
discouraging others from making tender offers for our common stock. These provisions may also prevent changes in our management.