BUSINESS
We are a biotechnology company developing
bioengineered organ implants based on our novel Cellframe
TM
technology. Our Cellframe
technology is comprised of a biocompatible scaffold seeded with the patient’s own stem cells. Our platform technology is
being developed to treat life-threatening conditions of the esophagus, bronchus and trachea. By focusing on these underserved patients,
we hope to dramatically improve the treatment paradigm for these patients. Our unique Cellframe technology combines the clinically
proven principles of tissue engineering, cell biology and material science.
We believe that our Cellframe technology
may provide surgeons a new paradigm to address life-threatening conditions of the esophagus, bronchus, and trachea due to cancer,
infection, trauma or congenital abnormalities. Our novel technology harnesses the body’s response and modulates it toward
the healing process to regenerate tissue and restore the continuity and integrity of the organ. We are pursuing the Cellspan
TM
esophageal implant as our first product candidates to address pediatric esophageal atresia and esophageal cancer, and we are also
developing our technology’s applications to address conditions of the bronchus and trachea.
In collaboration with world-class institutions,
such as Mayo Clinic and Connecticut Children’s Medical Center, we are advancing our technology toward filing an Investigational
New Drug (IND) application with the U.S. Food and Drug Administration (FDA) for our Cellspan esophageal implant product candidates.
We plan to conduct additional pre-clinical studies in 2018 for our pediatric esophageal atresia program as well as our adult esophageal
cancer indication. In 2019, we plan to file an IND with the FDA for each of these esophageal indications.
Our Cellframe technology platform: how
it works
Our Cellframe process begins with the collection
of an adipose (fat) tissue biopsy from the patient followed by the use of standard tissue culture techniques to isolate and expand
the patient’s own (autologous) mesenchymal (multipotent) stem cells, or MSC. The cells are seeded onto a proprietary biocompatible,
synthetic scaffold, produced to mimic the dimensions of the organ to be regenerated, and incubated in a proprietary organ bioreactor.
The scaffold is electrospun from polyurethane (PU) to form a non-woven, hollow tube. The specific microstructures of the Cellspan
implants are designed to allow the cultured cells to attach to and cover the scaffold fibers.
We have conducted large-animal studies to investigate the use
of the Cellspan implants for the reconstitution of the continuity and integrity of tubular shape organs, such as the esophagus
and the large airways, following a full circumferential resection of a clinically relevant segment, just as would occur in a clinical
setting. We announced favorable preliminary preclinical results of large-animal studies for the esophagus, bronchus and trachea
in November 2015. Based on the results of those studies, we chose the esophagus to be the initial focus for our organ regeneration
technology.
Illustration
of intersection of Cellspan esophageal implant and native
esophagus
at time of implant and proposed mechanism of action
In May 2016, we reported an update of results
from additional, confirmatory pre-clinical large-animal studies. We disclosed that the studies had demonstrated in a predictive
large-animal model the ability of our Cellspan organ implant to successfully stimulate the regeneration of a section of esophagus
that had been surgically removed. Cellspan esophageal implants, consisting of a proprietary biocompatible synthetic scaffold seeded
with the recipient animal’s own stem cells, were surgically implanted in place of the esophagus section that had been removed.
After the surgical full circumferential resection of a portion of the thoracic esophagus, the Cellspan implant stimulated the reconstitution
of full esophageal structural integrity and continuity.
Illustration
of esophageal reconstitution over Cellspan esophageal
implant
following time of implant and proposed mechanism of action
Study animals were returned to a solid
diet three weeks after the implantation surgery. The scaffold portions of the Cellspan implants, which are intended to be in place
only temporarily, were retrieved approximately three weeks post-surgery via the animal’s mouth in a non-surgical endoscopic
procedure. Within 2.5 to 3 months, a complete inner epithelium layer and other specialized esophagus tissue layers were regenerated.
Two animals in the study were kept in life for almost two years to evaluate the long-term viability of the newly regenerated tubular
conduit and were then sacrificed for histological data. Prior to their sacrifice, these animals demonstrated normal weight gain,
appeared healthy and free of any significant side effects and received no specialized care.
Platform technology in life-threatening orphan indications
In November 2016, we were granted Orphan
Drug Designation for our Cellspan esophageal implant by the FDA to restore the structure and function of the esophagus subsequent
to esophageal damage due to cancer, injury or congenital abnormalities. Orphan drug designation provides a seven-year marketing
exclusivity period against competition in the U.S. from the date of a product’s approval for marketing. This exclusivity
would be in addition to any exclusivity we may obtain from our patents. Additionally, orphan designation provides certain incentives,
including tax credits and a waiver of the Biologics License Application fee. We also plan to apply for orphan drug designation
for our Cellspan esophageal implant in Europe. Orphan drug designation in Europe provides market exclusivity in Europe for ten
years from the date of the product’s approval for marketing.
We are now advancing the development of
our Cellframe technology, specifically a Cellspan esophageal implant, in large-animal studies with collaborators. In order to seek
approval for the initiation of clinical trials for Biostage Cellspan esophageal implants in humans, GLP studies to support the
safety of the Cellspan esophageal implant are required to submit an Investigational New Drug (IND) application with the FDA. As
we believe that our recent studies provided sufficient confirmatory proof of concept data, we have initiated the Good Laboratory
Practice (GLP) studies to demonstrate that our technology, personnel, systems and practices are sufficient for advancing into human
clinical trials. We have conducted a number of IND-enabling GLP studies demonstrating safety and feasibility of the Cellspan implant.
These studies were done primarily in pursuit of our adult esophageal cancer program. Additional GLP studies are necessary in support
of the adult esophageal cancer program, which will also be supportive of an IND for the pediatric esophageal atresia program. We
intend to perform those studies in 2018. We will also pursue additional non-GLP studies for the pediatric esophageal atresia program
in 2018 to optimize that product candidate.
First-In-Human Use of Esophageal Implant
Product Candidate
On August 7, 2017, we announced the use
of our Cellspan Esophageal Implant product candidate in a patient at a major U.S. hospital via an FDA-approved single-use
expanded access application. The patient was a 75-year old male with a life-threatening cancerous mass in his chest that
spanned his heart, a lung and his esophagus. The surgery was performed in May 2017 to remove the tumor, repair the heart,
part of one lung, and a section of the esophagus. The Cellspan Esophageal Implant was interpositioned into the gap in the
esophagus created by the removal of the tumor. The patient’s surgeon informed us at that time that the surgery was a
success and the patient was later discharged from the hospital. In February 2018 the surgeon informed us that the patient had
died after living approximately eight months after surgery. The surgeon stated that the cause of death was a stroke, and that
the stroke was unrelated to the esophageal implant. The surgeon also informed us that a preliminary autopsy had shown that
the esophageal implant resulted in a regenerated esophageal tube in the patient, except for a very small (approximately 5mm)
hole on the lateral wall that was right up against a synthetic graft inserted as part of the patient’s heart repair on
the pericardium in that same surgery. The synthetic graft on the pericardium was not related to our esophageal implant
product and may have acted as an irritant to esophageal regeneration where it contacted the esophageal implant. The surgeon
also informed us that the esophageal regeneration in this patient was consistent with the regeneration previously observed in
our large-animal studies. The surgeon informed us that following completion of the autopsy the hospital will pursue a
publication and we expect to be in a position to release additional information on this landmark case at that time.
Our product candidates are currently in
development and have not yet received regulatory approval for sale anywhere in the world.
Changing the surgical treatment of Esophageal
Cancer
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Illustration of esophageal cancer site
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Illustration of potential human application of Cellspan esophageal implant at site of esophageal cancer (depicting implant prior to esophageal tissue reconstitution over implant)
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According to the World Health Organization’s
International Agency for Research on Cancer, there are approximately 450,000 new cases of esophageal cancer worldwide each year.
A portion of all patients diagnosed with esophageal cancer are treated via a surgical procedure known as an esophagectomy. The
current standard of care for an esophagectomy requires a complex surgical procedure that involves moving the patient’s stomach
or a portion of their colon into the chest to replace the portion of esophagus resected by the removal of the tumor. These current
procedures have high rates of complications and can lead to a severely diminished quality of life and require costly ongoing care.
Our Cellspan esophageal implants aim to provide a simpler surgical procedure, with reduced complications, that may result in a
better quality of life after the operation and reduce the overall cost of these patients to the healthcare system.
Focus on Pediatric Esophageal Atresia:
a congenital abnormality in need of a better solution
Each year, several thousand children worldwide
are born with a congenital abnormality known as esophageal atresia, a condition where the baby is born with an esophagus that does
not extend completely from the mouth to the stomach. When a long segment of the esophagus is lacking, the current standard of care
is a series of surgical procedures where surgical sutures are applied to both ends of the esophagus in an attempt to stretch them
and pull them together so they can be connected at a later date. This process can take weeks and the procedure is plagued by serious
complications and may carry high rates of failure. Such approach also requires, in time, at least two separate surgical interventions.
Other options include the use of the child’s stomach or intestine that would be pulled up into the chest to allow a connection
to the mouth. We are working to develop a Cellspan esophageal implant solution to address the complications of esophageal atresia,
that could potentially be life-changing or organ-sparing, or both.
Our Mission and Our Strategy
Our mission is to revolutionize regenerative
medicine by bioengineering patient-specific Cellspan implants that use the patient’s own cells to stimulate organ regeneration
and restore an organ’s structure and continuity. Our business strategy to accomplish this mission includes:
Targeting life-threatening medical conditions.
We are focused on creating products to help physicians treat life-threatening conditions like esophageal cancer, central
lung cancer and damage to the trachea caused by cancer, trauma or infection. We are also developing products for the treatment
of congenital abnormalities of the esophagus and the airways. We are not targeting less severe conditions that have reasonable
existing treatment options. Solutions for life-threatening medical conditions present a favorable therapeutic index, or risk/benefit
relationship, by providing the opportunity of a significant medical benefit for patients who have poor or no treatment alternatives.
We believe that product candidates targeting life-threatening medical conditions may be eligible for review and approval by regulatory
authorities under established expedited review programs, which may result in savings of time in the regulatory approval process.
Also, we believe that products targeting life-threatening medical conditions may be more likely to receive favorable reimbursement
compared with treatments for less critical medical conditions.
Developing products that have a relatively
short time to market.
Since the number of patients diagnosed with esophageal cancer in the U.S. each year is relatively
small, we expect the number of patients that we would likely need to enroll in a clinical trial will also be relatively small.
A small number of patients implies a relatively fast enrollment time and a less expensive clinical development program. Therefore,
we expect to be able to conduct a clinical trial in a relatively short period of time compared to clinical trials in indications
with larger patient populations. We intend to work closely with regulatory agencies and clinical experts to design and size the
clinical studies appropriately based on the specific conditions our products are intended to treat.
Using our Cellframe technology as a
platform to address multiple organs.
We believe that pre-clinical data we have produced to date may suggest that our
Cellframe technology is a novel and innovative approach to restoring organ function that may provide an ability to develop products
that would address life-threatening conditions impacting organs like the esophagus, bronchus and trachea, and perhaps lower portions
of the gastrointestinal (GI) tract. We believe that our Cellframe technology may allow physicians to treat certain life-threatening
conditions in ways not currently possible, and in some combination, to save patients’ lives, avoid or reduce complications
experienced in the current standard of care, and improve the patients’ quality of life, while at the same time reducing the
overall cost of patient care to the healthcare system.
Supplying the finished organ implant
to the surgeon.
Our technology includes our proprietary organ bioreactor, as well as our proprietary biocompatible scaffold
that is seeded with the patient’s own cells. We believe there is considerable value in supplying the final cell-seeded scaffold
implant to the surgeon so that the hospital and surgeon may focus solely on performing the implantation.
Collaborating with leading medical and
research institutions.
We have and will continue to collaborate with leading medical and research institutions. We have
a co-development initiative with Mayo Clinic for regenerative medicine organ implant products for the esophagus and airways based
on our Cellframe technology. We are also collaborating with Connecticut Children’s Medical Center on a co-development project
to translate our Cellframe technology for pediatric esophageal atresia from pre-clinical studies to clinical trials. We believe
the use of our product candidates by leading surgeons and institutions will increase the likelihood that other surgeons and institutions
will use our products.
Our Technology
Our Cellframe technology is comprised of
our proprietary bioengineered organ scaffold seeded with the patient’s own stem cells in our proprietary organ bioreactor
prior to implantation. We believe that our Cellframe technology combines a highly-engineered, biocompatible scaffold and a robust
population of cells that, by tapping into the stem cell niche of the surrounding native tissue after implantation, may potentially
enable a tubular organ to remodel or regenerate tissue to close the gap created by a surgical resection of a portion of that organ.
This unique combination of technologies, developed through our extensive testing performed during the last few years, may potentially
provide solutions to life-threatening conditions for patients with unmet medical needs.
We believe that our technology is unique,
in that its mode of action appears to be different from other tissue engineering organ scaffold products developed previously,
of which we are aware. Prior to our development of the Cellframe technology, our approach attempted to implant an organ scaffold
that would be incorporated into the patient’s body by the surrounding native tissue growing into the scaffold. To our knowledge,
all previous research and development efforts by other investigators were based on that same concept. Our Cellframe technology
appears to work very differently. We believe that the unique combination of our highly-engineered organ scaffold with a population
of the patient’s own mesenchymal stem cells enables an organ to develop new native tissue around our scaffold, but not into
it, so the scaffold acts as a type of frame or staging for the new tissue. As a result, our scaffold is not incorporated into the
body. Instead, it is retrieved from the body via an endoscopic procedure, not surgically, after sufficient tissue remodeling and
regeneration has occurred to restore the organ’s integrity and function.
A Cellframe technology-based organ implant
includes two key components: a biocompatible synthetic scaffold and the patient’s own stem cells.
Biocompatible Scaffold Component
Our proprietary biocompatible scaffold
component of the Cellspan esophageal implant is constructed primarily of polyurethane (PU; a plastic polymer). This material was
chosen based on extensive testing of various materials. The scaffold is made using a manufacturing process known as electrospinning.
The combination of the electrospinning process, which provides control over the desired microstructure of the scaffold fabric,
with the PU results in a scaffold that we believe has favorable biocompatibility characteristics.
The Patient’s Cells
Based on current pre-clinical development
efforts, the cells we seed onto the scaffold are obtained from the patient’s adipose tissue (abdominal fat). This fat tissue
is obtained from a standard biopsy before the implant surgery. Mesenchymal stem cells are extracted and isolated from the adipose
tissue biopsy. The isolated cells are then expanded, or grown, for a short period prior to surgery in order to derive a sufficient
cell population to be seeded on the scaffold. The cells are then seeded on the scaffold in our proprietary organ bioreactor and
incubated there before the implant surgery.
We believe the Cellspan esophageal implant
has the potential to provide a major advance over the current therapeutic options for treating esophageal cancer, damage from infection
or trauma and congenital abnormalities. We believe our Cellframe technology has the potential to overcome the major challenges
in restoring organ function for a damaged esophagus. With our Cellspan esophageal implant we are developing a surgical procedure
that has the objective of reconstituting the continuity of the patient’s esophagus without having to relocate another organ
in its place. In addition, by reducing or eliminating complications that occur in the current standard of care, we expect to reduce
the costs of addressing and treating those additional complications. Because these substantial costs can be reduced or even eliminated
with our technology, we believe our products, if successfully developed, can help save lives, improve the quality of life for patients
and reduce overall healthcare costs.
Unmet Patient Needs and Cellspan Implant
Solutions
Esophageal Cancer
There are approximately 456,000 new diagnoses
of esophageal cancer globally each year, according to the World Health Organization’s International Agency for Research on
Cancer. According to the American Cancer Society, there are approximately 17,000 new diagnoses of esophageal cancer in the U.S.
each year, and there are more than 15,000 deaths from esophageal cancer each year. Esophageal cancer is very deadly - the five-year
survival rate for people with esophageal cancer is 18% in the U.S. Approximately 5,000 esophagectomy surgeries occur in the U.S.
annually to treat esophageal cancer, and approximately 10,000 esophagectomies occur in Europe annually. We believe that approximately
one half of the world’s esophageal cancer cases occur in China, which would represent the largest patient population for
our adult esophageal product candidate. We believe that our Cellspan esophageal implant, if approved, has the potential to provide
a major advance over the current esophagectomy procedures for addressing esophageal cancer, which have high complication and morbidity
rates.
The current standard of care for the esophagectomy
requires either (A) a gastric pull-up, where the stomach is cut and sutured into a tubular shape, then pulled up through the diaphragm
to replace a portion of the esophagus resected by the removal of the cancerous tumor; or (B) a colon interposition, where a portion
of the colon is resected and used to replace the portion of the esophagus resected by the removal of the cancerous tumor. Esophagectomies
have 90-day mortality rates of up to 19%. Serious complications, such as leakage at the anastomoses, which can lead to infections
and sepsis, and pulmonary complications, such as impaired pulmonary function or pneumonia, occur in up to 30% of esophagectomy
cases. Other complications from esophagectomies, such as a narrowing of the esophagus post-surgery, gastroesophageal reflux and
dumping syndrome (repetitive nausea, dizziness and vomiting) can also pose significant quality of life issues for patients.
We believe that the Cellspan esophageal
implant has the potential to provide physicians a new, simpler procedure to restore organ function while significantly reducing
complication and morbidity rates compared with the current standard of care, and without creating significant quality of life issues
for patients.
Esophageal Atresia
Esophageal Atresia (EA) is a rare congenital
abnormality in which a baby is born without part of the esophagus. About 1 in 4,000 babies in the U.S. is born with EA. In some
cases, the two sections can be connected surgically. However, in cases where the gap is too great for a simple surgical reconnection,
the current standard of care is a gastric pull-up, a colon interposition, or a procedure known as the Foker process. In the Foker
process, traction devices are surgically attached to the two ends of the esophagus. Traction is then applied, usually for several
weeks during which time the baby remains in an Intensive Care Unit, to stimulate the ends of the esophagus to grow and narrow the
gap. If the Foker process is successful in narrowing the gap sufficiently, a second surgery is necessary to connect the two ends
of the esophagus. In addition to the Foker process being complex, it is also a very expensive procedure, because the baby will
normally be several months in hospital for the process.
We believe that a pediatric Cellspan esophageal
implant may provide pediatric surgeons with a better procedure to treat EA that would result in a connected esophagus with higher
success rates, lower complications and lower overall costs to the healthcare system.
Central Lung Cancer
Lung cancer is the most common form of
cancer and the most common cause of death from cancer worldwide. There are more than 450,000 new lung cancer diagnoses annually
in the U.S. and Europe. In approximately 25% of all lung cancer cases, the cancerous tumor resides only in a bronchus and not in
the lobes of the lungs, and is known as central lung cancer. Approximately 33,000 central lung cancer cases diagnosed in the U.S.
and Europe are Stage I and II and are considered eligible for surgical resection, often with adjuvant chemotherapy and radiation.
Approximately 5,000 of those patients are treated via pneumonectomy, a surgical procedure involving the resection of the cancer
tumor, the whole bronchus below the tumor and the entire lung to which it is connected. It is a complex surgery and, due to the
removal of a lung, results in a 50% reduction in the patient’s respiratory capacity. The procedure has reported rates of
post-surgical (in hospital) mortality of 8% to 15%. Complication rates associated with pneumonectomy are reported as high as 50%,
and include post-operative pneumonia, supraventricular arrhythmias and anastomotic leakage, placing patients at significant mortality
risk post-discharge.
We believe that a Cellspan bronchial implant,
once developed and approved for marketing, has the potential to provide physicians a treatment alternative superior to the sleeve
pneumonectomy to address central lung cancer, a simpler procedure to restore organ function of the bronchus without sacrificing
one of the patient’s lungs, resulting in fewer post-surgery complications, improved mortality rates and improved quality
of life for the patient.
Life-threatening conditions of the Trachea
There are approximately 8,000 patients
per year in the U.S. and Europe who suffer from a condition of the trachea that put the patient at high risk of death. These conditions
can be due to tracheal trauma, tracheal stenosis or trachea cancer. There are approximately 40,000 tracheal trauma patients diagnosed
each year in the U.S. Of those, approximately 1,000 are severe enough to need surgical resection procedures. Tracheal stenosis
is a rare complication from tracheostomies, but may have a devastating impact on respiratory function for patients. Approximately
2,000 patients are diagnosed with stenosis from tracheostomy in the U.S. each year. Trachea cancer is a very rare but extremely
deadly cancer. Trachea cancer patients in the U.S. have a median survival of 10 months from diagnosis and a 5-year survival of
only 27%. There were approximately 200 cases of primary trachea cancer diagnosed in the U.S. in 2013. Based on these facts, we
estimate that there are approximately 8,000 patients in the U.S. and Europe with conditions of the trachea that put them at high
risk of death, but for whom there is currently no clinically effective tracheal implant or replacement method currently available.
We believe that a Cellspan tracheal implant
may potentially provide physicians a treatment to re-establish the structural integrity and function of a damaged or diseased trachea
to address life-threatening conditions due tracheal trauma, stenosis or cancer.
Our History
We were incorporated under the laws of the State of Delaware
on May 3, 2012 by Harvard Bioscience, Inc. (“Harvard Bioscience”) to provide a means for separating its regenerative
medicine business from its other businesses. Harvard Bioscience decided to separate its regenerative medicine business into our
company, a separate corporate entity (the “Separation”), and it spun off its interest in our business to its stockholders
in November 2013. Since the Separation we have been a separately-traded public company and Harvard Bioscience has not been a stockholder
of our common stock or controlled our operations. Following the Separation, we continued to innovate our bioreactors based on our
physiology expertise, we developed our materials science capabilities and we investigated and developed a synthetic tracheal scaffold.
By that time, we had built and staffed cell biology laboratories at our Holliston facility, to give ourselves the ability to perform
and control our scientific investigation and developments internally. At that point, we began the second phase of our company’s
development.
In mid-2014, we increased the pace of our scientifically-based
internal analysis and development of our first-generation tracheal implant product, the HART-Trachea. From large-animal studies
conducted thereafter we found that the product elicited an unfavorable inflammatory response after implantation, which required
additional development and testing. These requirements extended our expectations regarding our regulatory milestones and we announced
the additional testing and extended milestone expectations in January 2015. During 2015 we isolated and tested all major variables
of the organ scaffold and the cell source and protocols, examining the effects of alternatives against the then-existing product
approach. Through extensive
in vitro
preclinical studies, and small-animal and large-animal studies, we made dramatic improvements,
and discovered that the mechanism of action of this new approach was very different from our hypothesis regarding that of the first-generation
product. We call this new implant approach our Cellframe technology. Our Cellframe technology uses a different scaffold material
and microstructure, a different source and concentration of the patient’s cells and several other changes from our earlier
trachea initiative. We believe that our Cellframe technology, although built on learnings from our earlier-generation product initiative,
represents a new technology platform resulting from our rigorous science and development. We see the development of our Cellframe
technology platform as the beginning of a new, third phase in our company’s progression.
We discontinued development of our earlier initiative in 2014;
that first-generation product approach was significantly different from our new Cellframe technology and Cellspan product candidates
currently in development. We have focused our development efforts on our Cellframe technology and Cellspan product candidates,
which we have and will continue to develop internally, and with our collaborators, via a rigorous scientific development process.
Clinical Trials
Our Esophageal Cellspan Implant has been designated by the FDA
as a combination product biologic. We believe that this is a favorable designation as it allows for orphan designation and a more
participatory path to approval. To date, we have conducted numerous pre-clinical studies in our esophageal implant programs and
continue to see consistent regeneration. We are analyzing these data and our human experience to better ascertain what specific
pre-clinical studies are still needed prior to conducting a phase I human clinical trial. We are pursuing two indications in parallel.
The two complementary indications we are pursuing are esophageal cancer and pediatric esophageal atresia. In order to market our
product candidates, we will need to successfully complete clinical trials. The initial indication for which we intend to seek FDA
approval will be to restore the function of the esophagus subsequent to esophageal damage or stenosis due to cancer, injury or
infection.
Because esophageal cancer affects only approximately 17,000
patients per year in the U.S. we anticipate that our clinical trials will involve relatively few patients. Therefore, once commenced,
we expect to be able to conduct a clinical trial in a relatively short period of time compared to clinical trials in indications
with larger patient populations. We intend to work closely with regulatory agencies and clinical experts to design and size the
clinical studies appropriately based on the specific conditions our products are intended to treat. We also intend to request expedited
review from the FDA for the Cellspan esophageal implant product. Receipt of expedited review would reduce the overall time through
the regulatory approval process. These expedited requests are submitted during the IND process.
We believe that we have excellent pre-clinical and clinical
support of the pediatric atresia program through our collaboration with Connecticut Children’s Medical Center and our primary
investigator Dr. Christine Finck. Essentially, we liken the pediatric atresia market to a rare disease market. Accordingly, the
clinical trial population should reflect the ultra-orphan nature of the disease state.
We intend to pursue regulatory approval for the Cellspan esophageal
implant in the U.S., initially. Following clinical trials in other foreign markets, we expect to pursue regulatory approval for
the Cellspan esophageal implant in those foreign markets, as well. We believe that approximately one half of the world’s
esophageal cancer cases occur in China, which would represent the largest potential patient population for our adult esophageal
implant product candidate, and we are consequently beginning to prepare to address that market.
Research and Development
Our primary research and development activities
are focused in three areas: materials science, cell biology and engineering. In materials science, we focus on designing and testing
biocompatible organ scaffolds, testing the structural integrity and the cellularization capacities of the scaffolds. In cell biology,
we focus on developing and testing isolation and expansion protocols, cell characterization and fate studies, investigating the
effects of various cell types and concentrations, evaluating the biocompatibility of scaffolds, experimenting with different cell
seeding methodologies, and developing protocols for implantation experiments. Our engineering group supports the materials science
and cell biology groups across an array of their activities, i.e. designing, engineering and making our proprietary organ bioreactors.
All three of our R&D groups combine to plan and execute the in vitro studies. A fundamental part of our R&D effort in developing
the Cellframe technology has been dedicated to the discovery and development of small and large animal model studies. The large-animal
model employs the use of Yucatan mini-pigs. Our Cellspan scaffolds were implanted in the cervical portion as well as the thoracic
portion of the esophagus and the airways in studies to date.
Following
the failure to receive the funding with respect to a securities purchase agreement in August 2017, and in an effort to
conserve cash, we completed a reduction in headcount of 20 persons during October and November 2017, of whom 18 were directly
involved in research and development activities. As a result, we had one research and development employee as of December 31,
2017. Following our raising additional capital in December 2017, January 2018 and February 2018, we re-hired four of our former
research and development employees into key scientific and engineering positions, and retained two others as consultants, in
January 2018. We believe that our new staffing level after those hires, combined with our consultant and co-development
collaborator resources, is sufficient to pursue both of our esophageal programs.
In addition to our in-house engineering
and scientific development team, we collaborate with leaders in the field of regenerative medicine who are performing the fundamental
research and surgeries in this field to develop and test new products that will advance and improve the procedures being performed.
We will work with our collaborators to further enhance our products to make them more efficient and easier to use by surgeons.
In the U.S., our principal collaborations have been with Mayo Clinic and Connecticut Children’s Medical Center. Collaboration
typically involves us developing new technologies specifically to address issues these researchers and clinicians face, and then
working together to translate our technology from pre-clinical studies to clinical trials. In certain instances, we have entered
into agreements that govern the ownership of the technologies developed in connection with these collaborations.
We incurred approximately $7.7 million and $7.6 million of research
and development expenses in 2017 and 2016, respectively. As we have not yet applied for or received regulatory approval to market
any clinical products and sales of our research bioreactor products have not been significant in relation to our operating costs,
no significant amount of these research and development costs have been passed on to our customers.
Manufacturing
Biostage has developed a comprehensive
manufacturing process for our product candidates, including: cell biology, scaffold production, cell isolation and expansion, seeding
of cells on the scaffold, incubation and expansion processes in the bioreactor and product transportation. We currently perform
certain manufacturing steps in-house and subcontract certain processes and activities, primarily those related to cell expansion,
seeding and incubation, to experienced partners.
For our scaffolds we use a process called
electrospinning to create the fabric part of the scaffold. Electrospinning is a well-known fabrication process. It is useful for
cell culture applications as it can create extremely thin fibers (much thinner than a human hair) that can make a fabric with pores
approximately the same size as a cell. The electrospinning process parameters can be tuned to create a structure that is very similar
to the natural structure of the collagen fibers in human extracellular matrix. Our process and end product have been developed
over many years and involve many trade secrets and proprietary know-how. Our Cellspan scaffolds are made from polyurethane, an
inert polymer that is not bioresorbable. However, we also perform studies on the use of scaffolds made from bioresorbable materials.
While we do not manufacture the cells, as they will come from the patient’s adipose tissue, for regulatory purposes we are
responsible for the quality control of the cells and the seeding of the cells onto the scaffold in the bioreactor. For this we
have, in collaboration with our partners, developed standard operating procedures for the seeding of cells on the scaffold. For
U.S. clinical trials we anticipate that the seeding will be performed in an automated version of our bioreactor at a pre-qualified
third-party contract manufacturer using current Good Manufacturing Procedures (cGMP) using our proprietary protocol and under the
supervision of our staff.
For our scaffolds, our primary materials
are medical-grade plastic resins and solvents used to liquefy the resins in our manufacturing process. These materials are readily
available from a variety of suppliers and do not currently represent a large proportion of our total costs. For our bioreactors,
we perform final assembly and testing of components that we buy from third parties like machine shops, parts distributors, molding
facilities and printed circuit board manufacturers. These operations are performed primarily at our Holliston, MA headquarters.
Sales and Marketing
We expect that most surgeries using the Cellspan esophageal
implant product will be performed at a relatively small number of major hospitals in the U.S., Canada and European countries that
will establish themselves as specialized centers of excellence. We believe that a relatively small number of centers of excellence
in each country would be able to treat a very large percentage of that country’s patients annually, given the expected number
of patients to be treated each year. So, we expect our markets to be served by a concentrated number of treatment centers. Further,
our three Cellspan product candidates are for the esophagus, the bronchi and the trachea, three organs all treated by thoracic
surgeons. Therefore, all three products, once approved, would be marketed primarily to physicians practicing in a single surgical
specialty, so we expect that the total number of physicians using our products will be a much smaller population than if our products
were to be used by physicians in multiple areas of surgical specialties. Due to our expectation of a population of physicians in
one surgical specialty being the primary users of our products in a concentrated number of centers of excellence in each national
market, we expect to be able to support our markets with a fairly small field sales force.
We expect to price the product commensurate with the medical
value created for the patient and the costs avoided with the use of our product. We further expect to be paid by the hospital that
buys the product from us. Finally, we expect that the hospital would seek reimbursement from payers for the entire transplant procedure,
including the use of our products.
Harvard Bioscience is the exclusive distributor for the research
versions of our organ bioreactors. Harvard Bioscience can only sell those products to the research markets in accordance with the
terms of our distribution agreement. We retain all rights to manufacture and sell all our products for clinical use.
Intellectual Property and Related Agreements
We actively seek to protect our products and proprietary information
by means of U.S. and foreign patents, trademarks and contractual arrangements. Our success will depend in part on our ability to
obtain and enforce patents on our products, processes and technologies to preserve our trade secrets and other proprietary information
and to avoid infringing on the patents or proprietary rights of others.
We anticipate that we will sell products in various markets
in the United States and various jurisdictions under brand name, logo and product design trademarks and service marks and that
these marks will attain material importance in the future.
We also own select U.S. Patents as well as certain patents in
Germany. These patents cover aspects of device and processes currently under development by our company. Patents for various processes
and devices extend for varying periods according to the date of patent filing or grant and the legal term of patents in the country
or countries in which the patent was obtained. The actual protection afforded by a patent can vary from country to country and
depends on factors such as the type of patent, scope of protection and available legal remedies.
In addition to issued patents, we have several pending patent
applications in the U.S. and key target jurisdictions. We believe that one or more of these pending patent applications may be
of importance to material position depending upon factors such as the relevant patent jurisdiction, type of patent granted, and
scope of patent claims ultimately allowed in a given jurisdiction. Depending upon factors such as the type of grant and the date
on which the patent application was filed, we anticipate that the term of certain pending patents may extend to 2036.
We also rely on unpatented proprietary technologies in the development
and commercialization of our products. We also depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors. To help protect our proprietary know-how that may
not be patentable, and our inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality
agreements to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that
prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements
require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s
proprietary technology.
Exclusive License Agreement and Sponsored Research Agreement - InBreath
Bioreactor
We entered into a sponsored research agreement with Sara Mantero,
Maria Adelaide Asnaghi, and the Department of Bioengineering of the Politecnico Di Milano, or PDM. Under the terms of this agreement,
PDM was required to use its facilities and best efforts to conduct a research program relating to the development of bioreactors,
clinical applications, and automated seeding processes. We were required to provide engineering support to PDM with respect to
bioreactor designs. Intellectual property developed by PDM or its employees, including Dr. Mantero or Ms. Asnaghi, under this sponsored
research agreement will be owned by Dr. Mantero or Ms. Asnaghi and covered by our exclusive license agreement described above.
In addition, we have an option to an exclusive license for intellectual property relating to new technology that may not be covered
by the exclusive license agreement. We will own any inventions and discoveries that we solely develop in connection with the research
program and any inventions and discoveries that are jointly developed in connection with the research program will be owned jointly
by the parties. We terminated the sponsored research agreement in 2017.
Sublicense Agreement with Harvard Bioscience
We have entered into a sublicense agreement with Harvard Bioscience
pursuant to which Harvard Bioscience has granted us a perpetual, worldwide, royalty-free, exclusive, except as to Harvard Bioscience
and its subsidiaries, license to use the mark “Harvard Apparatus” in the name Harvard Apparatus Regenerative Technology.
The mark “Harvard Apparatus” is used under a license agreement between Harvard Bioscience and Harvard University, and
we have agreed to be bound by such license agreement in accordance with our sublicense agreement. We currently have no affiliation
with Harvard University.
Separation Agreements with Harvard Bioscience
On November 1, 2013, to effect the Separation, Harvard Bioscience
distributed all of the shares of our common stock to the Harvard Bioscience stockholders (the “Distribution”). Prior
to the Distribution Harvard Bioscience contributed the assets of its regenerative medicine business, and approximately $15 million
in cash, to our company to fund our operations following the Distribution.
In connection with the Separation and immediately prior to the
Distribution, we entered into a Separation and Distribution Agreement, Intellectual Property Matters Agreement, Product Distribution
Agreement, Tax Sharing Agreement, Transition Services Agreement, and Sublicense Agreement with Harvard Bioscience to effect the
Separation and Distribution and provide a framework for our relationship with Harvard Bioscience after the Separation. These agreements
govern the current relationships among us and Harvard Bioscience and provided for the allocation among us and Harvard Bioscience
of Harvard Bioscience’s assets, liabilities and obligations (including employee benefits and tax-related assets and liabilities)
attributable to periods prior to the Separation.
Government Regulation
Any product that we may develop based on
our Cellframe technology, and any other clinical products that we may develop, will be subject to considerable regulation by governments.
We were in the past informed by the FDA that our previous-generation tracheal product candidate would be regulated under the Biologics
License Application, or BLA, pathway in the U.S. and we were informed by the European Medicines Agency (EMA) that the previous
generation tracheal product would be regulated under the Advanced Therapy Medicinal Products(ATMP), pathway in the EU. On October
18, 2016, we also received written confirmation from FDA’s Center for Biologics Evaluation and Research(CBER), that FDA intends
to regulate our Cellspan esophageal implant as a combination product under the primary jurisdiction of CBER. We further understand
that CBER may choose to consult or collaborate with the FDA’s Center for Devices and Radiological Health (CDRH), with respect
to the characteristics of the synthetic scaffold component of our product based on CBER’s determination of need for such
assistance. Although our Cellframe technology differs in design and performance from the first-generation product candidate, we
expect that Cellframe-based products will be regulated by the FDA and EMA under the same pathways as the first-generation tracheal
product candidate. This expectation is based on the fact that the Cellframe technology is centered on the delivery of the patient’s
own cells seeded on an implanted synthetic scaffold in order to restore organ function and our belief that the cells provide the
primary mode of action. Of course, it is possible that some of our current and future products may use alternative regulatory pathways.
Regulatory Strategy
Domestic Regulation of Our Products
and Business
The testing, manufacturing, and potential
labeling, advertising, promotion, distribution, import and marketing of our products are subject to extensive regulation by governmental
authorities in the U.S. and in other countries. In the U.S., the FDA, under the Public Health Service Act, the Federal Food, Drug
and Cosmetic Act, and its implementing regulations, regulates biologics and medical device products.
The labeling, advertising, promotion, marketing
and distribution of biopharmaceuticals, or biologics and medical devices also must be in compliance with the FDA and U.S. Federal
Trade Commission (FTC), requirements which include, among others, standards and regulations for off-label promotion, industry sponsored
scientific and educational activities, promotional activities involving the internet, and direct-to-consumer advertising. The FDA
and FTC have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the
issuance of a warning letter directing us to correct deviations from regulatory standards and enforcement actions that can include
seizures, injunctions and criminal prosecution. Further, we are required to meet regulatory requirements in countries outside the
U.S., which can change rapidly with relatively short notice.
We have been informed by the FDA that our
Cellspan esophageal implant product candidates are combination biologic/device products. Biological products must satisfy the requirements
of the Public Health Services Act and the Food, Drug and Cosmetics Act and their implementing regulations. In order for a biologic
product to be legally marketed in the U.S., the product must have a BLA approved by the FDA.
The BLA Approval Process
The steps for obtaining FDA approval of
a BLA to market a biopharmaceutical, or biologic product in the U.S. include:
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completion of pre-clinical laboratory tests, animal studies
and formulation studies under the FDA’s GLP regulations;
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submission to the FDA of an IND application, for human
clinical testing, which must become effective before human clinical trials may begin and which must include Institutional Review
Board (IRB), approval at each clinical site before the trials may be initiated;
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performance of adequate and well-controlled clinical trials
in accordance with Good Clinical Practices (GCP), to establish the safety and efficacy of the product for each indication;
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submission to the FDA of a BLA, which contains detailed
information about the chemistry, manufacturing and controls for the product, extensive pre-clinical information, reports of the
outcomes of the clinical trials, and proposed labeling and packaging for the product;
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the FDA’s acceptance of the BLA for filing;
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satisfactory review of the contents of the BLA by the FDA,
including the satisfactory resolution of any questions raised during the review or by the advisory committee, if applicable;
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satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities,
methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and
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FDA approval of the BLA.
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Based on preliminary discussions with the
FDA, we expect the clinical trials for our esophageal implant product candidates to be conducted in two sequential phases:
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A Phase 1, or Pilot Trial, where our product would be tested
on a small number, perhaps five or six, of patients to demonstrate the product’s safety. If successful, that study would
be followed by,
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A Phase II Registration, or Pivotal Trial to test the product’s
efficacy. We believe that the nature of our esophageal products and the sizes of their targeted patient populations would lead
to a small number of patients in this trial, relative to most biotechnology clinical trials.
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Clinical testing may not be completed successfully
within any specified time period, if at all. The FDA closely monitors the progress of each of the phases of clinical trials that
are conducted under an IND and may, at its discretion, reevaluate, alter, suspend, or terminate the testing based upon the data
accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA or the sponsor may suspend
or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed
to an unacceptable health risk. The FDA can also request that additional pre-clinical studies or clinical trials be conducted as
a condition to product approval.
Companies also may seek Fast Track or Breakthrough
Therapy designation for their products. Fast Track or Breakthrough Therapy products are those that are intended for the treatment
of a serious or life-threatening condition and that demonstrate the potential to address unmet medical needs for such a condition.
If awarded, the Fast Track or Breakthrough Therapy designation applies to the product only for the indication for which the designation
was received.
If the FDA determines after review of preliminary
clinical data submitted by the sponsor that a Fast Track or Breakthrough Therapy product may be effective, it may begin review
of portions of a BLA before the sponsor submits the complete BLA (rolling review), thereby accelerating the date on which review
of a portion of the BLA can begin. There can be no assurance that any of our products will be granted Fast Track or Breakthrough
Therapy designation. And even if they are designated as Fast Track or Breakthrough Therapy products, we cannot assure you that
our products will be reviewed or approved more expeditiously for their Fast Track or Breakthrough Therapy indications than would
otherwise have been the case or will be approved promptly, or at all. Furthermore, the FDA can revoke Fast Track or Breakthrough
Therapy designation at any time.
In addition, products studied for their
safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over
existing treatments may receive Accelerated Approval and may be approved on the basis of adequate and well-controlled clinical
trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit
or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval,
the FDA may require that a sponsor of a product receiving Accelerated Approval perform adequate and well-controlled post-approval
clinical trials to verify and further define the product’s clinical benefit and safety profile. There can be no assurance
that any of our products will receive Accelerated Approval. Even if Accelerated Approval is granted, the FDA may withdraw such
approval if the sponsor fails to conduct the required post-approval clinical trials, or if the post-approval clinical trials fail
to confirm the early benefits seen during the accelerated approval process.
Priority Review Voucher
Fast Track or Breakthrough Therapy designation
and Accelerated Approval should be distinguished from Priority Review designation although products awarded Fast Track or Breakthrough
Therapy designation may also be eligible for Priority Review designation.
Products regulated by the CBER may receive
Priority Review designation if they provide significant improvement in the safety or effectiveness of the treatment, diagnosis,
or prevention of a serious or life-threatening disease. The agency has agreed to the performance goal of reviewing products awarded
Priority Review designation within six months, whereas products under standard review receive a ten-month target. The review process,
however, can be significantly extended by FDA requests for additional information or clarification regarding information already
provided in the submission. Priority Review designation is requested at the time the BLA is submitted, and the FDA makes a decision
as part of the agency’s review of the application for filing.
Separately, but somewhat related, is a
product’s ability to qualify its sponsor to receive a Priority Review Voucher, or PRV. For a product aimed at prevention
or treatment of a “rare pediatric disease” as defined by Food, Drug and Cosmetics Act at 21 USC 360ff, and that also
meets certain other qualifying attributes, the product’s sponsor may qualify, apply for and receive a PRV, from the FDA.
A PRV entitles its holder to Priority Review for a drug application, and the PRV is transferable. Some companies who have received
PRV’s have sold their PRV’s to other companies who have then used the PRV to receive Priority Review for a drug application
with the FDA. Recent transfers of PRV’s from one company to another have occurred at prices in the $125 – 150 million
range. We intend to apply for rare pediatric disease designation for our pediatric esophageal implant product candidate as a first
step in pursuit of a PRV. A PRV is earned only upon marketing approval of the product. There is no certainty that our pediatric
esophageal product will achieve marketing approval from the FDA, or that if it does, that FDA would award us a PRV. Further, if
received, there is no certainty that the value of a PRV at that future date will compare favorably with the values reflected in
recent transfers of PRV’s.
Orphan Drug Designations
The Orphan Drug Act provides incentives
to manufacturers to develop and market drugs and biologics for rare diseases and conditions affecting fewer than 200,000 persons
in the U.S. at the time of application for orphan drug designation.. In September 2014 the FDA granted orphan designation to our
HART-Trachea product in the U.S. In November 2016, we were granted Orphan Drug Designation for our Cellspan esophageal implant
by the FDA to restore the structure and function of the esophagus subsequent to esophageal damage due to cancer, injury or congenital
abnormalities. The first developer to receive FDA marketing approval for an orphan biologic is entitled to a seven-year exclusive
marketing period in the U.S. for that product. The marketing exclusivity prevents FDA approval of another application for the same
product for the same indication for a period of seven years. Orphan status also entitles the product’s sponsor to certain
other benefits, such as a waiver of the BLA user fee, which is currently a $2 million value. Orphan product designation does not
convey any advantage in or shorten the duration of the regulatory review and approval process.
International
We plan to seek required regulatory approvals
and comply with extensive regulations governing product safety, quality, manufacturing and reimbursement processes in order to
market our products in other major foreign markets. The regulation of our products in the Asian and European markets, and in other
foreign markets varies significantly from one jurisdiction to another. The classification of the particular products and related
approval or CE marking procedures can involve additional product testing and additional administrative review periods. The time
required to obtain these foreign approvals or to CE mark our products may be longer or shorter than that required in the U.S.,
and requirements for approval may differ from the FDA requirements. Regulatory approval in one country does not ensure regulatory
approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory
process in others.
Legislation similar to the Orphan Drug
Act has been enacted in other jurisdictions, including the EU. The orphan legislation in the EU is available for therapies addressing
conditions that affect five or fewer out of 10,000 persons. The marketing exclusivity period is for ten years, although that period
can be reduced to six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable
not to justify maintenance of market exclusivity.
Employees
At December 31, 2017, we had 5 employees
working in our business, of whom 4 were full-time and one was part-time. At that date, all of our employees were based in the U.S.
None of our employees are unionized. In general, we consider our relations with our employees to be good.
Competition
We are not aware of any companies whose
products are directly competitive with our cell-seeded biocompatible synthetic scaffold system. However, in our key markets we
may in the future compete with multiple pharmaceutical, biotechnology, and medical device, including, among others, Aldagen, Asterias
Biotherapeutics, Athersys, BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours and Company,
InVivo Therapeutics, Mesoblast, Miramatrix Medical, Nanofiber Solutions, Neuralstem, Organovo, Osiris Therapeutics, Pluristem,
Smiths Medical, Tissue Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation and W.L. Gore and Associates.
In addition, there are many academic and clinical centers that are developing regenerative technologies that may one day become
competitors with us.
Many of our potential competitors have
substantially greater financial, technological, research and development, marketing, and personnel resources than we do. We cannot
forecast if or when these or other companies may develop competitive products.
We expect that other products will compete with products and
potential products based on efficacy, safety, cost, and intellectual property positions. While we believe that these will be the
primary competitive factors, other factors include, in certain instances, obtaining marketing exclusivity under the Orphan Drug
Act, availability of supply, manufacturing, marketing and sales expertise and capability, and reimbursement coverage.
Executive Officers of the Registrant
The following table shows information about our executive officers
as of December 31, 2017.
Name
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Age
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Position(s)
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James McGorry
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Chief Executive Officer and Member of the Board of Directors
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Thomas McNaughton
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57
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Chief Financial Officer
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James McGorry - Chief Executive Officer and Director
Mr. McGorry has served as our President and Chief Executive
Officer (CEO) since July 6, 2015. He has served as a Member of our Board of Directors since February 2013. Mr. McGorry has more
than 30 years of experience as a life science business leader in biologics, personalized medicine and medical devices, including
multiple product launches. Prior to becoming President and CEO at Biostage, Mr. McGorry most recently served as Executive Vice
President and General Manager, Translational Oncology Solutions for Champions Oncology and previously was Executive Vice President
of Commercial Operations at Accellent. During a 12-year tenure at Genzyme, he held leadership positions across several therapeutic
areas, including Bio Surgery, Cardiac Surgery, Oncology and Transplant. Mr. McGorry also was President of Clineffect Systems, an
electronic medical records company. He began his life sciences career with Baxter Healthcare Corporation, where he spent 11 years
in positions of increasing responsibility. Mr. McGorry also served as an officer in the United States Army for six years, including
commanding a special operations Green Beret SCUBA detachment. Mr. McGorry has an MBA with a concentration in healthcare from Duke
University, Fuqua School of Business, and a B.S. in engineering from the United States Military Academy at West Point where he
was the president of his class. We believe Mr. McGorry’s qualifications to sit on our Board of Directors include his extensive
executive leadership positions at several biotechnology and healthcare companies over the past 25 years.
Thomas McNaughton - Chief Financial Officer
Mr. McNaughton has served as our Chief Financial Officer since
May 3, 2012. Mr. McNaughton joined Harvard Bioscience as its Chief Financial Officer in September 2008, and served in that role
until the spin-off of our company from Harvard Bioscience on November 1, 2013. During 2008 and prior to joining Harvard Bioscience,
Mr. McNaughton was a consultant providing services primarily to an angel-investing group and a silicon manufacturing start-up.
From 2005 to 2007, he served as Vice President of Finance and Chief Financial Officer for Tivoli Audio, LLC, a venture capital-backed
global manufacturer of premium audio systems. From 1990 to 2005, Mr. McNaughton served in various managerial positions in the areas
of financial reporting, treasury, investor relations, and acquisitions within Cabot Corporation, a global manufacturer of fine
particulate products, and served from 2002 to 2005 as Finance Director, Chief Financial Officer of Cabot Supermetals, a $350 million
Cabot division that provided high purity tantalum and niobium products to the electronics and semiconductor industries. Mr. McNaughton
practiced from 1982 to 1990 as a Certified Public Accountant in the audit services group of Deloitte & Touche, LLP. He holds
a B.S. in accounting and finance with distinction from Babson College.
Available Information and Website
Our website address is
www.biostage.com
. Our Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and exhibits and amendments to those reports filed or furnished with the Securities
and Exchange Commission pursuant to Section 13(a) of the Exchange Act are available for review on our website and the Securities
and Exchange Commission’s (“SEC”) website at www.sec.gov. Any such materials that we file with, or furnish to,
the SEC in the future will be available on our website as soon as reasonably practicable after they are electronically filed with,
or furnished to, the SEC. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
The following factors should be reviewed carefully, in conjunction
with the other information contained in this Annual Report on Form 10-K. As previously discussed, our actual results could differ
materially from our forward-looking statements. Our business faces a variety of risks. We describe below what we believe are currently
the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties
of which we are unaware, or that we currently believe are not material, may also become important factors that adversely affect
our business. In addition, past financial performance may not be a reliable indicator of future performance and historical trends
should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops
into actual events, these events could have a material adverse effect on our business, financial condition or results of operations.
In such case, the trading price of our common stock could decline, and you may lose all or part of your investment in our securities.
The risk factors generally have been separated into three groups: (i) risks relating to our business, (ii) risks relating to the
Separation and (iii) risks relating to our common stock. These risk factors should be read in conjunction with the other information
in this Annual Report on Form 10-K.
Risks Relating To Our Business
Risks Associated with Clinical Trials and Pre-Clinical Development
The results of our clinical trials
or pre-clinical development efforts may not support our product claims or may result in the discovery of adverse side effects.
Even if our pre-clinical development efforts
or clinical trials are completed as planned, we cannot be certain that their results will support our product claims or that the
FDA, foreign regulatory authorities or notified bodies will agree with our conclusions regarding them. Although we have obtained
some positive results from the use of our scaffolds and bioreactors for trachea transplants performed to date, we also discovered
that our first-generation trachea product design encountered certain body response issues that we have sought to resolve with our
ongoing development of our Cellframe implant design. We cannot be certain that our Cellframe implant design or any future modifications
or improvements with respect thereto will support our claims, and any such developments may result in the discovery of further
adverse side effects. We also may not see positive results when our products undergo clinical testing in humans in the future.
Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we
cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. Our pre-clinical development
efforts and any clinical trial process may fail to demonstrate that our products are safe and effective for the proposed indicated
uses, which could cause us to abandon a product and may delay development of others. Also, patients receiving surgeries using our
products under compassionate use or in clinical trials may experience significant adverse events following the surgeries, including
serious health complications or death, which may or may not be related to materials provided by us. Our current Cellframe technology
has never been used in humans. We provided a previous generation trachea implant that was used in human patients under compassionate
use. To date, we believe that at least four of the six patients who received that first-generation implant have died. While we
believe that none of them have died because of a failure of the first-generation implant, these and any other such adverse events
have and may cause or contribute to the delay or termination of our clinical trials or pre-clinical development efforts. Any delay
or termination of our pre-clinical development efforts or clinical trials will delay the filing of our product submissions and,
ultimately, our ability to commercialize our products and generate revenues. It is also possible that patients enrolled in clinical
trials will experience adverse side effects that are not currently part of the product’s profile.
Clinical trials necessary to support
a biological product license or other marketing authorization for our products will be expensive and will require the enrollment
of sufficient patients to adequately demonstrate safety and efficacy for the product’s target populations. Suitable patients
may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any products
and will adversely affect our business, operating results and prospects.
In the U.S., initiating and completing
clinical trials necessary to support Biological License Applications (BLAs), will be time consuming, expensive and the outcome
uncertain. Moreover, the FDA may not agree that clinical trial results support an application for the indications sought in the
application for the product. In other jurisdictions such as the EU, the conduct of extensive and expensive clinical trials may
also be required in order to demonstrate the quality, safety and efficacy of our products, depending on each specific product,
the claims being studied, and the target condition or disease. The outcome of these clinical trials, which can be expensive and
are heavily regulated, will also be uncertain. Moreover, the results of early clinical trials are not necessarily predictive of
future results, and any product we advance into clinical trials following initial positive results in early clinical trials may
not have favorable results in later clinical trials.
Conducting successful clinical trials will require the enrollment
of a sufficient number of patients to support each trial’s claims, and suitable patients may be difficult to identify and
recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including
the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomfort and risks associated
with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff,
and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation
in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness
of our products, or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable
risks or discomfort. Also, patients may not participate in our clinical trials if they choose to participate in contemporaneous
clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the
trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate
clinical protocols to demonstrate safety and efficacy are required and we may not adequately develop such protocols to support
clearance and approval. Further, the FDA and foreign regulatory authorities may require us to submit data on a greater number of
patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data
analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a
clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result
in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA
and foreign regulatory authorities may not consider our data adequate to demonstrate safety and efficacy. Although FDA regulations
allow submission of data from clinical trials outside the U.S., there can be no assurance that such data will be accepted or that
the FDA will not apply closer scrutiny to such data. Increased costs and delays necessary to generate appropriate data, or failures
in clinical trials could adversely affect our business, operating results and prospects. In the U.S., clinical studies for our
products will be reviewed through the Investigational New Drug, or IND, pathway for biologics or combination products.
If the third parties on which we
rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually-required or
expected, we may not be able to obtain regulatory approval for or commercialize our products.
We do not have the ability to independently
conduct our pre-clinical and clinical trials for our products and we must rely on third parties, such as contract research organizations,
medical institutions, clinical investigators and contract laboratories to conduct, or assist us in conducting, such trials, including
data collection and analysis. We do not have direct control over such third parties’ personnel or operations. If these third
parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third
parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere
to our clinical protocols or any regulatory requirements, or for other reasons, our pre-clinical development activities or clinical
trials may be extended, delayed, suspended or terminated, and we may not be able to seek or obtain regulatory approval for, or
successfully commercialize, our products on a timely basis, if at all. Our business, operating results and prospects may also be
adversely affected. Furthermore, any third-party clinical trial investigators pertaining to our products may be delayed in conducting
our clinical trials for reasons outside of their control.
Risks Associated with Regulatory Approvals
If we fail to obtain, or experience
significant delays in obtaining, regulatory approvals in the U.S. and the EU for our products, including those for the esophagus
and airways, or are unable to maintain such clearances or approvals for our products, our ability to commercially distribute and
market these products would be adversely impacted.
We currently do not have regulatory approval
to market any of our implant products, including those for the esophagus and airways (trachea and bronchus). Our products are subject
to rigorous regulation by the FDA, and numerous other federal and state governmental authorities in the U.S., as well as foreign
governmental authorities. In the U.S., the FDA permits commercial distribution of new medical products only after approval of a
Premarket Approval (PMA), NDA or BLA, unless the product is specifically exempt from those requirements. A PMA, NDA or BLA must
be supported by extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling
data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the product for its intended use. There are similar
approval processes in the EU and other foreign jurisdictions. Our failure to receive or obtain such clearances or approvals on
a timely basis or at all would have an adverse effect on our results of operations.
The first bioengineered trachea implant
approved in the U.S. using our first-generation trachea implant was approved under the IND pathway through CBER for a compassionate
use. Such initial U.S. surgery was led by Professor Paolo Macchiarini, M.D., a surgeon pioneering tracheal replacement techniques.
Dr. Macchiarini was not employed or affiliated with our company, and we did no pay him any compensation or consulting fees. In
June 2014, shortly after our Chief Medical Officer joined our company, we ceased support of any human surgeries with Dr. Macchiarini.
Since the time we withdrew from involvement with Dr. Macchiarini, allegations that Dr. Macchiarini had failed to obtain informed
consent and accurately report patient conditions, among other things, for surgeries performed at the Karolinska Institutet in Stockholm,
Sweden, were made public.
The Karolinska Institutet investigated
the allegations and concluded that while in some instances Dr. Macchiarini did act without due care, his actions did not qualify
as scientific misconduct. Subsequent to this investigation, further negative publicity and claims continued to be released questioning
the conduct of Dr. Macchiarini, the Karolinska Institutet, the Krasnodar Regional Hospital in Krasnodar, Russia as well as our
company relating to surgeries performed by Dr. Macchiarini and other surgeons at such facilities. In February 2015, the Karolinska
Institutet announced that it would conduct an additional investigation into the allegations made about Dr. Macchiarini and the
Karolinska Institutet’s response and actions in the earlier investigation. In March 2015, the Karolinska Institutet announced
that it was terminating Dr. Macchiarini’s employment, and in December 2016 the Karolinska Institutet found Dr. Macchiarini,
along with three co-authors, guilty of scientific misconduct. These allegations, the results of the investigation and any further
actions that may be taken in connection with these matters, have and may continue to harm the perception of our products or company
and make it difficult to recruit patients for any clinical trials.
The FDA has informed us that our
first-generation trachea product and our Cellspan esophageal implant would be viewed by the FDA as a combination product comprised
of a biologic (cells) and a medical device component. Nevertheless, we cannot be certain how the FDA will regulate our products.
The FDA may require us to obtain marketing clearance and approval from multiple FDA centers. The review of combination products
is often more complex and more time consuming than the review of products under the jurisdiction of only one center within the
FDA.
While the FDA has informed us that our
first-generation trachea product and our Cellspan esophageal implant would be regulated by the FDA as a combination product, we
cannot be certain that any of our other products would also be regulated by the FDA as a combination product. For a combination
product, the Office of Combination Products, or OCP, within FDA can determine which center or centers within the FDA will review
the product and under what legal authority the product will be reviewed. Generally, the center within the FDA that has the primary
role in regulating a combination product is determined based on the primary mode of action of the product. Generally, if the primary
mode of action is as a device CDRH takes the lead. Alternatively, if the primary mode of action is cellular, then the Center for
Biologics Evaluation and Research takes the lead. On August 29, 2013, we received written confirmation from FDA’s Office
of Combination Products that FDA intends to regulate our first-generation trachea product as a combination product under the primary
jurisdiction of CBER. On October 18, 2016, we also received written confirmation from FDA’s Center for Biologics Evaluation
and Research, or CBER, that FDA intends to regulate our Cellspan esophageal implant as a combination product under the primary
jurisdiction of CBER. We further understand that CBER may choose to consult or collaborate with CDRH with respect to the characteristics
of the synthetic scaffold component of our product based on CBER’s determination of need for such assistance.
The process of obtaining FDA marketing
approval is lengthy, expensive, and uncertain, and we cannot be certain that our products, including products pertaining to the
esophagus, airways, or otherwise, will be cleared or approved in a timely fashion, or at all. In addition, the review of combination
products is often more complex and can be more time consuming than the review of a product under the jurisdiction of only one center
within the FDA.
We cannot be certain that the FDA will
not elect to have our combination products reviewed and regulated by only one FDA center and/or different legal authority, in which
case the path to regulatory approval would be different and could be more lengthy and costly.
If the FDA does not approve or clear our
products in a timely fashion, or at all, our business and financial condition will be adversely affected.
In the EU, our esophagus product
will likely be regulated as a combined advanced therapy medicinal product and our other products, including for the trachea or
bronchus, may also be viewed as advanced therapy medicinal products, which could delay approvals and clearances and increase costs
of obtaining such approvals and clearances.
On May 28, 2014, we received notice from
the European Medicines Agency (EMA) that our first-generation trachea product would be regulated as a combined advanced therapy
medicinal product. While we have not had any formal interaction with the EMA with respect to our Cellframe implant technology,
including pertaining to the esophagus, we believe that such implant technology would likely be regulated as a combined advanced
therapy medicinal product. In the event of such classification, it would be necessary to seek a marketing authorization for these
products granted by the European Commission before being marketed in the EU.
Other products we may develop, including
any products pertaining to the airways or otherwise, may similarly be regulated as advanced therapy medicinal products or combined
advanced therapy medicinal products. The regulatory procedures leading to marketing approval of our products vary among jurisdictions
and can involve substantial additional testing. Compliance with the FDA requirements does not ensure clearance or approval in other
jurisdictions, and the ability to legally market our products in any one foreign country does not ensure clearance, or approval
by regulatory authorities in other foreign jurisdictions. The foreign regulatory process leading to the marketing of the products
may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required
to comply with foreign regulations and market products may differ from that required to obtain FDA approval, and we may not obtain
foreign approval or clearance on a timely basis, if at all.
The United Kingdom’s vote to
leave the European Union will have uncertain effects and could adversely affect us.
On June 23, 2016, eligible members
of the electorate in the United Kingdom (the U.K.) decided by referendum to leave the European Union, commonly referred to as "Brexit".
On March 29, 2017, the U.K. formally notified the E.U. of its intention to withdraw pursuant to the Treaty on European Union. The
withdrawal of the U.K. from the E.U. will take effect either when agreed upon or, in the absence of such an agreement, two years
after the U.K. provided its notice of withdrawal. It appears likely that this withdrawal will involve a process of lengthy negotiations
between the U.K. and the E.U. member states to determine the terms of the withdrawal as well as the U.K.’s relationship with
the E.U. going forward. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either
during a transitional period or more permanently. Since a significant proportion of the regulatory framework in the U.K. is derived
from European Union directives and regulations, the referendum could materially change the regulatory regime applicable to the
approval of any product candidates in the U.K. In addition, since the EMA is located in the U.K., the implications for the regulatory
review process in the European Union has not been clarified and could result in relocation of the EMA or a disruption in the EMA
review process.
Further, Brexit could adversely affect
European and worldwide economic or market conditions and could contribute to instability in global financial markets. Brexit is
likely to lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws
to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business and
financial condition.
Risk Associated with Product Marketing
Even if our products are cleared
or approved by regulatory authorities, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority
requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or
withdrawal from the market.
Any product for which we obtain clearance
or approval in the U.S. or the EU, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and
other domestic and foreign regulatory authorities or notified bodies. In particular, we and our suppliers are required to comply
with the FDA’s Quality System Regulations, or QSR, and Good Manufacturing Practices, or GMPs, for our medical products, and
International Standards Organization, or ISO, regulations for the manufacture of our products and other regulations which cover
the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and
shipping of any product for which we obtain clearance or approval. Manufacturing may also be subject to controls by the FDA for
parts of the system or combination products that the FDA may find are controlled by the biologics regulations. Equivalent regulatory
obligations apply in foreign jurisdictions. Regulatory authorities, such as the FDA, the competent authorities of the EU Member
States, the European Medicines Agency and notified bodies, enforce the QSR, GMP and other applicable regulations in the U.S. and
in foreign jurisdictions through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes
and regulations administered by the FDA and other regulatory authorities or notified bodies in the U.S. or in foreign jurisdictions,
or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result
in, among other things, any of the following enforcement actions:
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untitled letters, warning letters, fines, injunctions,
consent decrees and civil penalties;
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unanticipated expenditures to address or defend such actions;
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customer notifications for repair, replacement, refunds;
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recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown
of production;
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withdrawing BLA or NDA approvals that have already been
granted;
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withdrawal of the marketing authorization granted by the
European Commission or delay in obtaining such marketing authorization;
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withdrawal of the CE Certificates of Conformity granted
by the notified body or delay in obtaining these certificates;
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refusal to grant export approval for our products; and
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Post-market enforcement actions can
generate adverse commercial consequences.
Even if regulatory approval of a product
is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed
and reduce our potential to successfully commercialize the product and generate revenue from the product. If the FDA or a foreign
regulatory authority determines that our promotional materials, labeling, training or other marketing or educational activities
constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject
us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take
action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result
in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In
addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our
products, and we must comply with medical products reporting requirements, including the reporting of adverse events and malfunctions
related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events
or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements
such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products
from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture
or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal
penalties which would adversely affect our business, operating results and prospects.
Healthcare legislative reform measures
may have a material adverse effect on our business and results of operations.
In the United States, there have been and
continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Affordable Care
Act, or the ACA, was passed, which substantially changes the way healthcare is financed by both governmental and private insurers,
and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things, subjects biological products to potential
competition by lower-cost biosimilars, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug
Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, increases the minimum Medicaid
rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in
Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of certain branded prescription drugs,
and creates a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (70% commencing
January 1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their
coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. Some of
the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional
challenges, as well as efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017,
President Trump has signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or otherwise
circumvent some of the requirements for health insurance mandated by the ACA.
Concurrently, Congress has considered legislation
that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation,
two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017,
or TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the
ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred
to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on
appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac”
tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain high cost employer-sponsored insurance
plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device excise tax on
non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective
January 1, 2019, to reduce the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.”
The effect that the ACA and its possible repeal and replacement may have on our business remains unclear.
Other legislative changes have been proposed
and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things,
created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a
targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare
payments to providers of 2% per fiscal year. These reductions went into effect on April 1, 2013 and, due to subsequent legislative
amendments to the statute, will remain in effect through 2027 unless additional congressional action is taken. On January 2, 2013,
the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several
types of providers.
Moreover, payment methodologies may be
subject to changes in healthcare legislation and regulatory initiatives. For example, the Middle Class Tax Relief and Job Creation
Act of 2012 required that the Centers for Medicare & Medicaid Services, or CMS, the agency responsible for administering the
Medicare program, reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which served as a base for 2014 and subsequent
years. In addition, effective January 1, 2014, CMS also began bundling the Medicare payments for certain laboratory tests ordered
while a patient received services in a hospital outpatient setting. We expect that additional state and federal healthcare reform
measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare
products and services, which could result in reduced demand for any product candidate we develop or complementary diagnostics or
companion diagnostics or additional pricing pressures.
Additionally, there has been increasing
legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there
have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among
other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship
between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.
Any of these regulatory changes and events
could limit our ability to form collaborations and our ability to commercialize our products, and if we fail to comply with any
such new or modified regulations and requirements it could adversely affect our business, operating results and prospects.
If we fail to complete the required
IRS forms for exemptions, make timely semi-monthly payments of collected excise taxes, or submit quarterly reports as required
by the Medical Device Excise Tax, we may be subject to penalties, such as Section 6656 penalties for any failure to make timely
deposits.
Section 4191 of the Internal Revenue Code,
enacted by Section 1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)),
in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), imposed as of January
1, 2013, an excise tax on the sale of certain medical devices. The excise tax imposed by Section 4191 is 2.3% of the price for
which a taxable medical device is sold within the U.S.
While the provision for a medical device
excise tax has been suspended for 2017 and 2016, there is no guarantee that the moratorium will be approved for subsequent years.
The excise tax will apply to future sales of any company medical device listed with the FDA under Section 510(j) of the Federal
Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, unless the device falls within an exemption from the tax, such as the exemption
governing direct retail sale of devices to consumers or for foreign sales of these devices. We will need to assess to what extent
this excise tax may impact the sales price and distribution agreements under which any of our products are sold in the U.S. We
also expect general and administrative expense to increase due to the medical device excise tax. We will need to submit IRS forms
applicable to relevant exemptions, make semi-monthly payments of any collected excise taxes, and make timely (quarterly) reports
to the IRS regarding the excise tax. To the extent we do not comply with the requirements of the Medical Device Excise Tax we may
be subject to penalties.
Financial and Operating Risks
Our audited financial statements for the year ended December
31, 2017 contain a going concern qualification. Our financial status creates doubt whether we will continue as a going concern.
We will need additional funds in the near future and our operations will be adversely affected if we are unable to obtain needed
funding.
In their audit report
dated April 2, 2018, included in this Form 10-K, our independent registered public accounting firm included a “going
concern” qualification as to our ability to continue as a going concern. We believe that if we do not raise additional capital
from outside sources in the very near future, we may be forced to curtail or cease our operations. We believe that our existing
cash resources will be sufficient to fund our planned operations into the third quarter of 2018. Our cash requirements and cash
resources will vary significantly depending upon the timing, financial and other resources that will be required to complete ongoing
development and pre-clinical and clinical testing of our products as well as regulatory efforts and collaborative arrangements
necessary for our products that are currently under development. In addition to development and other costs, we expect to incur
capital expenditures from time to time. These capital expenditures will be influenced by our regulatory compliance efforts, our
success, if any, at developing collaborative arrangements with strategic partners, our needs for additional facilities and capital
equipment and the growth, if any, of our business in general. We will require additional funding by the end of the third quarter
of 2018 to continue our anticipated operations and support our capital needs. We may seek to raise necessary funds through a combination
of public or private equity offerings, debt financings, other financing mechanisms, strategic collaborations and licensing arrangements.
We may not be able to obtain additional financing on terms favorable to us, if at all. In addition, general market conditions
may make it difficult for us to seek financing from the capital markets.
Any additional equity financings could result in significant
dilution to our stockholders and possible restrictions on subsequent financings. Debt financing, if available, could result in
agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt,
making capital expenditures or paying dividends. Other financing mechanisms may involve selling intellectual property rights, payment
of royalties or participation in our revenue or cash flow. In addition, in order to raise additional funds through strategic collaborations
or licensing arrangements, we may be required to relinquish certain rights to some or all of our technologies or products. If we
cannot raise funds or engage strategic partners on acceptable terms when needed, we may not be able to continue our research and
development activities, develop or enhance our products, take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements.
We have generated insignificant revenue to date and have
an accumulated deficit. We anticipate that we will incur losses for the foreseeable future. We may never achieve or sustain profitability.
We have generated insignificant revenues to date and we have
generated no revenues from sales of any clinical products, and as of December 31, 2017, we had an accumulated deficit of approximately
$48.2 million. We expect to continue to experience losses in the foreseeable future due to our limited anticipated revenues and
significant anticipated expenses. We do not anticipate that we will achieve meaningful revenues for the foreseeable future. In
addition, we expect that we will continue to incur significant operating expenses as we continue to focus on additional research
and development, preclinical testing, clinical testing and regulatory review and/or approvals of our products and technologies.
As a result, we cannot predict when, if ever, we might achieve profitability and cannot be certain that we will be able to sustain
profitability, if achieved.
Our products are in an early stage of development. If
we are unable to develop or market any of our products, our financial condition will be negatively affected, and we may have to
curtail or cease our operations.
We are in the early stage of product development. One must evaluate
us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our products require additional
research and development, preclinical testing, clinical testing and regulatory review and/or approvals or clearances before marketing.
In addition, we may not succeed in developing new products as an alternative to our existing portfolio of products. If we fail
to successfully develop and commercialize our products, including our esophageal or airway products, our financial condition may
be negatively affected, and we may have to curtail or cease our operations.
We have a limited operating history and it is difficult
to predict our future growth and operating results.
We have a limited operating history and limited operations and
assets. Accordingly, one should consider our prospects in light of the costs, uncertainties, delays and difficulties encountered
by companies in the early stage of development. As such, our development timelines have been and may continue to be subject to
delay that could negatively affect our cash flow and our ability to develop or bring products to market, if at all. Our estimates
of patient population are based on published data and analysis of external databases by third parties and are subject to uncertainty
and possible future revision as they often require inference or extrapolations from one country to another or one patient condition
to another.
Our prospects must be considered in light of inherent risks,
expenses and difficulties encountered by all early stage companies, particularly companies in new and evolving markets, such as
bioengineered organ implants, and regenerative medicine. These risks include, but are not limited to, unforeseen capital requirements,
delays in obtaining regulatory approvals, failure to gain market acceptance and competition from foreseen and unforeseen sources.
If we fail to retain key personnel, we may not be able
to compete effectively, which would have an adverse effect on our operations.
Our success is highly dependent on the continued services of
key management, technical and scientific personnel and collaborators. Our management and other employees may voluntarily terminate
their employment at any time upon short notice. The loss of the services of any member of our senior management team, including
our Chief Executive Officer, James McGorry, our Chief Financial Officer, Thomas McNaughton, and our other key scientific, technical
and management personnel, may significantly delay or prevent the achievement of product development and other business objectives.
If our collaborators do not devote sufficient time and
resources to successfully carry out their duties or meet expected deadlines, we may not be able to advance our products in a timely
manner or at all.
We are currently collaborating with multiple academic researchers
and clinicians at a variety of research and clinical institutions. Our success depends in part on the performance of our collaborators.
Some collaborators may not be successful in their research and clinical trials or may not perform their obligations in a timely
fashion or in a manner satisfactory to us. Typically, we have limited ability to control the amount of resources or time our collaborators
may devote to our programs or potential products that may be developed in collaboration with us. Our collaborators frequently depend
on outside sources of funding to conduct or complete research and development, such as grants or other awards. In addition, our
academic collaborators may depend on graduate students, medical students, or research assistants to conduct certain work, and such
individuals may not be fully trained or experienced in certain areas, or they may elect to discontinue their participation in a
particular research program, creating an inability to complete ongoing research in a timely and efficient manner. As a result of
these uncertainties, we are unable to control the precise timing and execution of any experiments that may be conducted.
Although we have formal co-development collaboration agreements
with Mayo Clinic and Connecticut Children’s Medical Center, we do not have formal agreements in place with other collaborators,
and most of our collaborators retain the ability to pursue other research, product development or commercial opportunities that
may be directly competitive with our programs. If any of our collaborators elect to prioritize or pursue other programs in lieu
of ours, we may not be able to advance product development programs in an efficient or effective manner, if at all. If a collaborator
is pursuing a competitive program and encounters unexpected financial or capability limitations, they may be motivated to reduce
the priority placed on our programs or delay certain activities related to our programs. Any of these developments could harm or
slow our product and technology development efforts.
Public perception of ethical and social issues surrounding
the use of cell technology may limit or discourage the use of our technologies, which may reduce the demand for our products and
technologies and reduce our revenues.
Our success will depend in part upon our collaborators’
ability to develop therapeutic approaches incorporating, or discovered through, the use of cells. If either bioengineered organ
implant technology is perceived negatively by the public for social, ethical, medical or other reasons, governmental authorities
in the U.S. and other countries may call for prohibition of, or limits on, cell-based technologies and other approaches to bioengineering
and tissue engineering. Although the surgeons using our products have not, to date, used the more controversial stem cells derived
from human embryos or fetuses in the human transplant surgeries using our products, claims that human-derived stem cell technologies
are ineffective or unethical may influence public attitudes. The subject of cell and stem cell technologies in general has at times
received negative publicity and aroused public debate in the U.S. and some other countries. Ethical and other concerns about such
cells could materially harm the market acceptance of our products.
Our products will subject us to liability exposure.
We face an inherent risk of product liability claims, especially
with respect to our products that will be used within the human body, including the scaffolds we manufacture. Product liability
coverage is expensive and sometimes difficult to obtain. We may not be able to obtain or maintain insurance at a reasonable cost.
We may be subject to claims for liabilities for unsuccessful outcomes of surgeries involving our products, which may include claims
relating to patient death. We may also be subject to claims for liabilities relating to patients that suffer serious complications
or death during or following transplants involving our products, including the patients who had surgeries utilizing our first-generation
scaffold product or our bioreactor technology, or patients that may have surgeries utilizing any of our products in the future.
Our current product liability coverage is $15 million per occurrence and in the aggregate. We will need to increase our insurance
coverage if and when we begin commercializing any of our products. There can be no assurance that existing insurance coverage will
extend to other products in the future. Any product liability insurance coverage may not be sufficient to satisfy all liabilities
resulting from product liability claims. A successful claim may prevent us from obtaining adequate product liability insurance
in the future on commercially desirable items, if at all. If claims against us substantially exceed our coverage, then our business
could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation, such litigation
could consume substantial amounts of our financial and managerial resources and could result in, among others:
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significant awards against us;
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substantial litigation costs;
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injury to our reputation and the reputation of our products;
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withdrawal of clinical trial participants; and
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adverse regulatory action.
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Any of these results would substantially harm our business.
If restrictions on reimbursements or other conditions
imposed by payers limit our customers’ actual or potential financial returns on our products, our customers may not purchase
our products or may reduce their purchases.
Our customers’ willingness to use our products will depend
in part on the extent to which coverage for these products is available from government payers, private health insurers and other
third-party payers. These payers are increasingly challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved treatments and products in the fields of biotechnology and regenerative
medicine, and coverage and adequate payments may not be available for these treatments and products. In addition, third-party payers
may require additional clinical trial data to establish or continue reimbursement coverage. These clinical trials, if required,
could take years to complete and could be expensive. There can be no assurance that the payers will agree to continue reimbursement
or provide additional coverage based upon these clinical trials. Failure to obtain adequate reimbursement would result in reduced
sales of our products.
We depend upon a single-source supplier for the hardware
used for our organ bioreactor control and acquisition system. The loss of this supplier, or future single-source suppliers we may
rely on, or their failure to provide us with an adequate supply of their products or services on a timely basis, could adversely
affect our business.
We currently have a single supplier for
certain components that we use for our organ bioreactor control and acquisition systems as well as materials used in scaffolds.
We may also rely on other single-source suppliers for critical components of our products in the future. If we were unable to acquire
hardware or other products or services from applicable single-source suppliers, we could experience a delay in developing and manufacturing
our products.
We use and generate hazardous materials in our business
and must comply with environmental laws and regulations, which can be expensive.
Our research, development and manufacturing involve the controlled
use of hazardous chemicals, and we may incur significant costs as a result of the need to comply with numerous laws and regulations.
For example, certain volatile organic laboratory chemicals we use, such as fluorinated hydrocarbons, must be disposed of as hazardous
waste. We are subject to laws and regulations enforced by the FDA, foreign health authorities and other regulatory requirements,
including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, and other current and potential federal, state, local and foreign laws and regulations governing
the use, manufacture, storage, handling and disposal of our products, materials used to develop and manufacture our products, and
resulting waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, our operations could be interrupted. Further, we could be held
liable for any damages that result and any such liability could exceed our resources.
Our products are novel and will require market acceptance.
Even if we receive regulatory approvals for the commercial use
of our products, their commercial success will depend upon acceptance by physicians, patients, third party payers such as health
insurance companies and other members of the medical community. Market acceptance of our products is also dependent upon our ability
to provide acceptable evidence and the perception of the positive characteristics of our products relative to existing or future
treatment methods, including their safety, efficacy and/or other positive advantages. If our products fail to gain market acceptance,
we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we
may develop and commercialize will depend on many factors, both within and outside of our control. If our products receive only
limited market acceptance, our business, financial condition and results of operations would be materially and adversely affected.
Our long-term growth depends on our ability to develop
products for other organs.
Our growth strategy includes expanding the use of our products
in treatments pertaining to organs other than the esophagus and airways, such as the lungs, GI tract, among others. These other
organs are more complex than the esophagus and airways. There is no assurance that we will be able to successfully apply our technologies
to these other more complex organs, which might limit our expected growth.
Our success will depend partly on our ability to operate
without infringing on, or misappropriating, the intellectual property or confidentiality rights of others.
We may be sued for infringing on the intellectual
property or confidentiality rights of others, including the patent rights, trademarks and trade names and confidential information
of third parties. We have received correspondence from legal counsel to Nanofiber Solutions, Inc., or NFS, claiming that in developing
our scaffold product and related intellectual property, we may have committed misappropriation, unauthorized use and disclosure
of confidential information, and possible infringement of intellectual property rights of NFS. We have received correspondence
from legal counsel to UCL Business PLC, or UCLB, challenging the validity of the assignment of certain patent applications that
have been assigned to us by Dr. Macchiarini. We have also received correspondence from an academic researcher implying that one
of our research bioreactor products may violate an issued patent. We do not believe that our current products violate this patent.
To the extent that any of such claims are valid, if we had utilized, or were to utilize, such patent applications or patents without
an agreement from the owner thereof, it could result in infringement of the intellectual property rights of the respective owner.
Intellectual property and related litigation is costly and the outcome is uncertain. If we do not prevail in any such intellectual
property or related litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity,
or obtain a license to or design around the intellectual property or confidential information in question. If we are unable to
obtain a required license on acceptable terms or are unable to design around any third-party patent, we may be unable to sell some
of our products and services, which could result in reduced revenue.
We may be involved in lawsuits to protect or enforce our
patents that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate
patent litigation against third parties. We may also become subject to interference proceedings conducted in the patent and trademark
offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual
property suits, interference proceedings and related legal and administrative proceedings would be costly, and may divert our technical
and management personnel from their normal responsibilities. We may not prevail in any of these suits should they occur. An adverse
determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly
and could put our patent applications at risk of being rejected and patents not being issued.
Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation, there is a risk that some of our confidential information could be
compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, there could
be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. Securities
analysts or investors may perceive these announcements to be negative, which could cause the market price of our stock to decline.
If we are unable to effectively protect our intellectual
property, third parties may use our technology, which would impair our ability to compete in our markets.
Our continued success will depend significantly on our ability
to obtain and maintain meaningful patent protection for certain of our products throughout the world. Patent law relating to the
scope of claims in the biotechnology, regenerative medicine, and medical device fields in which we operate is still evolving. The
degree of future protection for our proprietary rights is uncertain. We may rely on patents to protect a significant part of our
intellectual property and to enhance our competitive position. However, our presently pending or future patent applications may
not be accepted and patents might not be issued, and any patent previously issued to us may be challenged, invalidated, held unenforceable
or circumvented. Furthermore, the claims in patents which have been issued or which may be issued to us in the future may not be
sufficiently broad to prevent third parties from producing competing products similar to our products. We may also operate in countries
where we do not have patent rights and in those countries we would not have patent protection. We also rely on trademarks and trade
names in our business. The laws of various foreign countries in which we compete may not protect our intellectual property to the
same extent as do the laws of the U.S. If we fail to obtain adequate patent protection for our proprietary technology, our ability
to be commercially competitive could be materially impaired. It is also possible that our intellectual property may be stolen via
cyber-attacks or similar methods.
In addition to patent protection, we also rely on protection
of trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade-secrets and proprietary
information, we generally seek to enter into confidentiality agreements with our employees, consultants and strategic partners
upon the commencement of a relationship. However, we may not be able to obtain these agreements in all circumstances in part due
to local regulations. In the event of unauthorized use or disclosure of this information, these agreements, even if obtained, may
not provide meaningful protection for our trade-secrets or other confidential information. In addition, adequate remedies may not
exist in the event of unauthorized use or disclosure of this information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a material adverse effect on our operating results, financial
condition and future growth prospects.
Our competitors and potential competitors may have greater
resources than we have and may develop products and technologies that are more effective or commercially attractive than our products
and technologies or may develop competing relationships with our key collaborators.
We expect to compete with multiple pharmaceutical,
biotechnology, medical device and scientific research product companies. Companies working in competing areas include, among others,
Aldagen, Asterias Biotherapeutics, Athersys, BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours
and Company, InVivo Therapeutics, Mesoblast, Miramatrix Medical, Nanofiber Solutions, Neuralstem, Organovo, Osiris Therapeutics,
Pluristem Therapeutics, Smiths Medical, Tissue Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation,
and W.L. Gore and Associates. In addition, there are many academic and clinical centers that are developing bioengineered or regenerative
organ technologies that may one day become competitors for us. Many of our competitors and potential competitors have substantially
greater financial, technological, research and development, marketing, and personnel resources than we do. We cannot, with any
accuracy, forecast when or if these companies are likely to bring bioengineered organ or regenerative medicine products to market
for indications that we are also pursuing. Many of these potential competitors may be further along in the process of product development
and also operate large, company-funded research and development programs.
We expect that other products will compete
with our current and future products based on efficacy, safety, cost, and intellectual property positions. While we believe that
these will be the primary competitive factors, other factors include obtaining marketing exclusivity under certain regulations,
availability of supply, manufacturing, marketing and sales expertise and capability, and reimbursement coverage. Our competitors
may develop or market products that are more effective or commercially attractive than our current or future products and may also
develop competing relationships with our key collaborators. In addition, we may face competition from new entrants into the field.
We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully
in the future. The effects of any such actions of our competitors may have a material adverse effect on our business, operating
results and financial condition.
If we do not successfully manage our growth, our business
goals may not be achieved.
To manage growth, we will be required to continue to improve
existing, and implement additional, operational and financial systems, procedures and controls, and hire, train and manage additional
employees. Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth
and we may not be able to hire, train, retain, motivate and manage required personnel. Competition for qualified personnel in the
biotechnology and regenerative medicine area is intense, and we operate in several geographic locations where labor markets are
particularly competitive, including Boston, Massachusetts, where demand for personnel with these skills is extremely high and is
likely to remain high. As a result, competition for qualified personnel is intense and the process of hiring suitably qualified
personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient
number of qualified employees or otherwise manage our growth effectively, our ability to conduct and expand our business could
be seriously reduced.
We are exposed to a variety of risks relating to our international
sales and operations, including fluctuations in exchange rates, local economic conditions and delays in collection of accounts
receivable.
We intend to generate significant revenues outside the U.S.
in multiple foreign currencies including Euros, British pounds, and in U.S. dollar-denominated transactions conducted with customers
who generate revenue in currencies other than the U.S. dollar. For those foreign customers who purchase our products in U.S. dollars,
currency fluctuations between the U.S. dollar and the currencies in which those customers do business may have a negative impact
on the demand for our products in foreign countries where the U.S. dollar has increased in value compared to the local currency.
Since we have vendors and customers outside the U.S. and we
may generate revenues and incur operating expenses in multiple foreign currencies, we will experience currency exchange risk with
respect to any foreign currency-denominated revenues and expenses. We cannot predict the consolidated effects of exchange rate
fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposure
and the potential volatility of currency exchange rates. Our international activities subject us to laws regarding sanctioned countries,
entities and persons, customs, import-export, laws regarding transactions in foreign countries, the U.S. Foreign Corrupt Practices
Act and local anti-bribery and other laws regarding interactions with healthcare professionals. Among other things, these laws
restrict, and in some cases prohibit, U.S. companies from directly or indirectly selling goods, technology or services to people
or entities in certain countries. In addition, these laws require that we exercise care in structuring our sales and marketing
practices in foreign countries.
Local economic conditions, legal, regulatory or political considerations,
disruptions from strikes, the effectiveness of our sales representatives and distributors, local competition and changes in local
medical practice could also affect our sales to foreign markets. Relationships with customers and effective terms of sale frequently
vary by country, often with longer-term receivables than are typical in the U.S.
Comprehensive tax reform legislation could adversely affect
our business and financial condition.
On December 22, 2017, the U.S. government enacted the TCJA,
which significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes
to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective
January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses and
elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017
(though any such tax losses may be carried forward indefinitely); and modifying or repealing many business deductions and credits,
including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare
diseases or conditions generally referred to as “orphan drugs”. The tax rate change resulted in (i) a reduction in
the gross amount of our deferred tax assets recorded as of December 31, 2017, without an impact on the net amount of our deferred
tax assets, which are recorded with a full valuation allowance. We continue to examine the impact this tax reform legislation may
have on our business. However, the effect of the TCJA on us and our affiliates, whether adverse or favorable, is uncertain and
may not become evident for some period of time. We urge investors to consult with their legal and tax advisers regarding the implications
of the TCJA on an investment in our common stock.
Changes in the European regulatory environment regarding
privacy and data protection regulations could have a material adverse impact on our results of operations.
The E.U. has recently adopted a comprehensive overhaul of its
data protection regime in the form of the General Data Protection Regulation (GDPR), which comes into effect in May 2018. GDPR
extends the scope of the existing E.U. data protection law to foreign companies processing personal data of E.U. residents. The
regulation imposes a strict data protection compliance regime with severe penalties of 4% of worldwide turnover or €20 million,
whichever is greater, and includes new rights such as the right of erasure of personal data. Although the GDPR will apply across
the E.U., as has been the case under the current data protection regime, E.U. Member States have some national derogations and
local data protection authorities (DPAs) will still have the ability to interpret the GDPR, which has the potential to create inconsistencies
on a country-by-country basis. Implementation of, and compliance with the GDPR could increase our cost of doing business and/or
force us to change our business practices in a manner adverse to our business. In addition, violations of the GDPR may result in
significant fines, penalties and damage to our brand and business which could, individually or in the aggregate, materially harm
our business and reputation.
Risks Related To Our Separation From
Harvard Bioscience
If the Separation and related distribution of all of the
shares of our common stock by Harvard Bioscience, together with certain related transactions, does not qualify as a transaction
that is generally tax-free for U.S. federal income tax purposes, Harvard Bioscience could be subject to significant tax liability
and, in certain circumstances, we could be required to indemnify Harvard Bioscience for material taxes pursuant to indemnification
obligations under the tax sharing agreement.
Harvard Bioscience has informed us that on June 28, 2013 it
received a Supplemental Ruling to the Private Letter Ruling dated March 22, 2013 from the IRS to the effect that, among other things,
the Separation and related distribution of all of the shares of our common stock by Harvard Bioscience, or the Distribution, will
qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Internal
Revenue Code continuing in effect. The private letter and supplemental rulings and the tax opinion that Harvard Bioscience received
from Burns & Levinson LLP, special counsel to Harvard Bioscience, rely on certain representations, assumptions and undertakings,
including those relating to the past and future conduct of our business, and neither the private letter and supplemental rulings
nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter
and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for
tax-free treatment. Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution
should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the
representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings
are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.
If the Distribution fails to qualify for tax-free treatment,
in general, Harvard Bioscience would be subject to tax as if it had sold our common stock in a taxable sale for its fair market
value, and Harvard Bioscience stockholders who receive shares of our common stock in the Distribution would be subject to tax as
if they had received a taxable Distribution equal to the fair market value of such shares.
Under the tax sharing agreement between Harvard Bioscience and
us, we would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the extent
that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (ii)
other actions or failures to act by us, or (iii) any of our representations or undertakings being incorrect or violated. Our indemnification
obligations to Harvard Bioscience and its subsidiaries, officers and directors are not limited by any maximum amount. If we are
required to indemnify Harvard Bioscience or such other persons under the circumstances set forth in the tax sharing agreement,
we may be subject to substantial liabilities.
We may have received better terms from unaffiliated third
parties than the terms we received in our agreements with Harvard Bioscience.
The agreements related to the Separation, including the separation
and distribution agreement, tax sharing agreement, transition services agreement and the other agreements, were negotiated in the
context of the Separation while we were still part of Harvard Bioscience and, accordingly, may not reflect terms that would have
resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the
context of the Separation related to, among other things, allocation of assets, liabilities, rights, indemnifications and other
obligations among Harvard Bioscience and us. We may have received better terms from third parties because third parties may have
competed with each other to win our business. One of the members of our Board of Directors is also a member of the Harvard Bioscience
Board of Directors.
The ownership by one of our executive officers and one
of our directors of shares of common stock, options, or other equity awards of Harvard Bioscience, as well as the continued role
of our director with Harvard Bioscience may create, or may create the appearance of, conflicts of interest.
The ownership by one
of our executive officers and one of our directors of shares of common stock, options, or other equity awards of Harvard Bioscience
may create, or may create the appearance of, conflicts of interest. Because of their current or former positions with Harvard
Bioscience, one of our executive officers, and one of our directors, own shares of Harvard Bioscience common stock, options to
purchase shares of Harvard Bioscience common stock or other equity awards. The individual holdings of common stock, options to
purchase common stock of Harvard Bioscience or our company or other equity awards, may be significant for some of these persons
compared to such persons’ total assets. Ownership by our directors and officers of common stock or options to purchase common
stock of Harvard Bioscience, or any other equity awards, creates, or, may create the appearance of, conflicts of interest when
these directors and officers are faced with decisions that could have different implications for Harvard Bioscience than the decisions
have for us.
Third parties may seek to hold us responsible for liabilities
of Harvard Bioscience that we did not assume in our agreements.
In connection with the Separation, Harvard Bioscience has generally
agreed to retain all liabilities that did not historically arise from our business. Third parties may seek to hold us responsible
for Harvard Bioscience’s retained liabilities. Under our agreements with Harvard Bioscience, Harvard Bioscience has agreed
to indemnify us for claims and losses relating to these retained liabilities. However, if those liabilities are significant and
we are ultimately liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Harvard
Bioscience.
Any disputes that arise between us and Harvard Bioscience
with respect to our past and ongoing relationships could harm our business operations.
Disputes may arise between Harvard Bioscience and us in a number
of areas relating to our past and ongoing relationships, including:
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intellectual property, technology and business matters,
including failure to make required technology transfers and failure to comply with non-compete provisions applicable to Harvard
Bioscience and us;
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labor, tax, employee benefit, indemnification and other
matters arising from the Separation;
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distribution and supply obligations;
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employee retention and recruiting;
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business combinations involving us;
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sales or distributions by Harvard Bioscience of all or
any portion of its ownership interest in us; and
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business opportunities that may be attractive to both Harvard
Bioscience and us.
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We may not be able to resolve any potential conflicts, and even
if we do, the resolution may be less favorable than if we were dealing with a different party.
Risks Relating To Our Common Stock
Our principal stockholders hold a majority of voting power
and will be able to exert significant control over us.
The
stockholders who purchased shares of our common stock pursuant to a Securities Purchase Agreement dated December 27, 2017 collectively
hold shares of common stock and Series D Convertible Preferred Stock that represent approximately 47% of all outstanding voting
power, and as such may significantly influence the results of matters voted on by the Company’s shareholders. The interests
of these stockholders may conflict with your interests. These stockholders have the right to nominate a majority of our Board of
Directors and, therefore, effectively could control many other major decisions regarding our operations.
This significant
concentration of share ownership may adversely affect the trading price for our
common
stock
because investors may perceive disadvantages in owning stock in companies with controlling stockholders.
Substantial sales of common stock have and may continue
to occur, or may be anticipated, which have and could continue to cause our stock price to decline.
We expect that we will seek to raise additional
capital from time to time in the future, which may involve the issuance of additional shares of common stock, or securities convertible
into common stock. Since our February 2015 public offering, the holders of the shares of Series B Convertible Preferred Stock issued
in that offering have converted all such shares and have sold substantially all of the common stock they received upon such conversion.
We believe that the effect of these conversions and sales contributed, at that time, to a decline in the price of our common stock.
On February 10, 2017, we completed a public offering of 1,000,000 shares of common stock and the issuance of warrants to purchase
1,000,000 shares of common stock. Additionally, we issued to the placement agent warrants to purchase 50,000 shares of common stock
to the placement agent for the offering. The purchasers of the shares of common stock and warrants to purchase shares of common
stock from that offering may sell significant quantities of our common stock in the market, which may cause a decline in the price
of our common stock. Further, we cannot predict the effect, if any, that any additional market sales of common stock, or anticipation
of such sales, or the availability of those shares of common stock for sale will have on the market price of our common stock.
Any future sales of significant amounts of our common stock, or the perception in the market that this will occur, may result in
a decline in the price of our common stock.
A trading market that will provide you with adequate liquidity
may not develop for our common stock.
The current public market for our common stock has limited trading
volume and liquidity. We cannot predict the extent to which investor interest in our company will lead to the development of a
more active trading market in our common stock, or how liquid that market might be.
Our revenues, operating results and cash flows may fluctuate
in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.
Variations in our quarterly and year-end operating results are
difficult to predict and may fluctuate significantly from period to period. If our revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the
other factors discussed under these “Risk Factors,” specific factors that may cause fluctuations in our operating results
include:
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demand and pricing for our products;
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government or private healthcare reimbursement policies;
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adverse events or publicity related to our products, our
research or investigations, or our collaborators or other partners;
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physician and patient acceptance of any of our current
or future products;
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manufacturing stoppages or delays;
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introduction of competing products or technologies;
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our operating expenses which fluctuate due to growth of
our business; and
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timing and size of any new product or technology acquisitions
we may complete.
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The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending
upon many factors, some of which may be beyond our control, including:
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the success and costs of preclinical and clinical testing
and obtaining regulatory approvals or clearances for our products;
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the success or failure of surgeries and procedures involving
the use our products;
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a shift in our investor base;
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our quarterly or annual results of operations, or those
of other companies in our industry;
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actual or anticipated fluctuations in our operating results
due to factors related to our business;
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changes in accounting standards, policies, guidance, interpretations
or principles;
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announcements by us or our competitors of significant acquisitions,
dispositions or intellectual property developments or issuances;
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the failure of securities analysts to cover our common
stock;
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changes in earnings estimates by securities analysts or
our ability to meet those estimates;
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the operating and stock price performance of other comparable
companies; our issuance of equity, debt or other financing instruments;
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overall market fluctuations; and
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general macroeconomic conditions.
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Stock markets in general have experienced volatility that has
often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect
the trading price of our common stock.
Your percentage ownership will be diluted in the future.
Your percentage ownership will be diluted in the future because
of equity awards that we expect will be granted to our directors, officers and employees, as well as shares of common stock, or
securities convertible into common stock, we issue in connection with future capital raising or strategic transactions. Our 2013
Equity Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock
options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants.
In addition, your percentage ownership will be diluted by our issuance of common stock following the exercise of options, or vesting
of restricted stock units, we issued pertaining to the adjustment and conversion of outstanding Harvard Bioscience equity awards
as a result of the Separation. The issuance of any shares of our stock would dilute the proportionate ownership and voting power
of existing security holders.
Provisions of Delaware law, of our amended and restated
charter and amended and restated bylaws may make a takeover more difficult, which could cause our stock price to decline.
Provisions in our amended and restated certificate of incorporation
and amended and restated bylaws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue
a tender offer, change in control or takeover attempt, which is opposed by management and the Board of Directors. Public stockholders
who might desire to participate in such a transaction may not have an opportunity to do so. We have a staggered Board of Directors
that makes it difficult for stockholders to change the composition of the Board of Directors in any one year. Any removal of directors
will require a super-majority vote of the holders of at least 75% of the outstanding shares entitled to be cast on the election
of directors which may discourage a third party from making a tender offer or otherwise attempting to obtain control of us. These
anti-takeover provisions could substantially impede the ability of public stockholders to change our management and Board of Directors.
Such provisions may also limit the price that investors might be willing to pay for shares of our common stock in the future.
Any issuance of preferred stock in the future may dilute
the rights of our common stockholders.
Our Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, privileges and other terms of these shares. Our Board of Directors is empowered
to exercise this authority without any further approval of stockholders. The rights of the holders of common stock may be adversely
affected by the rights of future holders of preferred stock.
We have in the past issued, and we may at any time in the future
issue, additional shares of authorized preferred stock. For example, in our December 2017 private placement transaction, we authorized
12,000 shares of Series D Convertible Preferred Stock, of which we issued 3,108 shares.
We do not intend to pay cash dividends on our common stock.
Currently, we do not anticipate paying any cash dividends to
holders of our common stock. As a result, capital appreciation, if any, of our common stock will be a stockholder’s sole
source of gain.
The JOBS Act allows us to postpone the date by which we
must comply with certain laws and regulations and to reduce the amount of information provided in reports filed with the SEC. We
cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less
attractive to investors.
We are and we will remain an “emerging growth company”
until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion
(subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of our
first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which we have, during
the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a
“large accelerated filer” under the Securities and Exchange Act of 1934, as amended, or the Exchange Act. For so long
as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely
on some or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from
various reporting requirements, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate
us to a level acceptable by them and may result in less investor confidence.
Our common stock has been delisted on The NASDAQ Capital
Market, which may negatively impact the trading price of our common stock and the levels of liquidity available to our stockholders.
Our common stock was suspended from trading on The NASDAQ Capital
Market, prior to the opening of the market on October 6, 2017 and began quotation on the OTCQB Venture Market on that date, retaining
the symbol “BSTG”. On December 7, 2017, NASDAQ filed a Form 25-NSE with the SEC to complete the delisting process.
The trading of our common stock on the OTCQB Venture Market rather than The NASDAQ Capital Market may negatively impact the trading
price of our common stock and the levels of liquidity available to our stockholders.
Upon such delisting, our common stock became subject to the
regulations of the SEC relating to the market for penny stocks. A penny stock is any equity security not traded on a national securities
exchange that has a market price of less than $5.00 per share. The regulations applicable to penny stocks may severely affect the
market liquidity for our common stock and could limit the ability of shareholders to sell securities in the secondary market. Accordingly,
investors in our common stock may find it more difficult to dispose of or obtain accurate quotations as to the market value of
our common stock, and there can be no assurance that our common stock will continue to be eligible for trading or quotation on
the OTCQB Venture Market or any other alternative exchanges or markets.
The delisting of our common stock from The NASDAQ Capital Market
may adversely affect our ability to raise additional financing through public or private sales of equity securities, may significantly
affect the ability of investors to trade our securities, and may negatively affect the value and liquidity of our common stock.
Such delisting may also have other negative results, including the potential loss of confidence by employees, the loss of institutional
investor interest and fewer business development opportunities. Furthermore, because of the limited market and low volume of trading
in our common stock that could occur, the share price of our common stock could more likely be affected by broad market fluctuations,
general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and
announcements made by us, our competitors, parties with whom we have business relationships or third parties.