Item
1. Business.
Overview
Cocrystal
Pharma, Inc. (the “Company” or “Cocrystal”) is a biotechnology company seeking to discover and develop
novel antiviral therapeutics as treatments for serious and/or chronic viral diseases. We employ unique structure-based technologies
and Nobel Prize winning expertise to create first- and best-in-class antiviral drugs. These technologies are designed to efficiently
deliver small molecule therapeutics that are safe, effective and convenient to administer. We have identified promising preclinical
and early clinical stage antiviral compounds for unmet medical needs including influenza, Hepatitis C virus (“HCV”),
and norovirus infections.
The
Company operates in one segment. Management uses cash flows as the primary measure to manage its business and does not segment
its business for internal reporting or decision-making.
Cocrystal
Technology
We
are developing antiviral therapeutics that inhibit the essential replication function of various viruses. One of our goals is
to decrease the duration of HCV therapy by advancing drug candidates targeting the HCV RNA-dependent RNA polymerase enzyme. Additional
goals include treating human and avian (bird) influenza virus and norovirus infections by discovering and developing drug candidates
targeting the viral replication complex. To discover and design these inhibitors, we use a proprietary platform comprising computation,
medicinal chemistry, X-ray crystallography, and our extensive know-how. We determine the structures of cocrystals containing the
inhibitors bound to the enzyme or protein to guide our design. We also use advanced computational methods to screen and design
product candidates using proprietary cocrystal structural information. In designing the candidates, we seek to anticipate and
avert potential viral mutations leading to resistance. By designing and selecting drug candidates that interrupt the viral replication
process and also have specific binding characteristics, we seek to develop drugs that are not only effective against both the
virus and possible mutants of the virus, but which also have reduced off-target interactions that cause undesirable clinical side
effects. This approach requires an extensive knowledge of viruses and drug targets to carry out. In addition, knowledge and experience
in the fields of structural biology, and enzymology are required. We developed our proprietary structure-based drug design under
the guidance of Dr. Roger Kornberg, our Chief Scientist and recipient of the Nobel Prize in Chemistry in 2006. Our drug discovery
process focuses on those parts of the enzymes to which drugs bind and on drug-enzyme interactions at the atomic level. Additionally,
we have developed proprietary targeted in-house chemical libraries of non-nucleoside inhibitors, metal-binding inhibitors, and
drug-like fragments. Our drug discovery process is different from traditional, empirical, medicinal chemistry approaches that
often require iterative high-throughput compound screening and lengthy hit-to-lead processes. We continue developing preclinical
and clinical drug candidates using our proprietary drug discovery technology.
The
Company’s proprietary technology integrates several powerful and specialized techniques:
(1)
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Selection
of viral drug targets amenable to broad-spectrum antiviral drug development and essential for viral genome replication;
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(2)
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Atomic
resolution 3-D structure determination of drug binding pockets;
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(3)
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In-depth
computational analysis of conservation of drug-binding pockets and critical molecular interactions between antiviral inhibitors
and amino acid residues of the target molecule’s drug-binding pocket;
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(4)
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Cocrystal
structure determinations to inform hit identification, hit-to-lead, and lead optimization processes;
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(5)
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Molecular
modeling and computer-guided lead discovery to support rational chemical modifications based on structure-activity relationships,
or SAR, of candidate inhibitor compounds;
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(6)
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Knowledge
of enzymatic mechanisms to guide the design of drugs with exceptional affinity, specificity, and broad-spectrum activity;
and
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(7)
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Platforms
for rapid identification of antiviral enzyme inhibitors showing broad-spectrum antiviral capability.
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We
have applied these techniques to develop antiviral inhibitors of three important viruses: HCV, influenza, and norovirus.
Market-Driven
Product Profiles
In
all of our programs our goal is to develop best-in-class broad-spectrum antiviral drugs with high-barrier-to-drug resistance.
An ideal product for an antiviral therapy would have at least the following characteristics:
(1)
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Fast
onset of action and/or shortened therapeutic time;
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(2)
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Good
safety and tolerability profile;
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(3)
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Effective
against all viral subtypes that cause disease;
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(4)
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High
barrier to viral resistance; and
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(5)
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Ease
of administration, for example, a pill.
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Even
at the discovery stage of drug development, we select compounds with these factors in mind. Furthermore, our technology is capable
of delivering therapies that satisfy all of these key factors, as detailed below.
In
order to improve patient care and penetrate the HCV marketplace, drugs are needed with faster onset of viral load reduction resulting
in shorter treatment time. Current and known future influenza treatments shorten symptoms by only about 24 hours.
Norovirus
spreads readily among the affected and is in need of a fast-acting therapeutic intervention. During the discovery and development
phases we focus on this important clinical variable.
Safety
and tolerability
: All drugs have side effects, also referred to as adverse effects. These usually result from a drug’s
ability to bind to human molecules (usually proteins). When this interaction is intentional (i.e., part of the drug’s mechanism
of action), the adverse effects are classified as on-target effects. When this interaction is unintentional (i.e., resulting from
the drug’s interaction with an unintended human molecule), the effects are called off-target effects. Our inhibitors target
viral replication enzymes, which are generally unique to viruses. Because the targets are viral, not human, minimal adverse effects
are possible. During the discovery phase, we evaluate candidate compounds for potential cross-reactivity with human replication
enzymes and attempt to eliminate those compounds that are cross-reactive with humans.
Broadly
effective against major strains responsible for a viral disease
: For any given viral disease, there are different strains
of viruses that cause the disease. For example, there are six major strains of the virus known to cause HCV. These strains are
termed “genotypes.” Each HCV genotype is common in some parts of the world and rare in others. Also, there are three
types of influenza viruses, A, B, and C. Influenza A and B viruses are significant human respiratory pathogens that cause seasonal
flu. Influenza A viruses can also cause an influenza pandemic. Influenza C is a subtype of the influenza virus that tends to cause
only mild illness, and is not responsible for seasonal or pandemic infections. Our goal is to design and develop drug candidates
that will be effective on the broadest possible range of viruses causing the disease.
Many
antiviral drugs available today are effective only against certain strains of viruses and less effective or not effective at all
against other strains. To address this problem, we are developing drug candidates that specifically target viral proteins involved
in viral replication. Despite the various strains of virus that may exist, these replication enzymes are essentially identical
(highly conserved) among all strains of a given virus. By targeting these conserved replication enzymes, our antiviral compounds
are designed and tested to be effective against major virus strains. Replication enzymes are generally conserved not only among
subtypes of a given virus but also among many different viruses, creating an opportunity for the development of broad-spectrum
antiviral drugs.
High
barrier to drug resistance
: Drug resistance is a major obstacle to developing effective antiviral therapies. Viruses can reproduce
rapidly and in enormous quantities in infected human cells. During viral replication, random changes in the viral genome, called
mutations, spontaneously develop. If such a mutation occurs in a region of the viral genome that is targeted by a given antiviral
therapy, that therapy may no longer be effective against the mutated virus. These mutated or “resistant” viruses can
freely infect and multiply even in individuals who have received drug treatment. In some cases, resistant virus strains may even
predominate. For example, in the 2009 swine influenza pandemic, the predominant strain was resistant to the best available therapies.
The
Company’s focus on viral replication proteins can overcome the obstacle of viral resistance. We identify and target critical
components of viral replication proteins that are essential for function, therefore, sensitive to change. A mutation in these
critical components is likely to inactivate the replication protein and, in turn, render the virus incapable of replicating. Because
such mutations cannot propagate, the virus cannot effectively develop resistance to the enzyme inhibitors we employ. We test the
effectiveness of our compounds against potential viral mutations and select compounds with the highest barrier to resistance.
Ease
of administration:
We select compounds for development that can be administered orally, preferably once daily in pill-form.
Research
and Development Update
During
the year ended December 31, 2018 and to date in 2019, the Company focused its research and development efforts primarily in three
areas:
Hepatitis
C
CC-31244,
our HCV Non-Nucleoside Polymerase Inhibitor (“NNI”), is a potential best-in-class pan-genotypic inhibitor of NS5B
polymerase for the treatment of HCV infection. It has the potential to be an important component in an all-oral ultra-short HCV
combination therapy. The Company filed an Investigational New Drug (“IND”) application with the U.S. Food and Drug
Administration (“FDA”) on February 28, 2018 and received notice from the FDA on March 29, 2018 that its IND was now
open and the Company was cleared to initiate its Phase 2a clinical study evaluating CC-31244 for the treatment of HCV infected
individuals.
In
June 2018, the Company began enrollment in and initiation of patient dosing in its Phase 2a clinical study evaluating CC-31244
for the treatment of HCV infected individuals and completed the enrollment in September 2018. The Phase 2a open-label study was
designed to evaluate the safety, tolerability and preliminary efficacy of CC-31244 in combination with Epclusa, an approved HCV
drug. Patients are treated with CC-31244 and Epclusa for two weeks and then Epclusa alone for an additional four weeks.
On
January 22, 2019 the Company announced safety and preliminary efficacy data for the Phase 2a study. All subjects had completed
the six-week treatment regimen. The treatment was well tolerated with no study discontinuations due to adverse events. Eight of
12 subjects achieved the primary efficacy endpoint of sustained virologic response at 12 weeks after completion of treatment (SVR12).
SVR12 is defined as undetectable virus in blood 12 weeks after completion of treatment and is considered a virologic cure. The
trial is ongoing at the Institute of Human Virology, University of Maryland School of Medicine and final study results are expected
in the second quarter of 2019.
In
addition, in October 2018, the Company signed a Clinical Trial Agreement for an investigator-initiated study with the Humanity
& Health Research Centre in Hong Kong, China. Under the Clinical Trial Agreement, the Phase 2a study of CC-31244 for the treatment
of HCV, which is expected to commence during the first half of 2019, will be sponsored and conducted by the Humanity & Health
Research Centre in Hong Kong under the guidance of Dr. George Lau, MBBS (HKU), M.D. (HKU), FRCP (Edin, Lond), FHKAM (Med), FHKCP,
FAASLD, Chairman of Humanity and Health Medical Centre, Hong Kong. The Company has agreed to provide CC-31244 to be used in the
Phase 2a study.
In
December 2018, the Company voluntarily terminated a license agreement with Emory University covering the patents and patent applications
for HCV inhibitors, which are not essential to our HCV program. See “Item I - Business – Collaborations –
Emory University Collaboration” for further information.
The
Company is in partnership discussions for further clinical development of CC-31244.
Influenza
We
have several preclinical candidates under development for the treatment of influenza infection. CC-42344, a novel PB2 inhibitor,
has been selected as a preclinical lead. This candidate binds to a highly conserved PB2 site of influenza polymerase complex (PB1:
PB2: PA) and exhibits a novel mechanism of action. CC-42344 showed excellent antiviral activity against influenza A strains, including
avian pandemic strains and Tamiflu resistant strains, and has favorable pharmacokinetic profiles. We are currently conducting
additional preclinical IND enabling studies and plan to initiate a Phase 1 study during 2020.
In
addition, novel inhibitors effective against both strains A and B have been identified and are in the preclinical stage. Several
of these have potencies approaching single digit nanomolar. On January 2, 2019, the Company entered into an Exclusive License
and Research Collaboration Agreement (the “Collaboration Agreement”) with Merck Sharp & Dohme Corp. (“Merck”)
to discover and develop certain proprietary influenza A/B antiviral agents. See “Item 1 – Business – Collaborations
– Merck Collaboration” for more information.
Norovirus
Infections
We
continue to identify and develop non-nucleoside polymerase inhibitors using the Company’s proprietary structure-based drug
design technology platform.
Therapeutic
Targets
Hepatitis
C: A large competitive market with opportunity for shorter treatment regimens
.
HCV
is a highly competitive and changing market. Currently, the standard treatment varies with the genotype of the HCV infection.
Prior to late 2013, treatment included peginterferon alpha and ribavirin, along with a protease inhibitor (either telaprevir,
boceprevir, or simeprevir). In late 2013, sofosbuvir, a drug belonging to a new class of drugs called “nucleoside analogs”
or “Nucs,” was approved to treat HCV. In patients infected with HCV genotype 1 (the most common HCV genotype in the
US), sofosbuvir was administered in combination with peginterferon alpha and ribavirin. In patients with HCV genotypes 2 and 3,
however, sofosbuvir could be effectively administered in combination with ribavirin, without the need for peginterferon alpha.
Since 2014, several new combinations of direct-acting antiviral agents (“DAAs”) have been approved for the treatment
of HCV infection. These include Harvoni (sofosbuvir/ledipasvir) 12 weeks of treatment, Viekira Pak (ombitasvir/paritaprevir/ritonavir,
dasabuvir) 12 weeks of treatment, Epclusa (sofosbuvir/velpatasvir) 12 weeks of treatment, Zepatier (elbasvir/grazoprevir) 12 weeks
of treatment and Mavyret (glecaprevir/pibrentasvir) 8 weeks of treatment. We believe the next improvements in HCV treatment will
be ultra-short treatments of four to six weeks, the goal of our program.
We
anticipate a significant global HCV market opportunity that will persist through at least 2036, given the large prevalence of
HCV infection worldwide. The 2017 World Health Organization Global Hepatitis Report estimates that 71 million people worldwide
have chronic HCV infections.
We
are targeting the NS5B polymerase with an NNI, which could be developed as part of an all-oral, pan-genotypic combination regimen.
Our focus is on developing what is now called ultrashort treatment regimens from 4 to 6 weeks in length. Such a combination treatment
CC-31244 with different classes of approved DAAs has the potential to change the paradigm of treatment for HCV with a shorter
duration of treatment. Combination strategies with approved drugs could allow us to expand CC-31244 into the HCV antiviral therapeutic
area globally and could lead to a high and fast cure rate, to improved compliance, and to reduced treatment duration. To our knowledge
no competing company has yet developed a short HCV treatment of less than 8 weeks with a high (>95%) sustained virologic response
(SVR) at week 12.
CC-31244,
an HCV NNI, is a potential best in class pan-genotypic inhibitor of NS5B polymerase for the treatment of HCV. The Company completed
a Phase 1a/b study in Canada in September 2016, with favorable safety results in a randomized, double-blinded, Phase 1a/b study
in healthy volunteers and HCV-infected subjects. The Company is presently conducting a Phase 2a study in HCV genotype 1 subjects
in the United States. Cocrystal presented the interim results from the Phase1a/b study at the APASL in February 2017. HCV-infected
subjects treated with CC-31244 had a rapid and marked decline in HCV RNA levels, and slow viral rebound after treatment. Results
of this study suggest that CC-31244 could be an important component in a shortened duration all-oral HCV combination therapy.
Patient enrollment has been completed in the Phase 2b. See “Item 1 – Business – Research and Development Update
– Hepatitis C” for more information.
The
Company is progressing clinically while seeking a partner for further clinical development of CC-31244.
Influenza:
A worldwide public health problem, including the potential for pandemic disease
.
Influenza
is a severe respiratory illness, caused primarily by influenza A or B virus. The Centers for Disease Control and Prevention (the
“CDC”) estimates that influenza was linked to approximately 79,000 deaths and 960,000 hospitalizations in the United
States during the 2017-2018 flu season. According to the report published by BCC Research in May 2018, the worldwide market for
antiviral drugs to treat influenza was valued at approximately $5.6 billion in 2017 and is expected to grow to $6.5 billion by
2022.
Currently,
approved antiviral treatments for influenza are effective, but burdened with significant viral resistance. Strains of influenza
virus that are resistant to the approved treatments osteltamivir phosphate (Tamiflu(R)) and zanamavir (Relenza(R)) have appeared,
and in some cases predominate. For example, the predominant strain of the 2009 swine influenza pandemic was resistant to Tamiflu.
These drugs target viral neuraminidase enzymes, which are not highly conserved between viral strains. In fact, different influenza
virus strains such as H1N1 and H5N1 are named according to their respective differences in hemagglutinin (H) and neuraminidase
(N).
In
addition, the Company has several preclinical candidates under development for the treatment of influenza infection. CC-42344,
a novel PB2 inhibitor, has been selected as a preclinical lead. This candidate binds to a highly conserved PB2 site of the influenza
polymerase complex (PB1: PB2: PA), and exhibits a novel mechanism of action. CC-42344 showed excellent antiviral activity against
influenza A strains, including avian pandemic strains and Tamiflu-resistant strains, and has favorable pharmacokinetic profile.
Antiviral product candidates that are competitors for the Company’s influenza programs are, VX-787, being developed by Janssen,
and S-033188, being developed by Shionogi/Roche. S-033188 was approved as Xofluza in Japan on February 23, 2018, and in US as
Baloxavir Marboxil (trade name Xofluza®) on October 24, 2018. See “Item 1 – Business – Research and Development
Update – Influenza” for more information.
Norovirus:
A worldwide public health problem responsible for close to 90% of epidemic, non-bacterial outbreaks of gastroenteritis around
the world
.
Norovirus
is a very common and highly contagious virus that causes symptoms of acute gastroenteritis including nausea, vomiting, stomach
pain and diarrhea. Other symptoms include fatigue, fever and dehydration. Noroviruses are a major cause of gastrointestinal illness
in closed and crowded environments, having become notorious for their common occurrence in hospitals, nursing homes, child care
facilities, and cruise ships. In the United States alone, noroviruses are the most common cause of acute gastroenteritis, and
are estimated to cause 20 million illnesses each year and contribute to 70,000 hospitalizations and 800 deaths. Noroviruses are
responsible for up to 1.1 million hospitalizations and 218,000 deaths annually in children in the developing world. In immunosuppressed
patients, chronic norovirus infection can lead to a debilitating illness with extended periods of nausea, vomiting and diarrhea.
There is currently no effective treatment or effective vaccine for norovirus, and the ability to curtail outbreaks is limited.
A few companies, including Chimerix, are developing antiviral treatments for this disease and three candidate vaccines are currently
in early stages of clinical testing by GlaxoSmithKline, Ligocyte and Takeda Pharmaceuticals.
By
targeting viral replication enzymes, we believe it is possible to develop an effective treatment for all genogroups of norovirus.
Also, because of the significant unmet medical need and the possibility of chronic norovirus infection in immunocompromised individuals,
new antiviral therapeutic approaches may warrant an accelerated path to market. The Company is developing inhibitors of the RNA-dependent
RNA polymerase of norovirus. Similar to the HCV polymerases, this enzyme is essential to viral replication and is highly
conserved between all noroviral genogroups. Therefore, an inhibitor of this enzyme might be an effective treatment or short-term
prophylactic agent, when administered during a cruise or nursing home stay, for example. We have developed X-ray quality norovirus
polymerase crystals, and have identified promising NNIs. We are implementing the platform and approaches that have proven successful
in our other antiviral programs.
Intellectual
Property
Our
success depends, in part, upon our ability to protect our core technology. To establish and protect our proprietary rights, we
rely on a combination of patents, patent applications, trademarks, copyrights, trade secrets and know-how, license agreements,
confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements,
and other contractual rights.
Our
patent portfolio consisted of patents and pending applications in the areas primarily related to the treatment of HCV, Influenza
A, and Influenza B.
In
our NS5B NNI program, our patent portfolio consists of three related families, including two granted U.S. patents and two pending
U.S. patent applications. Counterpart applications in one family are filed in various countries and regions around the world.
In
our influenza A program, our patent portfolio consists of two related families, including three pending U.S. provisional applications
and pending applications in Patent Cooperation Treaty countries and Taiwan. In our influenza A/B program
two pending U.S. provisional applications have been filed.
In
our NS3 program for HepC, we have one issued U.S. patent, an allowed European application, and three pending foreign applications
in Canada, China, and Japan.
Collaborations
Merck
Collaboration
On
January 2, 2019, we entered into an Exclusive License and Research Collaboration Agreement (the “Collaboration Agreement”)
with Merck to discover and develop certain proprietary influenza A/B antiviral agents.
Under
the terms of the Collaboration Agreement, Merck is funding research and development for the program at Cocrystal and Merck, including
clinical development at Merck, and Merck is responsible for worldwide commercialization of any products derived from the collaboration.
The Company received an upfront payment of $4,000,000 and is eligible to receive milestone payments related to designated development,
regulatory and sales milestones with the potential to earn up to $156,000,000, as well as royalties on product sales.
See
“Item 1A. Risk Factors - If our research collaboration with Merck is terminated or is otherwise unsuccessful, including
failure to reach milestones, we could lose the research program funding, and would not receive milestone payments or royalties,
which could materially and adversely affect our business, our ability to successfully develop and commercialize influenza A/B
product candidates and our future financial condition” for the discussion of termination provisions of the Collaboration
Agreement.
Emory
University Collaboration
On
December 6, 2018, we notified Emory University (“Emory”) of the termination of our License Agreement with Emory, dated
March 7, 2013 (the “License Agreement”). The License Agreement covered patents and patent applications for HCV inhibitors,
which we no longer consider essential to our HCV program. As part of our HCV program, we continue to focus our efforts on CC-31244,
our HCV NNI. See “Item 1 – Business ‒ Research and Development Update ‒ Hepatitis C.” The Company
had the right to terminate the License Agreement at its sole discretion upon 90 days’ prior written notice and upon payment
of all amounts due Emory under the License Agreement through the date of termination. As of the date of this Annual Report on
Form 10-K, the License Agreement has been terminated, no amounts were due under the License Agreement and none will be owed in
the future.
National
Institute of Health
Cocrystal
has two Public Health Biological Materials License Agreements with the National Institute of Health. The original license agreements
were dated August 31, 2010 and amended on November 6, 2013. The materials licensed are being used in Norovirus assays to screen
potential antiviral agents in our library.
Competition
The
biotechnology and pharmaceutical industries are subject to intense and rapidly changing competition as companies seek to develop
new technologies and proprietary products. We know of several companies that have marketed or are developing products for the
treatment of HCV or influenza, including Gilead Sciences, Inc. (“Gilead”), Merck & Co., Janssen Pharmaceuticals,
Inc., Bristol-Myers Squibb, Toyama Chemical Co., Shionogi/Roche and Abbvie, Inc. In particular, Gilead and Abbvie dominate the
market for HCV with an estimated combined market share greater than 85%. Their products are widely considered effective. Many
of the companies developing products for the other viral diseases that are of interest to us have substantially greater financial
resources, expertise and capabilities than we do.
Government
Regulation
Government
authorities extensively regulate the research, development, testing, manufacturing and commercialization of drug products. Any
product candidates we develop must be approved by the U.S. Food and Drug Administration (“FDA”) before they may be
legally marketed in the U.S., and by the appropriate foreign regulatory agencies before they may be legally marketed in other
countries. The clinical testing of product candidates to establish their safety and efficacy in humans is subject to substantial
statutory and regulatory requirements with which we must comply.
Employees
As
of April 1, 2019, we employed 10 full-time employees. Of these full-time employees, eight are engaged in research and development
activities. In addition, we have contracts with Clinical Research Organizations (“CROs”), Contract Manufacturing Organizations
(“CMOs”) and consultants to provide chemistry, toxicology, preclinical, clinical, regulatory work on our programs.
Corporate
History
The
Company was formerly incorporated in Nevada under the name Biozone Pharmaceuticals, Inc. (“Biozone”). On January 2,
2014, Biozone sold substantially all of its assets to MusclePharm Corporation, and, on the same day, merged with Cocrystal Discovery,
Inc. (“Discovery”) in a transaction accounted for as a reverse merger. Following the merger, the Company assumed Discovery’s
business plan and operations. On March 18, 2014, the Company reincorporated in Delaware under the name Cocrystal Pharma, Inc.
On
November 25, 2014, a subsidiary of the Company and affiliated entities completed a series of merger transactions. As a result,
a subsidiary of the Company merged with RFS Pharma, LLC, a Georgia limited liability company (RFS Pharma”).
Available
Information
Our
corporate website is www.cocrystalpharma.com. We make available on our website under “Investors – SEC Filings”
access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule
14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), free of charge.
Item
1A. Risk Factors.
You
should consider carefully the following risk factors, together with all of the other information included or incorporated in this
Annual Report. Each of these risk factors, either alone or taken together, could adversely affect our business, operating results
and financial condition, and adversely affect the value of an investment in our common stock. There may be additional risks that
we do not know of or that we believe are immaterial that could also impair our business and financial position.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether
to invest in the Company. If any of the events discussed in the risk factors below occur, our business, financial condition, results
of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common
stock could decline.
RISKS
RELATED TO OUR FINANCIAL CONDITION AND NEED FOR ADDITIONAL CAPITAL
We
have never generated revenue from product sales and expect that due to the regulatory constraints on a drug development company
with products in the pre-clinical and early clinical stages, we may never generate revenue from product sales and may continue
to incur significant losses for the foreseeable future.
We
are a pre-clinical and early stage clinical, biopharmaceutical discovery and development company. From inception until 2016, our
operations were limited to organizing and staffing the Company, acquiring and developing intellectual property rights, developing
our technology platform, undertaking basic research on viral replication enzyme targets and conducting preclinical studies for
our initial programs. We currently have only one product candidate in a Phase 2a clinical trial. Because of the need to complete
clinical trials, establish safety and efficacy and obtaining regulatory approval, which is an expensive and time-consuming process,
we do not anticipate generating revenue from product sales for at least five years and will continue to sustain considerable losses.
We may develop a partnership that could generate income sooner, but there is no guarantee that will be achievable.
To
date, we have devoted the majority of our financial resources to research and development. We have financed our operations primarily
through the sale of equity securities and entering into research collaborations. The results of our operations will depend, in
part, on the rate of future expenditures and our ability to obtain funding through equity or debt financings, strategic alliances
or grants. We anticipate our expenses will increase substantially if and as we continue our research and clinical and preclinical
development of our product candidates. We anticipate that if we continue to undertake clinical studies our expenses will increase
even further.
We
have lost $187 million from inception through December 31, 2018 and expect to continue losing money in the future. We may never
achieve income from operations or have positive cash flow from operations
.
As
an early stage drug development company, our focus is on developing product candidates, obtaining regulatory approvals and commercializing
pharmaceutical products. As a result, we have lost $187 million from inception through December 31, 2018, expect losses to continue,
and have never generated revenue from product sales. It is likely that we will need to raise money again in the future. We cannot
assure you that we will ever generate income from operations or have positive cash flow from operations.
Our
ability to continue as a going concern is in doubt.
We
anticipate that we will continue to lose money for the foreseeable future. Based on cash on hand as of March 29, 2019 of approximately
$8,700,000, the Company may not have the capital to finance its operations, including any unforeseen expenses such as higher than
anticipated legal costs and uninsured catastrophe, for the next 12 months. The Company has incurred net losses and negative operating
cash flows since inception. For the year ended December 31, 2018, the Company recorded a net loss of approximately $49,048,000
and used approximately $8,290,000 of cash in operating activities. The Company has not yet established an ongoing source of revenue
sufficient to cover its operating costs and allow it to continue as a going concern. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. If we are unable to continue as a going concern, our stockholders
will likely lose all of their investment in the Company.
Because
we have yet to generate any revenue from product sales on which to evaluate our potential for future success and to determine
if we will be able to execute our business plan, it is difficult to evaluate our future prospects and the risk of success or failure
of our business.
Our
ability to generate revenue from product sales and achieve profitability depends on our ability, alone or with partners, to successfully
complete the development of, obtain the regulatory approvals for and commercialize pharmaceutical product candidates. We have
no pharmaceutical product candidates that have generated any commercial revenue, do not expect to generate revenues from the commercial
sale of pharmaceutical products for many years, and might never generate revenues from the sale of pharmaceutical products. Our
ability to generate revenue and achieve profitability will depend on, among other things, the following:
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identifying
and validating new therapeutic strategies;
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entering
into collaborations with large pharmaceutical on biotechnology companies, similar to our recently announced Collaboration
Agreement with Merck;
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completing
our research and preclinical development of pharmaceutical product candidates;
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initiating
and completing clinical trials for pharmaceutical product candidates;
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seeking
and obtaining regulatory marketing approvals for pharmaceutical product candidates that successfully complete clinical trials;
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establishing
and maintaining supply and manufacturing relationships with third parties;
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launching
and commercializing pharmaceutical product candidates for which we obtain regulatory marketing approval, with a partner or,
if launched independently, successfully establishing a sales force, marketing and distribution infrastructure;
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maintaining,
protecting, enforcing, defending and expanding our intellectual property portfolio; and
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attracting,
hiring and retaining qualified personnel.
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Because
of the numerous risks and uncertainties associated with pharmaceutical product development, we cannot predict the timing or amount
of increased expenses and when we will be able to achieve or maintain profitability, if ever. Our expenses could increase beyond
expectations if we are required by regulatory agencies to perform unanticipated studies and trials.
Even
if one or more pharmaceutical product candidates we independently develop is approved for commercial sale, we anticipate incurring
significant costs associated with commercializing any approved pharmaceutical product candidate. Moreover, if we can generate
revenues from the sale of any approved pharmaceutical products, we may not become profitable and may need to obtain additional
funding to continue operations.
Because
early stage drug development requires major capital investment, as we continue to incur operating losses, we will need to raise
additional capital or form strategic partnerships to support our research and development activities in the future.
We
are still in the early stages of development of our product candidates and have no products approved for commercial sale. Developing
pharmaceutical products, including conducting preclinical studies and clinical trials, is capital-intensive. As a rule, research
and development expenses increase substantially as we advance our product candidates toward clinical programs. We currently have
one hepatitis C product candidate in an investigator-sponsored Phase 2a clinical trial and have secured funding of the research
and development of influenza A/B product candidates under our Collaboration Agreement with Merck. See “Item 1 – Business
– Collaborations – Merck Collaboration.” However, in order to conduct trials for our other product candidates,
we will need to raise additional capital to support our operations or form partnerships, in addition to our existing collaborative
alliances, which may give substantial rights to a partner. Such funding or partnerships may not be available to us on acceptable
terms, or at all. Moreover, any future financing may be very dilutive to our existing stockholders.
As
we move lead compounds through toxicology and other preclinical studies, also referred to as nonclinical studies, we have and
we will be required to file an Investigational New Drug application (“IND”) or its equivalent in foreign countries,
and as we conduct clinical development of product candidates, we may have adverse results that may cause us to consume additional
capital. Our partners may not elect to pursue the development and commercialization of our product candidates subject to our respective
agreements with them. These events may increase our development costs more than we expect. We may need to raise additional capital
or otherwise obtain funding through strategic alliances if we initiate clinical trials for new product candidates other than programs
currently partnered. We will require additional capital to obtain regulatory approval for, and to commercialize, product candidates.
In
securing additional financing, such additional fundraising efforts may divert our management’s attention from our day-to-day
activities, which may adversely affect our ability to develop and commercialize product candidates. We cannot guarantee that future
financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we cannot raise additional capital
when required or on acceptable terms, we may be required to:
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significantly
delay, scale back or discontinue the development or commercialization of any product candidates;
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seek
strategic alliances for research and development programs at an earlier stage than otherwise would be desirable or on terms
less favorable than might otherwise be available; or
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relinquish
or license on unfavorable terms, our rights to technologies or any product candidates we otherwise would seek to develop or
commercialize ourselves.
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If
we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing
development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects
or may render the Company unable to continue operations.
Because,
we are unable to rely on certain exemptions from registration under the federal securities laws, as the result of a “disqualifying
event” involving a director of the Company, it could materially and adversely affect our ability to obtain future financing.
On
January 10, 2019, Dr. Frost, one of our directors, was permanently enjoined from violating a certain anti-fraud provision of the
Securities Act of 1933, future violations of Section 13(d) of the Exchange Act and Rule 13d-1(a) thereunder, and participating
in penny stock offerings with certain exceptions. So long as Dr. Frost is a director, the Company will be unable to rely on certain
exemptions from registration including the exemptions under Regulation A and Rule 506 promulgated under the Securities Act absent
a waiver issued by the Securities and Exchange Commission (the “SEC”). We have not applied for
a waiver, and even if we do, the SEC may choose not to grant us a waiver. While there is a statutory exemption for private placements
under Section 4(a)(2) of the Securities Act, the absence of the Rule 506 safe harbor under Regulation D could adversely affect
our ability to raise necessary financing in the future on terms favorable to us, or at all.
SEC
regulations limit the amount of funds we may raise during any 12-month period pursuant to our shelf registration Statement on
Form S-3.
Under
General Instruction I.B.6 to Form S-3 (the “Baby Shelf Rule”), the amount of funds we can raise through primary public
offerings of securities in any 12-month period using our registration statement on Form S-3 is limited to one-third of the aggregate
market value of the voting and non-voting common equity held by non-affiliates of the Company. As of March 29, 2019, our
public float was approximately $45 million, based on 16,406,468 shares of outstanding common stock held by non-affiliates and
a price of $2.73 per share, which was the last reported sale price of our common stock on The Nasdaq Capital Market on
March 29, 2019. We therefore are limited by the Baby Shelf Rule as of the filing of this Annual Report on Form 10-K, until
such time as our public float exceeds $75 million. If we are required to file a new registration statement on another form, we
may incur additional costs and be subject to delays due to review by the SEC Staff. Further, if there is another government shutdown
affecting the SEC, any delays could adversely affect our ability to raise capital in a registered public offering.
RISKS
RELATED TO OUR RELIANCE ON THIRD PARTIES
We
will depend substantially on Merck for the successful research, development and commercialization of our influenza A/B product
candidates.
In
January 2019, we entered into the Collaboration Agreement with Merck to research, develop, and commercialize certain proprietary
influenza A/B antiviral agents. See “Item 1 – Business – Collaborations – Merck Collaboration” for
more information on the Collaboration Agreement. The success of this collaborative alliance will depend substantially on the efforts
and activities of Merck. Pursuant to the Collaboration Agreement, in case the joint research committee overseeing the research
program cannot reach an agreement, the ultimate decision-making authority is vested in Merck as to most matters. Furthermore,
Merck will be solely responsible for the development and commercialization of any products derived from the collaboration.
In
addition, during the term of the research program and for a period of 12 months following the expiration or termination of the
research program under the Collaboration Agreement, we have agreed to work exclusively with Merck on the research and development
of influenza A/B antiviral agents. During the term of the Collaboration Agreement, we will be unable to conduct, or enable third
parties to conduct, research, development and commercialization activities related to such agents. These restrictions may impair
our ability to pursue research, development and commercialization opportunities that we would otherwise deem to be beneficial
to our business.
If
our research collaboration with Merck is terminated or is otherwise unsuccessful, including failure to reach milestones, we could
lose the research program funding, and would not receive milestone payments or royalties, which could materially and adversely
affect our business, our ability to successfully develop and commercialize influenza A/B product candidates and our future financial
condition.
Pursuant
to the terms of the Collaboration Agreement, Merck agreed to, among other things, (i) fund the research and development collaboration,
including clinical development and commercialization; (ii) make certain milestone payments up to a total of $156 million, including
payments associated with the successful product development and attainment of certain U.S. and EU regulatory approvals for the
developed products and sales volume; and (iii) pay royalties on net sales of the products.
Merck
can terminate the Collaboration Agreement at any time prior to the first commercial sale of the first product developed under
the Collaboration Agreement, in its sole discretion, without cause. Furthermore, research collaborations, including the Collaboration
Agreement, may turn out to be unsuccessful and are subject to certain risks, including the following risks:
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disagreements
with Merck resulting in delays or termination of the research, development or commercialization
of product candidates, or litigation;
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change
the focus by Merck of its development and commercialization efforts;
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failure
by Merck to commit sufficient resources to the testing, marketing, distribution or development
of product candidates; and
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development
by Merck of alternative products either on its own or in collaboration with others, or
conflicts of interest or changes in business strategy or other business issues, which
could adversely affect its willingness or ability to fulfill their obligations to us.
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If
our collaboration with Merck is unsuccessful for these or other reasons, or is otherwise terminated for any reason, we may lose
the research program funding, and would not receive the milestone payments or royalties under the Collaboration Agreement.
Further,
pursuant to the Collaboration Agreement Merck will only be obligated to make many of the milestone payments if our influenza A/B
product receives required regulatory approvals, is commercialized and net sales exceed the thresholds set forth in the Collaboration
Agreement. Achieving the milestones may be difficult and time-consuming. If some or all of these goals are not achieved, we may
not receive some or all of the milestone payments under the Collaboration Agreement.
Any
of the foregoing could have a material adverse effect on our business, our ability to successfully develop and commercialize influenza
A/B product candidates and our future financial condition.
If
we form strategic alliances which are unsuccessful or are terminated, we may be unable to develop or commercialize certain product
candidates and we may be unable to generate revenues from our development programs.
In
addition to the Collaboration Agreement with Merck, we are likely to use third-party alliance partners for financial, scientific,
manufacturing, marketing and sales resources for the clinical development and commercialization of certain of our product candidates.
These strategic alliances will likely constrain our control over development and commercialization of our product candidates,
especially once a candidate has reached the stage of clinical development. Our ability to recognize revenues from successful strategic
alliances may be impaired by several factors including:
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a
partner may shift its priorities and resources away from our programs due to a change in business strategies, or a merger,
acquisition, sale or downsizing of its company or business unit;
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a
partner may cease development in therapeutic areas which are the subject of our strategic alliances;
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a
partner may change the success criteria for a program or product candidate delaying or ceasing development of such program
or candidate;
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a
significant delay in initiation of certain development activities by a partner could also delay payment of milestones tied
to such activities, impacting our ability to fund our own activities;
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a
partner could develop a product that competes, either directly or indirectly, with an alliance product;
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a
partner with commercialization obligations may not commit sufficient financial or human resources to the marketing, distribution
or sale of a product;
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a
partner with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to meet demand
requirements;
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a
partner may exercise its rights under the agreement to terminate a strategic alliance, including termination without cause;
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a
dispute may arise between us and a partner concerning the research, development or commercialization of a program or product
candidate resulting in a delay in milestones, royalty payments or termination of a program and possibly resulting in costly
litigation or arbitration which may divert management attention and resources; and
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a
partner may use our proprietary information or intellectual property to invite litigation from a third-party or fail to maintain
or prosecute intellectual property rights possibly jeopardizing our rights in such property.
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Termination
of a strategic alliance may require us to seek out and establish alternative strategic alliances with third-party partners. This
may not be possible, including due to restrictions under the terms of our existing collaborations, or we may not be able to do
so on terms acceptable to us. See “Item 1A – Risk Factors ‒ We will depend substantially on Merck for the successful
research, development and commercialization of our influenza A/B product candidates.” If we fail to establish alternative
strategic alliances with third-party partners on terms acceptable to us, or at all, we may be required to limit the size or scope
of one or more of our programs or decrease our expenditures and seek additional funding by other means. Such events would likely
have a material adverse effect on our results of operations and financial condition.
We
expect to rely on third parties to conduct some or all aspects of our compound formulation, research and preclinical testing,
and those third parties may not perform satisfactorily.
We
do not expect to independently conduct most and certainly not all aspects of our drug discovery activities, compound formulation
research or preclinical testing of product candidates. We rely and expect to continue to rely on third parties to conduct some
aspects of our preclinical testing and on third-party Clinical Research Organizations (“CROs”) to conduct clinical
trials.
If
these third parties terminate their engagements, we will need to enter into alternative arrangements which would delay our product
development activities. Our reliance on these third parties for research and development activities will reduce our control over
these activities but will not relieve us of our responsibilities. If in the future, we elect to develop and commercialize any
product candidates on our own, we will remain responsible for ensuring that each of our IND-enabling preclinical studies and clinical
trials are conducted under the respective study plans and trial protocols.
If
these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies under
regulatory requirements or our stated study plans and protocols, we will not be able to complete, or may experience delays in
completing, the necessary clinical trials and preclinical studies to enable us or our partners to select viable product candidates
for IND submissions and will not be able to, or may be delayed in our efforts to, successfully develop and commercialize such
product candidates.
Because
we intend to rely on third-party manufacturers to produce our preclinical and clinical supplies, and commercial supplies of any
approved product candidates, we will subject to a variety of risks.
Reliance
on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves,
including:
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the
inability to meet any product specifications and quality requirements consistently;
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a
delay or inability to procure or expand sufficient manufacturing capacity;
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manufacturing
and product quality issues related to scale-up of manufacturing;
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costs
and validation of new equipment and facilities required for scale-up;
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a
failure to comply with cGMP and similar foreign standards;
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the
inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
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termination
or nonrenewal of manufacturing agreements with third parties in a manner or that is costly or damaging to us;
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the
reliance on a few sources, and sometimes, single sources for raw materials, such that if we cannot secure a sufficient supply
of these product components, we cannot manufacture and sell product candidates in a timely fashion, in sufficient quantities
or under acceptable terms;
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the
lack of qualified backup suppliers for any raw materials currently purchased from a single source supplier;
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operations
of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including
the bankruptcy of the manufacturer or supplier;
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carrier
disruptions or increased costs beyond our control;
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misappropriation
of our proprietary technology for the purpose of manufacturing a “generic” version of our product or sale of our
product to organizations that distribute and sell counterfeit goods, including drugs; and
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failing
to deliver products under specified storage conditions and in a timely manner.
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These
events could lead to clinical study delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize
future products. Some of these events could be the basis for regulatory actions, including injunction, recall, seizure or total
or partial suspension of production.
Because
we expect to rely on limited sources of supply for the drug substance and drug product of product candidates, any disruption in
the chain of supply may cause a delay in developing and commercializing these product candidates.
We
intend to establish manufacturing relationships with a limited number of suppliers to manufacture raw materials, the drug substance,
and the drug product of any product candidate for which we are responsible for preclinical or clinical development. Each supplier
may require licenses to manufacture such components if such processes are not owned by the supplier or in the public domain. As
part of any marketing approval, a manufacturer and its processes must be qualified by the FDA or foreign regulatory authorities
prior to commercialization. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial
supply. An alternative vendor would need to be qualified through an NDA or marketing authorization supplement, which could cause
further delay. The FDA or other regulatory agencies outside of the United States may also require additional studies if a new
supplier is relied upon for commercial production.
These
factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product
candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our
suppliers fail to deliver the required commercial quantities of drug substance or drug product on a timely basis and at commercially
reasonable prices, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent
cost, our clinical trials may be delayed or we could lose potential revenue.
Manufacturing
issues may arise that could increase product and regulatory approval costs or delay commercialization.
As
third parties scale up manufacturing of product candidates and conduct required stability testing, product, packaging, equipment
and process-related issues may require refinement or resolution to proceed with any clinical trials and obtain regulatory approval
for commercial marketing. We or the manufacturers may identify significant impurities or stability problems, which could cause
increased scrutiny by regulatory agencies, delays in clinical programs and regulatory approval, significant increases in our operating
expenses, or failure to obtain or maintain approval for product candidates or any approved products.
We
rely and expect to continue to rely on third parties to conduct, supervise and monitor our clinical trials, and if those third
parties perform in an unsatisfactory manner, it may harm our business.
We
rely and expect to continue to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials.
While we have agreements governing the activities of such CROs and clinical trial sites, we or our partners will have limited
influence over their actual performance. Nevertheless, we or our partners will be responsible for ensuring that each of our clinical
trials is conducted in accordance with its protocol, and that all legal, regulatory and scientific standards are met. Our reliance
on the CROs does not relieve us of our regulatory responsibilities.
We,
our partners and our CROs must comply with current Good Clinical Practices (“cGCPs”), as defined by the FDA and the
International Conference on Harmonization, for conducting, recording and reporting the results of IND-enabling preclinical studies
and clinical trials, to ensure that data and reported results are credible and accurate and that the rights, integrity and confidentiality
of clinical trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal
investigators and clinical trial sites. If we or our CROs fail to comply with cGCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA or other regulators may require us to perform additional clinical trials before approving
any marketing applications. Our clinical trials will require a sufficiently large number of test subjects to evaluate the safety
and effectiveness of a product candidate. If our CROs fail to comply with these regulations or fail to recruit a sufficient number
of patients, fail to recruit properly qualified patients or fail to properly record or maintain patient data, we may be required
to repeat such clinical trials, which would delay the regulatory approval process.
Our
contracted CROs will not be our employees, and we cannot control whether they devote sufficient time and resources to our clinical
and nonclinical programs. These CROs may also have relationships with other commercial entities, including our competitors, for
whom they may also be conducting clinical trials, or other drug development activities that could harm our competitive position.
If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the
quality or accuracy of the clinical data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory
requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not obtain regulatory
approval for, or successfully commercialize our product candidates. Our financial results and the commercial prospects for such
products and any product candidates we develop would be harmed, our costs could increase, and our ability to generate revenues
could be delayed.
We
also expect to rely on other third parties to store and distribute drug products for any clinical trials we may conduct. Any performance
failure by our distributors could delay clinical development or marketing approval of our product candidates or commercialization
of our products, if approved, producing additional losses and depriving us of potential product revenue.
RISKS
RELATED TO THE DISCOVERY AND DEVELOPMENT OF PRODUCT CANDIDATES
Because
the approach we are taking to discover and develop drugs is novel, it may never lead to marketable products.
We
are concentrating our antiviral therapeutic product research and development efforts using our proprietary technology, and our
future success depends on the continued successful development of this technology and the products derived from it. We have no
drug products commercialized. The scientific discoveries that form the basis for our efforts to discover and develop drug product
candidates are relatively new and unproven. The scientific evidence to support the feasibility of developing product candidates
based on our approach is limited. If we do not successfully develop and commercialize drug product candidates based upon our technological
approach, we may not become profitable and the value of our stock may decline.
Further,
our focus on the Company’s technology for developing drugs, as opposed to relying entirely on more standard technologies
for drug development, increases the risks associated with the ownership of our stock. If we are unsuccessful in developing any
product candidates using the Company’s technology, we may be required to change the scope and direction of our product development
activities. We may not successfully identify and implement an alternative product development strategy and may as a result cease
operations.
If
we do not succeed in our efforts to identify or discover potential product candidates, your investment may be lost.
The
success of our business depends primarily upon our ability to identify, develop and commercialize antiviral drug products, an
extremely risky business. Our research programs may initially show promise in identifying potential product candidates, yet fail
to yield product candidates for clinical development for several reasons, including:
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our
research methodology or that of our partners may be unsuccessful in identifying potential product candidates;
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potential
product candidates may have harmful side effects or may have other characteristics that may make the products unmarketable
or unlikely to receive marketing approval; and
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we
or our partners may change their development profiles for potential product candidates or abandon a therapeutic area.
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Such
events may force us to abandon our development efforts for a program or programs, which would have a material adverse effect on
our business and could cause us to cease operations. Research programs to identify new product candidates require substantial
technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that
ultimately prove to be unsuccessful.
Because
our future commercial success depends on gaining regulatory approval for our products, we cannot generate revenue without obtaining
approvals
.
Our
long-term success and generation of revenue will depend upon the successful development of new products from our research and
development activities, including those licensed or acquired from third parties. Product development is very expensive and involves
a high degree of risk. Only a small number of research and development programs result in the commercialization of a product.
The process for obtaining regulatory approval to market a product like our hepatitis C or influenza products is expensive, takes
many years, and can vary substantially based on the type, complexity, and novelty of the product candidates involved. Our ability
to generate revenues would be adversely affected if we are delayed or unable to successfully develop our products.
We
cannot guarantee that any marketing application for our product candidates will be approved. If we do not obtain regulatory approval
of our products or we are significantly delayed or limited in doing so, we cannot generate revenue, and we may need to significantly
curtail operations.
If
we are unable to successfully complete preclinical testing and clinical trials of our product candidates or experience significant
delays in doing so, our business will be materially harmed.
We
intend to invest a significant portion of our efforts and financial resources in the identification and preclinical development
of product candidates that target viral replication enzymes. Our ability to generate product revenues, which we do not expect
will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product
candidates.
The
commercial success of our product candidates will depend on several factors, including:
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successful
completion of preclinical studies and clinical trials;
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receipt
of marketing and pricing approvals from regulatory authorities;
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obtaining
and maintaining patent and trade secret protection for product candidates;
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establishing
and maintaining manufacturing relationships with third parties or establishing our own manufacturing capability; and
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commercializing
our products, if and when approved, whether alone or in collaboration with others.
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If
we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability
to successfully complete development of, or to successfully commercialize, our product candidates, which would materially harm
our business. Most pharmaceutical products that do overcome the long odds of drug development and achieve commercialization still
do not recoup their cost of capital. If we are unable to design and develop each drug to meet a commercial need far in the future,
the approved drug may become a commercial failure and our investment in those development and commercialization efforts will have
been commercially unsuccessful.
We
may be unable to demonstrate safety and efficacy of our product candidates to the satisfaction of regulatory authorities or we
may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization
of our product candidates.
Before
obtaining marketing approval from regulatory authorities for the sale of product candidates, we or our partners must conduct extensive
preclinical studies and clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical trials
are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of
one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may
not be predictive of the success of later clinical trials, and interim results of a clinical trial do not predict final results.
Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that
have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed
to obtain marketing approval for their products.
Events
that may cause a delay or unsuccessful completion of clinical development include, as examples:
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delays
in agreeing with the FDA or other regulatory authorities on final clinical trial design;
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imposition
of a clinical hold following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory
authorities;
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delays
in agreeing on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
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delays
in obtaining required institutional review board approval at each clinical trial site;
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delays
in recruiting suitable patients to participate in a trial;
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delays
in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
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delays
in having patients complete participation in a trial or return for post-treatment follow-up;
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delays
caused by patients dropping out of a trial due to product side effects or disease progression;
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clinical
sites dropping out of a trial to the detriment of enrollment;
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time
required to add new clinical sites; or
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delays
by our contract manufacturers in producing and delivering sufficient supply of clinical trial materials.
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If
we or our partners must conduct additional clinical trials or other testing of any product candidates beyond those that are contemplated,
or are unable to successfully complete clinical trials or other testing of any of our product candidates, or if the results of
these trials or tests are not positive or are only modestly positive or if there are safety concerns, we or our partners may:
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be
delayed in obtaining marketing approval for our product candidates;
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not
obtain marketing approval at all;
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obtain
approval for indications or patient populations not as broad as intended or desired;
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obtain
approval with labeling that includes significant use or distribution restrictions or safety warnings;
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be
subject to additional post-marketing testing requirements; or
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remove
the product from the market after obtaining marketing approval.
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Our
product development costs will also increase if we experience delays in testing or in obtaining marketing approvals. We do not
know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all.
Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize
our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to successfully
commercialize our product candidates and may harm our business and results of operations. Any inability to successfully complete
preclinical and clinical development, whether independently or with our partners, could cause additional costs to us or impair
our ability to generate revenues from our product candidates, including product sales, milestone payments, profit sharing or royalties.
Our
product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or
limit the scope of any approved label or market acceptance.
Adverse
events (“AEs”) or serious adverse events (SAEs”), that may be observed during clinical trials of our product
candidates could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt
such trials and could cause denial of regulatory approval. If AEs or SAEs are observed in any clinical trials of our product candidates,
including those our partners may develop under alliance agreements, our or our partners’ ability to obtain regulatory approval
for product candidates may be negatively impacted.
Serious
or unexpected side effects caused by an approved product could result in significant negative consequences, including:
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regulatory
authorities may withdraw prior approval of the product or impose restrictions on its distribution in the form of a modified
risk evaluation and mitigation strategy;
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we
may be required to add labeling statements, such as warnings or contraindications;
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we
may be required to change the way the product is administered or conduct additional clinical trials;
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we
could be sued and held liable for harm caused to patients; and
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our
reputation may suffer.
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These
events could prevent us or our partners from achieving or maintaining market acceptance of the affected product and could substantially
increase the costs of commercializing our products and impair our ability to generate revenues from the commercialization of these
products either by us or by our partners.
Following
regulatory approval for a product candidate, we will still face extensive regulatory requirements and the approved product may
face future development and regulatory difficulties.
Even
if we obtain regulatory approval in the United States or elsewhere, the applicable regulators may still impose significant restrictions
on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly post-approval
studies or post-market surveillance. The following discussion is based on United States law. Similar types of regulatory provision
apply outside of the United States.
The
holder of an approved New Drug Application (“NDA”), must monitor and report AEs and SAEs and any failure of a product
to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain
FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional
materials must comply with FDA rules and other applicable federal and state laws, and are subject to FDA review.
Drug
product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by
the FDA and other regulatory authorities for compliance with current Good Manufacturing Practices (“cGMP”), and adherence
to commitments made in the NDA. If we or a regulatory agency discover previously unknown problems with a product such as AEs or
SAEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency
may impose restrictions on that product or the manufacturing facility, including requiring recall or withdrawal of the product
from the market or suspension of manufacturing.
If
we or our partners fail to comply with regulatory requirements following approval of our product candidates, a regulatory agency
may:
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issue
a warning letter asserting we are in violation of the law;
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seek
an injunction or impose civil or criminal penalties or monetary fines;
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suspend
or withdraw regulatory approval;
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suspend
any ongoing clinical trials;
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refuse
to approve a pending NDA or supplements to an NDA submitted by us;
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seize
product; or
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refuse
to allow us to enter into supply contracts, including government contracts.
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Our
defense of any government investigation of alleged violations of law, or any lawsuit alleging such violations, could require us
to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty
described above may prevent or inhibit our ability to commercialize our products and generate revenues.
We
may not succeed in obtaining or maintaining necessary rights to drug compounds and processes for our development pipeline through
acquisitions and in-licenses.
We
may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property
rights from third parties we identify. The licensing and acquisition of third-party intellectual property rights is a competitive
area, and more established companies are also pursuing strategies to license or acquire third-party intellectual property rights
we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources
and greater clinical development and commercialization capabilities.
Companies
that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire
third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are
unable to successfully obtain rights to required third-party intellectual property rights, our business, financial condition and
prospects for growth could suffer.
Because
third parties without our knowledge may be developing competitive products, we may later learn that competitive products are superior
which may cause to terminate our research efforts of one or more product candidates.
We
face potential completion from companies, particularly privately-held companies and foreign companies that may be developing competitive
products that are superior to one or more of our product candidates. If in the future we learn of the existence of one or more
competitive products we may be required to:
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cease
our development efforts for a product candidate;
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cause
a partner to terminate its support of a product candidate; or
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cause
a potential partner to terminate discussions about a potential license.
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Any
of these events may occur after we have spent substantial sums in connection with the clinical research of one or more product
candidates.
Compliance
with governmental regulations regarding the treatment of animals used in research could increase our operating costs, which would
adversely affect the commercialization of our technology.
The
Animal Welfare Act (“AWA”), is the United States federal law that covers the treatment of certain animals used in
research. The AWA imposes a wide variety of specific regulations that govern the humane handling, care, treatment and transportation
of certain animals by producers and users of research animals, most notably relating to personnel, facilities, sanitation, cage
size, feeding, watering and shipping conditions. Third parties with whom we contract are subject to registration, inspections
and reporting requirements. Some states have their own regulations, including general anti-cruelty legislation, which establish
certain standards in handling animals. If we or our contractors fail to comply with United States and foreign laws and regulations,
as applicable, concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity,
and our operations could be adversely affected.
Public
perception of ethical and social issues may limit or discourage the type of research we conduct.
Our
clinical trials will involve people, and we and third parties with whom we contract also do research using animals. Governmental
authorities could, for public health or other purposes, limit the use of human or animal research or prohibit the use of our technology.
In addition, animal rights activists could protest or make threats against our facilities, which may cause property damage and
delay our research. Ethical and other concerns about our methods, such as our use of human subjects in clinical trials or our
use of animal testing, could adversely affect our market acceptance.
We
have limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain
approvals for marketing our product candidates, including approval by the FDA.
Our
efforts to develop our product candidates are at an early stage. To date, with one exception, we have not entered a compound into
human clinical trials. We may be unable to progress our other product candidates undergoing preclinical testing into clinical
trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will succeed, and
favorable initial results from a clinical trial do not determine outcomes in subsequent clinical trials. The indications of use
for which we are pursuing development may have clinical effectiveness endpoints not previously reviewed or validated by the FDA
or foreign regulatory authorities, which may complicate or delay our effort to obtain marketing approval. We cannot guarantee
that our clinical trials will succeed. In fact, most compounds fail in clinical trials, even at companies far larger and more
experienced than us.
We
have not obtained marketing approval or commercialized any of our product candidates. We may not successfully design or implement
clinical trials required for marketing approval to market our product candidates. If we are unsuccessful in conducting and managing
our preclinical development activities or clinical trials or obtaining marketing approvals, we might not be able to commercialize
our product candidates, or might be significantly delayed in doing so, which will materially harm our business.
RISKS
RELATED TO OUR INTELLECTUAL PROPERTY
If
we cannot obtain or protect intellectual property rights related to our future products and product candidates, we may not be
able to compete effectively in our markets.
We
rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property
related to our future products and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves
complex legal and scientific questions and can be uncertain. The patent applications we own or in-license may fail to result in
patents with claims that cover the products in the United States or in other countries. There is no assurance that all of the
potentially relevant prior art relating to our patents and patent applications has been found; such prior art can invalidate a
patent or prevent a patent from issuing based on a pending patent application. Even if patents do successfully issue, third parties
may challenge their validity, enforceability or scope, which may cause such patents to be narrowed or invalidated. Even if unchallenged,
our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around
our claims.
If
the patent applications we hold or have in-licensed regarding our programs or product candidates fail to issue or if their breadth
or strength of protection is threatened, it could dissuade companies from collaborating with us to develop product candidates,
and threaten our ability to commercialize products. Patents may not issue and issued patents may be found invalid and unenforceable
or challenged by third parties. Since patent applications in the United States and most other countries are confidential for a
period after filing, and some remain so until issued, we cannot be certain that we were the first to invent a patent application
related to a product candidate. In certain situations, if we and one or more third parties have filed patent applications in the
United States and claiming the same subject matter, an administrative proceeding can be initiated to determine which applicant
is entitled to the patent on that subject matter. Patents have a limited lifespan. In the United States, the natural expiration
of a patent is 20 years after it is filed, although various extensions may be available. The life of a patent, and the protection
it affords, is limited. Once the patent life has expired for a product, we may be open to competition from generic medications.
Further, if we encounter delays in regulatory approvals, the time during which we could market a product candidate under patent
protection could be reduced.
Besides
the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how
that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and
development processes that involve proprietary know-how, information or technology not covered by patents. Each of our employees
agrees to assign their inventions to us through an employee inventions agreement. In addition, as a general practice, our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information or technology enter into
confidentiality agreements. Nonetheless, our trade secrets and other confidential proprietary information may be disclosed and
competitors may otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.
In addition, in January 2018 the FDA as part of its Transparency Initiative, launched a voluntary pilot program to release clinical
study reports summarizing clinical trial data. However, with only one company having disclosed information as part of the pilot
program to date, the FDA in response to concerns expressed by the academic community may consider making release of clinical study
reports mandatory and may consider making additional information publicly available on a routine basis, including information
we may consider to be trade secrets or other proprietary information.
The
laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United
States. We may encounter significant problems in protecting and defending our intellectual property both in the United States
and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies
to third parties, and there is no guarantee we will have any such enforceable trade secret protection, we may not be able to establish
or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations
and financial condition.
Third-party
intellectual property infringement claims may prevent or delay our development and commercialization efforts.
Our
commercial success depends in part on our avoiding infringement on the patents and proprietary rights of third parties. There
is substantial litigation, both within and outside the United States, involving patent and other intellectual property rights
in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexaminations
and other post-grant proceedings before the U.S. Patent and Trademark Office, and corresponding foreign patent offices. Numerous
U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which
we and our partners are pursuing product candidates. As the biotechnology and pharmaceutical industries expand and more patents
are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third
parties.
Third
parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents
or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the
use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be patent applications
currently pending that may later result in patents that our product candidates may infringe. Third parties may obtain patents
in the future and claim that use of our technologies infringes on these patents. If any third-party patents were to be held by
a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any molecules formed during
the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize
such product candidate unless we obtained a license under the applicable patents, or until such patents expire. Similarly, if
any third-party patents were to be held by a court of competent jurisdiction to cover aspects of our formulations, processes for
manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block our ability
to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either
case, such a license may not be available on commercially reasonable terms or at all.
Parties
making intellectual property claims against us may obtain injunctive or other equitable relief, which could block our ability
to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit,
involves substantial litigation expense and would be a substantial diversion of our management’s attention from our business.
If a claim of infringement against us succeeds, we may have to pay substantial damages, possibly including treble damages and
attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses
from third parties, which may be impossible or require substantial time and monetary expenditure.
We
may need to obtain licenses to intellectual property rights from third parties.
We
may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates. We
may fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to
further develop and commercialize one or more of our product candidates, which could harm our business significantly. We cannot
provide any assurances that third-party patents do not exist that might be enforced against our products, resulting in either
an injunction prohibiting our sales, or, with respect to our sales and other activities, an obligation on our part to pay royalties
and/or other forms of compensation to third parties. Because of the costs involved in defending patent litigation, we currently
lack and may in the future lack the capital to defend our intellectual property rights.
We
may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming
and unsuccessful.
Competitors
may infringe our patents or the patents of our licensors. To counter such infringement or unauthorized use, we may be required
to file infringement claims, or we may be required to defend the validity or enforceability of such patents, which can be expensive
and time-consuming. In an infringement proceeding, a court may decide that either one or more of our patents or our licensors’
patents is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue because our
patents do not cover that technology. An adverse result in any litigation or defense proceedings could put one or more of our
patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference
proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions regarding our
patents or patent applications or those of our partners or licensors. An unfavorable outcome could require us to cease using the
related technology or to license rights to it from the prevailing party. Our business could be harmed if the prevailing party
does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and,
even if successful, may cause us to incur substantial costs and distract the attention of our management and other employees.
We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly
in countries where the laws may not protect those rights as fully as in the United States.
Because
of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. There could also be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these
results to be negative, it could have a material adverse effect on the price of our securities.
We
may be subject to claims our employees, consultants or independent contractors have wrongfully used or disclosed confidential
information of third parties.
We
employ individuals previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims we or our
employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of
our employees’ former employers or other third parties. We may also be subject to claims that former employers or other
third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is
no guarantee of success in defending these claims, and if we succeed, litigation could cause substantial cost and be a distraction
to our management and other employees.
Because
we face significant competition from other biotechnology and pharmaceutical companies, our operating results will suffer if we
fail to compete effectively.
The
biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United States and internationally,
including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.
Our competitors have substantially greater financial, technical and other resources, such as larger research and development staff
and experienced marketing and manufacturing organizations. Additional mergers and acquisitions in the biotechnology and pharmaceutical
industries may cause even more resources being concentrated in our competitors. Competition may increase further because of advances
in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors
may develop, acquire or license drug products that are more effective or less costly than any product candidate we may develop.
With
the exception of one product candidate, all of our programs are in a preclinical development stage and are targeted toward indications
for which there are approved products on the market or product candidates in clinical development. We will face competition from
other drugs that are or will be approved for the same therapeutic indications. Our ability to compete successfully will depend
largely on our ability to leverage our experience in drug discovery and development to:
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discover
and develop therapeutics superior to other products in the market;
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attract
qualified scientific, product development and commercial personnel;
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obtain
patent and/or other proprietary protection for our technology platform and product candidates;
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obtain
required regulatory approvals; and
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successfully
collaborate with pharmaceutical companies in the discovery, development and commercialization of new therapeutics.
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The
availability of our competitors’ products could limit the demand, and the price we can charge, for any products we may develop
and commercialize. We will not achieve our business plan if the acceptance of these products is inhibited by price competition
or the reluctance of physicians to switch from existing drug products to our products, or if physicians switch to other new drug
products or reserve our products for use in limited circumstances. The inability to compete with existing or subsequently introduced
drug products would have a material adverse impact on our business, financial condition and prospects.
Established
pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel
compounds that could make our product candidates less competitive. Any new product that competes with an approved product must
typically demonstrate advantages, such as in efficacy, convenience, tolerability or safety, to overcome price competition and
to succeed. Our competitors may obtain patent protection, receive approval by FDA and/or foreign regulatory authorities or discover,
develop and commercialize product candidates before we do, which would have a material adverse impact on our business.
The
commercial success of our product candidates will depend upon the acceptance of these product candidates by the medical community,
including physicians, patients and healthcare payors.
Assuming
one or more product candidates achieve regulatory approval and we commence marketing such products, the market acceptance of any
product candidates will depend on several factors, including:
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demonstration
of clinical safety and efficacy compared to other products;
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the
relative convenience, ease of administration and acceptance by physicians, patients and healthcare payors;
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the
prevalence and severity of any AEs or SAEs;
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limitations
or warnings in the label approved by FDA and/or foreign regulatory authorities for such products;
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availability
of alternative treatments;
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pricing
and cost-effectiveness;
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the
effectiveness of our or any collaborators’ sales and marketing strategies;
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our
ability to obtain hospital formulary approval; and
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our
ability to obtain and maintain sufficient third-party payor coverage or reimbursement.
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If
our current product candidates are approved, we expect sales to generate substantially all of our product revenues for the foreseeable
future, and as such, the failure of these products to find market acceptance would harm our business.
If
insurance and/or government coverage and adequate reimbursement are not available for our product candidates, it could impair
our ability to achieve and maintain profitability.
Market
acceptance and sales of any product candidates we develop will depend on coverage and reimbursement policies of third-party payors.
Government authorities and third-party payors, such as private health insurers, hospitals and health maintenance organizations,
decide which drugs they will pay for and establish reimbursement levels. Coverage and adequate reimbursement may not be available
for some or all of our product candidates. As patients generally rely on third-party payors to reimburse all or part of the costs
associated with their treatment, inadequate reimbursement amounts may reduce the demand for, or the price of, our future products.
Thus, the availability of adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid,
and commercial payors is critical to new product acceptance.
Obtaining
coverage and reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process,
and no uniform policy of coverage and reimbursement for products exists among third-party payors in the United States. Even if
we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain
profitability or may require co-payments that patients find unacceptable. If reimbursement is not available, or is available at
limited levels, we may not be able to successfully commercialize product candidates we develop.
Pricing
pressures on our drug candidates, including as the result of proposed legislative changes, may negatively impact our future results
of operations.
There
have been numerous legislative and regulatory proposals to change the healthcare system in the United States and in some foreign
jurisdictions that could affect our ability to sell products profitably. For example, in May 2018, the Trump administration issued
a plan to lower drug prices, including among other things the disclosure of list prices in television ads, increasing negotiated
discounts in Medicare, banning pharmacy gag clauses, adopting real-time prescription benefit tools, and boosting low-cost generic
and biosimilar competition. In January 2019, the Trump administration proposed a rule to lower prescription drug prices and out-of-pocket
costs by banning rebates on prescription drugs paid by manufacturers to pharmacy benefit managers, Part D plans and Medicaid managed
care organizations to increase the use and sales of their products.
Further,
in February 2019, President Trump expressed concern that prescription drug prices in Canada are approximately 50% of prescription
drug prices in the United States. At the same time, all of the current Democratic Presidential candidates are advocating for a
Medicare-for-all approach. While expanding Medicare would increase the demand for prescription drugs, there is a likelihood that
Medicare will be required to negotiate drug prices, which could adversely affect our future prospects.
At
the state level, individual states are increasingly aggressive in passing legislation and implementing regulations designed to
control drug pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access
and marketing cost disclosure and transparency measures. These proposed measures could reduce the ultimate demand for our products,
once approved, or put pressure on our product pricing. The availability of generic treatments may also substantially increase
pricing pressures on, and reduce reimbursement for, our future products. The potential application of user fees to generic drug
products may expedite approval of additional generic drug treatments. We expect to experience additional pricing pressures in
connection with sale of any of our products, due to the trend toward managed healthcare, the increasing influence of health maintenance
organizations and additional legislative changes.
In
some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing vary widely from country to country. The European Union, or EU, provides options for its member states
to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control
the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may
instead adopt a system of direct or indirect controls on the profitability of the Company placing the medicinal product on the
market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products
will allow favorable reimbursement and pricing arrangements for our products. Historically, products launched in the EU do not
follow price structures of the U.S. and tend to be priced significantly lower.
If
we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our
product candidates, we may be unable to generate any revenues from product sales.
We
do not have an organization for the sales, marketing and distribution of pharmaceutical products and the cost of establishing
and maintaining such an organization may exceed the cost-effectiveness of doing so. To market any products that may be approved,
we must build our sales, marketing, managerial and other non-technical capabilities or arrange with third parties to perform these
services.
Our
current and future partners may not dedicate sufficient resources to the commercialization of our product candidates or may otherwise
fail in their commercialization due to factors beyond our control. If we are unable to establish effective alliances to enable
the sale of our product candidates to healthcare professionals and in geographical regions, including the United States, that
will not be covered by our own marketing and sales force, or if our potential future strategic partners do not successfully commercialize
the product candidates, our ability to generate revenues from product sales will be adversely affected.
If
we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties,
we may not be able to generate sufficient product revenue and may not become profitable. We will be competing with many companies
that have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third-party to
perform marketing and sales functions, we may be unable to compete successfully against these more established companies.
If
we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international
operations could materially adversely affect our business.
If
any of our product candidates are approved for commercialization, we may enter into agreements with third parties to market them
on a worldwide basis or in more limited geographical regions. We expect we will be subject to additional risks related to entering
into international business relationships, including:
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different
regulatory requirements for drug approvals in foreign countries;
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reduced
protection for intellectual property rights;
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unexpected
changes in tariffs, trade barriers and regulatory requirements;
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economic
weakness, including inflation, or political instability in foreign economies and markets;
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compliance
with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign
taxes, including withholding of payroll taxes;
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foreign
currency fluctuations, which could cause increased operating expenses and reduced revenues, and other obligations incident
to doing business in another country;
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workforce
uncertainty in countries where labor unrest is endemic;
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production
shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business
interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes,
typhoons, floods and fires.
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RISKS
RELATED TO OUR BUSINESS OPERATIONS AND INDUSTRY
If
we lose key management or scientific personnel, cannot recruit qualified employees, directors, officers, or other personnel or
experience increases in our compensation costs, our business may materially suffer.
We
depend on principal members of our executive and research teams; the loss of whose services may adversely impact the achievement
of our objectives. We are highly dependent on our Chairman of the Board and Chief Executive Officer, Dr. Gary Wilcox, and our
President, Dr. Sam Lee. We do not carry “key-man” life insurance on any of our employees or advisors. Furthermore,
our future success will also depend in part on the continued service of our key scientific and management personnel and our ability
to identify, hire, and retain additional personnel. We may not be able to attract and retain personnel on acceptable terms, as
there is significant competition among numerous pharmaceutical companies for individuals with similar skill sets. Because of this
competition, our compensation costs may increase significantly. If we lose key employees, our business may suffer.
If
we expand our organization, we may experience difficulties in managing growth, which could disrupt our operations.
As
of April 1, 2019, we have 10 full-time employees. As our company matures, we expect to expand our employee base to increase
our managerial, scientific and operational, commercial, financial and other resources and to hire more consultants and contractors.
Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit,
maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a
disproportionate amount of its attention away from our day-to-day activities and to managing these growth activities. We may not
be able to effectively manage the expansion of our operations, which may cause weaknesses in our infrastructure, and give rise
to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.
Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such
as developing additional product candidates. If our management cannot effectively manage our growth, our expenses may increase
more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business
strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend,
in part, on our ability to manage our future growth.
Any
relationships with customers and third-party payors may be subject, directly or indirectly, to federal and state healthcare fraud
and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not fully
complied, with such laws, we could face criminal sanctions, civil penalties, contractual damages, reputational harm and diminished
profits and future earnings.
If
we obtain FDA approval for any of our product candidates and commercialize those products in the United States, our operations
may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without
limitation, the federal Anti-Kickback Statute and the federal False Claims Act. These laws may impact, among other things, our
proposed sales, marketing and education programs. We may be subject to patient privacy regulation by the federal government and
by the U.S. states and foreign jurisdictions in which we conduct our business. The laws that may affect our ability to operate
include:
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the
federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving,
offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual,
or the purchase or recommendation of an item or service for which payment may be made under a federal healthcare program,
such as the Medicare and Medicaid programs;
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federal
civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers
that are false or fraudulent;
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the
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes
that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare
matters;
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HIPAA,
as amended by the Health Information Technology and Clinical Health Act of 2009, or HITECH, and its implementing regulations,
which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health
information; and
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state
and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply
to items or services reimbursed by any third-party payer, including commercial insurers, and state and foreign laws governing
the privacy and security of health information in certain circumstances, many of which differ from each other in significant
ways and may not have the same effect, thus complicating compliance efforts.
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If
our operations are found to violate any of the laws described above or any other governmental regulations that apply to us, we
may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, possible exclusion from
Medicare, Medicaid and other government healthcare programs, and curtailment or restructuring of our operations, which could adversely
affect our ability to operate our business and our results of operations.
We
face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs.
Using
our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the
risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical
companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend against product
liability claims, we could incur substantial liability and costs. Regardless of merit or eventual outcome, product liability claims
may cause:
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impairment
of our business reputation;
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withdrawal
of clinical trial participants;
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costs
due to related litigation;
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distraction
of management’s attention from our primary business;
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substantial
monetary awards to patients or other claimants;
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the
inability to commercialize our product candidates; and
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decreased
demand for our product candidates, if approved for commercial sale.
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Insurance
coverage is becoming increasingly expensive and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend
to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability
insurance on commercially reasonable terms or in adequate amounts. Occasionally, large judgments have been awarded in class action
lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought
against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our
results of operations and business.
Business
interruptions resulting from natural disasters and adverse weather events could cause delays in research and development of our
product candidates.
Our
principal offices are in Bothell, Washington where we conduct our scientific research. We also maintain a small finance and accounting
office in Miami, Florida. We are vulnerable to natural disasters such as earthquakes and tornados as well as other events that
could disrupt our operations and cause delays in research and development of our product candidates. We do not carry insurance
for natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur.
Any losses or damages we incur could have a material adverse effect on our operations.
If
our information technology systems are compromised, the information we store and process, including our intellectual property,
could be accessed, publicly disclosed, lost or stolen, which could harm our business, relationships with strategic partners and
future results of operations.
Companies
are increasingly suffering damage from attacks by hackers. In the ordinary course of business, we store sensitive information,
such as our intellectual property, including trade secrets and results of our clinical and preclinical research, and that of our
suppliers and business partners, on a central server, and such information is transmitted via email correspondence. The secure
maintenance and processing of this information is critical to our research and development activities and future operations. Despite
our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breaches due to
employee error, malfeasance or other disruptions. Any such breach could compromise our information technology systems and the
information stored there could be accessed by third parties, publicly disclosed, lost or stolen. Any such access, disclosure,
misappropriation or other loss of information could result in disruption of our operations, including our existing and future
research collaborations, and damage our reputation, which in its turn could harm our business and future results of operations.
If
we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or
incur costs that could have a material adverse effect on our business.
We
are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures
and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve using hazardous
and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We
generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination
or injury from these materials. If contamination occurs or injury results from our use of hazardous materials, we could be held
liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated
with civil or criminal fines and penalties.
Although
our workers’ compensation insurance may cover us for costs and expenses, we may incur additional costs due to injuries to
our employees resulting from the use of hazardous materials or other work-related injuries, and this insurance may not provide
adequate coverage against other potential liabilities. We may incur substantial costs to comply with current or future environmental,
health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production
efforts. Failure to comply with these laws and regulations also may cause substantial fines, penalties or other sanctions.
RISKS
RELATED TO OUR COMMON STOCK
Due
to factors beyond our control, our common stock price may be volatile, or may decline regardless of our operating performance,
and you may not be able to resell your shares.
The
market price of our common stock will depend on a number of factors, many of which are beyond our control and may not be related
to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock since
you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the market price
of our common stock include the following:
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price
and volume fluctuations in the overall stock market from time to time;
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volatility
in the market prices and trading volumes of biotechnology stocks generally, or those in our peer group in particular;
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our
announcements concerning the initiation and results of clinical trials;
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changes
in operating performance and stock market valuations of other biotechnology companies generally, or those in our industry
in particular;
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sales
of shares of our stock by us or our stockholders;
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the
failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow
our company or our failure to meet these estimates or the expectations of investors;
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the
financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
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announcements
by us or our competitors of new novel medicines;
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the
public’s reaction to our earnings releases, other public announcements and filings with the SEC;
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rumors
and market speculation involving us or other companies in our industry;
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actual
or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
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actual
or anticipated changes in our operating results or fluctuations in our operating results;
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litigation
involving us, our current or former officers and directors, our stockholders, our industry, or investigations by regulators
into our operations or those of our competitors;
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developments
or disputes concerning our intellectual property or other proprietary rights;
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new
laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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changes
in accounting standards, policies, guidelines, interpretations or principles;
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any
significant change in our management; and
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general
economic conditions and slow or negative growth in any of our significant markets.
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In
addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s
securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our management’s attention and resources.
Any
future impairment in the carrying value of goodwill and in-process research and development assets could depress our stock price.
Historically,
we had a significant amount of goodwill and indefinite-lived intangible assets for in-process research and development (“IPR&D”)
on our balance sheet. Goodwill and indefinite-lived intangible assets must be evaluated for impairment annually or more frequently
if events indicate it is warranted. If the carrying value of a reporting unit or IPR&D asset exceeds its current fair value,
the goodwill or IPR&D asset is considered impaired. Events and conditions that could result in impairment in the value of
our indefinite-lived assets and goodwill include, but are not limited to, significant negative industry or economic trends, significant
decline in the Company’s stock price for a sustained period of time, significant decline in market capitalization relative
to net book value, limited funding that could delay development efforts, significant changes in the manner of use of the assets
or the strategy for the Company’s overall business, safety or efficacy issues that surface during development efforts, or
preclinical and clinical outcomes that reduce the probability for technical and regulatory success of our product candidates.
We
have incurred impairment charges of approximately $131,061,000 from our IPR&D prior to and as of December 31, 2017; refer
to “Item 7 – Management’s Discussion and Analysis – Critical Accounting Policies and Estimates –
Business Combinations and Intangible Assets.” As of December 31, 2018, we incurred an additional $53,905,000 in non-cash
impairment charges which was a full write-off of the remaining IPR&D and we no longer have an IPR&D asset.
We
may in the future be required to record impairment charges to write-off goodwill which is also related to our merger with RFS
Pharma in 2014. Our stock price could be negatively impacted should future impairments of our goodwill occur.
At
December 31, 2018 and 2017, the Company had goodwill of $65,195,000 and determined the fair value of its reporting unit, measured
by the Company’s Nasdaq market capitalization and an income approach analysis, exceeded the carrying value at December 31,
2018; therefore, management did not consider goodwill to be impaired.
Because
certain of our stockholders control a significant number of shares of our common stock, they may have effective control over our
actions requiring stockholder approval.
As
of March 28, 2019, our directors, executive officers and principal stockholders (those beneficially owning in excess of
5%), and their respective affiliates, beneficially own approximately 48% of our outstanding shares of common stock. As a result,
these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for
approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.
Dr.
Raymond Schinazi, our former Board Chairman, and Dr. Philip Frost, a director and certain other stockholders entered into a Stockholders
Rights Agreement in November 2014 when we acquired another company headed by Dr. Schinazi. This Agreement gives each of Dr. Schinazi
and Dr. Frost (and certain other stockholders) the right to designate three directors to a seven-person board of directors and
together agree upon the seventh designee. In addition, our principal stockholders, acting together, would have the ability to
control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of
our common stock by:
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delaying,
deferring or preventing a change in corporate control;
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impeding
a merger, consolidation, takeover or other business combination involving us; or
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discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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Further,
the Stockholder Rights Agreement provides Dr. Schinazi and Dr. Frost and certain other Company stockholders with rights including
the right to approve future financings and a right of first refusal, which have not been impediments to date. However, in the
event of any future disagreements between Dr. Schinazi and Dr. Frost, we may be unable to raise future capital we need or make
concessions to one of these directors, which may adversely affect us or result in added expenses.
Future
sales and issuances of our common stock or rights to purchase common stock, including under our equity incentive plan, could cause
additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We
expect that significant additional capital will be needed to continue our planned operations. To the extent we raise additional
capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible
securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If
we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially
diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors
could gain rights superior to our existing stockholders.
Under
our Equity Incentive Plans, our management may grant stock options and other equity-based awards to our employees, directors and
consultants. Approximately 2,467,000 million shares of common stock are available for future grant.
We
are currently involved in a class action lawsuit, a related derivative action, and other litigation, and may in the future be
involved in other legal proceedings, which may be expensive and time consuming to defend, and, if resolved adversely, could harm
our business and financial condition.
We
and certain current and former executive officers and directors of the Company are currently defendants in a class action lawsuit
filed with the U.S. District Court for the District of New Jersey alleging violation of Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder, and a related derivative action lawsuit filed with the U.S. District Court for the Western
District of Washington, and may become involved in additional legal proceedings in the future. See “Item 3 – Legal
Proceedings” for more information. Similar allegations are also asserted in a lawsuit filed with the U.S. District Court
for the District of Minnesota by a former Biozone Pharmaceuticals, Inc. lawyer, and currently on appeal with the U.S. Court of
Appeals for the Eighth Circuit. These proceedings can be time consuming, divert management’s attention and resources and
cause us to incur significant expenses. While we believe we have insurance coverage for the class action suit and the derivative
action, our insurance carrier has initially declined to cover the lawsuits. While we are seeking to reverse this decision, even
if we can do so the amount of insurance may be insufficient. Furthermore, because litigation is inherently unpredictable, the
results of any such actions may have a material adverse effect on our business, and financial condition, and cause our stock price
to decrease.
Failure
to meet the continued listing requirements of The Nasdaq Capital Market, could result in delisting of our common stock, which
in its turn would negatively affect the price of our common stock and limit investors’ ability to trade in our common stock.
Our
common stock trades on The Nasdaq Capital Market (“Nasdaq”). Nasdaq rules impose certain continued listing requirements,
including the minimum $1 bid price, corporate governance standards and number of public stockholders. If we fail to meet these
continued listing requirements, Nasdaq may take steps to delist our common stock. If our common stock is delisted from The Nasdaq
Capital Market, we could face significant material adverse consequences, including:
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a
limited availability of market quotations for our common stock;
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reduced
liquidity with respect to our common stock;
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a
determination that our shares of common stock are a “penny stock” which will require broker-dealers trading in
our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary
trading market for our common stock;
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a
limited amount of news and analyst coverage for our company; and
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a
limited ability to issue additional securities or obtain additional financing in the future.
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Our
ability to use our net operating loss carry forwards and certain other tax attributes may be limited.
Under
Section 382 of the Internal Revenue Code of 1986 if a corporation undergoes an “ownership change,” generally defined
as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use
its pre-change net operating loss carry forwards (“NOLs”), and other pre-change tax attributes (such as research tax
credits) to offset its post-change income may be limited. We believe that, with the RFS Pharma and Discovery mergers and other
transactions that have occurred over the past three years, we may have triggered an “ownership change” limitation.
We may also experience ownership changes in the future because of subsequent shifts in our stock ownership. If we earn net taxable
income, our ability to use our pre-change net operating loss carry forwards to offset U.S. federal taxable income may be subject
to limitations, which could result in increased future tax liability to us. At the state level, there may be periods during which
the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Because
our common stock is not actively traded, purchasers of our stock may incur difficulty in selling their shares at or above the
price they paid for them, or at all.
Our
average daily trading volume on The Nasdaq Capital Market has been approximately 35,400 shares of common stock for the
60 trading days prior to March 28, 2019. An active market for our common stock may never develop, or if it does, it may
not be sustained. Accordingly, investors may experience difficulty is selling their shares of common stock at or above the price
they paid for them, or at all.
We
do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We
have never declared or paid any cash dividends on our common stock. We anticipate we will retain future earnings for the development,
operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future.
Any return to stockholders will therefore be limited to the appreciation of their stock.
Because
we may not attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.
It
is possible that securities analysts of major brokerage firms will not provide research coverage for our common stock. The absence
of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult
for us to attract new investors when we acquire additional capital.
Future
sales of our common stock could cause the market price for our common stock to decline, even if our business is performing well.
As
of March 28, 2019, we had approximately 31,620,646 million shares of common stock outstanding, approximately 15 million
of which are either free trading or may be sold without volume or manner of sale limitations under Rule 144. The remainder of
our shares, because they are held by affiliates, are subject to additional restrictions as described below.
In general, Rule 144 provides that any person who is not an affiliate of the Company and has not been an affiliate
for 90 days, and who has held restricted common stock for at least six months, is entitled to sell their restricted stock freely,
provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any restrictions.
Our
largest stockholder, Dr. Raymond Schinazi, who beneficially owned 32% of our common stock as of March 29, 2019, resigned
as our Board Chairman effective February 1, 2019. However, a Stockholder Rights Agreement he signed in 2014, in which another
principal shareholder is a party, requires that we continue to treat him as an affiliate.
The
shares of common stock outstanding which are held by affiliates of the Company are subject to additional restrictions. An affiliate
may sell after a six-month holding period with the following restrictions:
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we
are current in our filings;
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(ii)
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certain
manner of sale provisions; and
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(iii)
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filing
of Form 144.
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Future
sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur,
could cause the market price of our common stock to decline significantly, even if our business is performing well.
We
may issue preferred stock which could make it more difficult for a third-party to acquire us and could depress our stock price
.
In
accordance with the provisions of our Certificate of Incorporation and the Stockholder Rights Agreement described above, our Board
may issue one or more additional series of preferred stock that have more than one vote per share, so long as the Board obtains
the majority approval of each of the groups of stockholders who formerly held our Series A and Series B. This could permit our
Board to issue preferred stock to investors who support our management and give effective control of our business to our management.
Issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of
our common stock. This could make it more difficult for stockholders to sell their common stock. This could also cause the market
price of our common stock shares to drop significantly, even if our business is performing well.
We
continue to have material weaknesses in our internal control over financial reporting. If we are unable to remediate these, or
if we experience additional material weaknesses in the future or otherwise fail to maintain effective internal controls, we may
not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor
confidence in us and could negatively impact our ability to raise capital.
Our
management has concluded that, as of December 31, 2018, our internal control over financial reporting was not effective. Management
has identified two material weaknesses in our internal control over financial reporting related to the following:
(i)
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management’s
failure to maintain an effective financial reporting process to ensure there were timely
and documented reviews over completeness and accuracy of information included in the
financial statements; and
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management’s
failure to design and maintain controls over management’s review of technical accounting
matters and account reconciliations.
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See
“Part II – Item 9A – Controls and Procedures” for more information. Although we have developed and are
implementing a plan to remediate these material weaknesses, and expect to focus on remediating these material weaknesses in 2019,
we may not be able to remediate all or any of them in the near future. Furthermore, additional material weaknesses in our internal
control over financial reporting may be identified in the future. Material weaknesses identified by management could result in
a material misstatement in our annual or interim financial statements that would not be prevented or detected. If we are unable
to remediate the identified material weaknesses or implement required new or improved controls, our ability to record, process
and report financial information accurately, and to prepare financial statements within the time periods specified by the rules
and forms of the SEC could be adversely affected. The occurrence of or failure to remediate the material weaknesses may adversely
affect investor confidence in us and could negatively impact our ability to raise capital.
Recently
the SEC sued four public companies alleging in part that they had violated Section 13(b) of the Exchange Act resulting from their
failure to remediate material weaknesses in their internal control over financial reporting over an extensive period of time.
Three of these companies had remediated their material weaknesses at the time the lawsuits were filed. Since we acquired Cocrystal
Discovery, Inc., our principal subsidiary, in January 2014, we have identified and disclosed material weaknesses in internal control
over financial reporting beginning with the year ended December 31, 2014 and have since made significant progress in remediating
them. As of December 31, 2018, we had two material weaknesses, both of which had previously been identified as of December
31, 2017 and have not been remediated. See “Part II – Item 9a Controls and Procedures” for more information.
If the SEC Staff investigates us and following that investigation a lawsuit is filed alleging that we had not remediated our material
weaknesses for a number of consecutive annual reporting periods, we will face the following risks:
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It
will divert our management’s attention from our core business of drug development;
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We
will incur substantial legal fees in connection with both the investigation and the lawsuit if it is filed;
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If
we are sued, we may be required to pay a civil monetary penalty in addition to other remedies the SEC or a court may impose;
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Any
public disclosure may cause investors to sell our stock which may result in a material decline in our stock price that will
cause investors to lose money; and
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Our
existing stockholders will experience more dilution as we are required to raise capital at a lower price per share.
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