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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-236332

 

PROPOSED MERGER

YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Conatus Pharmaceuticals Inc. and Histogen Inc.:

Conatus Pharmaceuticals Inc. (“Conatus”) and Histogen Inc. (“Histogen”) have entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which a wholly owned subsidiary of Conatus will merge with and into Histogen, with Histogen surviving as a wholly owned subsidiary of Conatus (the “merger”). The merger will result in a company focused on developing patented, innovative technologies that replace and regenerate tissues in the body for aesthetic and therapeutic markets.

At the effective time of the merger, each share of (x) common stock of Histogen, $0.001 par value (“Histogen common stock”), and (y) preferred stock of Histogen (“Histogen preferred stock” and, together with the Histogen common stock, “Histogen capital stock”) will be converted into the right to receive approximately 1.4750 shares of Conatus’ common stock (the “exchange ratio”), subject to adjustment for the reverse stock split of Conatus’ common stock to be implemented prior to the consummation of the merger as discussed in this proxy statement/prospectus/information statement. This exchange ratio is an estimate only and is based upon Conatus’ and Histogen’s capitalization at March 2, 2020. The final exchange ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in the attached proxy statement/prospectus/information statement, which formula accounts for adjustments due to changes in Conatus’ and Histogen’s capitalization prior to the consummation of the merger as well as the respective net cash balances of Conatus and Histogen prior to the merger. Conatus will assume outstanding and unexercised warrants and options to purchase shares of Histogen capital stock, and these securities will be converted into warrants and options, respectively, to purchase shares of Conatus’ common stock, with the number of Conatus shares subject to such warrant or option and the exercise price being appropriately adjusted to reflect the exchange ratio. Conatus’ stockholders will continue to own and hold their existing shares of Conatus’ common stock, adjusted for the reverse stock split. The vesting of all outstanding and unexercised options to purchase shares of Conatus’ common stock will be accelerated in full as of immediately prior to the closing of the merger, all outstanding restricted stock units for shares of Conatus’ common stock (“RSUs”) will be accelerated in full as of immediately prior to the closing of the merger and all outstanding and unexercised warrants to purchase shares of Conatus’ common stock will otherwise remain in effect pursuant to their terms. Immediately after the merger, current stockholders, warrantholders and optionholders of Histogen will own, or hold rights to acquire, approximately 74% of the fully-diluted common stock of Conatus, which for these purposes is defined as the outstanding common stock of Conatus (including the shares of common stock issued in the merger), plus all shares of Conatus stock subject to options and warrants of Conatus outstanding immediately prior to the merger, plus all shares of Histogen stock subject to options and warrants of Histogen converted into options and warrants of Conatus in connection with the merger (the “Fully-Diluted Common Stock of Conatus”), with Conatus’ current stockholders, optionholders and warrantholders owning, or holding rights to acquire, approximately 26% of the Fully-Diluted Common Stock of Conatus. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the exchange ratio to the extent that Conatus’ net cash at the effective time of the merger is less than $11.9 million or Histogen’s net cash at the effective time of the merger is more than negative $0.8 million (and as a result, Conatus stockholders could own less, and Histogen stockholders could own more, of the combined organization), or a downward adjustment to the exchange ratio to the extent that Conatus’ net cash at the effective time of the merger is more than $12.7 million or Histogen’s net cash at the effective time of the merger is less than negative $1.6 million (and as a result, Conatus stockholders could own more, and Histogen stockholders could own less, of the combined organization). The foregoing net cash amounts at which adjustments to the exchange ratio may be triggered reflect reductions for each company’s daily cash burn (as defined in the Merger Agreement) from January 31, 2020 through May 7, 2020, the date of the Conatus special meeting of stockholders and will be further adjusted to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger.

Shares of Conatus’ common stock are currently listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “CNAT.” Prior to consummation of the merger, Conatus intends to file an initial listing application with Nasdaq pursuant to Nasdaq’s “reverse merger” rules. After completion of the merger, Conatus will be renamed “Histogen Inc.” and expects to trade on Nasdaq under the symbol “HSTO.” On March 31, 2020, the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Conatus’ common stock on Nasdaq was $0.31 per share.


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Conatus is holding a special meeting of stockholders in order to obtain the stockholder approvals necessary to complete the merger and related matters. The Conatus special meeting will be held virtually at www.proxydocs.com/CNAT on May 7, 2020 at 9:00 a.m. Pacific time unless postponed or adjourned to a later date. At the Conatus special meeting, Conatus will ask its stockholders to, among other things:

 

1.

approve the Merger Agreement and thereby approve the transactions contemplated thereby, including the merger, the issuance of Conatus’ common stock to Histogen’s stockholders and the change of control resulting from the merger;

 

2.

approve a series of alternative amendments to the Conatus amended and restated certificate of incorporation to effect a reverse stock split of Conatus’ common stock, within a range, as determined by Conatus’ board of directors, of one new share for every 10 to 50 (or any number in between) shares outstanding (the “Conatus Reverse Stock Split”);

 

3.

approve the Conatus 2020 Incentive Award Plan (the “Conatus 2020 Plan”);

 

4.

approve, on a nonbinding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger;

 

5.

consider and vote upon an adjournment of the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3; and

 

6.

transact such other business as may properly come before the Conatus special meeting or any adjournment or postponement thereof.

As described in the accompanying proxy statement/prospectus/information statement, certain of Histogen’s stockholders who in the aggregate own approximately 50.4% of the outstanding shares of Histogen capital stock on an as converted to common stock basis, and certain of Conatus’ stockholders who in the aggregate own approximately 2.8% of the outstanding shares of Conatus’ common stock, are parties to support agreements with Conatus and Histogen, respectively, whereby such stockholders have agreed to vote their shares in favor of the adoption or approval, as applicable, of the Merger Agreement and the approval of the transactions contemplated therein, including the merger and the issuance of shares of Conatus’ common stock to Histogen’s stockholders, subject to the terms of the support agreements. In addition, following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the U.S. Securities and Exchange Commission (the “SEC”) and pursuant to the conditions of the Merger Agreement and the support agreements, Histogen’s stockholders who are party to the support agreements will each execute an action by written consent of Histogen’s stockholders, referred to as the written consent, adopting the Merger Agreement, thereby approving the transactions contemplated therein, including the merger. Therefore, holders of a sufficient number of shares of Histogen capital stock required to adopt the Merger Agreement will adopt the Merger Agreement, and no meeting of Histogen’s stockholders to adopt the Merger Agreement and approve the merger and related transactions will be held. Nevertheless, all of Histogen’s stockholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the merger and related transactions, by signing and returning to Histogen a written consent.

After careful consideration, each of Conatus’ and Histogen’s board of directors has (i) determined that the transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of Conatus or Histogen, as applicable, and their respective stockholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated therein and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that its stockholders vote to adopt or approve, as applicable, the Merger Agreement and, therefore, approve the transactions contemplated therein. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus/information statement, and Histogen’s board of directors recommends that Histogen’s stockholders sign and return the written consent indicating their approval of the merger and adoption of the Merger Agreement and the transactions contemplated therein.

More information about Conatus, Histogen and the proposed transaction is contained in this proxy statement/prospectus/information statement. Conatus and Histogen urge you to read the accompanying proxy statement/


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prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 25.

Conatus and Histogen are excited about the opportunities the merger brings to both Conatus’ and Histogen’s stockholders, and thank you for your consideration and continued support.

 

Steven J. Mento, Ph.D.

   Richard W. Pascoe

President and Chief Executive Officer

   Chairman and Chief Executive Officer

Conatus Pharmaceuticals Inc.

   Histogen Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement/prospectus/information statement is dated April 1, 2020, and is first being mailed to Conatus’ and Histogen’s stockholders on or about April 3, 2020.


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CONATUS PHARMACEUTICALS INC.

16745 West Bernardo Drive, Suite 250

San Diego, CA 92127

(858) 376-2600

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD VIRTUALLY ON MAY 7, 2020

Dear Stockholders of Conatus:

On behalf of the board of directors of Conatus Pharmaceuticals Inc., a Delaware corporation (“Conatus”), we are pleased to deliver this proxy statement/prospectus/information statement for the proposed merger between Conatus and Histogen Inc., a Delaware corporation (“Histogen”), pursuant to which Chinook Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Conatus (“Merger Sub”), will merge with and into Histogen, with Histogen surviving as a wholly owned subsidiary of Conatus. The Conatus special meeting will be held virtually at www.proxydocs.com/CNAT on May 7, 2020 at 9:00 a.m. Pacific time unless postponed or adjourned to a later date for the following purposes:

 

1.

To consider and vote upon a proposal to approve the Agreement and Plan of Merger and Reorganization, dated as of January 28, 2020, by and among Conatus, Merger Sub, and Histogen, a copy of which is attached as Annex A to this proxy statement/prospectus/information statement, and the transactions contemplated thereby, including the merger, the issuance of shares of Conatus’ common stock to Histogen’s stockholders pursuant to the terms of the Merger Agreement and the change of control resulting from the merger.

 

2.

To approve a series of alternative amendments to the amended and restated certificate of incorporation of Conatus to effect a reverse stock split of Conatus’ common stock, within a range, as determined by Conatus’ board of directors, of one new share for every 10 to 50 (or any number in between) shares outstanding, in the form attached as Annex D to this proxy statement/prospectus/information statement (the “Conatus Reverse Stock Split”).

 

3.

To approve the Conatus 2020 Incentive Award Plan (“Conatus 2020 Plan”), a copy of which is attached as Annex E to this proxy statement/prospectus/information statement.

 

4.

To approve, on a nonbinding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger.

 

5.

To consider and vote upon an adjournment of the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3.

 

6.

To transact such other business as may properly come before the Conatus special meeting or any adjournment or postponement thereof.

Conatus’ board of directors has fixed March 13, 2020, as the record date for the determination of stockholders entitled to notice of, and to vote at, the Conatus special meeting and any adjournment or postponement thereof. Only holders of record of shares of Conatus’ common stock at the close of business on the record date are entitled to notice of, and to vote at, the Conatus special meeting. At the close of business on the record date, Conatus had shares of common stock outstanding and entitled to vote.

Your vote is important. Assuming that a quorum is present at the special meeting, the affirmative vote of the majority of the votes cast (meaning the number of shares voted “FOR” the proposal must exceed the number of shares voted “AGAINST” the proposal) is required for approval of Proposal Nos. 1, 3, 4 and 5. The affirmative vote of the holders of a majority of shares of Conatus’ common stock having voting power outstanding on the record date for the Conatus special meeting is required for approval of Proposal No. 2. Each of Proposal Nos. 1 and 2 are conditioned upon each other. Therefore, the merger cannot be consummated without the approval of both Proposal Nos. 1 and 2. Proposal No. 3 is conditioned upon the consummation of the merger. If the merger is not completed or the stockholders do not approve Proposal No. 3, the Conatus 2020 Incentive Award Plan will not become effective. Proposal Nos. 1 and 2 are not conditioned on Proposal No. 3 being approved.

Even if you plan to attend the Conatus virtual special meeting, Conatus requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Conatus special meeting if you are unable to attend.

By Order of Conatus’ Board of Directors,

Steven J. Mento, Ph.D., President and

Chief Executive Officer April 1, 2020

CONATUS’ BOARD OF DIRECTORS HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, CONATUS AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. CONATUS’ BOARD OF DIRECTORS RECOMMENDS THAT CONATUS’ STOCKHOLDERS VOTE “FOR” EACH SUCH PROPOSAL.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement incorporates important business and financial information about Conatus that is not included in or delivered with this document. You may obtain this information without charge through the SEC website (www.sec.gov) or upon your written or oral request by contacting the Corporate Secretary of Conatus Pharmaceuticals Inc., at 16745 West Bernardo Drive, Suite 250, San Diego, CA 92127 or by calling (858) 376-2600.

To ensure timely delivery of these documents, any request should be made no later than April 23, 2020 to receive them before the special meeting.

For additional details about where you can find information about Conatus, please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.


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     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1  

PROSPECTUS SUMMARY

     8  

The Companies

     8  

The Merger

     8  

Reasons for the Merger

     9  

Opinion of the Conatus Financial Advisor

     10  

Overview of the Merger Agreement

     11  

Support Agreements

     14  

Lock-up Agreements

     15  

Management Following the Merger

     15  

Interests of Certain Directors, Officers and Affiliates of Conatus and Histogen

     16  

Risk Factors

     17  

Regulatory Approvals

     17  

Nasdaq Stock Market Listing

     18  

Anticipated Accounting Treatment

     18  

Appraisal Rights

     18  

Comparison of Stockholder Rights

     18  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

     19  

Selected Historical Financial Data of Conatus

     19  

Selected Historical Financial Data of Histogen

     20  

Selected Unaudited Pro Forma Condensed Combined Financial Data of Conatus and Histogen

     22  

Comparative Historical and Unaudited Pro Forma Per Share Data

     24  

RISK FACTORS

     25  

Risks Related to the Merger

     25  

Risks Related to Conatus’ Evaluation of Strategic Alternatives

     30  

Risks Related to Conatus’ Business and Industry

     34  

Risks Related to Conatus’ Reliance on Third Parties

     50  

Risks Related to Conatus’ Financial Position and Capital Requirements

     51  

Risks Related to Conatus’ Intellectual Property

     54  

Risks Related to Ownership of Conatus’ Common Stock

     57  

Risks Related to Histogen

     62  

Risks Related to Histogen’s Intellectual Property

     82  

Risks Related to the Combined Organization

     88  

FORWARD-LOOKING STATEMENTS

     93  

THE SPECIAL MEETING OF CONATUS’ STOCKHOLDERS

     94  

Date, Time and Place

     94  

Purpose of the Conatus Special Meeting

     94  

Recommendation of Conatus’ Board of Directors

     94  

Record Date and Voting Power

     95  

Voting and Revocation of Proxies

     95  

Required Vote

     96  

Solicitation of Proxies

     97  

Other Matters

     97  

 

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THE MERGER

     98  

Background of the Merger

     98  

Conatus Reasons for the Merger

     111  

Histogen Reasons for the Merger

     114  

Opinion of the Conatus Financial Advisor

     116  

Interests of the Conatus Directors and Executive Officers in the Merger

     123  

Interests of the Histogen Directors and Executive Officers in the Merger

     131  

Limitations of Liability and Indemnification

     137  

Histogen Stock Options and Warrants

     137  

Success Fee Agreement with Lordship

     137  

Form of the Merger

     138  

Merger Consideration

     138  

Effective Time of the Merger

     140  

Regulatory Approvals

     140  

Tax Treatment of the Merger

     140  

Tax Withholding

     140  

Material U.S. Federal Income Tax Consequences of the Merger

     140  

Nasdaq Stock Market Listing

     144  

Anticipated Accounting Treatment

     144  

Appraisal Rights

     144  

THE MERGER AGREEMENT

     148  

General

     148  

Merger Consideration and Exchange Ratio

     148  

Determination of Conatus’ and Histogen’s Net Cash

     152  

Treatment of Conatus’ Stock Awards and Warrants

     152  

Treatment of Histogen’s Stock Options and Warrants

     153  

Directors and Officers of Conatus Following the Merger

     153  

Amended and Restated Certificate of Incorporation and Amendment to the Amended and Restated Certificate of Incorporation of Conatus

     153  

Conditions to the Completion of the Merger

     154  

Representations and Warranties

     157  

No Solicitation

     158  

Approval of Stockholders

     160  

Board Recommendations

     160  

Conduct of Business Pending the Merger

     161  

Other Covenants

     164  

Termination

     165  

Termination Fee

     167  

Amendment

     168  

Transaction Expenses

     168  

Miscellaneous

     169  

AGREEMENTS RELATED TO THE MERGER

     170  

Histogen Support Agreement

     170  

Conatus Support Agreement

     171  

Lock-up Agreements

     172  

CONATUS EXECUTIVE COMPENSATION

     173  

CONATUS DIRECTOR COMPENSATION

     178  

MATTERS BEING SUBMITTED TO A VOTE OF CONATUS’ STOCKHOLDERS

     180  

Proposal No.  1: Approval of the Merger and the Issuance of Common Stock in the Merger

     180  

 

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Proposal No.  2: Approval of an Amendment to the Amended and Restated Certificate of Incorporation of Conatus Effecting the Conatus Reverse Stock Split

     180  

Proposal No. 3: Approval of the Conatus 2020 Incentive Award Plan

     186  

Proposal No. 4: Advisory Vote on Merger Related Compensation

     197  

Proposal No. 5: Approval of Possible Adjournment of the Conatus Special Meeting

     197  

CONATUS BUSINESS

     198  

Overview

     198  

Competition

     200  

Material Contracts

     200  

Intellectual Property

     202  

Government Regulation

     202  

Geographic and Financial Segment Information

     213  

Corporate Information and Website

     213  

Employees

     213  

Available Information

     213  

Properties

     213  

Legal Proceedings

     213  

Market Information

     214  

Holders of Common Stock

     214  

Dividend Policy

     214  

HISTOGEN BUSINESS

     215  

Company Overview

     215  

Product Candidates

     215  

Business Strategy

     217  

Corporate Information

     217  

Market and Commercial Opportunity

     218  

Strategic Agreements

     218  

Governmental Regulation

     220  

Chemistry, Manufacturing, and Controls

     234  

Intellectual Property

     234  

Competition

     236  

Employees

     237  

Properties

     237  

Legal Proceedings

     237  

CONATUS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     238  

Disclosure Regarding Forward-Looking Statements

     238  

Overview

     238  

Financial Overview

     240  

Critical Accounting Policies and Significant Judgments and Estimates

     242  

Results of Operations

     245  

Liquidity and Capital Resources

     247  

Contractual Obligations and Commitments

     249  

Off-Balance Sheet Arrangements

     250  

HISTOGEN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     251  

Overview

     251  

Results of Operations

     254  

Liquidity and Going Concern

     256  

 

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Contractual Obligations and Commitments

     258  

Critical Accounting Policies and Significant Judgments and Estimates

     260  

Off-Balance Sheet Arrangements

     262  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     263  

MANAGEMENT FOLLOWING THE MERGER

     264  

Executive Officers and Directors

     264  

Composition of the Board of Directors

     268  

Committees of the Board of Directors

     269  

HISTOGEN EXECUTIVE COMPENSATION.

     272  

HISTOGEN DIRECTOR COMPENSATION

     277  

RELATED PARTY TRANSACTIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED ORGANIZATION

     279  

Conatus Transactions

     279  

Histogen Transactions

     280  

DESCRIPTION OF CONATUS’ CAPITAL STOCK

     281  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     285  

Pro Forma Condensed Combined Balance Sheet

     287  

Pro Forma Condensed Combined Statement of Operations

     288  

Notes to the Unaudited Pro Forma Condensed Combined Financial Information

     289  

COMPARISON OF RIGHTS OF HOLDERS OF CONATUS STOCK AND HISTOGEN STOCK

     295  

PRINCIPAL STOCKHOLDERS OF CONATUS

     309  

PRINCIPAL STOCKHOLDERS OF HISTOGEN

     311  

PRINCIPAL STOCKHOLDERS OF COMBINED ORGANIZATION

     313  

LEGAL MATTERS

     315  

EXPERTS

     315  

WHERE YOU CAN FIND MORE INFORMATION

     316  

TRADEMARK NOTICE

     316  

OTHER MATTERS

     317  

Delinquent Section 16(a) Reports

     317  

Stockholder Proposals

     317  

Communication with Conatus’ Board of Directors

     317  

INDEX TO CONATUS FINANCIAL STATEMENTS

     F-A-1  

INDEX TO HISTOGEN FINANCIAL STATEMENTS

     F-B-1  

ANNEX A—AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

     A-i  

ANNEX B—OPINION OF OPPENHEIMER

     B-1  

ANNEX C—GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

     C-1  

ANNEX D—CONATUS CERTIFICATE OF AMENDMENT REGARDING REVERSE STOCK SPLIT

     D-1  

ANNEX E—CONATUS 2020 INCENTIVE AWARD PLAN

     E-1  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split within a range, as determined by the board of directors of Conatus Pharmaceuticals Inc. (“Conatus”), of one new share for every 10 to 50 (or any number in between) shares outstanding, as described in Proposal No. 2 in this proxy statement/prospectus/information statement (the “Conatus Reverse Stock Split”).

The following section provides answers to frequently asked questions about the merger. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

 

Q:

What is the merger?

 

A:

Conatus and Histogen Inc. (“Histogen”) have entered into an Agreement and Plan of Merger and Reorganization, dated as of January 28, 2020 (the “Merger Agreement”). The Merger Agreement contains the terms and conditions of the proposed business combination of Conatus and Histogen. Under the Merger Agreement, Chinook Merger Sub, Inc., a wholly owned subsidiary of Conatus (“Merger Sub”), will merge with and into Histogen, with Histogen surviving as a wholly owned subsidiary of Conatus. This transaction is referred to as “the merger.”

At the effective time of the merger (the “Effective Time”), each share of Histogen’s common stock and Histogen’s preferred stock outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement, and shares held by Histogen stockholders who have exercised and perfected appraisal rights as more fully described in the section entitled “The Merger—Appraisal Rights” below) will be converted into the right to receive 1.4750 shares of Conatus’ common stock, subject to adjustment to account for the Conatus Reverse Stock Split (the “exchange ratio”). This exchange ratio is an estimate only and is based upon Conatus and Histogen’s capitalization at March 2, 2020. The final exchange ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in the attached proxy statement/prospectus/information statement, which formula accounts for adjustments due to changes in Conatus and Histogen’s capitalization prior to the consummation of the merger as well as the respective net cash balances of Conatus and Histogen prior to the merger. As a result of the merger, current holders of Histogen’s capital stock and options and warrants to purchase Histogen’s capital stock are expected to own, or hold rights to acquire, in the aggregate approximately 74% of the fully-diluted common stock of Conatus, which for these purposes is defined as the outstanding common stock of Conatus (including the shares of common stock issued in the merger), plus all options and warrants of Conatus outstanding immediately prior to the merger, plus all options and warrants of Histogen converted into options and warrants of Conatus in connection with the merger (the “Fully-Diluted Common Stock of Conatus”), and Conatus’ current stockholders, optionholders and warrantholders are expected to own, or hold rights to acquire, in the aggregate approximately 26% of the Fully-Diluted Common Stock of Conatus, in each case, following the effective time of the merger (the “Effective Time”). These estimates are subject to adjustment prior to the closing of the merger, including an upward adjustment to the extent that Conatus’ net cash at the Effective Time is less than $11.9 million or Histogen’s net cash at the Effective Time is more than negative $0.8 million (and as a result, Conatus stockholders could own less, and Histogen stockholders could own more, of the combined organization), or a downward adjustment to the extent that Conatus’ net cash at the Effective Time is more than $12.7 million or Histogen’s net cash at the Effective Time is less than negative $1.6 million (and as a result, Conatus stockholders could own more, and Histogen stockholders could own less, of the combined organization). The foregoing net cash amounts at which adjustments to the exchange ratio may be triggered reflect reductions for each company’s daily cash burn from January 31, 2020 through May 7, 2020, the date of the Conatus special meeting of stockholders, and will be further adjusted to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger. After the completion of the merger, Conatus will change its corporate name from “Conatus Pharmaceuticals Inc.” to “Histogen Inc.” (or to such other name as Conatus and Histogen may agree) as contemplated by the Merger Agreement (the “Conatus Name Change”).

 

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Q:

What will happen to Conatus if, for any reason, the merger does not close?

 

A:

If, for any reason, the merger does not close, Conatus’ board of directors may elect to, among other things, attempt to complete another strategic transaction like the merger, attempt to sell or otherwise dispose of the various assets of Conatus, resume its research and development activities and continue to operate the business of Conatus or dissolve and liquidate its assets. If Conatus decides to dissolve and liquidate its assets, Conatus would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims. There can be no assurances as to the amount or timing of available cash left to distribute to stockholders after paying the debts and other obligations of Conatus and setting aside funds for reserves.

 

Q:

Why are the two companies proposing to merge?

 

A:

Histogen and Conatus believe that the merger will result in a company focused on developing patented, innovative technologies that replace and regenerate tissues in the body for aesthetic and therapeutic markets. For a discussion of Conatus’ and Histogen’s reasons for the merger, please see the section entitled “The Merger—Conatus Reasons for the Merger” and “The Merger—Histogen Reasons for the Merger” in this proxy statement/prospectus/information statement.

 

Q:

Why am I receiving this proxy statement/prospectus/information statement?

 

A:

You are receiving this proxy statement/prospectus/information statement because you have been identified as a stockholder of Conatus or of Histogen as of the applicable record date. If you are a stockholder of Conatus, you are entitled to vote at Conatus’ special stockholder meeting (referred to herein as the “Conatus special meeting”) to approve the Merger Agreement and the transactions contemplated thereby, including the merger and the issuance of shares of Conatus’ common stock pursuant to the Merger Agreement. If you are a stockholder of Histogen, you are entitled to sign and return the Histogen written consent to adopt the Merger Agreement and approve the transactions contemplated thereby, including the merger. This document serves as:

 

   

a proxy statement of Conatus used to solicit proxies for the Conatus special meeting;

 

   

a prospectus of Conatus used to offer shares of Conatus’ common stock in exchange for shares of Histogen’s capital stock in the merger and issuable upon exercise of Histogen’s warrants and options, as applicable; and

 

   

an information statement of Histogen used to solicit the written consent of its stockholders for the adoption of the Merger Agreement and the approval of the merger and related transactions.

 

Q:

What is required to consummate the merger?

 

A:

To consummate the merger, Conatus’ stockholders must approve the merger, the issuance of Conatus’ common stock pursuant to the Merger Agreement, the change of control of Conatus and an amendment to the amended and restated certificate of incorporation of Conatus effecting the Conatus Reverse Stock Split, and Histogen’s stockholders must adopt the Merger Agreement and, thereby, approve the merger and the other transactions contemplated therein.

The approval of the merger, the issuance of Conatus’ common stock pursuant to the Merger Agreement and the change of control by Conatus’ stockholders requires the affirmative vote of the majority of the votes cast (meaning the number of shares voted “FOR” the proposal must exceed the number of share voted “AGAINST” the proposal) at the Conatus special meeting. The approval of the amendment to the amended and restated certificate of incorporation of Conatus to effect the Conatus Reverse Stock Split requires the affirmative vote of the holders of a majority of the shares of Conatus’ common stock having voting power outstanding on the record date for the Conatus special meeting. The approval of the Conatus Reverse Stock

 

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Split is required in order to authorize Conatus’ issuance of the shares of its common stock pursuant to the Merger Agreement and avoid a delisting of Conatus’ common stock from the Nasdaq Capital Market (“Nasdaq”). Therefore, if the requisite stockholders of Conatus approve the merger, the issuance of Conatus’ common stock pursuant to the Merger Agreement and the change of control of Conatus but do not approve the Conatus Reverse Stock Split, the merger will not be consummated.

The adoption of the Merger Agreement and the approval of the merger and related transactions by Histogen’s stockholders requires the affirmative vote (or written consent) of the holders of a majority of (a) the outstanding shares of Histogen’s common stock and preferred stock, voting together as one class, and (b) the outstanding shares of Histogen’s preferred stock voting as a separate class. Certain of Histogen’s stockholders who in the aggregate own approximately 50.4% of the outstanding shares of Histogen’s capital stock on an as converted to common stock basis, and certain of Conatus’ stockholders who in the aggregate own approximately 2.8% of the outstanding shares of Conatus’ common stock, are parties to support agreements with Conatus and Histogen, whereby such stockholders have agreed, subject to the terms of the support agreements, to vote their shares in favor of the adoption or approval, as applicable, of the Merger Agreement and the transactions contemplated therein, including the merger and the issuance of Conatus’ common stock to Histogen’s stockholders pursuant to the Merger Agreement. In addition, following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the SEC and pursuant to the conditions of the Merger Agreement, Histogen’s stockholders who are party to the support agreements will execute written consents approving the merger and related transactions. Therefore, holders of a sufficient number of shares of Histogen capital stock required to adopt the Merger Agreement, thereby approving the merger, have agreed to adopt the Merger Agreement via written consent. Stockholders of Histogen, including those who are parties to support agreements, are being requested to execute written consents providing such approvals.

In addition to the requirement of obtaining the stockholder approvals described above and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived. One of these conditions is that Conatus is required to have net cash of at least $12.5 million at the closing of the merger, as adjusted downward by approximately $7,000, which represents Conatus’ average daily net cash burn in December 2019, for each day after January 31, 2020 until the closing date of the merger. For example, if the merger is anticipated to close on May 7, 2020 and Conatus’ net cash falls below $11.8 million, Histogen could decide not to consummate the transaction and the Merger Agreement could be terminated. As of the date of this proxy statement/prospectus/information statement, Conatus expects its net cash to be above the net cash required by the Merger Agreement at closing. For a more complete description of the closing conditions under the Merger Agreement, we urge you to read the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement.

 

Q:

What will Histogen’s stockholders, warrantholders and optionholders receive in the merger?

 

A:

As a result of the merger, Histogen’s stockholders, warrantholders and optionholders will become entitled to receive shares, or rights to acquire shares, of Conatus’ common stock equal to, in the aggregate, approximately 74% of the Fully-Diluted Common Stock of Conatus. At the closing of the merger, Histogen warrantholders and optionholders will have their Histogen warrants and options converted into warrants and options to purchase Conatus’ common stock, with the number of Conatus shares subject to such warrant or option, and the exercise price, being appropriately adjusted to reflect the exchange ratio between Conatus’ common stock and Histogen capital stock determined in accordance with the Merger Agreement.

For a more complete description of what Histogen’s stockholders, warrantholders and optionholders will receive in the merger, please see the section entitled “The Merger Agreement—Merger Consideration and Exchange Ratio” in this proxy statement/prospectus/information statement.

 

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Q:

Who will be the directors of Conatus following the merger?

 

A:

Following the merger, Conatus’ board of directors will consist of a total of eight directors. Pursuant to the terms of the Merger Agreement, six of such directors will be designated by Histogen, and two of such directors will be designated by Conatus. It is anticipated that, following the closing of the merger, Conatus’ board of directors will be constituted as follows:

 

Name

  

Current Principal Affiliation

Steven J. Mento, Ph.D.    Director, President & Chief Executive Officer, Conatus Pharmaceuticals Inc.
Richard W. Pascoe    Chairman, President & Chief Executive Officer, Histogen Inc.
Daniel L. Kisner, M.D.    Director, Conatus Pharmaceuticals Inc.
Stephen Chang, Ph.D.    Director, Histogen Inc.
David H. Crean, Ph.D.    Director, Histogen Inc.
Jonathan Jackson    Director, Histogen Inc.
Brian M. Satz    Director, Histogen Inc.
Hayden Yizhuo Zhang    Director, Histogen Inc.

 

Q:

As a stockholder of Conatus, how does Conatus’ board of directors recommend that I vote?

 

A:

After careful consideration, Conatus’ board of directors recommends that Conatus’ stockholders vote:

 

   

“FOR” Proposal No. 1 to approve the Merger Agreement and the transactions contemplated thereby, including the merger, the issuance of shares of Conatus’ common stock to Histogen’s stockholders in the merger and the change of control;

 

   

“FOR” Proposal No. 2 to approve an amendment to the amended and restated certificate of incorporation of Conatus to effect the Conatus Reverse Stock Split;

 

   

“FOR” Proposal No. 3 to approve the Conatus 2020 Plan;

 

   

“FOR” Proposal No. 4 to approve, on a non-binding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger; and

 

   

“FOR” Proposal No. 5 to adjourn the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3.

 

Q:

As a stockholder of Histogen, how does Histogen’s board of directors recommend that I vote?

 

A:

After careful consideration, Histogen’s board of directors recommends that Histogen’s stockholders execute the written consent indicating their vote in favor of the adoption of the Merger Agreement and the approval of the merger and the transactions contemplated by the Merger Agreement.

 

Q:

What risks should I consider in deciding whether to vote in favor of the merger or to execute and return the written consent, as applicable?

 

A:

You should carefully review the section of this proxy statement/prospectus/information statement entitled “Risk Factors,” which sets forth certain risks and uncertainties related to the merger, risks and uncertainties to which the combined organization’s business will be subject, and risks and uncertainties to which each of Conatus and Histogen, as an independent company, is subject.

 

Q:

When do you expect the merger to be consummated?

 

A:

We anticipate that the merger will occur in May 2020, soon after the Conatus special meeting to be held on May 7, 2020, but we cannot predict the exact timing. For more information, please see the section entitled

 

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  “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement.

 

Q:

What do I need to do now?

 

A:

Conatus and Histogen urge you to read this proxy statement/prospectus/information statement carefully, including its annexes, and to consider how the merger affects you.

If you are a stockholder of Conatus, you may provide your proxy instructions in one of four different ways. First, you can mail your signed proxy card in the enclosed return envelope. You may also provide your proxy instructions via phone or via the Internet by following the instructions on your proxy card or voting instruction form. Finally, you can vote your shares at the virtual special meeting; see “How can I vote and participate in the Conatus virtual special meeting of stockholders?” below. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the Conatus special meeting.

If you are a stockholder of Histogen, you may execute and return your written consent to Histogen in accordance with the instructions provided by Histogen.

 

Q:

What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A:

If you are a stockholder of Conatus, the failure to return your proxy card or otherwise provide proxy instructions may result in there not being a quorum present at the Conatus special meeting, which would prevent the meeting from occurring. If there is a quorum at the special meeting, failure to return your proxy card or otherwise provide proxy instructions will have no effect on the approval of Proposal Nos. 1, 3, 4 and 5 and will have the same effect as voting against Proposal No. 2. If your shares are held in “street name” by your broker, Conatus does not believe your broker will have discretion to vote for or against any of the Proposals if you do not provide your broker with voting instructions. Thus, for shares held in “street name,” if you do not provide voting instructions to your broker, this will result in a “broker non-vote” and such “broker non-votes” have the same effect as an “AGAINST” vote on Proposal No. 2 and will have no effect on Proposal Nos. 1, 3, 4 and 5. Please see the answer to “Q: If my Conatus shares are held in “street name” by my broker, will my broker vote my shares for me?” below for further discussion regarding broker discretion to vote on the proposals and “broker non-votes.”

 

Q:

How can I vote and participate in the Conatus virtual special meeting of stockholders?

 

A:

You are entitled to participate in the Conatus virtual special meeting of stockholders only if you were a Conatus stockholder as of the close of business on March 13, 2020 or if you hold a valid proxy for the Conatus virtual special meeting.

Conatus stockholders and proxy holders that have registered to attend the meeting will be able to participate in the Conatus virtual special meeting online during the meeting. You also will be able to vote your shares electronically at the Conatus virtual special meeting of stockholders.

To participate in the Conatus special meeting, you will need to register in advance by visiting www.proxydocs.com/CNAT and following the registration instructions prior to the deadline of 2:00 p.m., Pacific time, on May 5, 2020. When registering you will be asked to provide the control number located inside the shaded gray box on your proxy card or voting instruction form, as described in the proxy card or voting instruction form. Upon completing your registration, you will receive an email confirming that you have registered. Approximately one hour prior to the start of the Conatus special meeting, you will receive further instructions via email, including a unique link, that will allow you access to the meeting. Please be sure to follow the instructions that will be delivered to you via email after completing the registration.

Conatus recommends that you register as soon as possible and that you log in at least 15 minutes before the Conatus special meeting to ensure you are logged in when the meeting starts.

 

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Q:

When and where is the special meeting of Conatus’ stockholders?

 

A:

The Conatus special meeting will be held at 9:00 a.m., Pacific time, on May 7, 2020. The Conatus virtual special meeting of stockholders can be accessed by visiting www.proxydocs.com/CNAT, where Conatus stockholders will be able to participate and vote online. Online access will begin at 8:45 a.m., Pacific Time, and Conatus encourages its stockholders to access the meeting prior to the start time. For instructions on how to register and participate in the Conatus special meeting see “Q: How can I vote and participate in the Conatus virtual special meeting of stockholders” above.

 

Q:

What are the material U.S. federal income tax consequences of the merger to U.S. Holders of Histogen capital stock?

 

A:

It is a condition to Conatus’ obligation to consummate the merger that Conatus receive an opinion from Latham & Watkins LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). It is a condition to Histogen’s obligation to consummate the merger that Histogen receive an opinion from Sheppard Mullin Richter & Hampton LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Subject to the tax opinion representations and assumptions (as defined on page 142), in the opinions of Latham & Watkins LLP and Sheppard Mullin Richter & Hampton LLP, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, a U.S. Holder (as defined on page 142) of Histogen’s capital stock will not recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of Histogen capital stock for shares of Conatus common stock in the merger, except with respect to cash received by a U.S. Holder of Histogen capital stock in lieu of a fractional share of Conatus common stock. If any of the tax opinion representations and assumptions is incorrect, incomplete or inaccurate or is violated, the accuracy of the opinions described above may be affected and the U.S. federal income tax consequences of the merger could differ from those described in this proxy statement/prospectus/information statement.

Please review the information in the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” for a more complete description of the material U.S. federal income tax consequences of the merger to U.S. Holders of Histogen capital stock. The tax consequences to you of the merger will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the merger.

 

Q:

What are the material U.S. federal income tax consequences of the Conatus Reverse Stock Split to Conatus U.S. Holders?

 

A:

A Conatus U.S. Holder generally should not recognize gain or loss upon the Conatus Reverse Stock Split, except to the extent a Conatus U.S. Holder receives cash in lieu of a fractional share of Conatus common stock. Please review the information in the section entitled “Proposal No. 2: Approval of a Series of Alternative Amendments to the Amended and Restated Certificate of Incorporation of Conatus Effecting the Conatus Reverse Stock Split—Material U.S. Federal Income Tax Consequences of the Conatus Reverse Stock Split” for a more complete description of the material U.S. federal income tax consequences of the Conatus Reverse Stock Split to Conatus U.S. Holders.

The tax consequences to you related to the Conatus Reverse Stock Split will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you.

 

Q:

If my Conatus shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:

Brokers are not expected to have discretionary authority to vote for any of the Proposals, so your broker will not be able to vote your shares of Conatus common stock without instructions from you. Conatus believes that each of the Proposals are deemed to be “non-discretionary” matters under certain rules applicable to brokers, which does not allow brokers to vote on these matters if they are not provided with voting

 

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  instructions by the beneficial owners of the shares. Therefore, if you fail to provide instructions to your broker as to how to vote your shares on each of the Proposals, your broker will not have the discretion to vote your shares on those proposals. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.

 

Q:

May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:

Conatus’ stockholders of record, other than those of Conatus’ stockholders who are parties to support agreements, may change their vote at any time before their proxy is voted at the Conatus special meeting in one of three ways. First, a stockholder of record of Conatus can send a written notice to the Secretary of Conatus stating that it would like to revoke its proxy. Second, a stockholder of record of Conatus can submit new proxy instructions either on a new proxy card or via the Internet. Third, a stockholder of record of Conatus can attend the Conatus virtual special meeting and vote during the meeting. Attendance alone will not revoke a proxy. If a stockholder of Conatus of record or a stockholder who owns Conatus shares in “street name” has instructed a broker to vote its shares of Conatus’ common stock, the stockholder must follow directions received from its broker to change those instructions.

 

Q:

Who is paying for this proxy solicitation?

 

A:

Conatus and Histogen will share equally the cost of printing and filing of this proxy statement/prospectus/information statement and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Conatus’ common stock for the forwarding of solicitation materials to the beneficial owners of Conatus’ common stock. Conatus will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

Conatus has engaged Laurel Hill Advisory to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements, which are not expected to exceed $125,000 in total.

 

Q:

Who can help answer my questions?

 

A:

If you are a stockholder of Conatus and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the merger, including the procedures for voting your shares, you should contact:

Conatus Pharmaceuticals Inc.

16745 West Bernardo Drive, Suite 250

San Diego, CA 92127

Tel: (858) 376-2600

Attn: Corporate Secretary

If you are a stockholder of Histogen, and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the merger, including the procedures for voting your shares, you should contact:

Histogen Inc.

10655 Sorrento Valley Road, Ste 200

San Diego, CA 92121

(858) 526-3100

Attn: Corporate Secretary

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the merger, the proposals being considered at the Conatus special meeting and Histogen’s stockholder actions that are the subject of the written consent, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement attached as Annex A, the opinion of Oppenheimer & Co. Inc. attached as Annex B and the other annexes to which you are referred herein. For more information, please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

The Companies

Conatus Pharmaceuticals Inc.

16745 West Bernardo Drive, Suite 250

San Diego, CA 92127

Tel: (858) 376-2600

Conatus is a biotechnology company that has been focused on the development and commercialization of novel medicines to treat chronic diseases with significant unmet need. Conatus has been developing emricasan, an orally active pan-caspase inhibitor, for the treatment of patients with chronic liver disease. Conatus has also been developing CTS-2090, an orally active selective caspase inhibitor, for diseases involving inflammasome pathways.

Histogen Inc.

10655 Sorrento Valley Road, Ste 200

San Diego, CA 92121

(858) 526-3100

Histogen is a regenerative medicine company focused on developing patented, innovative technologies that replace and regenerate tissues in the body for aesthetic and therapeutic markets.

Chinook Merger Sub, Inc.

Merger Sub is a wholly owned subsidiary of Conatus, and was formed solely for the purposes of carrying out the merger.

The Merger (see page 98)

If the merger is completed, Merger Sub will merge with and into Histogen, with Histogen surviving as a wholly owned subsidiary of Conatus.

At the Effective Time, each share of Histogen capital stock outstanding immediately prior to the Effective Time (excluding certain shares to be canceled pursuant to the Merger Agreement, and shares held by stockholders who have exercised and perfected appraisal rights as more fully described in the section entitled “The Merger—Appraisal Rights” below) will be converted into the right to receive approximately 1.4750 shares of Conatus’ common stock, subject to adjustment to account for the Conatus Reverse Stock Split. The exchange ratio is calculated using a formula intended to allocate Histogen’s existing stockholders, optionholders and warrantholders (on a fully-diluted basis), an ownership percentage of the combined company, based on a valuation for Conatus of $35.135 million and $100.0 million for Histogen. This exchange ratio is an estimate only and the final exchange ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement. Immediately following the consummation of the merger, current stockholders, optionholders and warrantholders of Histogen will own, or hold rights to acquire, approximately 74% of the Fully-Diluted Common Stock of Conatus, with current



 

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stockholders, optionholders and warrantholders of Conatus owning, or holding rights to acquire, approximately 26% of the Fully-Diluted Common Stock of Conatus. Conatus will assume outstanding and unexercised options and warrants to purchase Histogen capital stock, and each such option or warrant will be converted into options or warrants, as applicable, to purchase Conatus’ common stock, with the exercise price being appropriately adjusted to reflect the exchange ratio. These estimates are subject to adjustment prior to closing of the merger, including an upward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is less than $11.9 million or Histogen’s net cash at the Effective Time is more than negative $0.8 million (and as a result, Conatus stockholders could own less, and Histogen stockholders could own more, of the combined organization), or a downward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is more than $12.7 million or Histogen’s net cash at the Effective Time is less than negative $1.6 million (and as a result, Conatus stockholders could own more, and Histogen stockholders could own less, of the combined organization). The foregoing net cash amounts at which adjustments to the exchange ratio may be triggered reflect reductions for each company’s daily cash burn from January 31, 2020 through May 7, 2020, the date of the Conatus special meeting of stockholders, and will be further adjusted to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger.

For a more complete description of the exchange ratio please see the section entitled “The Merger Agreement” in this proxy statement/prospectus/information statement.

The closing of the merger will occur no later than the second business day after the last of the conditions to the merger has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of each such conditions), or at such other time as Conatus and Histogen agree. Conatus and Histogen anticipate that the consummation of the merger will occur in the second quarter of the fiscal year. However, because the merger is subject to a number of conditions, neither Conatus nor Histogen can predict exactly when the closing will occur or if it will occur at all. After completion of the merger, Conatus will be renamed “Histogen Inc.”

Reasons for the Merger (see page 111)

Following the merger, the combined organization will be a company focused on developing patented, innovative technologies that replace and regenerate tissues in the body for aesthetic and therapeutic markets. Conatus and Histogen believe that the combined organization will have the following potential advantages:

 

   

Management Team. It is expected that the combined organization will be led by experienced senior management from Histogen and a board of directors with representation from each of Conatus and Histogen.

 

   

Cash Resources. Conatus and Histogen believe the combined organization’s cash and cash equivalents at the closing of the merger will be sufficient to enable Histogen to advance up to three product candidates into clinical development and to fund the combined organization into early 2021.

Each of Conatus’ and Histogen’s respective board of directors also considered other reasons for the merger, as described herein. For example, Conatus’ board of directors considered, among other things:

 

   

the strategic alternatives of Conatus to the merger, including the discussions that Conatus’ management and Conatus’ board of directors previously conducted with other potential merger partners;

 

   

the failure of emricasan to show success in clinical trials and the unlikelihood that such circumstances would change for the benefit of Conatus’ stockholders in the foreseeable future;

 

   

the risk associated with, and uncertain value and costs to stockholders of, liquidating Conatus;

 

   

the risks of continuing to operate Conatus on a stand-alone basis; and



 

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the opportunity as a result of the merger for Conatus’ stockholders to participate in the potential value of the Histogen product candidate portfolio.

In addition, Histogen’s board of directors approved the merger based on a number of factors, including the following:

 

   

the potential increased access to sources of capital and a broader range of investors to support the clinical development of its products than it could otherwise obtain if it continued to operate as a privately held company;

 

   

the potential to provide its current stockholders with greater liquidity by owning stock in a public company;

 

   

Histogen’s board of directors’ belief that no alternatives to the merger were reasonably likely to create greater value for Histogen’s stockholders after reviewing the various strategic options to enhance stockholder value that were considered by Histogen’s board of directors;

 

   

the cash resources of the combined organization expected to be available at the closing of the merger; and

 

   

the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes.

Opinion of the Conatus Financial Advisor (see page 116)

At the January 27, 2020 meeting of the Conatus board of directors, representatives of Oppenheimer & Co. Inc. (“Oppenheimer”) rendered Oppenheimer’s oral opinion, subsequently confirmed in writing, that as of such date, and based upon and subject to the qualifications, assumptions and other matters considered in connection with the preparation of its opinion, the Merger Consideration to be paid by Conatus pursuant to the Merger Agreement, was fair to Conatus from a financial point of view.

The full text of the written opinion of Oppenheimer, dated January 27, 2020, which sets forth, among other things, the various qualifications, assumptions and limitations on the scope of the review undertaken by Oppenheimer, is attached as Annex B to this prospectus. Oppenheimer provided its opinion for the information and assistance of the Conatus board of directors (solely in its capacity as such) in connection with, and for purposes of, its consideration of the Merger and its opinion only addresses whether the Merger Consideration to be paid by Conatus in the Merger pursuant to the Merger Agreement was fair, from a financial point of view, to Conatus as of the date of the opinion. The Oppenheimer opinion did not address any other term or aspect of the Merger Agreement or the Merger or any other transaction. The Oppenheimer opinion does not constitute a recommendation to the Board or any holder of Conatus Common Stock as to how the Board, such stockholder or any other person should vote or otherwise act with respect to the Merger or any other matter.

Material U.S. Federal Income Tax Consequences of the Merger (see page 140)

It is a condition to Conatus’ obligation to consummate the merger that Conatus receive an opinion from Latham & Watkins LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to Histogen’s obligation to consummate the merger that Histogen receive an opinion from Sheppard Mullin Richter & Hampton LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Subject to the tax opinion representations and assumptions (as defined on page 142), in the opinions of Latham & Watkins LLP and Sheppard Mullin Richter & Hampton LLP, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, a U.S. Holder (as defined on page 142) of Histogen capital stock will not recognize any gain or loss for U.S. federal income tax



 

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purposes on the exchange of shares of Histogen capital stock for shares of Conatus common stock in the merger, except with respect to cash received by a U.S. Holder of Histogen capital stock in lieu of a fractional share of Conatus common stock. If any of the tax opinion representations and assumptions is incorrect, incomplete or inaccurate or is violated, the accuracy of the opinions described above may be affected and the tax consequences of the merger could differ from those described in this proxy statement/prospectus/information statement.

Please review the information in the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” for a more complete description of the material U.S. federal income tax consequences of the merger to U.S. Holders of Histogen capital stock. The tax consequences to you of the merger will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the merger.

Material U.S. Federal Income Tax Consequences of the Conatus Reverse Stock Split (see page 183)

A Conatus U.S. Holder generally should not recognize gain or loss upon the Conatus Reverse Stock Split, except to the extent a Conatus U.S. Holder receives cash in lieu of a fractional share of Conatus common stock. Please review the information in the section entitled “Proposal No. 2: Approval of a Series of Alternative Amendments to the Amended and Restated Certificate of Incorporation of Conatus Effecting the Conatus Reverse Stock Split —Material U.S. Federal Income Tax Consequences of the Conatus Reverse Stock Split” for a more complete description of the material U.S. federal income tax consequences of the Conatus Reverse Stock Split to Conatus U.S. Holders.

The tax consequences to you of the Conatus Reverse Stock Split will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you.

Overview of the Merger Agreement

Merger Consideration and Exchange Ratio (see page 148)

At the Effective Time, all outstanding shares of Histogen capital stock shall convert into the right to receive shares of Conatus’ common stock as follows:

 

   

each share of Histogen’s capital stock outstanding immediately prior to the Effective Time (excluding shares of Histogen’s common stock held as treasury stock or held by Histogen, Merger Sub or any subsidiary of Histogen) will automatically be converted into the right to receive a number of shares of Conatus’ common stock equal to the exchange ratio of approximately 1.4750.

 

   

This exchange ratio is an estimate only and the final exchange ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement, which formula accounts for adjustments due to changes in Conatus’ and Histogen’s capitalization prior to the consummation of the merger as well as the respective cash balances of Conatus and Histogen prior to the merger.

Immediately after the merger, based on the exchange ratio, Histogen’s current stockholders, warrantholders and option holders will own, or hold rights to acquire, approximately 74% of the Fully-Diluted Common Stock of Conatus with current stockholders, optionholders and warrantholders of Conatus owning, or holding rights to acquire, approximately 26% of the Fully-Diluted Common Stock of Conatus. These estimates are subject to adjustment prior to closing of the merger, including upward adjustment to the extent that Conatus’ net cash at the Effective Time is less than $11.9 million or Histogen’s net cash at the Effective Time is more than negative $0.8 million (and as a result, Conatus stockholders could own less, and Histogen stockholders could own more, of the combined organization), or a downward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is more than $12.7 million or Histogen’s net cash at the Effective Time is less than



 

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negative $1.6 million (and as a result, Conatus stockholders could own more, and Histogen stockholders could own less, of the combined organization). The foregoing net cash amounts at which adjustments to the exchange ratio may be triggered reflect reductions for each company’s daily cash burn from January 31, 2020 through May 7, 2020, the date of the Conatus special meeting of stockholders, and will be further adjusted to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger.

The Merger Agreement does not include a price-based termination right, and there will be no adjustment to the total number of shares of Conatus’ common stock that Histogen’s stockholders will be entitled to receive for changes in the market price of Conatus’ common stock after the date the Merger Agreement was signed. Accordingly, the market value of the shares of Conatus’ common stock issued pursuant to the merger will depend on the market value of the shares of Conatus’ common stock at the time the merger closes, and could vary significantly from the market value on the date of this proxy statement/prospectus/information statement.

Treatment of Conatus’ Stock Awards and Warrants (see page 152)

Prior to the closing of the merger, Conatus’ board of directors will adopt appropriate resolutions and take all other actions necessary and appropriate to provide that the vesting of each unexpired and unexercised option to purchase Conatus’ common stock will be accelerated in full effective as of immediately prior to the Effective Time. The number of shares of common stock underlying such options and the exercise price for such options will be adjusted to account for the Reverse Stock Split. The terms governing options to purchase Conatus’ common stock will otherwise remain in full force and effect following the closing of the merger.

Under the Merger Agreement, Conatus’ board of directors will adopt appropriate resolutions and take all other actions necessary and appropriate to provide that, prior to the effective time of the Conatus Reverse Stock Split, the vesting of all outstanding Conatus RSUs, including those held by Conatus’ executive officers, will accelerate in full and, in settlement thereof and exchange therefor, each former holder of any Conatus RSU will be entitled to receive a number of shares of Conatus common stock equal to (1) the total number of shares of Conatus common stock subject to such holder’s Conatus RSUs, less (2) a number of shares of Conatus common stock equal to the quotient (rounded up to the nearest whole share) of (x) the dollar amount necessary to satisfy the applicable tax withholding obligations arising as a result of the vesting and settlement of such Conatus RSU (as determined in accordance with the applicable award agreement), divided by (y) the fair market value of a share of Conatus common stock having a fair market value (which, for this purpose, shall be the closing price per share of Conatus common stock immediately prior to the effective time of the acceleration).

Treatment of Histogen’s Stock Options and Warrants (see page 153)

Pursuant to the Merger Agreement, at the Effective Time:

 

   

each option to purchase shares of Histogen’s capital stock that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be assumed by Conatus and will become an option to purchase that number of shares of Conatus’ common stock equal to the product obtained by multiplying (i) the number of shares of Histogen’s common stock that were subject to such option immediately prior to the Effective Time by (ii) the exchange ratio (rounded down to the nearest whole number of shares). The per share exercise price for shares of Conatus’ common stock issuable upon exercise of each Histogen option assumed by Conatus shall be determined by dividing (a) the per share exercise price of Histogen’s common stock subject to such Histogen option, as in effect immediately prior to the Effective Time, by (b) the exchange ratio (and rounded up to the nearest penny). Any restriction on the exercise of any Histogen option assumed by Conatus will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Histogen option shall otherwise remain unchanged; and



 

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each warrant to purchase shares of Histogen capital stock outstanding and unexercised immediately prior to the Effective Time will be assumed by Conatus and will become a warrant to purchase that number of shares of Conatus’ common stock equal to the product obtained by multiplying (i) the number of shares of Histogen’s common stock, or the number of shares of Histogen’s common stock issuable upon conversion of the shares of Histogen’s preferred stock issuable upon exercise of the Histogen warrant, as applicable, that were subject to such warrant immediately prior to the Effective Time by (ii) the exchange ratio. The per share exercise price for shares of Conatus’ common stock issuable upon exercise of each Histogen warrant assumed by Conatus shall be determined by dividing (a) the per share exercise price of Histogen’s common stock or preferred stock subject to such Histogen warrant, as in effect immediately prior to the Effective Time, by (b) the exchange ratio. Any restriction on any Histogen warrant assumed by Conatus shall continue in full force and effect and the terms and other provisions of such Histogen warrant shall otherwise remain unchanged.

Conditions to the Completion of the Merger (see page 154)

To consummate the merger, Conatus’ stockholders must approve (a) the Merger Agreement and the transactions contemplated thereby, including the merger and the issuance of shares of Conatus’ common stock in the merger, and (b) an amendment to the amended and restated certificate of incorporation of Conatus effecting the Conatus Reverse Stock Split. Additionally, Histogen’s stockholders must adopt the Merger Agreement thereby approving the merger and the other transactions contemplated by the Merger Agreement. Additionally, Conatus is required to have net cash of at least $12.5 million at the closing of the merger, as adjusted downward by approximately $7,000, which represents Conatus’ average daily net cash burn in December 2019, for each day after January 31, 2020 until the closing date of the merger. For example, if the merger is anticipated to close on May 7, 2020 and Conatus’ net cash falls below $11.8 million, Histogen could decide not to consummate the transaction and the Merger Agreement could be terminated. As of the date of this proxy statement/prospectus/information statement, Conatus expects its net cash to be above the net cash required by the Merger Agreement at closing. In addition to obtaining such stockholder approvals and appropriate regulatory approvals and Conatus maintaining an adequate net cash balance, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

No Solicitation (see page 158)

Each of Conatus and Histogen agreed that, except as described below, from the date of the Merger Agreement until the earlier of the consummation of the merger or the termination of the Merger Agreement in accordance with its terms, Conatus and Histogen and any of their respective subsidiaries will not, nor will either party or any of its subsidiaries authorize any of the directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors or representatives retained by it or any of its subsidiaries to, directly or indirectly:

 

   

solicit, initiate or knowingly encourage, induce or facilitate the communication, making, submission or announcement of, any “acquisition proposal” (as defined in the section entitled “The Merger Agreement—No Solicitation” below), or “acquisition inquiry” (as defined in the section entitled “The Merger Agreement—No Solicitation” below);

 

   

furnish any non-public information with respect to it to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

engage in discussions or negotiations with any person with respect to any acquisition proposal or acquisition inquiry;

 

   

approve, endorse or recommend an acquisition proposal;

 

   

execute or enter into any letter of intent or similar document or any contract contemplating or otherwise relating to an acquisition transaction (as defined in the section entitled “The Merger Agreement—No Solicitation” below); or

 

   

publicly propose to do any of the above.



 

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Termination of the Merger Agreement (see page 165)

Either Conatus or Histogen can terminate the Merger Agreement under certain circumstances, which would prevent the merger from being consummated.

Termination Fee (see page 167)

If the Merger Agreement is terminated under certain circumstances, Conatus or Histogen will be required to pay the other party a termination fee of $500,000 or, in some circumstances, reimburse the other party for expenses incurred in connection with the merger, up to a maximum of $350,000.

Support Agreements (see page 170)

Certain stockholders of Histogen are each party to a support agreement with Histogen and Conatus pursuant to which, among other things, each of these stockholders agreed, solely in his, her or its capacity as a stockholder of Histogen, to vote all of his, her or its shares of Histogen’s capital stock in favor of the adoption and approval of the Merger Agreement and the adoption and approval of the transactions contemplated thereby, including the merger. Pursuant to the support agreement, the stockholders of Histogen also acknowledge that the approval given for the Merger Agreement is irrevocable, that the stockholder is aware of its appraisal rights under Section 262 of the DGCL, and that the stockholder is not entitled to appraisal rights by voting in favor of the transaction and waiving appraisal rights under the DGCL. The Histogen stockholders party to the support agreement with Histogen and Conatus are as follows:

 

   

Gail K Naughton, Ph.D.

 

   

Gail K. Naughton Revocable Trust dated January 19, 2018

 

   

Naughton Descendants’ Trust-EB dated January 19, 2018

 

   

Naughton Descendants’ Trust-MN dated January 19, 2018

 

   

Naughton Descendants’ Trust-BN dated January 19, 2018

 

   

Naughton Descendants’ Trust-BB dated January 19, 2018

 

   

Naughton Descendants’ Trust-RB dated January 19, 2018

 

   

Richard W. Pascoe

 

   

Martin Latterich

 

   

Thomas L. Hubka

 

   

Stephen Chang, Ph.D.

 

   

David H. Crean, Ph.D.

 

   

Hayden Yizhuo Zhang

 

   

Pineworld Capital Limited

 

   

Jonathan Jackson

 

   

Lordship Ventures Histogen Holdings, LLC

 

   

Brian M. Satz

 

   

Secure Medical, Inc.



 

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The stockholders of Histogen that are party to a support agreement with Histogen and Conatus owned an aggregate of 11,670,174 shares of Histogen’s common stock and 17,786,946 shares of Histogen’s preferred stock, representing approximately 50.4% of the outstanding shares of Histogen’s capital stock on an as converted to common stock basis, in each case as of January 28, 2020. These stockholders include only executive officers and directors of Histogen and certain stockholders owning more than 5% of Histogen’s outstanding capital stock. Following the effectiveness of the registration statement of which this proxy statement/prospectus/information statement is a part, stockholders of Histogen holding a sufficient number of shares to adopt the Merger Agreement and thereby approve the merger will execute written consents providing for such adoption and approval.

Certain of Conatus’ stockholders are each party to a support agreement with Conatus and Histogen pursuant to which, among other things, each of these stockholders agreed, solely in his, her or its capacity as a stockholder, to vote all of his, her or its shares of Conatus common stock (or cause his or her shares of Conatus common stock to be voted) in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including Proposal Nos. 1, 2 and 3.

Each of Conatus’ executive officers and directors are party to a support agreement with Conatus and Histogen. The stockholders of Conatus that are party to a support agreement with Conatus and Histogen owned an aggregate of 929,842 shares of Conatus’ common stock, representing approximately 2.8% of the outstanding common stock of Conatus as of January 28, 2020.

The support agreements are discussed in greater detail in the section entitled “Agreements Related to the Merger—Support Agreements” in this proxy statement/prospectus/information statement.

Lock-up Agreements (see page 172)

As a condition to the closing of the merger, certain of Conatus’ stockholders and Histogen’s stockholders have entered into lock-up agreements, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in swap or similar transactions with respect to, shares of Conatus’ common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 180 days from the closing date of the merger.

As of January 28, 2020, Conatus’ stockholders who have committed to execute lock-up agreements beneficially owned in the aggregate approximately 1.5% of the outstanding shares of Conatus’ common stock.

Histogen’s stockholders who have committed to execute lock-up agreements as of January 28, 2020 owned in the aggregate approximately 50.4% of the outstanding shares of Histogen’s capital stock on an as if converted into common stock basis.

Management Following the Merger (see page 264)

Effective as of the closing of the merger, Conatus’ executive officers are expected to include:

 

Name

  

Title

Richard W. Pascoe    Chief Executive Officer & Director
Gail K. Naughton, Ph.D.    Founder, Chief Scientific Officer & Chief Business Development Officer
Martin Latterich, Ph.D.    Vice President, Technical Operations
Thomas L. Hubka    Director of Business Operations & Corporate Secretary


 

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Interests of Certain Directors, Officers and Affiliates of Conatus and Histogen (see pages 123 and 131)

In considering the recommendation of Conatus’ board of directors with respect to the issuance of Conatus common stock pursuant to the Merger Agreement and the other matters to be acted upon by Conatus’ stockholders at the Conatus special meeting, Conatus’ stockholders should be aware that certain members of Conatus’ board of directors and executive officers of Conatus have interests in the merger that may be different from, or in addition to, interests they have as Conatus’ stockholders. For example, under Conatus’ equity plans, all equity awards granted to directors will vest upon the close of the merger, and Conatus has entered into certain employment agreements with its named executive officers that may result in the receipt by such named executive officers of cash severance payments and other benefits and the acceleration of RSUs held by those officers upon an eligible termination of employment of each executive officer’s employment or upon the closing of the merger. As a result, the vesting of all RSUs held by executive officers will accelerate in connection with the merger. In addition, Dr. Mento, Conatus’ chief executive officer, and Daniel L. Kisner, M.D., one of Conatus’ non-employee directors, are expected to continue as a director on Conatus’ board of directors following the merger. The compensation arrangements with Conatus’ officers and directors are discussed in greater detail in the section entitled “Agreements Related to the Merger—Interests of the Conatus Directors and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

As of December 31, 2019, Conatus’ directors and executive officers beneficially owned, in the aggregate approximately 2.8% of the outstanding shares of Conatus common stock. Each of Conatus’ executive officers and directors has also entered into a support agreement in connection with the merger. The support agreements are discussed in greater detail in the section entitled “Agreements Related to the Merger—Support Agreements” in this proxy statement/prospectus/information statement.

In considering the recommendation of Histogen’s board of directors with respect to approving the merger and related transactions by written consent, Histogen’s stockholders should be aware that certain members of Histogen’s board of directors and certain of Histogen’s executive officers have interests in the merger that may be different from, or in addition to, interests they have as Histogen’s stockholders. For example, certain of Histogen’s directors and executive officers have options, subject to vesting, to purchase shares of Histogen’s common stock which, at the closing of the merger, shall be converted (by multiplying (x) the number of shares of Histogen common stock that were subject to such options, by (y) the exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Conatus common stock, with the per share exercise price equal to such option’s exercise price divided by the exchange Ratio and rounding up to the nearest whole cent) into and become options to purchase shares of Conatus’ common stock, certain options will vest, certain of Histogen’s directors and executive officers are expected to become directors and executive officers of Conatus upon the closing of the merger, certain Histogen executive officers are subject to employment agreements which provide for severance and benefit payments if employment of such officers terminates without cause or for good reason and all of Histogen’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement.

As of December 31, 2019, all of Histogen’s directors and executive officers, together with their affiliates, owned approximately 37% of the outstanding shares of Histogen capital stock, on an as converted to common stock basis. Certain of Histogen’s officers and directors, and their affiliates, have also entered into support agreements in connection with the merger. The support agreements are discussed in greater detail in the section entitled “Agreements Related to the Merger—Support Agreements” in this proxy statement/prospectus/information statement.



 

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Risk Factors (see page 25)

Both Conatus and Histogen are subject to various risks associated with their businesses and their industries. In addition, the merger poses a number of risks to each company and its respective stockholders, including the possibility that the merger may not be completed and the following risks:

 

   

the exchange ratio is not adjustable based on the market price of Conatus’ common stock, so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed;

 

   

failure to complete the merger may result in Conatus and Histogen paying a termination fee or expenses to the other and could harm the price of Conatus’ common stock and the future business and operations of each company;

 

   

the merger may be completed even though material adverse changes may result solely from the announcement of the merger, changes in the industry in which Conatus and Histogen operate that apply to all companies generally and other causes;

 

   

some of Conatus’ and Histogen’s respective officers and directors have interests that are different from or in addition to those considered by other stockholders of Histogen and Conatus and which may influence them to support or approve the merger;

 

   

the market price of the combined organization’s common stock may decline as a result of the merger;

 

   

Conatus’ and Histogen’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger;

 

   

during the pendency of the merger, Conatus and Histogen may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;

 

   

certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement;

 

   

because the lack of a public market for shares of Histogen’s capital stock makes it difficult to evaluate the fairness of the merger, Histogen’s stockholders may receive consideration in the merger that is less than the fair market value of the shares of Histogen’s capital stock and/or Conatus may pay more than the fair market value of the shares of Histogen’s capital stock; and

 

   

if the conditions to the merger are not met, the merger will not occur.

These risks and other risks are discussed in greater detail under the section entitled “Risk Factors” in this proxy statement/prospectus/information statement. Conatus and Histogen both encourage you to read and consider all of these risks carefully.

Regulatory Approvals (see page 140)

In the United States, Conatus must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Conatus’ common stock and the filing of this proxy statement/prospectus/information statement with the SEC.



 

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Nasdaq Stock Market Listing (see page 144)

Prior to consummation of the merger, Conatus intends to file an initial listing application with Nasdaq pursuant to Nasdaq Stock Market LLC “reverse merger” rules. If such application is accepted, Conatus anticipates that Conatus’ common stock will be listed on the Nasdaq Capital Market following the closing of the merger under the trading symbol “HSTO”.

Anticipated Accounting Treatment (see page 144)

The merger will be treated by Conatus as a reverse merger under the acquisition method of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). For accounting purposes, Histogen is considered to be acquiring Conatus in this transaction. The transaction will be accounted for under the acquisition method of accounting under existing GAAP, which are subject to change and interpretation. Under the acquisition method of accounting, management of Conatus and Histogen have made a preliminary estimated purchase price calculated as described in Note 3 to the Notes to the Unaudited Pro Forma Condensed Combined Financial Information. The net tangible and intangible assets acquired and liabilities assumed in connection with the transaction are at their estimated acquisition date fair values. The acquisition method of accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. A final determination of these estimated fair values, which cannot be made prior to the completion of the transaction, will be based on the actual net tangible and intangible assets of Conatus that exist as of the date of completion of the transaction.

Appraisal Rights (see page 144)

Holders of Conatus’ common stock are not entitled to appraisal rights in connection with the merger. Histogen’s stockholders are entitled to appraisal rights in connection with the merger under Delaware law. For more information about such rights, see the provisions of Section 262 of the General Corporation Law of the State of Delaware (“DGCL”) attached hereto as Annex C, and the section entitled “The Merger—Appraisal Rights” in this proxy statement/prospectus/information statement.

Comparison of Stockholder Rights (see page 295)

Both Conatus and Histogen are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the merger is completed, Histogen’s stockholders will become stockholders of Conatus, and their rights will be governed by the DGCL, Conatus’ amended and restated bylaws and, Conatus’ amended and restated certificate of incorporation, as amended by the amendment set forth in Annex D and an amendment to effect the Conatus Name Change, assuming Proposal Nos. 1 and 2 are approved. The rights of Conatus’ stockholders contained in Conatus’ amended and restated certificate of incorporation and Conatus’ amended and restated bylaws differ from the rights of Histogen’s stockholders under Histogen’s amended and restated certificate of incorporation and Histogen’s bylaws, as more fully described under the section entitled “Comparison of Rights of Holders of Conatus Stock and Histogen Stock” in this proxy statement/prospectus/information statement.



 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL DATA

The following tables present summary historical financial data for Conatus and Histogen, summary unaudited pro forma condensed financial data for Conatus and Histogen, and comparative historical and unaudited pro forma per share data for Conatus and Histogen.

Selected Historical Financial Data of Conatus

The selected financial data as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018, and 2017 are derived from the Conatus audited financial statements prepared using accounting principles generally accepted in the United States (“GAAP”), which are included in this proxy statement/prospectus/information statement. The financial data should be read in conjunction with “Conatus Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Conatus’ financial statements and related notes appearing elsewhere in this proxy statement/prospectus/information statement. These historical results are not necessarily indicative of results to be expected in any future period.

Statements of Operations Data:

 

     Year Ended December 31,  
(in thousands, except per share data)    2019     2018     2017  

Collaboration revenue

   $ 21,717     $ 33,586     $ 35,377  

Operating expense

      

Research and development

     23,527       41,368       43,220  

General and administrative

     10,196       10,495       9,707  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     33,723       51,863       52,927  
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,006     (18,277     (17,550

Total other income

     621       267       154  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,385   $ (18,010   $ (17,396
  

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.34   $ (0.59 )   $ (0.61 )
  

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic and diluted loss per share

     33,169       30,370       28,587
  

 

 

   

 

 

   

 

 

 

Balance Sheet Data:

 

     December 31,  
     2019      2018  
(in thousands)              

Cash and cash equivalents

   $ 20,703      $ 11,565  

Marketable securities

     —          29,127  

Working capital(a)

     19,966        28,905  

Total assets

     21,827        48,803  

Total stockholders’ equity

     20,187        27,399  

 

(a)

Working capital is defined as current assets less current liabilities.



 

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Selected Historical Financial Data of Histogen

The selected financial data as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 are derived from Histogen’s audited financial statements prepared using GAAP, which are included in this proxy statement/prospectus/information statement. These historical results are not necessarily indicative of results to be expected in any future period. The selected financial data should be read in conjunction with Histogen’s financial statements and the related notes to those statements included in this proxy statement/prospectus/information statement and “Histogen Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Consolidated Statements of Operations Data:

 

     Years Ended December 31,  
(in thousands, except per share data)    2019     2018     2017  

Revenue

      

Product and services

   $ 3,785     $ 1,458     $ 296  

License

     7,519       19       9,203  

Grants

     150       300       149  
  

 

 

   

 

 

   

 

 

 

Total revenue

     11,454       1,777       9,648  

Cost of revenues

     2,215       744       437  

Research and development

     6,345       3,490       2,891  

General and administrative

     6,212       3,184       3,365  
  

 

 

   

 

 

   

 

 

 

Total operating expense

     14,772       7,418       6,693  
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (3,318     (5,641     2,955  
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     318       (521     (1,080

Income tax expense

     (1     (1     (19
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     (3,001     (6,163     1,856  

Loss attributable to noncontrolling interest

     (35     (38     (19
  

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (2,966   $ (6,125   $ 1,875  
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share available to common stockholders

      

Basic

   $ (0.13   $ (0.27   $ 0.09  

Diluted

   $ (0.13   $ (0.27   $ 0.04  

Weighted-average number of common shares outstanding used to compute net income (loss) per share

      

Basic

     23,234       22,772       20,470  

Diluted

     23,245       22,772       53,614  


 

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Consolidated Balance Sheet Data:

 

     December 31,  
     2019     2018  
(in thousands)             

Cash, cash equivalents and restricted cash

   $ 2,075     $ 3,037  

Working capital(a)

     1,077       1,196  

Total assets

     2,942       4,747  

Long-term liabilities

     459       543  

Convertible preferred stock classified outside of stockholders’ deficit

     39,070       36,683  

Accumulated deficit

     (43,933     (40,967

Total stockholders’ deficit

     (37,968     (35,520

 

(a)

Working capital is defined as current assets less current liabilities.



 

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Selected Unaudited Pro Forma Condensed Combined Financial Data of Conatus and Histogen

The following information does not give effect to the proposed Conatus Reverse Stock Split described in Conatus’ Proposal No. 2.

The following selected unaudited pro forma condensed combined financial data was prepared using the acquisition method of accounting under GAAP. For accounting purposes, Histogen is considered to be acquiring Conatus in the merger. The Conatus and Histogen unaudited pro forma combined balance sheet data assume that the merger took place on December 31, 2019, and combines the Conatus and Histogen historical balance sheets at December 31, 2019. The Conatus and Histogen unaudited pro forma condensed combined statements of operations data assume that the merger took place as of January 1, 2019, and combines the historical results of Conatus and Histogen for the year ended December 31, 2019.

The selected unaudited pro forma condensed combined financial data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during these periods. The selected unaudited pro forma condensed combined financial data as of and for the year ended December 31, 2019 are derived from the unaudited pro forma condensed combined financial information and should be read in conjunction with that information. For more information, please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” in this proxy statement/prospectus/information statement.



 

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The unaudited pro forma condensed combined financial information assumes that, at the Effective Time, each share of Histogen’s capital stock will be converted into the right to receive shares of Conatus common stock such that, immediately following the Effective Time, Conatus’ current stockholders, optionholders, and warrantholders are expected to own, or hold rights to acquire, approximately 26% of the Fully-Diluted Common Stock of Conatus, and Histogen’s current stockholders, optionholders and warrantholders are expected to own, or hold rights to acquire, approximately 74% of the Fully-Diluted Common Stock of Conatus, and is subject to adjustment to account for the occurrence of certain events discussed elsewhere in this proxy statement/prospectus/information statement. These estimates are subject to adjustment prior to closing of the merger, including upward adjustment to the extent that Conatus’ net cash at the Effective Time is less than $11.9 million or Histogen’s net cash at the Effective Time is more than negative $0.8 million (and as a result, Conatus stockholders could own less, and Histogen stockholders could own more, of the combined organization), or a downward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is more than $12.7 million or Histogen’s net cash at the Effective Time is less than negative $1.6 million (and as a result, Conatus stockholders could own more, and Histogen stockholders could own less, of the combined organization). Additionally, the net cash amounts at which adjustments to the exchange ratio may be triggered will be reduced to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger.

 

     Year Ended
December 31, 2019
 
(in thousands, except per share data)    (unaudited)  

Selected Unaudited Pro Forma Condensed Combined Statements of Operations and Comprehensive Loss

  

Revenues

  

Collaboration revenue

   $ 21,717  

Product revenue

     3,415  

License revenue

     7,519  

Grant revenue

     150  

Professional services revenue

     370  
  

 

 

 

Total revenue

  

Operating expenses

  

Cost of product revenue

     1,893  

Cost of professional services revenue

     322  

Research and development

     29,872  

General and administrative

     14,659  
  

 

 

 

Total operating expenses

     46,746  
  

 

 

 

Loss from operations

     (13,575

Other income

  

Interest income, net

     610  

Other income

     53  
  

 

 

 

Loss before income taxes

     (12,912

Income tax expense

     1  
  

 

 

 

Net loss

     (12,913

Other comprehensive income

  

Net unrealized gains on marketable securities

     17  
  

 

 

 

Comprehensive loss

     (12,896

Net loss attributable to noncontrolling interests

     (35
  

 

 

 

Net loss available to common stockholders

   $ (12,861
  

 

 

 

Net loss per share available to common stockholders, basic and diluted

   $ (0.11
  

 

 

 

Weighted-average common shares outstanding, basic and diluted

     119,337  
  

 

 

 


 

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     December 31,
2019
 
(in thousands)    (unaudited)  

Selected Unaudited Pro Forma Condensed Combined Balance Sheet Data

  

Cash, cash equivalents and restricted cash

   $ 22,778  

Total assets

     24,769  

Total liabilities

     10,038  

Total stockholders’ equity

     24,769  

Comparative Historical and Unaudited Pro Forma Per Share Data

The information below reflects the historical net loss and book value per share of Conatus common stock and the historical net loss and book value per share of Histogen common stock in comparison with the unaudited pro forma net loss and book value per share after giving effect to the proposed merger of Conatus with Histogen on a pro forma basis. The unaudited pro forma net loss and book value per share does not give effect to the Conatus Reverse Stock Split.

You should read the tables below in conjunction with the audited financial statements of Conatus included in this proxy statement/prospectus/information statement and the audited financial statements of Histogen included in this proxy statement/prospectus/information statement and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

 

     Year Ended
December 31,
2019
 
     (unaudited)  

Conatus Historical Per Share Data

  

Net loss per share, basic and diluted

   $ (0.34

Book value per share

   $ 0.61  

Histogen Historical Per Share Data

  

Net loss per share, basic and diluted

   $ (0.13

Book value per share

   $ (1.60

Combined Organization Per Share Data

  

Net loss per share, basic and diluted

   $ (0.11

Book value per share

   $ 0.13  


 

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RISK FACTORS

The combined organization will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. You should also read and consider the other information in this proxy statement/prospectus/information statement and the other documents incorporated by reference into this proxy statement/prospectus/information statement. Please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Risks Related to the Merger

The exchange ratio is not adjustable based on the market price of Conatus common stock, so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

The Merger Agreement has set the exchange ratio formula for the Histogen common stock, and the exchange ratio is based on the fully-diluted outstanding capital stock of Histogen and the fully-diluted outstanding common stock of Conatus, after taking into account each company’s outstanding options and warrants, irrespective of the exercise prices of such options and warrants, and Conatus’ and Histogen’s net cash balances, in each case immediately prior to the closing of the merger as described under the heading “The Merger—Merger Consideration.” Any changes in the market price of Conatus common stock before the completion of the merger will not affect the number of shares of Conatus common stock issuable to Histogen’s stockholders pursuant to the Merger Agreement. Therefore, if before the completion of the merger the market price of Conatus common stock declines from the market price on the date of the Merger Agreement, then Histogen’s stockholders could receive merger consideration with substantially lower value than the value of such merger consideration on the date of the Merger Agreement. Similarly, if before the completion of the merger the market price of Conatus common stock increases from the market price of Conatus common stock on the date of the Merger Agreement, then Histogen’s stockholders could receive merger consideration with substantially greater value than the value of such merger consideration on the date of the Merger Agreement. The Merger Agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the market price of Conatus common stock, for each one percentage point change in the market price of Conatus common stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration payable to Histogen’s stockholders pursuant to the Merger Agreement.

The net cash balances of Conatus and Histogen at the closing of the merger could result in their respective securityholders owning a smaller or larger percentage of the combined organization and could even result in the termination of the Merger Agreement.

The estimates of the respective ownership percentages of the Conatus and Histogen securityholders are based on the date of this proxy statement/prospectus/information statement and are subject to adjustment prior to closing of the merger, including an upward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is less than $11.9 million or Histogen’s net cash at the Effective Time is more than negative $0.8 million (in each case as net cash is defined in the Merger Agreement and as adjusted based on the closing date of the merger), or a downward adjustment to the exchange ratio to the extent that Conatus’ net cash at the Effective Time is more than $12.7 million or Histogen’s net cash at the effective time of the merger is less than negative $1.6 million (in each case as net cash is defined in the Merger Agreement and adjusted based on the closing date of the merger). As a result, Conatus and Histogen stockholders could own more or less, respectively, of the combined organization based on the final net cash positions of the companies. The foregoing net cash amounts at which adjustments to the exchange ratio may be triggered reflect reductions for each company’s daily cash burn (as defined in the Merger Agreement) from January 31, 2020 through May 7, 2020, the date of the Conatus special meeting of stockholders, and will be further adjusted to reflect each company’s daily cash burn from May 7, 2020 until the closing date of the merger.

As of January 31, 2020, Conatus’ net cash was approximately $14.5 million and Histogen’s net cash was approximately zero dollars (in each case, as net cash is defined in the Merger Agreement). Assuming the closing

 

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of the merger occurs on May 7, 2020, the target range of net cash required without a resulting change in the exchange ratio would be between approximately $11.9 million and $12.7 million for Conatus, and between approximately negative $1.6 million and negative $0.8 million for Histogen. Assuming Histogen holds an amount of net cash within its net cash target range of between negative $0.8 million and negative $1.6 million, each additional $1.0 million of net cash Conatus holds prior to the closing above Conatus’ net cash target of $12.3 million, which is the mid-point of its target net cash range, would result in a downward adjustment to the exchange ratio of approximately 0.0409, which would increase the relative ownership of Conatus’ current stockholder by approximately 0.54%; and each additional $1.0 million of net cash Conatus holds prior to the closing below Conatus’ net cash target of $12.3 million would result in a upward adjustment to the exchange ratio of approximately 0.0432 which would decrease the relative ownership of Conatus’ current stockholder by approximately 0.55%. Assuming Conatus holds an amount of net cash within its net cash target range of between $11.9 million and $12.7 million, each additional $1.0 million of net cash Histogen holds prior to the closing above Histogen’s net cash target of negative $1.2 million, which is the mid-point of its target net cash range, would result in an upward adjustment to the exchange ratio of approximately 0.0147, which would increase the relative ownership of Histogen’s current stockholder by approximately 0.19%; and each $1.0 million of net cash Histogen holds prior to the closing below Histogen’s net cash target of negative $1.2 million, would result in a downward adjustment to the exchange ratio of approximately 0.0148, which would decrease the relative ownership of Histogen’s current stockholder by approximately 0.19%. For example, if, prior to the closing, Conatus’ net cash were $1.0 million above its net cash target of $12.3 million (as further adjusted for cash burn if the merger closes after May 7, 2020) and Histogen’s net cash were $1.0 million below its net cash target of negative $1.2 million (as further adjusted for cash burn if the merger closes after May 7, 2020), then the Conatus stockholders immediately prior to the merger would own approximately 26.7% of the Fully-Diluted Common Stock of Conatus following the merger, and the Histogen stockholders immediately before the merger would own approximately 73.3% of the Fully-Diluted Common Stock of Conatus following the merger.

As of the date of this proxy statement/prospectus/information statement, Conatus estimates that it will hold net cash of between $12.75 million to $13.75 million as of an assumed closing date of May 7, 2020, the date of the Conatus special meeting, and Histogen estimates that it will hold net cash of between negative $3.75 million and negative $2.75 million as of an assumed closing date of May 7, 2020, the date of the Conatus special meeting. If, as of the assumed closing date of May 7, 2020, Conatus’ net cash is $13.25 million, the midpoint of its estimated net cash range, and Histogen’s net cash is negative $3.25 million, the midpoint of its estimated net cash range, after applying an exchange ratio of 1.4063, Conatus’ stockholders immediately prior to the merger would own approximately 26.9% of the Fully-Diluted Common Stock of Conatus following the merger and Histogen’s stockholders immediately prior to the merger would own approximately 73.1% of the Fully-Diluted Common Stock of Conatus following the merger.

Additionally, Conatus is required to have net cash of at least $12.5 million at the closing of the merger, as adjusted downward by approximately $7,000, which represents Conatus’ average daily net cash burn in December 2019, for each day after January 31, 2020 until the closing date of the merger. For example, if the merger is anticipated to close on May 7, 2020 and Conatus’ net cash falls below $11.8 million, Histogen could decide not to consummate the transaction and the Merger Agreement could be terminated. As of the date of this proxy statement/prospectus/information statement, Conatus expects its net cash to be above the net cash required by the Merger Agreement at closing.

Failure to complete the merger may result in Conatus or Histogen paying a termination fee or expenses to the other party and could significantly harm the market price of Conatus common stock and negatively affect the future business and operations of each company.

If the merger is not completed and the Merger Agreement is terminated under certain circumstances, Conatus or Histogen may be required to pay the other party a termination fee of $500,000 or reimburse the transaction expenses of the other party, up to a maximum of $350,000. Even if a termination fee is not payable or transaction expenses are not reimbursable in connection with a termination of the Merger Agreement, each of Conatus and Histogen will have incurred significant fees and expenses, such as legal and accounting fees, which must be paid whether or not the merger is completed. Further, if the merger is not completed, it could significantly harm the market price of Conatus’ common stock.

 

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In addition, if the Merger Agreement is terminated and the board of directors of Conatus or Histogen determines to seek another business combination, there can be no assurance that either Conatus or Histogen will be able to find a partner and close an alternative transaction on terms that are as favorable or more favorable than the terms set forth in the Merger Agreement.

The merger may be completed even though certain events occur prior to the closing that materially and adversely affect Conatus or Histogen.

The Merger Agreement provides that either Conatus or Histogen can refuse to complete the merger if there is a material adverse change affecting the other party between January 28, 2020, the date of the Merger Agreement, and the closing of the merger. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Conatus or Histogen, including:

 

   

any effect resulting from the announcement or pendency of the merger or any related transactions;

 

   

the taking of any action, or the failure to take any action, by either Conatus or Histogen required to comply with the terms of the Merger Agreement;

 

   

any natural disaster or any act or threat of terrorism or war anywhere in the world, any armed hostilities or terrorist activities anywhere in the world, any threat or escalation or armed hostilities or terrorist activities anywhere in the world, or any governmental or other response or reaction to any of the foregoing;

 

   

general economic or political conditions or conditions generally affecting the industries in which Conatus or Histogen, as applicable, operates;

 

   

any rejection by a governmental body of a registration or filing by Conatus or Histogen relating to certain intellectual property rights of Conatus or Histogen;

 

   

any change in accounting requirements or principles or any change in applicable laws, rules, or regulations or the interpretation thereof;

 

   

with respect to Conatus, any change in the stock price or trading volume of Conatus excluding any underlying effect that may have caused such change;

 

   

with respect to Conatus, the termination, sublease, or assignment of Conatus’ facility lease, or failure to do the foregoing;

 

   

with respect to Conatus, continued losses from operations or decreases in cash balances of Conatus;

 

   

with respect to Conatus, the winding down of Conatus’ operations; and

 

   

with respect to Histogen, any change in the cash position of Histogen resulting from operations in the ordinary course of business.

If adverse changes occur and Conatus and Histogen still complete the merger, the market price of the combined organization’s common stock may suffer. This in turn may reduce the value of the merger to the stockholders of Conatus, Histogen or both.

Even if the merger is completed, the combined organization will need to raise additional capital by issuing securities or debt or through licensing or similar arrangements, which may cause significant dilution to the combined organization’s stockholders, restrict the combined organization’s operations or require the combined organization to relinquish proprietary rights. Future issuances of the combined company’s common stock pursuant to options and warrants outstanding following the merger and its equity incentive plans, including the Conatus 2020 Plan, could result in additional dilution.

Following the completion of the merger, Conatus expects the combined organization will need to raise additional capital to fund its operations beyond 2020. Additional financing may not be available to the combined

 

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organization when it needs it or may not be available on favorable terms. To the extent that the combined organization raises additional capital by issuing equity securities, the terms of such an issuance may cause more significant dilution to the combined organization’s stockholders’ ownership, and the terms of any new equity securities may have preferences over the combined organization’s common stock. Any debt financing the combined organization enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined organization’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined organization raises additional funds through licensing or similar arrangements, it may be necessary to relinquish potentially valuable rights to current product candidates and potential products or proprietary technologies, or grant licenses on terms that are not favorable to the combined organization.

In addition, the exercise or conversion of some or all of the combined company’s outstanding options or warrants (or, after the merger, the issuance of equity awards under the Conatus 2020 Plan) could result in additional dilution in the percentage ownership interest of Conatus or Histogen stockholders.

Some Conatus and Histogen officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.

Certain officers and directors of Conatus and Histogen participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, the continued service as an officer or director of the combined organization, severance benefits, the acceleration of RSUs and stock option vesting, continued indemnification and the potential ability to sell an increased number of shares of common stock of the combined organization in accordance with Rule 144 under the Securities Act of 1933, as amended (“Securities Act”).

For example, Conatus has entered into certain employment and severance benefits agreements with certain of its executive officers that may result in the receipt by such executive officers of cash severance payments and other benefits in the event of a covered termination of employment of each executive officer’s employment. The closing of the merger will also result in the acceleration of vesting of RSUs and options to purchase shares of Conatus common stock held by Conatus’ executive officers and directors, whether or not there is a covered termination of such officer’s employment. For more information concerning the treatment of Conatus’ RSUs and stock options in connection with the merger, see the section entitled “The Merger Agreement—Treatment of Conatus Stock Awards and Warrants” in this proxy statement/prospectus/information statement.

In addition, and for example, Histogen’s Chairman and Chief Executive Officer, Richard Pascoe is expected to become a director and the Chief Executive Officer of Conatus upon the closing of the merger, and Histogen’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. These interests, among others, may influence the officers and directors of Conatus and Histogen to support or approve the merger. For more information concerning the interests of Conatus’ and Histogen’s executive officers and directors, see the sections entitled “The Merger—Interests of the Conatus Directors and Executive Officers in the Merger” and “The Merger—Interests of Histogen Directors and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

The market price of Conatus’ common stock following the merger may decline as a result of the merger.

The market price of Conatus’ common stock may decline as a result of the merger for a number of reasons including if:

 

   

investors react negatively to the prospects of the combined organization’s product candidates, business and financial condition following the merger;

 

   

the effect of the merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

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the combined organization does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts.

Conatus and Histogen stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined organization is unable to realize the strategic and financial benefits currently anticipated from the merger, Conatus’ and Histogen’s stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving the expected commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the expected strategic and financial benefits currently anticipated from the merger.

During the pendency of the merger, Conatus and Histogen may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede the ability of Conatus and Histogen to make acquisitions, subject to certain exceptions relating to fiduciary duties, as set forth below, or to complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors during such period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties, as set forth below. Any such transactions could be favorable to such party’s stockholders.

Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Conatus and Histogen from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and that failure to cooperate with the proponent of the proposal would be reasonably likely to be inconsistent with the board of directors’ fiduciary duties.

Because the lack of a public market for Histogen’s capital stock makes it difficult to evaluate the value of Histogen’s capital stock, the stockholders of Histogen may receive shares of Conatus common stock in the merger that have a value that is less than, or greater than, the fair market value of Histogen’s capital stock.

The outstanding capital stock of Histogen is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Histogen. Because the percentage of Conatus common stock to be issued to Histogen’s stockholders was determined based on negotiations between the parties, it is possible that the value of Conatus common stock to be received by Histogen’s stockholders will be less than the fair market value of Histogen, or Conatus may pay more than the aggregate fair market value for Histogen.

If the conditions to the merger are not satisfied or waived, the merger will not occur.

Even if the merger is approved by the stockholders of Conatus and Histogen, other conditions must be satisfied or waived to complete the merger. These conditions are set forth in the Merger Agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement. Conatus and Histogen cannot assure you that all of the conditions will be

 

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satisfied or waived. Certain of the closing conditions are incapable of being waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and Conatus and Histogen each may lose some or all of the intended benefits of the merger.

The Merger may fail to qualify as a “reorganization” for U.S. federal income tax purposes, resulting in recognition of taxable gain or loss by holders of Histogen capital stock.

Conatus and Histogen intend for the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, as described in the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” in this proxy statement/prospectus/information statement. In the event that the merger does not qualify as a “reorganization,” the merger would result in taxable gain or loss for each holder of Histogen capital stock, with the amount of such gain or loss determined by the amount that each Histogen stockholder’s adjusted tax basis in the Histogen capital stock surrendered is less or more than the fair market value of the Conatus common stock and any cash in lieu of a fractional share received in exchange therefor. Each holder of Histogen capital stock is urged to consult with his, her or its own tax advisor with respect to the tax consequences of the merger.

The combined organization may become involved in securities class action litigation that could divert management’s attention and harm the combined organization’s business and insurance coverage may not be sufficient to cover all costs and damages.

In the past, securities class action or shareholder derivative litigation often follows certain significant business transactions, such as the sale of a business division or announcement of a merger. The combined organization may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention and resources, which could adversely affect the combined organization’s business.

Risks Related to Conatus’ Evaluation of Strategic Alternatives

Conatus’ activities to evaluate and pursue strategic alternatives may not be successful.

In June 2019, Conatus announced that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint, and it was discontinuing further treatment of patients enrolled in the ENCORE-LF clinical trial. In addition, results from the 24-week extension in Conatus’ ENCORE-PH clinical trial of emricasan were consistent with results from the initial 24-week treatment period and did not meet predefined objectives. Previously, in March 2019, Conatus announced that top-line results from the Phase 2b ENCORE-NF clinical trial of emricasan also did not meet the primary endpoint. Consequently, Conatus and Novartis Pharma AG, or Novartis, entered into an amendment to the Option, Collaboration and License Agreement, (the “Collaboration Agreement”), with Novartis, pursuant to which Conatus and Novartis mutually agreed to terminate the Collaboration Agreement, effective September 30, 2019.

In connection with the recent emricasan clinical trial results and plans to evaluate strategic alternatives, Conatus commenced a restructuring plan in June 2019 that included reducing staff by approximately 40% and suspending development of its inflammasome disease candidate, CTS-2090, and another restructuring plan in September 2019 that included further reducing staff by approximately 40%, in order to extend its resources.

Conatus has engaged Oppenheimer & Co. Inc. as a financial advisor to assist in the exploration and evaluation of strategic alternatives to enhance shareholder value, including a merger, an acquisition or sale of assets or a dissolution and liquidation of Conatus. There can be no assurance that Conatus’ process to identify and evaluate potential strategic alternatives will result in any definitive offer to consummate a strategic transaction, or if made, what the terms thereof will be or that any transaction will be approved or consummated. In addition, potential strategic transactions that require stockholder approval may not be approved by Conatus stockholders. A strategic transaction would also likely result in substantial dilution to Conatus stockholders and could result in other restrictions that may affect its business. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.

 

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Conatus may also acquire additional businesses, products or product candidates. Integrating any newly acquired business, product or product candidate could be expensive and time-consuming. Conatus may not be able to integrate any acquired business, product or product candidate successfully. Conatus’ future financial performance will depend, in part, on its ability to manage any future growth effectively and its ability to integrate any acquired businesses.

Any strategic transaction may require Conatus to incur non-recurring or other charges, may increase its near- and long-term expenditures and may pose significant integration challenges or disrupt Conatus’ management or business, which could adversely affect its operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

 

   

exposure to unknown liabilities;

 

   

incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

 

   

higher than expected acquisition and integration costs;

 

   

write downs of assets or goodwill or impairment charges;

 

   

increased amortization expenses;

 

   

difficulty and cost in combining the operations and personnel of any acquired businesses with its operations and personnel;

 

   

impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

 

   

the inability to retain key employees of Conatus or any acquired businesses.

Accordingly, there can be no assurance that Conatus will undertake or successfully complete any strategic transactions of the nature described above. Any transactions that Conatus does complete may be subject to the foregoing or other risks and could have a material adverse effect on its business, financial condition and prospects.

In connection with the recent clinical failures of emricasan, Conatus began evaluating strategic alternatives, and recently entered into the Merger Agreement with Histogen. Conatus’ merger with Histogen may not be consummated and, if consummated, will result in substantial dilution to Conatus stockholders and may not deliver the anticipated benefits Conatus expects.

In June 2019, in connection with the failure of emricasan to meet the primary endpoints in the ENCORE trials, Conatus announced plans to evaluate strategic alternatives. Conatus engaged Oppenheimer & Co. Inc. to assist in the exploration and evaluation of strategic alternatives to enhance shareholder value, including a merger, an acquisition or sale of assets or a dissolution and liquidation of Conatus. In December 2019, Conatus entered into the Merger Agreement pursuant to which, among other things, Merger Sub, a wholly owned subsidiary of Conatus, will merge with and into Histogen, with Histogen surviving as a wholly owned subsidiary of Conatus. Consummation of the merger is subject to certain closing conditions, including approval from Conatus’ stockholders, satisfaction of which conditions may take a significant amount of time and will further decrease Conatus’ cash resources. There can be no assurance that Conatus will be able to successfully complete the merger and investors may disagree with the new focus of its business. The transaction will result in dilution to Conatus’ stockholders and could result in other restrictions that may affect its business. Further, if completed, the merger ultimately may not deliver the anticipated benefits or enhance stockholder value.

If Conatus is unable to complete the merger, Conatus cannot predict whether and to what extent it would be successful in consummating an alternative transaction, the timing of such a transaction or its future cash needs required to complete such a transaction. Therefore, Conatus may be required to pursue a dissolution and liquidation. In such an event, the amount of cash, if any, available for distribution to its shareholders will depend

 

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heavily on the timing of such decision and Conatus’ other financial obligations. In addition, with the passage of time, the amount of cash, if any, available for distribution will be reduced as Conatus continues to fund its operations. Furthermore, Conatus may be subject to litigation or other claims related to the Merger Agreement.

Business development activity involves numerous risks, including the risks that Conatus may be unable to integrate an acquired business successfully and that Conatus may assume liabilities that could adversely affect it.

In order to enhance shareholder value, on January 28, 2020, Conatus entered into the Merger Agreement with Histogen. Conatus cannot be sure the merger will result in a successful acquisition, development or launch of products that will prove to be commercially successful or will improve the long-term profitability of Conatus’ business. Acquisitions or licenses could require Conatus to raise significant capital and potentially incur significant dilution through the issuance of new shares of capital stock. These strategic transactions involve many risks, including, but not limited to, the following:

 

   

difficulties in achieving identified financial revenue synergies, growth opportunities, operating synergies and cost savings;

 

   

difficulties in assimilating the personnel, operations and products of an acquired company, and the potential loss of key employees;

 

   

difficulties in consolidating information technology platforms, business applications and corporate infrastructure;

 

   

difficulties in integrating Conatus’ corporate culture with local customs and cultures;

 

   

possible overlap between Conatus products or customers and those of an acquired entity that may create conflicts in relationships or other commitments detrimental to the integrated businesses;

 

   

Conatus’ inability to achieve expected revenues and gross margins for any products Conatus may acquire;

 

   

the diversion of management’s attention from other business concerns;

 

   

risks and challenges of entering or operating in markets in which Conatus has limited or no prior experience, including the unanticipated effects of export controls, exchange rate fluctuations, foreign legal and regulatory requirements, and foreign political and economic conditions; and

 

   

difficulties in reorganizing, winding-down or liquidating operations if not successful.

In addition, foreign acquisitions involve numerous risks, including those related to changes in local laws and market conditions and due to the absence of policies and procedures sufficient to assure compliance by a foreign entity with United States regulatory and legal requirements. Business development activities require significant transaction costs, including substantial fees for investment bankers, attorneys, and accountants. Any acquisition could result in Conatus’ assumption of material unknown and/or unexpected liabilities. Conatus also cannot provide assurance that it will achieve any cost savings or synergies relating to recent or future acquisitions. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect Conatus, and liabilities resulting from any breaches could exceed negotiated indemnity limitations. These factors could impair Conatus’ growth and ability to compete, divert resources from other potentially more profitable areas, or otherwise cause a material adverse effect on its business, financial position and results of operations.

The financial statements of acquired companies, or those that may be acquired in the future, are prepared by management of such companies and are not independently verified by Conatus’ management. In addition, any pro forma financial statements prepared by Conatus to give effect to such acquisitions may not accurately reflect the results of operations of such companies that would have been achieved had the acquisition of such entities been completed at the beginning of the applicable periods.

 

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If Conatus does not successfully consummate a strategic transaction, its board of directors may decide to pursue a dissolution and liquidation of Conatus. In such an event, the amount of cash available for distribution to Conatus stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the process to identify a strategic transaction will result in a successfully consummated transaction. If no transaction is completed, Conatus’ board of directors may decide to pursue a dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to Conatus stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as Conatus funds its operations while it evaluates its strategic alternatives. In addition, if the Conatus board of directors was to approve and recommend, and its stockholders were to approve, a dissolution and liquidation of the company, Conatus would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to its stockholders. Conatus’ commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under its employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of Conatus; (iii) potential litigation against Conatus, and other various claims and legal actions arising in the ordinary course of business; and (iv) non-cancelable facility lease obligations. As a result of this requirement, a portion of Conatus’ assets may need to be reserved pending the resolution of such obligations. In addition, Conatus may be subject to litigation or other claims related to a dissolution and liquidation of the company. If a dissolution and liquidation were pursued, the Conatus board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Conatus common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the company.

Conatus is substantially dependent on its remaining employees to facilitate the consummation of a strategic transaction. Conatus could lose such key employees, in particular, as a result of the recent emricasan trial results and the restructuring plans it commenced in June 2019 and September 2019.

In order to extend its resources, Conatus commenced a restructuring plan in June 2019 that included reducing staff by approximately 40% and suspending development of its inflammasome disease candidate, CTS-2090, and another restructuring plan in September 2019 that included further reducing staff by another approximately 40%. Conatus’ cash conservation activities may yield unintended consequences, such as attrition beyond its planned reduction in workforce and reduced employee morale, which may cause remaining employees to seek alternative employment. Conatus’ ability to successfully complete a strategic transaction depends in large part on its ability to retain certain of its remaining personnel. Despite Conatus’ efforts to retain these employees, one or more may terminate their employment with it on short notice. The loss of the services of any of these employees could potentially harm Conatus’ ability to evaluate and pursue strategic alternatives, as well as fulfill its reporting obligations as a public company.

Conatus conducts its operations at its leased facility in San Diego, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in its market is very intense and may limit Conatus’ ability to hire and retain highly qualified personnel on acceptable terms, and the ability to retain its key employees is critical to its ability to effectively manage its resources and to consummate a strategic transaction. Although Conatus is completing clinical trial closeout activities for emricasan and has suspended development of CTS-2090, if it resumes the development of emricasan, CTS-2090 or new therapeutic products, such development requires expertise from a number of different disciplines, some of which are not widely available. The inability to recruit or loss of the services of any executive, key employee, consultant or advisor may impede Conatus’ ability to identify and execute on a strategic path forward.

 

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Conatus’ key employees have a significant amount of know-how and experience in its company, and the loss of one or more of them could have a material and adverse effect on its operations or ability to consummate a strategic transaction.

In order to induce valuable employees to remain with Conatus, in addition to salary and cash incentives, Conatus has provided equity options that vest over time. In August 2019, Conatus effected a one-time option exchange, wherein certain employees were offered the opportunity to exchange eligible outstanding stock options with exercise prices that are significantly higher than the current fair market value of its common stock for the grant of a lesser number of RSUs. The participants received one new RSU for every two stock options tendered for exchange. The value to employees of the RSUs may be significantly affected by movements in Conatus’ stock price that are beyond its control and may at any time be insufficient to counteract more lucrative offers from other companies, particularly in light of the recent emricasan trial results and restructuring plans.

The loss of the services of existing personnel or the failure to recruit additional, suitable key scientific, managerial, clinical, regulatory, operational and other personnel in a timely manner could harm Conatus’ business. Conatus may experience difficulty in hiring and retaining highly-skilled employees with appropriate qualifications as needed, particularly in light of the recent emricasan trial results. If Conatus fails to attract new personnel or fails to retain and motivate its current personnel, its business and future growth prospects and its ability to consummate a strategic transaction would be harmed.

Although Conatus has employment agreements with its key employees, these employment agreements provide for at-will employment, which means that any of its employees can leave Conatus’ employment at any time, with or without notice. Conatus does not maintain “key man” insurance policies on the lives of these individuals or the lives of any of its other employees. Conatus’ success also depends on its ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

Risks Related to Conatus’ Business and Industry

Although Conatus has suspended its research and development activities related to emricasan, if it resumes the clinical development of emricasan, its business may be dependent on the success of a single clinical-stage product candidate, emricasan, which will require significant additional clinical testing before Conatus can seek regulatory approval and potentially launch commercial sales.

Although Conatus has suspended its research and development activities related to emricasan, if it resumes the clinical development of emricasan, Conatus’ future success will depend on its ability to obtain regulatory approval for, and then successfully commercialize, its only clinical-stage product candidate, emricasan. Conatus has not completed the development of any product candidates. Conatus generates no revenues from sales of any drugs, and it may never be able to develop a marketable drug. Emricasan will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before Conatus can generate any revenues from product sales.

In December 2016, Conatus entered into the Collaboration Agreement with Novartis pursuant to which it granted Novartis an exclusive license to collaborate with Conatus to develop products containing emricasan either as a single active ingredient or in combination with other Novartis compounds for liver cirrhosis or liver fibrosis. In June 2019, Conatus announced that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint, and were discontinuing further treatment of patients enrolled in the ENCORE-LF clinical trial. In addition, results from the 24-week extension in Conatus’ ENCORE-PH clinical trial of emricasan were consistent with results from the initial 24-week treatment period and did not meet predefined objectives. Previously, in March 2019, Conatus announced that top-line results from the Phase 2b ENCORE-NF clinical trial of emricasan also did not meet the primary endpoint. Consequently, Conatus and Novartis entered into an amendment to the Collaboration Agreement, pursuant to which they mutually agreed to terminate the Collaboration Agreement, and Conatus has no further development plans for emricasan.

 

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If Conatus resumes clinical development of emricasan, there is no guarantee that future clinical trials will be completed on time or at all or that any future clinical trials will commence on time or at all, and the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of its clinical trials. Even if such regulatory authorities agree with the design and implementation of Conatus’ clinical trials, it cannot guarantee you that such regulatory authorities will not change their requirements in the future. In addition, even if future clinical trials are successfully completed, Conatus cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as it does, and more trials would likely be required before Conatus submits emricasan for approval. To the extent that the results of the clinical trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of emricasan may be significantly delayed, or Conatus may be required to expend significant additional resources, which may not be available to Conatus, to conduct additional trials in support of potential approval of emricasan.

If Conatus resumes clinical development of emricasan, Conatus cannot anticipate when or if it will seek regulatory review of emricasan for any indication. Conatus has not previously submitted a new drug application, or NDA, to the FDA, or similar drug approval filings to comparable foreign authorities. An NDA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. An NDA must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of an NDA is a lengthy, expensive and uncertain process and may not be obtained. Conatus has not received marketing approval for any product candidate, and Conatus cannot be certain that emricasan will be successful in future clinical trials or receive regulatory approval for any indication. If Conatus does not receive regulatory approvals for and successfully commercialize emricasan on a timely basis or at all, Conatus may not be able to continue its operations. Even if Conatus successfully obtains regulatory approvals to market emricasan, its revenues will be dependent on the ability to commercialize emricasan as well as the size of the markets in the territories for which Conatus gains regulatory approval and has commercial rights.

If Conatus resumes the development of any product candidates, additional capital that Conatus may need to operate or expand its business may not be available.

Conatus may require additional capital to operate or expand its business. The failure of emricasan in recent trials to meet the primary endpoints may make it very difficult for Conatus to seek and obtain financing from the capital markets on favorable terms, or at all. If Conatus raises additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of its common stock could be substantially diluted, and these newly issued securities may have rights, preferences or privileges senior to those of holders of its common stock. Furthermore, volatility in the credit or equity markets may have an adverse effect on Conatus’ ability to obtain debt or equity financing or the cost of such financing. If Conatus does not have funds available to enhance any potential product candidates, maintain the competitiveness of its technology and pursue business opportunities, this could have an adverse effect on its business, operating results and financial condition.

Emricasan was the subject of a clinical hold imposed by the FDA while under development by Pfizer Inc. due to a preclinical observation. Although the clinical hold has been lifted, any adverse side effects or other safety risks associated with emricasan could, if Conatus resumes the development of emricasan, delay or preclude approval of the product candidate, cause Conatus to suspend or discontinue its clinical trials or limit the commercial profile of emricasan.

When Conatus acquired emricasan from Pfizer in 2010, emricasan was on clinical hold in the United States due to an observation of inflammatory infiltrates in mice that Pfizer saw in a preclinical study and reported to the FDA in 2007. Pfizer performed additional preclinical studies attempting to characterize the nature of the inflammatory infiltrates, but did not carry out a formal carcinogenicity study to evaluate whether or not the infiltrates progressed to cancer. These infiltrates observed in mice were not observed in any other species. In 2008, Pfizer stopped work on the program. After acquiring emricasan, Conatus conducted a thorough internal review of these studies, commissioned several independent experts to review the data and, based on guidance

 

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from the FDA, conducted a 6-month carcinogenicity study in the Tg.rasH2 transgenic mouse model, which is known to be predisposed toward tumor development. This study was completed in 2012. There was no evidence of drug-related tumorgenicity in its carcinogenicity study, and after further discussions with the FDA, Conatus was cleared in January 2013 to proceed with Conatus’ previously planned HCV-POLT clinical trial, formally lifting emricasan from clinical hold in the United States. Emricasan was never placed on clinical hold outside the United States. Conatus cannot assure you that emricasan will not be placed on clinical hold in the future for similar or unrelated reasons.

In addition, undesirable side effects caused by emricasan could result in the delay, suspension or termination of clinical trials by Conatus, the FDA or other regulatory authorities or institutional review boards, or IRBs, for a number of reasons. To date, over 1,000 subjects have received emricasan in Phase 1 and Phase 2 clinical trials. Although most of the adverse events reported in relation to emricasan in these trials were mild to moderate, results of future trials could reveal a high and unacceptable severity and prevalence of these or other side effects, including, potentially, more severe side effects. In such an event, Conatus’ trials could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order Conatus to cease further development of, or deny approval of, emricasan for any or all targeted indications. In addition, the drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the clinical trial or result in potential product liability claims. Even if regulatory authorities granted approval of emricasan, if adverse events caused regulatory authorities to impose a restrictive label or if physicians’ perceptions of emricasan’s safety caused them to limit their use of the drug, Conatus’ ability to generate sufficient sales of emricasan could be limited. Any of these occurrences may harm Conatus’ business, prospects, financial condition and results of operations significantly.

Clinical drug development involves uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. For example, in late 2011, Conatus ceased clinical development of a product candidate, CTS-1027, for which it had incurred $31.3 million in research and development expenses prior to such time. The results of preclinical studies and early clinical trials of emricasan may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or safety profiles, notwithstanding promising results in earlier trials.

Emricasan has been the subject of eight completed Phase 1 and twelve completed Phase 2 clinical trials. Conatus cannot be certain that any of its future clinical trials will be successful. Failure in one indication may have negative consequences for the development of emricasan for other indications. Any such failure may harm Conatus’ business, prospects and financial condition. For example, the Phase 2b POLT-HCV-SVR, the Phase 2b ENCORE-PH, the Phase 2b ENCORE-NF and the Phase 2b ENCORE-LF clinical trials did not meet their primary endpoints. As a result of the recent clinical failures of emricasan, Conatus discontinued development of emricasan in 2019.

The FDA regulatory approval process is lengthy and time-consuming, and if Conatus resumes development of emricasan or CTS-2090, it could experience significant delays in the clinical development and regulatory approval of emricasan or CTS-2090, its business will be substantially harmed.

Conatus may experience delays in commencing and completing clinical trials of emricasan or CTS-2090. For example, based on data in 2013 regarding a new HCV antiviral being developed by another company, Conatus chose to delay and change its previously planned Phase 2b/3 HCV-POLT clinical trial to the Phase 2b POLT-HCV-SVR clinical trial. Conatus does not know whether planned clinical trials will begin on time, need to be

 

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redesigned, enroll patients on time or be completed on schedule, if at all. Any of Conatus future clinical trials may be delayed for a variety of reasons, including delays related to:

 

   

the availability of financial resources for Conatus to commence and complete its planned clinical trials;

 

   

reaching agreement on acceptable terms with prospective contract research organizations (“CROs”), and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;

 

   

obtaining IRB approval at each clinical trial site;

 

   

obtaining regulatory approval for clinical trials in each country;

 

   

recruiting suitable patients to participate in clinical trials;

 

   

having patients complete a clinical trial or return for post-treatment follow-up;

 

   

clinical trial sites deviating from trial protocol or dropping out of a trial;

 

   

adding new clinical trial sites;

 

   

developing one or more new formulations or routes of administration; or

 

   

manufacturing sufficient quantities of its product candidate for use in clinical trials.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications Conatus is investigating. In addition, significant numbers of patients who enroll in Conatus’ clinical trials may drop out during the clinical trials for various reasons. Conatus believes it appropriately accounts for such increased risk of dropout rates in its trials when determining expected clinical trial timelines, but Conatus cannot assure you that its assumptions are correct, or that it will not experience higher numbers of dropouts than anticipated, which would result in the delay of completion of such trials beyond its expected timelines. For example, Conatus’ previous Phase 2b ACLF clinical trial experienced lower than expected enrollment rates, and Conatus elected to complete the trial prior to reaching the initial targeted number of patients.

Conatus could encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of emricasan or CTS-2090 in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or terminated by Conatus, the IRBs in the institutions in which such trials are being conducted, the data monitoring committee for such trial, or by the FDA or other regulatory authorities due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or Conatus’ clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. If Conatus experiences termination of, or delays in the completion of, any clinical trial of its product candidates, the commercial prospects for such product candidate will be harmed, and Conatus’ ability to generate product revenues will be delayed. In addition, any delays in completing Conatus’ clinical trials will increase its costs, slow down its product development and approval process and jeopardize its ability to commence product sales and generate revenues. Any of these occurrences may harm Conatus’ business, prospects, financial condition and results of operations significantly. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

The clinical trials for emricasan and CTS-2090 involve a high degree of uncertainty and risk of failure, and some of Conatus’ development activities involve indications with little or no previous product candidate development

 

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activities as well as patient populations with critical illnesses and potential challenges for enrollment and participation in clinical trials.

In connection with clinical trials, Conatus faces risks that:

 

   

IRBs may delay approval of, or fail to approve, a clinical trial at a prospective site;

 

   

there may be a limited number of, and significant competition for, suitable patients for enrollment in the clinical trials;

 

   

there may be slower than expected rates of patient recruitment and enrollment;

 

   

patients may fail to complete the clinical trials;

 

   

there may be an inability or unwillingness of patients or medical investigators to follow Conatus’ clinical trial protocols;

 

   

there may be an inability to monitor patients adequately during or after treatment;

 

   

there may be termination of the clinical trials by one or more clinical trial sites;

 

   

unforeseen ethical or safety issues may arise;

 

   

conditions of patients may deteriorate rapidly or unexpectedly, which may cause the patients to become ineligible for a clinical trial or may prevent emricasan or CTS-2090 from demonstrating efficacy or safety;

 

   

patients may die or suffer other adverse effects for reasons that may or may not be related to Conatus’ product candidate being tested;

 

   

Conatus may not be able to sufficiently standardize certain of the tests and procedures that are part of Conatus’ clinical trials because such tests and procedures are highly specialized and involve a high degree of expertise;

 

   

a product candidate may not prove to be efficacious in all or some patient populations;

 

   

the results of the clinical trials may not confirm the results of earlier trials;

 

   

the results of the clinical trials may not meet the level of statistical significance required by the FDA or other regulatory agencies; and

 

   

a product candidate may not have a favorable risk/benefit assessment in the disease areas studied.

Conatus cannot assure you that any future clinical trial for emricasan or CTS-2090 will be started or completed on schedule, or at all. Any failure or significant delay in completing clinical trials for Conatus’ product candidates would harm the commercial prospects for such product candidate and adversely affect Conatus’ financial results. Difficulties and failures can occur at any stage of clinical development, and Conatus cannot assure you that it will be able to successfully complete the development and commercialization of any product candidate in any indication.

If Conatus resumes development of emricasan and is unable to obtain regulatory approval of emricasan, Conatus will not be able to commercialize this product candidate and its business will be adversely impacted.

Conatus has not obtained regulatory approval for any product candidate. If Conatus fails to obtain regulatory approval to market emricasan, its only clinical-stage product candidate, it will be unable to sell emricasan, which will significantly impair its ability to generate revenues. To receive approval, Conatus must, among other things, demonstrate with substantial evidence from clinical trials that the product candidate is both safe and effective for each indication for which approval is sought, and failure can occur in any stage of development. Satisfaction of the approval requirements typically takes several years, and the time and money needed to satisfy them may vary

 

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substantially, based on the type, complexity and novelty of the pharmaceutical product. Conatus has not commenced any Phase 3 clinical trials of emricasan to date, and Conatus cannot predict if, or when, its future clinical trials will generate the data necessary to support an NDA and if, or when, it might receive regulatory approvals for emricasan.

The FDA generally requires two confirmatory clinical trials for approval of an NDA. Under the FDA’s Accelerated Approval Program, the FDA may grant “accelerated approval” to product candidates that have been studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit to patients over existing treatments. Accelerated approval provides a pathway for an investigational product to be approved on the basis of adequate and well-controlled clinical studies establishing that the product candidate has an effect on a surrogate endpoint that the FDA considers reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. The Accelerated Approval Program does not change the statutory requirements for marketing approval. In addition, as a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies. The FDA also generally requires pre-approval of promotional materials as a condition of accelerated approval.

Emricasan could fail to receive regulatory approval for many reasons, including the following:

 

   

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of clinical trials;

 

   

Conatus may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that emricasan is safe and effective for any of its proposed indications;

 

   

the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;

 

   

Conatus may be unable to demonstrate that emricasan’s clinical and other benefits outweigh its safety risks;

 

   

the FDA or comparable foreign regulatory authorities may disagree with Conatus’ interpretation of data from preclinical studies or clinical trials;

 

   

the data collected from clinical trials of emricasan may not be sufficient to the satisfaction of the FDA or comparable foreign regulatory authorities to support the submission of an NDA or other comparable submission in foreign jurisdictions or to obtain regulatory approval in the United States or elsewhere;

 

   

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party manufacturers with which Conatus contracts for clinical and commercial supplies; and

 

   

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering Conatus’ clinical data insufficient for approval.

This lengthy approval process as well as the unpredictability of future clinical trial results may result in Conatus’ failure to obtain regulatory approval to market emricasan, which would significantly harm its business, prospects, financial condition and results of operations. In addition, even if Conatus were to obtain approval, regulatory authorities may grant approval contingent on the performance of costly post-marketing clinical trials or the imposition of a risk evaluation and mitigation strategy, or REMS, requiring substantial additional post-approval safety measures. Moreover, any approvals that Conatus may obtain may not cover all of the clinical indications for which it is seeking approval or could contain significant limitations in the form of narrow indications, warnings, precautions or contra-indications with respect to conditions of use. In such event, Conatus’ ability to generate revenues would be greatly reduced and its business would be harmed.

 

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Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact Conatus’ business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including (i) government budget and funding levels, (ii) the ability to hire and retain key personnel and accept the payment of user fees and (iii) statutory, regulatory and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect its business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process Conatus’ regulatory submissions, which could have a material adverse effect on its business.

Even if Conatus resumes development of any product candidate and obtains and maintains regulatory approval for a product candidate in one jurisdiction, it may never obtain regulatory approval for such product candidate in any other jurisdiction, which would limit its market opportunities and adversely affect Conatus’ business.

Obtaining and maintaining regulatory approval for a product candidate in one jurisdiction does not guarantee that Conatus will be able to obtain or maintain regulatory approval in any other jurisdiction. For example, even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities in foreign countries must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that Conatus intends to charge for its products is also subject to approval. Conatus is expected to submit a marketing authorization application, (“MAA”), to the European Medicines Agency, (“EMA”), for approval of a product candidate in the European Union, (the “EU”). As with the FDA, obtaining approval of an MAA from the EMA is a similarly lengthy and expensive process, and the EMA has its own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling, require a REMS or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the EU also have requirements for approval of product candidates with which Conatus must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for Conatus and could delay or prevent the introduction of its products in certain countries.

Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not ensure approval in any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval process in others. Also, regulatory approval for any product candidate may be withdrawn. If Conatus fails to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, its target market will be reduced and its ability to realize the full market potential of a product candidate will be harmed, which would adversely affect its business, prospects, financial condition and results of operations.

 

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If Conatus resumes the clinical development and receives regulatory approval for a product candidate, Conatus will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, a product candidate, if approved, could be subject to labeling and other restrictions and market withdrawal, and Conatus may be subject to penalties if it fails to comply with regulatory requirements or experiences unanticipated problems with such product candidate.

Any regulatory approvals that Conatus receives for a product candidate may be subject to limitations on the approved indicated uses for which such product candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a REMS in order to approve a product candidate, which could entail requirements for a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign regulatory authority approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for such product candidate will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practices, (“cGMPs”), and good clinical practice regulations, (“GCPs”), for any clinical trials that it conducts post-approval. Later discovery of previously unknown problems with a product candidate, including adverse events of unanticipated severity or frequency, or with its third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

   

restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;

 

   

fines, warning letters or holds on clinical trials;

 

   

refusal by the FDA or comparable foreign regulatory authorities to approve pending applications or supplements to approved applications filed by Conatus or suspension or revocation of license approvals;

 

   

product seizure or detention, or refusal to permit the import or export of the product; and

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of a product candidate. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of drugs and spur innovation. If Conatus is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if Conatus is not able to maintain regulatory compliance, it may lose any marketing approval that it may have obtained, and it may not achieve or sustain profitability, which would adversely affect its business, prospects, financial condition and results of operations.

Conatus also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the Trump administration may impact its business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of a number of executive orders, that could impose significant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive orders will be implemented and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on the FDA’s ability to engage in oversight and implementation activities in the normal course, Conatus’ business may be negatively impacted.

 

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Even if Conatus resumes development of and obtains regulatory approval for a product candidate, the product may not gain market acceptance among physicians, patients and others in the medical community.

If a product candidate is approved for commercialization, its acceptance will depend on a number of factors, including:

 

   

the clinical indications for which the product is approved;

 

   

physicians and patients considering a product candidate as a safe and effective treatment;

 

   

the potential and perceived advantages of the product over alternative treatments;

 

   

the prevalence and severity of any side effects;

 

   

product labeling or product insert requirements of the FDA or other regulatory authorities;

 

   

the timing of market introduction of the product as well as competitive products;

 

   

the cost of treatment in relation to alternative treatments;

 

   

the availability of adequate reimbursement and pricing by third-party payors and government authorities;

 

   

relative convenience and ease of administration; and

 

   

the effectiveness of Conatus’ sales and marketing efforts.

If a product candidate is approved but fails to achieve market acceptance among physicians, patients or others in the medical community, Conatus will not be able to generate significant revenues, which would have a material adverse effect on its business, prospects, financial condition and results of operations.

Coverage and reimbursement may be limited or unavailable in certain market segments for a product, which could make it difficult for Conatus to sell the product profitably.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and the amount of reimbursement. Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process that could require Conatus to provide to the payor supporting scientific, clinical and cost-effectiveness data for the use of its products. Conatus may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement of Conatus’ future products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Conatus may be unable to achieve or sustain profitability.

Conatus may seek approval to market a product candidate in both the United States and in select foreign jurisdictions. If Conatus obtain approval in one or more foreign jurisdictions for a product candidate, it will be subject to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the EU, the pricing of prescription pharmaceuticals and biologics is subject to governmental control. In these countries,

 

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pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval for a product candidate. In addition, market acceptance and sales of the product will depend significantly on the availability of adequate coverage and reimbursement from third-party payors for the product and may be affected by existing and future health care reform measures.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact Conatus’ ability to sell its products profitably. In particular, in 2010, the Affordable Care Act, was enacted, which, among other things, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extended the rebate program to individuals enrolled in Medicaid managed care organizations, established annual fees on manufacturers of certain branded prescription drugs, required manufacturers to participate in a discount program for certain outpatient drugs under Medicare Part D and promoted programs that increase the federal government’s comparative effectiveness research, which will impact existing government healthcare programs and will result in the development of new programs. An expansion in the government’s role in the United States healthcare industry may further lower rates of reimbursement for pharmaceutical products.

Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011 resulted in aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. For instance, there have recently been public hearings in the U.S. Congress concerning pharmaceutical product pricing, which have resulted in several Congressional inquiries and proposed and enacted legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products. Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Conatus cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

   

the demand for a Conatus product candidate, if Conatus obtains regulatory approval;

 

   

Conatus’ ability to set a price that it believes is fair for its products;

 

   

product candidate ability to generate revenues and achieve or maintain profitability;

 

   

the level of taxes that Conatus is are required to pay; and

 

   

the availability of capital.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely affect Conatus’ future profitability.

 

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A variety of risks associated with marketing products internationally could materially adversely affect Conatus’ business.

Conatus may seek regulatory approval for a product candidate outside of the United States and, accordingly, Conatus expects that it will be subject to additional risks related to operating in foreign countries if Conatus obtains the necessary approvals, including:

 

   

differing regulatory requirements in foreign countries;

 

   

the potential for so-called parallel importing, which occurs when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

   

unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign taxes, including withholding of payroll taxes;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

   

difficulties staffing and managing foreign operations;

 

   

workforce uncertainty in countries where labor unrest is more common than in the United States;

 

   

potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;

 

   

challenges enforcing its contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism.

These and other risks associated with its international operations may materially adversely affect Conatus’ ability to attain or maintain profitable operations.

If Conatus resumes the development of emricasan or CTS-2090 and fails to develop and commercialize any other product candidates, Conatus may be unable to grow its business.

Emricasan and CTS-2090 are Conatus’ only product candidates. In order to develop and commercialize any additional product candidates, Conatus may be required to invest significant resources to acquire or in-license the rights to such product candidates or to conduct drug discovery activities. In addition, any other product candidates will require additional, time-consuming development efforts prior to commercial sale, including preclinical studies, extensive clinical trials and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and/or effective for approval by regulatory authorities. In addition, Conatus cannot assure you that it will be able to acquire, discover or develop any additional product candidates, or that any additional product candidates Conatus may develop will be approved, manufactured or produced economically, be successfully commercialized or widely accepted in the marketplace or be more effective than other commercially available alternatives. Research

 

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programs to identify new product candidates require substantial technical, financial and human resources whether or not Conatus ultimately identifies any candidates. If Conatus is unable to develop or commercialize emricasan, CTS-2090 or any other product candidates, its business and prospects will suffer.

Conatus cannot be certain that emricasan, CTS-2090 or any other product candidates that it develops will produce commercially viable drugs that safely and effectively treat liver, inflammasome-related or other diseases. Even if Conatus is successful in completing preclinical and clinical development and receiving regulatory approval for one commercially viable drug for the treatment of one disease, Conatus cannot be certain that it will also be able to develop and receive regulatory approval for other product candidates for the treatment of other forms of that disease or other diseases. If Conatus fails to develop a pipeline of potential product candidates other than emricasan or CTS-2090, Conatus will not have any prospects for commercially viable drugs should its efforts to develop and commercialize emricasan or CTS-2090 be unsuccessful, and its business prospects would be harmed significantly.

If Conatus resumes development of emricasan, it may not be able to obtain orphan drug exclusivity for emricasan for any indication.

In the United States, under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition. Such diseases and conditions are those that affect fewer than 200,000 individuals in the United States, or if they affect more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making a drug product available in the United States for these types of diseases or conditions will be recovered from sales of the product. Orphan Drug Designation must be requested before submitting an NDA. If the FDA grants Orphan Drug Designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by that agency. Orphan Drug Designation does not convey any advantage in or shorten the duration of the regulatory review and approval process, but it can lead to financial incentives, such as opportunities for grant funding toward clinical trial costs, tax advantages and user-fee waivers.

If a drug that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the drug is entitled to orphan drug marketing exclusivity for a period of seven years. Orphan drug marketing exclusivity generally prevents the FDA from approving another application, including a full NDA, to market the same drug or biological product for the same indication for seven years, except in limited circumstances, including if the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. A designated orphan drug may not receive orphan drug marketing exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Orphan drug marketing exclusivity rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

The criteria for designating an orphan medicinal product in the EU are similar in principle to those in the United States. Under Article 3 of Regulation (EC) 141/2000, a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the EU when the application is made, or (b) the product, without the benefits derived from orphan status, would not generate sufficient return in the EU to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to ten years of market exclusivity for the approved therapeutic indication. The application for orphan designation must be submitted before the application for marketing authorization. The applicant will

 

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receive a fee reduction for the marketing authorization application if the orphan designation has been granted, but not if the designation is still pending at the time the marketing authorization is submitted. Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

The ten-year market exclusivity in the EU may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may be granted to a similar product for the same indication at any time if:

 

   

the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;

 

   

the applicant consents to a second orphan medicinal product application; or

 

   

the applicant cannot supply enough orphan medicinal product.

Conatus originally applied for Orphan Drug Designation for emricasan for the treatment of fibrosis in HCV-POLT patients in the United States and the EU. In late 2013, the FDA granted an Orphan Drug Designation for emricasan for the treatment of POLT patients with reestablished fibrosis to delay the progression to cirrhosis and end-stage liver disease. In the EU, Conatus withdrew the application based on feedback from the applicable regulatory body that emricasan may have efficacy in fibrosis outside of the HCV-POLT patient population. Conatus cannot assure you that it will be able to obtain orphan drug exclusivity for emricasan in any jurisdiction for the target indications in a timely manner or at all or that a competitor will not obtain orphan drug exclusivity that could block the regulatory approval of emricasan for several years. If Conatus is unable to obtain Orphan Drug Designation in the United States or in the EU, it will not receive market exclusivity, which might affect its ability to generate sufficient revenues. If a competitor is able to obtain orphan exclusivity that would block emricasan’s regulatory approval, its ability to generate revenues could be significantly reduced, which could harm Conatus’ business prospects, financial condition and results of operations.

If Conatus resumes development of emricasan, Conatus may be unable to maintain or effectively utilize orphan drug exclusivity for emricasan for any indication.

Conatus received Orphan Drug Designation from the FDA for emricasan for the treatment of POLT patients with reestablished fibrosis to delay the progression to cirrhosis and end-stage liver disease. Conatus may be unable to obtain regulatory approval for emricasan for this orphan population or any other orphan population, or Conatus may be unable to successfully commercialize emricasan for such orphan population due to risks that include:

 

   

the orphan patient population may change in size;

 

   

there may be changes in the treatment options for patients that may provide alternative treatments to emricasan;

 

   

the development costs may be greater than projected revenue of drug sales for the orphan indications;

 

   

the regulatory agencies may disagree with the design or implementation of Conatus’ clinical trials;

 

   

there may be difficulties in enrolling patients for clinical trials;

 

   

emricasan or may not prove to be efficacious in the orphan patient population;

 

   

clinical trial results may not meet the level of statistical significance required by the regulatory agencies; and

 

   

emricasan may not have a favorable risk/benefit assessment in the respective orphan indication.

If Conatus is unable to obtain regulatory approval for emricasan for any orphan population or is unable to successfully commercialize emricasan for such orphan population, it could harm Conatus’ business prospects, financial condition and results of operations.

 

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Conatus may form or seek strategic alliances or collaborations in the future. Such alliances and collaborations may inhibit future opportunities, or Conatus may not realize the benefits of such collaborations or alliances.

Conatus may form or seek strategic alliances, joint ventures or collaborations or enter into licensing arrangements with other third parties that it believes will complement or augment its development and commercialization efforts with respect to its product candidates that it may develop. Future efforts for alliances or collaborations may also require Conatus to incur non-recurring and other charges, increase its near- and long-term expenditures, issue securities that dilute its existing stockholders or disrupt its management and business. In addition, Conatus faces significant competition in seeking appropriate strategic partners, and the negotiation process is time-consuming and complex. Furthermore, Conatus may not be able to realize the benefit of such transactions if it is unable to successfully integrate them with its existing operations and company culture. Conatus cannot be certain that, following a strategic transaction or license, it will achieve the revenues or specific net income that justifies such transaction.

Conatus’ business and operations would suffer in the event of system failures.

Despite the implementation of security measures, Conatus’ internal computer systems and those of its current and future CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While Conatus has not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in its operations, it could result in a material disruption of its development programs and its business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in Conatus’ regulatory approval efforts and significantly increase its costs to recover or reproduce the data. Likewise, Conatus relies on third parties to manufacture its product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on its business. To the extent that any disruption or security breach were to result in a loss of, or damage to, Conatus’ data or applications, or inappropriate disclosure of confidential or proprietary information, Conatus could incur liability and the further development and commercialization of its product candidates could be delayed.

Business disruptions could seriously harm Conatus’ future revenues and financial condition and increase its costs and expenses.

Conatus’ operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which it is predominantly self-insured. For example, in December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The coronavirus has impacted the global economy, including limiting travel to China and Europe, and may impact our operations including potential interruption of our clinical operations and supply chain. The extent to which the coronavirus will impact our results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. The occurrence of any of these business disruptions could seriously harm Conatus’ operations and financial condition and increase its costs and expenses. Conatus relies on third-party manufacturers to produce its product candidates. Conatus’ ability to obtain clinical supplies of its product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption. Conatus’ corporate headquarters is located in California near major earthquake faults and fire zones. The ultimate impact on Conatus, its significant suppliers and its general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but Conatus’ operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

 

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Conatus relies significantly on information technology, which faces certain risks, and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm its ability to operate its business effectively.

Conatus relies significantly on its information technology to effectively manage and conduct its business and operations. Any failure, inadequacy or interruption of that infrastructure or security lapse of that technology, including cybersecurity incidents, could harm Conatus’ ability to operate its business effectively. In the ordinary course of business, Conatus collects, stores and transmits confidential information, and it is critical that Conatus does so in a secure manner in order to maintain the confidentiality and integrity of such confidential information. Significant disruptions to Conatus’ information technology systems or breaches of information security could adversely affect its business. Conatus’ information technology systems are potentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by its employees, partners, vendors, or from attacks by malicious third parties. Maintaining the secrecy of this confidential, proprietary, and/or trade secret information is important to Conatus’ competitive business position. While Conatus has taken steps to protect such information and invested in information technology, there can be no assurance that its efforts will prevent service interruptions or security breaches in its systems or the unauthorized or inadvertent wrongful access or disclosure of confidential information that could adversely affect its business operations or result in the loss, dissemination, or misuse of critical or sensitive information. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of its confidential or otherwise protected information and corruption of data. A breach of Conatus’ security measures or the accidental loss, inadvertent disclosure, unapproved dissemination or misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, or other forms of deception, or for any other cause, could enable others to produce competing products, use its proprietary technology and/or adversely affect its business position. Further, a breach in security, unauthorized access resulting in misappropriation, theft, or sabotage with respect to its proprietary and confidential information, including research or clinical data, could require significant capital investments to remediate and could adversely affect Conatus’ business, financial condition and results of operations.

Conatus’ employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Conatus is exposed to the risk that its employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to Conatus that violate FDA laws and regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Conatus’ reputation. Conatus has adopted a code of business conduct and ethics, but it is not always possible to identify and deter third-party misconduct, and the precautions Conatus takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting it from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Conatus, and Conatus is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs,

 

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reputational harm, diminished profits and future earnings, and curtailment of its operations, any of which could adversely affect its ability to operate its business and its results of operations.

Conatus’ current and future relationships with investigators, health care professionals, consultants, third-party payors and customers will be subject to applicable healthcare regulatory laws. Conatus or its collaborators’ failure to comply with those laws could have a material adverse effect on its results of operations and financial condition.

Conatus’ business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers, may expose it to broadly applicable fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which Conatus conducts its operations, including how it researches, markets, sells and distributes its product candidates for which it obtains marketing approval. Such laws include, without limitation:

 

   

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

 

   

the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;

 

   

federal false claims 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 payors that are false or fraudulent;

 

   

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

   

the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members and payments or other “transfers of value” to such physician owners (manufacturers are required to submit reports to the government by the 90th day of each calendar year);

 

   

federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

 

   

state 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 payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other

 

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potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by the Health Insurance Portability and Accountability Act, thus complicating compliance efforts; and

 

   

similar healthcare laws and regulations in the European Union and other non-U.S. jurisdictions, including reporting requirements detailing interactions with and payments to healthcare providers and laws governing the privacy and security of certain protected information, such as the General Data Protection Regulation, (“GDPR”), which imposes obligations and restrictions on the collection and use of personal data relating to individuals located in the EU (including health data).

If Conatus or its collaborators’ operations are found to be in violation of any of such laws or any other governmental regulations that apply to Conatus, it may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of its operations, the exclusion from participation in federal and state healthcare programs or similar programs in other countries or jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, and individual imprisonment, any of which could adversely affect its ability to operate Conatus’ business and its results of operations.

Risks Related to Conatus’ Reliance on Third Parties

Since Conatus and Novartis terminated the Collaboration Agreement, Conatus will not receive any future milestone, royalty or profit and loss sharing payments under the Collaboration Agreement, and Conatus may not be able to enter into a similar agreement on favorable terms, or at all.

In June 2019, Conatus announced that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint, and Conatus was discontinuing further treatment of patients enrolled in the ENCORE-LF clinical trial. In addition, results from the 24-week extension in Conatus’ ENCORE-PH clinical trial of emricasan were consistent with results from the initial 24-week treatment period and did not meet predefined objectives. Previously, in March 2019, Conatus announced that top-line results from the Phase 2b ENCORE-NF clinical trial of emricasan also did not meet the primary endpoint. Consequently, Conatus and Novartis entered into an amendment to the Collaboration Agreement, pursuant to which they mutually agreed to terminate the Collaboration Agreement in September 2019.

As a result, Conatus will not receive additional milestones under the Collaboration Agreement, and Conatus may be unable to raise the additional capital required to further develop and commercialize emricasan, if it resumes development, or enter into a collaboration agreement with another pharmaceutical company with equivalent or comparable terms, or at all. Further, any delays in entering into new strategic partnership agreements related to emricasan could delay the development and commercialization of emricasan, which would harm Conatus’ business, prospects, financial condition and results of operations. In addition, a strategic transaction may not result in any future development and commercialization of emricasan, which would harm Conatus’ business, prospects, financial condition and results of operations.

Conatus relies on third parties to conduct its clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, Conatus may not be able to obtain regulatory approval for or commercialize a product candidate, and its business could be substantially harmed.

Conatus anticipates that it will continue to engage one or more third-party CROs in connection with future clinical trials for any product candidate. Conatus relies heavily on these parties for execution of its clinical trials, and it controls only certain aspects of their activities. Nevertheless, Conatus is responsible for ensuring that each of its trials is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and its reliance on its CROs does not relieve it of its regulatory responsibilities. Conatus and its CROs are required to

 

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comply with GCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If Conatus or any of its CROs fail to comply with applicable GCPs, the clinical data generated in its clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require Conatus to perform additional clinical trials before approving its marketing applications. Conatus cannot assure you that, upon inspection, such regulatory authorities will determine that any of its clinical trials comply with the GCPs. In addition, Conatus’ clinical trials must be conducted with drug product produced under cGMP regulations and will require a large number of test subjects. Conatus’ failure or any failure by its CROs to comply with these regulations or to recruit a sufficient number of patients may require Conatus to repeat clinical trials, which would delay the regulatory approval process. Moreover, Conatus’ business may be implicated if any of its CROs violate federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws. Conatus’ CROs are not its employees and, except for remedies available to Conatus under its agreements with such CROs, it cannot control whether or not they devote sufficient time and resources to Conatus’ ongoing preclinical, clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including its competitors, for whom they may also be conducting clinical trials or other drug development activities, which could affect their performance on Conatus’ behalf. Conatus’ clinical trials may be extended, delayed or terminated if CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to Conatus’ clinical protocols or regulatory requirements or for other reasons. As a result, Conatus may not be able to complete development of, obtain regulatory approval for or successfully commercialize any product candidate. Therefore, Conatus’ financial results and the commercial prospects for any product candidate would be harmed, Conatus’ costs could increase and its ability to generate revenues could be delayed.

Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact Conatus’ ability to meet its desired clinical development timelines. Although Conatus carefully manages its relationships with its CROs, there can be no assurance that Conatus will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on its business, prospects, financial condition and results of operations.

Conatus relies completely on third parties to manufacture its preclinical and clinical drug supplies, and Conatus intends to rely on third parties to produce commercial supplies of any product candidates, if approved. The development and commercialization of any product candidate could be stopped, delayed or made less profitable if those third parties fail to obtain and maintain regulatory approval of their facilities, fail to provide Conatus with sufficient quantities of drug product or fail to do so at acceptable quality levels or prices.

Risks Related to Conatus’ Financial Position and Capital Requirements

To conserve capital, Conatus may undertake additional workforce and cost reduction activities in the future. These activities may cause Conatus to be unable to fully support and manage its operations.

In June 2019 and September 2019, Conatus implemented restructuring plans to conserve capital, and it may, in the future, need to undertake additional workforce reductions or restructuring activities. As a result of the reduction in its workforce, Conatus faces an increased risk of employment litigation. Conatus also needs to effectively manage its operations and facilities. Following Conatus’ workforce reductions in June 2019 and September 2019, it is possible that its infrastructure may be inadequate to support its future efforts and business strategy or to maintain operational, financial and management controls and reporting systems and procedures. If Conatus cannot successfully manage its operations, it may be unsuccessful in executing its business strategy, including potential strategic alternatives.

 

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Conatus has a limited operating history, has incurred significant operating losses since its inception and anticipates that it will continue to incur losses for the foreseeable future.

Conatus’ operations began in 2005, and it has only a limited operating history upon which you can evaluate its business and prospects. Conatus’ operations to date have been limited to conducting product development activities and performing research and development with respect to its clinical and preclinical programs. In addition, as an early-stage company, Conatus has limited experience and has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical area. Nor has Conatus demonstrated an ability to obtain regulatory approval for or to commercialize a product candidate. Consequently, any predictions about its future performance may not be as accurate as they would be if Conatus had a history of successfully developing and commercializing pharmaceutical products.

Conatus has incurred significant operating losses since its inception, including net losses of $11.4 million, $18.0 million and $17.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, Conatus had an accumulated deficit of $198.0 million. Conatus’ prior losses, combined with expected future losses, have had and will continue to have an adverse effect on its stockholders’ equity and working capital. Conatus’ losses have resulted principally from costs incurred in its research and development activities. In addition, if Conatus obtains regulatory approval of any product candidate, Conatus may incur significant sales and marketing expenses. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, Conatus is unable to predict the extent of any future losses or whether or when it will become profitable, if ever.

Conatus has not generated any revenues to date from product. Conatus may never achieve or sustain profitability, which could depress the market price of its common stock and could cause its stockholders to lose all or a part of their investment.

Conatus’ ability to become profitable depends in part on its ability to develop and commercialize emricasan or CTS-2090. To date, Conatus has no products approved for commercial sale and has not generated any revenues from sales of any product candidate, and it does not know when, or if, it will generate revenues in the future. Conatus does not anticipate generating revenues, if any, from sales of emricasan or CTS-2090 for at least the next several years, and it will never generate revenues from emricasan or CTS-2090 if it does not obtain regulatory approval of such product candidates. Conatus’ ability to generate future revenues depends heavily on its success in:

 

   

developing and securing United States and/or foreign regulatory approvals for its product candidates;

 

   

manufacturing commercial quantities of its product candidates at acceptable cost;

 

   

achieving broad market acceptance of its product candidates in the medical community and with third-party payors and patients;

 

   

commercializing its product candidates, assuming its product candidates receive regulatory approval; and

 

   

pursuing clinical development of its product candidates in additional indications.

Even if Conatus does generate product sales, it may never achieve or sustain profitability. Conatus’ failure to become and remain profitable would depress the market price of its common stock and could impair its ability to raise capital, expand its business, diversify its product offerings or continue its operations.

Raising additional capital may cause dilution to existing Conatus stockholders, restrict Conatus’ operations or require it to relinquish rights to its technologies or product candidate.

Conatus may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that Conatus raises

 

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additional capital through the sale of equity or convertible debt securities, the ownership interests of its stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of its stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on Conatus’ ability to incur additional debt, limitations on its ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact its ability to conduct its business. If Conatus raises additional funds through strategic partnerships and alliances and licensing arrangements with third parties, it may have to relinquish valuable rights to its technologies or product candidate, or grant licenses on terms unfavorable to it.

Conatus’ ability to utilize its net operating loss (“NOL”) carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Code, 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 NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. Conatus previously completed a study to assess whether an ownership change, as defined by Section 382 of the Code, had occurred from its formation through December 31, 2017. Based upon this study, Conatus determined that ownership changes had occurred in 2006 and 2013 but concluded that the annual utilization limitation would be sufficient to utilize its pre-ownership change NOLs and research and development credits prior to expiration, with the exception of a de minimis amount. Future ownership changes may limit Conatus’ ability to utilize remaining tax attributes. As of December 31, 2019, Conatus had federal and state NOL carryforwards of $145.5 million and $76.4 million, respectively. Conatus also had federal, including orphan drug, and state research and development credit carryforwards of $8.3 million and $2.4 million, respectively. Furthermore, under recently enacted U.S. tax legislation, although the treatment of tax losses generated in taxable years ending before December 31, 2017 has generally not changed, tax losses generated in taxable years beginning after December 31, 2017 may only be utilized to offset 80% of taxable income annually. This change may require Conatus to pay federal income taxes in future years despite generating a loss for federal income tax purposes in prior years.

Unstable market and economic conditions may have serious adverse consequences on Conatus’ business, financial condition and stock price.

As widely reported, global credit and financial markets have experienced extreme disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Conatus’ general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary equity or debt financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on Conatus’ growth strategy, financial performance and stock price and could require Conatus to delay or abandon clinical development plans. In addition, there is a risk that one or more of Conatus’ current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect Conatus ability to attain its operating goals on schedule and on budget.

At December 31, 2019, Conatus had $20.7 million of cash and cash equivalents. While Conatus is not aware of any downgrades, material losses, or other significant deterioration in the fair value of its cash equivalents since December 31, 2019, no assurance can be given that deterioration of the global credit and financial markets would not negatively impact its current portfolio of cash equivalents or its ability to meet its financing objectives. Furthermore, its stock price may decline due in part to the volatility of the stock market.

 

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Risks Related to Conatus’ Intellectual Property

If Conatus’ efforts to protect the proprietary nature of the intellectual property related to its technologies are not adequate, it may not be able to compete effectively in its market.

Conatus relies upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to its technologies. Any disclosure to or misappropriation by third parties of its confidential proprietary information could enable competitors to quickly duplicate or surpass its technological achievements, thus eroding its competitive position in its market.

Composition-of-matter patents on the API and crystalline forms are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. Conatus cannot be certain that the claims in its patent applications covering composition-of-matter or crystalline forms of emricasan or CTS-2090 will be considered patentable by the United States Patent and Trademark Office, (the “USPTO”), courts in the United States, or by the patent offices and courts in foreign countries. Method-of-use patents protect the use of a product for the specified method. This type of patent does not prevent a competitor from making and marketing a product that is identical to its product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for its targeted indications, physicians may prescribe these products “off-label.” Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or prosecute.

The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. Some of Conatus’ patents related to emricasan were acquired from a predecessor owner and were therefore not written by it or its attorneys, and it did not have control over the drafting and prosecution of these patent applications. Further, the former patent owners might not have given the same attention to the drafting and early prosecution of these patents and applications as Conatus would have if it had been the owners of the patents and applications and had control over the drafting and prosecution. In addition, the former patent owners may not have been completely familiar with United States patent law, possibly resulting in inadequate disclosure and/or claims. This could result in findings of invalidity or unenforceability of the patents Conatus owns or patents issuing with reduced claim scope.

In addition, the patent applications that Conatus owns or that it may license may fail to result in issued patents in the United States or in other foreign countries. Even if the patents do successfully issue, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, Conatus’ patents and patent applications may not adequately protect its intellectual property or prevent others from designing around its claims.

In addition to the protection afforded by patents, Conatus seeks to 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 its drug discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Although Conatus requires all of its employees to assign their inventions to it, and require all of its employees, advisors and any third parties who have access to its proprietary know-how, information or technology to enter into confidentiality agreements, Conatus cannot be certain that its trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to its trade secrets or independently develop substantially equivalent information and techniques. Furthermore, 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. As a result, Conatus may encounter significant problems in protecting and defending its intellectual property both in the United States and abroad. If Conatus is unable to prevent unauthorized material disclosure of its intellectual property to third parties, Conatus will not be able to establish or maintain a competitive advantage in its market, which could materially adversely affect its business, operating results and financial condition.

 

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Third-party claims of intellectual property infringement may prevent or delay Conatus’ drug discovery and development efforts.

Conatus’ commercial success depends in part on its and its collaborators avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Under United States patent reform, new procedures including inter partes review and post grant review have been implemented. As stated above, this reform brings uncertainty to the possibility of challenge to its patents in the future. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which it or its collaborators are developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that a product candidate may give rise to claims of infringement of the patent rights of others.

Third parties may assert that Conatus or its collaborators are employing their proprietary technology without authorization. There may be third-party patents of which Conatus or its collaborators are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of a Conatus product candidate. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that a product candidate may infringe. In addition, third parties may obtain patents in the future and claim that use of Conatus or its collaborators’ technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of a product candidate, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block the ability to commercialize the product candidate unless Conatus or its collaborators obtain a license under the applicable patents, or until such patents expire or they are finally determined to be held invalid or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of its formulations, processes for manufacture or methods of Conatus, including combination therapy or patient selection methods, the holders of any such patent may be able to block the ability to develop and commercialize the product candidate, unless Conatus or its collaborators obtain a license or until such patent expires or is finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all. If Conatus or its collaborators are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, Conatus’ ability to commercialize a product candidate may be impaired or delayed, which could in turn significantly harm Conatus’ business.

Parties making claims against Conatus may seek and obtain injunctive or other equitable relief, which could effectively block the ability to further develop and commercialize a product candidate. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from its business. In the event of a successful claim of infringement against Conatus, it may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign its infringing products, which may be impossible or require substantial time and monetary expenditure. Conatus cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, Conatus or its collaborators may need to obtain licenses from third parties to advance Conatus’ research or allow commercialization of a product candidate. Conatus may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, Conatus or its collaborators would be unable to further develop and commercialize a product candidate, which could harm Conatus’ business significantly.

 

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Conatus or its collaborators may be involved in lawsuits to protect or enforce its patents, which could be expensive, time-consuming and unsuccessful.

Competitors may infringe Conatus’ patents. To counter infringement or unauthorized use, Conatus or its collaborators may be required to file infringement claims, which can be expensive and time-consuming. In an infringement proceeding, a court may decide that one or more of Conatus’ patents is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that Conatus’ patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of Conatus’ patents at risk of being invalidated, held unenforceable, or interpreted narrowly and could put Conatus’ patent applications at risk of not issuing. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from Conatus’ business. In the event of a successful claim of infringement against Conatus, it or its collaborators may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign its infringing products, which may be impossible or require substantial time and monetary expenditure.

Interference proceedings provoked by third parties or brought by the USPTO may be necessary to determine the priority of inventions with respect to Conatus’ patents or patent applications. An unfavorable outcome could require Conatus to cease using the related technology or to attempt to license rights to it from the prevailing party. Conatus’ business could be harmed if the prevailing party does not offer it a license on commercially reasonable terms. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract Conatus’ management and other employees. Conatus may not be able to prevent misappropriation of its trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Conatus’ confidential information could be compromised by disclosure during this type of litigation. In addition, there could 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 substantial adverse effect on the price of Conatus’ common stock.

Obtaining and maintaining Conatus’ patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Conatus’ patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, Conatus’ competitors might be able to enter the market, which would have a material adverse effect on Conatus’ business.

Conatus may be subject to claims that its employees or independent contractors have wrongfully used or disclosed confidential information of third parties.

Conatus has received confidential and proprietary information from third parties. In addition, Conatus employs individuals who were previously employed at other biotechnology or pharmaceutical companies. Conatus may be subject to claims that it or its employees or independent contractors have inadvertently or otherwise used or

 

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disclosed confidential information of these third parties or Conatus employees’ former employers. Litigation may be necessary to defend against these claims. Even if Conatus is successful in defending against these claims, litigation could result in substantial cost and be a distraction to its management and employees.

Risks Related to Ownership of Conatus’ Common Stock

If Conatus is not able to comply with the applicable continued listing requirements or standards of the Nasdaq Capital Market, its common stock could be delisted.

Conatus’ common stock is currently listed on the Nasdaq Capital Market. In order to maintain that listing, Conatus must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that Conatus will be able to comply with the applicable listing standards.

On May 29, 2019, Conatus received a letter from the Nasdaq staff indicating that, for the last thirty consecutive business days, the bid price for its common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(a)(1). Conatus had a period of 180 calendar days, or until November 25, 2019, to regain compliance. On November 25, 2019, Conatus filed an application to transfer the listing of its common stock from the Nasdaq Global Market to the Nasdaq Capital Market.

On November 27, 2019, Conatus received approval from Nasdaq to transfer the listing of Conatus’ common stock from the Nasdaq Global Market to the Nasdaq Capital Market. Conatus’ common stock was transferred to the Nasdaq Capital Market effective as of the open of business on November 29, 2019, and continues to trade under the symbol “CNAT.” The Nasdaq Capital Market operates in substantially the same manner as the Nasdaq Global Market and listed companies must meet certain financial requirements and comply with Nasdaq’s corporate governance requirements.

In connection with the transfer to the Nasdaq Capital Market, Conatus has been granted an additional 180-day grace period, until May 25, 2020, to regain compliance with the minimum $1.00 per share requirement for continued listing on the Nasdaq Capital Market under Nasdaq Listing Rule 5810(c)(3)(A). If compliance cannot be demonstrated by May 25, 2020, or Conatus does not comply with the terms of this extension, the Nasdaq staff will provide written notification that Conatus’ securities will be delisted. In the event of such a notification, Conatus may appeal the Nasdaq staff’s determination to delist its securities, but there can be no assurance the Nasdaq staff would grant Conatus’ request for continued listing.

In the event that its common stock is delisted from the Nasdaq Capital Market and is not eligible for quotation or listing on another market or exchange, trading of its common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities, such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, its common stock, and there would likely also be a reduction in its coverage by securities analysts and the news media, which could cause the price of its common stock to decline further. Also, it may be difficult for Conatus to raise additional capital if it is not listed on a major exchange.

The price of Conatus’ stock may be volatile.

Prior to Conatus’ IPO, there was no public market for its common stock. Since the commencement of trading in connection with Conatus’ IPO in July 2013 through January 31, 2020, the sale price per share of its common stock on Nasdaq has ranged from a low of $0.25 to a high of $15.67. The trading price of Conatus’ common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various

 

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factors, some of which are beyond its control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Form S-4, these factors include:

 

   

any potential strategic alternative that Conatus pursue, including the proposed merger with Histogen;

 

   

actual or anticipated variations in quarterly operating results;

 

   

Conatus’ cash position;

 

   

Conatus’ failure to meet the estimates and projections of the investment community or that it may otherwise provide to the public;

 

   

publication of research reports about Conatus or its industry or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

changes in the market valuations of similar companies;

 

   

overall performance of the equity markets;

 

   

sales of Conatus’ common stock by it or its stockholders in the future;

 

   

trading volume of Conatus’ common stock;

 

   

changes in accounting practices;

 

   

ineffectiveness of Conatus’ internal controls;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and Conatus’ ability to obtain patent protection for its technologies;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

general political and economic conditions; and

 

   

other events or factors, many of which are beyond Conatus’ control.

In addition, the stock market in general, and Nasdaq and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of its common stock, regardless of its actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section and elsewhere in this Form S-4, could have a dramatic and material adverse impact on the market price of Conatus’ common stock.

Conatus does not intend to pay dividends on its common stock so any returns will be limited to the value of its stock.

Conatus has never declared or paid any cash dividend on its common stock. Conatus currently anticipates that it will retain future earnings for the development, operation and expansion of its business and does 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.

Conatus’ principal stockholders and management own a significant percentage of its stock and will be able to exert significant control over matters subject to stockholder approval.

As of December 31, 2019, Conatus’ executive officers, directors, 5% stockholders and their affiliates owned approximately 11.5% of Conatus’ outstanding voting stock. Therefore, these stockholders have the ability to influence Conatus through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors,

 

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amendments of its organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for Conatus’ common stock that its stockholders may feel are in their best interests.

Conatus is required to maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or Conatus may be subject to sanctions by regulatory authorities.

Section 404(a) of the Sarbanes-Oxley Act of 2002 requires that Conatus evaluates and determines the effectiveness of its internal controls over financial reporting and provide a management report on the internal control over financial reporting. Conatus has performed the system and process evaluation and testing required to comply with the management certification. In the future, Conatus may also be required to comply with auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. If Conatus does not properly implement the requirements of Section 404 with adequate compliance, and maintain such compliance, Conatus may be subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq. Any such action could adversely affect Conatus’ financial results or investors’ confidence in Conatus and could cause its stock price to fall. If Conatus has a material weakness in its internal controls over financial reporting, Conatus may not detect errors on a timely basis and its consolidated financial statements may be materially misstated. If Conatus or its independent registered public accounting firm identifies deficiencies in its internal controls that are deemed to be material weaknesses, Conatus could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources and could materially adversely affect Conatus’ stock price.

Conatus incurs significant increased costs as a result of operating as a public company, and its management is required to devote substantial time to compliance initiatives.

As a public company, Conatus incurs significant legal, accounting and other expenses that it did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and Nasdaq to implement provisions of the Sarbanes-Oxley Act, imposes significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which Conatus operates its business in ways it cannot currently anticipate.

The rules and regulations applicable to public companies may substantially increase Conatus’ legal and financial compliance costs and make some activities more time-consuming and costly. If these requirements divert the attention of Conatus management and personnel from other business concerns, they could have a material adverse effect on Conatus’ business, financial condition and results of operations. The increased costs will decrease Conatus’ net income or increase its net loss and may require it to reduce costs in other areas of its business or increase the prices of its products or services. For example, these rules and regulations may make it more difficult and more expensive for Conatus to obtain director and officer liability insurance, and it may be required to incur substantial costs to maintain the same or similar coverage. Conatus cannot predict or estimate the amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also make it more difficult for Conatus to attract and retain qualified persons to serve on its board of directors, its board committees or as executive officers.

 

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Future sales and issuances of the Conatus common stock or rights to purchase common stock, including pursuant its equity incentive plans could result in additional dilution of the percentage ownership of its stockholders and could cause its stock price to fall.

To raise capital, Conatus may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner it determines from time to time. If Conatus sells common stock, convertible securities or other equity securities, its stockholders may be materially diluted by subsequent sales, and new investors could gain rights preferences and privileges senior to the holders of its common stock.

Pursuant to Conatus’ 2013 equity incentive award plan (the “Conatus 2013 Plan”), which became effective in July 2013, its management, is authorized to grant stock options and other equity awards to its employees, directors and consultants. The number of shares available for future grant under the Conatus 2013 Plan automatically increases each year by an amount equal to the least of (1) 1,000,000 shares of its common stock, (2) 5% of the outstanding shares of its common stock as of the last day of its immediately preceding fiscal year, or (3) such other amount as its board of directors may determine. Unless Conatus’ board of directors elects not to increase the number of shares available for future grant each year, its stockholders may experience additional dilution, which could cause its stock price to fall.

Conatus could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for Conatus because pharmaceutical companies have experienced significant stock price volatility in recent years. If Conatus faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm its business.

Anti-takeover provisions under Conatus’ charter documents and Delaware law could delay or prevent a change of control, which could limit the market price of its common stock and may prevent or frustrate attempts by its stockholders to replace or remove its current management.

Conatus amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of the company or changes in its board of directors that its stockholders might consider favorable to its board of directors and its management. Some of these provisions include:

 

   

a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

   

a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of its stockholders;

 

   

a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president or by a majority of the total number of authorized directors;

 

   

advance notice requirements for stockholder proposals and nominations for election to its board of directors;

 

   

a requirement that no member of its board of directors may be removed from office by its stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of all outstanding shares of its voting stock then entitled to vote in the election of directors;

 

   

a requirement of approval of not less than two-thirds of all outstanding shares of its voting stock to amend any bylaws by stockholder action or to amend specific provisions of its certificate of incorporation; and

 

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the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and such preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because Conatus is incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of its outstanding voting stock. These anti-takeover provisions and other provisions in Conatus’ amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirors to obtain control of its board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer or proxy contest involving Conatus. These provisions could also discourage proxy contests and make it more difficult for Conatus stockholders to elect directors of their choosing or cause it to take other corporate actions desired by certain stockholders. Any delay or prevention of a change of control transaction or changes in the Conatus board of directors could cause the market price of its common stock to decline.

The amended and restated certificate of incorporation of the combined company will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

The amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf under Delaware statutory or common law, including any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided, that, this provision would not apply to suits brought to enforce a duty or liability created by the Securities Act or the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. The choice of forum provisions in our amended and restated certificate of incorporation may limit the ability of a stockholder of the combined company to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. By agreeing to these provisions, however, stockholders of the combined company will not be deemed to have waived the combined company’s compliance with the federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the choice of forum provisions in the combined company’s amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about Conatus’ business, its stock price and trading volume could decline.

The trading market for Conatus’ common stock depends in part on the research and reports that securities or industry analysts publish about its business. Conatus currently has limited research coverage by securities and industry analysts. In the event one or more of the analysts who covers Conatus downgrades its stock or publishes inaccurate or unfavorable research about its business, its stock price may decline. If one or more of these analysts ceases coverage of Conatus or fails to publish reports on Conatus regularly, demand for its stock could decrease, which might cause its stock price and trading volume to decline.

 

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The comprehensive U.S. tax reform bill passed in 2017 could adversely affect Conatus’ business and financial condition.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Tax Act”) into law, which significantly revised the Code. The Tax Act, among other things, contained significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limitation of the deduction for NOLs generated in tax years beginning after December 31, 2017 to 80% of current year taxable income and elimination of carrybacks of NOLs arising in taxable years ending after December 31, 2017, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act could adversely affect Conatus. In addition, it is uncertain if and to what extent various states will conform to the Tax Act. The impact of the Tax Act on holders of Conatus’ common stock is also uncertain and could be adverse. Conatus urges its stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding Conatus common stock.

Risks Related to Histogen

Histogen is a clinical-stage company, has a very limited operating history, is not currently profitable, does not expect to become profitable in the near future and may never become profitable.

Histogen is a clinical-stage biopharmaceutical company. Since Histogen’s incorporation, it has focused primarily on the development of patented, innovative technologies that replace and regenerate tissues in the body for aesthetic and therapeutic markets. All of Histogen’s product candidates are in the clinical development stage and none of Histogen’s product candidates have been approved for marketing or are being marketed or commercialized.

As a result, Histogen has no meaningful historical operations upon which to evaluate Histogen’s business and prospects and has not yet demonstrated an ability to obtain marketing approval for any of its product candidates or successfully overcome the risks and uncertainties frequently encountered by companies in the biopharmaceutical industry. Histogen also has generated limited revenues from collaboration and licensing agreements or product sales to date, and continues to incur significant research and development and other expenses. As a result, Histogen has not been profitable and has incurred significant operating losses in every reporting period since its inception, except for the year ended December 31, 2017. For the years ended December 31, 2019 and 2018, Histogen reported net losses of $3.0 million and $6.2 million, respectively, and had an accumulated deficit of $43.9 million as of December 31, 2019.

For the foreseeable future, Histogen expects to continue to incur losses, which will increase significantly from historical levels as Histogen expands its drug development activities, seeks partnering regulatory approvals for its product candidates and begins to commercialize them if they are approved by the U.S. Food and Drug Administration (the “FDA”) the European Medicines Agency (the “EMA”) or comparable foreign authorities. Even if Histogen succeeds in developing and commercializing one or more product candidates, Histogen may never become profitable.

Histogen is dependent on the success of one or more of Histogen’s current product candidates and Histogen cannot be certain that any of them will receive regulatory approval or be commercialized.

Histogen has spent significant time, money and effort on the licensing and development of its core assets, HST-001, HST-002 and HST-003 and its pre-clinical assets, HST-004 and HST-005. To date, no pivotal clinical trials designed to provide clinically and statistically significant proof of efficacy, or to provide sufficient evidence of

 

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safety to justify approval, have been completed with any of Histogen’s product candidates. All of Histogen’s product candidates will require additional development, including clinical trials as well as further preclinical studies to evaluate their toxicology, carcinogenicity and pharmacokinetics and optimize their formulation, and regulatory clearances before they can be commercialized. Positive results obtained during early development do not necessarily mean later development will succeed or that regulatory clearances will be obtained. Histogen’s drug development efforts may not lead to commercial drugs, either because Histogen’s product candidates fail to be safe and effective or because Histogen has inadequate financial or other resources to advance Histogen’s product candidates through the clinical development and approval processes. If any of Histogen’s product candidates fail to demonstrate safety or efficacy at any time or during any phase of development, Histogen would experience potentially significant delays in, or be required to abandon, development of the product candidate.

Histogen does not anticipate that any of its current product candidates will be eligible to receive regulatory approval from the FDA, the EMA or comparable foreign authorities and begin commercialization for a number of years, if ever. Even if Histogen ultimately receives regulatory approval for any of these product candidates, Histogen or its potential future partners, if any, may be unable to commercialize them successfully for a variety of reasons. These include, for example, the availability of alternative treatments, lack of cost-effectiveness, the cost of manufacturing the product on a commercial scale and competition with other drugs. The success of Histogen’s product candidates may also be limited by the prevalence and severity of any adverse side effects. If Histogen fails to commercialize one or more of its current product candidates, Histogen may be unable to generate sufficient revenues to attain or maintain profitability, and Histogen’s financial condition and stock price may decline.

If development of Histogen’s product candidates does not produce favorable results, Histogen and its collaborators, if any, may be unable to commercialize these products.

To receive regulatory approval for the commercialization of Histogen’s core assets, HST-001, HST-002 and HST-003 and its pre-clinical assets, HST-004 and HST-005, or any other product candidates that Histogen may develop, adequate and well-controlled clinical trials must be conducted to demonstrate safety and efficacy in humans to the satisfaction of the FDA, the EMA and comparable foreign authorities. In order to support marketing approval, these agencies typically require successful results in one or more Phase 3 clinical trials, which Histogen’s current product candidates have not yet reached and may never reach. The development process is expensive, can take many years and has an uncertain outcome. Failure can occur at any stage of the process. Histogen may experience numerous unforeseen events during, or as a result of, the development process that could delay or prevent commercialization of Histogen’s current or future product candidates, including the following:

 

   

clinical trials may produce negative or inconclusive results;

 

   

preclinical studies conducted with product candidates during clinical development to, among other things, evaluate their toxicology, carcinogenicity and pharmacokinetics and optimize their formulation may produce unfavorable results;

 

   

patient recruitment and enrollment in clinical trials may be slower than Histogen anticipates;

 

   

costs of development may be greater than Histogen anticipates;

 

   

Histogen’s product candidates may cause undesirable side effects that delay or preclude regulatory approval or limit their commercial use or market acceptance, if approved;

 

   

collaborators who may be responsible for the development of Histogen’s product candidates may not devote sufficient resources to these clinical trials or other preclinical studies of these candidates or conduct them in a timely manner; or

 

   

Histogen may face delays in obtaining regulatory approvals to commence one or more clinical trials.

 

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Success in early development does not mean that later development will be successful because, for example, product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy despite having progressed through initial clinical trials.

In the future, Histogen or any potential future collaborative partner will be responsible for establishing the targeted endpoints and goals for development of its product candidates. These targeted endpoints and goals may be inadequate to demonstrate the safety and efficacy levels required for regulatory approvals. Even if Histogen believes data collected during the development of its product candidates are promising, such data may not be sufficient to support marketing approval by the FDA, the EMA or comparable foreign authorities. Further, data generated during development can be interpreted in different ways, and the FDA, the EMA or comparable foreign authorities may interpret such data in different ways than Histogen or Histogen’s collaborators. Histogen’s failure to adequately demonstrate the safety and efficacy of Histogen’s product candidates would prevent Histogen’s receipt of regulatory approval, and ultimately the potential commercialization of these product candidates.

Since Histogen does not currently possess the resources necessary to independently develop and commercialize its product candidates or any other product candidates that Histogen may develop, Histogen may seek to enter into collaborative agreements to assist in the development and potential future commercialization of some or all of these assets as a component of Histogen’s strategic plan. However, Histogen’s discussions with potential collaborators may not lead to the establishment of collaborations on acceptable terms, if at all, or it may take longer than expected to establish new collaborations, leading to development and potential commercialization delays, which would adversely affect Histogen’s business, financial condition and results of operations.

Histogen expects to continue to incur significant research and development expenses, which may make it difficult for Histogen to attain profitability.

Histogen expects to expend substantial funds in research and development, including preclinical studies and clinical trials of its product candidates, and to manufacture and market any product candidates in the event they are approved for commercial sale. Histogen also may need additional funding to develop or acquire complementary companies, technologies and assets, as well as for working capital requirements and other operating and general corporate purposes. Moreover, Histogen’s planned increases in staffing will dramatically increase Histogen’s costs in the near and long-term.

However, Histogen’s spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. Due to Histogen’s limited financial and managerial resources, Histogen must focus on a limited number of research programs and product candidates and on specific indications. Histogen’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or profitable market opportunities.

Because the successful development of Histogen’s product candidates is uncertain, Histogen is unable to precisely estimate the actual funds Histogen will require to develop and potentially commercialize them. In addition, Histogen may not be able to generate sufficient revenue, even if Histogen is able to commercialize any of its product candidates, to become profitable.

Histogen’s financial statements include an explanatory paragraph that expresses substantial doubt on Histogen’s ability to continue as a going concern, and Histogen must raise additional funds to finance its operations to remain a going concern.

Based on its cash balances, recurring losses since inception, except for year ended December 31, 2017, and inadequacy of existing capital resources to fund planned operations for a twelve-month period, Histogen’s independent registered public accounting firm has included an explanatory paragraph in its report on Histogen’s financial statements as of and for the years ended December 31, 2019 and 2018 expressing substantial doubt

 

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about its ability to continue as a going concern. Histogen will, during 2020, require significant additional funding to continue operations. If Histogen is unable to raise additional funds when needed, it will not be able to continue development of its product candidates, or Histogen will be required to delay, scale back or eliminate some or all of its development programs or cease operations. Any additional equity or debt financing that Histogen is able to obtain may be dilutive to its current stockholders and debt financing, if available, may involve restrictive covenants or unfavorable terms. If Histogen raises funds through collaborative or licensing arrangements, it may be required to relinquish, on terms that are not favorable to Histogen, rights to some of its technologies or product candidates that it would otherwise seek to develop or commercialize. Moreover, if Histogen is unable to continue as a going concern, it may be forced to liquidate its assets and the values it receives for its assets in liquidation or dissolution could be significantly lower than the values reflected in its financial statements.

Given Histogen’s lack of current cash flow, Histogen will need to raise additional capital; however, it may be unavailable to Histogen or, even if capital is obtained, may cause dilution or place significant restrictions on Histogen’s ability to operate its business.

Since Histogen will be unable to generate sufficient, if any, cash flow to fund its operations for the foreseeable future, Histogen will need to seek additional equity or debt financing to provide the capital required to maintain or expand its operations.

There can be no assurance that Histogen will be able to raise sufficient additional capital on acceptable terms or at all. If such additional financing is not available on satisfactory terms, or is not available in sufficient amounts, Histogen may be required to delay, limit or eliminate the development of business opportunities and its ability to achieve its business objectives, its competitiveness, and its business, financial condition and results of operations may be materially adversely affected. In addition, Histogen may be required to grant rights to develop and market product candidates that it would otherwise prefer to develop and market itself. Histogen’s inability to fund its business could lead to the loss of your investment.

Histogen’s future capital requirements will depend on many factors, including, but not limited to:

 

   

the scope, rate of progress, results and cost of its clinical trials, preclinical studies and other related activities;

 

   

its ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;

 

   

the timing of, and the costs involved in, obtaining regulatory approvals for any of its current or future product candidates;

 

   

the number and characteristics of the product candidates it seeks to develop or commercialize;

 

   

the cost of manufacturing clinical supplies, and establishing commercial supplies, of its product candidates;

 

   

the cost of commercialization activities if any of its current or future product candidates are approved for sale, including marketing, sales and distribution costs;

 

   

the expenses needed to attract and retain skilled personnel;

 

   

the costs associated with being a public company;

 

   

the amount of revenue, if any, received from commercial sales of its product candidates, should any of its product candidates receive marketing approval; and

 

   

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation.

If Histogen raises additional capital by issuing equity securities, the percentage ownership of its existing stockholders may be reduced, and accordingly these stockholders may experience substantial dilution. Histogen

 

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may also issue equity securities that provide for rights, preferences and privileges senior to those of its common stock. Given Histogen’s need for cash and that equity issuances are the most common type of fundraising for similarly situated companies, the risk of dilution is particularly significant for Histogen’s stockholders.

Histogen’s product candidates may cause undesirable side effects that could delay or prevent their regulatory approval or commercialization or have other significant adverse implications on Histogen’s business, financial condition and results of operations.

Undesirable side effects observed in clinical trials or in supportive preclinical studies with Histogen’s product candidates could interrupt, delay or halt their development and could result in the denial of regulatory approval by the FDA, the EMA or comparable foreign authorities for any or all targeted indications or adversely affect the marketability of any such product candidates that receive regulatory approval. In turn, this could eliminate or limit Histogen’s ability to commercialize its product candidates.

Histogen’s product candidates may exhibit adverse effects in preclinical toxicology studies and adverse interactions with other drugs. There are also risks associated with additional requirements the FDA, the EMA or comparable foreign authorities may impose for marketing approval with regard to a particular disease.

Histogen’s product candidates may require a risk management program that could include patient and healthcare provider education, usage guidelines, appropriate promotional activities, a post-marketing observational study, and ongoing safety and reporting mechanisms, among other requirements. Prescribing could be limited to physician specialists or physicians trained in the use of the drug, or could be limited to a more restricted patient population. Any risk management program required for approval of Histogen’s product candidates could potentially have an adverse effect on Histogen’s business, financial condition and results of operations.

Undesirable side effects involving Histogen’s product candidates may have other significant adverse implications on Histogen’s business, financial condition and results of operations. For example:

 

   

Histogen may be unable to obtain additional financing on acceptable terms, if at all;

 

   

Histogen’s collaborators may terminate any development agreements covering these product candidates;

 

   

if any development agreements are terminated, Histogen may determine not to further develop the affected product candidates due to resource constraints and may not be able to establish additional collaborations for their further development on acceptable terms, if at all;

 

   

if Histogen were to later continue the development of these product candidates and receive regulatory approval, earlier findings may significantly limit their marketability and thus significantly lower Histogen’s potential future revenues from their commercialization;

 

   

Histogen may be subject to product liability or stockholder litigation; and

 

   

Histogen may be unable to attract and retain key employees.

In addition, if any of Histogen’s product candidates receive marketing approval and Histogen or others later identify undesirable side effects caused by the product:

 

   

regulatory authorities may withdraw their approval of the product, or Histogen or Histogen’s partners may decide to cease marketing and sale of the product voluntarily;

 

   

Histogen may be required to change the way the product is administered, conduct additional clinical trials or preclinical studies regarding the product, change the labeling of the product, or change the product’s manufacturing facilities; and

 

   

Histogen’s reputation may suffer.

 

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Any of these events could prevent Histogen from achieving or maintaining market acceptance of the affected product and could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent Histogen from generating significant revenues from the sale of the product.

Histogen’s efforts to discover product candidates beyond Histogen’s current product candidates may not succeed, and any product candidates Histogen recommends for clinical development may not actually begin clinical trials.

Histogen intends to expand its existing pipeline of core assets by advancing drug compounds from current ongoing discovery programs into clinical development. However, the process of researching and discovering drug compounds is expensive, time-consuming and unpredictable. Data from Histogen’s current preclinical programs may not support the clinical development of its lead compounds or other compounds from these programs, and Histogen may not identify any additional drug compounds suitable for recommendation for clinical development. Moreover, any drug compounds Histogen recommends for clinical development may not demonstrate, through preclinical studies, indications of safety and potential efficacy that would support advancement into clinical trials. Such findings would potentially impede Histogen’s ability to maintain or expand Histogen’s clinical development pipeline. Histogen’s ability to identify new drug compounds and advance them into clinical development also depends upon Histogen’s ability to fund its research and development operations, and Histogen cannot be certain that additional funding will be available on acceptable terms, or at all.

Delays in the commencement or completion of clinical trials could result in increased costs to Histogen and delay Histogen’s ability to establish strategic collaborations.

Delays in the commencement or completion of clinical trials could significantly impact Histogen’s drug development costs. Histogen does not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement of clinical trials can be delayed for a variety of reasons, including, but not limited to, delays related to:

 

   

obtaining regulatory approval to commence one or more clinical trials;

 

   

reaching agreement on acceptable terms with prospective third-party contract research organizations (“CROs”) and clinical trial sites;

 

   

manufacturing sufficient quantities of a product candidate or other materials necessary to conduct clinical trials;

 

   

obtaining institutional review board approval to conduct one or more clinical trials at a prospective site;

 

   

recruiting and enrolling patients to participate in one or more clinical trials; and

 

   

the failure of Histogen’s collaborators to adequately resource Histogen’s product candidates due to their focus on other programs or as a result of general market conditions.

In addition, once a clinical trial has begun, it may be suspended or terminated by Histogen, Histogen’s collaborators, the institutional review boards or data safety monitoring boards charged with overseeing Histogen’s clinical trials, the FDA, the EMA or comparable foreign authorities due to a number of factors, including:

 

   

failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols;

 

   

inspection of the clinical trial operations or clinical trial site by the FDA, the EMA or comparable foreign authorities resulting in the imposition of a clinical hold;

 

   

unforeseen safety issues; or

 

   

lack of adequate funding to continue the clinical trial.

 

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If Histogen experiences delays in the completion or termination of any clinical trial of its product candidates, the commercial prospects of Histogen’s product candidates will be harmed, and Histogen’s ability to commence product sales and generate product revenues from any of Histogen’s product candidates will be delayed. In addition, any delays in completing Histogen’s clinical trials will increase Histogen’s costs and slow down its product candidate development and approval process. Delays in completing Histogen’s clinical trials could also allow Histogen’s competitors to obtain marketing approval before Histogen does or shorten the patent protection period during which Histogen may have the exclusive right to commercialize its product candidates. Any of these occurrences may harm Histogen’s business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of Histogen’s product candidates.

Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.

The results of preclinical studies and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy results despite having progressed through preclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, Histogen’s future clinical trial results may not be successful for these or other reasons.

This product candidate development risk is heightened by any changes in the planned clinical trials compared to the completed clinical trials. As product candidates are developed through preclinical too early to late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for late stage clinical trials, approval and commercialization, such changes carry the risk that they will not achieve these intended objectives.

Any of these changes could make the results of Histogen’s planned clinical trials or other future clinical trials Histogen may initiate less predictable and could cause Histogen’s product candidates to perform differently, including causing toxicities, which could delay completion of Histogen’s clinical trials, delay approval of its product candidates, and/or jeopardize Histogen’s ability to commence product sales and generate revenues.

If Histogen experiences delays in the enrollment of patients in its clinical trials, Histogen’s receipt of necessary regulatory approvals could be delayed or prevented.

Histogen may not be able to initiate or continue clinical trials for Histogen’s product candidates if Histogen is unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or other regulatory authorities. Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications Histogen is investigating.

If Histogen fails to enroll and maintain the number of patients for which the clinical trial was designed, the statistical power of that clinical trial may be reduced, which would make it harder to demonstrate that the product candidate being tested in such clinical trial is safe and effective. Additionally, enrollment delays in Histogen’s clinical trials may result in increased development costs for Histogen’s product candidates, which would cause the value of Histogen to decline and limit its ability to obtain additional financing. Histogen’s inability to enroll a sufficient number of patients for any of its current or future clinical trials would result in significant delays or may require Histogen to abandon one or more clinical trials altogether.

 

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A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect Histogen’s business and operations.

The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States and several European countries. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect our operations and those of third parties on which Histogen relies, including by causing disruptions in the supply of its product candidates and the conduct of current and future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the FDA and other health authorities, which could result in delays of reviews and approvals, including with respect to Histogen’s product candidates. The evolving COVID-19 pandemic is also likely to directly or indirectly impact the pace of enrollment in Histogen’s Phase 1b clinical trial for HST-001 and its Phase 1 clinical trial for HST-002 for at least the next several months and possibly longer as patients may avoid or may not be able to travel to healthcare facilities and physicians’ offices unless due to a health emergency. Such facilities and offices may also be required to focus limited resources on non-clinical trial matters, including treatment of COVID-19 patients, and may not be available, in whole or in part, for clinical trial services related to HST-001 and HST-002 or Histogen’s other product candidates. Additionally, while the potential economic impact brought by, and the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce Histogen’s ability to access capital, which could negatively impact our short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. Histogen does not yet know the full extent of potential delays or impacts on its business, financing or clinical trial activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on Histogen’s liquidity, capital resources, operations and business and those of the third parties on which it relies.

Histogen intends to rely on third parties to conduct its preclinical studies and clinical trials and perform other tasks. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, Histogen may not be able to obtain regulatory approval for or commercialize its product candidates and its business, financial condition and results of operations could be substantially harmed.

Histogen intends to rely upon third-party CROs, medical institutions, clinical investigators and contract laboratories to monitor and manage data for Histogen’s ongoing preclinical and clinical programs. Nevertheless, Histogen maintains responsibility for ensuring that each of Histogen’s clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and Histogen’s reliance on these third parties does not relieve Histogen of its regulatory responsibilities. Histogen and its CROs and other vendors are required to comply with current requirements on good manufacturing practices (“cGMP”) good clinical practices (“GCP”) and good laboratory practice (“GLP”) which are a collection of laws and regulations enforced by the FDA, the EMA and comparable foreign authorities for all of Histogen’s product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections of preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other contractors. If Histogen or any of its CROs or vendors fails to comply with applicable regulations, the data generated in Histogen’s preclinical studies and clinical trials may be deemed unreliable and the FDA, the EMA or comparable foreign authorities may require Histogen to perform additional preclinical studies and clinical trials before approving Histogen’s marketing applications. Histogen cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of Histogen’s clinical trials comply with GCP regulations. In addition, Histogen’s clinical trials must be conducted with products produced consistent with cGMP regulations. Histogen’s failure to comply with these regulations may require it to repeat clinical trials, which would delay the development and regulatory approval processes.

Histogen may not be able to enter into arrangements with CROs on commercially reasonable terms, or at all. In addition, Histogen’s CROs will not be Histogen’s employees, and except for remedies available to Histogen

 

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under its agreements with such CROs, Histogen will not be able to control whether or not they devote sufficient time and resources to Histogen’s ongoing preclinical and clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to Histogen’s protocols, regulatory requirements, or for other reasons, Histogen’s clinical trials may be extended, delayed or terminated and Histogen may not be able to obtain regulatory approval for or successfully commercialize Histogen’s product candidates. CROs may also generate higher costs than anticipated. As a result, Histogen’s business, financial condition and results of operations and the commercial prospects for Histogen’s product candidates could be materially and adversely affected, its costs could increase, and its ability to generate revenue could be delayed.

Switching or adding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays occur, which can materially impact Histogen’s ability to meet its desired clinical development timelines. There can be no assurance that Histogen will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse effect on Histogen’s business, financial condition or results of operations.

Histogen’s product candidates are subject to extensive regulation under the FDA, the EMA or comparable foreign authorities, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to commercialize Histogen’s product candidates.

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution of Histogen’s product candidates are subject to extensive regulation by the FDA and other U.S. regulatory agencies, the EMA or comparable authorities in foreign markets. In the U.S., neither Histogen nor Histogen’s collaborators are permitted to market Histogen’s product candidates until Histogen or Histogen’s collaborators receive approval of a new drug application (“NDA”) from the FDA or receive similar approvals abroad. The process of obtaining these approvals is expensive, often takes many years, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Approval policies or regulations may change and may be influenced by the results of other similar or competitive products, making it more difficult for Histogen to achieve such approval in a timely manner or at all. Any guidance that may result from recent FDA advisory panel discussions may make it more expensive to develop and commercialize such product candidates. In addition, as a company, Histogen has not previously filed NDAs with the FDA or filed similar applications with other foreign regulatory agencies. This lack of experience may impede Histogen’s ability to obtain FDA or other foreign regulatory agency approval in a timely manner, if at all, for Histogen’s product candidates for which development and commercialization is Histogen’s responsibility.

Despite the time and expense invested, regulatory approval is never guaranteed. The FDA, the EMA or comparable foreign authorities can delay, limit or deny approval of a product candidate for many reasons, including:

 

   

a product candidate may not be deemed safe or effective;

 

   

agency officials of the FDA, the EMA or comparable foreign authorities may not find the data from non-clinical or preclinical studies and clinical trials generated during development to be sufficient;

 

   

the FDA, the EMA or comparable foreign authorities may not approve Histogen’s third-party manufacturers’ processes or facilities; or

 

   

the FDA, the EMA or a comparable foreign authority may change its approval policies or adopt new regulations.

Histogen’s inability to obtain these approvals would prevent Histogen from commercializing its product candidates.

 

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Even if Histogen’s product candidates receive regulatory approval in the U.S., it may never receive approval or commercialize Histogen’s products outside of the U.S.

In order to market any products outside of the U.S., Histogen must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay seeking or obtaining such approval would impair Histogen’s ability to develop foreign markets for its product candidates.

Even if any of Histogen’s product candidates receive regulatory approval, its product candidates may still face future development and regulatory difficulties.

If any of Histogen’s product candidates receive regulatory approval, the FDA, the EMA or comparable foreign authorities may still impose significant restrictions on the indicated uses or marketing of the product candidates or impose ongoing requirements for potentially costly post-approval studies and trials. In addition, regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, Histogen’s collaborators or Histogen, including requiring withdrawal of the product from the market. Histogen’s product candidates will also be subject to ongoing FDA, the EMA or comparable foreign authorities’ requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. If Histogen’s product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

   

issue warning letters or other notices of possible violations;

 

   

impose civil or criminal penalties or fines or seek disgorgement of revenue or profits;

 

   

suspend any ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to approved applications filed by Histogen or Histogen’s collaborators;

 

   

withdraw any regulatory approvals

 

   

impose restrictions on operations, including costly new manufacturing requirements, or shut down Histogen’s manufacturing operations; or

 

   

seize or detain products or require a product recall.

The FDA, the EMA and comparable foreign authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses.

The FDA, the EMA and comparable foreign authorities strictly regulate the promotional claims that may be made about prescription products, such as Histogen’s product candidates, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA, the EMA or comparable foreign authorities as reflected in the product’s approved labeling. If Histogen receive marketing approval for its product candidates for Histogen’s proposed indications, physicians may nevertheless use Histogen’s products for their patients in a manner that is inconsistent with the approved label, if the physicians personally believe in their professional medical judgment that Histogen’s products could be used in such manner. However, if Histogen is found to have

 

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promoted its products for any off-label uses, the federal government could levy civil, criminal or administrative penalties, and seek fines against Histogen. Such enforcement has become more common in the industry. The FDA, the EMA or comparable foreign authorities could also request that Histogen enter into a consent decree or a corporate integrity agreement, or seek a permanent injunction against Histogen under which specified promotional conduct is monitored, changed or curtailed. If Histogen cannot successfully manage the promotion of its product candidates, if approved, Histogen could become subject to significant liability, which would materially adversely affect Histogen’s business, financial condition and results of operations.

If Histogen’s competitors have product candidates that are approved faster, marketed more effectively, are better tolerated, have a more favorable safety profile or are demonstrated to be more effective than Histogen’s, Histogen’s commercial opportunity may be reduced or eliminated.

The biopharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While Histogen believes that its technology, knowledge, experience and scientific resources provide it with competitive advantages, Histogen faces potential competition from many different sources, including commercial biopharmaceutical enterprises, academic institutions, government agencies and private and public research institutions. Any product candidates that Histogen successfully develops and commercializes will compete with existing therapies and new therapies that may become available in the future.

Many of Histogen’s competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical studies, clinical trials, regulatory approvals and marketing approved products than Histogen does. Some of Histogen’s competitors include companies such Allergan plc, RepliCel Life Sciences Inc., Kerastem, Cassiopea, Inc., Johnson & Johnson, Merck & Co, Inc., and PhotoMedex, Inc. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Histogen’s competitors may succeed in developing technologies and therapies that are more effective, better tolerated or less costly than any which Histogen is developing, or that would render Histogen’s product candidates obsolete and noncompetitive. Even if Histogen obtains regulatory approval for any of its product candidates, Histogen’s competitors may succeed in obtaining regulatory approvals for their products earlier than Histogen does. Histogen will also face competition from these third parties in recruiting and retaining qualified scientific and management personnel, in establishing clinical trial sites and patient registration for clinical trials, and in acquiring and in-licensing technologies and products complementary to Histogen’s programs or advantageous to Histogen’s business.

The key competitive factors affecting the success of each of Histogen’s product candidates, if approved, are likely to be its efficacy, safety, tolerability, frequency and route of administration, convenience and price, the level of branded and generic competition and the availability of coverage and reimbursement from government and other third-party payors.

Histogen is subject to a multitude of manufacturing risks, any of which could substantially increase Histogen’s costs and limit supply of its product candidates.

The process of manufacturing Histogen’s product candidates is complex, highly regulated, and subject to several risks. For example, the process of manufacturing Histogen’s product candidates is extremely susceptible to product loss due to contamination, equipment failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes for any of Histogen’s product candidates could result in reduced production yields, product defects, and other supply disruptions. If microbial, viral, or other contaminations are discovered in Histogen’s product candidates or in the manufacturing facilities in which its product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. In addition, the manufacturing facilities in which its product candidates are made could be adversely affected by equipment failures, labor shortages, natural disasters, power failures and numerous other factors.

 

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In addition, any adverse developments affecting manufacturing operations for Histogen’s product candidates may result in shipment delays, inventory shortages, lot failures, withdrawals or recalls, or other interruptions in the supply of Histogen’s product candidates. Histogen also may need to take inventory write-offs and incur other charges and expenses for product candidates that fail to meet specifications, undertake costly remediation efforts, or seek costlier manufacturing alternatives.

Histogen relies completely on third parties to manufacture Histogen’s preclinical and clinical drug supplies, and Histogen’s business, financial condition and results of operations could be harmed if those third parties fail to provide Histogen with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.

Histogen does not currently have, nor does Histogen plan to acquire, the infrastructure or capability internally to manufacture Histogen’s preclinical and clinical drug supplies for use in its clinical trials, and Histogen lacks the resources and the capability to manufacture any of Histogen’s product candidates on a clinical or commercial scale. Histogen relies on its manufacturers to purchase from third-party suppliers the materials necessary to produce Histogen’s product candidates for Histogen’s clinical trials. There are a limited number of suppliers for raw materials that Histogen uses to manufacture its product candidates, and there may be a need to identify alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce Histogen’s product candidates for its clinical trials, and, if approved, ultimately for commercial sale. Histogen does not have any control over the process or timing of the acquisition of these raw materials by Histogen’s manufacturers. Although Histogen generally does not begin a clinical trial unless Histogen believes it has a sufficient supply of a product candidate to complete such clinical trial, any significant delay or discontinuity in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of Histogen’s clinical trials, product testing and potential regulatory approval of Histogen’s product candidates, which could harm Histogen’s business, financial condition and results of operations.

Histogen and its contract manufacturers are subject to significant regulation with respect to manufacturing Histogen’s product candidates. The manufacturing facilities on which Histogen relies may not continue to meet regulatory requirements.

All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including Histogen’s contract manufacturers for its product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of Histogen’s product candidates that may not be detectable in final product testing. Histogen or its contract manufacturers must supply all necessary documentation in support of an NDA or marketing authorization application (“MAA”) on a timely basis and must adhere to GLP and cGMP regulations enforced by the FDA, the EMA or comparable foreign authorities through their facilities inspection program. Some of Histogen’s contract manufacturers may not have produced a commercially approved pharmaceutical product and therefore may not have obtained the requisite regulatory authority approvals to do so. The facilities and quality systems of some or all of Histogen’s third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of Histogen’s product candidates or any of its other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of Histogen’s product candidates or any of Histogen’s other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. Although Histogen plans to oversee the contract manufacturers, Histogen cannot control the manufacturing process of, and is completely dependent on, Histogen’s contract manufacturing partners for compliance with the regulatory requirements. If these facilities do not pass a pre-approval plant inspection, regulatory approval of the products may not be granted or may be substantially delayed until any violations are corrected to the satisfaction of the regulatory authority, if ever.

 

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The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of Histogen’s third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of Histogen’s product specifications or applicable regulations occurs independent of such an inspection or audit, Histogen or the relevant regulatory authority may require remedial measures that may be costly or time consuming for Histogen or a third party to implement, and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon Histogen or third parties with whom Histogen contracts could materially harm Histogen’s business, financial condition and results of operations.

If Histogen or any of its third-party manufacturers fail to maintain regulatory compliance, the FDA, the EMA or comparable foreign authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a product candidate, withdrawal of an approval, or suspension of production. As a result, Histogen’s business, financial condition and results of operations may be materially and adversely affected.

Additionally, if supply from one manufacturer is interrupted, an alternative manufacturer would need to be qualified through an NDA supplement or MAA variation, or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also require additional studies or trials if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in Histogen’s desired clinical and commercial timelines.

These factors could cause Histogen to incur higher costs and could cause the delay or termination of clinical trials, regulatory submissions, required approvals, or commercialization of Histogen’s product candidates. Furthermore, if Histogen’s suppliers fail to meet contractual requirements and Histogen is unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, Histogen’s clinical trials may be delayed or Histogen could lose potential revenue.

Any collaboration arrangement that Histogen may enter into in the future may not be successful, which could adversely affect Histogen’s ability to develop and commercialize Histogen’s current and potential future product candidates.

Histogen may seek collaboration arrangements with biopharmaceutical companies for the development or commercialization of its current and potential future product candidates. To the extent that Histogen decides to enter into collaboration agreements, Histogen will face significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, execute and implement. Histogen may not be successful in its efforts to establish and implement collaborations or other alternative arrangements should Histogen choose to enter into such arrangements, and the terms of the arrangements may not be favorable to Histogen. If and when Histogen collaborates with a third party for development and commercialization of a product candidate, Histogen can expect to relinquish some or all of the control over the future success of that product candidate to the third party. The success of Histogen’s collaboration arrangements will depend heavily on the efforts and activities of its collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.

Disagreements between parties to a collaboration arrangement can lead to delays in developing or commercializing the applicable product candidate and can be difficult to resolve in a mutually beneficial manner. In some cases, collaborations with biopharmaceutical companies and other third parties are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect Histogen’s business, financial condition and results of operations.

 

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If Histogen is unable to develop its own commercial organization or enter into agreements with third parties to sell and market Histogen’s product candidates, Histogen may be unable to generate significant revenues.

Histogen does not have a sales and marketing organization, and Histogen has no experience as a company in the sales, marketing and distribution of pharmaceutical products. If any of Histogen’s product candidates are approved for commercialization, Histogen may be required to develop its sales, marketing and distribution capabilities, or make arrangements with a third party to perform sales and marketing services. Developing a sales force for any resulting product or any product resulting from any of Histogen’s other product candidates is expensive and time consuming and could delay any product launch. Histogen may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force Histogen does establish may not be capable of generating sufficient demand for Histogen’s product candidates. To the extent that Histogen enters into arrangements with collaborators or other third parties to perform sales and marketing services, Histogen’s product revenues are likely to be lower than if Histogen marketed and sold its product candidates independently. If Histogen is unable to establish adequate sales and marketing capabilities, independently or with others, Histogen may not be able to generate significant revenues and may not become profitable.

The commercial success of Histogen’s product candidates depends upon their market acceptance among physicians, patients, healthcare payors and the medical community.

Even if Histogen’s product candidates obtain regulatory approval, Histogen’s products, if any, may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any of Histogen’s approved product candidates will depend on a number of factors, including:

 

   

the effectiveness of Histogen’s approved product candidates as compared to currently available products;

 

   

patient willingness to adopt Histogen’s approved product candidates in place of current therapies;

 

   

Histogen’s ability to provide acceptable evidence of safety and efficacy;

 

   

relative convenience and ease of administration;

 

   

the prevalence and severity of any adverse side effects;

 

   

restrictions on use in combination with other products;

 

   

availability of alternative treatments;

 

   

pricing and cost-effectiveness assuming either competitive or potential premium pricing requirements, based on the profile of Histogen’s product candidates and target markets;

 

   

effectiveness of Histogen’s or its partners’ sales and marketing strategy;

 

   

Histogen’s ability to obtain sufficient third-party coverage or reimbursement; and

 

   

potential product liability claims.

In addition, the potential market opportunity for Histogen’s product candidates is difficult to precisely estimate. Histogen’s estimates of the potential market opportunity for its product candidates include several key assumptions based on Histogen’s industry knowledge, industry publications, third-party research reports and other surveys. Independent sources have not verified all of Histogen’s assumptions. If any of these assumptions proves to be inaccurate, then the actual market for Histogen’s product candidates could be smaller than Histogen’s estimates of its potential market opportunity. If the actual market for Histogen’s product candidates is smaller than Histogen expects, Histogen’s product revenue may be limited, it may be harder than expected to raise funds and it may be more difficult for Histogen to achieve or maintain profitability. If Histogen fails to achieve market acceptance of Histogen’s product candidates in the U.S. and abroad, Histogen’s revenue will be limited and it will be more difficult to achieve profitability.

 

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If Histogen fails to obtain and sustain an adequate level of reimbursement for its potential products by third-party payors, potential future sales would be materially adversely affected.

There will be no viable commercial market for Histogen’s product candidates, if approved, without reimbursement from third-party payors. Reimbursement policies may be affected by future healthcare reform measures. Histogen cannot be certain that reimbursement will be available for its current product candidates or any other product candidate Histogen may develop. Additionally, even if there is a viable commercial market, if the level of reimbursement is below Histogen’s expectations, Histogen’s anticipated revenue and gross margins will be adversely affected.

Third-party payors, such as government or private healthcare insurers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. There is a current trend in the U.S. healthcare industry toward cost containment.

Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price Histogen might establish for products, which could result in product revenues being lower than anticipated. Histogen believes its drugs will be priced significantly higher than existing generic drugs and consistent with current branded drugs. If Histogen is unable to show a significant benefit relative to existing generic drugs, Medicare, Medicaid and private payors may not be willing to provide reimbursement for Histogen’s drugs, which would significantly reduce the likelihood of Histogen’s products gaining market acceptance.

Histogen expects that private insurers will consider the efficacy, cost-effectiveness, safety and tolerability of Histogen’s potential products in determining whether to approve reimbursement for such products and at what level. Obtaining these approvals can be a time consuming and expensive process. Histogen’s business, financial condition and results of operations would be materially adversely affected if Histogen does not receive approval for reimbursement of its potential products from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Histogen’s business, financial condition and results of operations could be materially adversely affected if Part D prescription drug plans were to limit access to, or deny or limit reimbursement of, Histogen’s product candidates or other potential products.

Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In many countries, the product cannot be commercially launched until reimbursement is approved. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. The negotiation process in some countries can exceed 12 months. To obtain reimbursement or pricing approval in some countries, Histogen may be required to conduct a clinical trial that compares the cost-effectiveness of its products to other available therapies.

If the prices for Histogen’s potential products are reduced or if governmental and other third-party payors do not provide adequate coverage and reimbursement of Histogen’s drugs, Histogen’s future revenue, cash flows and prospects for profitability will suffer.

 

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Current and future legislation may increase the difficulty and cost of commercializing Histogen’s product candidates and may affect the prices Histogen may obtain if Histogen’s product candidates are approved for commercialization.

In the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding the healthcare system that could prevent or delay regulatory approval of Histogen’s product candidates, restrict or regulate post-marketing activities and affect Histogen’s ability to profitably sell any of Histogen’s product candidates for which Histogen obtains regulatory approval.

In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. Cost reduction initiatives and other provisions of this legislation could limit the coverage and reimbursement rate that Histogen receives for any of its approved products. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively the “PPACA”), was enacted. The PPACA was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The PPACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of “average manufacturer price,” (“AMP”), which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare & Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid rebates to the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the PPACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.

There have been recent public announcements by members of the U.S. Congress, President Trump and his administration regarding their plans to repeal and replace the PPACA and Medicare. For example, on December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017, which, among other things, eliminated the individual mandate requiring most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. Histogen is not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of Histogen’s product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Histogen to more stringent product labeling and post-marketing approval testing and other requirements.

In Europe, the United Kingdom has indicated its intent to withdraw from the European Union in the future. A significant portion of the regulatory framework in the United Kingdom is derived from the regulations of the European Union, and the EMA is currently located in the United Kingdom. Histogen cannot predict what consequences the withdrawal of the United Kingdom from the European Union, if it occurs, might have on the regulatory frameworks of the United Kingdom or the European Union, or on Histogen’s future operations, if any, in these jurisdictions.

 

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Changes in government funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, properly administer drug innovation, or prevent Histogen’s product candidates from being developed or commercialized, which could negatively impact Histogen’s business, financial condition and results of operations.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including budget and funding levels, ability to hire and retain key personnel, and statutory, regulatory and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

In December 2016, the 21st Century Cures Act was signed into law. This new legislation is designed to advance medical innovation and empower the FDA with the authority to directly hire positions related to drug and device development and review. However, government proposals to reduce or eliminate budgetary deficits may include reduced allocations to the FDA and other related government agencies. These budgetary pressures may result in a reduced ability by the FDA to perform their respective roles; including the related impact to academic institutions and research laboratories whose funding is fully or partially dependent on both the level and timing of funding from government sources.

Disruptions at the FDA and other agencies may also slow the time necessary for Histogen’s product candidates to be reviewed or approved by necessary government agencies, which could adversely affect its business, financial condition and results of operations.

Histogen is subject to “fraud and abuse” and similar laws and regulations, and a failure to comply with such regulations or prevail in any litigation related to noncompliance could harm Histogen’s business, financial condition and results of operations.

In the U.S., Histogen is subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws, false claims laws and other laws intended, among other things, to reduce fraud and abuse in federal and state healthcare programs. The federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug, or other good or service for which payment in whole or in part may be made under a federal healthcare program, such as Medicare or Medicaid. Although Histogen seeks to structure its business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that Histogen’s practices may be challenged under the federal Anti-Kickback Statute.

The federal False Claims Act prohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Under the Health Insurance Portability and Accountability Act of 1996, Histogen is prohibited from knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services to obtain money or property of any healthcare benefit program. Violations of fraud and abuse laws may be punishable by criminal or civil sanctions, including penalties, fines or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.

 

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Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payors. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if Histogen fails to comply with an applicable state law requirement, it could be subject to penalties.

Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to Histogen’s business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of Histogen’s practices may be challenged under these laws. Efforts to ensure that Histogen’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If Histogen is found in violation of one of these laws, Histogen could be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from governmental funded federal or state healthcare programs and the curtailment or restructuring of Histogen’s operations. If this occurs, Histogen’s business, financial condition and results of operations may be materially adversely affected.

If Histogen faces allegations of noncompliance with the law and encounter sanctions, its reputation, revenues and liquidity may suffer, and any of Histogen’s product candidates that are ultimately approved for commercialization could be subject to restrictions or withdrawal from the market.

Any government investigation of alleged violations of law could require Histogen to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect Histogen’s ability to generate revenues from any of its product candidates that are ultimately approved for commercialization. If regulatory sanctions are applied or if regulatory approval is withdrawn, Histogen’s business, financial condition and results of operations will be adversely affected. Additionally, if Histogen is unable to generate revenues from product sales, Histogen’s potential for achieving profitability will be diminished and Histogen’s need to raise capital to fund its operations will increase.

If Histogen fails to retain current members of Histogen’s senior management and scientific personnel, or to attract and keep additional key personnel, Histogen may be unable to successfully develop or commercialize Histogen’s product candidates.

Histogen’s success depends on Histogen’s continued ability to attract, retain and motivate highly qualified management and scientific personnel. Histogen has identified several individuals that are expected to become full-time employees of the combined organization prior to or shortly following the closing of the merger and fill the position of Chief Financial Officer. However, competition for qualified personnel is intense. Histogen may not be successful in attracting qualified personnel to fulfill Histogen’s current or future needs and there is no guarantee that any of these individuals will join the combined organization on a full-time employment basis, or at all. In the event the combined organization is unable to fill critical open employment positions, the company may need to delay its operational activities and goals, including the development of the company’s product candidates, and may have difficulty in meeting its obligations as a public company. Histogen does not maintain “key person” insurance on any of its employees.

In addition, competitors and others are likely in the future to attempt to recruit Histogen’s employees. The loss of the services of any of Histogen’s key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiring such personnel, particularly senior management and other technical personnel, could materially and adversely affect Histogen’s business, financial condition and results of operations. In addition, the replacement of key personnel likely would involve significant time and costs, and may significantly delay or prevent the achievement of Histogen’s business objectives.

 

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From time to time, Histogen’s management seeks the advice and guidance of certain scientific advisors and consultants regarding clinical and regulatory development programs and other customary matters. These scientific advisors and consultants are not Histogen’s employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to Histogen. In addition, Histogen’s scientific advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with Histogen’s.

Histogen will need to increase the size of Histogen’s organization and may not successfully manage Histogen’s growth.

Histogen is a clinical-stage biopharmaceutical company with a small number of employees, and Histogen’s management systems currently in place are not likely to be adequate to support Histogen’s future growth plans. Histogen’s ability to grow and to manage its growth effectively will require Histogen to hire, train, retain, manage and motivate additional employees and to implement and improve its operational, financial and management systems. These demands also may require the hiring of additional senior management personnel or the development of additional expertise by Histogen’s senior management personnel. Hiring a significant number of additional employees, particularly those at the management level, would increase Histogen’s expenses significantly. Moreover, if Histogen fails to expand and enhance its operational, financial and management systems in conjunction with Histogen’s potential future growth, it could have a material adverse effect on Histogen’s business, financial condition and results of operations.

Histogen is exposed to product liability, non-clinical and clinical liability risks which could place a substantial financial burden upon Histogen, should lawsuits be filed against Histogen.

Histogen’s business exposes it to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical formulations and products. In addition, the use in Histogen’s clinical trials of pharmaceutical products and the subsequent sale of these products by Histogen or its potential collaborators may cause Histogen to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against Histogen could have a material adverse effect on Histogen’s business, financial condition and results of operations.

Histogen’s research and development activities involve the use of hazardous materials, which subject Histogen to regulation, related costs and delays and potential liabilities.

Histogen’s research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. If an accident occurs, Histogen could be held liable for resulting damages, which could be substantial. Histogen is also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Additional federal, state and local laws and regulations affecting Histogen’s operations may be adopted in the future. Histogen may incur substantial costs to comply with, and substantial fines or penalties if Histogen violates any of these laws or regulations.

Histogen relies significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm Histogen’s ability to operate Histogen’s business effectively.

Despite the implementation of security measures, Histogen’s internal computer systems and those of third parties with which Histogen contracts are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in Histogen’s operations, and could result in a material disruption of Histogen’s drug development and clinical activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of drug development or clinical trial data could result in

 

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delays in Histogen’s regulatory approval efforts and significantly increase Histogen’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Histogen’s data or applications, or inappropriate disclosure of confidential or proprietary information, Histogen could incur liability and its development programs and the development of its product candidates could be delayed.

Histogen’s employees and consultants may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

Histogen is exposed to the risk of employee or consultant fraud or other misconduct. Misconduct by Histogen’s employees or consultants could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to Histogen. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commissions, customer incentive programs and other business arrangements. Employee and consultant misconduct also could involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Histogen’s reputation. It is not always possible to identify and deter such misconduct, and the precautions Histogen takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Histogen from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against Histogen, and Histogen is not successful in defending itself or asserting Histogen’s rights, those actions could have a material adverse effect on Histogen’s business, financial condition and results of operations, and result in the imposition of significant fines or other sanctions against Histogen.

Business disruptions such as natural disasters could seriously harm Histogen’s future revenues and financial condition and increase its costs and expenses.

Histogen and its suppliers may experience a disruption in their business as a result of natural disasters. A significant natural disaster, such as an earthquake, hurricane, flood or fire, could severely damage or destroy Histogen’s headquarters or facilities or the facilities of Histogen’s manufacturers or suppliers, which could have a material and adverse effect on Histogen’s business, financial condition and results of operations. In addition, terrorist acts or acts of war targeted at the U.S., could cause damage or disruption to Histogen, its employees, facilities, partners and suppliers, which could have a material adverse effect on Histogen’s business, financial condition and results of operations.

Histogen may engage in strategic transactions that could impact its liquidity, increase its expenses and present significant distractions to its management.

From time to time, Histogen may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. Additional potential transactions that Histogen may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require Histogen to incur non-recurring or other charges, may increase Histogen’s near- and long-term expenditures and may pose significant integration challenges or disrupt Histogen’s management or business, which could adversely affect Histogen’s business, financial condition and results of operations. For example, these transactions may entail numerous operational and financial risks, including:

 

   

exposure to unknown liabilities;

 

   

disruption of Histogen’s business and diversion of Histogen’s management’s time and attention in order to develop acquired products, product candidates or technologies;

 

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incurrence of substantial debt or dilutive issuances of equity securities to pay for any of these transactions;

 

   

higher-than-expected transaction and integration costs;

 

   

write-downs of assets or goodwill or impairment charges;

 

   

increased amortization expenses;

 

   

difficulty and cost in combining the operations and personnel of any acquired businesses or product lines with Histogen’s operations and personnel;

 

   

impairment of relationships with key suppliers or customers of any acquired businesses or product lines due to changes in management and ownership; and

 

   

inability to retain key employees of any acquired businesses.

Accordingly, although there can be no assurance that Histogen will undertake or successfully complete any transactions of the nature described above, any transactions that Histogen does complete may be subject to the foregoing or other risks, and could have a material adverse effect on Histogen’s business, financial condition and results of operations.

Risks Relating to Histogen’s Intellectual Property

Histogen may not be successful in obtaining or maintaining necessary rights to its product candidates through acquisitions and in-licenses.

One of Histogen’s programs may require the use of proprietary rights held by third parties. Histogen may need to acquire or in-license additional intellectual property in the future with respect to other product candidates. Moreover, Histogen may be unable to acquire or in-license any compositions, methods of use, processes or other intellectual property rights from third parties that Histogen identifies as necessary for its product candidates. Histogen faces competition with regard to acquiring and in-licensing third-party intellectual property rights, including from a number of more established companies. These established companies may have a competitive advantage over Histogen due to their size, cash resources and greater clinical development and commercialization capabilities. In addition, companies that perceive Histogen to be a competitor may be unwilling to assign or license intellectual property rights to Histogen. Histogen also may be unable to acquire or in-license third-party intellectual property rights on terms that would allow it to make an appropriate return on Histogen’s investment.

Histogen may enter into collaboration agreements with U.S. and foreign academic institutions to accelerate development of Histogen’s current or future preclinical product candidates. Typically, these agreements include an option for the company to negotiate a license to the institution’s intellectual property rights resulting from the collaboration. Even with such an option, Histogen may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to Histogen. If Histogen is unable to license rights from a collaborating institution, the institution may offer the intellectual property rights to other parties, potentially blocking Histogen’s ability to pursue its desired program.

If Histogen is unable to successfully obtain required third-party intellectual property rights or maintain Histogen’s existing intellectual property rights, Histogen may need to abandon development of the related program and Histogen’s business, financial condition and results of operations could be materially and adversely affected.

 

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Histogen may not be able to protect its proprietary or licensed technology in the marketplace.

Histogen depends on Histogen’s ability to protect its proprietary or licensed technology. Histogen relies on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees and third parties, all of which offer only limited protection. Histogen’s success depends in large part on Histogen’s ability and any licensor’s or licensee’s ability to obtain and maintain patent protection in the U.S. and other countries with respect to Histogen’s proprietary or licensed technology and products. Histogen currently in-license some of Histogen’s intellectual property rights to develop Histogen’s product candidates and may in-license additional intellectual property rights in the future. Histogen cannot be certain that patent enforcement activities by its current or future licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents or other intellectual property rights. Histogen also cannot be certain that its current or future licensors will allocate sufficient resources or prioritize their or Histogen’s enforcement of such patents. Even if Histogen is not a party to these legal actions, an adverse outcome could prevent Histogen from continuing to license intellectual property that Histogen may need to operate its business, which would have a material adverse effect on its business, financial condition and results of operations.

Histogen believes it will be able to obtain, through prosecution of patent applications covering Histogen’s owned technology and technology licensed from others, adequate patent protection for Histogen’s proprietary drug technology, including those related to Histogen’s in-licensed intellectual property. If Histogen is compelled to spend significant time and money protecting or enforcing its licensed patents and future patents Histogen may own, designing around patents held by others or licensing or acquiring, potentially for large fees, patents or other proprietary rights held by others, Histogen’s business, financial condition and results of operations may be materially and adversely affected. If Histogen is unable to effectively protect the intellectual property that Histogen owns or in-licenses, other companies may be able to offer the same or similar products for sale, which could materially adversely affect Histogen’s business, financial condition and results of operations. The patents of others from whom Histogen may license technology, and any future patents Histogen may own, may be challenged, narrowed, invalidated or circumvented, which could limit Histogen’s ability to stop competitors from marketing the same or similar products or limit the length of term of patent protection that Histogen may have for its products.

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Histogen’s patent protection for licensed patents, pending patent applications and potential future patent applications and patents could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or patent applications will be due to be paid to the U.S. Patent and Trademark Office (“USPTO”) and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the applicable patent and/or patent application. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs with respect to Histogen’s in-licensed patents or patent applications Histogen may file in the future, Histogen’s competitors might be able to use its technologies, which would have a material adverse effect on Histogen’s business, financial condition and results of operations.

The patent positions of pharmaceutical products are often complex and uncertain. The breadth of claims allowed in pharmaceutical patents in the U.S. and many jurisdictions outside of the U.S. is not consistent. For example, in many jurisdictions, the support standards for pharmaceutical patents are becoming increasingly strict. Some countries prohibit method of treatment claims in patents. Changes in either the patent laws or interpretations of

 

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patent laws in the U.S. and other countries may diminish the value of Histogen’s licensed or owned intellectual property or create uncertainty. In addition, publication of information related to Histogen’s current product candidates and potential products may prevent Histogen from obtaining or enforcing patents relating to these product candidates and potential products, including without limitation composition-of-matter patents, which are generally believed to offer the strongest patent protection.

Patents that Histogen currently licenses and patents that Histogen may own or license in the future do not necessarily ensure the protection of Histogen’s licensed or owned intellectual property for a number of reasons, including, without limitation, the following:

 

   

the patents may not be broad or strong enough to prevent competition from other products that are identical or similar to Histogen’s product candidates;

 

   

there can be no assurance that the term of a patent can be extended under the provisions of patent term extensions afforded by U.S. law or similar provisions in foreign countries, where available;

 

   

the issued patents and patents that Histogen may obtain or license in the future may not prevent generic entry into the market for Histogen’s product candidates;

 

   

Histogen, or third parties from whom Histogen in-license or may license patents, may be required to disclaim part of the term of one or more patents;

 

   

there may be prior art of which Histogen is not aware that may affect the validity or enforceability of a patent claim;

 

   

there may be prior art of which Histogen is aware, which Histogen does not believe affects the validity or enforceability of a patent claim, but which, nonetheless, ultimately may be found to affect the validity or enforceability of a patent claim;

 

   

there may be other patents issued to others that will affect Histogen’s freedom to operate;

 

   

if the patents are challenged, a court could determine that they are invalid or unenforceable;

 

   

there might be a significant change in the law that governs patentability, validity and infringement of Histogen’s licensed patents or any future patents Histogen may own that adversely affects the scope of Histogen’s patent rights;

 

   

a court could determine that a competitor’s technology or product does not infringe Histogen’s licensed patents or any future patents Histogen may own; and

 

   

the patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations or could be subject to compulsory licensing. If Histogen encounters delays in Histogen’s development or clinical trials, the period of time during which Histogen could market its potential products under patent protection would be reduced.

Histogen’s competitors may be able to circumvent its licensed patents or future patents Histogen may own by developing similar or alternative technologies or products in a non-infringing manner. Histogen’s competitors may seek to market generic versions of any approved products by submitting abbreviated new drug applications to the FDA in which Histogen’s competitors claim that Histogen’s licensed patents or any future patents Histogen may own are invalid, unenforceable or not infringed. Alternatively, Histogen’s competitors may seek approval to market their own products similar to or otherwise competitive with Histogen’s products. In these circumstances, Histogen may need to defend or assert Histogen’s licensed patents or any future patents Histogen may own, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find Histogen’s licensed patents or any future patents Histogen may own invalid or unenforceable. Histogen may also fail to identify patentable aspects of its research and development before it is too late to obtain patent protection. Even if Histogen owns or in-licenses valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve Histogen’s business objectives.

 

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The issuance of a patent is not conclusive as to its inventorship, scope, ownership, priority, validity or enforceability. In this regard, third parties may challenge Histogen’s licensed patents or any future patents Histogen may own in the courts or patent offices in the U.S. and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit Histogen’s ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of Histogen’s technology and potential products. In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized.

Histogen may infringe the intellectual property rights of others, which may prevent or delay its drug development efforts and prevent Histogen from commercializing or increase the costs of commercializing Histogen’s products.

Histogen’s commercial success depends significantly on Histogen’s ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which Histogen is not aware that Histogen’s current or potential future product candidates infringe. There also could be patents that Histogen believes Histogen does not infringe, but that Histogen may ultimately be found to infringe.

Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which Histogen is unaware that may later result in issued patents that Histogen’s product candidates or potential products infringe. For example, pending applications may exist that claim or can be amended to claim subject matter that Histogen’s product candidates or potential products infringe. Competitors may file continuing patent applications claiming priority to already issued patents in the form of continuation, divisional, or continuation-in-part applications, in order to maintain the pendency of a patent family and attempt to cover Histogen’s product candidates.

Third parties may assert that Histogen is employing their proprietary technology without authorization and may sue Histogen for patent or other intellectual property infringement. These lawsuits are costly and could adversely affect Histogen’s business, financial condition and results of operations and divert the attention of managerial and scientific personnel. If Histogen is sued for patent infringement, Histogen would need to demonstrate that its product candidates, potential products or methods either do not infringe the claims of the relevant patent or that the patent claims are invalid, and Histogen may not be able to do this. Proving invalidity is difficult. For example, in the U.S., proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if Histogen is successful in these proceedings, Histogen may incur substantial costs and the time and attention of Histogen’s management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on Histogen. In addition, Histogen may not have sufficient resources to bring these actions to a successful conclusion. If a court holds that any third-party patents are valid, enforceable and cover Histogen’s products or their use, the holders of any of these patents may be able to block Histogen’s ability to commercialize its products unless it acquires or obtains a license under the applicable patents or until the patents expire.

Histogen may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of Histogen’s products or lead to prohibition of the manufacture or sale of products by Histogen. Even if Histogen is able to obtain a license, it may be non-exclusive, thereby giving Histogen’s competitors access to the same technologies licensed to Histogen. Histogen could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, in any such proceeding or litigation, Histogen could be found liable for monetary damages, including treble damages and attorneys’ fees, if Histogen is found to have willfully infringed a patent. A finding of infringement could prevent Histogen from

 

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commercializing its product candidates or force Histogen to cease some of its business operations, which could materially and adversely affect Histogen’s business, financial condition and results of operations. Any claims by third parties that Histogen has misappropriated their confidential information or trade secrets could have a similar material and adverse effect on Histogen’s business, financial condition and results of operations. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on Histogen’s ability to raise the funds necessary to continue Histogen’s operations.

Any claims or lawsuits relating to infringement of intellectual property rights brought by or against Histogen will be costly and time consuming and may adversely affect its business, financial condition and results of operations.

Histogen may be required to initiate litigation to enforce or defend its licensed and owned intellectual property. Lawsuits to protect Histogen’s intellectual property rights can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biopharmaceutical industry generally. Such litigation or proceedings could substantially increase Histogen’s operating expenses and reduce the resources available for development activities or any future sales, marketing or distribution activities.

In any infringement litigation, any award of monetary damages Histogen receives may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Histogen’s confidential information could be compromised by disclosure during litigation. Moreover, there can be no assurance that Histogen will have sufficient financial or other resources to file and pursue such infringement claims, which typically last for years before they are resolved. Further, any claims Histogen asserts against a perceived infringer could provoke these parties to assert counterclaims against Histogen alleging that Histogen has infringed their patents. Some of Histogen’s competitors may be able to sustain the costs of such litigation or proceedings more effectively than Histogen can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on Histogen’s ability to compete in the marketplace.

In addition, Histogen’s licensed patents and patent applications, and patents and patent applications that Histogen may apply for, own or license in the future, could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings and other forms of post-grant review. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of Histogen’s licensed patents and patent applications and patents and patent applications that Histogen may apply for, own or license in the future subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert Histogen’s management and scientific personnel’s time and attention.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Histogen’s ability to protect Histogen’s products.

As is the case with other biopharmaceutical companies, Histogen’s success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is costly, time-consuming and inherently uncertain. For example, the U.S. previously enacted and is currently implementing wide-ranging patent reform legislation. Specifically, on September 16, 2011, the Leahy-Smith America Invents Act (the “Leahy-Smith Act”) was signed into law and included a number of significant changes to U.S. patent law, and many of the provisions became effective in March 2013. However, it may take the courts years to interpret the provisions of the Leahy-Smith Act, and the implementation of the statute could increase the uncertainties and costs surrounding the prosecution of Histogen’s licensed and future patent applications and the enforcement or defense of Histogen’s licensed and future patents, all of which could have a material adverse effect on Histogen’s business, financial condition and results of operations.

 

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In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Histogen’s ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Histogen’s ability to obtain new patents or to enforce patents that Histogen might obtain in the future.

Histogen may not be able to protect its intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates throughout the world would be prohibitively expensive. Competitors may use Histogen’s licensed and owned technologies in jurisdictions where Histogen has not licensed or obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where Histogen may obtain or license patent protection, but where patent enforcement is not as strong as that in the U.S. These products may compete with Histogen’s products in jurisdictions where Histogen does not have any issued or licensed patents and any future patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for Histogen to stop the infringement of Histogen’s licensed patents and future patents Histogen may own, or marketing of competing products in violation of Histogen’s proprietary rights generally. Further, 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 U.S. As a result, Histogen may encounter significant problems in protecting and defending its licensed and owned intellectual property both in the U.S. and abroad. For example, China currently affords less protection to a company’s intellectual property than some other jurisdictions. As such, the lack of strong patent and other intellectual property protection in China may significantly increase Histogen’s vulnerability regarding unauthorized disclosure or use of its intellectual property and undermine its competitive position. Proceedings to enforce Histogen’s future patent rights, if any, in foreign jurisdictions could result in substantial cost and divert its efforts and attention from other aspects of Histogen’s business.

Histogen may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect Histogen’s proprietary and licensed technology and processes, Histogen relies in part on confidentiality agreements with its corporate partners, employees, consultants, manufacturers, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of Histogen’s confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover Histogen’s trade secrets and proprietary information. Failure to obtain or maintain trade secret protection could adversely affect Histogen’s competitive business position.

Histogen may be subject to claims that Histogen’s employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

Histogen expects to employ individuals who were previously employed at other biopharmaceutical companies. Although Histogen has no knowledge of any such claims against Histogen, Histogen may be subject to claims that it or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of Histogen’s employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if Histogen is successful, litigation could result in substantial cost and be a distraction to Histogen’s management and other employees. To date, none of Histogen’s employees have been subject to such claims.

 

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Histogen may be subject to claims challenging the inventorship of its licensed patents, any future patents Histogen may own and other intellectual property.

Although Histogen is not currently experiencing any claims challenging the inventorship of its licensed patents or Histogen’s licensed or owned intellectual property, Histogen may in the future be subject to claims that former employees, collaborators or other third parties have an interest in Histogen’s licensed patents or other licensed or owned intellectual property as an inventor or co-inventor. For example, Histogen may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing Histogen’s product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship. If Histogen fails in defending any such claims, in addition to paying monetary damages, Histogen may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on Histogen’s business, financial condition and results of operations. Even if Histogen is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

If Histogen does not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation extending the terms of Histogen’s licensed patents and any future patents Histogen may own, Histogen’s business, financial condition and results of operations may be materially and adversely affected.

Depending upon the timing, duration and specifics of FDA regulatory approval for Histogen’s product candidates, one or more of its licensed U.S. patents or future U.S. patents that Histogen may license or own may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during drug development and the FDA regulatory review process. This period is generally one-half the time between the effective date of an investigational new drug application (“IND”) (falling after issuance of the patent), and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Patent term restorations, however, cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval by the FDA.

The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. It takes at least six months to obtain approval of the application for patent term extension. Histogen may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than Histogen requests. If Histogen is unable to obtain patent term extension or restoration or the term of any such extension is less than Histogen requests, the period during which Histogen will have the right to exclusively market its product will be shortened and Histogen’s competitors may obtain earlier approval of competing products, and Histogen’s ability to generate revenues could be materially adversely affected.

Risks Related to the Combined Organization

In determining whether you should approve the merger, the issuance of shares of Conatus common stock and other matters related to the merger, as the case may be, you should carefully read the following risk factors in addition to the risk factors described under “Risk Factors—Risks Related to the Merger,” “Risk Factors—Risks Related to Conatus” and “Risk Factors—Risks Related to Histogen,” which will also apply to the combined organization.

 

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The market price of Conatus common stock is expected to be volatile and may drop following the merger.

The market price of the combined organization’s common stock is likely to be volatile following the merger. The combined organization’s stock price could be subject to wide fluctuations in response to a variety of factors including the following:

 

   

results from, and any delays in, planned clinical trials for the combined organization’s product candidates, or any other future product candidates, and the results of trials of competitors or those of other companies in the combined organization’s market sector;

 

   

any delay in filing an Investigational New Drug Application, Investigational Device Exemption or NDA for any of the combined organization’s product candidates and any adverse development or perceived adverse development with respect to the FDA’s review of that NDA;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

inability to obtain additional funding;

 

   

failure to successfully develop and commercialize the combined organization’s product candidates;

 

   

changes in laws or regulations applicable to the combined organization’s product candidates;

 

   

inability to obtain adequate product supply for the combined organization’s product candidates, or the inability to do so at acceptable prices;

 

   

unanticipated serious safety concerns related to any of the combined organization’s product candidates;

 

   

adverse regulatory decisions;

 

   

introduction of new products or technologies by the combined organization’s competitors;

 

   

failure to meet or exceed drug development or financial projections the combined organization provides to the public;

 

   

failure to meet or exceed the estimates and projections of the investment community;

 

   

the perception of the biopharmaceutical industry by the public, legislatures, regulators and the investment community;

 

   

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by the combined organization or the combined organization’s competitors;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and the combined organization’s ability to obtain patent protection for the combined organization’s licensed and owned technologies;

 

   

additions or departures of key scientific or management personnel;

 

   

changes in the market valuations of similar companies;

 

   

general economic and market conditions and overall fluctuations in the U.S. equity market;

 

   

sales of the combined organization’s common stock by the combined organization or its stockholders in the future; and

 

   

trading volume of the combined organization’s common stock.

In addition, the stock market, in general, and small biopharmaceutical companies, in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of the combined organization’s common stock, regardless of the combined organization’s actual operating performance. Further, a decline in the financial markets and related factors beyond the combined organization’s control may cause the combined organization’s stock price to decline rapidly and unexpectedly.

 

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Anti-takeover provisions in the combined organization charter documents and under Delaware law could make an acquisition of the combined organization more difficult and may prevent attempts by the combined organization stockholders to replace or remove the combined organization management.

Provisions in the combined organization’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined organization’s stockholders and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined organization will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined organization voting stock from merging or combining with the combined organization. Although Conatus and Histogen believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with the combined organization’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined organization’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

The pre-merger net operating loss carryforwards and certain other tax attributes of Conatus and Histogen may be subject to limitations. The pre-merger net operating loss carryforwards and certain other tax attributes of Conatus, Histogen and the combined organization may also be subject to limitations as a result of ownership changes resulting from the merger.

In general, a corporation that undergoes an “ownership change” as defined in Section 382 of the Code, is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders, generally stockholders beneficially owning five percent or more of a corporation’s common stock, applying certain look-through and aggregation rules, increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period, generally three years. Conatus and Histogen may have experienced ownership changes in the past and the combined organization may experience ownership changes in the future. In addition, the closing of the merger may result in an ownership change for Conatus, which could result in limitations on the use of its federal and state net operating loss carryforwards of $145.5 million and $76.4 million, respectively, in addition to its federal, including orphan drug, and state research credit carryforwards of $8.3 million and $2.4 million, respectively. It is possible that the combined organization’s net operating loss carryforwards and certain other tax attributes may also be subject to limitation as a result of ownership changes in the past and/or the closing of the merger. Consequently, even if the combined organization achieves profitability, it may not be able to utilize a material portion of Conatus’, Histogen’s or the combined organization’s net operating loss carryforwards and certain other tax attributes, which could have a material adverse effect on cash flow and results of operations.

The combined company’s failure to meet the continued listing requirements of the Nasdaq could result in a delisting of the combined company’s common stock.

If, after listing, the combined company fails to satisfy the continued listing requirements of the Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist the combined company’s common stock. Such a delisting would likely have a negative effect on the price of the combined company’s common stock and would impair your ability to sell or purchase the combined company’s common stock when you wish to do so. In the event of a delisting, the combined company can provide no assurance that any action taken by the combined company to restore compliance with listing requirements would allow the combined company’s common stock to become listed again, stabilize the market price or improve the liquidity of the combined company’s common stock, prevent the combined company’s common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.

 

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Sales of a substantial number of shares of the combined company’s common stock by the combined company’s stockholders in the public market could cause the combined company’s stock price to fall.

Sales of a substantial number of shares of the combined company’s common stock in the public market or the perception that these sales might occur could significantly reduce the market price of the combined company’s common stock and impair the combined company’s ability to raise adequate capital through the sale of additional equity securities.

Based on shares of Conatus common stock outstanding and issuable as of March 2, 2020 and assuming an exchange ratio of 1.4750, the combined company will have outstanding a total of 120,295,801 shares of common stock after the merger, assuming no exercise of outstanding options or warrants. Of these shares, only 75,973,011 shares of common stock will be freely tradable, without restriction, in the public market immediately following the merger, unless they are purchased by one of the combined company’s affiliates.

Histogen’s directors and executive officers and holders of approximately 50.4% of Histogen’s outstanding capital stock on an as converted to common stock basis and directors of Conatus holding 1.5% of Conatus’ outstanding common stock are expected to enter into lock-up agreements with Conatus in connection with the closing of the merger pursuant to which they may not, for a period of 180 days from the date of the Effective Time, offer, sell or otherwise transfer or dispose of any of the combined company’s securities, subject to certain exceptions. Sales of these shares, or perceptions that they will be sold, could cause the trading price of the combined company’s common stock to decline. After the lock-up agreements expire, up to an additional 44,322,790 shares of common stock will be eligible for sale in the public market.

The combined organization’s internal control over financial reporting may not meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, could have a material adverse effect on the combined organization’s business and share price.

As a privately held company, Histogen was not required to evaluate its internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404 of the Sarbanes-Oxley Act (“Section 404”). Commencing with the combined organization’s Annual Report on Form 10-K for this fiscal year, the combined organization’s management will be required to report on the effectiveness of the combined organization’s internal control over financial reporting. The rules governing the standards that must be met for the combined organization’s management to assess the combined organization’s internal control over financial reporting are complex and require significant documentation, testing and possible remediation.

The combined company cannot assure you that there will not be material weaknesses or significant deficiencies in the combined company’s internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit the combined company’s ability to accurately report its financial condition, results of operations or cash flows. If the combined company is unable to conclude that its internal control over financial reporting is effective, or if the combined company’s independent registered public accounting firm determines the combined company has a material weakness or significant deficiency in the combined company’s internal control over financial reporting once that firm begin its Section 404 reviews, investors may lose confidence in the accuracy and completeness of the combined company’s financial reports, the market price of the combined company’s common stock could decline, and the combined company could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in the combined company’s internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict the combined company’s future access to the capital markets.

 

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After the merger, the combined company’s executive officers, directors and principal stockholders, if they choose to act together, will continue to control or significantly influence all matters submitted to stockholders for approval. Furthermore, two of the combined company’s anticipated directors will be appointed by Conatus.

Following the completion of the merger, the combined company’s executive officers, directors and greater than 5% stockholders, in the aggregate, will own approximately 40.7% of combined company’s outstanding common stock (assuming no exercise of outstanding options). Furthermore, two of the combined company’s anticipated directors will be appointed by Conatus. As a result, such persons or their appointees to the combined company’s board of directors, acting together, will have the ability to control or significantly influence all matters submitted to the combined company’s board of directors or stockholders for approval, including the appointment of the combined company’s management, the election and removal of directors and approval of any significant transaction, as well as the combined company’s management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving the combined company, or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of the combined company’s business, even if such a transaction would benefit other stockholders.

 

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FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus/information statement and the documents incorporated by reference into this proxy statement/prospectus/information statement contain forward-looking statements (including within the meaning of Section 21E of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”)) concerning Conatus, Histogen, the proposed merger and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of Conatus, as well as assumptions made by, and information currently available to, management. Forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “believe,” “intend,” “look forward,” and other similar expressions among others. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties and are not guarantees of future performance. Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation: the risk that the conditions to the closing of the merger are not satisfied, including the failure to timely or at all obtain stockholder approval for the merger; uncertainties as to the timing of the consummation of the merger and the ability of each of Conatus and Histogen to consummate the merger; risks related to Conatus’ ability to correctly estimate its operating expenses and its expenses associated with the merger; risks related to the changes in market price of Conatus’ common stock relative to the exchange ratio; the ability of Conatus or Histogen to protect their respective intellectual property rights; competitive responses to the merger; unexpected costs, charges or expenses resulting from the merger; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger; and legislative, regulatory, political and economic developments. The foregoing review of important factors that could cause actual events to differ from expectations should not be construed as exhaustive and should be read in conjunction with statements that are included herein and elsewhere. Conatus can give no assurance that the conditions to the merger will be satisfied. Except as required by applicable law, Conatus undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

For a discussion of the factors that may cause Conatus, Histogen or the combined organization’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Conatus and Histogen to complete the merger and the effect of the merger on the business of Conatus, Histogen and the combined organization, see the section entitled “Risk Factors.”

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Conatus including the risk factors included in Conatus’ most recent Annual Report on Form 10-K, and Conatus’ recent Quarterly Report on Form 10-Q and Current Reports on Form 8-K filed with the SEC. See the section entitled “Where You Can Find More Information.”

If any of these risks or uncertainties materialize or any of these assumptions prove incorrect, the results of Conatus, Histogen or the combined organization could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus/information statement are current only as of the date on which the statements were made. Except as required by applicable law, Conatus and Histogen do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

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THE SPECIAL MEETING OF CONATUS’ STOCKHOLDERS

Date, Time and Place

The Conatus special meeting will be held on May 7, 2020, commencing at 9:00 a.m., Pacific time. The Conatus virtual special meeting can be accessed by visiting www.proxydocs.com/CNAT, where Conatus stockholders will be able to register to attend the Conatus special meeting by the registration deadline of 2:00 p.m. Pacific time on May 5, 2020, as well as participate and vote online. Conatus encourages its stockholders to register as soon as possible and log in at least 15 minutes prior to the start time. Conatus is sending this proxy statement/prospectus/information statement to its stockholders in connection with the solicitation of proxies by Conatus’ board of directors for use at the Conatus special meeting and any adjournments or postponements of the Conatus special meeting. This proxy statement/prospectus/information statement is first being furnished to Conatus’ stockholders on or about April 1, 2020.

Purpose of the Conatus Special Meeting

The purpose of the Conatus special meeting is:

 

  1.

To consider and vote upon a proposal to approve the Merger Agreement, a copy of which is attached as Annex A to this proxy statement/prospectus/information statement, and the transactions contemplated thereby, including the merger, the issuance of Conatus’ common stock to Histogen’s stockholders in accordance with the Merger Agreement and the change in control of Conatus.

 

  2.

To approve a series of alternative amendments to the amended and restated certificate of incorporation of Conatus to effect the Conatus Reverse Stock Split, in the form attached as Annex D to this proxy statement/prospectus/information statement.

 

  3.

To approve the Conatus 2020 Incentive Award Plan (“Conatus 2020 Plan”), a copy of which is attached as Annex E to this proxy statement/prospectus/information statement;

 

  4.

To approve, on a nonbinding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger;

 

  5.

To consider and vote upon an adjournment of the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3.

 

  6.

To transact such other business as may properly come before the Conatus special meeting or any adjournment or postponement thereof.

Recommendation of Conatus’ Board of Directors

 

   

Conatus’ board of directors has determined that the transactions contemplated by the Merger Agreement, including the merger and the issuance of shares of Conatus’ common stock to Histogen’s stockholders pursuant to the Merger Agreement are fair to, advisable and in the best interest of Conatus and its stockholders and has approved and declared advisable the Merger Agreement and such transactions. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” Proposal No. 1 to approve the Merger Agreement and the transactions contemplated thereby, including the merger and the issuance of shares of Conatus’ common stock to Histogen’s stockholders.

 

   

Conatus’ board of directors has determined that the Conatus Reverse Stock Split is fair to, advisable and in the best interest of Conatus and its stockholders and has approved and declared advisable the Conatus Reverse Stock Split. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” Proposal No. 2 to approve an amendment to the amended and restated certificate of incorporation of Conatus effecting the Conatus Reverse Stock Split.

 

   

Conatus’ board of directors has determined that the adoption of the Conatus 2020 Plan is fair to, advisable and in the best interests of Conatus and its stockholders and has approved and declared advisable the Conatus 2020 Plan. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” Proposal No. 3 to approve the Conatus 2020 Plan.

 

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Conatus’ board of directors has determined that the approval of the nonbinding, advisory vote on the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger is advisable and in the best interests of Conatus and its stockholders and has approved such nonbinding advisory vote. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” Proposal No. 4 to approve, on a nonbinding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger.

 

   

Conatus’ board of directors has determined and believes that adjourning the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3 is advisable to, and in the best interests of, Conatus and its stockholders and has approved and adopted the proposal. Conatus’ board of directors recommends that Conatus’ stockholders vote “FOR” Proposal No. 5 to adjourn the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3.

Record Date and Voting Power

Only holders of record of Conatus’ common stock at the close of business on the record date, March 13, 2020, are entitled to notice of, and to vote at, the Conatus special meeting. There were approximately 23 holders of record of Conatus’ common stock at the close of business on the record date. At the close of business on the record date, 33,170,487 shares of Conatus’ common stock were issued and outstanding. Each share of Conatus’ common stock entitles the holder thereof to one vote on each matter submitted for stockholder approval. See the section entitled “Principal Stockholders of Conatus” in this proxy statement/prospectus/information statement for information regarding persons known to Conatus’ management to be the beneficial owners of more than 5% of the outstanding shares of Conatus’ common stock.

Voting and Revocation of Proxies

The proxy accompanying this proxy statement/prospectus/information statement is solicited on behalf of Conatus’ board of directors for use at the Conatus special meeting.

If you are a stockholder of record of Conatus as of the record date referred to above, you may vote during the Conatus virtual special meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the Conatus virtual special meeting, Conatus urges you to vote by proxy to ensure your vote is counted. You may still attend the Conatus special meeting and vote if you have already voted by proxy. As a stockholder of record you may vote in any of the following ways:

 

   

to vote during the Conatus virtual special meeting, go to www.proxydocs.com/CNAT during the meeting and follow the instructions on the website. You will need to register in advance to attend the Conatus special meeting by visiting www.proxydocs.com/CNAT and following the registration instructions prior to the deadline of 2:00 p.m., Pacific time, on May 5, 2020. When registering you will be asked to provide the control number located inside the shaded gray box on your proxy card or voting instruction form, as described in the proxy card or voting instruction form. Upon completing your registration, you will receive an email confirming that you have registered. Approximately one hour prior to the start of the Conatus special meeting, you will receive further instructions via email, including a unique link, that will allow you access to the meeting. Please be sure to follow the instructions that will be delivered to you via email after completing the registration.

 

   

to vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to Conatus before the Conatus special meeting, Conatus will vote your shares as you direct on the proxy card.

 

   

to vote by telephone or on the Internet in advance of the Conatus virtual special meeting, dial the number on the proxy card or voting instruction form or visit the website on the proxy card or voting instruction form to complete an electronic proxy card. You will be asked to provide Conatus’ number

 

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and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern time on May 6, 2020 to be counted.

If your shares of Conatus’ common stock are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that proxy card regarding how to instruct your broker to vote your shares of Conatus’ common stock. If you do not give instructions to your broker, your broker can vote your shares of Conatus’ common stock with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of Nasdaq on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, your shares of Conatus’ common stock will be treated as broker non-votes. It is anticipated that all proposals will be non-discretionary items.

All properly executed proxies that are not revoked will be voted at the Conatus special meeting and at any adjournments or postponements of the Conatus special meeting in accordance with the instructions contained in the proxy. If a holder of Conatus’ common stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Proposal No. 1 to approve the Merger Agreement and the transactions contemplated thereby, including the merger and the issuance of shares of Conatus’ common stock to Histogen’s stockholders pursuant to the Merger Agreement; “FOR” Proposal No. 2 to approve an amendment to the amended and restated certificate of incorporation of Conatus effecting the Conatus Reverse Stock Split; “FOR” Proposal No. 3 to approve the Conatus 2020 Plan; “FOR” Proposal No. 4 to approve, on a nonbinding, advisory basis, the compensation that will be paid or may become payable to Conatus’ named executive officers in connection with the merger; and “FOR” Proposal No. 5 to approve the adjournment of the Conatus special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1, 2 or 3 in accordance with the recommendation of Conatus’ board of directors.

Conatus’ stockholders of record, other than those Conatus’ stockholders who have executed support agreements, may change their vote at any time before their proxy is voted at the Conatus special meeting in one of three ways. First, a stockholder of record of Conatus can send a written notice to the Secretary of Conatus stating that the stockholder would like to revoke its proxy. Second, a stockholder of record of Conatus can submit new proxy instructions either on a new proxy card or by telephone or via the Internet. Third, a stockholder of record of Conatus can attend the Conatus virtual special meeting and vote. Attendance at the Conatus virtual special meeting alone will not revoke a proxy. If a stockholder of Conatus of record or a stockholder who owns shares of Conatus’ common stock in “street name” has instructed a broker to vote its shares of Conatus’ common stock, the stockholder must follow directions received from its broker to change those instructions. Stockholders must register in advance to attend the Conatus special meeting by visiting www.proxydocs.com/CNAT and following the registration instructions prior to the deadline of 2:00 p.m., Pacific time, on May 5, 2020. When registering stockholders will be asked to provide the control number located inside the shaded gray box on your proxy card or voting instruction form, as described in the proxy card or voting instruction form. Upon completing your registration, you will receive an email confirming that you have registered. Approximately one hour prior to the start of the Conatus special meeting, you will receive further instructions via email, including a unique link, that will allow you access to the meeting. Stockholders should be sure to follow the instructions that will be delivered to them via email after completing the registration. Conatus recommends that stockholders register as soon as possible and log in at least 15 minutes before the Conatus special meeting to ensure they are logged in when the meeting starts.

Required Vote

The presence, in person or represented by proxy, at the Conatus special meeting of the holders of a majority of the shares of Conatus’ common stock outstanding and entitled to vote at the Conatus special meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum. Approval of Proposal Nos. 1, 3, 4 and 5 requires the affirmative vote of the majority of the votes cast (meaning the number of shares voted “FOR” the proposal must exceed the number of shares voted “AGAINST” the

 

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proposal) at the Conatus special meeting. Abstentions from voting on the proposal and broker, non-votes, if any, will not be counted as votes cast and accordingly will have no effect upon the outcome of Proposal Nos. 1, 3, 4 and 5. Approval of Proposal No. 2 requires the affirmative vote of holders of a majority of Conatus’ common stock having voting power outstanding on the record date for the Conatus special meeting.

Votes will be counted by the inspector of election appointed for the Conatus special meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes. Abstentions will be counted towards the vote total and will have the same effect as “AGAINST” votes for Proposal No. 2; abstentions will have no effect on Proposal Nos. 1, 3, 4 and 5. Broker non-votes will have the same effect as “AGAINST” votes for Proposal No. 2. For Proposal Nos. 1, 3, 4 and 5, broker non-votes will have no effect and will not be counted towards the vote total, but will be used to determine whether a quorum is present at the Conatus special meeting.

As of December 31, 2019, the directors and executive officers of Conatus beneficially owned approximately 2.8% of the outstanding shares of Conatus’ common stock entitled to vote at the Conatus special meeting. Each of the directors and executive officers, and certain other stockholders, of Conatus have entered into support agreements, pursuant to which such director, executive officer or other stockholder has agreed to be present (in person or by proxy) at the Conatus special meeting to vote all shares of Conatus’ common stock owned by him, her or it as of the record date (1) in favor of the adoption and approval of the Merger Agreement and the adoption and approval of the merger and other transactions contemplated thereby, or any matter that could reasonably be expected to facilitate the merger or other transactions, including Proposal Nos. 1, 2 and 3; (2) against any proposal or action that could reasonably be expected to delay, impede or interfere with the approval of the merger or any other transaction contemplated by the Merger Agreement, including against any “acquisition proposal” and any action in furtherance of any acquisition proposal; and (3) against any action or agreement that could reasonably be expected to result in a material breach of any covenant, representation or warranty or any other obligation of Conatus or the stockholder under the Merger Agreement or any related transaction document. As of December 31, 2019, Conatus is not aware of any affiliate of Histogen owning any shares of Conatus’ common stock entitled to vote at the Conatus special meeting.

Solicitation of Proxies

In addition to solicitation by mail, the directors, officers, employees and agents of Conatus may solicit proxies from Conatus’ stockholders by personal interview, telephone, telegram or otherwise. Conatus and Histogen will share equally the costs of printing and filing this proxy statement/prospectus/information statement and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Conatus’ common stock for the forwarding of solicitation materials to the beneficial owners of Conatus’ common stock. Conatus will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials. Conatus has retained Laurel Hill Advisory as its proxy solicitor. Conatus will pay the fees of Laurel Hill Advisory, which Conatus expects to be approximately $125,000, plus reimbursement of out-of-pocket expenses.

Other Matters

As of the date of this proxy statement/prospectus/information statement, Conatus’ board of directors does not know of any business to be presented at the Conatus special meeting other than as set forth in the notice accompanying this proxy statement/prospectus/information statement. If any other matters should properly come before the Conatus special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

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THE MERGER

This section and the section entitled “The Merger Agreement” in this proxy statement/prospectus/information statement describe the material aspects of the merger, including the Merger Agreement. While Conatus and Histogen believe that this description covers the material terms of the merger and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus/information statement for a more complete understanding of the merger and the Merger Agreement, including the Merger Agreement attached as Annex A, the opinion of Oppenheimer attached as Annex B, and the other documents to which you are referred herein. See the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Background of the Merger

Historical Background for Conatus

Conatus’ board of directors and management regularly review its operating and strategic plans in an effort to enhance stockholder value. These reviews involve, among other things, discussions of opportunities and risks associated with Conatus’ product candidates, development programs, financial condition and market, as well as consideration of strategic alternatives and options available to Conatus.

In June 2019, Conatus announced that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint, and it was discontinuing further treatment of patients enrolled in the ENCORE-LF clinical trial. In addition, results from the 24-week extension in Conatus’ ENCORE-PH clinical trial of emricasan were consistent with results from the initial 24-week treatment period and did not meet predefined objectives. Previously, in March 2019, Conatus announced that top-line results from the Phase 2b ENCORE-NF clinical trial of emricasan also did not meet the primary endpoint.

As a result of the failure of emricasan in the ENCORE clinical trials, Conatus’ board of directors initiated a process to identify and evaluate strategic alternatives available to Conatus that ultimately resulted in the execution of the Merger Agreement with Histogen. The terms of the Merger Agreement are the result of extensive arm’s-length negotiations between Conatus’ management and Histogen’s management, along with their respective advisors and under the guidance of each company’s board of directors.

From the beginning, Conatus followed a deliberate process assisted by experienced outside financial and legal advisors to rigorously examine potential transactions and transaction candidates in a broad and inclusive manner. The following is a summary of the background of the process undertaken by Conatus, and the identification and evaluation of strategic alternatives and the negotiation of the Merger Agreement, including the circumstances surrounding Conatus’ decision to review strategic alternatives available to it.

On March 8, 2019, after the close of trading of Conatus common stock, Conatus filed its annual report on Form 10-K and issued a press release providing its 2018 year-end financial results and its corporate update, including announcing the selection of CTS-2090 as a preclinical development candidate, making it the second candidate, the other being emricasan, in Conatus’ development pipeline.

In April 2019, Conatus initiated discussions with several investment banks regarding financial advisor services related to raising capital for Conatus’ CTS-2090 program and, in the event of negative results of the ENCORE-LF clinical trial results later in the year, related to evaluating strategic alternatives for Conatus.

On April 22, 2019, Conatus’ board of directors held a special telephonic meeting with members of Conatus’ management and a representative of Latham & Watkins LLP (“Latham & Watkins”) to among other matters, review the potential engagement of a financial advisor to advise upon raising capital to support the CTS-2090 program and strategic alternatives to enhance shareholder value. As part of the discussion with respect to the

 

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engagement of a financial advisor, a representative of Latham & Watkins reviewed with the board of directors its fiduciary duties and legal considerations in connection with such a process. The board of directors directed management to continue to negotiate with potential financial advisors. During the meeting, Oppenheimer & Co. Inc. (“Oppenheimer”), as well as a second investment bank, presented their qualifications to act as a financial advisor to the board of directors of Conatus by telephone.

Between April 22, 2019 and May 10, 2019, Conatus continued an active dialogue with Oppenheimer, as well as several other investment banks regarding the potential engagement.

On May 11, 2019, by unanimous written consent, the Conatus board of directors approved the engagement of Oppenheimer to act as underwriter in a capital raise to support the CTS-2090 program and/or as Conatus’ financial advisor for a potential strategic transaction and related engagement letter.

On May 16, 2019, Conatus entered into an investment banking agreement with Oppenheimer, pursuant to which Oppenheimer agreed to act as lead bookrunning underwriter in a capital raise to support the CTS-2090 program and/or exclusive financial advisor to Conatus, in connection the exploration and evaluation of strategic alternatives to enhance shareholder value, including a merger, an acquisition or sale of assets or a dissolution and liquidation of the company.

In an effort to determine if capital could be raised by Conatus to support the CTS-2090 program, Conatus and Oppenheimer reached out to 25 potential investors between May 16, 2019 and June 24, 2019. Subsequent discussions occurred with 11 such potential investors, none of which elected to engage in advanced due diligence.

On June 14, 2019, Conatus management received the top-line results from the ENCORE-LF clinical trial, in which emricasan failed to meet the primary endpoint.

On June 17, 2019, Conatus’ board of directors held its regularly scheduled quarterly meeting with members of Conatus’ management and a representative of Latham & Watkins, Conatus’ outside corporate counsel, to discuss the ENCORE-LF trial results and strategic options for Conatus. Conatus’ board of directors and management reviewed potential strategic opportunities, including an acquisition of Conatus, in-licensing additional development programs or a reverse merger. A representative of Latham & Watkins reviewed with the board of directors its fiduciary duties in considering strategic alternatives. The board of directors discussed and considered with management the strategic alternatives presented by management as well as a reduction in force to extend Conatus resources. The board of directors directed management to continue to evaluate out-license opportunities for CTS-2090 and cultivate reverse merger opportunities.

On June 24, 2019, Conatus filed a Form 8-K and issued a press release announcing that top-line results from its ENCORE-LF clinical trial of emricasan did not meet the primary endpoint. The ENCORE-LF trial was the third and last of its ENCORE clinical trials, which tested emricasan in patients with cirrhosis due to nonalcoholic steatohepatitis. The two prior trials, the ENCORE-PH and ENCORE-NF trials, also failed to meet the primary endpoint in each study. In connection with the emricasan trial results, Conatus announced plan to discontinue development activities for emricasan, as well as its inflammasome disease product candidate, CTS-2090. In addition, Conatus commenced a restructuring plan that included reducing staff by approximately 40% and suspending development of CTS-2090 in order to extend its resources.

On June 26, 2019, as a result of the top-line results from the ENCORE-LF clinical trial, Conatus and Novartis Pharma AG (“Novartis”) agreed to begin negotiations to wind-down the ENCORE-LF trial ahead of its scheduled completion, and that the parties had no further plans to develop emricasan at that time.

Starting in June 2019 continuing through November 2019, the board of directors of Conatus, its management team and its advisors conducted a process of identifying and evaluating potential strategic alternatives with

 

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private and public biotechnology/health care companies. In addition, management considered acquiring potential product candidates. During this time, Conatus also continued to explore potential strategic alliances or other ways to monetize its caspase inhibitor assets.

In its outreach efforts, representatives of Oppenheimer contacted a broad set of companies that met certain criteria established by the board of directors and that consisted of private companies actively considering an initial public offering, private companies not actively considering an initial public offering, private companies that had failed in earlier attempts to complete an initial public offering but that had raised significant capital, publicly traded foreign companies seeking a Nasdaq listing and public companies in the United States seeking capital or that were believed to have a strategic fit with Conatus or were seeking a business combination transaction as a de facto financing event. In addition, Oppenheimer, with the help of Conatus management, also reached out to a broad set of investors and service providers which included venture capital firms, law firms, auditors and investor relations firms to garner additional interest in a transaction with Conatus. Furthermore, there was interest from companies known to the management and board of directors of Conatus, and unsolicited inquiries received by the various parties. Conatus first became aware of Histogen’s interest in pursuing a transaction with Conatus on July 15, 2019, when management from Histogen reached out to management of Conatus.

In total more than 85 companies were contacted by Oppenheimer during this process. As a result of this process, between June 24, 2019 and August 29, 2019, Oppenheimer delivered bid process letters to a total of 56 companies and, in response thereto, a total of 25 companies submitted non-binding proposals to Conatus. Except as described below none of these discussions or proposals advanced beyond a preliminary stage.

In their review of potential strategic partners, Conatus and Oppenheimer focused on biotechnology companies possessing (i) a perceived lower financing risk at closing, (ii) a strong product pipeline with one or more mid-to-late or commercial-stage assets, (iii) strong news flows, (iv) an experienced management team, (v) high-quality existing investors or new investors willing to support a potential transaction, (vi) a capital structure with no debt or a clear path to restructuring existing debt, and (vii) audited financial statements or the ability to produce audited financial statements for the last two fiscal years. Prospective strategic partners were removed from consideration as reverse merger partners if their proposed valuation was considered to be too high (resulting in existing Conatus stockholders owning a smaller portion of the proposed combined organization), they possessed assets in a high-risk space or their management team was not viewed as possessing the necessary experience to operate as publicly traded company following a potential transaction.

On July 3, 2019, July 2, 2019 and July 10, 2019, representatives of Oppenheimer delivered Conatus’ bid process letter to each of Party A, Party B and Party C, respectively.

On July 15, 2019, Michael Mueller, Conatus’ Vice President, General Counsel & Secretary received an unsolicited inquiry regarding Conatus’ strategic process from, Richard Pascoe, Chairman and Chief Executive Officer of Histogen, of whom he was familiar. Mr. Mueller instructed Mr. Pascoe to speak with a representative of Oppenheimer regarding Conatus’ strategic process.

Later on July 15, 2019, a representative from Oppenheimer spoke with Mr. Pascoe to discuss Conatus’ strategic process and discuss initial diligence matters. Also on July 15, 2019, representatives of Oppenheimer delivered Conatus’ bid process letter to Histogen.

On July 18, 2019, Conatus and Histogen executed a confidentiality agreement between the parties.

On August 1, 2019, Histogen submitted its first non-binding proposal setting forth proposed terms for a transaction and provided a corporate information presentation. Histogen’s proposal provided that Conatus stockholders before closing would collectively own approximately 20% of the issued and outstanding common stock of company following the closing of a transaction. Histogen’s proposal assigned Conatus a valuation of $22.0 million.

 

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Also on August 1, 2019, a representative from Oppenheimer held a meeting with members of Histogen management, including Mr. Pascoe, to discuss Conatus’ strategic process and discuss initial diligence matters.

On August 2, 2019, Party A, Party B and Party C each submitted their first non-binding proposal setting forth proposed terms for a transaction and provided a corporate information presentation.

Party A’s proposal provided that Conatus stockholders before closing would collectively own approximately 12.9% of the issued and outstanding common stock of the combined company following the closing of a transaction. Conatus was assigned a valuation of $20.0 million in Party A’s proposal. The proposal was predicated on Party A completing a $60.0 million financing prior to closing a transaction with Conatus. Party A’s lead development program was at a pre-IND stage.

Party B’s proposal provided that Conatus stockholders before closing would collectively own approximately 20.3% of the issued and outstanding common stock of the combined company following the closing of a transaction. Conatus was assigned a valuation of $28.0 million in Party B’s proposal. Party B’s lead development program was in clinical development. The cash from the combined company was expected to be sufficient for the company to complete a Phase 2 clinical trial.

Party C’s proposal provided that Conatus stockholders before closing would collectively own approximately 13% of the issued and outstanding common stock of the combined company following the closing of a transaction. Conatus was assigned a valuation of $21.0 million in Party C’s proposal. Party C’s lead development program was in clinical development.

On August 9, 2019, Conatus and Party C executed a confidentiality agreement between the parties.

On August 12, 2019, Conatus entered into confidentiality agreements with each of Party A and Party B.

Between August 1, 2019 and September 4, 2019, representatives of Oppenheimer discussed the current proposals with each remaining bidder and Conatus exchanged additional due diligence items with the respective bidders.

Following review of the candidates by Conatus and Oppenheimer, 25 companies submitted formal proposals by August 2, 2019 detailing potential financial and structural terms of a transaction. Conatus management and Oppenheimer carried out an initial analysis and due diligence of potential strategic partners involved.

On August 30, 2019, Oppenheimer contacted the three selected candidates to inform them of their selection and outlined for each company a list of key topics that would be the focus of near-term diligence efforts.

On September 3, 2019, Conatus received second non-binding proposals from each of Party A and Party B, both of which increased the assumed valuation of Conatus compared to each party’s prior proposal. Party A’s proposal provided that Conatus stockholders before closing would collectively own approximately 19.6% of the issued and outstanding common stock of the combined company following the closing of a transaction. Conatus was assigned a valuation of $20.0 million in Party A’s proposal. In addition, Party A’s proposal lowered the assumed pre-closing financing to a range of $18.0 to $23.0 million. Party B’s proposal provided that Conatus stockholders before closing would collectively own approximately 33.5% of the issued and outstanding common stock of company following the closing of a transaction. Conatus was assigned a valuation of $53.0 million in Party B’s proposal. Furthermore, Party B’s proposal indicated a commitment by an existing Party B investor for a $10 million financing concurrent with the closing of a transaction with Conatus.

On September 4, 2019, Conatus received a second non-binding proposal from Party C, which proposed the same terms as Party C’s first proposal.

Based on the analysis of the eight potential strategic partners, four companies had one or more of the desired elements missing (for example, that the potential strategic partner did not have sufficient resources to achieve

 

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potentially meaningful development milestones within its portfolio of product development candidates or an ability to enter into an agreement in the near-term for a transaction with a public company).

Starting in June 2019, data rooms were established for due diligence purposes and Conatus continued to actively diligence each of the remaining potential strategic partners. Conatus and Oppenheimer held face-to-face meetings or telephone conferences with executive members of several of the candidate partners. During that period management of Conatus also had numerous calls with representatives of Oppenheimer and Latham & Watkins regarding the candidate companies under review. With assistance from Oppenheimer, Conatus management team selected three companies which management felt best fit the pre-established selection criteria to be presented to Conatus’ board of directors.

On September 19, 2019, Conatus’ board of directors held a regular meeting with members of Conatus’ management, including Drs. Mento, Marshall and Spada and Mr. Mueller, representatives from Oppenheimer and a representative of Latham & Watkins to discuss Conatus’ ongoing strategic process, among other things. At the meeting representatives from Party A, Party B and Party C presented their respective proposals and companies to Conatus’ board of directors. The board of directors noted that the process had been designed to identify as many potential counterparties as possible, and that the ultimate objective was to select one or more programs with the greatest potential future value to Conatus’ stockholders. A representative from Latham & Watkins reviewed with the board of directors its fiduciary duties implicated by a strategic transaction. A representative from Oppenheimer discussed strengths and considerations for each of the strategic companies that remained in the process, and reviewed the profile for each in detail. The board of directors discussed each of the companies remaining in the process as well as alternatives designed to maximize long-term value for Conatus’ stockholders. In evaluating the proposals received by Conatus, the board of directors considered such factors as the valuation ascribed to Conatus, the ability and interest of each company to close a transaction quickly, the potential value of a combined organization and other factors relevant to maximizing stockholder value. For each of the strategic companies, the board of directors also considered the development plans for each company’s lead development candidate, including the stage of development and the development risks in the target indications. The Conatus board of directors instructed management to prioritize its due diligence on Party B. The board of directors also directed management to proceed with a second restructuring plan in order to extend Conatus’ resources.

On September 24, 2019, Conatus announced a second restructuring plan that included reducing staff by another approximately 40% in order to extend resources.

On October 4, 2019, Conatus announced that it and Novartis had entered into an amendment to the Option, Collaboration and License Agreement, dated December 19, 2016, (“Collaboration Agreement”), pursuant to which Conatus and Novartis mutually agreed to terminate the Collaboration Agreement, effective September 30, 2019. Under the amended Collaboration Agreement, Conatus granted Novartis an exclusive license for the global development and commercialization of emricasan.

On October 8, 2019, Conatus’ board of directors held a telephonic meeting with members of Conatus’ management, including Drs. Mento, Marshall and Spada and Mr. Mueller, a representative from Oppenheimer, a representative of Latham & Watkins and a representative of Jones Day LLP (“Jones Day”), Conatus’ outside patent counsel, to discuss Conatus’ ongoing strategic process. Conatus’ management provided an update on the due diligence efforts related to Party B, including review of Party B’s development status and future plans and then-current financial information. The representative from Jones Day discussed its evaluation of Party B’s patent portfolio. The representative from Oppenheimer discussed the status of negotiations with Party B and financial considerations.

On October 9, 2019, Conatus and Party B entered into an exclusivity agreement whereby the parties agreed, until November 6, 2019, to continue to negotiate the terms of a transaction between the parties, culminating in the execution of a definitive agreement. Oppenheimer informed the other parties, including Histogen, that Conatus had entered into an exclusivity agreement with another party.

 

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Between October 9, 2019 and November 5, 2019, Conatus and Party B conducted due diligence and negotiations related to the transaction.

On November 6, 2019, Conatus’ board of directors held a telephonic meeting with members of Conatus’ management, including Drs. Mento, Marshall and Spada and Mr. Mueller, a representative from Oppenheimer and a representative of Latham & Watkins to discuss the status of Conatus’ negotiations with Party B. Conatus’ management provided an update on due diligence and negotiations with Party B, namely concern relating to Party B’s development plans, cash balance and previously assured concurrent transaction financing which became less certain. Conatus’ board of directors discussed other potential reverse merger candidates based on input from Oppenheimer and prior interest received, including Histogen, Party A and Party C. Conatus’ board of directors also discussed its priorities, including opportunities to preserve and create long-term shareholder value. After the discussion, Conatus’ board of directors directed management, Oppenheimer and Latham and Watkins to continue to conduct due diligence on the various opportunities described at the meeting.

On November 6, 2019, Oppenheimer contacted Histogen, Party A and Party C to reengage in due diligence to evaluate the potential of a strategic transaction with Conatus. Also, on November 6, 2019, Oppenheimer received a re-submitted first proposal setting forth proposed terms for a transaction and provided a corporate information presentation from Histogen.

Between November 6, 2019 and November 19, Conatus continued to conduct due diligence on Histogen and Party A.

On November 12, 2019, representatives of Conatus, including Drs. Mento, Marshall and Spada and Mr. Mueller, Oppenheimer, Histogen, including Mr. Pascoe, Gail K. Naughton, Ph.D., Martin Latterich, Ph.D. and Thomas L. Hubka, and Canaccord Genuity LLC (“Canaccord”) had a face-to-face meeting to discuss the finance and development operations of both companies and the possible combination of business operations. Histogen provided a detailed company presentation.

On November 18, 2019, members of Histogen management, including Mr. Pascoe and Mr. Hubka, and Conatus management, including Drs. Mento and Marshall and Mr. Mueller, and their respective representatives participated in a conference call to discuss finance matters related to the transaction, including each company’s projected cash balances and projected cash burn.

Also on November 18, 2019, Canaccord sent to Oppenheimer a revised proposal that increased the combined company percentage ownership of Conatus stockholders before closing from 20% to 25% of the issued and outstanding common stock of company following the closing of a transaction. Conatus’ valuation in the proposal was increased to $33.3 million, and Histogen’s valuation was increased to $100 million.

On November 19, 2019, Conatus’ board of directors held a telephonic meeting with members of Conatus’ management, including Drs. Mento, Marshall and Spada and Mr. Mueller, a representative from Oppenheimer and a representative of Latham & Watkins to discuss the status of the ongoing strategic process. Representatives from Histogen, including Mr. Pascoe, Dr. Naughton, Dr. Latterich and Mr. Hubka, presented a corporate presentation at the meeting. The board of directors discussed its objectives with respect to any strategic transaction, including preservation and potential creation of long-term shareholder value. Conatus’ board of directors scheduled a call on November 20, 2019 to continue its discussion of strategic alternatives for Conatus.

On November 20, 2019, Conatus’ board of directors held a telephonic meeting with members of Conatus’ management, including Drs. Mento, Marshall and Spada and Mr. Mueller, a representative from Oppenheimer and a representative of Latham & Watkins to discuss the status of the ongoing strategic process. Conatus’ board of directors reviewed the strategic alternatives in detail, including a number of potential counterparties that had been identified by Oppenheimer, including Histogen and Party A. In particular, Conatus’ board of directors discussed the merits of proceeding with definitive agreement negotiations with Histogen for a reverse merger on

 

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the terms discussed at the meeting and that the combined capital of Conatus and Histogen would allow for the potential achievement of multiple clinical and regulatory milestones in 2020 without the need for additional financing activities, whereas Party A would require longer development time and additional financing to achieve later stage clinical milestones. Conatus’ board of directors also discussed its strategic priorities, including preservation and creation of long-term shareholder value. Following the discussion, Conatus’ board of directors also directed management, Oppenheimer and Latham & Watkins to proceed with due diligence and negotiations with Histogen.

On November 20, 2019, Conatus sent to Histogen a draft of the Merger Agreement between Conatus and Histogen, which included terms that provided for both parties entering into support agreements with their respective management teams, directors and certain investors, that Conatus would have the ability to consider unsolicited competing offers submitted after the parties entered into the merger agreement and other terms common in merger agreements of this type.

On November 21, 2019, Party C informed Oppenheimer it was removing itself from consideration for a potential strategic transaction with Conatus.

On November 22, 2019, Conatus management, including Drs. Mento, Marshall and Spada, and Histogen management, including Mr. Pascoe and Mr. Hubka, had a telephonic meeting to discuss scientific and business aspects of the proposed transaction, including the composition of the board of directors for the combined company, partnering efforts for emricasan and CTS-2090 and plans and timing for financial audits.

On November 25, 2019, members of the management of each of Conatus, including Drs. Mento, Marshall and Spada and Mr. Mueller, and Histogen, including Mr. Pascoe and Mr. Hubka, and their respective advisors and counsel had an organizational call to discuss the process for negotiating a definitive agreement and the anticipated timeline for signing a definitive agreement and the subsequent closing of a transaction.

On November 26, 2019, Sheppard Mullin Richter & Hampton LLP (“Sheppard Mullin”), legal counsel to Histogen, sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, made certain changes to the exchange ratio calculation with respect to Histogen’s cash burn and introduced a requirement that Conatus have a certain minimum net cash at closing.

On December 2, 2019, members of the management of each of Conatus, including Drs. Mento, Marshall and Spada and Mr. Mueller, and Histogen, including Mr. Pascoe and Mr. Hubka, and their respective advisors and counsel had a call to discuss diligence matters and high-level discussion points with respect to the transaction, including support agreements to be provided by each company and calculation of the exchange ratio. Specifically, there was discussion on the treatment of out-of-the-money options and warrants with respect to the exchange ratio. Also, that same day, Latham & Watkins sent Sheppard Mullin drafts of the support agreements and the lock up agreement. The support agreements provided that each stockholder signatory would vote its shares in favor of the merger and the contemplated transactions and provided the respective companies proxies for those shares to be voted.

On December 3, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement which among other things, removed a requirement to have certain non-affiliate stockholders enter into the Conatus support agreement, added certain additional representations and warranties with respect to Histogen and certain covenants with respect to both parties’ ongoing operations, clarified treatment of Histogen’s warrants and stock options and Conatus’ RSUs and options, including with respect to the exchange ratio and set a net cash floor and target for both companies to provide clarity about the projected net cash of the combined company and provide incentive for capital preservation.

On December 4, 2019, Conatus’ board of directors held a regular meeting with members of Conatus’ management, representatives from Oppenheimer and a representative of Latham & Watkins to discuss Conatus’

 

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ongoing strategic process, among other matters. Conatus management discussed ongoing diligence of Histogen including regarding its intellectual property and finances. After discussion, the board of directors directed management, Oppenheimer and Latham & Watkins to continue negotiations with Histogen.

On December 5, 2019, Sheppard Mullen sent Latham & Watkins and Conatus a revised draft of the Merger Agreement, which, among other things, introduced a provision that would allow Histogen to conduct a financing transaction after the execution of the merger under certain circumstances.

On December 9, 2019 Conatus, including Drs. Mento and Marshall and Mr. Mueller, Oppenheimer, Histogen, including Mr. Pascoe and Mr. Hubka and Canaccord had a call to discuss financial matters of each company, including each company’s financial audits and projected cash balances. Also on December 9, 2019 Latham & Watkins sent Sheppard Mullin and Histogen a revised draft of the Merger Agreement which among other things, placed additional restrictions on Histogen’s ongoing operations and ability to conduct a financing transaction, further clarified treatment of Histogen’s warrants and stock options and Conatus’ RSUs and options, including with respect to the exchange ratio and clarified the net cash collar with respect to each company.

On December 11, 2019, Conatus, including Dr. Spada, representatives from Jones Day, Histogen, including Dr. Naughton and Mr. Hubka, and a representative from DLA Piper LLP, Histogen’s outside IP counsel, had a diligence call to discuss Histogen’s patent portfolio.

Additional diligence and discussions continued between Conatus and Histogen and their respective representatives throughout December 2019.

On December 12, 2019, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, revised the time line required for Conatus to file a Form S-4 in connection with the transaction.

On December 18, 2019, Sheppard Mullin sent Latham & Watkins a further revised draft of the Merger Agreement and a revised draft of the Histogen stockholder support agreement, which among other things, set forth their proposed post-closing board composition and further clarified the exchange ratio calculation with respect to out-of-the-money options and warrants.

On December 19, 2019, members of the management of each of Conatus, including Drs. Mento, Marshall and Spada and Mr. Mueller, and Histogen, including Mr. Pascoe and Mr. Hubka, and their respective advisors and counsel had a call to discuss the status of the transaction documents and process for the anticipated signing of a the Merger Agreement and the subsequent closing of a transaction. Conatus and Histogen also discussed amendments to the Merger Agreement, including net cash and cash burn calculations, employee matters, board composition and support agreement. Conatus indicated its desire to have the support agreement signed by a majority of Histogen stockholders prior to signing a merger agreement.

On December 20, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, removed certain additional representations and warranties with respect to Conatus intellectual property due to Conatus’ discontinuation of certain development activities and clarified certain covenants with respect to Histogen’s ongoing operations and ability to finance and set forth the limits on the range of shares that could be included in a new incentive award plan to be voted upon at the special meeting of stockholders.

On December 26, 2019, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement.

On December 30, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Histogen stockholder support agreement, which made clarifying technical changes regarding Histogen’s stockholder consent requirement.

 

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On December 31, 2019, Sheppard Mullin sent Latham & Watkins revised drafts of the lock-up agreement and Histogen stockholder support agreement, which included clarifying and technical changes.

On January 2, 2020, Sheppard Mullin sent Latham & Watkins a further revised draft of the Merger Agreement, which, among other things, made revisions to the calculation of both companies’ net cash amounts.

On January 3, 2020, Latham & Watkins sent Sheppard Mullin a draft of the Histogen support agreement, which included clarifying and technical changes.

On January 7, 2020, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other minor changes, set forth an exercise price floor with respect to the inclusion of each company’s options and warrants for purposes of the exchange ratio.

On January 7, 2020, Dr. Mento and Mr. Pascoe had a call to discuss the exchange ratio, the valuation of Conatus and the treatment of each company’s outstanding equity. Dr. Mento and Mr. Pascoe agreed to a valuation of $35.135 million for Conatus and to including all outstanding equity in the calculation of outstanding shares for the purposes of the exchange ratio. Subsequently, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which counted all outstanding options and warrants for purposes of the exchange ratio. As a result the exchange ratio in this draft of the merger agreement used a formula intended to allocate Histogen’s existing stockholders, optionholders and warrantholders (on a fully-diluted basis), an ownership percentage of the combined company, based on a valuation for Conatus of $35.135 million and $100.0 for Histogen.

On January 8, 2020, Sheppard Mullen sent Latham & Watkins a revised draft of the Conatus Support Agreement, which among other things, conformed the Conatus support agreement to the format of the Histogen support agreement. Later that day, Latham & Watkins and Sheppard Mullin had a discussion regarding the status of transaction documents and progress towards signing the Merger Agreement.

On January 16, 2020, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement. That same day, Latham & Watkins and Sheppard Mullin had a discussion regarding revisions to the Merger Agreement and progressing toward signing and announcing the transaction. Later that day, Latham & Watkins sent Sheppard Mullin a further revised draft of the Merger Agreement.

On January 17, 2020, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, revised the list of stockholders from whom Histogen would seek support agreements.

On January 21, 2020, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, stated that Conatus would accelerate all options prior to closing. Also on January 21, 2020, members of Histogen, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Drs. Mento and Mr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins and financial advisors, participated in a conference call to discuss the status of the Form S-4 and coordinate drafting of the pro forma financial statements.

On January 22, 2020, Latham & Watkins sent Sheppard Mullin a further revised draft of the Merger Agreement, which included technical and clarifying changes.

On January 23, 2020, Latham & Watkins and Sheppard Mullin had a discussion regarding progressing toward signing and announcing the transaction.

On January 24, 2020, Latham & Watkins and Sheppard Mullin had a discussion regarding progressing toward signing and announcing the transaction.

On January 27, 2020, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which included technical and clarifying changes.

 

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On January 27, 2020, the Conatus board of directors held a special meeting, with Conatus management and representatives of Latham & Watkins and Oppenheimer. Conatus management updated the board of directors on the status of the transaction timeline. Oppenheimer then reviewed with the board of directors its financial analysis of the transaction and rendered an oral opinion, subsequently confirmed in writing by delivery of a written opinion, dated as of January 27, 2020, to the effect that as of the date of such opinion and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Oppenheimer as set forth in the written opinion, the Merger Consideration to be paid by Conatus pursuant to the Merger Agreement, was fair to Conatus from a financial point of view, to the holders of Conatus common stock, as more fully described in the section entitled “The Merger—Opinion of the Conatus Financial Advisor.” Latham & Watkins reviewed in detail the material terms of the final draft of the Merger Agreement, which had been provided to the board of directors prior to the meeting. After discussions, the board of directors unanimously (i) determined that Merger and all related transactions set forth in and contemplated by the Merger Agreement are fair to, advisable and in the best interests of Conatus and its stockholders and Merger Sub, (ii) approved and declared advisable the Merger Agreement and all related transactions set forth in and contemplated by the Merger Agreement, including the issuance of shares of and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that the stockholders of Conatus vote to approve the Merger and adopt the Merger Agreement.

On January 28, 2020, Conatus and Histogen issued a joint press release announcing the execution of the Merger Agreement. An investor conference call was held later that day to explain the transaction and provide an overview of the product candidates the combined company would be developing and the expected timing of certain ongoing development efforts.

Historical Background for Histogen

Histogen’s board of directors and management periodically review options to enhance stockholder value, including financing transactions, mergers and acquisitions.

Richard W. Pascoe, President, Chief Executive Officer and Director of Histogen saw Conatus’ announcement on June 24, 2019 to explore strategic alternatives.

On July 15, 2019, Mr. Pascoe submitted an unsolicited inquiry to Conatus’ Vice President, General Counsel, Michael Mueller, with whom Mr. Pascoe is familiar, expressing interest in pursuing a merger transaction. Mr. Mueller encouraged Mr. Pascoe to contact Oppenheimer to discuss the bid process. Subsequently, that same day, Mr. Pascoe spoke with a representative from Oppenheimer who provided a bid process letter for Mr. Pascoe’s use.

On July 18, 2019, Histogen and Conatus executed a confidentiality agreement.

Between July 18, 2019 and August 1, 2019, members of Histogen management corresponded regarding Conatus’ strategic process and discussed initial diligence matters with representatives from Oppenheimer and Canaccord.

On August 1, 2019, Histogen submitted its first non-binding proposal setting forth proposed terms for a transaction and provided a corporate information presentation.

Between August 1, 2019 and October 9, 2019, Histogen discussed its current proposal with representatives of Oppenheimer and Histogen and Conatus exchanged additional due diligence items.

On October 9, 2019, Histogen was informed by Oppenheimer that Conatus had entered into an exclusivity agreement with another party, Conatus and the other party agreed to exclusively negotiate the terms of a potential transaction with the other party.

 

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On November 6, 2019, Histogen submitted its second non-binding proposal setting forth proposed terms of a transaction and provided a response to certain due diligence questions from Conatus.

On November 8, 2019, Histogen executed an engagement letter with Canaccord.

On November 12, 2019, representatives of Histogen, Mr. Pascoe, Dr. Naughton, Dr. Latterich and Thomas Hubka, Director of Business Operations and Corporate Secretary and representatives from Conatus, Dr. Mento, Dr. Marshall and Mr. Mueller, had a face-to-face meeting, with representatives from Canaccord and Oppenheimer participating telephonically, to discuss the operations of both companies and the possible combination of business operations. Histogen provided a detailed company presentation.

On November 18, 2019, members of Histogen management, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins, participated in a conference call to discuss finance matters related to the transaction.

On November 19, 2019, Conatus’ board of directors held a telephonic meeting with members of Conatus’ management, a representative from Oppenheimer and a representative of Latham & Watkins to discuss the status of the ongoing strategic process. Representatives from Histogen, Mr. Pascoe, Dr. Naughton, Dr. Latterich and Mr. Hubka, presented at the meeting.

On November 20, 2019, Histogen’s board of directors, except for Mr. Satz and Mr. Jackson, held a telephonic meeting with Mr. Pascoe, Dr. Naughton, Dr. Latterich, Mr. Hubka and Will Chuchawat, a representative of Sheppard Mullin Richter & Hampton LLP (“Sheppard Mullin”), legal counsel to Histogen, to discuss the reverse merger opportunity, among other things. The board of directors encouraged Mr. Pascoe to proceed to negotiate definitive terms for a transaction designed to enhance shareholder value. Also on November 20, 2019, Histogen received a draft Merger Agreement between Histogen and Conatus.

On November 22, 2019, Mr. Pascoe and Dr. Mento had a telephonic meeting to discuss scientific and business aspects of the proposed transaction.

On November 25, 2019, members of Histogen management, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins, participated in a conference call to discuss the process of negotiating a definitive agreement and the anticipated timeline for signing and definitive agreement and the subsequent closing of a transaction.

On November 26, 2019, Mr. Pascoe participated in a conference call with members of Histogen’s management, including Mr. Hubka, the parties’ legal advisors, including Mr. Chuchawat from Sheppard Mullin, and representatives from Canaccord, to discuss the proposed transaction. Subsequently, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, made certain changes to the exchange ratio calculation with respect to Histogen’s cash burn.

On December 2, 2019, members of Histogen management, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins, participated in a conference call to discuss diligence matters and high-level discussion points with respect to the transaction, including support agreements to be provided by each side and calculation of the exchange ratio. Specifically, there was discussion on the treatment of out-of-the-money options and warrants with respect to the exchange ratio. Also, that same day, Latham & Watkins sent Sheppard Mullin drafts of the support agreements and the lock up agreement.

 

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On December 3, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, added certain additional representations and warranties with respect to Histogen and certain covenants with respect to both parties’ ongoing operations, clarified treatment of Histogen’s warrants and stock options and Conatus’ RSUs and options, including with respect to the exchange ratio and set a cash floor and target with respect to each company.

On December 5, 2019, Sheppard Mullen sent Latham & Watkins and Conatus a revised draft of the Merger Agreement.

On December 9, 2019, Histogen’s board of directors, except Mr. Satz and Mr. Jackson, held a telephonic meeting with members of Histogen’s management, including Mr. Pascoe and Mr. Hubka, and Mr. Chuchawat from Sheppard Mullin to discuss the status of the reverse merger opportunity, among other things. Also on December 9, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, clarified certain covenants with respect to Histogen’s ongoing operations and ability to finance, further clarified treatment of Histogen’s warrants and stock options and Conatus’ RSUs and options, including with respect to the exchange ratio and clarified the net cash collar with respect to each company. Later that day, members of Histogen management, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins, participated in a conference call to discuss financial matters of each company, including each company’s financial audits and projected cash balances.

December 11, 2019, members of Histogen management, including Dr. Naughton and Mr. Hubka, members of Conatus management, including Dr. Spada and their respective legal advisors, including a representative from Jones Day, Conatus’ outside IP counsel, and a representative from DLA Piper LLP, Histogen’s outside IP counsel, participated in a conference call to discuss intellectual property diligence matters related to the transaction.

Additional diligence and discussions continued between Histogen and Conatus and their respective representatives throughout December 2019.

On December 12, 2019, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, clarified the required timing for the Form S-4 and proxy statement.

On December 13, 2019, Mr. Pascoe participated in a conference call with Histogen’s management, including Mr. Hubka, the parties legal advisors, including Mr. Chuchawat from Sheppard Mullin, and representatives from Canaccord to discuss the proposed transaction, specifically the composition of the post-closing board of directors, status of Histogen’s audited financials and calculation of the exchange ratio.

On December 17, 2019, Histogen’s board of directors held an in-person meeting with Histogen’s management, including Mr. Pascoe, Dr. Naughton, Dr. Latterich and Mr. Hubka, Mr. Chuchawat from Sheppard Mullin, and representatives from Canaccord, with Mr. Satz, Mr. Jackson and Mr. Zhang participating telephonically, to discuss the reverse merger opportunity, among other things. The board of directors directed Mr. Pascoe to proceed with negotiations and keep the board of directors apprised as the transaction progresses.

On December 18, 2019, Mr. Pascoe participated in a conference call with members of Histogen’s management, including Mr. Hubka, Mr. Chuchawat from Sheppard Mullin and representatives from Canaccord to discuss the proposed transaction. Subsequently, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, set forth their proposed post-closing board composition and further clarified the exchange ratio calculation with respect to out-of-the-money options and warrants.

On December 19, 2019, members of Histogen management, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives,

 

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including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins, participated in a conference call to discuss the status of the transaction documents and process for the anticipated signing of a the Merger Agreement and the subsequent closing of a transaction. Histogen and Conatus also discussed amendments to the Merger Agreement.

On December 20, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, removed certain additional representations and warranties with respect to Conatus and clarified certain covenants with respect to Histogen’s ongoing operations and ability to finance.

On December 26, 2019, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement.

On December 27, 2019, Mr. Pascoe participated in a conference call with Histogen’s management, including Mr. Hubka, Mr. Chuchawat from Sheppard Mullin and representatives from Canaccord to discuss the proposed transaction.

On December 30, 2019, Latham & Watkins sent Sheppard Mullin a revised draft of the Histogen stockholder support agreement.

On December 31, 2019, Sheppard Mullin sent Latham & Watkins revised drafts of the lock-up agreement and Histogen stockholder support agreement.

On January 2, 2020, Sheppard Mullin sent Latham & Watkins a further revised draft of the Merger Agreement.

On January 3, 2020, Latham & Watkins sent Sheppard Mullin a draft of the Histogen support agreement.

On January 7, 2020, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other minor changes, set forth an exercise price floor with respect to the inclusion of each company’s options and warrants for purposes of the exchange ratio. Subsequently, later that day, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which counted all outstanding options and warrants for purposes of the exchange ratio.

On January 8, 2020, Mr. Pascoe participated in a conference call with Histogen’s management, including Mr. Hubka, Mr. Chuchawat from Sheppard Mullin and representatives from Canaccord to discuss the proposed transaction. Subsequently, Sheppard Mullen sent Latham & Watkins a revised draft of the Conatus Support Agreement. Later that day, Latham & Watkins and Sheppard Mullin had a discussion regarding the status of transaction documents and progress towards signing the Merger Agreement.

On January 16, 2020, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement. That same day, Latham & Watkins and Sheppard Mullin had a discussion regarding revisions to the Merger Agreement and progressing toward signing and announcing the transaction. Later that day, Latham & Watkins sent Sheppard Mullin a further revised draft of the Merger Agreement.

On January 17, 2020, Sheppard Mullin sent Latham & Watkins a revised draft of the Merger Agreement, which among other things, stated the support agreements Histogen agreed to obtain.

On January 21, 2020, Latham & Watkins sent Sheppard Mullin a revised draft of the Merger Agreement, which among other things, stated that Conatus would accelerate all options prior to closing. Also on January 21, 2020, members of Histogen, including Mr. Pascoe and Mr. Hubka, members of Conatus management, including Dr. Mento, Dr. Marshall and Mr. Mueller, and their respective representatives, including the parties’ legal advisors from Sheppard Mullin and Latham & Watkins and financial advisors, participated in a conference call to discuss the status of the Form S-4 and coordinate drafting of the pro forma financial statements.

 

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Histogen’s Board of Directors executed an action by unanimous written consent, effective as of January 28, 2020, (i) determining that the merger was in the best interests of Histogen and its stockholders and that the terms of the merger were fair, (ii) authorizing the entry by Histogen into the Merger Agreement and (iii) approving certain other related matters.

On January 28, 2020, Histogen’s advisors, including its legal counsel, reviewed with Mr. Pascoe the terms and conditions of the proposed merger and discussed Mr. Pascoe’s fiduciary duties in the context of the consideration and approval of the merger.

On January 28, 2020, Mr. Pascoe and a representative of Conatus executed the Merger Agreement and issued a joint press release announcing the execution of the Merger Agreement.

Conatus Reasons for the Merger

At a special meeting held on January 27, 2020, among other things, Conatus’ board of directors unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the merger are fair to, advisable and in the best interests of Conatus and its stockholders, (ii) approved and declared advisable the Merger Agreement and the merger, including the issuance of shares of Conatus common stock to the stockholders of Histogen pursuant to the terms of the Merger Agreement, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the Merger Agreement, that the stockholders of Conatus vote to approve the amendment of Conatus’ certificate of incorporation to effect the Conatus Reverse Stock Split, the Merger Agreement, the change of control of Conatus resulting from the merger pursuant to the Nasdaq Rules, and the adoption of the Conatus 2020 Incentive Awards Plan.

In the course of its evaluation of the Merger Agreement and merger with Histogen, the Conatus Board held meetings, consulted with Conatus senior management, outside legal counsel and financial advisor, and reviewed and assessed a significant amount of information, and considered a number of factors, including the following:

 

   

Based in part on the scientific diligence and analysis of Histogen’s product pipeline, the potential market opportunity for its products and the expertise of its scientific team, Conatus’ board of directors believes that Histogen’s platform and potential product candidates have the potential to meet unmet medical needs and address a sizable market opportunity, thereby creating value for the stockholders of the combined organization and an opportunity for Conatus’ stockholders to participate in the potential growth of the combined organization.

 

   

Conatus’ board of directors also reviewed its assessment of Histogen’s drug development capabilities and technologies with Conatus’ management. Based in part on this analysis, Conatus’ board of directors believes that Histogen has the potential to develop multiple new therapies using its therapeutic development expertise that would broaden Histogen’s pipeline, which in turn may reduce the risk to the combined organization and its stockholders that one or more of its product candidates is not commercialized.

 

   

Conatus’ board of directors considered the strength of the balance sheet and sufficiency of the expected cash resources of the combined organization. Conatus and Histogen believe that the approximately $13.0 million in cash resources expected to be held by Conatus at the time of the closing of the merger and Histogen’s cash on hand is sufficient to enable the combined organization to advance up to three product candidates into clinical development and to fund the combined organization into early 2021.

 

   

Conatus’ board of directors also reviewed with Conatus’ management the current operating plans of Histogen to confirm the likelihood that the combined organization would possess sufficient financial resources to allow the management team to focus on implementing Histogen’s business plan and growing Histogen’s business. Conatus’ board of directors also considered the ability of Histogen to take advantage of the potential benefits resulting from becoming a public reporting company listed on Nasdaq should it be required to raise additional equity or debt in the future.

 

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Conatus’ board of directors considered the financial analyses of Oppenheimer, including its opinion to Conatus’ board of directors as to the fairness to Conatus’ stockholders, from a financial point of view and as of the date of the opinion, of the exchange ratio for the conversion of shares of Histogen’s capital stock into shares of Conatus’ common stock, as more fully described below under the caption “The Merger—Opinion of the Conatus Financial Advisor.”

 

   

Conatus’ board of directors considered the strength of Histogen’s management and scientific team, and their expertise in the biotechnology industry and the fields of regenerative medicines for aesthetic and therapeutic uses, as well as the fact that the board of directors following the completion of the merger will include representatives of Conatus who have public company leadership experience.

 

   

Conatus’ board of directors concluded that the merger would provide Conatus’ existing stockholders with a significant opportunity to participate in the potential increase in value of the combined organization following the merger.

Conatus’ board of directors also reviewed various factors impacting the financial condition, results of operations and prospects for Conatus, including:

 

   

the strategic alternatives to the merger, including potential transactions that could have resulted from discussions that Conatus’ management conducted with other potential merger partners;

 

   

the consequences of negative results from clinical trials, and the likelihood that the resulting circumstances for Conatus would not change for the benefit of Conatus’ stockholders in the foreseeable future on a stand-alone basis;

 

   

the loss of the operational capabilities of Conatus, and the risks associated with continuing to operate Conatus on a stand-alone basis, including the need to rebuild infrastructure and management and raise substantial funds to continue its operations;

 

   

the risks associated with, and the limited value and high costs of, liquidating Conatus and thereafter distributing the remaining proceeds to Conatus’ stockholders; and

 

   

Conatus’ potential inability to maintain its Nasdaq listing without completing the merger.

Conatus’ board of directors also reviewed the terms and conditions of the Merger Agreement and associated transactions, as well as the safeguards and protective provisions included therein intended to mitigate risks, including:

 

   

that the exchange ratio used to establish the number of shares of Conatus’ common stock to be issued to Histogen’s stockholders in the merger is not subject to adjustment based on trading prices, and thus the relative percentage ownership of Conatus’ stockholders and Histogen’s stockholders immediately following the completion of the merger is not subject to market volatility;

 

   

the limited number and nature of the conditions to Histogen’s obligation to consummate the merger and the limited risk of non-satisfaction of such conditions as well as the likelihood that the merger will be consummated on a timely basis;

 

   

the respective rights of, and limitations on, Conatus and Histogen under the Merger Agreement to consider certain unsolicited acquisition proposals under certain circumstances should Conatus or Histogen receive a superior offer (as defined in the section entitled “The Merger Agreement—No Solicitation” below);

 

   

the reasonableness of the potential termination fee of $500,000 and related reimbursement of certain transaction expenses of up to $350,000, which could become payable by either Conatus or Histogen to the other party if the Merger Agreement is terminated in certain circumstances;

 

   

the support agreements, pursuant to which certain directors, officers and stockholders of Histogen and Conatus, respectively, have agreed, solely in their capacity as stockholders of Histogen and Conatus,

 

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respectively, to vote all of their shares of Histogen capital stock or Conatus’ common stock in favor of the adoption or approval, respectively, of the Merger Agreement, and against competing transactions;

 

   

the agreement of Histogen to provide a written consent of its stockholders necessary to adopt the Merger Agreement thereby approving the merger and related transactions within 15 days of the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, becoming effective; and

 

   

the belief that the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances.

In the course of its deliberations, Conatus’ board of directors also considered a variety of risks and other countervailing factors related to entering into the merger, including:

 

   

the $500,000 termination fee or up to $350,000 in related expense reimbursement obligations payable by Conatus to Histogen upon the occurrence of certain events and the potential effect of such fees in deterring other potential acquirers from proposing an alternative transaction that may be more advantageous to Conatus’ stockholders;

 

   

the substantial expenses to be incurred in connection with the merger;

 

   

the possible volatility, at least in the short term, of the trading price of Conatus’ common stock resulting from the announcement of the merger;

 

   

the risk that the merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the merger or of the delay or failure to complete the merger on the reputation of Conatus;

 

   

the likely detrimental effect on Conatus’ cash position, stock price and ability to initiate another process and to successfully complete an alternative transaction should the merger not be completed;

 

   

the risk to Conatus’ business, operations and financial results in the event that the merger is not consummated;

 

   

the likelihood of disruptive stockholder litigation following announcement of the merger

 

   

the unproven, development-stage nature of Histogen’s product candidates, which may not be successfully developed into products or successfully marketed and sold;

 

   

the strategic direction of the combined organization following the completion of the merger, which will be determined by a board of directors initially comprised of a majority of the directors designated by Histogen;

 

   

the fact that the merger could result in substantial limits on the utilization of Conatus’ NOLs; and

 

   

various other risks associated with the combined organization and the merger, including those described in the section entitled “Risk Factors” in this proxy statement/prospectus/information statement.

The foregoing information and factors considered by Conatus’ board of directors are not intended to be exhaustive but are believed to include all of the material factors considered by Conatus’ board of directors. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, Conatus’ board of directors did not find it useful to attempt, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of Conatus’ board of directors may have given different weight to different factors. Conatus’ board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Conatus’ management team, members of the Conatus board of directors and the legal and financial advisors of Conatus, and considered the factors overall to be favorable to, and to support, its determination.

 

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Histogen Reasons for the Merger

In the course of reaching its decision to approve the merger, Histogen’s board of directors consulted with Histogen’s senior management, financial and tax advisors and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:

 

   

the potential increased access to sources of capital and a broader range of investors to support the clinical development of its therapeutic candidates following consummation of the merger compared to if Histogen continued to operate as a privately held company;

 

   

the potential to provide its current stockholders with greater liquidity by owning stock in a public company;

 

   

the board’s belief that no alternatives to the merger were reasonably likely to create greater value for Histogen’s stockholders, after reviewing the various financing and other strategic options to enhance stockholder value that were considered by Histogen’s board of directors;

 

   

Conatus and Histogen believe the combined organization’s cash and cash equivalents at the closing of the merger will be sufficient to enable Histogen to advance up to three product candidates into clinical development and to fund the combined organization into early 2021;

 

   

the business, history and credibility of Conatus and its affiliates, including the failure of its main drug candidate emricasan to meet its primary endpoints and Conatus halting development activities for its other drug candidate CTS-2090;

 

   

the availability of appraisal rights under the DGCL to holders of Histogen’s capital stock who comply with the required procedures under the DGCL, which allow such holders to seek appraisal of the fair value of their shares of Histogen capital stock as determined by the Delaware Court of Chancery;

 

   

the expectation that the merger with Conatus would be a more time- and cost-effective means to access capital than other options considered by Histogen’s board of directors, including additional private financings or an initial public offering;

 

   

the terms and conditions of the Merger Agreement, including, the following:

 

   

the determination that the expected relative percentage ownership of Conatus’ stockholders and Histogen’s stockholders in the combined organization was appropriate based, in the judgment of the Histogen’s board of directors, on the board of directors’ assessment of the approximate valuations of Conatus (including the value of the net cash Conatus is expected to provide to the combined organization) and Histogen (including the value of the net cash Histogen is expected to provide to the combined organization);

 

   

the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes;

 

   

the limited number and nature of the conditions of the obligation of Conatus to consummate the merger;

 

   

the fact that Conatus is not making any representations and warranties specifically regarding its ownership, licensing and use of intellectual property rights;

 

   

the rights of Histogen under the Merger Agreement to consider certain unsolicited acquisition proposals under certain circumstances should Histogen receive a superior offer (as defined in the section entitled “The Merger Agreement—No Solicitation” below);

 

   

the conclusion of Histogen’s board of directors that the potential termination fee of $500,000, or in some situations the reimbursement of certain transaction expenses incurred in connection with the merger of up to $350,000, payable by Conatus or Histogen to the other party, and the circumstances when such fee may be payable, were reasonable; and

 

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the belief that the other terms of the Merger Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, were reasonable in light of the entire transaction.

 

   

the fact that shares of Conatus’ common stock issued to Histogen’s stockholders will be registered on a Form S-4 registration statement and listed on the Nasdaq Capital Market and accordingly will become freely tradable for Histogen’s stockholders who are not affiliates of Histogen and who are not parties to lock-up agreements;

 

   

the support agreements, pursuant to which certain directors, officers and stockholders of Histogen and Conatus, respectively, have agreed, solely in their capacity as stockholders of Histogen and Conatus, respectively, to vote all of their shares of Histogen capital stock or Conatus common stock in favor of the adoption or approval, respectively, of the Merger Agreement and against competing transactions;

 

   

the ability to obtain a Nasdaq listing and the fact that Conatus will change its name to Histogen Inc. upon the closing of the merger;

 

   

the fact that the proposed merger may enable certain stockholders of Conatus and Histogen to increase the value of their current shareholding; and

 

   

the likelihood that the merger will be consummated on a timely basis.

Histogen’s board of directors also considered a number of uncertainties and risks in its deliberations concerning the merger and the other transactions contemplated by the Merger Agreement, including the following: