Item 1. Business.
Overview
Scopus BioPharma Inc.
is a biopharmaceutical company developing transformational therapeutics targeting serious diseases with significant unmet medical
needs. Our mission is to improve patient outcomes and save lives. To achieve our mission, we are capitalizing on groundbreaking
scientific and medical discoveries at some of the world’s foremost research and academic institutions.
Our lead
development program is a novel, targeted immuno-oncology gene therapy for the treatment of multiple cancers. We have
partnered with the City of Hope, or COH, for CpG-STAT3siRNA, or CO-sTiRNA™, which is a STAT3 inhibitor gene
therapy. Pre-clinical testing at City of Hope was designed to determine whether CO-sTiRNA would reduce growth and metastasis
of various pre-clinical tumor models, including melanoma, and colon and bladder cancers, as well as leukemia and lymphoma.
Based upon such testing, an investigational new drug application, or IND, for CO-sTiRNA for B-cell lymphoma is currently
anticipated to be filed with the United States Food and Drug Administration, or FDA, in H1 2021. We currently anticipate that
a first-in-human Phase 1 clinical trial for B-cell lymphoma will commence in H2 2021.
In conjunction with
City of Hope, Phase 1 clinical trials for additional cancer indications are being contemplated for CO-sTiRNA in combination with
immune checkpoint inhibitors and chimeric antigen receptor T-cells, or CAR-Ts.
Our second lead
development program is MRI-1867, a peripherally-restricted, dual-action cannabinoid-1, CB1, receptor inverse agonist and
inhibitor of inducible nitric oxide synthase, or iNOS. We have partnered with the National Institutes of Health, or NIH, for
MRI-1867 and are initially targeting systemic sclerosis, or SSc. Over-activation of CB1 and iNOS has been implicated in the
pathophysiology of SSc, which includes fibrosis of the skin, lung, kidney, heart and the gastrointestinal tract. We are
currently continuing to conduct pre-clinical work for MRI-1867 to support an IND filing with the FDA.
We are also
partnered with The Hebrew University of Jerusalem, or Hebrew University, on several additional research and development
programs. These programs relate to a proprietary opioid-sparing anesthetic and synthesis of novel compounds and new chemical
entities, or NCEs.
Recent Developments
Public Offerings
On December 18, 2020, we
completed an initial public offering, or IPO, of our common stock at a public offering price of $5.50 per share for aggregate gross
proceeds, including our underwriters’ exercise, in full, of their over-allotment option, of $3,162,500, or net proceeds of
$1,711,186 after deducting $1,451,314 in offering costs. Our common stock is listed on The Nasdaq Global Market under the symbol
“SCPS”.
On February 10, 2021, we
completed a follow-on public offering of 1,150,000 shares of our common stock, including the underwriters’ exercise, in full,
of their over-allotment option, of our common stock at a public offering price of $9.00 per share of common stock for aggregate
gross proceeds of $10,350,000, or estimated net proceeds of approximately $9,150,000 after deducting approximately $1,200,000 in
offering costs.
COVID-19 Pandemic
In March 2020, the
World Health Organization declared the outbreak of a novel strain of coronavirus, or COVID-19, as a global pandemic, which continues
to spread throughout the United States and around the world. We are continually monitoring the impact of the global pandemic on
us, especially since we conduct activities in multiple locations, both in and outside of the United States. These locations are
New York City and Los Angeles in the United States and Tel Aviv, Israel. At various times since the onset of the global pandemic,
these locations have been severely affected by COVID-19 and, as a result, have been subject to various requirements to stay at
home and self-quarantine, as well as constraints on mobility and travel, especially international travel.
In many locations,
the primary focus of healthcare providers and hospitals has been to combat the virus. While we continue to advance our development
programs, we are also continually assessing the impact of the global pandemic on our product development efforts, including any
impact on the timing and/or costs for our clinical trials, IND-enabling work and other research and development activities. There
is no certainty as to the length and severity of societal disruption caused by COVID-19. Consequently, we do not have sufficient
visibility to predict the impact of the global pandemic on our operations and overall business, including delays in the progress
of our planned pre-clinical work and clinical trials, or by limiting our ability to recruit physicians or clinicians to run our
clinical trials, enroll patients or conduct follow-up assessments in our clinical trials. Further, the business or operations of
our strategic partners and other third parties with whom we conduct business may also be adversely affected by the global pandemic.
We continue to monitor the impact of the global pandemic, including regularly reevaluating the timing of our research and development
and clinical milestones. In light of the more restrictive constraints on international travel, we continue to adjust program emphasis
and prioritization. Until we are able to gain greater visibility as to the impact of the global pandemic, we intend to commit greater
resources to our existing and future programs in the United States and are slowing investment in program development outside the
United States.
Our Strategic Partners
Our strategic partners
for our lead development and other programs are City of Hope, the NIH and Hebrew University. The researchers with whom we are working
at each of our strategic partners are leaders in their respective fields.
City of Hope
City of Hope is a world-renowned,
independent biomedical research and treatment center for cancer, diabetes, and other life threatening diseases. City of Hope’s
unique research and development hybrid of the academic and commercial creates an infrastructure that enables City of Hope researchers
and their commercial partners to submit numerous INDs to the FDA each year. In June 2020, we signed an exclusive, worldwide license
for CO-sTiRNA.
National Institutes of Health
The NIH is the
primary government agency in the United States responsible for biomedical and public health research. The NIH spends
approximately $39 billion annually to conduct and fund medical research seeking to enhance health, lengthen life and reduce
illness and disability. The NIH is comprised of 27 separate institutes and centers covering different biomedical disciplines. We
are working with the Section of Neuroendocrinology of the Laboratory of Physiologic Studies, which are part of the National
Institute on Alcohol Abuse and Alcoholism, or NIAAA. We own an exclusive, worldwide license from the NIH to three patents
covering a series of novel dual-action CB1 receptor inverse agonists, which includes MRI-1867.
The Hebrew University of Jerusalem
Hebrew University has
been a pioneer in the research of the ECS for over 50 years. To better integrate and coordinate its extensive research in this
area, in April 2017, Hebrew University established the MCCR. The MCCR is staffed by eminent scientists and medical doctors from
a variety of faculties at Hebrew University and Hadassah University Medical Center. To date, we entered into two MOUs and have
executed two exclusive, worldwide licenses in connection with these programs covering the research results and any resulting patents.
Our Drug Candidates
Gene Therapy — STAT3
Inhibitor
Our licensed gene therapy,
or CO-sTiRNA, is a dual-action STAT3 inhibitor. STAT3 is a gene that drives tumor cell growth and anti-tumor immune
suppression. CO-sTiRNA is a highly selective and targeted gene therapy that is designed to silence the activity of the STAT3 gene
by way of RNA interference. CO-sTiRNA is also designed to stimulate TLR9 receptors and to activate the body’s immune defense
to recognize and kill cancer cells.
Cancer is caused by
genetic mutations that result in the uncontrolled division and proliferation of abnormally functioning cells. The STAT3 gene plays
a fundamental role in cell growth and division, cell movement and apoptosis in both tumor cells and tumor associated immune cells.
Studies suggest that many cancers depend on the activity of STAT3 to survive and proliferate. The ability to selectively and temporarily
silence STAT3 is highly desirable for certain cancer therapies.
We are working with
Dr. Hua Yu and Dr. Marin Kortylewski at City of Hope. Dr. Yu is the Billy and Audrey L. Wilder Professor in Tumor Immunotherapy,
Associate Chair/Professor in the Department of Immuno-Oncology, and Co-Leader of the Cancer Immunotherapeutics Program. Dr. Kortylewski
is an Associate Professor in the Department of Immuno-Oncology. Drs. Yu and Kortylewski are both leading experts in the role of
STAT3 in tumor angiogenesis and tumor immune evasion and in oligonucleotide-based cancer immunotherapies and developed CO-sTiRNA.
The strategy to pursue STAT3 inhibition was developed based on seminal discoveries by Dr. Yu and her team defining the key role
of STAT3 in cancer cell survival and immune tolerance, combined with pioneering work by Dr. Kortylewski and his team on STAT3 targeting
using TLR9-targeted delivery of siRNA oligonucleotide therapeutics into immune cells.
Multiple studies, including
those conducted at City of Hope, have indicated STAT3 as a promising target in non-Hodgkin’s lymphoma. There is growing evidence
linking B-cell non-Hodgkin lymphomas to persistent activation of STAT3. Pre-clinical testing at City of Hope was designed to determine
whether CO-sTiRNA would reduce growth and metastasis of various cancers, including lymphoma, leukemia, and solid tumors including
melanoma, and colon and bladder cancers. Pre-clinical studies in City of Hope laboratories indicated that intratumoral injection
of CO-sTiRNA combined with radiation therapy, or RT, may prove to be efficacious in eradicating established tumors in pre-clinical
models of human and mouse B-cell lymphoma. The therapeutic effect of CO-sTiRNA combined with RT may likely result from a two-pronged
effect, reducing survival signaling in lymphoma cells, as well as decreasing tolerogenic/proangiogenic effects of the tumor microenvironment
post-RT.
Local administration
of CO-sTiRNA with RT resulted in complete rejection of mouse syngeneic B-cell lymphoma and significant growth inhibition of xenotransplanted
tumors. Thus, the combination of local radiation and intratumoral injection of CO-sTiRNA may represent a novel approach to elicit
an anti-tumor immune response in the host.
License Agreement and Sponsored Research
Agreement
In June 2020, we entered
into a license agreement with City of Hope, or COH License Agreement. In addition to the COH License Agreement, we also entered
into a Sponsored Research Agreement, or SRA, relating to on-going research and development activities in collaboration with City
of Hope. We obtained the right to negotiate the COH License Agreement with City of Hope from Bioscience Oncology Pty. Ltd., or
Bioscience, which held the exclusive underlying right to negotiate the COH License Agreement. Simultaneously with the execution
of the COH License Agreement, we also closed on related transactions with Bioscience and certain related parties (together with
the COH License Agreement, the “Transactions”). In connection with the Transactions, we paid City of Hope and Bioscience
aggregate consideration and expense reimbursements at closing of approximately $455,000 in cash and issued 1,466,667 shares of
our common stock together with 959,308 Series W Warrants, or W Warrants. We are also obligated to pay additional consideration
in cash and common stock, in some cases upon satisfaction of certain milestones.
National Institutes of Health Program
We own an exclusive,
worldwide license from the NIH to three patents covering a series of cannabinoid receptor mediating compounds developed by Dr.
George Kunos, Scientific Director of the National Institute on Alcohol Abuse and Alcoholism of the NIH and leading researcher on
endocannabinoids and the endocannabinoid system.
These novel dual-action
cannabinoid receptor mediating compounds are proprietary NCEs that are CB1 receptor antagonists and inhibitors of inducible nitric
oxide synthase, or iNOS. Over activation of CB1 and iNOS has been implicated in the pathophysiology of SSc, which includes fibrosis
of the skin, lung, kidney, heart, and the gastrointestinal tract.
Our license enables
us to use these cannabinoid receptor mediating compounds for the commercial development as a new therapeutic for the treatment
of SSc and other skin fibrotic diseases.
Systemic Sclerosis
SSc is a chronic, systemic
autoimmune disease characterized by activation of innate and adaptive immune systems, an obliterative, proliferative vasculopathy
of small blood vessels, and fibrosis of the skin and multiple internal organs. Approximately 90,000 people in the United States
and Europe have SSc. The disease affects mainly adults (80% of SSc patients are women) with mean age of onset about 46 years of
age in the United States. Based on these patient population characteristics, SSc is classified as an orphan indication.
SSc can affect multiple
internal organs in the body, including the lungs, heart, kidneys, joints, muscles, esophagus, stomach and intestines. Clinically
apparent organ involvement that occurs in more than a third of these patients includes thickened skin, Raynaud’s phenomenon,
esophageal symptoms, pulmonary fibrosis, restrictive lung disease, edematous skin, joint contractures, digital ulcers, and muscle
weakness.
Less frequently occurring,
yet life-threatening manifestations include pulmonary artery hypertension (about 1 in 5 patients), cardiac conduction blocks (about
1 in 10 patients), and renal crisis (about 1 in 50 patients). In the United States, SSc is the most-deadly of the systemic autoimmune
diseases. The median disease duration for an individual who dies of SSc is 7.1 years from the onset of symptoms. About 85% of deaths
caused by SSc are the result of pulmonary fibrosis, pulmonary artery hypertension, or cardiovascular disease, such as sudden death.
Currently, there are
no FDA-approved therapies specifically for SSc, although therapies have been approved for the pulmonary artery hypertension associated
with this disease. Immunosuppressants with significant toxicities are commonly used to treat SSc, however, as far as we know, there
is a general absence of clinical data to support their use.
We believe there is
general agreement in the SSc community that an effective anti-inflammatory and anti-fibrotic drug would address a significant unmet
medical need in SSc, especially a drug that is orally administered, can be used chronically with other commonly prescribed medications
for SSc, and is not immunosuppressive. We believe such a therapy would be positively received by the market.
MRI-1867
We are developing the
cannabinoid receptor mediating compound, MRI-1867, for the treatment of SSc. MRI-1867 is a rationally designed, orally available,
dual-action, hybrid, small molecule that is an inverse agonist of the endocannabinoid system/CB1 receptor, or CB1, as well as an
inhibitor of the iNOS system. To date, MRI-1867 has demonstrated numerous positive characteristics in pre-clinical animal model
testing.
Specifically, NIH
researchers have indicated that MRI-1867 has druggable pharmacodynamic, pharmacokinetic and stability properties using
non-GLP in vitro and in vivo animal testing. Further, in vivo testing conducted by the NIH (published in peer review
journals) has, in relevant animal models, demonstrated successfully that, compared to a placebo, MRI-1867 has both slowed the
progression of fibrosis and attenuated pre-existing fibrosis in two organs (liver and lungs) with highly potent and selective
antagonism of both CB1 and iNOS. Importantly, in vivo animal studies have also demonstrated that MRI-1867 did not cross the
blood brain barrier, eliminating the potential for adverse CNS side effects which can be present with other cannabinoids that
bind to receptors in the brain. MRI-1867 has also exhibited sufficient bioavailability with oral delivery and supported once
daily dosing.
Cooperative Research and Development
Agreement
We have entered into
a CRADA with NIH. A CRADA, which is authorized under 15 U.S.C. §3710a, allows a federal laboratory to undertake joint research
and development activities with a non-federal party. Under the CRADA, we are advancing the research undertaken to date in connection
with the potential therapeutic benefits of using MRI-1867 as a treatment for SSc. The research being conducted under the CRADA
is being carried out by Dr. Kunos and his team at NIH. Preliminary in vivo studies demonstrated a reduction in pre-existing fibrosis
as compared to placebo in the treatment of bleomycin-induced skin fibrosis. Our company is funding Dr. Kunos’ research over
a two-year period under a proprietary research plan. The cost to our company is approximately $240,000 for the two-year study.
Development Plan
Based on the published
data for MRI-1867 in liver and lung fibrosis and the preliminary positive data in skin fibrosis generated under the CRADA, we intend
to commence additional studies to support an IND submission to the FDA for MRI-1867. Prior to this submission, our company plans
to file a pre-IND meeting request with FDA to confirm that the planned chemistry, manufacturing, and controls, or CMC, and non-clinical
tasks will support the initiation of a Phase 1 clinical trial. By doing so, we may receive feedback from the FDA that will enable
us to modify the development plan for MRI-1867 early on, expediting the overall development process and avoiding a waste of resources.
Additionally, given the significant unmet clinical need and lack of an FDA-approved treatment for SSc, we also plan to submit an
orphan drug designation request for MRI-1867 for the treatment of SSc. We plan to file an IND for MRI-1867 in 2021. We continue
to adjust our program emphasis and prioritization and we are slowing investments in programs outside of the United States. Accordingly,
until we are able to gain visibility as to the impact of the global pandemic, we are revising our planning relating to the timing
for filing an IND for MRI-1867 with the FDA.
Hebrew University Programs
We are working with
leading researchers at Hebrew University on three projects, which seek to identify novel cannabinoid-based therapeutics for development.
These projects are being conducted pursuant to the MOUs between us and Yissum Research Development Company of the Hebrew University,
which we refer to as Yissum. Under these MOUs, we are responsible for funding the costs of prescribed research projects. This research
is conducted under the auspices of a named researcher. We have the exclusive right to negotiate for licenses of the intellectual
property resulting from this research, including any patents that are filed. To date, we have executed two licenses in connection
with these MOUs.
Proprietary CBD-mediated, Opioid-sparing
Anesthetics
In collaboration with
Dr. Alexander Binshtok of Hebrew University, we are evaluating the CBD-mediated activation of nociceptive, transient receptor potential
cation channels, or TRPV1 and TRPA1 channels, for painless pain-selective anesthesia. Dr. Binshtok is studying the effects of approved
anesthetics in combination with CBD on sodium currents and action potential. The research will be carried out, under our company’s
sponsorship and supervision, by Dr. Binshtok and his team at Hebrew University.
In a previous study,
Dr. Binshtok discovered that the injection of capsaicin, a TRPV1 and TRPA1 channel activator, in combination with QX-314, a lidocaine
derivative, in-vivo effectively silenced pain and itch. Building upon these prior results, our sponsored research program with
Dr. Binshtok was designed to determine whether CBD, a TRPV1 and TRPA1 channel activator, could be used as an alternative to capsaicin
in combination with chloroprocaine, an approved anesthetic, to result in painless selective long-term pain relief without paralytic,
autonomic or neurotoxic side effects.
Based on the
foregoing, we are currently working with Dr. Binshtok to optimize potential treatment regimens, as well as to conduct safety
and efficacy studies. We believe that our proprietary combinations of CBD with approved anesthetics may be eligible for the
FDA’s 505(b)(2) development pathway; provided, however, there can be no assurance that we will be able to avail
ourselves of such pathway. This pathway was introduced to avoid duplication of studies already performed on drug compounds,
in this case both CBD and the anesthetics, and would significantly reduce the future time and costs associated with clinical
development.
We believe our proprietary
combinations of CBD with approved anesthetics would be applicable in multiple clinical settings including:
• opioid-sparing post-operative
pain management
• nerve block anesthesia
• epidural anesthesia during
childbirth (i.e., pain relief while retaining the ability to “push”)
• spinal anesthesia, particularly
in patients susceptible to low blood pressure (e.g., the elderly)
• dental anesthesia
• inflammatory, cancer
and neuropathic pain and itch
Each of these potential
applications represents a significant market opportunity in the United States, as well as globally.
Additionally, we believe
that opioid-sparing, pain-selective anesthetics may also reduce the need for the use of highly-addictive opioids in tandem with
anesthetics or for general stand-alone pain management helping to address a growing opioid epidemic in the United States. According
to the Center for Disease Control and Prevention, or CDC, there were nearly 30,000 overdose deaths related to opioids in 2017.
The U.S. Federal Government budgeted approximately $4.6 billion for 2018 to combat the growing opioid epidemic. Given the growing
health and economic impact of opioids, we believe an opioid-sparing anesthetic, such as those in our novel class of pain-selective
anesthetics, would be well-received by the market and may be considered for an expedited review by the FDA.
Synthesis of Novel Cannabinoids
In collaboration with
Dr. Dmitry Tsvelikhovsky of Hebrew University, we are pursuing two programs seeking to synthesize novel cannabinoids: cannabinoid-based
dual-action compounds and novel chemical derivatives based upon the molecular structure of existing cannabinoids. Both of these
programs are intended to provide us with a series of proprietary NCEs for evaluation as potential drug candidates.
Cannabinoid-based Dual-action Compounds
Our first program seeks
to create new dual-action, cannabinoid-based hybrid NCEs which improve upon the efficacy, side effects or a combination of both
compared to FDA-approved drugs and other promising drug candidates currently under development. Our initial strategy is to focus
on indications that have been proven to be responsive to cannabinoids and cannabinoid therapeutics such as certain metabolic, autoimmune
and inflammatory diseases. Once we have completed the synthesis portion of our program, we will contract with third-party CROs
to perform in vitro receptor binding assays to determine which indications these compounds may address. Based on the results of
these receptor binding assays, we will decide which compounds to advance in vivo testing and which compounds would benefit from
further chemical refinement. We are initially targeting the creation of approximately four new proprietary compounds as part of
this program.
Novel Chemical Derivatives of Existing
Cannabinoids
Our second
program seeks to create novel derivatives of two cannabinoids, CBG (which is a precursor to CBD and THC) and THCV, which we
intend to evaluate for their potential therapeutic benefits. We are initially targeting the creation of approximately four
and ten new proprietary CBG and THCV compounds, respectively, as part of this program.
CBG is a non-psychoactive
cannabinoid found in cannabis that is believed to boost anandamide, a naturally occurring endocannabinoid that increases dopamine
levels and is responsible for regulating various bodily functions related to mood, sleep and appetite. In addition, CBG is also
believed to be a possible inhibitor of the psychoactive effects of THC. CBG is believed to have potential benefits in the areas
of pain relief, inflammatory bowel disease/colitis, anti-cancer and anti-bacterial activities, neurodegenerative diseases (e.g.,
Huntington’s disease), cachexia, depression, overactive bladder and various forms of epilepsy.
THCV is a psychoactive cannabinoid found
in cannabis that shares a similar molecular structure to THC. Despite the structural similarities to THC, the psychoactive properties
of THCV are more difficult to define. In low doses, THCV is believed to be an antagonist of the CB1 receptor. In high doses, however,
THCV is believed to be an agonist of the CB1 receptor similar to THC. Unlike THC, which increases appetite, THCV has the opposite
effect of suppressing appetite making it a popular research target for weight loss and diabetes drugs. Further, THCV is also believed
to have anti-inflammatory, anti-anxiety and anti-seizure properties, as well as being effective at reducing tremors associated
with central nervous system conditions such as amyotrophic lateral sclerosis, or ALS, Parkinson’s disease and Alzheimer’s
disease.
That fact that CBG
and THCV already demonstrate biological activity gives us reason to believe that their derivatives will also be biologically active.
These derivatives may also demonstrate different biological activity than their respective parent compounds.
Once we complete the
chemical design and synthesis of these derivative cannabinoid compounds, we intend to test them in in vitro receptor binding assays
to determine the best potential indications for further development.
Commercialization
Given our stage of
development, we have not yet established a commercial organization or distribution capabilities. We may build our own commercial
infrastructure or utilize contract reimbursement specialists, sales people, medical education specialists, distribution or other
collaboration arrangements and take other steps to establish the necessary commercial infrastructure at such time as we believe
that one of our drug candidates is approaching marketing approval.
Competition
Our industry is characterized
by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face potential competition
from many different sources, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug
delivery companies and academic and research institutions. Many of our potential competitors have substantially greater financial,
scientific, technical, intellectual property, regulatory and human resources than we do, and greater experience than we do commercializing
products and developing drug candidates, including obtaining FDA and other regulatory approvals for drug candidates. Consequently,
our competitors may develop products for indications we pursue that are more effective, better tolerated, more widely-prescribed
or accepted, more useful and less costly, and they may also be more successful in manufacturing and marketing their products. We
also face competition from third parties in recruiting and retaining qualified personnel, establishing clinical trial sites and
enrolling patients for clinical trials and in identifying and acquiring or in-licensing new products and drug candidates.
Intellectual Property
The proprietary nature
of, and protection for, our drug candidates and our discovery programs, processes and know-how are important to our business. We
need to rely upon our licensors to obtain patent protection in the United States and internationally for our drug candidates and
our discovery programs, and any other inventions to which we have rights under our license agreements, where available and when
appropriate. To the extent we will be able to do so, our policy will be to work with our licensors to pursue, maintain our licensed
patents and defend patent rights and to protect the technology, inventions and improvements that are commercially important to
the development of our business. We will also rely on trade secrets that may be important to the development of our business.
Our commercial success
will depend in part on obtaining and maintaining patent protection by collaborating with our licensors and trade secret protection
of our current and future drug candidates and the methods used to develop and manufacture them, as well as successfully defending
any patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or
importing our products depends on the extent to which we have rights under valid and enforceable patents or trade secrets that
cover these activities. We cannot be sure that patents will be granted with respect to any of pending patent applications our licensors
file or with respect to any patent applications our licensors file in the future, nor can we be sure that any existing patents
or any patents that may be granted in the future upon which we rely will be commercially useful in protecting our drug candidates,
discovery programs and processes. For this and more comprehensive risks related to our licensed intellectual property, please see
“Risk Factors — Risks Relating to Our Intellectual Property.”
Intellectual Property Licenses
We acquired exclusive,
worldwide rights from City of Hope for CO-sTiRNA, including the patent rights and associated know-how. Under the COH License Agreement,
we are required to commercially develop CO-sTiRNA, including through all phases of clinical trials, and to eventually obtain marketing
approval. Upon the grant of the COH License Agreement, we paid City of Hope an upfront license fee and reimbursed certain patent
fees and expenses in an aggregate amount of approximately $284,000, and issued 200,000 shares of our common stock and 47,965 of
our W warrants. Over the course of the COH License Agreement, we are required to attain certain diligence milestones and are obligated
to raise a prescribed amount of capital to support the costs associated with development of CO-sTiRNA. We also are required to
make development milestone payments, which total approximately $3.5 million in the aggregate, for each indication. These milestone
payments are tied to achieving certain clinical milestones and obtaining marketing approvals. We also must make sales milestone
payments tied to achieving net sales starting at $50 million in a year up to $1 billion in a year, which payments total $57.5 million
in the aggregate. We are also subject to paying base royalties on sales, such royalty rate being a mid-single digit percentage
of sales, subject to minimum annual royalties. Royalty terms are determined on a country-by-country basis and extend to the later
of 15 years following the expiration of patent protection in such country or, in cases of know-how, 15 years from the first commercial
sale. Starting in 2021, we also must pay an annual license maintenance fee, such fee being less than $50,000 per year, which will
be a credit against base royalties in a license year once we become obligated to pay such royalties in a license year. The COH
License Agreement is subject to termination upon an uncured material breach by either party or our bankruptcy.
Through our wholly-owned
subsidiary, Vital Spark, Inc. or VSI, we own a license from the NIH, pursuant to which we have an exclusive, worldwide rights with
respect to three patents related to cannabinoid receptor mediating compounds for use in connection with SSc. We are required under
the license agreement to use reasonable commercial efforts to bring the licensed products and licensed processes to practical application,
which includes adhering to an agreed upon commercial development plan and meeting certain performance benchmarks. Upon execution
of the license agreement, we paid a license fee and reimbursed certain patent fees and expenses in an aggregate amount of approximately
$120,000. In addition, we are required to pay to NIH minimum annual royalties, such minimum amount being $25,000 per year, which
are credited against any earned royalties on product sales, such royalty rate being less than 5% of product sales. We are also
obligated to pay royalties in connection with the achievement of certain prescribed milestones tied to clinical development and
market approvals in prescribed countries. Such milestone payments total approximately $2,100,000 in the aggregate. We are responsible
for funding the patent prosecution costs NIH incurs for the patents licensed to us. We have the right to surrender the license
in any country for which we determine not to fund patent prosecution costs.
We have two
license agreements with Yissum. The first is to the patent and associated research results relating to the CBD combinations
with approved anesthetics resulting from our MOU with Dr. Binshtok. The second is to the research results relating to the
synthesis of novel cannabinoid dual-action compounds and novel chemical derivatives of CBG and THCV resulting from our MOU
with Dr. Tsevlikhovsky. Under the first license agreement and under the second license agreement, solely with respect to
regulated products, we have agreed to pay milestone payments upon achievement of certain clinical development and product
approval milestones. The first of these payments is due upon dosing of the first patient in the first in-human clinical
trial. The second becomes due upon the dosing of the first patient in a pivotal PhaseIIb/ Phase III trial. The last three
payments are tied to marketing approvals in the United States and in other countries. These milestone payments total
approximately $1,225,000 in the aggregate for each license agreement. We will also pay percentage royalties tied to sales of
any drug product that may arise in the future based upon the licensed patent. Such percentage royalty rate is less than 5% of
product sales. This license is worldwide subject, however, to our funding patent prosecutions on a country by country basis.
We have agreed, at a minimum, to fund patent prosecutions in the United States, Canada, Japan, China, India, the United
Kingdom, Germany and France. In addition, under our second license agreement, as for non-regulated products, we have agreed
to pay two milestone payments totaling $100,000, the first payment being due upon establishing the commercial optimization of
any product we develop and the second upon developing a small-scale pilot manufacturing plant. The royalty rate for
non-regulated products is 60% of the percentage royalty rate for regulated products.
Manufacturing
We do not own or operate,
and currently have no plans to establish, any manufacturing facilities for final manufacture. We intend to rely, on third parties
for the manufacture of our drug candidates for future pre-clinical and clinical testing, as well as for commercial manufacture
of any products that we may commercialize.
For our future drug
candidates, we aim to identify and qualify manufacturers and researchers to provide the application program interface, or API,
and fill-and-finish services prior to submission of an NDA to the FDA. We expect to continue to fund the development of drug candidates
that can be produced cost-effectively at contract manufacturing facilities.
Marketing
Given our stage of
development, we have not yet established marketing capabilities. We may perform marketing functions ourselves or through third
parties, or may take other steps to establish the necessary marketing infrastructure if any of our drug candidates are approved.
Government Regulation and Product Approval
Governmental authorities
in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the
research, development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and
export and import of products such as those we are developing. Our drug candidates must be approved by the FDA through the NDA,
process before they may be legally marketed in the United States and by the European Medical Associate, or EMA, through the Marketing
Authorization Application, or MAA, process before they may be legally marketed in Europe. Our drug candidates will be subject to
similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and
the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of
substantial time and financial resources.
Regulation of Cannabis and Cannabinoids
We intend to
pursue FDA approval, as well as other U.S. and non-U.S. regulatory approvals, for our proprietary drug candidates. We believe
that the rigorous safety and efficacy testing required to obtain FDA approval will distinguish our drugs from the
proliferation of commoditized cannabinoid products in the marketplace. FDA approval will also allow us to legally market our
drugs with claims of therapeutic benefit for specific diseases and indications which cannot be done with non-FDA approved
products. Finally, obtaining approval will allow us to overcome the legal obstacles that exist under state and federal laws
to the marketing, selling and transportation of cannabinoids and cannabinoid associated products. By pursuing this strategy,
we hope to gain a competitive advantage over non-approved products and encourage healthcare providers to prescribe our
products for the diseases and indications for which our products are intended at higher prices when compared to non-approved
products.
DEA Regulation
Cannabis, cannabis
extracts and some cannabinoids are regulated as “controlled substances” as defined in the CSA, which establishes registration,
security, recordkeeping, reporting, storage, distribution and other requirements administered by the DEA. The DEA is concerned
with the control of handlers of controlled substances, and with the equipment and raw materials used in their manufacture and packaging,
in order to prevent loss and diversion into illicit channels of commerce.
The DEA regulates
controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established
medicinal use, and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II,
III, IV or V, with Schedule II substances considered to present the highest risk of abuse and Schedule V substances the
lowest relative risk of abuse among such substances. Cannabis, cannabis extracts and some cannabinoids are listed by the DEA
as Schedule I controlled substances under the CSA, except that the DEA has de-scheduled CBD included in Epidiolex. The
manufacture, shipment, storage, sale and use of such Schedule I controlled substances are subject to a high degree of
regulation. Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports
any controlled substance. The registration is specific to the particular location, activity and controlled substance
schedule. For example, separate registrations are needed for import and manufacturing, and each registration will specify
which schedules of controlled substances are authorized.
The DEA typically inspects
a facility to review its security measures prior to issuing a registration. Security requirements vary by controlled substance
schedule, with the most stringent requirements applying to Schedule I and Schedule II substances. Required security measures include
background checks on employees and physical control of inventory through measures such as cages, surveillance cameras and inventory
reconciliations. The registered entity must maintain records for the handling of all controlled substances, and must make periodic
reports to the DEA. These include, for example, distribution reports for Schedule I and II controlled substances, Schedule III
substances that are narcotics, and other designated substances. The registered entity must also report thefts or losses of any
controlled substance, and obtain authorization to destroy any controlled substance. In addition, special authorization and notification
requirements apply to imports and exports.
In addition, a DEA
quota system controls and limits the availability and production of controlled substances in Schedule I or II. Distributions of
any Schedule I or II controlled substance must also be accompanied by special order forms, with copies provided to the DEA. The
DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year,
although the DEA has substantial discretion in whether or not to make such adjustments. To meet its responsibilities, the DEA conducts
periodic inspections of registered establishments that handle controlled substances. In the event of non-compliance, the DEA may
seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain
circumstances, violations could lead to criminal prosecution.
State Regulation
The states also maintain
separate controlled substance laws and regulations, including licensing, recordkeeping, security, distribution, and dispensing
requirements. State authorities, including Boards of Pharmacy, regulate use of controlled substances in each state. Failure to
maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances,
can result in enforcement action that could have a material adverse effect on our business, operations and financial condition.
The Single Convention on Narcotics Drugs
1961
Many countries, including
the United States, are parties to the 1961 Single Convention on Narcotic Drugs, or the Single Convention, which is an international
treaty that governs international trade and domestic control of narcotic substances, including cannabis and cannabis extracts.
The Single Convention requires all parties to take measures to limit the production, manufacture, export, import, distribution
of, trade in, and use and possession of cannabis exclusively to medical and scientific purposes. In particular, the Single Convention
requires member countries to establish a government agency to oversee the cultivation of marijuana and establish a monopoly on
the wholesale trade of marijuana, and it provides that this role must be filled by a single government agency if the member country’s
constitution so permits.
National Institute on Drug Abuse
Pursuant to the
Single Convention, National Institute on Drug Abuse, or NIDA, oversees the cultivation of research-grade cannabis for
medicinal research on behalf of the United States Government. NIDA has historically fulfilled this obligation through a
contract that it administers with University of Mississippi, or UM. UM has been the sole NIDA contractor to grow cannabis for
research purposes since 1968. The contract is open for competitive bidding at periodic intervals. Since 1999, the term of the
contract has been five years. UM engaged in a competitive bidding process for the next contract interval and was awarded the
contract in 2015. Under the NIDA contract, UM grows, harvests, stores, ships and analyzes cannabis of different varieties, as
NIDA requires. In August 2016 the DEA announced that it would consider granting registrations for the cultivation of cannabis
for research and development purposes outside of the NIDA contract process. We are not aware of any entity that has received
such a registration under this process.
UM has represented
that it also grows cannabis for purposes of researching cannabis extracts, and has in the past grown cannabis, purified cannabis
extracts, and distributed extracts for purposes of developing drug candidates, separate and apart from its contract with NIDA.
UM has indicated that it conducted these activities pursuant to separate registrations from the DEA and that it plans to seek the
necessary additional DEA registrations to conduct the contemplated activities in connection with our partnership, in compliance
with applicable law and the United States’ obligations under the Single Convention. However, there is a risk that regulatory
authorities may disagree and decline to authorize UM to engage in these activities.
United States Food and Drug Administration
Regulation
NDA Approval Processes
In the United States,
the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and implementing regulations. Failure to comply
with the applicable U.S. requirements at any time during the product development process or approval process, or after approval,
may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These
sanctions could include:
• refusal to approve pending
applications;
• withdrawal of an approval;
• imposition of a clinical
hold;
• warning letters;
• product seizures;
• total or partial suspension
of production or distribution; or
• injunctions, fines, disgorgement,
or civil or criminal penalties.
The process required by the FDA
before a drug may be marketed in the United States generally involves the following:
• completion of nonclinical
laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practices, or GLPs, or other applicable
regulations;
• submission to the FDA
of an Investigational New Drug application, or IND, which must become effective before human clinical trials may begin;
• performance of adequate
and well-controlled human clinical trials according to Good Clinical Practices, or GCPs, to establish the safety and efficacy of
the proposed drug for its intended use;
• submission to the FDA
of an NDA;
• satisfactory completion
of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current
Good Manufacturing Practices, or cGMPs, to assure that the facilities, methods and controls are adequate to preserve the drug’s
identity, strength, quality and purity; and
• FDA review and approval
of the NDA.
Once a pharmaceutical
candidate is identified for development, it will enter the pre-clinical or nonclinical testing stage. Nonclinical tests include
laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the
results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some
nonclinical testing may continue even after the IND is submitted. In addition to including the results of the nonclinical studies,
the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be
used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination.
The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places
the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials
can begin. A clinical hold may occur at any time during the life of an IND, and may affect one or more specific studies or all
studies conducted under the IND.
All clinical trials
must be conducted under the supervision of one or more qualified investigators in accordance with GCPs. They must be conducted
under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and
the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress
reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must timely report to
FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction
over that listed in the protocol or investigation brochure, or any findings from other studies or animal or in vitro testing that
suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB, at each institution participating
in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also
approve the information regarding the trial and the consent form that must be provided to each research subject or the subject’s
legal representative, monitor the study until completed and otherwise comply with IRB regulations.
Human clinical trials
are typically conducted in three sequential phases that may overlap or be combined:
• Phase 1. The drug
is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution
and elimination. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product
may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
• Phase 2. Clinical
trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to preliminarily
evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
• Phase 3. Clinical
trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically
dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide
an adequate basis for product labeling.
Human clinical trials
are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may
suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being
exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution
if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated
with unexpected serious harm to patients.
During the development
of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to the submission
of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide
an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next
phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present
their plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the new drug. If a Phase 2 clinical
trial is the subject of discussion at the end of Phase 2 meeting with the FDA, a sponsor may be able to request a Special Protocol
Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis
that will form the primary basis of an efficacy claim.
According to published
guidance on the SPA process, a sponsor which meets the prerequisites may make a specific request for a SPA and provide information
regarding the design and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the
request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional
information. A SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial
begins. If a written agreement is reached, it will be documented and made part of the record. The agreement will be binding on
the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor
and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the
drug was identified after the testing began.
Concurrent with clinical
trials, sponsors usually complete additional animal safety studies and also develop additional information about the chemistry
and physical characteristics of the drug and finalize a process for manufacturing commercial quantities of the product in accordance
with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the
manufacturer must develop methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging
must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable
deterioration over its proposed shelf-life.
The results of product
development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and
other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting
approval to market the product. The submission of an NDA is subject to the payment of user fees, but a waiver of such fees may
be obtained under specified circumstances. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for
substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing.
In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review
before the FDA accepts it for filing.
Once the submission
is accepted for filing, the FDA begins an in-depth review. NDAs receive either standard or priority review. A drug representing
a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA may refuse to approve
an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data
are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to
determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant.
The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved
and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested.
Expedited Review and Approval
The FDA has
various programs, including Fast Track, priority review, and accelerated approval, which are intended to expedite or simplify
the process for reviewing drugs, and/or provide for the approval of a drug on the basis of a surrogate endpoint. Even if a
drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for
qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for
these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs
and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to
facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and
fill unmet medical needs. Priority review is designed to give drugs that offer major advances in treatment or provide a
treatment where no adequate therapy exists an initial review within six months as compared to a standard review time of ten
months. Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate
early and frequent meetings with a sponsor of a Fast Track designated drug and expedite review of the application for a drug
designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an
earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills
an unmet medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or physical sign used
as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA
may require that a sponsor of a drug candidate receiving accelerated approval perform post-marketing clinical trials.
In the recently enacted
Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress encouraged the FDA to utilize innovative and flexible
approaches to the assessment of products under accelerated approval. The law requires the FDA to issue related draft guidance within
a year after the law’s enactment and also promulgate confirming regulatory changes.
The Hatch-Waxman Act
In seeking approval
for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product.
Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved
Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can,
in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA
provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed
drug and has been shown through bioequivalence testing to be bioequivalent to the listed drug. Other than the requirement for bioequivalence
testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety
or effectiveness of their drug product. Drugs approved in this way are considered to be therapeutically equivalent to the listed
drug, are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists
under prescriptions written for the original listed drug in accordance with state law.
The ANDA applicant
is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically,
the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii)
the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv)
the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section
viii statement, certifying that its proposed ANDA labeling does not contain (or carves out) any language regarding the patented
method-of-use, rather than certify to a listed method-of-use patent.
If the applicant does
not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced
product have expired.
A certification that
the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called
a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also
send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA.
The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification.
The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents
the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision
in the infringement case that is favorable to the ANDA applicant.
The ANDA application
also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has
expired.
Upon NDA approval of
a new chemical entity or NCE, which is a drug that contains no active moiety that has been approved by the FDA in any other NDA,
that drug receives five years of marketing exclusivity during which time the FDA cannot receive any ANDA or 505(b)(2) application
seeking approval of a drug that references a version of the NCE drug. Certain changes to a drug, such as the addition of a new
indication to the package insert, are associated with a three-year period of exclusivity during which the FDA cannot approve an
ANDA or 505(b)(2) application that includes the change.
An ANDA or 505(b)(2)
application may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed. If there is no listed
patent in the Orange Book, there may not be a Paragraph IV certification and thus no ANDA or 505(b)(2) application may be filed
before the expiration of the exclusivity period.
For a botanical drug,
the FDA may determine that the active moiety is one or more of the principal components or the complex mixture as a whole. This
determination would affect the utility of any five-year exclusivity as well as the ability of any potential generic competitor
to demonstrate that it is the same drug as the original botanical drug.
Five-year and three-year
exclusivities do not preclude FDA approval of a 505(b)(1) application for a duplicate version of the drug during the period of
exclusivity, provided that the 505(b)(1) applicant conducts or obtains a right of reference to all of the pre-clinical studies
and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
After NDA approval,
owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension is calculated
as half of the drug’s testing phase — the time between IND submission and NDA submission — and
all of the review phase — the time between NDA submission and approval up to a maximum of five years. The time
can be shortened if the FDA determines that the applicant did not pursue approval with due diligence. The total patent term after
the extension may not exceed 14 years.
For patents that might
expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases
the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent
extension is reduced by one year. The director of the PTO must determine that approval of the drug covered by the patent for which
a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been
submitted.
Orphan Drug Designation
Under the Orphan Drug
Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition, which is generally a disease
or condition that affects fewer than 200,000 individuals in the United States. Orphan product designation must be requested before
submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan
use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of regulatory
review and approval process. In addition to the potential period of exclusivity, orphan designation makes a company eligible for
grant funding of up to $500,000 per year for four years to defray costs of clinical trial expenses, tax credits for clinical research
expenses and potential exemption from the FDA application user fee.
If a product that has
orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation,
the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other applications to market the same
drug for the same indication for seven years, except in limited circumstances, such as (i) the drug’s orphan designation
is revoked; (ii) its marketing approval is withdrawn; (iii) the orphan exclusivity holder consents to the approval of another applicant’s
product; (iv) the orphan exclusivity holder is unable to assure the availability of a sufficient quantity of drug; or (v) a showing
of clinical superiority to the product with orphan exclusivity by a competitor product. If a drug designated as an orphan product
receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan drug exclusivity.
We intend to apply for orphan drug designation for MRI-1867 for SSc and any other of our drug candidates that we develop for diseases
or conditions that satisfy the requirements for orphan drug designation. There can be no assurance that we will receive orphan
drug designation for MRI-1867 for SSc, or any other drug candidates that we may develop for the treatment of SSc or other orphan
diseases.
Pediatric Exclusivity and Pediatric
Use
Under the Best
Pharmaceuticals for Children Act, or BPCA, certain drugs may obtain an additional six months of exclusivity, if the sponsor
submits information requested in writing by the FDA, or a Written Request, relating to the use of the active moiety of the
drug in children. The FDA may not issue a Written Request for studies on unapproved or approved indications or where it
determines that information relating to the use of a drug in a pediatric population, or part of the pediatric population, may
not produce health benefits in that population.
To receive the six-month
pediatric market exclusivity, we would have to receive a Written Request from the FDA, conduct the requested studies in accordance
with a written agreement with the FDA or, if there is no written agreement, in accordance with commonly accepted scientific principles,
and submit reports of the studies. A Written Request may include studies for indications that are not currently in the labeling
if the FDA determines that such information will benefit the public health. The FDA will accept the reports upon its determination
that the studies were conducted in accordance with and are responsive to the original Written Request or commonly accepted scientific
principles, as appropriate, and that the reports comply with the FDA’s filing requirements.
In addition, the Pediatric
Research Equity Act, or PREA, requires all applications (or supplements to an application) submitted under section 505 of the FDCA
(21 U.S.C. Section 355) for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration
to contain a pediatric assessment unless the applicant has obtained a waiver or deferral. It also authorizes the FDA to require
holders of approved NDAs for marketed drugs to conduct pediatric studies under certain circumstances. In general, PREA applies
only to those drugs developed for diseases and/or conditions that occur in both the adult and pediatric populations. Products intended
for pediatric-specific indications will be subject to the requirements of PREA only if they are initially developed for a subset
of the relevant pediatric population.
As part of the FDASIA,
Congress reauthorized both BPCA and PREA, which were slated to expire on September 30, 2012, and made both laws permanent.
Post-approval Requirements
Once an approval is
granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after
the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product,
such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.
In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized,
and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.
Any drug products manufactured
or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:
• record-keeping requirements;
• reporting of adverse
experiences with the drug;
• providing the FDA with
updated safety and efficacy information;
• drug sampling and distribution
requirements;
• notifying the FDA and
gaining its approval of specified manufacturing or labeling changes; and
• complying with FDA promotion
and advertising requirements.
Drug manufacturers
and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments
with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies
for compliance with cGMP and other laws.
From time to
time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions
governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and
guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and products. It
is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed
or what the impact of such changes, if any, may be.
Regulation Outside of the United
States
In addition to regulations
in the United States, we will be subject to regulations of other countries governing clinical trials and commercial sales and distribution
of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities
of countries outside of the United States before we can commence clinical trials in such countries and approval of the regulators
of such countries or economic areas, such as the European Union, before we may market products in those countries or areas. The
approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly
from place to place, and the time may be longer or shorter than that required for FDA approval.
In the European Union,
our future products may also be subject to extensive regulatory requirements. Similar to the United States, the marketing of medicinal
products is subject to the granting of marketing authorizations by regulatory agencies. Also, as in the United States, the various
phases of pre-clinical and clinical research in the European Union are subject to significant regulatory controls.
Medicinal products
require a marketing authorization before they may be placed on the market in the European Economic Area, or EEA, comprising the
member states of the European Union as well as Iceland, Liechtenstein and Norway. There are various application procedures available,
depending on the type of product involved. The centralized procedure gives rise to marketing authorizations that are valid throughout
the EEA. Applicants file marketing authorization applications with the European Medicines Agency, or EMA, where they are reviewed
by a relevant scientific committee, in most cases the Committee for Medicinal Products for Human Use, or CHMP. The EMA forwards
CHMP opinions to the European Commission, which uses them as the basis for deciding whether to grant a marketing authorization.
The centralized procedure is compulsory for medicinal products that (1) are derived from specified biotechnology processes, (2)
contain a new active substance (not yet approved on November 20, 2005) indicated for the treatment of certain diseases, such as
HIV/AIDS, cancer, diabetes, neurodegenerative disorders, viral diseases or autoimmune diseases and other immune dysfunctions, (3)
are orphan medicinal products or (4) are advanced therapy medicinal products (such as gene therapy, somatic cell therapy and tissue
engineered products). For medicines that do not fall within these categories, an applicant may voluntarily submit an application
for a centralized marketing authorization to the EMA, as long as the CHMP agrees that (i) the medicine concerned contains a new
active substance (not yet approved on November 20, 2005), (ii) the medicine is a significant therapeutic, scientific, or technical
innovation, or (iii) if its authorization under the centralized procedure would be in the interest of public health.
For those medicinal
products for which the centralized procedure is not available, the applicant must submit marketing authorization applications to
the national medicines regulators through one of three procedures: (1) a national procedure, which results in a marketing authorization
in a single EEA member state; (2) the decentralized procedure, in which applications are submitted simultaneously in two or more
EEA member states; and (3) the mutual recognition procedure, which must be used if the product has already been authorized in at
least one other EEA member state, and in which the EEA member states are required to grant an authorization recognizing the existing
authorization in the other EEA member state, unless they identify a serious risk to public health.
Marketing authorization
applications must usually include the results of clinical trials. Clinical trials of medicinal products in the EEA must be conducted
in accordance with EEA and national regulations and the International Conference on Harmonization guidelines on GCP. Prior to commencing
a clinical trial in a particular EEA member state, the sponsor must obtain a clinical trial authorization from the competent authority
and a positive opinion from an independent ethics committee.
In the EEA,
companies developing a new medicinal product must agree a Pediatric Investigation Plan (PIP) with the EMA and must conduct
pediatric clinical trials in accordance with that PIP, unless a waiver applies, e.g., because the relevant disease or
condition occurs only in adults. The marketing authorization application for the product must include the results of
pediatric clinical trials conducted in accordance with the PIP, unless a waiver applies, or a deferral has been granted, in
which case the pediatric clinical trials must be completed at a later date.
Reimbursement
Sales of any product
we successfully develop will depend, in part, on the extent to which the costs of our products will be covered by third-party payors,
such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly
challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become
a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state
legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price
controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment
measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our
net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies,
they may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient
to allow us to sell our products on a profitable basis.
The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, or the MMA, imposed new requirements for the distribution and pricing of prescription
drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private
entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug
benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D
coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and
each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However,
Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though
not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed
and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase
demand for our products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part
D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to
drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting
their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from
non-governmental payors.
The American Recovery
and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for
the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare
Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures
will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies
for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such
product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness
research demonstrating benefits in a competitor’s product could adversely affect the sales of our drug candidates. If third-party
payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products
as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a
profitable basis.
The Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010,
collectively referred to as the ACA, enacted in March 2010, is expected to have a significant impact on the health care
industry. ACA is expected to expand coverage for the uninsured while at the same time containing overall healthcare costs.
With regard to pharmaceutical products, among other things, ACA is expected to expand and increase industry rebates for drugs
covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot
predict the impact of ACA on pharmaceutical companies, as many of the ACA reforms require the promulgation of detailed
regulations implementing the statutory provisions which has not yet occurred. In addition, some members of the U.S. Congress
have been seeking to overturn at least portions of the legislation and we expect they will continue to review and assess this
legislation and alternative health care reform proposals. Any legal challenges to ACA, as well as Congressional efforts to
repeal ACA, add to the uncertainty of the legislative changes enacted as part of ACA.
In addition, in some
non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing
drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict
the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices
of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt
a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There
can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow
favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union
do not follow price structures of the United States and generally tend to be significantly lower.
Employees
Our executive management
consists of four members, one of whom, our President, is employed pursuant to an employment agreement, and three of whom provide
services to us pursuant to a management services agreement, or MSA.
The executive services
of our Chairman, Vice Chairman and Executive Committee Chairman are provided to us pursuant to an MSA, or Portfolio Services MSA,
between HCFP/Portfolio Services LLC, or Portfolio Services, and us. Upon closing of the Transactions and as contemplated thereby,
we entered into an MSA with an affiliate of Paul E. Hopper, or Hopper MSA. As further contemplated by and in connection with the
Transactions, Mr. Hopper assumed the position of Co-Chairman. In connection with Mr. Hopper’s need to commit greater time
to another biopharmaceutical company, unrelated to us, undertaking a series of financing transactions, including an IPO, Mr. Hopper
resigned as our Co-Chairman. We intend to replace the pre-existing MSA for services relating to Dr. Morris C. Laster and the Hopper
MSA, although there can be no assurance that we will actually enter into any such MSAs. Mr. Hopper continues to serve as a non-officer
and non-employee director of the company.
Our executive officers
are supported by additional personnel associated with the entities that provide services to the company pursuant to our management
services agreements. We also utilize consultants in the ordinary course of business with expertise in various aspects of the drug
development process.
Item 1A. Risk Factors.
RISK FACTORS
An investment in our common
stock involves a high degree of risk. You should consider carefully all of the material risks described below, together with the
other information contained in this Annual Report and our other filings with the SEC, before making a decision to invest in our
common stock. Investors should be aware that it is not possible to predict or identify all such factors and that the following
is not meant to be a complete discussion of all potential risks or uncertainties. If any of the following risk factors actually
occur, our business, financial condition, results of operations and prospects could suffer.
Risks Relating to Our Business and Strategy
The novel coronavirus could have a material
adverse impact on our business, results of operations, financial condition, cash flows or liquidity.
We note that the spread of the
novel coronavirus, which causes the disease now known as COVID-19 (the “Coronavirus”), is a rapidly evolving public
health emergency with global implications and at present we, as is common across industries and geographies, recognize that we
could be adversely affected by a range of factors and developments, largely beyond our control, and we are unable to predict the
outcomes of this even on a short-term basis. We continue to monitor the situation, among other objectives, to assess the impact
of developments on our financial condition, results of operations, cash flows and liquidity.
We currently are unable to predict
the duration and severity of the spread of the Coronavirus, and responses thereto, on our business and operations, and on our results
of operations, financial condition, cash flow and liquidity, as these depend on rapidly evolving developments, which are highly
uncertain and will be a function of factors beyond our control, such as the speed of contagion, the implementation of effective
preventative and containment measures, the development of effective medical solutions, the timing and scope of governmental restrictions
on public gatherings, mobility and other activities, financial and other market reactions to the foregoing, and reactions and responses
of the populace both in affected regions and regions yet to be affected. While we expect we will suffer adverse effects, the more
severe the outbreak and the longer it lasts, the more likely it is that the effects on us and our business will be materially adverse.
We face competition from other biotechnology
and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical
industries are intensely competitive and subject to rapid and significant technological change. We have competitors in the United
States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology companies,
specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of our competitors have
greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing
organizations. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory
approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research,
sales and marketing capabilities and collaborative arrangements in our target markets with leading companies and research institutions.
Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license
novel compounds that could make the drug candidates that we develop obsolete. As a result of all of these factors, our competitors
may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing drugs for diseases
that we are targeting before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large, established companies. In addition, many universities and private and public research
institutes may become active in our target disease areas. Our competitors may succeed in developing, acquiring or licensing on
an exclusive basis, technologies and drug products that are more effective or less costly than our drug candidates that we are
currently developing or that we may develop, which could render our products obsolete and noncompetitive.
We believe that our ability to successfully compete
will depend on, among other things:
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the results of our pre-clinical and clinical trials;
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our ability to recruit and enroll patients for clinical
trials;
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the efficacy, safety and reliability of our drug candidates;
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the speed at which we develop drug candidates;
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our ability to design and successfully execute appropriate
clinical trials;
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our ability to maintain a good relationship with regulatory
authorities;
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the timing and scope of regulatory approvals, if any;
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our ability to commercialize and market any of our drug
candidates that receive regulatory approval;
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the price of our products;
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adequate levels of reimbursement under private and governmental
health insurance plans, including Medicare;
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our ability to protect our intellectual property rights
related to our products;
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our ability to manufacture and sell commercial quantities
of any approved products to the market; and
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acceptance of our drug candidates by physicians and other
health care providers.
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If our competitors market products
that are more effective, safer or less expensive than our future products, if any, or that reach the market sooner than our future
products, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid
technological change. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological
advances or products developed by our competitors may render our drug candidates obsolete, less competitive or not economical.
We intend to utilize third-party contractors
for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions
ourselves.
We intend to outsource substantial
portions of our operations to third-party service providers, including the conduct of future pre-clinical and clinical studies,
collection and analysis of data and manufacturing. Our agreements with third-party service providers and contract research organizations,
or CROs, will be on a study-by-study and project-by-project basis. Typically, we may terminate the agreements with notice and are
responsible for the supplier’s previously incurred costs. In addition, any CRO that we retain will be subject to the FDA’s
and European Medicine Agency’s, or EMA’s, regulatory requirements and similar standards outside of the United States
and Europe and we do not have control over compliance with these regulations by these providers. Consequently, if these providers
do not adhere to applicable governing practices and standards, the development, manufacturing and commercialization of our drug
candidates could be delayed or stopped, which could severely harm our business and financial condition.
Because we intend to rely on
third parties, our internal capacity to perform these functions will be limited to management oversight. Outsourcing these functions
involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to
perform at all. It is possible that we could experience difficulties in the future with our third-party service providers. In addition,
the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase
the risk that this information will be misappropriated. There are a limited number of third-party service providers that specialize
or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party
service providers can be difficult, time consuming and cause delays in our development programs. Our operations are currently conducted
pursuant to management services agreements, which limits the internal resources we have available to identify and monitor third-party
service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service
providers in the future, our business may be adversely affected, and we may be subject to the imposition of civil or criminal penalties
if their conduct of clinical trials violates applicable law.
A variety of risks associated with potential
international business relationships could materially adversely affect our business.
We may enter into agreements
with third parties for the development and commercialization of our drug candidates in international markets. International business
relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations,
including:
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differing regulatory requirements for drug approvals
internationally;
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potentially reduced protection for our licensed intellectual
property rights;
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potential third-party patent rights in countries outside
of the United States;
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the potential for so-called “parallel importing,”
which is what occurs when a local seller, faced with relatively high local prices, opts to import goods from another jurisdiction
with relatively low prices, rather than buying them locally;
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unexpected changes in tariffs, trade barriers and regulatory
requirements;
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economic weakness, including inflation, or political
instability, particularly in non-U.S. economies and markets, including several countries in Europe;
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compliance with tax, employment, immigration and labor
laws for employees traveling abroad;
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taxes in other countries;
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foreign currency fluctuations, which could result in
increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
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workforce uncertainty in countries where labor unrest
is more common than in the United States;
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production shortages resulting from any events affecting
raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geo-political actions,
including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.
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We will need to expand our operations and
increase the size of our company, and we may experience difficulties in managing growth.
As we increase the number of
our ongoing drug development programs and our drug candidates continue pre-clinical studies and, in the future, clinical trials,
we will need to increase our drug development, scientific and administrative headcount to manage these programs. In addition, we
will need to increase our general and administrative capabilities. Our management, personnel and systems currently in place may
not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires
that we:
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successfully attract and recruit new employees or consultants
with the expertise and experience we will require;
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manage clinical programs effectively, which we anticipate
being conducted at numerous clinical sites; and
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continue to improve our operational, financial and management
controls, reporting systems and procedures.
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If we are unable to successfully
manage this growth and increased complexity of operations, our business may be adversely affected.
We may not be able to manage our business
effectively if we are unable to attract and retain key personnel and consultants.
We may not be able to attract
or retain qualified management, finance, scientific and clinical personnel and consultants due to the intense competition for qualified
personnel and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary
personnel and consultants to accomplish our business objectives, we may experience constraints that will significantly impede the
achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
Our industry has experienced
a high rate of turnover of management personnel in recent years. We are highly dependent on the expertise of our officers,
directors, advisors and consultants, and our ability to implement our business strategy successfully could be seriously harmed
if we were to lose their services. Replacing executive officers, directors, key employees, advisors and consultants may be difficult
and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills
and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire and
retain employees and consultants from this limited pool is intense, and we may be unable to hire, train, retain or motivate these
additional key personnel and consultants. Our failure to retain key personnel or consultants could materially harm our business.
In addition, we have scientific
and clinical advisors and consultants who assist us in formulating our research, development and clinical strategies. These advisors
are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their
availability to us and typically they will not enter into non-compete agreements with us. If a conflict of interest arises between
their work for us and their work for another entity, we may lose their services. In addition, our advisors may have arrangements
with other companies to assist those companies in developing products or technologies that may compete with ours.
Security breaches, loss of data and other
disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose
us to liability, which could adversely affect our business and our reputation.
We utilize information technology
systems and networks to process, transmit and store electronic information in connection with our business activities. As the use
of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to
computer systems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our
systems and networks and the confidentiality, availability and integrity of our data, all of which are vital to our operations
and business strategy. There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating
their effects.
Despite the implementation of
security measures, our computer systems and those of our future CROs and other third-party service providers are vulnerable to
damage or disruption from hacking, computer viruses, software bugs, unauthorized access or disclosure, natural disasters, terrorism,
war, and telecommunication, equipment and electrical failures. In addition, there can be no assurance that we will promptly detect
any such disruption or security breach, if at all. Unauthorized access, loss or dissemination could disrupt our operations, including
our ability to conduct research and development activities, process and prepare company financial information, and manage various
general and administrative aspects of our business. To the extent that any such disruption or security breach results in a loss
of or damage to our data or applications, or inappropriate disclosure or theft of confidential, proprietary or personal information,
we could incur liability, suffer reputational damage or poor financial performance or become the subject of regulatory actions
by state, federal or non-US authorities, any of which could adversely affect our business.
Our future employees may engage in misconduct
or other improper activities, including noncompliance with regulatory standards, which could significantly harm our business.
We will be exposed to the risk
of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations
of the FDA and other U.S. and non-U.S. regulators, provide accurate information to the FDA and other U.S. and non-U.S. regulators,
comply with health care fraud and abuse laws and regulations in the United States and abroad, report financial information or data
accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care
industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, 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. Employee misconduct could also involve the improper
use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. Our board of directors plans to adopt a code of ethics and business conduct, but, even with such adoption, it is not
always possible to identify and deter employee misconduct. The precautions we take to detect and prevent this activity may not
be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other
actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against
us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on
our business, including the imposition of significant fines or other sanctions.
We face potential product liability exposure,
and if successful claims are brought against us, we may incur substantial liability for a drug candidate and may have to limit
its commercialization.
The use of our drug candidates
in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability
claims. Product liability claims may be brought against us or our potential future collaborators by participants enrolled in our
clinical trials, patients, health care providers or others using, administering or selling our products. If we cannot successfully
defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product
liability claims may result in:
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withdrawal of clinical trial participants;
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termination of clinical trial sites or entire trial programs;
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costs of related litigation;
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substantial monetary awards to patients or other claimants;
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decreased demand for our drug candidates and loss of
revenues;
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impairment of our business reputation;
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diversion of management and scientific resources from
our business operations; and
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the inability to commercialize our drug candidates.
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Our insurance policies may be expensive and
only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not know if we will be
able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial
amounts, which may adversely affect our financial position and results of operations.
Risks Relating to Our Financial
Position
We have never been profitable. Currently,
we have no products approved for commercial sale, and to date we have not generated any revenue from product sales. As a result,
our ability to reduce our losses and reach profitability is unproven, and we may never achieve or sustain profitability.
We have never generated revenue
and have never been profitable and do not expect to generate revenue or be profitable in the foreseeable future. We have not yet
begun any clinical trials or submitted any drug candidates for approval by regulatory authorities in the United States or elsewhere
for any of our drug candidates for any indication. We have incurred net losses since our inception, including net losses of $10,862,292
and $2,689,949 for the years ended December 31, 2020 and 2019, respectively. We had an accumulated deficit of $14,501,739
as of December 31, 2020.
To date, we have devoted most
of our financial resources to licensing our intellectual property, sponsoring research with academic and medical research institutions
and our corporate overhead. We have not generated any revenues from product sales. We expect to continue to incur losses for the
foreseeable future, and we expect these losses to increase when we commence clinical trials and seek regulatory approvals for,
our drug candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel
to support our drug development efforts and operations as a public company. We anticipate that any such losses could be significant
for the next several years as we begin clinical trials and IND-enabling studies for our drug candidates and related activities
required for regulatory approval and continue pursuing additional indications for our drug candidates in our future clinical trials.
If any of our drug candidates fail in future clinical trials or do not gain regulatory approval, or if our drug candidates do not
achieve market acceptance, we may never become profitable. As a result of the foregoing, we expect to continue to experience net
losses and negative cash flows for the foreseeable future. These net losses and negative cash flows have had, and will continue
to have, an adverse effect on our stockholders’ equity (deficit) and working capital.
Because of the numerous risks
and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount
of increased expenses or when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we
are required by the FDA, EMA or other regulatory authority to perform studies or trials in addition to those currently expected,
or if there are any delays in commencing or completing our clinical trials or the development of any of our drug candidates. The
amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues.
Our recurring losses from operations may raise
doubt regarding our ability to continue as a going concern.
Because our continuing existence
has been dependent upon raising capital to sustain our business, it raises doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has included an explanatory paragraph in its report on our consolidated financial
statements stating there is doubt about our ability to continue as a going concern. Such an opinion could materially limit our
ability to raise additional funds through the issuance of new debt or equity securities or otherwise. There is no assurance that
sufficient financing will be available when needed to allow us to continue as a going concern. The perception that we may not be
able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our
contractual obligations. See Note 1 of our consolidated financial statements.
We will require substantial additional funding,
which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce
or cease our operations.
We are currently funding the
development of our drug candidates and prospective drug candidates. Developing pharmaceutical products, including conducting research,
pre-clinical studies and clinical trials, is expensive. We will require additional future capital in order to begin and complete
the research, development and clinical and regulatory activities necessary to bring our drug candidates to market in the future.
We intend to utilize our resources
to continue our pre-clinical research studies, to fund the continued pre-clinical and subsequent clinical development of our drug
candidates and to fund the research of prospective new drug candidates. Our financial resources will also be used for general corporate
purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our licensed
patents to the extent required under our license agreements. Accordingly, we will continue to require substantial additional capital
to continue our research and development activities. Because successful development of our drug candidates is uncertain, we are
unable to estimate the actual funds we will require to complete research and development and commercialize our drug candidates
under development.
The amount and timing of our
future funding requirements will depend on many factors, including but not limited to:
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the progress, costs, results of and timing of our drug
candidate trials for the treatment of cancer and SSc, and the future pre-clinical and clinical development of our drug candidates
for other potential indications;
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the number and characteristics of drug candidates that
we pursue;
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the ability of our drug candidates to progress through
future pre-clinical and future clinical development successfully;
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our need to expand research and development activities;
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the costs associated with securing and establishing commercialization
and manufacturing capabilities;
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market acceptance of our drug candidates;
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the costs of acquiring, licensing or investing in businesses,
products, drug candidates and technologies;
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our ability to maintain, expand and defend the scope
of our intellectual property portfolio rights, including the amount and timing of any payments we may be required to make, or
that we may receive, in connection with the filing, prosecution, defense and enforcement of any patents or other intellectual
property rights;
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our need and ability to hire additional management and
scientific and medical personnel;
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the effect of competing technological and market developments;
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our need to implement additional internal systems and
infrastructure, including financial and reporting systems; and
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the economic and other terms, timing of and success of
our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future.
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Some of these factors are outside
of our control. Based on our current financial resources and our expected level of operating expenditures, we believe that we will
be able to fund our projected operating requirements for at least the next 12 months. This period could be shortened if there
are any significant increases in planned spending on development programs or more rapid progress on our development programs than
anticipated. Thereafter, we will need to obtain additional financing to fund future clinical trials for our drug candidates and
other expenses. We expect to finance our cash needs primarily through equity and debt offerings. We may also raise capital through
government or other third-party funding and grants, collaborations and development agreements, strategic alliances and licensing
arrangements.
Additional funding may not be
available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the
rights of our stockholders. In addition, the issuance of additional shares by us, or the possibility of such issuance, may cause
the market price of our shares, if and when established, to decline.
If we are unable to obtain funding
on a timely basis, we may be required to significantly curtail one or more of our drug development programs. We also could be required
to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of
our technologies or drug candidates or otherwise agree to terms unfavorable to us.
We have a limited operating history and we
expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult
to predict our future performance.
We are a biopharmaceutical company
with a limited operating history. Our operations to date have been limited to the research and development of our drug candidates.
We have not yet started clinical trials or obtained regulatory approvals for any of our drug candidates. Consequently, any predictions
made about our future success or viability may not be as accurate as they could be if we had a longer operating history or approved
products on the market. Our financial condition and operating results may significantly fluctuate from quarter-to-quarter or year-to-year
due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these
fluctuations include:
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any delays in regulatory review and approval of our drug
candidates in future pre-clinical development, including our ability to receive approval from the FDA and the EMA for our drug
candidates, and our planned clinical and pre-clinical studies and other work, as the basis for review and approval of our drug
candidates;
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delays in the commencement, enrollment and timing of
clinical trials;
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difficulties in identifying and treating patients suffering
from our target indications;
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the success of our future clinical trials through all
phases of pre-clinical and clinical development;
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potential side effects of our drug candidates that could
delay or prevent approval or cause an approved drug to be taken off the market;
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our ability to obtain additional funding to develop our
drug candidates;
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our ability to identify and develop additional drug candidates;
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market acceptance of our drug candidates;
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our ability to establish an effective sales and marketing
infrastructure directly or through collaborations with third parties;
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competition from existing products or new products that
may emerge;
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the ability of patients or healthcare providers to obtain
coverage or sufficient reimbursement for our products;
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our ability to adhere to clinical study requirements
directly or with third parties such as contract research organizations, or CROs;
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our dependency on third-party manufacturers to manufacture
our products and key ingredients;
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our ability to establish or maintain collaborations,
licensing or other arrangements;
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the costs to us, and our ability and our third-party
collaborators’ ability to obtain, maintain and protect our licensed intellectual property rights;
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our ability to adequately support future growth;
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our ability to attract and retain key personnel to manage
our business effectively; and
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potential product liability claims.
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Accordingly, the results of any
quarterly or annual periods should not be relied upon as indications of future operating performance.
Risks Relating to Controlled
Substances
Our drug candidates may contain controlled
substances, the use of which may generate public controversy.
Since some of our drug candidates
contain, or may be derived from, controlled substances, their regulatory approval may generate public controversy. Political and
social pressures and adverse publicity could lead to delays in approval of, and increased expenses for our drug candidates. These
pressures could also limit or restrict the introduction and marketing of one or more of our drug candidates. Adverse publicity
from cannabis misuse or adverse side effects from cannabis or other cannabinoid products may adversely affect the commercial success
or market penetration achievable by our drug candidates. The nature of our business attracts a high level of public and media interest,
and in the event of any resultant adverse publicity, our reputation may be harmed.
Some of our drug candidates that we are developing
may be subject to U.S. controlled substance laws and regulations and failure to comply with these laws and regulations, or the
cost of compliance with these laws and regulations, may adversely affect the results of our business operations, both during pre-clinical
and clinical development and post-approval, and our financial condition.
Some of the drug candidates we
plan to develop may contain controlled substances as defined in the Controlled Substances Act of 1970, or the CSA. Controlled substances
that are pharmaceutical products are subject to a high degree of regulation under the CSA, which establishes, among other things,
certain registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered
by the Drug Enforcement Administration, or DEA. The DEA classifies controlled substances into five schedules: Schedule I,
II, III, IV or V substances. Schedule I substances by definition have a high potential for abuse, no currently “accepted
medical use” in the United States, lack accepted safety for use under medical supervision, and may not be prescribed, marketed
or sold in the United States. Pharmaceutical products approved for use in the United States may be listed as Schedule II,
III, IV or V, with Schedule II substances considered to present the highest potential for abuse or dependence and Schedule V
substances the lowest relative risk among such substances. Schedule I and II drugs are subject to the strictest controls under
the CSA, including manufacturing and procurement quotas, security requirements and criteria for importation. In addition, dispensing
of Schedule II drugs is further restricted. For example, they may not be refilled without a new prescription.
While cannabis, cannabis extracts,
and some cannabinoids are Schedule I controlled substances (except the DEA has de-scheduled CBD included in Epidiolex),
products approved for medical use in the United States that contain cannabis, cannabis extracts, some cannabinoids or synthetic
cannabinoids have been, and we expect should be, placed on Schedules II through V, since approval by the FDA satisfies the “accepted
medical use” requirement.
If and when our drug candidates
receive FDA approval, we expect the finished dosage forms of our cannabinoid-based drug candidates may be listed by the DEA as
a Schedule II, III, IV, or V controlled substance for it to be prescribed for patients in the United States. Consequently,
their manufacture, importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant
degree of regulation by the DEA. In addition, the scheduling process may take one or more years beyond FDA approval, thereby
delaying the launch of our drug products in the United States. However, the DEA must issue a temporary order scheduling the drug
within 90 days after the FDA approves the drug and the DEA receives a scientific and medical evaluation and scheduling recommendation
from the Department of Health and Human Services. Furthermore, if the FDA, DEA, or any foreign regulatory authority determines
that any of our drug candidates may have potential for abuse, it may require us to generate more clinical or other data than we
currently anticipate to establish whether or to what extent the substance has an abuse potential, which could increase the cost
and/or delay the launch of our drug products.
Facilities conducting research,
manufacturing, distributing, importing or exporting, or dispensing controlled substances must be registered (licensed) to perform
these activities and have the security, control, recordkeeping, reporting and inventory mechanisms required by the DEA to prevent
drug loss and diversion. All these facilities must renew their registrations annually, except dispensing facilities, which must
renew every three years. The DEA conducts periodic inspections of certain registered establishments that handle controlled
substances. Obtaining the necessary registrations may result in delay of the manufacturing, development, or distribution of our
drug candidates. Furthermore, failure to maintain compliance with the CSA, particularly non-compliance resulting in loss or diversion,
can result in regulatory action that could have a material adverse effect on our business, financial condition and results of operations.
The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke
those registrations. In certain circumstances, violations could lead to criminal proceedings. Individual states have also established
controlled substance laws and regulations. Though state-controlled substances laws often mirror federal law, because the states
are distinct jurisdictions, they may separately schedule our drug candidates. While some states automatically schedule a drug based
on federal action, other states schedule drugs through rulemaking or a legislative action. State scheduling may delay commercial
sale of any product for which we obtain federal regulatory approval and adverse scheduling could have a material adverse effect
on the commercial attractiveness of such product. We or our partners or clinical sites must also obtain separate state registrations,
permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical trials or commercial
sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the states in addition
to those from the DEA or otherwise arising under federal law.
To conduct clinical trials with
our drug candidates in the United States prior to approval, each of our research sites may be required to obtain and maintain a
DEA researcher registration that will allow those sites to handle and dispense the drug candidate and to obtain the product. If
the DEA delays or denies the grant of a research registration to one or more research sites, the clinical trial could be significantly
delayed, and we could lose clinical trial sites.
Manufacturing of our drug candidates
is, and, if approved, our commercial products may be, subject to the DEA’s annual manufacturing and procurement quota requirements,
if classified as Schedule II. The annual quota allocated to us or our contract manufacturers for the controlled substances
in our drug candidates may not be sufficient to meet commercial demand or complete clinical trials. Consequently, any delay or
refusal by the DEA in establishing our, or our contract manufacturers’, procurement and/or production quota for controlled
substances could delay or stop our clinical trials or product launches, which could have a material adverse effect on our business,
financial position and operations.
If, upon approval of any of our
drug candidates, the product is scheduled as Schedule II or III, we would also need to identify wholesale distributors with
the appropriate DEA registrations and authority to distribute the product to pharmacies and other health care providers. The failure
to obtain, or delay in obtaining, or the loss any of those registrations could result in increased costs to us. Furthermore, state
and federal enforcement actions, regulatory requirements, and legislation intended to reduce prescription drug abuse, such as the
requirement that physicians consult a state prescription drug monitoring program may make physicians less willing to prescribe,
and pharmacies to dispense, our products, if approved.
Our ability to research, develop and commercialize
our drug candidates is dependent on our ability to obtain and maintain the necessary controlled substance registrations from DEA.
In the United States, the DEA
regulates activities relating to the supply of cannabis for medical research and/or commercial development, including the requirement
to obtain annual registrations to manufacture or distribute pharmaceutical products derived from cannabis extracts. The National
Institute on Drug Abuse, or NIDA, also plays a role in oversight of the cultivation of cannabis for medicinal research. We do not
currently handle any controlled substances, but we plan to partner with third-parties to engage in the research and development
of our drug candidates, which may include synthetically-derived cannabinoids, or derivatives thereof, that are found in cannabis
for medical purposes. This may require that our third-party service providers obtain and maintain the necessary DEA registrations,
and be subject to other regulatory requirements.
Laws and regulations affecting therapeutic
uses of cannabinoids are constantly evolving and the legalization and use of medical and recreational cannabis in the U.S. and
elsewhere may impact our business.
There is a substantial amount
of change occurring in the U.S. regarding the use of medical and adult-use cannabis products. While cannabis products not approved
by the FDA are Schedule I substances as defined under federal law, and their possession and use is not permitted according
to federal law, 34 states in the United States, plus the District of Columbia, Puerto Rico and Guam, have legalized the use of
medical cannabis. Eleven states, plus the District of Columbia, have legalized the use of adult-use cannabis. Sixteen states have
legalized high-CBD, low-THC oils for a limited class of patients and 13 states, plus the U.S. Virgin Islands, have decriminalized
cannabis, which generally means that there is no arrest, prison time, or criminal record for the first-time possession of a small
amount of cannabis for personal consumption. The 2018 U.S. Farm Bill de-scheduled cannabinoid extracts and other material derived
from certain hemp plants with extremely low THC content, although the marketing of such products for medical or other purposes
would still be subject to regulatory premarketing approval requirements and other applicable laws and regulations, including by
the FDA. Although our business is quite distinct from that of medical cannabis companies, future legislation authorizing the sale,
distribution, use, and insurance reimbursement of non-FDA approved cannabis products could affect our business, results of operations,
financial condition or prospects.
The potential ongoing evolution
of laws and regulations affecting the research and development of cannabinoid-based medical drugs and treatments could detrimentally
affect our business. Laws and regulations related to the therapeutic uses of cannabinoid-based drugs may be subject to changing
interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and may ultimately
require us to alter our business plan. Furthermore, violations or alleged violation of these laws could disrupt our business and
result in a material adverse effect on our business, results of operations and financial condition. In addition, we cannot predict
the nature of any future laws, regulations, interpretations or applications of laws and regulations and it is possible that new
laws and regulations may be enacted in the future that will be directly applicable to our business.
To date, we have conducted all
research and development activities concerning our drug candidates, including those which are or contain cannabinoids, in the U.S.
through the NIH (with respect to MRI-1867), which we believe has complied with all applicable laws, or in Israel (with respect
to our candidates currently being developed at Hebrew University). We intend to continue our drug development activities in the
U.S. in compliance with all applicable laws and in other jurisdictions, including Israel, with more favorable laws and regulations
regarding research using cannabinoids. We do not believe that any of our current operations are subject to federal or state laws
regarding the possession or use of cannabis.
Risks Relating to Regulatory
Review and Approval of our Drug Candidates
In respect of our drug candidates targeting
rare indications, orphan drug exclusivity may afford limited protection, and if another party obtains orphan drug exclusivity for
the drugs and indications we are targeting, we may be precluded from commercializing our drug candidates in those indications during
that period of exclusivity.
The first New Drug Application,
or NDA, applicant with an Orphan Drug Designation for a particular active moiety to treat a specific disease or condition that
receives FDA approval is usually entitled to a seven-year exclusive marketing period in the U.S. for that drug, for that indication.
We intend to rely, in part, on this orphan drug exclusivity and other regulatory exclusivities to protect our NCEs and, potentially,
our other products and drug candidates from competitors, and we expect to continue relying in part on these regulatory exclusivities
in the future. The duration of that exclusivity period could be impacted by a number of factors, including the FDA’s later
determination that the request for designation was materially defective, that the manufacturer is unable to supply sufficient quantities
of the drug, or that the extension of the exclusivity period established by the Improving Regulatory Transparency for New Medical
Therapies Act does not apply. There is no assurance that we will successfully obtain Orphan Drug Designation for other drug candidates
or other rare diseases or that a drug candidate for which we receive Orphan Drug Designation will be approved, or that we will
be awarded orphan drug exclusivity upon approval as, for example, the FDA may reconsider whether the eligibility criteria for such
exclusivity have been met and/or maintained. Moreover, a drug product with an active moiety that is a different cannabinoid from
that in any of our drug candidate or, under limited circumstances, the same drug product, may be approved by the FDA for the same
indication during the period of marketing exclusivity. The limited circumstances include a showing that the second drug is clinically
superior to the drug with marketing exclusivity through a demonstration of superior safety or efficacy or that it makes a major
contribution to patient care. In addition, if a competitor obtains approval and marketing exclusivity for a drug product with an
active moiety that is the same as that in a drug candidate we are pursuing for the same indication before us, approval of our drug
candidate would be blocked during the period of marketing exclusivity unless we could demonstrate that our drug candidate is clinically
superior to the approved product. In addition, if a competitor obtains approval and marketing exclusivity for a drug product with
an active moiety that is the same as that in a drug candidate we are pursuing for a different orphan indication, this may negatively
impact the market opportunity for our drug candidate. There have been legal challenges to aspects of the FDA’s regulations
and policies concerning the exclusivity provisions of the Orphan Drug Act, including whether two drugs are the same drug product,
and future challenges could lead to changes that affect the protections potentially afforded our products in ways that are difficult
to predict. In a recent successful legal challenge, a court invalidated the FDA’s denial of orphan exclusivity to a drug
on the grounds that the drug was not proven to be clinically superior to a previously approved product containing the same ingredient
for the same orphan use. In response to the decision, the FDA released a policy statement stating that the court’s decision
is limited just to the facts of that particular case and that the FDA will continue to require the sponsor of a designated drug
that is the “same” as a previously approved drug to demonstrate that its drug is clinically superior to that drug upon
approval in order to be eligible for orphan drug exclusivity, or in some cases, to even be eligible for marketing approval. In
the future, there is the potential for additional legal challenges to the FDA’s orphan drug regulations and policies, and
it is uncertain how such challenges might affect our business.
In the European Union, if a marketing
authorization is granted for a medicinal product that is designated an orphan drug, that product is entitled to ten years
of marketing exclusivity. During the period of marketing exclusivity, subject to limited exceptions, no similar medicinal product
may be granted a marketing authorization for the orphan indication. There is no assurance that we will successfully obtain orphan
drug designation for future rare indications or orphan exclusivity upon approval of any of our drug candidates that have already
obtained designation. Even if we obtain orphan exclusivity for any drug candidate, the exclusivity period can be reduced to six years
if at the end of the fifth year it is established that the orphan designation criteria are no longer met or if it is demonstrated
that the orphan drug is sufficiently profitable that market exclusivity is no longer justified. Further, a similar medicinal product
may be granted a marketing authorization for the same indication notwithstanding our marketing exclusivity if we are unable to
supply sufficient quantities of our product, or if the second product is safer, more effective or otherwise clinically superior
to our orphan drug. In addition, if a competitor obtains marketing authorization and orphan exclusivity for a product that is similar
to a drug candidate we are pursuing for the same indication, approval of our drug candidate would be blocked during the period
of orphan marketing exclusivity unless we could demonstrate that our drug candidate is safer, more effective or otherwise clinically
superior to the approved product.
We cannot be certain that any of our drug
candidates will receive regulatory approval, and without regulatory approval we will not be able to market our drug candidates.
Our business currently depends
entirely on the successful development and commercialization of our drug candidates. Our ability to generate revenue related to
product sales, if ever, will depend on the successful development and regulatory approval of our drug candidates and our licensing
of our drug candidates, in one or more of their targeted indications.
Through our research agreements,
we are currently researching our drug candidates and thus have no products approved for sale and cannot guarantee that there will
ever have marketable products. The development of a drug candidate and issues relating to its approval and marketing are subject
to extensive regulation by the FDA in the United States, the EMA in Europe and regulatory authorities in other countries, with
regulations differing from country to country. We are not permitted to market our drug candidates in the United States or Europe
until we receive approval of a NDA from the FDA or a Marketing Authorization Application, or MAA, from the EMA, respectively. We
have not submitted any marketing applications for any of our drug candidates.
NDAs and MAAs must include extensive
pre-clinical and clinical data and supporting information to establish the drug candidate’s safety and effectiveness for
each desired indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls
for the product. Obtaining approval of a NDA or a MAA is a lengthy, expensive and uncertain process, and we may not be successful
in obtaining approval. The FDA and the EMA review processes can take years to complete and approval is never guaranteed. If
we submit a NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that
any submissions will be accepted for filing and review by the FDA. Regulators of other jurisdictions, such as the EMA, have their
own procedures for approval of drug 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 or require expensive
and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United
States and Europe also have requirements for approval of drug candidates with which we must comply prior to marketing in those
countries. Obtaining regulatory approval for marketing of a drug candidate in one country does not ensure that we will be able
to obtain regulatory approval in any other country. In addition, delays in approvals or rejections of marketing applications in
the United States, Europe or other countries may be based upon many factors, including regulatory requests for additional analyses,
reports, data, pre-clinical studies and clinical trials, regulatory questions regarding different interpretations of data and results,
changes in regulatory policy during the period of product development and the emergence of new information regarding our drug candidates
or other products. Also, regulatory approval for any of our drug candidates may be withdrawn.
Before we submit a NDA to the
FDA or a MAA to the EMA for any of our drug candidates, we must successfully complete pre-clinical studies and subsequent clinical
trials. We cannot predict whether our future trials and studies will be successful or whether regulators will agree with our conclusions
regarding the pre-clinical studies we have conducted to date.
If we are unable to obtain approval
from the FDA, the EMA or other regulatory agencies for our drug candidates, or if, subsequent to approval, we are unable to successfully
commercialize our drug candidates, we will not be able to generate sufficient revenue to become profitable or to continue our operations.
If we receive regulatory approvals, we intend
to market our drug candidates in multiple jurisdictions where we have limited or no operating experience and may be subject to
increased business and economic risks that could affect our financial results.
If we receive regulatory approvals,
we plan to market our drug candidates in jurisdictions where we have limited or no experience in marketing, developing and distributing
our products and cannot guarantee that we will ever have marketable products. Certain markets have substantial legal and regulatory
complexities that we may not have experience navigating. We are subject to a variety of risks inherent in doing business internationally,
including risks related to the legal and regulatory environment in non-U.S. jurisdictions, including with respect to privacy and
data security, trade control laws and unexpected changes in laws, regulatory requirements and enforcement, as well as risks related
to fluctuations in currency exchange rates and political, social and economic instability in foreign countries. If we are unable
to manage our international operations successfully, our financial results could be adversely affected.
In addition, controlled substance
legislation may differ in other jurisdictions and could restrict our ability to market our products internationally. Most countries
are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic
substances, including Cannabis extracts. Countries may interpret and implement their treaty obligations in a way that creates
a legal obstacle to us obtaining marketing approval for our drug candidates in those countries. These countries may not be willing
or able to amend or otherwise modify their laws and regulations to permit our candidates to be marketed, or achieving such amendments
to the laws and regulations may take a prolonged period of time. We would be unable to market our candidates in countries with
such obstacles in the near future or perhaps at all without modification to laws and regulations.
Delays in the commencement, enrollment and
completion of pre-clinical studies and clinical trials could result in increased costs to us and delay or limit our ability to
obtain regulatory approval for our drug candidates.
Delays in the commencement, enrollment
and completion of our future pre-clinical studies and clinical trials could increase our product development costs or limit the
regulatory approval of our drug candidates. Based on our current financial resources and our expected level of operating expenditures
and expected net proceeds of government, other third-party funding or combinations thereof, marketing and distribution arrangements
and other collaborations, strategic alliances and licensing arrangements, we believe that we will be able to fund our projected
operating requirements for at least the next 12 months. We, however, will require additional funding for our business activities.
In addition, we do not know whether any future trials or studies of our other drug candidates, including any confirmatory clinical
trial of our drug candidates, will begin on time or will be completed on schedule, if at all. The commencement, enrollment and
completion of clinical trials can be delayed or suspended for a variety of reasons, including:
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inability to obtain sufficient funds required for the
commencement of pre-clinical and clinical trials;
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inability to reach agreements on acceptable terms with
prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among
different CROs and trial sites;
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clinical holds, other regulatory objections to commencing
a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
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discussions with the FDA or non-U.S. regulators regarding
the scope or design of our clinical trials;
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inability to identify and maintain a sufficient number
of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same
indications targeted by our drug candidates;
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inability to obtain approval from institutional review
boards, or IRBs, to conduct a clinical trial at their respective sites;
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severe or unexpected drug-related adverse effects experienced
by patients;
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inability to timely manufacture sufficient quantities
of the drug candidate required for a clinical trial;
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difficulty recruiting and enrolling patients to participate
in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other
clinical trial programs for the same indications as our drug candidates; and
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inability to retain enrolled patients after a clinical
trial is underway.
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Changes in regulatory requirements
and guidance may also occur and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory
authorities. Amendments may require us to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs,
timing or successful completion of a clinical trial. In addition, any future clinical trial may be suspended or terminated at any
time by us, our future collaborators, the FDA or other regulatory authorities due to a number of factors, including:
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our failure to conduct a clinical trial in accordance
with regulatory requirements of our clinical protocols;
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unforeseen safety issues or any determination that any
future clinical trial presents unacceptable health risks;
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lack of adequate funding to begin any future clinical
trial due to unforeseen costs or other business decisions; and
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a breach of the terms of any agreement with, or for any
other reason by, future collaborators that have responsibility for the clinical development of any of our drug candidates.
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In addition, if we, or any of
our potential future collaborators, are required to conduct additional clinical trials or other pre-clinical studies of our drug
candidates beyond those contemplated, our ability to obtain regulatory approval of these drug candidates and generate revenue from
their sales would be similarly harmed.
Our drug candidates may have undesirable side
effects which may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market, require
them to include safety warnings or otherwise limit their sales.
Unforeseen side effects from
any of our drug candidates could arise either during clinical development or, if approved, after the approved product has been
marketed. The range and potential severity of possible side effects from systemic therapies is significant. The results of future
clinical trials may show that our drug candidates cause undesirable or unacceptable side effects, which could interrupt, delay
or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities,
or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings.
If any of our drug candidates
receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such products:
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regulatory authorities may require the addition of labeling
statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
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we may be required to change instructions regarding the
way the product is administered, conduct additional clinical trials or change the labeling of the product;
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we may be subject to limitations on how we may promote
the product;
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sales of the product may decrease significantly;
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regulatory authorities may require us to take our approved
product off the market;
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we may be subject to litigation or product liability
claims; and
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our reputation may suffer.
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Any of these events could prevent
us or our potential future collaborators from achieving or maintaining market acceptance of the affected product or could substantially
increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from
the sale of our products.
Reimbursement decisions by third-party payors
may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our drug candidates,
if approved, it is less likely that they will be widely used.
Market acceptance and sales of
our drug candidates, if approved, will depend on reimbursement policies and may be affected by, among other things, future healthcare
reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations,
decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be available for
our drug candidates, if approved. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the
price paid for, our drug candidates. If reimbursement is not available or is available on a limited basis, we may not be able to
successfully commercialize our drug candidates.
In March 2010, the Patient
Protection and Affordable Care Act, or PPACA, as amended by the Health Care and Education Affordability Reconciliation Act, or
collectively, ACA, became law in the United States. The goal of ACA is to reduce the cost of health care and substantially change
the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement
policies this legislation will have in general or on our business specifically, the ACA may result in downward pressure on pharmaceutical
reimbursement, which could negatively affect market acceptance of our current or future drug candidates. In addition, some members
of the U.S. Congress have been seeking to overturn at least portions of the legislation and we expect they will continue to review
and assess this legislation and alternative health care reform proposals. We cannot predict whether new proposals will be made
or adopted, when they may be adopted or what impact they may have on us if they are adopted.
In addition, other legislative
changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was
signed into law, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending
reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years
2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included aggregate
reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013. On January 2,
2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments
to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments
to providers from three to five years. Strong, partisan disagreement in Congress has prevented implementation of various PPACA
provisions, and the Trump Administration has made repeal of the PPACA a priority. One of the first executive orders of the Trump
administration granted federal agencies broad powers to unwind regulations under the PPACA. On January 11, 2017, the Senate
voted to approve a “budget blueprint” allowing Republicans to repeal parts of the law while avoiding Democrat filibuster.
The “Obamacare Repeal Resolution” passed 51 — 48 in the Senate. Certain legislators
are continuing their efforts to repeal the PPACA, although there is little clarity on how such a repeal would be implemented and
what a PPACA replacement might look like. For the immediate future, there is significant uncertainty regarding the health care,
health care coverage and health care insurance markets.
The U.S. government has in the
past considered, is currently considering and may in the future consider healthcare policies and proposals intended to curb rising
healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services.
State and local governments, as well as a number of foreign governments, are also considering or have adopted similar types of
policies. Future significant changes in the healthcare systems in the United States or elsewhere, and current uncertainty about
whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict
whether other healthcare policies, including policies stemming from legislation or regulations affecting our business, may be proposed
or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters
will have on the purchasing decisions of our customers.
We expect that additional state
and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in reduced demand for our products or additional
pricing pressures.
If we do not obtain protection under the Hatch-Waxman
Act and similar legislation outside of the United States by extending the patent terms and obtaining data exclusivity for our drug
candidates, our business may be materially harmed.
Depending upon the timing, duration
and specifics of FDA marketing approval of our drug candidates, if any, one or more of our U.S. licensed patents 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 Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term
lost during product development and the FDA regulatory review process. However, we 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 we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less
than we request, the period during which we will have the right to exclusively market our drug candidate will be shortened and
our competitors may obtain approval of competing products following our licensed patent expiration, and our revenue could be reduced,
possibly materially.
If we market products in a manner that violates
healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.
In addition to FDA restrictions
on marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly referred to as “fraud
and abuse” laws, have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry.
Other jurisdictions such as Europe have similar laws. These laws include false claims and anti-kickback statutes. If we market
our products and our products are paid for by governmental programs, it is possible that some of our business activities could
be subject to challenge under one or more of these laws.
Federal false claims laws prohibit
any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly
making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback statute
prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in
return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service covered
by Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there
are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions
and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending
may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations
similar to the federal anti-kickback law and federal false claims laws, which apply to items and services covered by Medicaid and
other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be
imposed under these federal and state laws.
Over the past few years,
a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and
marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to
prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging
in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid
rebates.
If the FDA and EMA and other regulatory agencies
do not approve the manufacturing facilities of our future contract manufacturers for commercial production, we may not be able
to commercialize any of our drug candidates.
We do not currently intend to
manufacture the pharmaceutical products that we plan to sell. We currently have no agreements with contract manufacturers for the
production of the active pharmaceutical ingredients and the formulation of sufficient quantities of drug product for our drug candidates’
pre-clinical studies and clinical trials and that we believe we will need to conduct prior to seeking regulatory approval.
We do not have agreements for
commercial supplies of any of our drug candidates and we may not be able to reach agreements with these or other contract manufacturers
for sufficient supplies to commercialize a drug candidate if it is approved. Additionally, the facilities used by any contract
manufacturer to manufacture a drug candidate must be the subject of a satisfactory inspection before the FDA or the regulators
in other jurisdictions approve the drug candidate manufactured at that facility. We will be completely dependent on these third-party
manufacturers for compliance with the requirements of U.S. and non-U.S. regulators for the manufacture of our finished products.
If our manufacturers cannot successfully manufacture material that conform to our specifications and current good manufacturing
practice requirements of any governmental agency whose jurisdiction to which we are subject, our drug candidates will not be approved
or, if already approved, may be subject to recalls. Reliance on third-party manufacturers entails risks to which we would not be
subject if we manufactured the drug candidates, including:
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the possibility that we are unable to enter into a manufacturing
agreement with a third party to manufacture our drug candidates;
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the possible breach of the manufacturing agreements by
the third parties because of factors beyond our control; and
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the possibility of termination or nonrenewal of the agreements
by the third parties before we are able to arrange for a qualified replacement third-party manufacturer.
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Any of these factors could cause
the delay of approval or commercialization of our drug candidates, cause us to incur higher costs or prevent us from commercializing
our drug candidates successfully. Furthermore, if any of our drug candidates are approved and contract manufacturers fail to deliver
the required commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable
to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent
volumes and quality and on a timely basis, we would likely be unable to meet demand for our products and could lose potential revenue.
It may take several years to establish an alternative source of supply for our drug candidates and to have any such new source
approved by the government agencies that regulate our products.
Even if our drug candidates receive regulatory
approval, we may still face future development and regulatory difficulties.
Our drug candidates, if approved,
will also be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, record-keeping
and submission of safety and other post-market information. In addition, approved products, manufacturers and manufacturers’
facilities are required to comply with extensive FDA and EMA requirements and requirements of other similar agencies, including
ensuring that quality control and manufacturing procedures conform to current good manufacturing practices, or cGMPs. As such,
we and our contract manufacturers will be subject to continual review and periodic inspections to assess compliance with cGMPs.
Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance,
including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production
problems, if any, to the FDA and EMA and other similar agencies and to comply with certain requirements concerning advertising
and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal
and regulatory restrictions and must be consistent with the information in the product’s approved label. Accordingly, we
may not promote our approved products, if any, for indications or uses for which they are not approved.
If a regulatory agency discovers
previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the
facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose
restrictions on that product or us, including requiring withdrawal of the product from the market. If our drug candidates fail
to comply with applicable regulatory requirements, a regulatory agency may:
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mandate modifications to promotional materials or require
us to provide corrective information to healthcare practitioners;
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require us or our potential future collaborators to enter
into a consent decree or permanent injunction, which can include imposition of various fines, reimbursements for inspection costs,
required due dates for specific actions and penalties for noncompliance;
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impose other administrative or judicial civil or criminal
penalties;
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withdraw regulatory approval;
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refuse to approve pending applications or supplements
to approved applications filed by us or our potential future collaborators;
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impose restrictions on operations, including costly new
manufacturing requirements; or
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seize or detain products.
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Risks Relating to the Commercialization
of Our Products
Even if approved, our drug candidates may
not achieve broad market acceptance among physicians, patients and healthcare payors, and as a result our revenues generated from
their sales may be limited.
The commercial success of our
drug candidates, if approved, will depend upon their acceptance among the medical community, including physicians, health care
payors and patients. The degree of market acceptance of our drug candidates will depend on a number of factors, including:
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limitations or warnings contained in our drug candidates’
FDA-approved labeling;
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changes in the standard of care or availability of alternative
therapies at similar or lower costs for the targeted indications for any of our drug candidates;
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limitations in the approved clinical indications for
our drug candidates;
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demonstrated clinical safety and efficacy compared to
other products;
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lack of significant adverse side effects;
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sales, marketing and distribution support;
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availability of reimbursement from managed care plans
and other third-party payors;
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timing of market introduction and perceived effectiveness
of competitive products;
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the degree of cost-effectiveness;
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availability of alternative therapies at similar or lower
cost, including generics and over-the-counter products;
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the extent to which our drug candidates are approved
for inclusion on formularies of hospitals and managed care organizations;
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whether our drug candidates are designated under physician
treatment guidelines for the treatment of the indications for which we have received regulatory approval;
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adverse publicity about our drug candidates or favorable
publicity about competitive products;
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convenience and ease of administration of our drug candidates;
and
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potential product liability claims.
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If our drug candidates are approved,
but do not achieve an adequate level of acceptance by physicians, patients, the medical community and healthcare payors, sufficient
revenue may not be generated from these products and we may not become or remain profitable. In addition, efforts to educate the
medical community and third-party payors on the benefits of our drug candidates may require significant resources and may never
be successful.
We have no sales, marketing or distribution
capabilities and we will have to invest significant resources to develop those capabilities or enter into acceptable third-party
sales and marketing arrangements.
We have no sales, marketing or
distribution capabilities. To develop internal sales, distribution and marketing capabilities, we will have to invest significant
amounts of financial and management resources, some of which will be committed prior to any confirmation that our initial drug
candidate or any of our other drug candidates will be approved. For drug candidates where we decide to perform sales, marketing
and distribution functions ourselves or through third parties, we could face a number of additional risks, including:
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we or our third-party sales collaborators may not
be able to attract and build an effective marketing or sales force;
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the cost of securing or establishing a marketing or
sales force may exceed the revenues generated by any products; and
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our direct sales and marketing efforts may not be
successful.
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We may have limited or no control
over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success
of the efforts of these third parties.
We may not be successful in establishing and
maintaining development and commercialization collaborations, which could adversely affect our ability to develop certain of our
drug candidates and our financial condition and operating results.
Because developing pharmaceutical
products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved
products are expensive, we may seek collaborations with companies that have more experience. Additionally, if any of our drug candidates
receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to our unlicensed
territories. If we are unable to enter into arrangements on acceptable terms, if at all, we may be unable to effectively market
and sell our products in our target markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration
arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to
maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for
the development of our drug candidates.
When we collaborate with a third
party for development and commercialization of a drug candidate, we can expect to relinquish some or all of the control over the
future success of that drug candidate to the third party. For example, we may relinquish the rights to a drug candidate in jurisdictions
outside of the United States. Our collaboration partner may not devote sufficient resources to the commercialization of our drug
candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish
may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization
of our drug candidates. In some cases, once we have begun pre-clinical and initial clinical development of a drug candidate, we
may be responsible for continuing research, or research programs under a collaboration arrangement, and the payment we receive
from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements
with suitable collaborators for our drug candidates, we would face increased costs, we may be forced to limit the number of our
drug candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize
products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating
results and financial condition may be materially and adversely affected.
If serious adverse events or other undesirable
side effects are identified during the development of a drug candidate for one indication, we may need to abandon our development
of the drug candidate for other indications.
Drug candidates in clinical stages
of development have a high risk of failure. We cannot predict when, or if, a drug candidate will prove effective or safe in humans
or will receive regulatory approval. New side effects could, however, be identified as we begin clinical trials for our drug candidate
in additional indications. If new side effects are found during the development of a drug candidate for any indication, if known
side effects are shown to be more severe than previously observed or if a drug candidate is found to have other unexpected characteristics,
we may need to abandon our development of a drug candidate for all potential indications. We cannot assure you that additional
or more severe adverse side effects with respect to a drug candidate will not develop in when we begin clinical trials, which could
delay or preclude regulatory approval of a drug candidate or limit its commercial use.
Risks Relating to Our Intellectual
Property
It is difficult and costly to protect our
proprietary rights, and we may not be able to ensure their protection. If our licensed patent position does not adequately protect
our drug candidates, others could compete against us more directly, which would harm our business, possibly materially.
Our commercial success will depend
in part on our licensors and us obtaining and maintaining patent protection and trade secret protection of our current and future
drug candidates and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges.
Our ability to stop third parties from making, using, selling, offering to sell or importing our drug candidates is dependent upon
the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities and the right
under our licensed patent to contest alleged infringement.
The patent positions of biotechnology
and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal
principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged
to date in the United States or in many jurisdictions outside of the United States. Changes in either the patent laws or interpretations
of patent laws in the United States and other countries may diminish the value of our licensed intellectual property. Accordingly,
we cannot predict the breadth of claims that may be enforced in the patents that may be issued from the applications we currently
or may in the future own or license from third parties. Further, if any patents we obtain or license are deemed invalid and unenforceable,
our ability to commercialize or license our technology could be adversely affected.
Others have filed, and in the
future, are likely to file, patent applications covering products and technologies that are similar, identical or competitive to
ours or important to our business. We cannot be certain that any patent application owned by a third party will not have priority
over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition
or invalidity proceedings before U.S. or non-U.S. patent offices.
The degree of future protection
for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights
or permit us to gain or keep our competitive advantage. For example:
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others may be able to develop a platform similar to,
or better than, ours in a way that is not covered by the claims of our licensed or owned patents;
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others may be able to make compounds that are similar
to our drug candidates but that are not covered by the claims of patents we have or are licensed to us;
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we might not have been the first to make the inventions
covered by any pending patent applications which have been or may be filed;
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we might not have been the first to file patent applications
for these inventions;
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others may independently develop similar or alternative
technologies or duplicate any of our technologies;
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any patents that we obtain, or are licensed to us,
may not provide us with any competitive advantages;
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we, or our licensors, may not develop additional proprietary
technologies that are patentable; or
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the patents of others may have an adverse effect on
our business.
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Without patent protection on
the composition of matter of our drug candidates, our ability to assert our patents to stop others from using or selling our drug
candidates in a non-pharmaceutically acceptable formulation may be limited.
Due to the patent laws of a country,
or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of
our drug candidates or methods involving these candidates in the parent patent application. We plan to pursue and request our licensors
to pursue divisional patent applications or continuation patent applications in the United States and other countries to obtain
claim coverage for inventions which were disclosed but not claimed in the parent patent application.
We may also rely on trade secrets
to protect our technology, especially where we do not believe patent protection is appropriate or feasible. However, trade secrets
are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors,
outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing
a claim that a third party illegally obtained and is using any of our trade secrets may be expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover,
our competitors may independently develop equivalent knowledge, methods and know-how.
Our commercial success will depend, in part,
on our ability, and the ability of our licensors, to obtain and maintain patent protection. Our licensors’ failure to obtain
and maintain patent protection for our products may have a material adverse effect on our business.
Pursuant to our license agreements
with City of Hope and the NIH and license agreements and MOUs with the Hebrew University’s technology transfer office, we
have obtained and may obtain rights to certain patents. For additional information regarding these license agreements, see “Business — Intellectual
Property.” In the future, we may seek rights from third parties to other patents or patent applications. Our success
will depend, in part, on our ability and the ability of our licensors to maintain and/or obtain and enforce patent protection for
our proposed products and to preserve our trade secrets, and to operate without infringing upon the proprietary rights of third
parties. Patent positions in the field of biotechnology and pharmaceuticals are generally highly uncertain and involve complex
legal and scientific questions. We cannot be certain that we or our licensors were the first inventors of inventions covered by
our licensed patents or that we or they were the first to file. Accordingly, the patents licensed to us may not be valid or afford
us protection against competitors with similar technology. The failure to maintain and/or obtain patent protection on the technologies
underlying our proposed products may have material adverse effects on our competitive position and business prospects.
We may incur substantial costs as a result
of litigation or other proceedings relating to patent and other intellectual property rights.
If we choose to go to court to
stop another party from using the inventions claimed in any patents we may obtain, that individual or company has the right to
ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits may be expensive
and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful
in stopping the infringement of such patents. In addition, there is a risk that the court will decide that such patents are not
valid and that we do not have the right to stop the other party from using the inventions.
There is also the risk that,
even if the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s
activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court has recently modified some tests used
by the U.S. Patent and Trademark Office, or USPTO, in granting patents over the past 20 years, which may decrease the likelihood
that we will be able to obtain patents and increase the likelihood of challenge of any patents we obtain or license.
We may infringe the intellectual property
rights of others, which may prevent or delay our drug development efforts and stop us from commercializing or increase the costs
of commercializing our drug candidates.
Our success will depend in part
on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that our drug candidates,
or manufacture or use of our drug candidates, will not infringe third-party patents. Furthermore, a third party may claim that
we or our manufacturing or commercialization collaborators are using inventions covered by the third party’s patent rights
and may go to court to stop us from engaging in our normal operations and activities, including making or selling our drug candidates.
These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel.
There is a risk that a court would decide that we or our commercialization collaborators are infringing the third party’s
patents and would order us or our collaborators to stop the activities covered by the patents. In that event, we or our commercialization
collaborators may not have a viable way around the patent and may need to halt commercialization of the relevant product. In addition,
there is a risk that a court will order us or our collaborators to pay the other party damages for having violated the other party’s
patents. In the future, we may agree to indemnify our commercial collaborators against certain intellectual property infringement
claims brought by third parties. The pharmaceutical and biotechnology industries have produced a proliferation of patents, and
it is not always clear to industry participants, including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued
for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of
the relevant patent or that the patent claims are invalid, and we may not be able to do this. Proving invalidity is difficult.
For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption
of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert
management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are
unable to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend
an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may
not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop
or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid,
we may incur substantial monetary damages, encounter significant delays in bringing our drug candidates to market and be precluded
from manufacturing or selling our drug candidates.
We cannot be certain that others
have not filed patent applications for technology covered by pending applications subject to our license agreements, or that we
were the first to invent the technology, because:
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some patent applications in the United States may
be maintained in secrecy until the patents are issued;
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patent applications in the United States are typically
not published until 18 months after the priority date; and
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publications in the scientific literature often lag
behind actual discoveries.
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Our competitors may have filed,
and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority
over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If
another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference
proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could
be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently
arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect
to such inventions. Other countries have similar laws that permit secrecy of patent applications, and may be entitled to priority
over our applications in such jurisdictions.
Some of our competitors may be
able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.
In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect
on our ability to raise the funds necessary to continue our operations.
Obtaining and maintaining our patent protection
depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental
patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal
fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various
governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications.
Currently, we rely upon our licensors to fund the payments under our license agreements. We are required to reimburse our licensors
for these fees. 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. 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. In such an event, our competitors might be able to enter the market and this circumstance would have
a material adverse effect on our business.
Risks Associated with Our
Common Stock
Our executive officers, directors and principal
stockholders have the ability to control all matters submitted to stockholders for approval.
Our executive officers, directors
and stockholders who own 5% or more of our currently outstanding shares of common stock, beneficially own shares, in the aggregate,
representing approximately 49.4% of our shares of common stock. As a result, if these stockholders were to choose to act
together, they would continue to be able to control all matters submitted to our stockholders for approval, as well as our management
and affairs. For example, these persons, if they choose to act collectively, would control the election of directors and approval
of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay
or prevent an acquisition of the company on terms that other stockholders may desire.
Claims for indemnification by our directors
and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount of money
available to us.
As permitted by Section 102(b)(7)
of the Delaware General Corporation Law, our certificate of incorporation limits the liability of our directors to the fullest
extent permitted by law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our certificate
of incorporation and by-laws provide that we shall indemnify, to the fullest extent authorized by the Delaware General Corporation
Law, each person who is involved in any litigation or other proceeding because such person is or was a director or officer of the
company or is or was serving as an officer or director of another entity at our request, against all expense, loss or liability
reasonably incurred or suffered in connection therewith. Our certificate of incorporation provides that indemnification includes
the right to be paid expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that
such advance payment will only be made upon delivery to us of an undertaking, by or on behalf of the director or officer, to repay
all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification.
Section 145 of the Delaware
General Corporation Law permits a corporation to indemnify any director or officer of the corporation against expenses (including
attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any
action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if
such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of
the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct
was unlawful. In a derivative action, (i.e., one brought by or on behalf of the corporation), indemnification may be provided only
for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an
action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that no indemnification shall be provided if such person shall have been adjudged
to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine
that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
The above limitations on liability
and our indemnification obligations limit the personal liability of our directors and officers for monetary damages for breach
of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Certain liabilities or expenses
covered by our indemnification obligations may not be covered by such insurance or the coverage limitation amounts may be exceeded.
As a result, we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely
harm our business and financial condition and limit the funds available to stockholders who may choose to bring a claim against
the company.
Although our common stock is listed on Nasdaq,
there can be no assurance that an active and liquid public market will fully develop or be sustained.
Our common stock is listed on
The Nasdaq Global Market. Notwithstanding such listing, there can be no assurance that an active or liquid public market will fully
develop or be sustained. In the absence of an active or liquid public market, investors may have difficulty buying and selling
or obtaining market quotations; market visibility for our securities may be limited; and a lack of visibility for our securities
may have a depressive effect on any market price for our securities. Moreover, there can be no assurance that securities analysts
of brokerage firms will provide coverage of our company, if at all. In the event there is no active or liquid public market for
our common stock or coverage of our company by securities analysts of brokerage firms, you may be unable to dispose of your common
stock at desirable prices or at all. Moreover, there is a risk that our common stock could be delisted from Nasdaq or any other
trading market on which it may be listed or quoted.
The lack of an active or liquid
public market may impair our ability to raise capital to continue to fund operations by selling securities and may impair our ability
to acquire additional intellectual property assets by using our securities as consideration.
Financial Industry Regulatory Authority sales
practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.
Financial Industry Regulatory
Authority, or FINRA, rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a
customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there
is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability
to buy and sell our shares once publicly traded, have an adverse effect on the market for our common stock, and thereby depress
our share price.
We do not intend to pay dividends on our common
stock.
We have not paid any cash dividends
on our shares of common stock to date. The payment of cash dividends on our common stock in the future will be dependent upon our
revenues and earnings, if any, capital requirements and general financial condition and will be within the discretion of our board
of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations
and, accordingly, our board of directors does not anticipate declaring any dividends on our common stock in the foreseeable future.
As a result, any gain you will realize on shares of our common stock will result solely from the appreciation of such shares.
We are an “emerging growth company,”
and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock
less attractive to investors.
We are an “emerging growth
company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was enacted in April 2012. For
as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that
status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following
the fifth anniversary of the completion of an initial public offering, (2) the last day of the fiscal year in which we have
total annual gross revenue of at least $1.0 billion, (3) the date on which we are deemed to be a large accelerated filer,
which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th,
and (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year
period. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some
investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and
our common stock may suffer or be more volatile.
Section 107 of the JOBS
Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other
words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting
standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting
standards that have different effective dates for public and private companies until those standards apply to private companies.
As a result of this election, our financial statements may not be comparable to companies that comply with public company effective
dates.
We are in the process of evaluating
the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions
set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including
without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted
by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis.
Provisions in our corporate charter documents
and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or
remove our current management.
Provisions in our corporate charter
and our by-laws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could
also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the
market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace
or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because
our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect
any attempt by our stockholders to replace current members of our management team. Among others, these provisions include the following.
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our board of directors is divided into three classes
with staggered three-year terms which may delay or prevent a change of our management or a change in control;
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our board of directors has the right to appoint directors
to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which
will prevent stockholders from being able to fill vacancies on our board of directors;
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our certificate of incorporation prohibits cumulative
voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and
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our board of directors is able to issue, without stockholder
approval, shares of undesignated preferred stock, which makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any attempt to acquire us.
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These provisions may also frustrate
or prevent any attempts by our stockholders to replace or remove our current management or members of our board of directors. In
addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years
following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board
of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired
by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from
acquiring us or merging with us.
Our certificate of incorporation and by-laws
include a forum selection clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers, employees, or agents.
Our certificate of incorporation
and by-laws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State
of Delaware shall be the sole and exclusive forum for:
(a) any derivative action or proceeding brought
on our behalf;
(b) any action asserting a claim of breach of a
fiduciary duty owed by any of our directors, officers, employees, or agents to us or to our stockholders;
(c) any action asserting a claim arising pursuant
to any provision of the Delaware General Corporation Law, the certificate of incorporation, or the by-laws; or
(d) any action asserting a claim governed by the
internal affairs doctrine
except that our by-laws provide that as to each
of (a) through (d) above, any claim (i) as to which such court determines that there is an indispensable party not
subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court
within ten (10) days following such determination), (ii) which is vested in the exclusive jurisdiction of a court or forum
other than such court or (iii) for which such court does not have subject matter jurisdiction. In no event, however, shall
the Court of Chancery, under our by-laws, constitute an exclusive forum for actions, including derivative actions arising under
the Securities Act or the Exchange Act, thereby allowing any such actions to be filed in any court having jurisdiction. Our by-laws
further provide that if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware
shall, to the fullest extent permitted by law, be the sole and exclusive forum for the matters specified above.
These exclusive-forum provisions
may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our
directors, officers, employees, or agents, which may discourage lawsuits against us or our directors, officers, employees, or agent.
If a court were to find either exclusive-forum provision in our certificate of incorporation or By-laws to be inapplicable or unenforceable
in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously
harm our business.