Company Overview
Capricor Therapeutics,
Inc. is a clinical-stage biotechnology company focused on the discovery, development and commercialization of first-in-class biological
therapies for the treatment of diseases, with a focus on Duchenne muscular dystrophy, or DMD, and other rare disorders.
We are currently conducting
HOPE-2, a Phase II clinical trial in the United States with our product candidate, CAP-1002, a cardiac cell derived therapy which
is being used to treat patients with late-stage DMD. We plan to report final 12-month data from HOPE-2 in the second quarter of
2020. Following the receipt of this data, if positive, we plan to continue with the next stages of development towards potential
registration which may include seeking approval from the FDA and, whether or not that approval is obtained following HOPE-2, pursuing
a partnership to conduct a Phase III trial.
Additionally, we have
begun work on developing our exosomes platform technology as a next-generation vaccine and therapeutic investigating a variety
of disorders.
Our Technologies
Cardiosphere-Derived Cells (CAP-1002)
Our core therapeutic
technology is based on cardiosphere-derived cells, or CDCs, a cardiac-derived cell therapy that was first identified in the academic
laboratory of Capricor’s scientific founder, Dr. Eduardo Marbán. Since the initial publication in 2007, CDCs have
been the subject of over 100 peer-reviewed scientific publications and have been administered to approximately 150 human subjects
across several clinical trials. CDCs have been shown to exert potent immunomodulatory activity and to alter the immune system’s
activity to encourage cellular regeneration. We have been developing allogeneic CDCs (CAP-1002) as a product candidate for the
treatment of Duchenne muscular dystrophy, or DMD, and investigating their effects on skeletal and cardiac function. Pre-clinical
and clinical data support the therapeutic concept of administering CDCs as a means to address conditions in which the heart or
skeletal muscle has been damaged.
In a variety of preclinical
experimental models of heart injury, CDCs have been shown to stimulate cell proliferation and blood vessel growth and to inhibit
programmed cell death and scar formation. Published data by Cedars-Sinai Medical Center, or CSMC, which tested the effectiveness
of CDCs in a mouse model of DMD, showed for the first time that the skeletal and cardiac improvements could be directly attributed
to treatment with CDCs. The data also provide further evidence of the potential of CDCs to stimulate tissue repair and regeneration
by first reducing inflammation, which then enables new healthy muscle to form, as was shown in the mouse model of DMD.
CDCs are derived from
cardiospheres, or CSps, which are self-adherent multicellular clusters derived from the heart. CDCs are sufficiently small that,
within acceptable dose limits, they can be infused into a coronary artery or into the peripheral vasculature. Capricor has performed
clinical studies to establish the range of CDC dose levels that appear to be safe via intracoronary administration or peripheral
venous access.
While CDCs originate
from either a deceased human donor (allogeneic source) or from heart tissue taken directly from recipient patients themselves (autologous
source), the methods for manufacturing CDCs from either source are similar.
Capricor’s proprietary
manufacturing methods are focused on producing therapeutic doses of CDCs to boost the regenerative capacity of the heart and skeletal
muscles, with the goal of improving cardiac and skeletal muscle function. Capricor has exclusively licensed intellectual property
covering CDCs and CSps from three academic institutions and is also pursuing its own intellectual property rights relating to CDCs
as a product candidate.
Exosomes
Our preclinical data
has shown that cardiosphere-derived cells mediate most of their therapeutic activities through the secretion of extracellular vesicles.
Extracellular vesicles, including exosomes and microvesicles, are nano-scale, membrane-enclosed vesicles which are secreted by
most cells and contain characteristic lipids, proteins and nucleic acids such as mRNA and microRNAs. They can signal through the
binding and activation of membrane receptors or through the delivery of their cargo into the cytosol of target cells.
Exosomes act as messengers
to regulate the functions of neighboring or distant cells and have been shown to regulate functions such as cell survival, proliferation,
inflammation and tissue regeneration. Furthermore, pre-clinical research has shown that exogenously-administered exosomes can modify
cellular activities, thereby supporting their therapeutic potential. Their size, low or null immunogenicity and ability to communicate
in native cellular language potentially makes them an exciting new class of therapeutic agents with the potential to expand our
ability to address complex biological responses. Because exosomes are a cell-free substance, they can be stored, handled, reconstituted
and administered in similar fashion to common biopharmaceutical products such as antibodies.
Our Strategy
Our
strategy is to discover, develop and commercialize first-in-class cell-derived therapies for the treatment of diseases. Our drug
candidates in active development consist of CAP-1002 (allogeneic CDCs) and our exosome technologies. We believe that CDC-exosomes
are primarily responsible for the mechanism of action of our cell therapy product. We are now positioning ourselves to advance
our exosome product candidates into a platform technology for clinical development. Additionally, we are also exploring
potential strategic alternatives with respect to the Company as well as our product candidates.
Our Product Candidates
Our drug candidates
which are in various stages of active development, consist of CAP-1002, our CDC-derived cells, and our exosome technologies. In
2018 we commenced enrollment of patients with DMD in a Phase II clinical trial of CAP-1002 called HOPE-2. CAP-1002 was also the
subject of three previous clinical trials conducted by us. CAP-1002 is also currently being investigated in two additional trials
sponsored by CSMC, which are the REGRESS trial investigating heart failure with preserved ejection fraction and the ALPHA trial
investigating pulmonary arterial hypertension. Although we are not the sponsor of these two trials, we are providing the investigational
product for use in the trials. We are also evaluating our exosomes in pre-clinical studies for the treatment of various indications,
with a view to making an IND filing for Duchenne muscular dystrophy in exosomes during the second quarter of 2020.
The following table summarizes our active
product development programs:
Product
|
|
Indication/Population
|
|
Development Stage
|
|
Commercial Rights
|
CAP-1002
|
|
Duchenne Muscular Dystrophy*
|
|
HOPE-3
Phase III – in planning stages
HOPE-2***
Phase II
· 6-month
interim analysis completed
· Final
12-month data expected in Q2-2020
|
|
Capricor
|
|
|
|
|
HOPE-Duchenne
Phase I/II completed**
|
|
|
Exosome Technologies
|
|
Immune-inflammatory conditions
· Neuromuscular,
including DMD
|
|
Pre-clinical
|
|
Capricor
|
* The U.S. Food and Drug Administration, or FDA,
has granted Orphan Drug, Regenerative Medicine Advanced Therapies, or RMAT, and Rare Pediatric Disease designations to CAP-1002
for the treatment of DMD.
**We completed an Open Label Extension, or OLE, for the usual
care only comparator arm of the HOPE-Duchenne trial.
***We are planning an OLE for the usual care only comparator
arm of the HOPE-2 trial.
Background on Duchenne Muscular Dystrophy
DMD is a rare form
of muscular dystrophy which results in muscle degeneration and premature death. DMD affects approximately 1 in 3,600 male infants
worldwide, and it is estimated that approximately 15,000 to 20,000 boys and young men are living with the disease in the United
States. DMD results from the lack of functional dystrophin protein caused by a gene mutation. The lack of dystrophin, an important
structural component of muscle cells, causes them to have increased susceptibility to damage and to progressively die. Additionally,
the absence of dystrophin in muscle cells leads to significant cell damage and ultimately causes muscle cell death and fibrotic
replacement. In DMD patients, heart muscle cells progressively die and are replaced with scar tissue. This cardiomyopathy eventually
leads to heart failure, which is currently the leading cause of death among those with DMD.
Patients with DMD experience
progressive muscle weakness starting at an early age. Generally, a loss of ambulation occurs after the first decade of life and
eventually the patients suffer respiratory and cardiac failure. Their lifespan is abbreviated and averages less than three decades.
The annual cost of care for patients with DMD is very high and increases with disease progression. We therefore believe that DMD
represents a significant market opportunity for our lead product candidate.
CAP-1002 for the Treatment of Duchenne
Muscular Dystrophy:
Based on our understanding
of the mechanism of action of CAP-1002 which has been seen in pre-clinical models of DMD, we believe that CAP-1002 has the potential
to decrease inflammation and muscle degeneration while exerting positive effects on muscle regeneration, all of which may translate
into patients retaining muscle function for a longer period of time. Data supporting peripheral intravenous route of administration
of CAP-1002 in the DMD setting has been provided by pre-clinical mouse studies where CDCs, the active ingredient in CAP-1002, have
been shown to increase exercise capacity and diaphragmatic function.
We are currently developing
CAP-1002 for the treatment of DMD. We completed the positive HOPE-Duchenne Phase I/II trial in 2017 and then subsequently began
the HOPE-2 Phase II trial in 2018. We reported positive interim 6-month results from HOPE-2 in the third quarter of 2019 and we
plan to report final 12-month results in the second quarter of 2020. Our further plans with respect to the clinical development
of CAP-1002 in DMD, including our decision to conduct a Phase III trial, will be based on the final guidance received from the
FDA, our ability to secure funding necessary to conduct the trial should we decide to pursue that path and/or our ability to partner
with another company to advance the development of CAP-1002 for DMD, as well as other factors, some of which are not known at this
time. After the receipt of our final 12-month data from HOPE-2, we plan to request another meeting with the FDA to discuss the
next stages of development which may include seeking approval from the FDA.
Phase II HOPE-2 Clinical Trial
HOPE-2 is a randomized,
double-blind, placebo-controlled clinical trial which is being conducted at multiple sites located in the United States. To date,
we have randomized 20 patients in our HOPE-2 clinical trial. The clinical trial was designed to evaluate the safety and efficacy
of repeat, intravenous, or IV, doses of CAP-1002, in boys and young men with evidence of skeletal muscle impairment regardless
of ambulatory status and who are on a stable regimen of systemic glucocorticoids. While there are many clinical initiatives in
DMD, HOPE-2 is one of the very few to focus on non-ambulant patients. These boys and young men are looking to maintain what function
they have in their arms and hands, and Capricor’s previous study of a single intracoronary dose of CAP-1002 provided preliminary
evidence of efficacy that CAP-1002 may be able to help DMD patients retain or slow the loss of upper limb function.
The primary efficacy
endpoint of the HOPE-2 trial is the relative change in patients’ abilities to perform manual tasks that relate to activities
of daily living and are important to their quality of life. These abilities will be measured through the Performance of the Upper
Limb, or PUL, test. In the HOPE-2 study we are evaluating these through both the PUL 1.2 and 2.0 versions. HOPE-2 is focusing on
the mid-level dimension of the PUL which assesses the ability to use muscles from the elbow to the hand, which are essential for
operating wheelchairs and performing other daily functions. In HOPE-2, additional secondary and exploratory endpoints such as cardiac
function, pulmonary function, quality of life and additional measures are included.
In July 2019, we reported
interim top-line results from the HOPE-2 trial which showed that a pre-specified interim analysis performed on 6-month data showed
meaningful results across several independent clinical measures.
In October 2019, we
reported additional data from the interim analysis at the 24th Annual International Congress of the World Muscle Society.
Data from a total of 20 patients was analyzed (12 placebo and 8 treated) at the 3- and 6-month time-point in the intent to treat
(ITT) population. The late breaking podium presentation presented the top-line, 6-month results from the HOPE-2 clinical trial
which showed meaningful results across several independent clinical measures which is summarized below.
Skeletal Assessments
To assess skeletal
muscle function, investigators used the PUL, versions 1.2 and 2.0. The FDA has suggested the use of the updated PUL 2.0 version
as the primary efficacy endpoint in support of a Biologics License Application, or BLA. Additional independent tests assessing
grip strength showed improvements at 6 months and tests assessing tip to tip pinch strength showed positive results. We also expanded
the skeletal assessment beyond the mid-level and evaluated patients’ PUL “scores” to include the upper and distal
dimensions.
Skeletal Assessments at 3 and 6-month time-points (PUL 2.0)
presented at World Muscle Society
Time-point
|
|
3 months
|
|
|
6 months
|
|
Treatment
|
|
CAP-1002
n=8
|
|
|
Placebo
n=10
|
|
|
p-value
|
|
|
CAP-1002
n=6
|
|
|
Placebo
n=8
|
|
|
p-value
|
|
Shoulder + Mid + Distal Level
|
|
|
0.5 (1.69)
|
|
|
|
-1.2 (1.69)
|
|
|
|
0.0549
|
|
|
|
-0.3 (0.52)
|
|
|
|
-2.3 (1.49)
|
|
|
|
0.0299
|
|
Mid + Distal Level
|
|
|
0.4 (1.30)
|
|
|
|
-0.4 (0.70)
|
|
|
|
0.1035
|
|
|
|
0.2 (1.47)
|
|
|
|
-1.4 (0.92)
|
|
|
|
0.0177
|
|
Mid-level
|
|
|
0.1 (0.99)
|
|
|
|
-0.4 (0.52)
|
|
|
|
0.2202
|
|
|
|
-0.2 (1.17)
|
|
|
|
-1.1 (0.99)
|
|
|
|
0.0612
|
|
Mean Change from baseline (standard deviation) shown.
ITT (intent to treat) population shown
Comparisons treated vs. placebo using mixed model repeated ANOVA with covariates
Pulmonary Assessments
To assess pulmonary
function, investigators measured several clinically relevant parameters. At 3 months, inspiratory flow reserve (absolute), a reflection
of diaphragmatic strength, showed an improvement. Additionally, an improvement was observed at 3 months in peak expiratory flow
(% predicted), another measure of diaphragmatic strength.
Cardiac Assessments
As reported from our
July interim analysis, magnetic resonance imaging, or MRI, was used to assess cardiac structure and function at 6 months. Positive
trends were found in cardiac muscle function including systolic wall thickening and cardiac mass among those treated with CAP-1002
compared to placebo. The hearts of DMD patients atrophy progressively and have impaired systolic function. Improved mass and wall
thickening suggest possible cardiac regeneration and functional improvement. These trends were consistent with the cardiac findings
seen in the previously published HOPE-Duchenne study.
Safety
In late December 2018,
Capricor put a voluntary hold on dosing after two patients in the HOPE trials had a serious adverse event in the form of an
immediate immune reaction. The investigation suggested the patients may have developed hypersensitivity to something contained
in the investigational product, including possibly an excipient or inactive ingredient in the formulation. To reduce the risk of
future adverse events, Capricor initiated a commonly used pre-medication strategy including oral steroids and antihistamines to
prevent or mitigate potential immune reactions during the administration. Since the initiation of the pre-treatment regimen, approximately
40 infusions of investigational drug (CAP-1002 or placebo) have been administered to HOPE-2 patients with only one serious adverse
event reported that required an overnight observation of the patient.
Regulatory Developments
In June 2017, we had
a meeting with the FDA to discuss potential clinical endpoints that could be used for registration strategies for CAP-1002 in the
DMD indication. The minutes of the meeting indicated the FDA's willingness to accept Capricor's proposal to use the PUL test as
the basis for the primary efficacy endpoint for clinical studies in support of a BLA. The PUL test is an outcome instrument that
was specifically designed to assess upper limb function in ambulant and non-ambulant patients with DMD.
In December 2018, we
met with the FDA as part of the expedited review afforded under the RMAT designation. The agency stated that the trial would need
to provide evidence of clinically meaningful changes in the PUL, as well as other evidence supportive of CAP-1002 efficacy for
patients with advanced Duchenne muscular dystrophy, in order to potentially serve as a registration trial.
In October 2019, we
had a meeting with the FDA to discuss, among other things, the results of the 6-month interim analysis of the HOPE-2 trial and
our path forward with our DMD program. During the meeting, we proposed the possibility of accelerated approval. The FDA was
not supportive of an accelerated approval pathway at that time and noted that the HOPE-2 trial was designed as an exploratory trial
and that data from the HOPE-2 trial did not provide substantial evidence of effectiveness to support a future biologics license
application, or BLA. The FDA did, however, indicate its support for conducting a Phase III trial of CAP-1002 for the treatment
of DMD. In addition, the FDA reiterated that as part of our RMAT designation, they are willing to work with us to further
the clinical development of the therapy.
In a follow-up to the
October 2019 meeting, Capricor requested an additional meeting to clarify endpoints for a Phase III clinical trial. In a written
response, FDA supported the use of the full PUL 2.0 from baseline to twelve months as a primary efficacy endpoint as long as clinical
meaningfulness can be demonstrated. They suggested that a 1.0 point change appears suitable from a clinical perspective for a Phase
III intended to provide primary evidence of effectiveness to support a BLA.
Phase I/II HOPE-Duchenne Clinical Trial
We have completed the
randomized, controlled, multi-center Phase I/II HOPE-Duchenne clinical trial which was designed to evaluate the safety and exploratory
efficacy of CAP-1002 in patients with cardiomyopathy associated with Duchenne muscular dystrophy, or DMD. Twenty-five patients
were randomized in a 1:1 ratio to receive either CAP-1002 on top of usual care or usual care only. In patients receiving CAP-1002,
25 million cells were infused into each of their three main coronary arteries for a total dose of 75 million cells. It was a one-time
treatment, and the last patient was infused in September 2016. Patients were observed over the course of 12 months. Efficacy was
evaluated according to several exploratory outcome measures. This study was funded in part through a grant award from the California
Institute for Regenerative Medicine, or CIRM. In January 2019, this study was published in the online issue of Neurology,
the medical journal of the American Academy of Neurology.
We commenced the HOPE-Duchenne
trial in February 2016 and completed enrollment in September 2016. In April 2017, we reported positive top-line results from a
pre-specified six-month interim analysis of this study, which showed that CAP-1002 was generally safe and well-tolerated over the
initial six-month follow-up period. The six-month results were presented at the 22nd Annual International Congress of the World
Muscle Society in October 2017.
In exploratory efficacy
analyses, observed changes from baseline to Month 6 significantly differed by treatment group for systolic thickening of the inferior
wall of the heart as measured by MRI (p=0.03). In a post-hoc analysis of function of the mid- and distal-level upper limb in which
a responder was defined as a patient who demonstrated a 10% improvement from baseline in score on the PUL test, CAP-1002 patients
were more likely to be responders than patients in usual care (p=0.045) at Week 6. In addition, numerical results in some other
cardiac and skeletal muscle measures, including cardiac scar (p=0.09), were consistent with a treatment effect although differences
between treatment groups were not statistically significant. The observed clinical results appear to generally corroborate a large
body of pre-clinical data from studies in DMD animal models.
We reported our 12-month
data from the HOPE-Duchenne trial at a Late-Breaking Science session of the American Heart Association Scientific Sessions 2017.
As shoulder function had already been lost in most of the HOPE participants, investigators used the combined mid-distal PUL subscales
to assess changes in skeletal muscle function and found significant improvement in those treated with CAP-1002 in a defined post-hoc
analysis. Among the lower-functioning patients, defined as patients with a baseline mid-distal PUL score < 55 out of 58, investigators
reported sustained or improved motor function at 12 months in 8 of 9 (89%) patients treated with CAP-1002 as compared to none (0%)
of the usual care participants (p=0.007).
To assess cardiac structure
and function, investigators used magnetic resonance imaging, or MRI. They found significant improvements in systolic thickening
of the left ventricular wall among those patients treated with CAP-1002. Systolic wall thickening is the component of myocardial
contraction ultimately responsible for ejection of blood from the left ventricle. Preservation or enhancement of systolic wall
thickening may potentially be the result of the reversal of fibrosis.
In the inferior wall,
they recorded a mean (SD) 31.2% (47.0%) increase in thickening six months after treatment and a mean 25.8% (46.7%) increase in
thickening 12 months after treatment. In comparison, the usual care group showed a mean 8.8% (27.7%) decrease at six months and
a mean 1.6% (37.9%) increase at 12 months in the systolic thickening of the inferior wall. The difference between the groups in
absolute change from baseline to six months achieved statistical significance (p=0.04) and trended in favor of CAP-1002 treatment
group (p=0.09) from baseline to 12 months.
Investigators also
found that scarring of the heart muscle among those treated with CAP-1002 decreased relative to the control group. Progressive
cardiac scarring eventually impairs the heart's pumping ability and is currently the leading cause of death in Duchenne muscular
dystrophy. At the 12-month follow-up, those treated with CAP-1002 had a mean (SD) 7.1% (10.3%) reduction in scar size, in contrast
to a mean 4.8% (22.3%) increase in scar size in the usual care group, a difference that achieved statistical significance using
non-parametric analysis to account for outliers (p=0.03).
CAP-1002 was generally
safe and well-tolerated in the HOPE-Duchenne trial. There was no significant difference in the incidence of treatment-emergent
adverse events in either group. There were no early study discontinuations due to adverse events.
Additionally, in 2018
we conducted an open-label extension of the Hope-Duchenne trial, or HOPE-OLE, where 8 patients who were randomized into the control
group of the HOPE-Duchenne trial were given two doses of CAP-1002. We have completed enrollment and treatment of the patients in
the HOPE-OLE trial. In January 2019, we entered into an Amendment to the CIRM Notice of Award pursuant to which CIRM allowed us
to use excess funds from our grant award to fund, in part, certain activities associated with HOPE-OLE.
Regulatory Designations for CAP-1002
for the treatment of DMD
In April 2015, the
FDA granted Orphan Drug Designation to CAP-1002 for the treatment of DMD. Orphan Drug Designation is granted by the FDA’s
Office of Orphan Drug Products to drugs intended to treat a rare disease or condition affecting fewer than 200,000 people in the
United States or a disease or condition that affects more than 200,000 people in the United States and for which there is no reasonable
expectation that the cost of developing and making available in the United States a drug for this type of disease or condition
will be recovered from sales in the United States for that drug. This designation confers special incentives to the drug developer,
including tax credits on the clinical development costs and prescription drug user fee waivers and may allow for a seven-year period
of market exclusivity in the United States upon FDA approval.
In July 2017, the FDA
granted Rare Pediatric Disease Designation to CAP-1002 for the treatment of DMD. The FDA defines a “rare pediatric disease”
as a serious or life-threatening disease affecting individuals primarily aged from birth to 18 years and that affects fewer than
200,000 individuals in the United States. Under the FDA's Rare Pediatric Disease Priority Review Voucher program, upon the approval
of a qualifying New Drug Application, or NDA, or BLA for the treatment of a rare pediatric disease, the sponsor of such application
would be eligible for a Rare Pediatric Disease Priority Review Voucher that can be used to obtain priority review for a subsequent
NDA or BLA. The Priority Review Voucher may be sold or transferred an unlimited number of times.
In February 2018, we
were notified by the FDA Office of Tissues and Advanced Therapies, that we were granted the Regenerative Medicine Advanced Therapy,
or RMAT, designation for CAP-1002 for the treatment of DMD. The FDA grants the RMAT designation to regenerative medicine therapies
intended to treat a serious condition and for which preliminary clinical evidence indicates a potential to address unmet medical
needs for that condition. The RMAT designation makes therapies eligible for the same actions to expedite the development and review
of a marketing application that are available to drugs that receive breakthrough therapy designation – including increased
meeting opportunities, early interactions to discuss any potential surrogate or intermediate endpoints and the potential to support
accelerated approval. CAP-1002 is one of the few therapies currently in development to help non-ambulant patients with DMD. To
receive the RMAT designation, we submitted data from the HOPE-Duchenne Trial.
CAP-1002 for the Treatment of Cardiac
Conditions:
In previous years,
we completed several trials investigating the use of CAP-1002 for the treatment of various cardiac conditions, including heart
failure (the DYNAMIC Trial) and post myocardial infarction (MI) with cardiac dysfunction (ALLSTAR). Because of our decision to
focus our efforts on DMD, we have decided not to pursue those indications at this time, nor do we have any plans to continue with
the development of these programs although we are continuing to evaluate certain cardiac measures in our HOPE-2 trial. We expect
no further material expenses in connection with these programs.
CAP-1002 - Investigator Sponsored
Clinical Trials:
Capricor has agreed
to provide cells for investigational purposes in two clinical trials sponsored by CSMC. These cells were developed as part of the
Company’s past research and development efforts. The first trial is known as “Regression of Fibrosis and Reversal of
Diastolic Dysfunction in HFpEF Patients Treated with Allogeneic CDCs.” Dr. Eduardo Marbán is the named principal investigator
under the study. We were recently informed that the REGRESS study was put on clinical hold by the FDA. This is an investigator
sponsored trial for which Capricor is providing CAP-1002, the investigational product. The preliminary information we have received
suggests that the issue may be related to inadequate patient monitoring at the study site to assess safety for certain patients
who were experiencing adverse events after receiving an intracoronary infusion of CAP-1002. It is currently not known whether the
clinical hold is related to the investigational product or the procedure. Capricor did not use intracoronary infusions in its HOPE-2
trial.
The second trial is
known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived Allogeneic Stem Cells.” In this trial,
the investigational product is infused into the venous system via catheter into the right atrium. This trial is currently ongoing.
In both studies, Capricor is providing the necessary number of doses of cells and will receive a negotiated amount of monetary
compensation which is estimated to be approximately $2.1 million over several years.
Exosomes Program
Our exosomes program
consists of exosomes derived from CDCs (CAP-2003) and engineered exosomes, both of which are in various stages of preclinical development.
We have explored the use of our CDC-exosomes in pre-clinical studies of inflammation and intense immune activation such as DMD,
sepsis, Graft versus-host disease (GVHD) and trauma. While CDC-exosomes are the initial technology used in preclinical development,
we have expanded Capricor’s pipeline to include additional exosome technologies. We are now focused on developing a precision-engineered
exosome platform technology that can carry defined sets of effector molecules which exert their effects through defined mechanisms
of action. We have announced our planned expansion of our exosome platform technology that potentially may be used for vaccine
development, vesicle mediated protein therapies and treatment of inherited diseases.
Bioactivity
Capricor has been working
to harness the natural therapeutic capability of exosomes by isolating them to develop a new class of therapeutic agents capable
of recapitulating the activities mediated by the CDCs. Isolated and purified exosomes appear to be preclinically less immunogenic
and demonstrate superior stability than isolated CDCs. To date, we have performed an extensive phenotypic analysis of CDC-exosomes
and identified a biomolecular profile that differentiates our CDC-exosomes from exosomes obtained from mesenchymal stem cells (MSC-exosomes).
Additionally, we have also developed an in vitro bioactivity assay to evaluate the potency of the CDC-exosomes compared
to exosomes obtained from different cellular sources. In several preclinical studies, CDC exosomes performed better than MSC exosomes.
These assays represent an extremely useful tool for our product development.
Immunomodulation
In pre-clinical studies,
Capricor’s exosomes have shown strong immunomodulatory activity by their ability to reduce the expression of pro-inflammatory
genes and concurrently increase the expression of genes related to tissue regeneration. These activities have been confirmed in
vivo in different animal models and open the possibility of using our exosomes technologies therapeutically for the treatment
of disease.
We have used RNA sequencing
analysis to identify miRNAs contained in our exosomes which are not seen in exosomes obtained from other cell types. The levels
of these miRNAs in our exosomes correlate with their immunomodulatory capabilities on macrophages. Multiple scientific publications
support the role of these miRNAs in macrophage polarization.
Biodistribution
During pre-clinical
development, we analyzed the biodistribution of our exosomes using different administration routes (intravenous, intrathecal, intranasal
or subconjunctival) in healthy and diseased animal models. After intravenous administration of our exosomes into these models,
we observed an accumulation of exosomes in the liver, spleen and lungs as well as in the heart. In disease models we also found
exosomes in damaged tissues suggesting a preferential uptake by cells involved in tissue repair.
Ex vivo experiments
have shown a strong uptake of our exosomes by skeletal muscle stem cells (or satellite cells), which opens the possibility that
our exosome technologies target this population of cells that play a critical role in muscle regeneration and which, to date, have
been difficult to reach.
Manufacturing
We have also made significant
progress planning the next steps for the manufacturing process for our exosome product candidates. We believe these developments
will enable us to scale up our manufacturing capabilities and potentially allow us to manufacture enough material for clinical
development.
In order to expand
the stability profile of our exosome technologies, we have also established a collaboration to further develop lyophilization of
the exosomes. Much of this work has been funded in part through a grant from the Department of Defense (DoD) awarded for the development
and characterization of the exosomes for product development.
Engineered Exosomes Platform
To build upon the natural
ability of exosomes for intercellular communication, we have initiated a program to engineer exosomes and load them with different
macromolecules. Our preliminary results demonstrated that it is possible to load exosomes with specific miRNAs which pave the way
to use our exosomes to potentially deliver miRNAs to specific target tissue. We are now working on developing exosome-based vaccines
for COVID-19. While these efforts are still in their early-stages, our exosome-based vaccine platform technology will aim to combine
the improved protection that comes from immunizing individuals with multiple antigens in a manner that mimics the advantages of
conventional virus vaccines, with the superior safety profile of virus-free vaccines. We plan to design exosome-based vaccines
to elicit strong humoral and cellular immune responses due to the simultaneous expression of antigens.
Investigation of Potential Indications
for our Exosomes Technologies
Capricor has exclusively
licensed intellectual property relating to CDC-exosomes from Cedars-Sinai Medical Center and is also pursuing its own intellectual
property rights relating to exosome technologies.
We have promising pre-clinical
data in several indications from studies done in our labs as well as in collaboration with other companies and academic institutions.
Additionally, in July 2018, we entered into a Cooperative Research and Development Agreement with the U.S. Army Institute of Surgical
Research (USAISR) pursuant to which we agreed to cooperate in research and development on the evaluation of our CDC-exosomes for
the treatment of trauma related injuries and conditions which are now the third leading cause of death in the U.S.
We plan to file an
IND for DMD with the FDA in advance of the filing deadline under our license agreement with CSMC, which is April 19, 2020, unless
we negotiate for an extension of this date with CSMC. We have also begun work on developing an exosome-based vaccine platform for
COVID-19.
These programs
represent our core technology and products.
Intellectual Property and Proprietary
Know-How
Our goal is to obtain,
maintain and enforce patent rights for our products, formulations, processes, methods of use and other proprietary technologies,
preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States
and abroad. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible
for our current product candidates and any future product candidates, proprietary information and proprietary technology through
a combination of contractual arrangements and patents, both in the United States and abroad. Even patent protection, however, may
not always afford us with complete protection against competitors who seek to circumvent our patents. If we fail to adequately
protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property
rights would diminish. To this end, we require all of our employees, consultants, advisors and other contractors to enter into
confidentiality agreements that prohibit the disclosure and use of confidential information and, where applicable, require disclosure
and assignment to us of the ideas, developments, discoveries and inventions relevant to our technologies and important to our business.
The development of
complex biotechnology products such as ours typically includes the early discovery of a technology platform – often in an
academic institution – followed by increasingly focused development around a product opportunity, including identification
and definition of a specific product candidate and development of scalable manufacturing processes, formulation, delivery and dosage
regimens. As a result, biotechnology products are often protected by several families of patent filings that are made at different
times in the development cycle and cover different aspects of the product. Earlier filed broad patent applications directed to
the discovery of the platform technology thus usually expire ahead of patents covering later developments such as scalable manufacturing
processes and dosing regimens. Patent expirations on products may therefore span several years and vary from country to country
based on the scope of available coverage. Our patents, if issued and upon payment of patent maintenance fees, would expire as early
as 2024 and as late as 2039. There are also limited opportunities to obtain extensions of patent terms in certain countries.
Capricor’s Technology - CAP-1002,
Exosomes, CAP-1001 and CSps
Capricor has entered
into exclusive license agreements for intellectual property rights related to certain cardiac-derived cells with Università
Degli Studi Di Roma La Sapienza, or the University of Rome, The Johns Hopkins University, or JHU, and CSMC. In addition, Capricor
has filed patent applications related to the technology developed by its own scientists.
University of Rome
License Agreement
Capricor and the University
of Rome entered into a License Agreement, dated June 21, 2006, or the Rome License Agreement, which provides for the grant of an
exclusive, world-wide, royalty-bearing license by the University of Rome to Capricor (with the right to sublicense) to develop
and commercialize licensed products under the licensed patent rights in all fields. Capricor has a right of first negotiation,
for a certain period of time, to obtain a license to any new and separate patent applications owned by the University of Rome utilizing
cardiac stem cells in cardiac care.
Pursuant to the Rome
License Agreement, Capricor paid the University of Rome a license issue fee, is currently paying minimum annual royalties in the
amount of 20,000 Euros per year, and is obligated to pay a lower-end of a mid-range double-digit percentage on all royalties received
as a result of sublicenses granted, which are net of any royalties paid to third parties under a license agreement from such third
party to Capricor. The minimum annual royalties are creditable against future royalty payments.
The Rome License Agreement
will, unless extended or sooner terminated, remain in effect until the later of the last claim of any patent or until any patent
application comprising licensed patent rights has expired or been abandoned. Under the terms of the Rome License Agreement, either
party may terminate the agreement should the other party become insolvent or file a petition in bankruptcy. Either party may terminate
the agreement upon the other party’s material breach, provided that the breaching party will have up to 90 days to cure its
material breach. Capricor may also terminate for any reason upon 90 days’ written notice to the University of Rome.
The Johns Hopkins
University License Agreement
Capricor and JHU entered
into an Exclusive License Agreement, effective June 22, 2006, or the JHU License Agreement, which provides for the grant of an
exclusive, world-wide, royalty-bearing license by JHU to Capricor (with the right to sublicense) to develop and commercialize licensed
products and licensed services under the licensed patent rights in all fields and a nonexclusive right to the know-how. In May
2009, the JHU License Agreement was amended to add additional patent rights to the JHU License Agreement in consideration of a
payment to JHU and reimbursement of patent costs. Capricor and JHU executed a Second Amendment to the JHU License Agreement, effective
as of December 20, 2013, pursuant to which, among other things, certain definitions were added or amended, the timing of certain
obligations was revised and other obligations of the parties were clarified. Under the JHU License Agreement, Capricor is required
to exercise commercially reasonable and diligent efforts to develop and commercialize licensed products covered by the licenses
from JHU.
Pursuant to the JHU
License Agreement, JHU was paid an initial license fee and, thereafter, Capricor is required to pay minimum annual royalties on
the anniversary dates of the JHU License Agreement. The minimum annual royalties range from $5,000 on the first and second anniversary
dates to $20,000 on the tenth anniversary date and thereafter. The minimum annual royalties are creditable against a low single-digit
running royalty on net sales of products and net service revenues, which Capricor is also required to pay under the JHU License
Agreement, which running royalty may be subject to further reduction in the event that Capricor is required to pay royalties on
any patent rights to third parties in order to make or sell a licensed product. In addition, Capricor is required to pay a low
double-digit percentage of the consideration received by it from sublicenses granted, and is required to pay JHU certain defined
development milestone payments upon the successful completion of certain phases of its clinical studies and upon receiving approval
from the FDA. The development milestones range from $100,000 upon successful completion of a full Phase I clinical study to $1,000,000
upon full FDA market approval and are fully creditable against payments owed by Capricor to JHU on account of sublicense consideration
attributable to milestone payments received from a sublicensee. The maximum aggregate amount of milestone payments payable under
the JHU License Agreement, as amended, is $1,850,000. In May 2015, Capricor paid the development milestone related to Phase I that
was owed to JHU pursuant to the terms of the JHU License Agreement. The next milestone is triggered upon successful completion
of a full Phase II study for which a payment of $250,000 will be due.
The JHU License Agreement
will, unless sooner terminated, continue in effect in each applicable country until the date of expiration of the last to expire
patent within the patent rights, or, if no patents are issued, then for twenty years from the effective date. Under the terms of
the JHU License Agreement, either party may terminate the agreement should the other party become insolvent or file a petition
in bankruptcy, or fail to cure a material breach within 30 days after notice. In addition, Capricor may terminate for any reason
upon 60 days’ written notice.
Cedars-Sinai Medical Center License
Agreements
License Agreement
for CDCs
On January 4, 2010,
Capricor entered into an Exclusive License Agreement with CSMC, or the Original CSMC License Agreement, for certain intellectual
property related to its CDC technology. In 2013, the Original CSMC License Agreement was amended twice resulting in, among other
things, a reduction in the percentage of sublicense fees which would have been payable to CSMC. Effective December 30, 2013, Capricor
entered into an Amended and Restated Exclusive License Agreement with CSMC, or the Amended CSMC License Agreement, which amended,
restated, and superseded the Original CSMC License Agreement, pursuant to which, among other things, certain definitions were added
or amended, the timing of certain obligations was revised and other obligations of the parties were clarified.
The Amended CSMC License
Agreement provides for the grant of an exclusive, world-wide, royalty-bearing license by CSMC to Capricor (with the right to sublicense)
to conduct research using the patent rights and know-how and develop and commercialize products in the field using the patent rights
and know-how. In addition, Capricor has the exclusive right to negotiate for an exclusive license to any future rights arising
from related work conducted by or under the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties
fail to agree upon the terms of an exclusive license for any future rights, Capricor will have a non-exclusive license to such
future rights, subject to royalty obligations.
Pursuant to the Original
CSMC License Agreement, CSMC was paid a license fee and Capricor was obligated to reimburse CSMC for certain fees and costs incurred
in connection with the prosecution of certain patent rights. Additionally, Capricor is required to meet certain spending and development
milestones. The annual spending requirements ranged from $350,000 to $800,000 each year between 2010 and 2017 (with the exception
of 2014, for which there was no annual spending requirement).
Pursuant to the Amended
CSMC License Agreement, Capricor remains obligated to pay low single-digit royalties on sales of royalty-bearing products as well
as a low double-digit percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned
royalties are subject to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights
in connection with the royalty-bearing product. In 2010, Capricor discontinued its research under some of the patents.
The Amended CSMC License
Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents
covering the patent rights or future patent rights. Under the terms of the Amended CSMC License Agreement, unless waived by CSMC,
the agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the
event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if
performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal
by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days’ notice from CSMC if Capricor
fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if a material breach
has not been cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake
commercially reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that breach after 90 days’
notice from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive
or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice.
On March 20, 2015,
Capricor and CSMC entered into a First Amendment to the Amended CSMC License Agreement, pursuant to which the parties agreed to
delete certain patent applications from the list of scheduled patents which Capricor determined not to be material to the portfolio.
On August 5, 2016,
Capricor and CSMC entered into a Second Amendment to the Amended CSMC License Agreement, or the Second License Amendment, pursuant
to which the parties agreed to add certain patent applications to the schedule of patent rights set forth in the agreement. Under
the Second License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes
six additional patent applications; (ii) Capricor paid an upfront fee of $2,500; and (iii) Capricor reimbursed CSMC approximately
$10,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent applications.
On December 26, 2017,
Capricor entered into a Third Amendment to the Amended CSMC License Agreement thereby amending the CDCs License, or the Third License
Amendment. Under the Third License Amendment, (i) the description of scheduled patent rights has been replaced by a revised
schedule that includes seven additional patent applications; and (ii) Capricor is required to reimburse CSMC approximately $50,000
for attorneys’ fees and filing fees that were incurred in connection with the additional patent rights.
On June 20, 2018, Capricor
and CSMC entered into a Fourth Amendment to the Amended CSMC License Agreement, or the Fourth License Amendment. Under the Fourth
License Amendment, the description of scheduled patent rights has been replaced by a revised schedule that includes two additional
patent applications.
License Agreement
for Exosomes
On May 5, 2014, Capricor
entered into an Exclusive License Agreement with CSMC, or the Exosomes License Agreement, for certain intellectual property rights
related to exosomes technology. The Exosomes License Agreement provides for the grant of an exclusive, world-wide, royalty-bearing
license by CSMC to Capricor (with the right to sublicense) in order to conduct research using the patent rights and know-how and
to develop and commercialize products in the field using the patent rights and know-how. In addition, Capricor has the exclusive
right to negotiate for an exclusive license to any future rights arising from related work conducted by or under the direction
of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties fail to agree upon the terms of an exclusive license,
Capricor shall have a non-exclusive license to such future rights, subject to royalty obligations.
Pursuant to the Exosomes
License Agreement, CSMC was paid a license fee and Capricor reimbursed CSMC for certain fees and costs incurred in connection with
the preparation and prosecution of certain patent applications. Additionally, Capricor is required to meet certain non-monetary
development milestones and is obligated to pay low single-digit royalties on sales of royalty-bearing products as well as a single-digit
percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned royalties are subject
to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights in connection with
the royalty bearing product.
The Exosomes License
Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents
covering the patent rights or future patent rights. Under the terms of the Exosomes License Agreement, unless waived by CSMC, the
agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the event
of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if performance
by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal by a governmental
body; (iv) within 30 days for non-payment of royalties; (v) after 90 days if Capricor fails to undertake commercially reasonable
efforts to exploit the patent rights or future patent rights; (vi) if a material breach has not been cured within 90 days; or (vii)
if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake commercially reasonable efforts to exploit
the patent rights or future patent rights, and fails to cure that breach after 90 days’ notice from CSMC, instead of terminating
the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive or co-exclusive license. Capricor
may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice.
On February 27, 2015,
Capricor and CSMC entered into a First Amendment to Exosomes License Agreement, or the First Exosomes License Amendment. Under
the First Exosomes License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that
includes four additional patent applications; (ii) Capricor was required to pay CSMC an upfront fee of $20,000; (iii) Capricor
was required to reimburse CSMC approximately $34,000 for attorneys’ fees and filing fees that were incurred in connection
with the additional patent rights; and (iv) Capricor is required to pay CSMC certain defined product development milestone payments
upon reaching certain phases of its clinical studies and upon receiving approval for a product from the FDA. The product development
milestones range from $15,000 upon the dosing of the first patient in a Phase I clinical trial of a product to $75,000 upon receipt
of FDA approval for a product. The maximum aggregate amount of milestone payments payable under the Exosomes License Agreement,
as amended, is $190,000.
On June 10, 2015, Capricor
and CSMC entered into a Second Amendment to Exosomes License Agreement, thereby amending the Exosomes License Agreement further
to add an additional patent application to the Schedule of Patent Rights.
On August 5, 2016,
Capricor and CSMC entered into a Third Amendment to the Exosomes License Agreement, or the Third Exosomes License Amendment, pursuant
to which the parties agreed to add certain patent applications to the schedule of patent rights under the agreement. Under the
Third Exosomes License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes
three additional patent applications; (ii) Capricor paid CSMC an upfront fee of $2,500; and (iii) Capricor reimbursed CSMC approximately
$16,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent applications.
On December 26, 2017,
Capricor and CSMC entered into a Fourth Amendment to Exosomes License Agreement, thereby amending the Exosomes License, or the
Fourth Exosomes License Amendment. Under the Fourth Exosomes License Amendment, (i) the description of scheduled patent rights
was replaced by a revised schedule that includes seven additional patent applications; (ii) Capricor is required to reimburse CSMC
approximately $50,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent rights;
and (iii) a schedule to the Exosomes License was modified to extend the milestone deadline for filing an IND for at least one product
to December 31, 2018.
On June 20, 2018, Capricor
and CSMC entered into a Fifth Amendment to the Exosomes License Agreement, or the Fifth License Amendment. Under the Fifth License
Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes four additional
patent applications; and (ii) Capricor is required to reimburse CSMC approximately $27,000 for attorneys’ fees and filing
fees that were incurred in connection with the additional patent rights.
On September 25, 2018,
Capricor and CSMC entered into a Sixth Amendment to the Exosomes License Agreement, or the Sixth License Amendment. Under the Sixth
License Amendment, the milestone deadline for filing an IND for at least one product has been extended to December 31, 2019. If
the Company does not file an IND by December 31, 2019, or negotiate an additional extension of the milestone deadline, CSMC would
have the option to convert the exclusive license to a non-exclusive license or to a co-exclusive license or terminate the license
under Title 35, Section 203 of the United States Code. Prior to exercising such option, Capricor has the opportunity to cure the
failure to file an IND for a period of 90 days after its receipt of written notice from CSMC of its intent to exercise its option.
In the first quarter of 2020, Capricor received a notice from CSMC indicating that Capricor was in default of this milestone and
further that unless such default is cured by April 19, 2020, the Exosomes License Agreement will automatically terminate. Capricor
intends to file an IND in advance of the April 19, 2020 deadline in order to avoid the termination of the license, or alternatively
negotiate an extension of the deadline with CSMC. Such intent has been communicated to CSMC.
Manufacturing
Capricor presently
maintains its laboratory, research and manufacturing facilities in leased premises located at CSMC, or the Facilities Lease. In
that portion of the leased premises where we manufacture CAP-1002 and plan to manufacture CAP-2003, we believe that we follow good
manufacturing practices to the extent that they are applicable to our clinical programs, but our premises are not approved as a
current Good Manufacturing Practices, or cGMP, facility, for the manufacture of commercial product. Capricor manufactured CAP-1002
in this facility for our previous studies as well as for the HOPE-2 clinical trial.
In addition to manufacturing
CAP-1002 for its own clinical trials, Capricor has agreed to provide CAP-1002 for investigational purposes in two clinical trials
sponsored by CSMC. If we elect to not extend the term of our Facilities Lease, Capricor would have to secure alternative facilities
in which to manufacture its products, which would involve a significant monetary investment and would negatively impact the progress
of our planned clinical trials and regulatory approvals. In addition, we would have to establish a collaboration agreement with
a third party or build out our own manufacturing facility for any commercial scale manufacturing or potentially for a Phase III
trial.
We are currently evaluating
a proposed contract manufacturing agreement with a contract manufacturing organization, or CMO, for continued expansion focused
on potential commercialization and scale-up of our cell therapy program for the treatment of DMD.
CAP-1002:
The manufacturing process
for CAP-1002 begins with material from an entire heart received from a donor that was collected from an organ procurement organization,
or OPO. This tissue is then taken to the lab where the cells are isolated, expanded, and processed through a series of proprietary
unit operations. After expanding, processing, release testing and quality review, the CAP-1002 product becomes available for administration
to patients participating in clinical trials. CAP-1002 is cryo-preserved, enabling us to produce large lots that can be frozen
and then administered to patients as needed.
Exosomes (CAP-2003):
The process for manufacturing
CAP-2003 starts with the proprietary process of creating a cell bank from donor heart tissue through the expansion of CDCs. Afterwards,
exosomes are isolated from the expanded CDCs. After these exosomes are prepared, formulated, filled, tested, and validated, the
exosomes product becomes available for clinical investigation. We believe that the allogeneic, acellular nature of exosomes would
potentially enable us to create a scalable cell-derived product.
Research and Development
Capricor’s research
and development program has been advanced in part through federal and state grants and loan awards totaling over approximately
$28.0 million to date. Our ongoing research and development activities primarily concern CDCs and exosomes, and are focused on
the characterization of their composition and actions, the evaluation of their therapeutic potential in selected disease settings,
the development of next generation product candidates, and the identification of new technologies and indications. Capricor spent
approximately $5.1 million and $12.1 million on research and development activities for the years ended December 31, 2019 and 2018,
respectively.
Competition
We are engaged in fields
that are characterized by extensive worldwide research and competition by pharmaceutical companies, medical device companies, specialized
biotechnology companies, hospitals, physicians and academic institutions, both in the United States and abroad. The pharmaceutical
industry is highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies.
Many of the organizations competing with us have substantially greater financial resources, larger research and development staffs
and facilities, longer drug development history in obtaining regulatory approvals, and greater manufacturing and marketing capabilities
than we do. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies,
and research organizations actively engaged in research and development of products which may target the same indications as our
product candidates. We expect any future products and product candidates we develop to compete on the basis of, among other things,
product efficacy and safety, time to market, price, extent of adverse side effects, and convenience of treatment procedures. The
biotechnology and pharmaceutical industries are subject to rapid and significant technological change. The drugs that we are attempting
to develop will have to compete with existing and future therapies. Our future success will depend in part on our ability to maintain
a competitive position with respect to evolving cell therapy and exosome technologies. There can be no assurance that existing
or future therapies developed by others will not render our potential products obsolete or noncompetitive. In addition, companies
pursuing different but related fields represent substantial competition. These organizations also compete with us to attract patients
for clinical trials, qualified personnel and parties for acquisitions, joint ventures, or other collaborations.
Government Regulation
The research, development,
testing, manufacture, labeling, promotion, advertising, distribution and marketing, among other things, of our product candidates
are extensively regulated by governmental authorities in the United States and other countries. In the United States, the FDA regulates
drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and its implementing regulations. Failure to comply with the
applicable U.S. requirements may subject us to administrative or judicial sanctions, such as the FDA’s refusal to approve
a pending NDA or a pending BLA, warning letters, product recalls, product seizures, total or partial suspension of production or
distribution, injunctions and/or criminal prosecution.
Drug Approval Process
Pharmaceutical products
such as ours may not be commercially marketed without prior approval from the FDA and comparable regulatory agencies in other countries.
In the United States, the process for receiving such approval is long, expensive and risky, and includes the following steps:
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pre-clinical laboratory tests, animal studies, and formulation studies;
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submission to the FDA of an IND for human clinical testing, which must become effective before
human clinical trials may begin;
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adequate and well-controlled human clinical trials to establish the safety and efficacy of the
drug for each indication;
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submission to the FDA of an NDA or BLA;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which
the drug is produced to assess compliance with cGMP;
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a potential FDA audit of the preclinical and clinical trial sites that generated the data in support
of the NDA or BLA;
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the ability to obtain clearance or approval of companion diagnostic tests, if required, on a timely
basis, or at all; and
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FDA review and approval of the NDA or BLA.
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Regulation by U.S.
and foreign governmental authorities is a significant factor affecting our ability to commercialize any of our products, as well
as the timing of such commercialization and our ongoing research and development activities. The commercialization of drug products
requires regulatory approval by governmental agencies prior to commercialization. Various laws and regulations govern or influence
the research and development, non-clinical and clinical testing, manufacturing, processing, packaging, validation, safety, labeling,
storage, record keeping, registration, listing, distribution, advertising, sale, marketing and post-marketing commitments of our
products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable laws and regulations, require
expending substantial resources.
The results of pre-clinical
testing, which include laboratory evaluation of product chemistry and formulation, animal studies to assess the potential safety
and efficacy of the product and its formulations, details concerning the drug manufacturing process and its controls, and a proposed
clinical trial protocol and other information must be submitted to the FDA as part of an IND that must be reviewed and become effective
before clinical testing can begin. The study protocol and informed consent information for patients in clinical trials must also
be submitted to an independent Institutional Review Board, or IRB, for approval covering each institution at which the clinical
trial will be conducted. Once a sponsor submits an IND, the sponsor must wait 30 calendar days before initiating any clinical trials.
If the FDA has comments or questions within this 30-day period, the issue(s) must be resolved to the satisfaction of the FDA before
clinical trials can begin. In addition, the FDA, an IRB or Capricor may impose a clinical hold on ongoing clinical trials due to
safety concerns. If the FDA imposes a clinical hold, clinical trials can only proceed under terms authorized by the FDA. Our pre-clinical
and clinical studies must conform to the FDA’s Good Laboratory Practice, or GLP, and Good Clinical Practice, or GCP, requirements,
respectively, which are designed to ensure the quality and integrity of submitted data and protect the rights and well-being of
study patients. Information for certain clinical trials also must be publicly disclosed within certain time limits on the clinical
trial registry and results databank maintained by the NIH.
Typically, clinical
testing involves a three-phase process; however, the phases may overlap or be combined:
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Phase I clinical trials typically are conducted in a small number of volunteers or patients to
assess the early tolerability and safety profile, and the pattern of drug absorption, distribution and metabolism;
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Phase II clinical trials typically are conducted in a limited patient population with a specific
disease in order to assess appropriate dosages and dose regimens, expand evidence of the safety profile and evaluate preliminary
efficacy; and
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Phase III clinical trials typically are larger scale, multicenter, well-controlled trials conducted
on patients with a specific disease to generate enough data to statistically evaluate the efficacy and safety of the product, to
establish the overall benefit-risk relationship of the drug and to provide adequate information for the registration of the drug.
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A therapeutic product
candidate being studied in clinical trials may be made available for treatment of individual patients, in certain circumstances.
Pursuant to the 21st Century Cures Act (Cures Act), which was signed into law in December 2016, the manufacturer of an investigational
product for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating
and responding to requests for individual patient access to such investigational product.
The results of the
pre-clinical and clinical testing, chemistry, manufacturing and control information, proposed labeling and other information are
then submitted to the FDA in the form of either an NDA or BLA for review and potential approval to begin commercial sales. In responding
to an NDA or BLA, the FDA may grant marketing approval, request additional information in a Complete Response Letter, or CRL, or
deny the approval if it determines that the NDA or BLA does not provide an adequate basis for approval. A CRL generally contains
a statement of specific conditions that must be met in order to secure final approval of an NDA or BLA and may require additional
testing. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter,
which authorizes commercial marketing of the product with specific prescribing information for specific indications, and sometimes
with specified post-marketing commitments and/or distribution and use restrictions imposed under a Risk Evaluation and Mitigation
Strategy program. Any approval required from the FDA might not be obtained on a timely basis, if at all.
Among the conditions
for an NDA or BLA approval is the requirement that the manufacturing operations conform on an ongoing basis with cGMP. In complying
with cGMP, we must expend time, money and effort in the areas of training, production and quality control within our own organization
and at our contract manufacturing facilities. A successful inspection of the manufacturing facility by the FDA is usually a prerequisite
for final approval of a pharmaceutical product. Following approval of the NDA or BLA, we and our manufacturers will remain subject
to periodic inspections by the FDA to assess compliance with cGMP requirements and the conditions of approval. We will also face
similar inspections coordinated by foreign regulatory authorities.
Disclosure of Clinical
Trial Information
Sponsors of certain
clinical trials of FDA-regulated products are required to register and disclose certain clinical trial information. Information
related to the product, patient population, phase of investigation, trial sites and investigators, and other aspects of the clinical
trial are then made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials
after completion. Disclosure of the results of these trials can be delayed in certain circumstances for up to two years after the
date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress
of development programs.
Orphan Drugs
Under the Orphan Drug
Act, the FDA may grant orphan drug designation to therapeutic candidates intended to treat a rare disease or condition, which is
generally a disease or condition that affects fewer than 200,000 individuals in the U.S. or more than 200,000 individuals in the
U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a therapeutic
candidate for this type of disease or condition will be recovered from sales in the U.S. for that therapeutic candidate. Orphan
drug designation must be requested before submitting a marketing application for the therapeutic for that particular disease or
condition. 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 drug designation does not convey any advantage in or shorten the duration of the regulatory
review and approval process. The FDA may revoke orphan drug designation, and if it does, it will publicize that the drug is no
longer designated as an orphan drug.
If a therapeutic candidate
with orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the
therapeutic candidate is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications
to market the same therapeutic candidate for the same indication, except in very limited circumstances, for seven years. Orphan
drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains
approval of the same therapeutic candidate as defined by the FDA or if our therapeutic candidate is determined to be contained
within the competitor’s therapeutic candidate for the same indication or disease.
In addition, as the
FDA has interpreted the Orphan Drug Act, even if a previously approved same drug does not have unexpired orphan exclusivity, while
a demonstration of clinical superiority is not required for a subsequent orphan-designated drug to obtain marketing approval, a
demonstration of clinical superiority is required for the subsequent orphan-designated same drug to be awarded a 7-year period
of orphan exclusivity upon marketing approval. In recent years, there have been multiple legal challenges to this FDA interpretation,
and in August 2017, Congress amended the orphan drug provisions of the FDCA through enactment of the FDA Reauthorization Act of
2017 to codify FDA’s longstanding interpretation. Section 527 of the FDCA now expressly provides that if a sponsor of a drug
that is designated as an orphan drug and is otherwise the same as an already approved drug is seeking exclusive approval for the
same rare disease or condition as the already approved drug, FDA shall require such sponsor, as a condition of such exclusive approval,
to demonstrate that such drug is clinically superior to any already approved or licensed drug that is the same drug. Orphan drug
exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a
different disease or condition.
Expedited Development
and Review Programs
The FDA has a Fast
Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet
certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended
to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition.
Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The
sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during
the clinical development of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing
application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission
of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable,
and the sponsor pays any required user fees upon submission of the first section of the application.
Any product submitted
to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite
development and review, such as priority review and accelerated approval. Under the Breakthrough Therapy program, products intended
to treat a serious or life-threatening disease or condition may be eligible for the benefits of the Fast Track program when preliminary
clinical evidence demonstrates that such product may have substantial improvement on one or more clinically significant endpoints
over existing therapies. Additionally, FDA will seek to ensure the sponsor of a breakthrough therapy product receives timely advice
and interactive communications to help the sponsor design and conduct a development program as efficiently as possible. Any product
is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative
therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products.
The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated
for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug
or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide
meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved
on the basis of adequate and well-controlled clinical studies establishing that the product has an effect on a surrogate endpoint
that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival
or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug or biological product receiving
accelerated approval perform adequate and well-controlled post-marketing clinical studies. In addition, the FDA currently requires
as a condition for accelerated approval the pre-approval of promotional materials, which could adversely impact the timing of the
commercial launch of the product. Fast Track designation, Breakthrough Therapy designation, priority review and accelerated approval
do not change the standards for approval but may expedite the development or approval process.
Regenerative Medicine
Advanced Therapies (RMAT) Designation
The FDA has established
a Regenerative Medicine Advanced Therapy (RMAT) designation as part of its implementation of the 21st Century Cures Act, or Cures
Act. The RMAT designation program is intended to fulfill the Cures Act requirement that the FDA facilitate an efficient development
program for, and expedite review of, any drug that meets the following criteria: (1) it qualifies as a RMAT, which is defined as
a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies
or products, with limited exceptions; (2) it is intended to treat, modify, reverse, or cure a serious or life-threatening disease
or condition; and (3) preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for
such a disease or condition. Like breakthrough therapy designation, RMAT designation provides potential benefits that include more
frequent meetings with FDA to discuss the development plan for the product candidate, and eligibility for rolling review and priority
review. Products granted RMAT designation may also be eligible for accelerated approval on the basis of a surrogate or intermediate
endpoint reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful number of sites,
including through expansion to additional sites. RMAT-designated products that receive accelerated approval may, as appropriate,
fulfill their post-approval requirements through the submission of clinical evidence, clinical studies, patient registries, or
other sources of real world evidence (such as electronic health records); through the collection of larger confirmatory data sets;
or via post-approval monitoring of all patients treated with such therapy prior to approval of the therapy.
Rare Pediatric Disease
Priority Review Voucher
The FDA generally defines
a “rare pediatric disease” as a serious or life-threatening disease that affects fewer than 200,000 individuals in
the U.S. primarily under the age of 18 years old. Under the FDA's Rare Pediatric Disease Priority Review Voucher (PRV) program,
upon the approval of an application for a product for the treatment of a rare pediatric disease, the sponsor of such application
is eligible for a Rare Pediatric Disease Priority Review Voucher. Currently, the Priority Review Voucher can be used to obtain
priority review for any subsequent application and may be sold or transferred an unlimited number of times. Under the Cures Act,
Congress extended the PRV program for rare pediatric diseases through 2020. A drug designated as a drug for a rare pediatric disease
by September 30, 2020, and approved by September 30, 2022, may receive a voucher.
Post -Approval Requirements
Oftentimes, even after
a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including
the conduct of additional clinical studies. If such post-approval requirements are not satisfied, the FDA may withdraw its approval
of the drug. In addition, holders of an approved NDA or BLA are required to report certain adverse reactions to the FDA, comply
with certain requirements concerning advertising and promotional labeling for their products, and continue to have quality control
and manufacturing procedures conform to cGMP after approval. The FDA periodically inspects the sponsor’s records related
to safety reporting and/or manufacturing facilities; this latter effort includes assessment of compliance with cGMP. Accordingly,
manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Pricing, Coverage
and Reimbursement
Sales of pharmaceutical
products depend, in part, on the extent to which the costs of products are covered and paid for by third-party payors, such as
government health programs, commercial insurance, and managed healthcare organizations. Third-party payors may limit coverage to
specific products on an approved list or formulary, which might not include all of the FDA-approved products for a particular indication.
Also, third-party payors may refuse to include a particular branded drug on their formularies or otherwise restrict patient access
to a branded drug when a less costly generic equivalent or another alternative is available. 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. The current U.S. administration
has indicated support for possible new measures to regulate drug pricing.
For example, 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, has had a significant impact on the health care industry by, for example, expanding
coverage for the uninsured and seeking to contain overall healthcare costs. With regard to pharmaceutical products, among other
things, the ACA contains provisions that may reduce the profitability of drug products such as expanding and increasing industry
rebates for drugs covered under Medicaid programs and making changes to the coverage requirements under the Medicare Part D program.
Recently, the current U.S. administration and certain members of the U.S. Congress have expressed a desire to modify, repeal, or
otherwise invalidate all, or certain provisions of, the ACA, which has contributed to the uncertainty of the ongoing implementation
and impact of the ACA and also underscores the potential for additional health care reform going forward. There is still uncertainty
with respect to the impact the current U.S. administration and the U.S. Congress may have, if any, and any changes will likely
take time to unfold.
Further other legislative
changes have been proposed and adopted since the ACA was enacted. For example, in August 2011, President Obama signed into law
the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend
to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit
reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction
to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year,
which went into effect beginning on April 1, 2013 and will stay in effect through 2027 unless additional Congressional action is
taken. In addition, on February 9, 2018, Congress passed the Bipartisan Budget Act that made a number of healthcare reforms. For
example, the law changes the discounts manufacturers were required to apply to their drugs under the Coverage Gap Discount Program
from 50% to 70% of the negotiated price starting in 2019. In addition, the law increases civil and criminal penalties for fraud
and abuse laws, including, for example, criminal fines for violations of the Anti-Kickback Statute increase from $25,000 to $100,000
and corresponding prison sentences also increase from no more than five years to no more than ten years.
There has also been
heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which
have resulted in several Congressional inquiries and proposed bills designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement
methodologies for drug products. Individual states in the United States have also become increasingly aggressive in passing legislation
and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement
constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. For example,
in September 2017, the California State Assembly approved SB17 which requires pharmaceutical companies to notify health insurers
and government health plans at least 60 days before any scheduled increases in the prices of their products if they exceed 16%
over a two-year period, and further requiring pharmaceutical companies to explain the reasons for such increase.
In addition, in some
non-U.S. jurisdictions, the proposed pricing for a product candidate must be approved before it may be lawfully marketed. The requirements
governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict
the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices
of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt
a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There
can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow
favorable reimbursement and pricing arrangements for any of our product candidates. Historically, product candidates launched in
the EU do not follow price structures of the U.S. and generally tend to have price structures that are significantly lower.
Other Healthcare
Fraud and Abuse Laws
In the U.S., our activities
are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including, but not
limited to, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human
Services (such as the Office of Inspector General and the Health Resources and Service Administration), the U.S. Department of
Justice, or the DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. For example, sales,
marketing and scientific/educational grant programs may have to comply with the anti-fraud and abuse provisions of the Social Security
Act, the false claims laws, the privacy and security provisions of the Health Insurance Portability and Accountability Act, or
HIPAA, and similar state laws, each as amended, as applicable.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving
any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any item or service reimbursable, in whole or in part, under Medicare,
Medicaid or other federal healthcare programs. The term remuneration has been interpreted broadly to include anything of value.
The Anti-Kickback Statute has been interpreted to apply to arrangements between therapeutic product manufacturers on one hand and
prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve
remuneration that may be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if
they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory
exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality
of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person
or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a
violation. In addition, the ACA codified case law that a claim including items or services resulting from a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act, or FCA.
The federal false claims
and civil monetary penalty laws, including the FCA, which imposes significant penalties and can be enforced by private citizens
through civil qui tam actions, prohibit any person or entity from, among other things, knowingly presenting, or causing to be presented,
a false or fraudulent claim for payment to, or approval by, the federal healthcare programs, including Medicare and Medicaid, or
knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the
federal government. A claim includes “any request or demand” for money or property presented to the U.S. government.
For instance, historically, pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing
free product to customers with the expectation that the customers would bill federal programs for the product. Other companies
have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved,
off-label, and thus generally non-reimbursable, uses.
HIPAA created additional
federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme
to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by,
or under the control or custody of, any healthcare benefit program, including private third-party payors, willfully obstructing
a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up by trick, scheme
or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of
or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, the ACA amended the intent standard for
certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute
or specific intent to violate it in order to have committed a violation.
Many states have similar,
and typically more prohibitive, fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid
and other state programs, or, in several states, apply regardless of the payor. Additionally, to the extent that our product candidates
may in the future be sold in a foreign country, we may be subject to similar foreign laws.
We may be subject to
data privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA, as
amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations,
imposes requirements relating to the privacy, security and transmission of individually identifiable health information. Among
other things, HITECH makes HIPAA’s privacy and security standards directly applicable to business associates, independent
contractors, or agents of covered entities that receive or obtain protected health information in connection with providing a service
on behalf of a covered entity. HITECH also created four new tiers of civil monetary penalties, amended HIPAA to make civil and
criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions
for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing
federal civil actions. In addition, many state laws govern the privacy and security of health information in specified circumstances,
many of which differ from each other in significant ways, are often not pre-empted by HIPAA, and may have a more prohibitive effect
than HIPAA, thus complicating compliance efforts. For example, the California Consumer Privacy Act of 2018, or CCPA, which took
effect on January 1, 2020, gives California residents expanded rights to access and require deletion of their personal information,
opt out of certain personal information sharing, and receive detailed information about how their personal information is used.
In addition, the CCPA authorizes private lawsuits to recover statutory damages for certain data breaches. While it exempts some
data regulated by HIPAA and certain clinical trials data, the CCPA may increase our compliance costs and potential liability with
respect to other personal information we collect about California residents.
We expect our product,
if and when approved, may be eligible for coverage under Medicare, the federal health care program that provides health care benefits
to the aged and disabled, and covers outpatient services and supplies, including certain pharmaceutical products, that are medically
necessary to treat a beneficiary’s health condition. In addition, the product may be covered and reimbursed under other government
programs, such as Medicaid and the 340B Drug Pricing Program. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers
to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services
as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid
patients. Under the 340B Drug Pricing Program, the manufacturer must extend discounts to entities that participate in the program.
As part of the requirements to participate in certain government programs, many pharmaceutical manufacturers must calculate and
report certain price reporting metrics to the government, such as average manufacturer price, or AMP, and best price. Penalties
may apply in some cases when such metrics are not submitted accurately and timely.
Additionally, the federal
Physician Payments Sunshine Act, or the Sunshine Act, within the ACA, and its implementing regulations, require that certain manufacturers
of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s
Health Insurance Program (with certain exceptions) report annually to CMS information related to certain payments or other transfers
of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated
on behalf of, the physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians
and their immediate family members. Failure to report accurately could result in penalties. In addition, many states also govern
the reporting of payments or other transfers of value, many of which differ from each other in significant ways, are often not
pre-empted, and may have a more prohibitive effect than the Sunshine Act, thus further complicating compliance efforts.
New Legislation and Regulations
From time to time,
legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the
testing, approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations
and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our products.
It is impossible to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies
or interpretations will be changed or what the effect of such changes, if any, may be.
Corporate Information
Our corporate headquarters
are located at 8840 Wilshire Blvd., 2nd Floor, Beverly Hills, California 90211. Our telephone number is (310) 358-3200 and our
internet address is www.capricor.com. The information on, or accessible through, our website is not part of this Annual
Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference.
Employees
Currently, we have
16 full-time employees. None of our employees are covered by a collective bargaining agreement. We believe that our relations with
our employees are satisfactory. We have also retained several consultants to perform various operational and administrative functions.
Certain officers of Capricor are also serving as officers of the Company.
Description of Property
We do not own any real
property. Our principal offices are located at 8840 Wilshire Blvd., 2nd Floor, Beverly Hills, California 90211. Capricor leases
space for its corporate offices from The Bubble Real Estate Company, LLC pursuant to a lease that was originally effective for
a two-year period beginning July 1, 2013 with an option to extend the lease for an additional twelve months. Capricor subsequently
entered into several amendments extending the term of the lease and modifying its terms. Effective January 1, 2020, we entered
into an amendment with the Bubble Real Estate Company, LLC pursuant to which we extended our lease for an additional year ending
December 31, 2020 and reduced the square footage. The monthly rental payment is $16,229 for this annual period.
Capricor leases facilities
from CSMC pursuant to a lease, or the Facilities Lease, that was originally effective for a three-year period beginning June 1,
2014. Capricor has subsequently entered into several amendments extending the term of the lease and modifying its terms. From August
1, 2017 through March 1, 2019, total monthly rent was $19,756. Effective March 1, 2019, the square footage of the leased premises
was reduced, resulting in a rent reduction of approximately $4,000 per month. In July 2019, Capricor exercised an option to extend
the term of the Facilities Lease for an additional 12-month period through July 31, 2020 with a monthly lease payment of $15,805.
The Company has a further option to extend the Facilities Lease through July 31, 2021. The premises leased from CSMC are located
at 8700 Beverly Blvd., Los Angeles, California 90048.
Investment in our
common stock involves significant risk. You should carefully consider the information described in the following risk factors,
together with the other information appearing elsewhere in this Annual Report on Form 10-K, before making an investment decision
regarding our common stock. If any of the events or circumstances described in these risks actually occur, our business, financial
condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances,
the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock. Moreover,
the risks described below are not the only ones that we face.
Risks Related to Our Business
We need substantial additional funding
before we can complete the development of our product candidates. If we are unable to obtain such additional capital, we will be
forced to delay, reduce or eliminate our product development and clinical programs and may not have the capital required to otherwise
operate our business.
Developing biopharmaceutical
products, including conducting pre-clinical studies and clinical trials and establishing manufacturing capabilities, is expensive.
As of December 31, 2019, we had cash, cash equivalents and marketable securities totaling approximately $9.9 million. We have not
generated any revenues from the commercial sale of products. We will not be able to generate any product revenues until, and only
if, we receive approval to sell our drug candidates from the FDA or other regulatory authorities.
From inception, we
have financed our operations through public and private sales of our equity and debt securities, grants from the National Institutes
of Health, or NIH, and the Department of Defense, or DoD, and a loan commitment and grant award from the California Institute for
Regenerative Medicine, or CIRM. In December 2013 we also entered into a collaboration agreement with Janssen Biotech, Inc., or
Janssen, which provided funding for the development of our cell manufacturing program, including CAP-1002. As we have not generated
any revenue from commercial sales to date and we do not expect to generate revenue for several years, if ever, we will need to
raise substantial additional capital in order to fund our general corporate activities and to fund our research and development,
including our ongoing clinical trials and plans for new clinical trials and product development.
In 2019, we implemented
certain cost cutting measures including a reduction in the size of our workforce in order to conserve cash resources. Other than
our cash on hand and the funds expected to be received from our supplying product for clinical trials sponsored by CSMC and the
DoD grant award which funds ongoing pre-clinical work for our exosomes, as well as potential sales under our August 2019 ATM Program,
we currently have no commitments or arrangements for any additional financing to fund the research and clinical development of
CAP-1002 or our exosomes.
We may seek to raise
additional funds through various potential sources, such as equity and debt financings, or through strategic collaborations and
license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations
or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. Moreover, to the extent
that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and
debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration
and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates, or grant
licenses on terms that may not be favorable to us.
Given our capital constraints,
we need to prioritize spending on our clinical and pre-clinical programs. If we are unable to raise sufficient funds to support
our current and planned operations, we may elect to discontinue certain of our ongoing activities or programs. Our inability to
raise additional funds could also prevent us from taking advantage of opportunities to pursue promising new or existing programs
in the future.
Our forecasts regarding
our beliefs in the sufficiency of our financial resources to support our current and planned operations are forward-looking statements
and involve significant risks and uncertainties, and actual results could vary as a result of a number of factors, including the
factors discussed elsewhere in this “Risk Factors” section. We have based these estimates on assumptions that may prove
to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements
will depend on many factors, including, but not limited to:
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the scope, rate of progress, cost and results of our research and development activities, especially our HOPE-2 clinical trial and our ongoing exosomes program;
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the next steps in the development of our Duchenne muscular dystrophy, or DMD, program, which may potentially include a Phase III clinical trial for our CAP-1002 product candidate in DMD;
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the availability of funding from government programs including the NIH, and DoD;
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the costs of developing adequate manufacturing processes and facilities;
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the costs associated with and timing of regulatory approval;
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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the costs and risks involved in conducting clinical trials and manufacturing operations in the U.S. and internationally;
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the effect of competing technological and market developments;
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the terms and timing of any collaboration, licensing or other arrangements that we may establish;
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the cost and timing of technology transfer for, and completion of, clinical and commercial-scale outsourced manufacturing activities; and
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the costs of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval.
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We have a history of net losses,
and we expect losses to continue for the foreseeable future. In addition, a number of factors may cause our operating results to
fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
We have a history of
net losses, expect to continue to incur substantial net losses for the foreseeable future, and may never achieve or maintain profitability.
Our operations to date have been primarily limited to organizing and staffing our company, developing our technology, and undertaking
pre-clinical studies and clinical trials of our product candidates. We have not yet obtained regulatory approval for any of our
product candidates. Specifically, our financial condition and operating results have varied significantly in the past and will
continue to fluctuate from quarter-to-quarter and year-to-year in the future 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 the following factors:
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our need for substantial additional capital to fund our trials and development programs;
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delays in the commencement, enrollment, and timing of clinical testing;
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the viability of CAP-1002 as a potential product candidate for the treatment of DMD and its development through all stages of clinical development;
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the viability of our exosome technologies as potential product candidates and the advancement of our exosome technologies through all stages of its pre-clinical and clinical development;
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any delays in regulatory review and approval of our product candidates in clinical development;
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our ability to receive regulatory approval or commercialize our product candidates, within and outside the United States;
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potential side effects of our current or future products and product candidates that could delay or prevent commercialization or cause an approved treatment drug to be taken off the market;
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market acceptance of our product candidates;
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our ability to establish an effective sales and marketing infrastructure once our products are commercialized or to establish partnerships with other companies who have greater sales and marketing capabilities;
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our ability to establish or maintain collaborations, licensing or other arrangements, including strategic partnerships for CAP-1002 in DMD;
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our ability and third parties’ abilities to obtain and protect intellectual property rights;
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competition from existing products or new products that may emerge;
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guidelines and recommendations of therapies published by various organizations;
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the ability of patients to obtain coverage of, or sufficient reimbursement for, our products;
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our ability to maintain adequate insurance policies;
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our ability to successfully manufacture our product candidates in sufficient quantities and on a timely basis to meet clinical trial and potential commercial demand;
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our dependency on third parties to formulate and manufacture our product candidates;
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our ability to maintain our current manufacturing facility, including our ability to achieve and maintain current Good Manufacturing Practices, or cGMP, certification, and to secure other facilities as determined to be necessary;
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costs related to and outcomes of potential intellectual property litigation;
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compliance with obligations under intellectual property licenses with third parties;
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our ability to implement additional internal systems and infrastructure;
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our ability to adequately support future growth;
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if our products are approved for commercial sale, the ability to secure reimbursement for our products;
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our ability to attract and retain key personnel to manage our business effectively; and
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the ability of members of our senior management who have limited experience in managing a public company to manage our business and operations.
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The Company’s technology is
not yet proven and each of our product candidates is still in clinical or pre-clinical development.
Each of the Company’s
two active product candidates, CAP-1002 and our exosome technologies, are in development and each requires further and, in some
cases, extensive clinical testing before it may be approved by the FDA, or another regulatory authority in a jurisdiction outside
the United States, which could take several years to complete, if ever. The Company’s failure to establish the efficacy of
its technologies would have a material adverse effect on the Company. We cannot predict with any certainty the results of such
clinical testing, including the results of our HOPE-2 trial or any potential Phase III trial of our CAP-1002 product candidate
in DMD. Additionally, we cannot predict with any certainty if, or when, we might commence any additional clinical trials of our
product candidates, whether we will be able to secure a partner to fund and/or conduct a potential Phase III trial, or whether
our current trials will yield sufficient data to permit us to proceed with additional clinical development and ultimately submit
an application for regulatory approval of our product candidates in the United States or abroad, or whether such applications will
be accepted by the appropriate regulatory agencies. We are also unable to predict whether our pre-clinical studies of our exosomes
product will result in a viable clinical development program.
Business disruptions such as natural
disasters, widespread infectious diseases or pandemics could seriously harm our future revenues and financial condition and increase
our costs and expenses.
Our corporate headquarters
and manufacturing facilities are located in the greater Los Angeles, California area, a region known for seismic activity, as well
as being susceptible to drought and fires. A significant natural disaster, such as an earthquake, flood or fire, occurring at our
headquarters or manufacturing facilities, or at the facilities of any third-party manufacturer or vendor, could have a material
adverse effect on our business, financial condition and results of operations. In addition, outbreaks of viruses, infectious diseases
or pandemics (including, for example, recent outbreak of the novel coronavirus (COVID-19)), terrorist acts or acts of war targeted
at the United States, and specifically the Los Angeles, California region, could cause damage or disruption to us, our employees,
facilities, contractors and collaborators, which could have a material adverse effect on our business, financial condition and
results of operations.
The coronavirus outbreak could adversely
impact our business.
In December 2019, it
was first reported that there had been an outbreak of a novel strain of coronavirus (COVID-19), in China. COVID-19 has since
spread globally, and the number of cases is increasing daily. Governments in the United States and elsewhere are taking severe
measures to slow the spread of COVID-19, including requiring that certain business close or conduct only the minimum necessary
operations.
As COVID-19 continues
to spread, we may experience disruptions that could severely impact our business, including:
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delays or difficulties in enrolling patients in our clinical trials;
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diversion of healthcare resources to address COVID-19, which could limit the availability of medical
facilities for our clinical trials;
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forced closures, or reductions in operations, at our facilities or the facilities of third parties
with whom we do business; and
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disruptions to our workforce, or the workforces of third parties with whom we do business, caused
by sickness, travel restrictions or quarantines, including but not limited to the announcement on March 19, 2020 by the Governor
of the State of California ordering all individuals living in the State of California to stay at home or at their place of residence.
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The global outbreak
of COVID-19 continues to evolve and its ultimate impact on our business will depend on future developments, which are highly uncertain
and cannot be predicted. Any of the disruptions listed above, or other disruptions caused by new developments associated
with the COVID-19 outbreak could severely impact our business.
A breakdown or breach of our information
technology systems could subject us to liability or interrupt the operation of our business.
We are increasingly
dependent upon information technology systems and data, especially if we expand our clinical trials and therefore our databases
of patient information. Our computer systems are potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise,
data privacy or security breaches by individuals authorized to access our information technology systems or others may pose a risk
that sensitive data, including intellectual property, trade secrets or personal information belonging to us, our patients, customers
or other business partners, may be exposed to unauthorized persons or to the public. Cyber-attacks are increasing in their frequency,
sophistication and intensity. While we continue to build and improve our information systems and infrastructure and believe we
have taken appropriate security measures to minimize these risks to our data and information technology systems, there can be no
assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
Our internal computer systems, or
those used by our CROs or other contractors or consultants, may fail or suffer security breaches.
We utilize and rely
on services of third parties to perform services in connection with our clinical trials, which services involve the collection,
use, storage and analysis of personal health information. While we receive assurances from these vendors that their services are
compliant with the Health Insurance Portability and Accountability Act, or HIPAA, and other applicable privacy laws, there can
be no assurance that such third parties will comply with applicable laws or regulations. Non-compliance by such vendors may result
in liability for us which would have a material adverse effect on our business, financial conditions and results of operations.
Despite the implementation
of security measures, our internal computer systems and those of our current and future clinical research organizations, or CROs,
and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not
experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions
in our operations, it could result in a material disruption of our development programs and our business operations. For example,
the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts
and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were
to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information,
we could incur liability and the further development and commercialization of our product candidates could be delayed.
If we achieve our near-term product
development milestones, we may not be able to manage any subsequent growth.
Should we achieve our
near-term product development milestones, of which no assurance can be given, our long-term viability will depend upon the expansion
of our operations and the effective management of our growth, which will place a significant strain on our management and on our
administrative, operational and financial resources, especially if we expand our business and operations internationally. To manage
this growth, we may need to expand our facilities, augment our operational, financial and management systems and hire and train
additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
Risks Related to Clinical and Commercialization
Activities
Our success depends upon the viability
of our product candidates and we cannot be certain any of them will receive regulatory approval to be commercialized.
We will need FDA approval
to market and sell any of our product candidates in the United States and approvals from FDA-equivalent regulatory authorities
in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to obtain FDA approval of any
of our product candidates, we must submit to the FDA a new drug application, or NDA, or a biologics license application, or BLA,
demonstrating that the product candidate is safe for humans and effective for its intended use. This demonstration requires significant
research and animal tests, which are referred to as pre-clinical studies, as well as human tests, which are referred to as clinical
trials. Satisfaction of the FDA’s regulatory requirements typically takes many years, depends upon the type, complexity,
and novelty of the product candidate, and requires substantial resources for research, development, testing and manufacturing.
We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and
effective for indicated uses. The FDA has substantial discretion in the drug approval process and may require us to conduct additional
pre-clinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in
government regulation, future legislation, administrative action or changes in FDA policy that occur prior to or during our regulatory
review.
Even if we comply with
all FDA requests, the FDA may ultimately reject one or more of our NDAs or BLAs, as applicable. We cannot be sure that we will
ever obtain regulatory clearance for our product candidates. Failure to obtain FDA approval of any of our product candidates will
reduce our number of potentially salable products, if any, and, therefore, corresponding product revenues, and will have a material
and adverse impact on our business.
As the results of earlier pre-clinical
studies or clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials
may not have favorable results in later clinical trials or receive regulatory approval.
Even if our pre-clinical
studies and clinical trials are completed as planned, we cannot be certain that their results will support the claims of our product
candidates. Positive results in pre-clinical testing and early clinical trials do not ensure that results from later clinical trials
will also be positive, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical
trials and pre-clinical testing. Results of our interim analysis of the HOPE-2 trial conducted at 6 months may not be predictive
of the 12-month results. Because we partially unblinded the results in order to conduct the interim analysis, our ability to use
the data from the HOPE-2 trial has been impacted.
Our clinical trial
process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure
would cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination
of, our clinical trials will delay or cause us to refrain from the filing of our NDAs and/or BLAs with the FDA and, ultimately,
our ability to commercialize our product candidates and generate product revenues. In addition, our clinical trials to date involve
small patient populations. Because of the small sample size, the results of these clinical trials may not be indicative of future
results.
Despite the results
reported in earlier clinical trials for our product candidates, we do not know whether any Phase II, Phase III or other clinical
trial which we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market our product
candidates. A number of companies in the pharmaceutical industry, including those with greater resources and experience, have suffered
significant setbacks in Phase II or Phase III clinical trials, even after seeing promising results in earlier clinical trials.
Our
exosome technologies are based on a novel therapeutic approach which makes it difficult to predict the time
and cost of development and of subsequently obtaining regulatory approval, if at all.
Our exosome technologies
involve a relatively new therapeutic approach which will face both clinical and regulatory challenges. To date,
no products based on exosomes have been approved in the United States or the European Union. It is therefore difficult to accurately
predict the developmental challenges we may face for our exosome technologies as they proceed through preclinical studies and clinical
trials. In addition, because we have only conducted preclinical studies with our exosome technologies, we have not yet been able
to assess their safety in humans, and there may be short-term or long-term effects from treatment with our exosomes that we cannot
predict at this time. Also, animal models for the indications we may explore may not exist or may be difficult to obtain for our
preclinical studies. As a result of these factors, we are unable to predict the time and cost of development of the exosome technologies
and we cannot predict whether the application of the exosome technologies, or any similar or competitive exosome technologies,
will result in regulatory approval of any products. There can be no assurance that any development problems we experience in the
future related to our exosomes or any of our research programs will not cause significant delays or unanticipated costs,
or that such development problems can be solved. Any of these factors may prevent us from completing our preclinical studies or
any clinical trials that we may initiate or commercializing any product candidates we may develop on a timely or profitable basis,
if at all.
The clinical trial
requirements of the FDA, the European Medicines Agency, or EMA, and other regulatory authorities and the criteria these regulators
use to determine the safety and efficacy of a product candidate vary substantially according to the
type, complexity and intended use and market of the product candidate. As a result, the regulatory approval process for our exosomes
is uncertain and may be more expensive and take longer than the approval process for other product candidates. It is difficult
to determine how long it will take or how much it will cost to obtain regulatory approvals for our exosomes in either the United
States or the European Union or other regions of the world or how long it will take to commercialize our product candidates, if
at all. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product
candidate to market could decrease our ability to generate sufficient product revenue, and our business, financial condition, results
of operations and prospects may be harmed.
Negative developments
in the field of exosomes could damage public perception of any product candidates that we develop, which could adversely affect
our ability to conduct our business or obtain regulatory approvals for such product candidates.
Exosome
therapeutics are novel and unproven therapies which may not gain the acceptance of the public, patients or the medical community.
To date, other efforts to leverage natural exosomes have generally demonstrated an inability to generate exosomes with predictable
biologically active properties or to manufacture exosomes at suitable scale to treat more than a small number of patients. Our
success will depend on our ability to demonstrate that our exosome technologies can overcome these challenges.
Additionally,
our success will depend upon physicians who specialize in the treatment of diseases targeted by our exosomes prescribing treatments
that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are more familiar
and for which greater clinical data may be available. Adverse events in clinical trials of our exosomes or in clinical trials of
others developing similar products and the resulting publicity, as well as any other adverse events in the field of exosome therapeutics,
could result in a decrease in demand for any products that we may develop. These events could also result in the suspension, discontinuation,
or clinical hold of, or modification to, our clinical trials. Any future negative developments in the field of exosomes and their
use as therapies could also result in greater governmental regulation, stricter labeling requirements and potential regulatory
delays in the testing or approvals of our exosomes or other future product candidates. Any increased scrutiny could delay or increase
the costs of obtaining marketing approval for our exosomes or any other product candidates which we may develop in the future.
We may not be able to file INDs to
commence additional clinical trials on the timelines we expect, and even if we are able to do so, the FDA may not permit us to
proceed.
We hope to file additional
investigational new drug applications, or INDs, over the next several years, including with respect to our exosome technologies
in one or more indications. However, the timing of our filing of these INDs is primarily dependent on receiving further data from
our pre-clinical studies. As discussed below, we need to file an IND with respect to one therapeutic indication on or before April
19, 2020, in order to retain our exclusive license with CSMC for exosomes.
We cannot be sure that
submission of an IND will result in the FDA allowing further clinical trials to begin, or that, once begun, issues will not arise
that result in the suspension or termination of such clinical trials. Any IND we submit could be denied by the FDA or the FDA could
place any future investigation of ours on clinical hold until we provide additional information, either before or after clinical
trials are initiated. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical
trial set forth in an IND or clinical trial application, we cannot guarantee that such regulatory authorities will not change their
requirements in the future. Unfavorable future trial results or other factors, such as insufficient capital to continue development
of a product candidate or program, could also cause us to voluntarily withdraw an effective IND.
The Company has limited experience
in conducting clinical trials, which are complex and subject to strict regulatory oversight.
The Company has limited
clinical trial experience with respect to its product candidates. The clinical testing process is governed by stringent regulation
and is highly complex, costly, time-consuming, and uncertain as to outcome, and pharmaceutical products and products used in the
regeneration of tissue may invite particularly close scrutiny and requirements from the FDA and other regulatory bodies. Our failure
or the failure of our collaborators to conduct clinical trials successfully or our failure to capitalize on the results of clinical
trials for our product candidates would have a material adverse effect on the Company. If our clinical trials of our product candidates
or future product candidates do not sufficiently enroll or produce results necessary to support regulatory approval in the United
States or elsewhere, or if they show undesirable side effects, we will be unable to commercialize these product candidates.
To receive regulatory
approval for the commercial sale of our product candidates, we must conduct adequate and well-controlled clinical trials to demonstrate
efficacy and safety in humans. Clinical failure can occur at any stage of testing. Our clinical trials may produce negative or
inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing.
In addition, the results of our clinical trials may show that our product candidates are ineffective or may cause undesirable side
effects, which could interrupt, delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other
regulatory authorities. Furthermore, negative, delayed or inconclusive results may result in:
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the withdrawal of clinical trial participants;
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the termination of clinical trial sites or entire trial programs;
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costly litigation arising out of the trials;
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substantial monetary awards to patients or other claimants;
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the requirement that additional trials be conducted;
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impairment of our business reputation;
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loss of revenues; and
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the inability to commercialize our product candidates.
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Delays in the commencement, enrollment,
and completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval
for our product candidates.
Delays in the commencement,
enrollment or completion of clinical testing could significantly affect our product development costs. A clinical trial may be
suspended or terminated by the Company, the FDA, or other regulatory authorities due to a number of factors. The commencement and
completion of clinical trials require us to identify and maintain a sufficient number of trial sites, many of which may already
be engaged in other clinical trial programs for the same indication as our product candidates or may otherwise be resource constrained.
We may be required to withdraw from a clinical trial as a result of changing standards of care, or we may become ineligible to
participate in clinical studies. We do not know whether planned clinical trials will begin on time or be completed on schedule,
if at all. The commencement, enrollment and completion of clinical trials can be delayed for a number of reasons, including, but
not limited to, delays related to:
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findings in pre-clinical studies;
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reaching agreements on acceptable terms with prospective CROs, vendors and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, vendors and trial sites;
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obtaining regulatory clearance to commence a clinical trial;
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complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial, or being required to conduct additional trials before moving on to the next phase of trials;
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obtaining institutional review board, or IRB, approval to conduct a clinical trial at numerous prospective sites;
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recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including the size of the patient population, nature of trial protocol, meeting the enrollment criteria for our studies, screening failures, the inability of the sites to conduct trial procedures properly, the inability of the sites to devote their resources to the trial, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;
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retaining patients who have initiated their participation in a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, or side effects from the therapy, or who are lost to further follow-up;
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manufacturing sufficient quantities of a product candidate for use in clinical trials on a timely basis;
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demonstrating the bioequivalence of products we manufacture to prior products manufactured on our behalf;
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complying with design protocols of any applicable special protocol assessment we receive from the FDA;
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severe or unexpected drug-related side effects experienced by patients in a clinical trial;
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collecting, analyzing and reporting final data from the clinical trials;
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breaches in quality of manufacturing runs that compromise all or some of the doses made; positive results in FDA-required viral testing; karyotypic abnormalities in our cell product; or contamination in our manufacturing facilities, all of which events would necessitate disposal of all cells made from that source;
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availability of materials provided by third parties necessary to manufacture our product candidates;
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availability of adequate amounts of acceptable tissue for preparation of master cell banks for our products;
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requirements to conduct additional trials and studies, and increased expenses associated with the services of the Company’s CROs and other third parties; and
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meeting logistical requirements for the delivery of investigational product.
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If we are required
to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, we
or our development partners, if any, may be delayed in obtaining, or may not be able to obtain or maintain, clinical or marketing
approval for these product candidates. We may not be able to obtain approval for indications that are as broad as intended, or
we may be able to obtain approval only for indications that are entirely different from those indications for which we sought approval.
Changes in regulatory
requirements and guidance may occur, and we may need to amend clinical trial protocols to reflect these changes with appropriate
regulatory authorities. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-examination, which may
impact the costs, timing, or successful completion of a clinical trial. If we experience delays in the completion of, or if we
terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate
product revenues will be delayed or will not be realized. In addition, many of the factors that cause, or lead to, a delay in the
commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
Even if we are able to ultimately commercialize our product candidates, other therapies for the same or similar indications may
have been introduced to the market and already established a competitive advantage. Any delays in obtaining regulatory approvals
may:
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delay commercialization of, and our ability to derive product revenues from, our product candidates;
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impose costly procedures on us; or
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diminish any competitive advantages that we may otherwise enjoy.
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The FDA has granted orphan drug status
and a Regenerative Medicine Advanced Therapy (RMAT) designation to CAP-1002 for the treatment of DMD, but we may be unable to maintain
or receive the benefits associated with orphan drug status, including market exclusivity, or an RMAT designation.
Under the Orphan Drug
Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition or for which there
is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for a disease
or condition will be recovered from sales in the United States for that drug or biologic. If a biological product that has orphan
drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is
entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full Biologics
License Application, or BLA, to market the same biologic for the same indication for seven years, except in limited circumstances,
such as a showing of clinical superiority to the product with orphan drug exclusivity.
We have received orphan
drug status for CAP-1002 for the treatment of DMD, but exclusive marketing rights in the United States may be limited if we seek
approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request
for designation was materially defective or if we are unable to assure the availability of sufficient quantities of the product
to meet the needs of patients with the rare disease or condition. Even though we have obtained orphan drug designation for CAP-1002
for a select indication, we may be unable to seek or obtain orphan drug designation for our future product candidates and we may
not be the first to obtain marketing approval for any particular orphan indication.
We have also obtained
an RMAT designation for CAP-1002 for the treatment of DMD. The RMAT designation program is intended to fulfill the Cures Act requirement
that the FDA facilitate an efficient development program for, and expedite review of, any drug that meets the following criteria:
(1) it qualifies as a RMAT, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product,
or any combination product using such therapies or products, with limited exceptions; (2) it is intended to treat, modify, reverse,
or cure a serious or life-threatening disease or condition; and (3) preliminary clinical evidence indicates that the drug has the
potential to address unmet medical needs for such a disease or condition. Like breakthrough therapy designation, RMAT designation
provides potential benefits that include more frequent meetings with FDA to discuss the development plan for the product candidate,
and eligibility for rolling review and priority review. Products granted RMAT designation may also be eligible for accelerated
approval on the basis of a surrogate or intermediate endpoint reasonably likely to predict long-term clinical benefit, or may be
able to rely upon data obtained from a meaningful number of sites, including through expansion to additional sites. RMAT designation
does not change the standards for product approval, and there is no assurance that such designation will result in expedited review
or approval or that the approved indication will not be narrower than the indication covered by the RMAT designation. Additionally,
RMAT designation can be revoked if the criteria for eligibility cease to be met as clinical data emerges.
Even if we were to obtain approval
for CAP-1002 for the treatment of DMD with the rare pediatric disease designation, the Rare Pediatric Disease Priority Review Voucher
Program may no longer be in effect at the time of such approval.
CAP-1002 has received
rare pediatric disease designation from the FDA for the treatment of DMD. The FDA generally defines a "rare pediatric disease"
as a serious or life-threatening disease that affects fewer than 200,000 individuals in the U.S. primarily under the age of 18
years old. Under the FDA's Rare Pediatric Disease Priority Review Voucher program, upon the approval of a NDA or BLA for the treatment
of a rare pediatric disease, the sponsor of such application would be eligible for a Rare Pediatric Disease Priority Review Voucher
that can be used to obtain priority review for a subsequent NDA or BLA. The Priority Review Voucher may be sold or transferred
an unlimited number of times. A drug designated as a drug for a rare pediatric disease by September 30, 2020, and approved by September
30, 2022, may receive a voucher. This program has been subject to criticism, including by the FDA, and it is possible that even
if we obtain approval for CAP-1002 and qualify for such a Priority Review Voucher, the program may no longer be in effect at the
time of approval.
Providing product for use in third
party trials poses risks to our product candidates.
In addition to manufacturing
CAP-1002 for its own clinical trials, Capricor has agreed to provide CAP-1002 for investigational purposes in two clinical trials
sponsored by CSMC. The first trial is known as “Regression of Fibrosis and Reversal of Diastolic Dysfunction in HFpEF Patients
Treated with Allogeneic CDCs.” The second trial is known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived
Allogeneic Stem Cells.” In both studies, Capricor is providing the necessary number of doses and will receive a negotiated
amount of monetary compensation in exchange for doing so.
Providing product
for clinical trials sponsored by third parties poses significant risks for the Company as we will not have control over the conduct
of the trial even though we have used our commercially reasonable efforts to ensure that the investigative sites are contractually
bound to follow the protocol and other procedures established by Capricor. Additionally, even though the investigative sites have
experience in conducting clinical trials, any adverse event that may occur during the trial may have a negative impact on our
efforts to obtain regulatory approval for our product. There are no assurances that the clinical trial sites will perform the
studies in accordance with the protocol, the manuals provided by Capricor or the sponsor’s instructions, or otherwise act
in accordance with applicable law. There is no assurance that if research injuries are sustained, any insurance carrier will compensate
Capricor for any liabilities or other losses sustained by Capricor arising out of these injuries. Since we cannot predict
when the trials will be completed, there is a risk that product designated for the trials will have expired at the time they are
required. Additionally, there is a risk that our product may encounter some kind of contamination internally in our leased facility,
at our contracted shipping facility or in transit which may have an adverse effect on our business or operations. While the Company
expects to continue to receive payment for the product that it supplies for the REGRESS and ALPHA trials, we cannot predict the
rate at which such payments will be made, if at all, due to delays in enrollment or other problems that may arise at the trial
sites.
Our products face a risk of failure
due to adverse immunological reactions.
A potential risk of
an allogeneic therapy such as that being tested by the Company with CAP-1002 is that patients might develop an immune response
to the cells being infused. Such an immune response may induce adverse clinical effects which would impact the safety and efficacy
of the Company’s products and the success of our trials. Additionally, if research subjects have pre-existing antibodies
or other immune sensitization to our cells, our cells and the therapy could potentially be rendered ineffective which could have
a negative impact on the regulatory pathway for our product as well as the viability for other potential indications. After a patient
in the HOPE-2 trial had a serious adverse event in the form of anaphylaxis, we put a voluntary hold on dosing in December 2018
to develop a plan to manage potential allergic reactions. The investigation suggests that the patient may have been allergic to
something contained in the investigational product, including possibly an excipient, or inactive ingredient, in the formulation.
To reduce the risk of future events, we initiated a pre-medication strategy commonly used by physicians to prevent and treat allergic
reactions. Although at the time of filing this Annual Report on Form 10-K, all infusions in the HOPE-2 trial have been completed
and we are not aware of the occurrence of any additional allergic reactions or further severe safety issues, we cannot provide
any assurances that this will not happen again in any future studies. If these or other reactions continue to occur, it could have
a material adverse impact on the effectiveness of the product, our ability to receive approval of our product candidates, and could
result in substantial delays, increased costs and potentially termination of the trial.
Our business faces significant government
regulation, and there is no guarantee that our product candidates will receive regulatory approval.
Our research and development
activities, pre-clinical studies, clinical trials, and manufacturing and marketing of our potential products are subject to extensive
regulation by the FDA and other regulatory authorities in the United States, as well as by regulatory authorities in other countries.
In the United States, our product candidates are subject to regulation as biological products or as combination biological products/medical
devices under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other statutes, and as further provided
in the Code of Federal Regulations. Different regulatory requirements may apply to our products depending on how they are categorized
by the FDA under these laws. These regulations can be subject to substantial and significant interpretation, addition, amendment
or revision by the FDA and by the legislative process. The FDA may determine that we will need to undertake clinical trials beyond
those currently planned. Furthermore, the FDA may determine that results of clinical trials do not support approval for the product.
Similar determinations may be encountered in foreign countries. The FDA will continue to monitor products in the market after approval,
if any, and may determine to withdraw its approval or otherwise seriously affect the marketing efforts for any such product. The
same possibilities exist for trials to be conducted outside of the United States that are subject to regulations established by
local authorities and local law. Any such determinations would delay or deny the introduction of our product candidates to the
market and have a material adverse effect on our business, financial condition, and results of operations.
Drug manufacturers
are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency, other federal agencies and corresponding
state agencies to ensure strict compliance with good manufacturing practices, and other government regulations and corresponding
foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards,
nor can we guarantee that we will maintain compliance with such regulations in regards to our own manufacturing processes. Other
risks include:
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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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regulatory authorities may withdraw their approval of the IND or the product or require us to take our approved products off the market;
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we may be required to change the way the product is manufactured or administered, and we may be required to conduct additional clinical trials or change the labeling of our products;
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we may be required to change the way the product is manufactured or administered, and we may be required to conduct additional clinical trials or change the labeling of our products;
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we will be required to manufacture or retain the services of a commercial manufacturer to develop product suitable for commercial sale;
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we may have limitations on how we promote our products; and
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we may be subject to litigation or product liability claims.
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There are additional risks involved
in conducting clinical trials internationally.
If we decide to expand
one or more of our clinical trials to investigative sites in Europe or other countries outside of the United States, we will have
additional regulatory requirements that we will have to meet in connection with our manufacturing, distribution, use of data and
other matters. For example, if we decide to conduct our trials in Europe, we will have to either move our manufacturing facility
to a facility located in Europe, enter into an agreement with a European manufacturer to manufacture our product candidates for
us or enter into an agreement with a domestic manufacturer who maintains an acceptable cGMP facility. Any of those options would
involve a significant monetary investment, time delays, and increased risk and may impact the progress of our clinical trials and
regulatory approvals.
To the extent we conduct
business in the European Union, or EU, or receive information about EU residents, we will also have to comply with the EU General
Data Protection Regulation, or the GDPR, which was officially adopted in April 2016 and went into effect in May 2018. The GDPR
introduces new data protection requirements in the EU, as well as substantial fines for breaches of data protections rules. The
GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded disclosures
about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements
and onerous new obligations on services providers. Non-compliance with the GDPR may result in monetary penalties of up to €20
million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the
enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase
our cost of providing our products and services or even prevent us from offering certain services in jurisdictions in which we
operate.
Additionally, the U.S.
Foreign Corrupt Practices Act, or FCPA, prohibits U.S. corporations and their representatives from offering, promising, authorizing
or making payments to any foreign government official, government staff member, political party or political candidate in an attempt
to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many
countries. Other countries have enacted similar anti-corruption laws and/or regulations. As we expand our business outside of the
United States, ensuring compliance with the FCPA and the laws of other countries will involve additional monetary and time commitments
on behalf of the Company.
Even if our product candidates receive
regulatory approval, we may still face future development and regulatory difficulties.
Even if U.S. regulatory
approval is obtained, the FDA may still impose significant restrictions on a product’s indicated uses or marketing, or impose
ongoing requirements for potentially costly post-approval studies. If any of our products were granted accelerated approval, the
FDA could require post-marketing confirmatory trials to verify and describe the anticipated effect on irreversible morbidity or
mortality or other clinical benefit. FDA may withdraw approval of a drug or indication approved under the accelerated approval
pathway if any of the following were to occur: a trial required to verify the predicted clinical benefit of the product fails to
verify such benefit; other evidence demonstrates that the product is not shown to be safe or effective under the conditions of
use; the applicant fails to conduct any required post-approval trial of the drug with due diligence; or the applicant disseminates
false or misleading promotional materials relating to the product. In addition, the FDA currently requires as a condition for accelerated
approval the pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.
Given the number of
recent high-profile adverse safety events with certain drug products, the FDA may require, as a condition of approval, costly risk
management programs, which may include safety surveillance, restricted distribution and use, patient education, enhanced labeling,
special packaging or labeling, expedited reporting of certain adverse events, pre-approval of promotional materials, and restrictions
on direct-to-consumer advertising. Furthermore, heightened Congressional scrutiny on the adequacy of the FDA’s drug approval
process and the FDA’s efforts to assure the safety of marketed drugs have resulted in the proposal of new legislation addressing
drug safety issues. If enacted, any new legislation could result in delays or increased costs during the period of product development,
clinical trials, and regulatory review and approval, as well as increased costs to assure compliance with any new post-approval
regulatory requirements. Any of these restrictions or requirements could force us to conduct costly studies or increase the time
for us to become profitable. For example, any labeling approved for any of our product candidates may include a restriction on
the term of its use, or it may not include one or more of our intended indications.
Our product candidates
will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping,
and submission of safety and other post-market information on the drug. New issues may arise during a product lifecycle that did
not exist, or were unknown, at the time of product approval, such as adverse events of unanticipated severity or frequency, or
problems with the facility where the product is manufactured. Since approved products, manufacturers, and manufacturers’
facilities are subject to continuous review and periodic inspections, these new issues post-approval may result in voluntary actions
by Capricor or may result in a regulatory agency imposing restrictions on that product or us, including requiring withdrawal of
the product from the market or for use in a clinical trial. If our product candidates fail to comply with applicable regulatory
requirements, such as good manufacturing practices, a regulatory agency may:
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issue warning letters;
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require us to enter into a consent decree, 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 civil or criminal penalties;
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suspend regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications filed by us;
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impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products or require a product recall.
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In order to market
and commercialize any product candidate outside of the United States, we must establish and comply with numerous and varying regulatory
requirements of other countries regarding manufacturing, safety and efficacy. Approval procedures vary among countries and can
involve additional product testing and additional administrative review periods. The time required to obtain approval in other
countries might differ from that required to obtain FDA approval. The regulatory approval process in other countries may include
all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one
country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country
may have a negative effect on the regulatory approval process in others. Failure to obtain regulatory approval in other countries,
or any delay or setback in obtaining such approval, could have the same adverse effects detailed above regarding FDA approval in
the United States. Such effects include the risks that our product candidates may not be approved for all indications requested,
which could limit the uses of our product candidates and have an adverse effect on product sales and potential royalties, and that
such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing
follow-up studies.
If we or current or future collaborators,
manufacturers, or service providers fail to comply with healthcare laws and regulations, we or they could be subject to enforcement
actions and substantial penalties, which could affect our ability to develop, market and sell our products and may harm our reputation.
Although we do not
currently have any products on the market, if our therapeutic candidates or clinical trials become covered by federal health care
programs, we will be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal, state
and foreign governments of the jurisdictions in which we conduct our business. Healthcare providers, physicians and third-party
payors play a primary role in the recommendation and prescription of any therapeutic candidates for which we obtain marketing approval.
Our future arrangements with third party payors and customers may expose us to broadly applicable fraud and abuse, transparency,
and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which
we market, sell and distribute our therapeutic candidates for which we obtain marketing approval. Restrictions under applicable
federal and state healthcare laws and regulations include, but are not limited to, the following:
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the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare or Medicaid;
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federal civil and criminal false claims laws and civil monetary penalty laws, such as the U.S. federal False Claims Act, or FCA, which imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against, individuals or entities for knowingly presenting or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA;
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the Health Insurance Portability and Accountability Act, or HIPAA, includes a fraud and abuse provision referred to as the HIPAA All-Payor Fraud Law, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, which impose obligations on certain covered entity healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform certain services involving the use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding, the privacy, security, and transmission of individually identifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information;
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federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
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the federal Physician Payment Sunshine Act and the implementing regulations, also referred to as “Open Payments,” issued under 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, which require that manufacturers of pharmaceutical and biological drugs reimbursable under Medicare, Medicaid, and Children’s Health Insurance Programs report to the Department of Health and Human Services all consulting fees, travel reimbursements, research grants, and other payments, transfers of value or gifts made to physicians and teaching hospitals with limited exceptions; and
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analogous state laws and regulations, such as, state anti-kickback and false claims laws potentially applicable to sales or marketing arrangements and claims involving healthcare items or services reimbursed by nongovernmental third party payors, including private insurers; and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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The scope and enforcement
of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light
of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny
of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions,
convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can
divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise
have an adverse effect on our business.
Ensuring that our business
arrangements with third parties comply with applicable healthcare laws and regulations could involve substantial costs. If our
operations are found to be in violation of any such requirements, we may be subject to penalties, including civil or criminal penalties,
monetary damages, the curtailment or restructuring of our operations, or exclusion from participation in government contracting,
healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which could adversely affect our
financial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations
of these laws, these risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause
us to incur significant legal expenses and could divert our management’s attention from the operation of our business, even
if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly
to us in terms of money, time and resources.
Any drugs we develop may become subject
to unfavorable pricing regulations, third party coverage and reimbursement practices or healthcare reform initiatives, thereby
harming our future business prospects.
The regulations that
govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country. Some countries
require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after
marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject
to continuing governmental control even after initial approval is granted. Although we intend to monitor these regulations, our
programs are currently in earlier stages of development and we will not be able to assess the impact of price regulations for a
number of years. As a result, we might obtain regulatory approval for a product in a particular country, but then be subject to
price regulations that delay our commercial launch of the product and negatively impact the revenues we are able to generate from
the sale of the product in that country.
Our ability to commercialize
any products successfully also will depend in part on the extent to which coverage and reimbursement for these products and related
treatments will be available from government health administration authorities, private health insurers and other organizations.
However, there may be significant delays in obtaining coverage for newly-approved drugs. Moreover, eligibility for coverage does
not necessarily signify that a drug will be reimbursed in all cases or at a rate that covers our costs, including research, development,
manufacture, sale and distribution costs. Also, interim payments for new drugs, if applicable, may be insufficient to cover our
costs and may not be made permanent. Thus, even if we succeed in bringing one or more products to the market, these products may
not be considered medically necessary or cost-effective, and the amount reimbursed for any products may be insufficient to allow
us to sell our products on a competitive basis. Because our programs are in early stages of development, we are unable at this
time to determine their cost effectiveness or the likely level or method of reimbursement. In addition, obtaining coverage and
reimbursement approval of a product from a government or other third-party payor is a time-consuming and costly process that could
require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our product on a
payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. A payor’s decision to
provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s
determination to provide coverage for a product does not assure that other payors will also provide coverage for the product. Adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product development. If reimbursement is not available or is available only at limited levels, we may not
be able to successfully commercialize any product candidate that we successfully develop.
Increasingly, the third-party
payors who reimburse patients or healthcare providers, such as government and private insurance plans, are seeking greater upfront
discounts, additional rebates and other concessions to reduce the prices for pharmaceutical products. If the price we are able
to charge for any products we develop, or the reimbursement provided for such products, is inadequate in light of our development
and other costs, our return on investment could be adversely affected.
We currently expect
that certain drugs we develop may need to be administered under the supervision of a physician on an outpatient basis. Under currently
applicable U.S. law, certain drugs that are not usually self-administered (including injectable drugs) may be eligible for coverage
under Medicare through Medicare Part B. Specifically, Medicare Part B coverage may be available for eligible beneficiaries when
the following, among other requirements have been satisfied:
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the product is reasonable and necessary for the diagnosis or treatment of the illness or injury for which the product is administered according to accepted standards of medical practice;
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the product is typically furnished incident to a physician's services;
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the indication for which the product will be used is included or approved for inclusion in certain Medicare-designated pharmaceutical compendia (when used for an off-label use); and
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the product has been approved by the FDA.
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Average prices for
drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any
future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in
the U.S. Reimbursement rates under Medicare Part B would depend in part on whether the newly approved product would be eligible
for a unique billing code. Self-administered, outpatient drugs are typically reimbursed under Medicare Part D, and drugs that are
administered in an inpatient hospital setting are typically reimbursed under Medicare Part A under a bundled payment. It is difficult
for us to predict how Medicare coverage and reimbursement policies will be applied to our products in the future and coverage and
reimbursement under different federal healthcare programs are not always consistent. Medicare reimbursement rates may also reflect
budgetary constraints placed on the Medicare program.
Third party payors
often rely upon Medicare coverage policies and payment limitations in setting their own reimbursement rates. These coverage policies
and limitations may rely, in part, on compendia listings for approved therapeutics. Our inability to promptly obtain relevant compendia
listings, coverage, and adequate reimbursement from both government-funded and private payors for new drugs that we develop and
for which we obtain regulatory approval could have a material adverse effect on our operating results, our ability to raise capital
needed to commercialize products and our financial condition.
We expect that these
and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower
reimbursement, and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement
from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation
of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability
or commercialize our drugs, once marketing approval is obtained.
We believe that the
efforts of governments and third-party payors to contain or reduce the cost of healthcare and legislative and regulatory proposals
to broaden the availability of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical
companies. A number of legislative and regulatory changes in the healthcare system in the U.S. and other major healthcare markets
have been proposed, and such efforts have expanded substantially in recent years. These developments could, directly or indirectly,
affect our ability to sell our products, if approved, at a favorable price. For example, in the U.S., in 2010, the U.S. Congress
passed the ACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of health spending,
enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries,
impose new taxes and fees on the healthcare industry and impose additional policy reforms. Among the provisions of the ACA addressing
coverage and reimbursement of pharmaceutical products, of importance to our potential therapeutic candidates are the following:
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increases to pharmaceutical manufacturer rebate liability under the Medicaid Drug Rebate Program due to an increase in the minimum basic Medicaid rebate on most branded prescription drugs and the application of Medicaid rebate liability to drugs used in risk-based Medicaid managed care plans;
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the expansion of the 340B Drug Pricing Program to require discounts for “covered outpatient drugs” sold to certain children’s hospitals, critical access hospitals, freestanding cancer hospitals, rural referral centers, and sole community hospitals;
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requirements imposed on pharmaceutical companies are required to offer discounts on brand-name drugs to patients who fall within the Medicare Part D coverage gap, commonly referred to as the “Donut Hole”;
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requirements imposed on pharmaceutical companies to pay an annual non-tax-deductible fee to the federal government based on each company’s market share of prior year total sales of branded drugs to certain federal healthcare programs, such as Medicare, Medicaid, Department of Veterans Affairs and Department of Defense; and
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for products classified as biologics, marketing approval for a follow-on biologic product may not become effective until 12 years after the date on which the reference innovator biologic product was first licensed by the FDA, with a possible six-month extension for pediatric products. After this exclusivity ends, it may be possible for biosimilar manufacturers to enter the market, which is likely to reduce the pricing for the innovator product and could affect our profitability if our products are classified as biologics.
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Recently, the Trump
Administration and certain members of U.S. Congress have expressed a desire to modify, repeal, or otherwise invalidate all or certain
provisions of the ACA, which contributes to the uncertainty of the ongoing implementation and impact of the ACA and also underscores
the potential for additional health care reform going forward. For example, a recently enacted federal income tax law effective
January 1, 2019 repealed what is commonly referred to as the “individual mandate,” a tax-based shared responsibility
payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage.
Separately, pursuant
to the health reform legislation and related initiatives, the Centers for Medicare and Medicaid Services, or CMS, is working with
various healthcare providers to develop, refine, and implement Accountable Care Organizations, or ACOs, and other innovative models
of care for Medicare and Medicaid beneficiaries, including the Bundled Payments for Care Improvement Initiative, the Comprehensive
Primary Care Initiative, the Duals Demonstration, and other models. The continued development and expansion of ACOs and other innovative
models of care will have an uncertain impact on any future reimbursement we may receive for approved therapeutics administered
by these organizations.
The healthcare industry is heavily
regulated in the U.S. at the federal, state, and local levels, and our failure to comply with applicable requirements may subject
us to penalties and negatively affect our financial condition.
As a biotechnology
company, our operations, clinical trial activities and interactions with healthcare providers may be subject to extensive regulation
in the U.S., particularly if we receive FDA approval for any of our products in the future. For example, if we receive FDA approval
for a product for which reimbursement is available under a federal healthcare program (e.g., Medicare, Medicaid), it would be subject
to a variety of federal laws and regulations, including those that prohibit the filing of false or improper claims for payment
by federal healthcare programs (e.g., the federal FCA), prohibit unlawful inducements for the referral of business reimbursable
by federal healthcare programs (e.g., the federal Anti-Kickback Statute), and require disclosure of certain payments or other transfers
of value made to U.S.-licensed physicians and teaching hospitals or other entities subject to the Open Payments regulations. We
are not able to predict how third parties will interpret these laws and apply applicable governmental guidance and may challenge
our practices and activities under one or more of these laws. If our past or present operations are found to be in violation of
any of these laws, we could be subject to civil and criminal penalties, which could hurt our business, our operations and financial
condition.
The federal Anti-Kickback
Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving
any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing,
ordering or arranging for the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal
healthcare programs. The term remuneration has been interpreted broadly to include anything of value. The Anti-Kickback Statute
has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and
formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common
activities from prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may
be alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for
an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory
safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement
will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may
not in all cases meet all of the criteria for protection under a statutory exception or regulatory safe harbor.
Additionally, the intent
standard under the Anti-Kickback Statute was amended by the ACA, to a stricter standard such that a person or entity no longer
needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition,
the ACA codified case law that a claim including items or services resulting from a violation of the federal Anti- Kickback Statute
constitutes a false or fraudulent claim for purposes of the federal FCA.
The civil monetary
penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused
to be presented a claim to a federal healthcare program that the person knows or should know is for an item or service that was
not provided as claimed or is false or fraudulent.
Federal false claims
and false statement laws, including the federal FCA, prohibit, among other things, any person or entity from knowingly presenting,
or causing to be presented, a false or fraudulent claim for payment to, or approval by, the federal healthcare programs, including
Medicare and Medicaid, or knowingly making, using, or causing to be made or used a false record or statement material to a false
or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented
to the U.S. government. For instance, historically, pharmaceutical and other healthcare companies have been prosecuted under these
laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for
the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing
of the product for unapproved, off-label, and thus generally non-reimbursable, uses.
HIPAA prohibits, among
other offenses, knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors,
or falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for items or services under a health care benefit program. To the extent that we act
as a business associate to a healthcare provider engaging in electronic transactions, we may also be subject to the privacy and
security provisions of HIPAA, as amended by HITECH, which restricts the use and disclosure of patient-identifiable health information,
mandates the adoption of standards relating to the privacy and security of patient-identifiable health information, and requires
the reporting of certain security breaches to healthcare provider customers with respect to such information. Additionally, many
states have enacted similar laws that may impose more stringent requirements on entities like ours. Failure to comply with applicable
laws and regulations could result in substantial penalties and adversely affect our financial condition and results of operations.
Many states also have
similar fraud and abuse statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs,
or, in several states, apply regardless of the payor. Additionally, to the extent that our product is sold in a foreign country,
we may be subject to similar foreign laws.
Our products, once
approved, may be eligible for coverage under Medicare and Medicaid, among other government healthcare programs. Accordingly, we
may be subject to a number of obligations based on their participation in these programs, such as a requirement to calculate and
report certain price reporting metrics to the government, such as average sales price (ASP) and best price. Penalties may apply
in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory
discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently
restrict imports of drugs from countries where they may be sold at lower prices than in the United States. It is difficult to predict
how Medicare coverage and reimbursement policies will be applied to our products in the future and coverage and reimbursement under
different federal healthcare programs are not always consistent. Medicare reimbursement rates may also reflect budgetary constraints
placed on the Medicare program.
In order to distribute
products commercially, we must comply with state laws that require the registration of manufacturers and wholesale distributors
of drug and biological products in a state, including, in certain states, manufacturers and distributors who ship products into
the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements
on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that
require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution
chain. Several states have enacted legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance
programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials
and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities
from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing,
and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal and state
consumer protection and unfair competition laws.
If our operations are
found to be in violation of any of the federal and state healthcare laws described above or any other governmental regulations
that apply to us, we may be subject to penalties, including without limitation, civil, criminal and/or administrative penalties,
damages, fines, disgorgement, exclusion from participation in government programs, such as Medicare and Medicaid, injunctions,
private “qui tam” actions brought by individual whistleblowers in the name of the government, or refusal to allow us
to enter into government contracts, contractual damages, reputational harm, administrative burdens, diminished profits and future
earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations.
Our risk mitigation measures cannot
guarantee that we effectively manage all operational risks and that we are in compliance with all potentially applicable U.S. federal
and state regulations and all potentially applicable foreign regulations and/or other requirements.
The development, manufacturing,
distribution, pricing, sale, marketing and reimbursement of our product candidates, together with our general operations, are subject
to extensive federal and state regulation in the United States and may be subject to extensive regulation in foreign countries.
In addition, our business is complex, involves significant operational risks and includes the use of third parties to conduct business.
While we intend to implement numerous risk mitigation measures to comply with such regulations in this complex operating environment,
we cannot guarantee that we will be able to effectively mitigate all operational risks. We cannot guarantee that we, our employees,
our consultants, our contractors or other third parties are or will be in compliance with all potentially applicable U.S. federal
and state regulations and/or laws, and all potentially applicable foreign regulations and/or laws. If we fail to adequately mitigate
our operational risks or if we or our agents fail to comply with any of those regulations or laws, a range of actions could result,
including, but not limited to, the termination of clinical trials, the failure to approve a product candidate, restrictions on
our products or manufacturing processes, withdrawal of our products from the market, significant fines, exclusion from government
healthcare programs or other sanctions or litigation. Any of these occurrences could have a material and adverse effect on our
business and results of operations.
Our employees and consultants may
engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the
risk of employee or consultant fraud or other misconduct. Misconduct by our employees or consultants could include intentional
failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards, comply with
federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose
unauthorized activities to us. Employee and consultant misconduct could 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. It is not always possible
to identify and deter such misconduct, and 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 be in compliance with such laws or regulations. If any such actions are instituted against us and we
are not successful in defending ourselves or asserting our rights, those actions could have a material adverse effect on our business,
financial condition and results of operations, and result in the imposition of significant fines or other sanctions against us.
Our ability to obtain reimbursement
or funding for our programs from the federal government may be impacted by possible reductions in federal spending.
U.S. federal government
agencies currently face potentially significant spending reductions. The Bipartisan Budget Act of 2015 extended sequestration for
Medicare through fiscal year 2027. The U.S. federal budget remains in flux, however, which could, among other things, result in
a cut to Medicare payments to providers and otherwise affect federal spending on clinical and pre-clinical research and development.
The Medicare program is frequently mentioned as a target for spending cuts. The full impact on our business of any future cuts
in Medicare or other programs is uncertain. In addition, we cannot predict any impact which the actions of President Trump's administration
and the U.S. Congress may have on the federal budget. Following the most recent federal elections, Congress has again focused on
reducing the cost of drugs and other medical treatments. If federal spending is reduced, anticipated budgetary shortfalls may also
impact the ability of relevant agencies, such as the FDA or the National Institutes of Health, to continue to function at current
levels. Amounts allocated to federal grants and contracts may be reduced or eliminated. These reductions may also impact the ability
of relevant agencies to timely review and approve drug research and development, manufacturing, and marketing activities, which
may delay our ability to develop, market and sell any products we may develop.
Vaccines carry unique risks and uncertainties,
which could have a negative impact on future results of operations.
We are in the process
of initiating development of vaccine candidates using our exosome technologies. The successful development, testing, manufacturing
and commercialization of vaccines is a long, complex, expensive and uncertain process. There are unique risks and uncertainties
associated with vaccines, including:
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There may be limited access to, and supply of, normal and diseased tissue samples, cell lines,
media pathogens, bacteria, viral strains, synthesized nucleic acids and other biological materials. In addition, government regulations
in multiple jurisdictions, such as the United States and the EU, could result in restricted access to, or transport or use of,
such materials. If the Company in unable to access sufficient sources of such materials, or if tighter restrictions are imposed
on the use of such materials, the Company may not be able to conduct research or product development activities as planned and
may incur additional costs.
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The development, manufacturing and marketing of vaccines are subject to regulation by the FDA,
the EMA and other regulatory bodies that are often more complex and extensive than the regulations applicable to other pharmaceutical
products. For example, in the United States, a BLA, including both preclinical and clinical trial data and extensive data regarding
the manufacturing procedures, is required for human vaccine candidates, and FDA approval is generally required for the release
of each manufactured commercial lot.
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Vaccines are frequently costly to manufacture because production ingredients are inactive biological
materials derived from virus, animals, or plants and most biologics and vaccines cannot be made synthetically. In particular, keeping
up with the demand for vaccines may be difficult due to the complexity of producing vaccines.
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Risks Related to the Manufacturing of
our Product Candidates
We have limited manufacturing capability
and may not be able to maintain our manufacturing licenses.
We presently maintain
our laboratories, research and manufacturing facilities in leased premises at CSMC in Los Angeles, California. In that portion
of the leased premises where we manufacture CAP-1002 and plan to manufacture our exosomes, we believe that we follow good manufacturing
practices sufficient for an investigational stage product, but it is not a cGMP approved facility and would not be adequate for
manufacturing product for commercial use. Capricor manufactured CAP-1002 in this facility for our previous clinical studies as
well as our HOPE-2 clinical trial. In addition to manufacturing CAP-1002 for its own clinical trials, Capricor has agreed to provide
CAP-1002 for investigational purposes in two clinical trials sponsored by CSMC.
Our plans to use this
facility for future trials could change if we decide to expand any of our clinical trials to include international sites, such
as in Europe or if we fail to meet the specifications necessary to produce our product in a qualified manner. Currently, we also
intend to utilize our premises at CSMC to develop and manufacture our exosomes. Currently, our Facilities Lease is scheduled to
expire on July 31, 2020 although we have an additional 1-year option enabling us to extend the term of our Facilities Lease to
July 31, 2021. There can be no assurance that the Facilities Lease will be continued beyond July 31, 2021. If the Facilities Lease
with CSMC is terminated or expires, we would have to secure alternative facilities in which to operate our research and development
activities and/or manufacture our products, which would involve a significant monetary investment and would negatively impact the
progress of our clinical trials and regulatory approvals.
If we were to initiate
a Phase III study, we are unsure at this time if the FDA would allow us to produce doses in our current facility or whether the
FDA would require us to use a cGMP facility. If we were required to use a cGMP facility to produce product for a Phase III study,
this would result in delays and significant expenses which would have a negative impact on our business and product development.
Furthermore, given our workforce reductions in our manufacturing group in early 2019, and the scale required for the manufacturing
of products for commercial sale, we will have to establish a collaboration agreement with a third party or build out our own manufacturing
facility for any commercial scale manufacturing which would also involve significant expenses and cause delays.
We are currently evaluating
a proposed contract manufacturing agreement with a contract manufacturing organization, or CMO, for continued expansion focused
on potential commercialization and scale-up of our cell therapy program for the treatment of DMD. Concurrently, Capricor is internally
developing additional process development improvements in anticipation of potential commercial scale and/or later stage clinical
trials which may affect the timing of our technology transfer.
We are required to
obtain and maintain certain licenses in connection with our manufacturing facilities and activities. We have been issued a Manufacturing
License and a Tissue Bank License from the State of California. There is no guarantee that any licenses issued to us will not be
revoked or forfeited by operation of law or otherwise. If we were denied any required license or if any of our licenses were to
be revoked or forfeited, we would suffer significant harm. Additionally, if a serious adverse event in any of our clinical trials
were to occur during the period in which any required license was not in place, we could be exposed to additional liability if
it were determined that the event was due to our fault and we had not secured the required license. Other states may impose additional
licensing requirements upon us which, until obtained, would limit our ability to conduct our trials in such states.
We obtain the donor
hearts from which our CDCs are manufactured from organ procurement organizations, or OPOs. There is no guarantee that the OPOs
which currently provide donor hearts to us will be able to continue to supply us with donor hearts in the future or, in that case,
that an alternative OPO will be available to us. If those OPOs or an alternative OPO is not able or willing to supply us with donor
hearts, we would be unable to produce our CDCs or exosomes and the development of our lead product candidates would be significantly
impaired and possibly terminated. Additionally, OPOs are subject to regulations of various government agencies. There is no guarantee
that laws and regulations pursuant to which our OPOs provide donor hearts will not change, making it more difficult or even impossible
for the OPOs to continue to supply us with the hearts we need to produce our product.
We have no prior experience in manufacturing
products for large clinical trials or commercial use.
Our manufacturing experience
has been limited to manufacturing CAP-1002 for the ALLSTAR, DYNAMIC and HOPE-Duchenne clinical trials, the ongoing CSMC trials
and our current HOPE-2 clinical trial. Our experience in the manufacturing of exosomes is limited to producing product for pre-clinical
use. We have no prior history or experience in manufacturing our allogeneic product or any other product for any other clinical
use and no experience manufacturing any product for large clinical trials or commercial use. Our product candidates have not previously
been tested in any large trials to show safety or efficacy, nor are they available for commercial use. We face risks of manufacturing
failures and risks of making products that are not proven to be safe or effective.
We are subject to a number of manufacturing
risks, any of which could substantially increase our costs and limit supply of our product candidates.
The process of manufacturing
our product candidates is complex, highly regulated, and subject to several risks. For example, the process of manufacturing our
product candidates is extremely susceptible to product loss due to contamination, equipment failure or improper installation or
operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes for any of our product
candidates could result in reduced production yields, product defects, and other supply disruptions. If microbial, viral, or other
contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are
made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
In addition, the manufacturing facilities in which our product candidates are made could be adversely affected by supply chain
issues, equipment failures, labor shortages, natural disasters, power failures and numerous other factors.
If we continue with the development
of CAP-1002 or our exosomes, we may need to rely exclusively on third parties to formulate and manufacture these product candidates
and provide us with the devices and other products necessary to administer such a product.
We have not established
our own manufacturing facilities sufficient for the production of CAP-1002 or our exosomes for commercial purposes. While we plan
to utilize our currently manufactured product for a potential Phase III trial, there is no assurance that the FDA will not require
that the product used in the Phase III trial be manufactured under cGMP conditions. Also, our resources and expertise to formulate
or manufacture this product candidate are limited. If we were to conduct such a trial or reach the commercialization stage, we
may have to engage one or more manufacturers to manufacture, supply, store, and distribute drug supplies for such purposes. If
CAP-1002 or any of our exosome technologies receives FDA approval, we may need to rely on one or more third-party contractors to
manufacture supplies of these drug products which may cause delays in our ability to sell commercially. Our current and anticipated
future reliance on a limited number of third-party manufacturers exposes us to the following risks:
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We may be unable to identify manufacturers needed to manufacture our product candidates on acceptable terms or at all, because the number of potential manufacturers is limited, and subsequent to approval of an NDA or BLA, the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer may have to be educated in, or develop substantially equivalent processes for, production of our products or the devices after receipt of FDA approval, if any.
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Our third-party manufacturers may not be able to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical and commercial needs, if any.
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Our third-party manufacturers may not be able to manufacture or supply us with sufficient quantities of acceptable materials necessary for the development or use of our product candidates.
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Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store, and distribute our products or the materials needed to manufacture or utilize our product candidates.
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Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Agency, and corresponding state agencies to ensure strict compliance with good manufacturing practices and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
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Each of these risks
could delay our clinical trials, the approval, if any, of our product candidates by the FDA, or the commercialization of our product
candidates, or result in higher costs or deprive us of potential product revenues.
The third parties we use in the manufacturing
process for our product candidates may fail to comply with cGMP regulations.
If we decide to transfer
the manufacturing of our product candidates for future clinical trials or for commercial supply, our contract manufacturers will
be required to produce our drug products in compliance with cGMP. These contract manufacturers are subject to periodic unannounced
inspections by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable
government regulations and corresponding foreign requirements. We do not have control over a third-party manufacturer’s compliance
with these regulations and requirements. In addition, changes in cGMP could negatively impact the ability of our contract manufacturers
to complete the manufacturing process of our product candidates in a compliant manner on the schedule we require for clinical trials
or for potential commercial use. The failure to achieve and maintain high quality compliance, including failure to detect or control
anticipated or unanticipated manufacturing errors, could result in patient injury or death or product recalls. Any difficulties
or delays in our contractors’ manufacturing and supply of product candidates, or any failure of our contractors to maintain
compliance with the applicable regulations and requirements could increase our costs, make us postpone or cancel clinical trials,
prevent or delay regulatory approvals by the FDA and corresponding state and foreign authorities, prevent the import and/or export
of our products, cause us to lose revenue, result in the termination of the development of a product candidate, or have our product
candidates recalled or withdrawn from use.
Risks Related to Our Intellectual Property
We may face uncertainty and difficulty
in obtaining and enforcing our patents and other proprietary rights.
Our success will depend
in large part on our ability to obtain, maintain, and defend patents on our product candidates, obtain licenses to use third-party
technologies, protect our trade secrets and operate without infringing the proprietary rights of others. Legal standards regarding
the scope of claims and validity of biotechnology patents are uncertain and evolving. There can be no assurance that our pending,
in-licensed or owned patent applications will be approved, or that challenges will not be instituted against the validity or enforceability
of any patent licensed-in or owned by us. Additionally, we have entered into various confidentiality agreements with employees
and third parties. There is no assurance that such agreements will be honored by such parties or enforced in whole or part by the
courts. The cost of litigation to uphold the validity and prevent infringement of a patent is substantial. Furthermore, there can
be no assurance that others will not independently develop substantially equivalent technologies not covered by patents to which
we have rights or obtain access to our know-how. In addition, the laws of certain countries may not adequately protect our intellectual
property. Our competitors may possess or obtain patents on products or processes that are necessary or useful to the development,
use, or manufacture of our product candidates.
There can also be no
assurance that our proposed technology will not infringe upon patents or proprietary rights owned by others, with the result that
others may bring infringement claims against us and require us to license such proprietary rights, which may not be available on
commercially reasonable terms, if at all. Any such litigation, if instituted, could have a material adverse effect, potentially
including monetary penalties, diversion of management resources, and injunction against continued manufacture, use, or sale of
certain products or processes.
Some of our technology
has resulted and/or will result from research funded by agencies of the U.S. government and the State of California. As a result
of such funding, the U.S. government and the State of California have certain rights in the technology developed with the funding.
These rights include a non-exclusive, non-transferable, irrevocable, paid-up, worldwide license to practice or have practiced for
or on behalf of the government(s) such inventions. In addition, the government(s) has the right to “march in” and require
us to grant third parties licenses to such technology, in certain circumstances, such as if we fail to take effective steps to
achieve practical application of such inventions.
The licenses by which
we have obtained some of our intellectual property are subject to the rights of the funding agencies. We also rely upon non-patented
proprietary know-how and trade secrets. There can be no assurance that we can adequately protect our rights in such non-patented
proprietary know-how and trade secrets, or that others will not independently develop substantially equivalent proprietary information
or techniques or gain access to our proprietary know-how and trade secrets. Any of the foregoing events could have a material adverse
effect on us. In addition, if any of our trade secrets, know-how or other proprietary information were to be disclosed, or misappropriated,
the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive
position would suffer.
In September 2011,
the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant
changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect
patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a “first to
file” system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed
to submit prior art before the issuance of a patent by the U.S. Patent and Trademark Office, or USPTO, and may become involved
in derivation, post-grant review, or inter partes review, proceedings challenging our patent rights or the patent rights
of our licensors. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate,
our or our licensors’ patent rights, which could adversely affect our competitive position.
It is difficult and costly to protect
our proprietary rights, and we may not be able to ensure their protection. If we fail to protect or enforce our intellectual property
rights adequately or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our commercial viability
will depend, in part, on obtaining and maintaining patent protection and trade secret protection of our product 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 products is dependent upon the extent to
which we have rights under valid and enforceable patents or trade secrets that cover these activities.
We have licensed certain
patent and other intellectual property rights that cover cardiospheres (CSps), and cardiosphere-derived cells (CDCs), (including
our CAP-1002 product candidate) from Università Degli Studi Di Roma La Sapienza, or the University of Rome, The Johns Hopkins
University, or JHU, and CSMC. We have also licensed certain patent and other intellectual property rights from CSMC that cover
extracellular vesicles, such as exosomes and microvesicles derived from CDCs. Under the license agreements with the University
of Rome and JHU, those institutions prosecute and maintain their patents and patent applications in collaboration with us. We rely
on these institutions to file, prosecute, and maintain patent applications, and otherwise protect the intellectual property to
which we have a license, and we have not had and do not have primary control over these activities for certain of these patents
or patent applications and other intellectual property rights. We cannot be certain that such activities by these institutions
have been or will be conducted in compliance with applicable laws and regulations, or will result in valid and enforceable patents
and other intellectual property rights. Under our Amended and Restated Exclusive License Agreement with CSMC and our Exclusive
License Agreement with CSMC, as the same have been amended, we have assumed, in coordination with CSMC, financial responsibility
for the prosecution and maintenance of all patents and patent applications thereunder. Our enforcement of certain of these licensed
patents or defense of any claims asserting the invalidity and/or unenforceability of these patents would also be subject to the
cooperation of the University of Rome, JHU, and/or CSMC.
Additionally, in 2018,
Capricor and CSMC entered into a Sixth Amendment to the Exosomes License Agreement. Under the Sixth License Amendment, the milestone
deadline for filing an IND for at least one product has been extended to December 31, 2019. If the Company does not file an IND
by December 31, 2019, or negotiate an additional extension of the milestone deadline, CSMC would have the option to convert
the exclusive license to a non-exclusive license or to a co-exclusive license or terminate the license under Title 35, Section
203 of the United States Code. Prior to exercising such option, Capricor has the opportunity to cure the failure to file an IND
for a period of 90 days after its receipt of written notice from CSMC of its intent to exercise its option. In the first quarter
of 2020, CSMC notified Capricor that it was in breach of the Exosomes License Agreement because it failed to file an IND by December
31, 2019 and that if not done so by April 19, 2020, that the Exosomes License Agreement shall immediately terminate. Subsequently,
Capricor informed CSMC that it intends to file an IND prior to that date.
The patent positions
of pharmaceutical and biopharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which
important legal principles remain unresolved. No consistent laws regarding the breadth of claims allowed in biopharmaceutical patents
has emerged to date in the United States. The biopharmaceutical patent situation outside the United States is even more uncertain.
Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the
value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the
patents we own or that are in-licensed. Further, if any of our owned or in-licensed patents are determined by legal authority to
be invalid or unenforceable, it could impact our ability to commercialize or license our technology.
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 make products that are similar to our product candidates but that are not covered by the claims of any of our patents;
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we might not have been the first to make the inventions covered by any issued patents or patent applications we may have (or third parties from whom we license intellectual property may have);
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we might not have been the first to file patent applications for these inventions;
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it is possible that any pending patent applications we may have will not result in issued patents;
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any issued patents may not provide us with any competitive advantage, or may be held invalid or unenforceable as a result of legal challenges by third parties;
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we may not develop additional proprietary technologies that are patentable or protectable under trade secrets law; and
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the patents of others may have an adverse effect on our business.
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We also may rely on
trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. 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. 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.
If any of our trade secrets, know-how
or other proprietary information is improperly disclosed, the value of our trade secrets, know-how and other proprietary rights
would be significantly impaired and our business and competitive position would suffer.
Our viability also
depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors, as well
as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable
or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees,
consultants, advisors and contractors to enter into agreements which prohibit unauthorized disclosure and use of confidential information
and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important
to our business. These agreements are often limited in duration and may not provide adequate protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others
of such information. In addition, enforcing a claim that a third party illegally obtained and is using any of our trade secrets
is expensive and time consuming, and the outcome is unpredictable. If any of our trade secrets, know-how or other proprietary information
is improperly disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired
and our business and competitive position would suffer.
We may incur substantial costs as
a result of litigation or other adversarial proceedings relating to patent and other intellectual property rights and we may be
unable to protect our rights to, or use of, our technology.
If we choose to go
to court to stop a third party from using the inventions covered by our patents, that individual or company has the right to ask
the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive
and would consume time and other resources, even if we were successful in discontinuing the infringement of our patents. In addition,
there is a risk that the court will determine that these 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 these 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 these patents. In
addition, the U.S. Supreme Court has modified certain legal tests so as to make it harder to obtain patents from the USPTO, and
to defend issued patents against invalidity challenges. As a consequence, issued patents may be found to contain invalid claims
according to the revised legal standards. Some of our own or in-licensed patents may be subject to challenge and subsequent invalidation
in a variety of post-grant proceedings, before the Patent Trial and Appeal Board (the PTAB) of the USPTO or in litigation under
the revised legal standards, which make it more difficult to defend the validity of claims in already issued patents.
Furthermore, a third
party may claim that we or our manufacturing or commercialization partners 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 product candidates. These lawsuits are costly and could affect the results of our operations and divert the attention of managerial
and technical personnel. There is a risk that a court could determine that we or our commercialization partners are infringing
the third party’s patents and order us or our partners to stop the activities covered by the patents. In addition, there
is a risk that a court could order us or our partners to pay the other party damages for having violated the other party’s
patents. We have agreed to indemnify certain of our commercial partners against certain patent infringement claims brought by third
parties. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products, manufacturing processes or methods of use. The coverage of patents
is subject to claim construction by the courts, which is not always predictable or reasonable. If we are sued for patent infringement,
we would need to demonstrate that our products, manufacturing processes or methods of use either do not infringe the patent claims
of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular,
is difficult since it requires a proof by clear and convincing evidence to overcome the presumption of validity enjoyed by issued
patents.
As some patent applications
in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States
and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the
scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications
for technology covered by our issued patents or our pending applications, or that we were the first to invent the technology. Our
competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent
applications may have priority over our patent applications or patents, which could further require us to obtain licenses to these
issued patents covering such technologies. For patent applications filed before the Leahy-Smith Act, if another party has filed
a United States 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.
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 or inter partes review
proceedings could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Some jurisdictions
in which we operate have enacted legislation which allows members of the public to access information under statutes similar to
the U.S. Freedom of Information Act. Even though we believe our information would be excluded from the scope of such statutes,
there are no assurances that we can protect our confidential information from being disclosed under the provisions of such laws.
If any confidential or proprietary information is released to the public, such disclosures may negatively impact our ability to
protect our intellectual property rights.
We may be subject to claims that
we or our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third
parties.
We have received confidential
and proprietary information from third parties. In addition, we employ individuals who were previously employed at other biotechnology
or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise improperly used, misappropriated or disclosed confidential information of these third parties or our
employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
We depend on intellectual property
licensed from third parties and termination of any of these licenses could result in the loss of significant rights, which would
harm our business.
We are dependent on
patents, trade secrets, know-how and proprietary technology, both our own and that licensed from others. We have several license
agreements, including with the University of Rome, JHU and CSMC. These licenses may be terminated upon certain conditions, including
in some cases, if we fail to meet certain minimum funding or spending requirements, fail to take certain developmental actions,
fail to pay certain minimum royalties, or fail to maintain the licensed intellectual property. For example, CSMC has indicated
that our exclusive license with CSMC for exosomes requires us to file an IND by April 19, 2020 or it will automatically terminate
for breach. Any termination of these licenses could result in the loss of significant rights and could harm our ability to commercialize
our product candidates. Disputes may also arise between us and our licensors regarding intellectual property subject to a license
agreement, including: the scope of rights granted under the license agreement and other contract interpretation-related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject
to the licensing agreement; our right to sublicense patent and other rights to third parties under collaborative development relationships;
our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization
of our product candidates, and what activities satisfy those diligence obligations; and the ownership of inventions and know-how
resulting from the joint creation or use of intellectual property by our licensors and us and our partners.
If disputes over intellectual
property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms,
we may be unable to successfully develop and commercialize the affected product candidates. If we or our licensors fail to adequately
protect this intellectual property, our ability to commercialize products could suffer.
Risks Related to Our Relationships with
Third Parties
We are largely dependent on our relationships
with our licensors and collaborators and there is no guarantee that such relationships will be maintained or continued.
We have entered into
certain license agreements for certain intellectual property rights which are essential to enable us to develop and commercialize
our products. Agreements have been entered into with the University of Rome, JHU and CSMC, the latter of which is also a stockholder
of ours. Each of those agreements provides for an exclusive license to certain patents and other intellectual property and requires
the payment of fees, milestone payments and/or royalties to the institutions that will reduce our net revenues, if and to the extent
that we have future revenues. Each of those agreements also contains additional obligations that we are required to satisfy. For
example, CSMC has indicated that our exclusive license with CSMC for exosomes requires us to file an IND by April 19, 2020 or it
will automatically terminate for breach. There is no guarantee that we will be able to satisfy all of our obligations under our
license agreements to each of the institutions and that such license agreements will not be terminated. Each of the institutions
receives funding from independent sources such as the NIH and other private or not-for-profit sources and are investigating scientific
and clinical questions of interest to their own principal investigators as well as the scientific and clinical communities at large.
These investigators (including Capricor, Inc.’s founder, Dr. Eduardo Marbán, who is the Director of the Smidt Heart
Institute at CSMC) are under no obligation to conduct, continue, or conclude either current or future studies utilizing our cell
therapy or exosomes technology, and they are not compelled to license any further technologies or intellectual property rights
to us except as may be stated in the applicable licensing agreements between those institutions and us. Changes in these collaborators’
research interests or their funding sources away from our technology would have a material adverse effect on us. Further, the failure
of any third-party licensor to comply with its licensing obligations under its respective agreement with us would have a material
adverse effect on us. We are substantially dependent on our relationships with these institutions from which we license the rights
to our technologies and know-how. If requirements under our license agreements are not met, including meeting defined milestones,
we could suffer significant harm, including losing rights to our product candidates.
In addition, we are
responsible for the cost of filing and prosecuting certain patent applications and maintaining certain issued patents licensed
to us. If we do not meet our obligations under our license agreements in a timely manner, we could lose the rights to the proprietary
technology.
Finally, we may be
required to obtain licenses to patents or other proprietary rights of third parties (including and other than the University of
Rome, JHU and CSMC) in connection with the development and use of our product candidates and technologies. Licenses required under
any such patents or proprietary rights might not be made available on terms acceptable to us, if at all.
We have received government grants
and a loan award which impose certain conditions on our operations.
Commencing in 2009,
we received several grants from the NIH and DoD to fund various projects. Some of these awards remain subject to annual and quarterly
reporting requirements and require us to allocate expenses to the applicable project.
In September 2016,
Capricor was approved for a grant award from the DoD in the amount of approximately $2.4 million to be used toward developing a
scalable, commercially-ready process to manufacture our exosomes. Under the terms of the award, disbursements will be made to Capricor
over a period of approximately three years, subject to annual and quarterly reporting requirements. We were subsequently granted
a no-cost extension until September 29, 2020 in order to be able to continue to utilize these funds.
On February 5, 2013,
we entered into the CIRM Loan Agreement, pursuant to which CIRM agreed to disburse approximately $19.8 million to us over a period
of approximately three and one-half years to support Phase II of our ALLSTAR clinical trial. Under the CIRM Loan Agreement, we
were required to repay the CIRM loan with interest at maturity. So long as we were not in default, the Loan Agreement had provisions
allowing for forgiveness of the debt after the end of the project period, if we elected to abandon the project under certain circumstances.
On November 17, 2017, we gave notice to CIRM that we were electing to abandon the CIRM-funded project pursuant to the Loan Agreement
and on December 11, 2017, Capricor and CIRM entered into Amendment No. 3 to the CIRM Notice of Loan Award whereby the total loan
balance under the CIRM Loan Agreement was forgiven by CIRM thereby terminating Capricor’s and the Company’s obligation
to repay the loan balance. The Company classified the forgiveness of the loan payable, consisting of principal and accrued interest,
of approximately $15.7 million as “other income” in our Consolidated Statement of Operations and Comprehensive Income
(Loss). The decision to terminate the Loan Award and forgive the loan balance was due to the abandonment of the ALLSTAR project
at the end of the project period in accordance with Section 4.10 of the Loan Agreement and Article VII, Section I of the CIRM Loan
Administration Policy. Additionally, on June 16, 2016, Capricor entered into the CIRM Award with CIRM in the amount of approximately
$3.4 million to fund, in part, the HOPE-Duchenne trial. Pursuant to terms of the CIRM Award, disbursements were tied to the achievement
of specified operational milestones. The CIRM Award is further subject to the conditions and requirements set forth in the CIRM
Grants Administration Policy for Clinical Stage Projects. Such requirements include, without limitation, the filing of quarterly
and annual reports with CIRM, the sharing of intellectual property pursuant to Title 17, California Code of Regulations (CCR) Sections
100600-100612, and the sharing with the State of California of a fraction of licensing revenue received from a CIRM funded research
project and net commercial revenue from a commercialized product which resulted from the CIRM funded research as set forth in Title
17, CCR Section 100608. The maximum royalty on net commercial revenue that Capricor may be required to pay to CIRM is equal to
nine times the total amount awarded and paid to Capricor.
If we enter into strategic partnerships,
we may be required to relinquish important rights to and control over the development of our product candidates or otherwise be
subject to terms unfavorable to us.
We are actively looking
into potential strategic partnerships for our product candidates, particularly for our CAP-1002 product candidate. If we do not
establish strategic partnerships, we potentially will have to undertake development and commercialization efforts with respect
to our product candidates on our own, which would be costly and adversely impact our ability to commercialize any future products
or product candidates. If we enter into any strategic partnerships with pharmaceutical, biotechnology or other life science companies,
we will be subject to a number of risks, including:
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we may not be able to control the amount and timing of resources that our strategic partners devote to the development or commercialization of product candidates;
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strategic partners may delay clinical trials, provide insufficient funding, terminate a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new version of a product candidate for clinical testing;
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strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs;
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strategic partners may not commit adequate resources to the marketing and distribution of any future products, limiting our potential revenues from these products;
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disputes may arise between us and our strategic partners that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management’s attention and consumes resources;
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strategic partners may experience financial difficulties;
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strategic partners may not properly maintain or defend our intellectual property rights or may use our proprietary information in a manner that could jeopardize or invalidate our proprietary information or expose us to potential litigation;
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business combinations or significant changes in a strategic partner’s business strategy may also adversely affect a strategic partner’s willingness or ability to complete its obligations under any arrangement; and
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strategic partners could independently move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors.
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We rely and will rely on third parties
to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected
deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
We depend and will
depend upon independent investigators and collaborators, such as universities, medical institutions, CROs, vendors and strategic
partners to conduct our pre-clinical and clinical trials under agreements with us. We negotiate budgets and contracts with CROs,
vendors and trial sites which may result in delays to our development timelines and increased costs. We rely heavily on these third
parties over the course of our clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible
for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards,
and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required
to comply with current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA and comparable
foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through
periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply
with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable
foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.
We cannot assure that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with
the cGCP regulations. Biologic products for commercial purposes must also be produced under cGMP. Our failure or any failure by
these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical
trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of these third parties
violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws and regulations.
Any third parties conducting
our clinical trials are not and will not be our employees and, except for remedies available to us under our agreements with such
third parties, which in some instances may be limited, we cannot control whether or not they devote sufficient time and resources
to our ongoing pre-clinical, clinical and nonclinical programs. These third parties may also have relationships with other commercial
entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities,
which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties
or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they
obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our
clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval
of or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our
product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed. Switching or
adding third parties to conduct our clinical trials involves substantial cost and requires extensive management time and focus.
In addition, there is a natural transition period when a new third party commences work. As a result, delays occur, which can materially
impact our ability to meet our desired clinical development timelines.
Risks Related to Competitive Factors
Our products will likely face intense
competition.
The Company is engaged
in fields that are characterized by extensive worldwide research and competition by pharmaceutical companies, medical device companies,
specialized biotechnology companies, hospitals, physicians and academic institutions, both in the United States and abroad. We
will experience intense competition with respect to our existing and future product candidates. The pharmaceutical industry is
highly competitive, with a number of established, large pharmaceutical companies, as well as many smaller companies. Many of these
organizations competing with us have substantially greater financial resources, larger research and development staffs and facilities,
greater clinical trial experience, longer drug development history in obtaining regulatory approvals, and greater manufacturing,
distribution, sales and marketing capabilities than we do. There are many pharmaceutical companies, biotechnology companies, public
and private universities, government agencies, and research organizations actively engaged in research and development of products
which may target the same indications as our product candidates. We expect any future products and product candidates that we develop
to compete on the basis of, among other things, product efficacy and safety, time to market, price, extent of adverse side effects,
and convenience of treatment procedures. One or more of our competitors may develop products based upon the principles underlying
our proprietary technologies earlier than we do, obtain approvals for such products from the FDA more rapidly than we do, or develop
alternative products or therapies that are safer, more effective and/or more cost effective than any product developed by us. Our
competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or
other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may
also develop drugs that are more effective, useful, and less costly than ours, and may also be more successful than us in manufacturing
and marketing their products.
Our future success
will depend in part on our ability to maintain a competitive position with respect to evolving therapies as well as other novel
technologies. Existing or future therapies developed by others may render our potential products obsolete or noncompetitive. The
drugs that we are attempting to develop will have to compete with existing therapies. In addition, companies pursuing different
but related fields represent substantial competition. These organizations also compete with us to attract qualified personnel and
parties for acquisitions, joint ventures, or other collaborations.
If we are unable to retain and recruit
qualified scientists and advisors, or if any of our key executives, key employees or key consultants discontinues his or her employment
or consulting relationship with us, it may delay our development efforts or otherwise harm our business. In addition, several of
our consultants render services on a part-time basis to other entities which may result in the creation of intellectual property
rights in favor of those entities.
Because of the specialized
nature of our technology, we are dependent upon existing key personnel and on our ability to attract and retain qualified executive
officers and scientific personnel for research, clinical studies, and development activities conducted or sponsored by us. There
is intense competition for qualified personnel in our fields of research and development, and there can be no assurance that we
will be able to continue to attract additional qualified personnel necessary for the development and commercialization of our product
candidates or retain our current personnel. For example, Dr. Frank Litvack, our Executive Chairman, is only a part-time consultant
to the Company and provides services to other non-competing enterprises.
We have experienced
employee turnover from time to time, including involving some of our key employees. The loss of any of our current key employees
or key consultants could impede the achievement of our research and development objectives. Furthermore, recruiting and retaining
qualified scientific personnel to perform research and development work in the future is critical to the Company’s success,
both to enable the Company to grow, and to allow the Company to replace any employees or consultants whose relationships with the
Company have been terminated. The market for employees with experience in the cell therapy and exosome industries is especially
competitive, and we may not be able to recruit employees needed to develop and manufacture our products, or be able to retain the
employees whom we do recruit. In early 2019, in an effort to reduce costs and preserve our capital, we reduced our workforce by
21 employees, most of whom were engaged in manufacturing and product development.
There has been a close
working relationship between the academic lab at CSMC and our research and development team where employees and consultants of
both entities contribute time and services to the research being performed by the other. As a result, it can sometimes be unclear
whether intellectual property developed out of these services for CSMC would be owned by CSMC or by the Company, although if owned
by CSMC, the Company may have rights to that intellectual property under the terms of its license agreements with CSMC.
The Company may be
unable to attract and retain personnel on acceptable terms given the competition among biotechnology, biopharmaceutical, and health
care companies, universities, and non-profit research institutions for experienced scientists. Certain of the Company’s officers,
directors, scientific advisors, and/or consultants or certain of the officers, directors, scientific advisors, and/or consultants
hereafter appointed may from time to time serve as officers, directors, scientific advisors, and/or consultants of other biopharmaceutical
or biotechnology companies. The Company currently does not maintain “key man” insurance policies on any of its officers
or employees. All of the Company’s employees will be employed “at will” and, therefore, each employee may leave
the employment of the Company at any time. If we are unable to retain our existing employees, including qualified scientific personnel,
and attract additional qualified candidates, the Company’s business and results of operations could be adversely affected.
If we do not establish strategic
partnerships, we will have to undertake development and commercialization efforts on our own, which would be costly and delay our
ability to commercialize any future products or product candidates.
An element of our business
strategy includes potentially partnering with pharmaceutical, biotechnology and other companies to obtain assistance for the development
and potential commercialization of our product candidates, including the cash and other resources we need for such development
and potential commercialization. We may not be able to negotiate strategic partnerships on acceptable terms, or at all. If we are
unable to negotiate strategic partnerships for our product candidates, we may be forced to curtail the development of a particular
candidate, reduce, delay, or terminate its development program, delay its potential commercialization, reduce the scope of our
sales or marketing activities or undertake development or commercialization activities at our own expense. In addition, we will
bear all risk related to the development of that product candidate. If we elect to increase our expenditures to fund development
or commercialization activities on our own, we will need to obtain substantial additional capital, which may not be available to
us on acceptable terms, or at all. If we do not secure sufficient funds, we will not be able to complete our trials or bring our
product candidates to market and generate product revenue. We have announced that our goal is pursue a partnership for the continued
development of CAP-1002 in DMD.
We have no experience selling, marketing,
or distributing products and no current internal capability to do so.
The Company currently
has no sales, marketing, or distribution capabilities. We do not anticipate having resources in the foreseeable future to allocate
to the sales and marketing of our proposed products. Our future success depends, in part, on our ability to enter into and maintain
sales and marketing collaborative relationships, or on our ability to build sales and marketing capabilities internally. If we
enter into a sales and marketing collaborative relationship, then we will be dependent upon the collaborator’s strategic
interest in the products under development, and such collaborator’s ability to successfully market and sell any such products.
If any of our product candidates are cleared for commercialization, we intend to pursue collaborative arrangements regarding the
sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative
arrangements, or if able to do so, that such collaborators will have effective sales forces. To the extent that we decide not to,
or are unable to, enter into collaborative arrangements with respect to the sales and marketing of our proposed products, significant
capital expenditures, management resources, and time will be required to establish and develop an in-house marketing and sales
force with sufficient technical expertise. There can also be no assurance that we will be able to establish or maintain relationships
with third-party collaborators or develop in-house sales and distribution capabilities. To the extent that we depend on third parties
for marketing and distribution, any revenues we receive will depend upon the efforts of such third parties, and there can be no
assurance that such efforts will be successful.
If any of our product candidates
for which we receive regulatory approval do not achieve broad market acceptance, the revenues that we generate from their sales,
if any, will be limited.
The commercial viability
of our product candidates for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon
their acceptance among physicians, the medical community, and patients, and coverage and reimbursement of them by third-party payors,
including government payors. The degree of market acceptance of any of our approved products will depend on a number of factors,
including:
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limitations or warnings contained in a product’s FDA-approved labeling;
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changes in the standard of care for the targeted indications for any of our product candidates, which could reduce the marketing impact of any claims that we could make following FDA approval;
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limitations inherent in the approved indication for any of our product candidates compared to more commonly understood or addressed conditions;
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lower demonstrated clinical safety and efficacy compared to other products;
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prevalence and severity of adverse effects;
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ineffective marketing and distribution efforts;
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lack of availability of reimbursement from managed care plans and other third-party payors;
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lack of cost-effectiveness;
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timing of market introduction and perceived effectiveness of competitive products;
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availability of alternative therapies at similar costs; and
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potential product liability claims.
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Our ability to effectively
promote and sell our product candidates in the marketplace will also depend on pricing, including our ability to manufacture a
product at a competitive price. We will also need to demonstrate acceptable evidence of safety and efficacy and may need to demonstrate
relative convenience and ease of administration. Market acceptance could be further limited depending on the prevalence and severity
of any expected or unexpected adverse side effects associated with our product candidates. If our product candidates are approved
but do not achieve an adequate level of acceptance by physicians, health care payors, and patients, we may not generate sufficient
revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community
and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.
If our approved drugs fail to achieve market acceptance, we will not be able to generate significant revenue, if any.
Our ability to generate product revenues
will be diminished if our drugs sell for inadequate prices or patients are unable to obtain adequate levels of reimbursement.
Our ability to generate
significant sales of our products, if approved, depends on the availability of adequate coverage and reimbursement from third-party
payors. Healthcare providers that purchase medicine or medical products for treatment of their patients generally rely on third-party
payors to reimburse all or part of the costs and fees associated with the products. Adequate coverage and reimbursement from governmental
payors, such as Medicare and Medicaid, and commercial payors is critical to new product acceptance. Patients are unlikely to use
our products if they do not receive reimbursement adequate to cover the cost of our products. Orphan drugs in particular have received
recent negative publicity for the perceived high prices charged for them by their manufacturers, and as a result, other orphan
drug developers such as us may be negatively impacted by such publicity and any U.S. or other government regulatory response.
In addition, the market
for our future products will depend significantly on access to third-party payors’ drug formularies, or lists of medications
for which third-party payors provide coverage and reimbursement. Industry competition to be included in such formularies results
in downward pricing pressures on pharmaceutical companies.
All third-party payors,
whether governmental or commercial, whether inside the United States or outside, are developing increasingly sophisticated methods
of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for medical
technology exists among all these payors. Therefore, coverage of and reimbursement for medical products can differ significantly
from payor to payor.
Further, we believe
that future coverage and reimbursement may be subject to increased restrictions both in the United States and in international
markets. Third-party coverage and reimbursement for our products may not be available or adequate in either the United States or
international markets, limiting our ability to sell our products on a profitable basis.
Significant uncertainty
exists as to the reimbursement status of newly approved healthcare products. Healthcare payors, including Medicare, are challenging
the prices charged for medical products and services. Government and other healthcare payors increasingly attempt to contain healthcare
costs by limiting both coverage and the level of reimbursement for drugs. Even if our product candidates are approved by the FDA,
insurance coverage may not be available, and reimbursement levels may be inadequate, to cover our drugs. If government and other
healthcare payors do not provide adequate coverage and reimbursement levels for any of our products, once approved, market acceptance
of our products could be reduced.
There have been public
announcements by members of the U.S. Congress, President Trump and his administration regarding their plans to repeal and replace
the Patient Protection and Affordable Care Act as well as to make changes to Medicare and Medicaid. While we cannot predict the
timing or impact of any specific changes to applicable laws, the U.S. government has shown significant interest in pursuing healthcare
reform and reducing healthcare costs. Any government-adopted reform measures could decrease the amount of reimbursement available
from governmental and other third-party payors for our products.
Risks Related to Product and Environmental
Liability
Our products may expose us to potential
product liability, and there is no guarantee that we will be able to obtain and maintain adequate insurance to cover these liabilities.
The testing, marketing,
and sale of human cell therapeutics, pharmaceuticals, and services entail an inherent risk of adverse effects or medical complications
to patients and, as a result, product liability claims may be asserted against us. A future product liability claim or product
recall could have a material adverse effect on the Company. There can be no assurance that product liability insurance will be
available to us in the future on acceptable terms, if at all, or that coverage will be adequate to protect us against product liability
claims. In the event of a successful claim against the Company, insufficient or lack of insurance or indemnification rights could
result in liability to us, which could have a material adverse effect on the Company and its future viability. The use of our product
candidates in clinical trials and the sale of any products for which we obtain marketing approval, if at all, expose the Company
to the risk of product liability claims. Product liability claims might be brought against the Company by consumers, health care
providers or others using, administering or selling our products. If we cannot successfully defend ourselves against these claims,
we will incur substantial liabilities. Regardless of merit or eventual outcome, 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 product candidates;
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impairment of our business reputation;
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loss of revenues; and
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the inability to commercialize our product candidates.
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The Company has obtained
clinical trial insurance coverage for its clinical trials. However, such insurance coverage may not reimburse the Company or the
levels of coverage may not be sufficient to reimburse it for expenses or losses it may suffer or for its indemnification obligations.
Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage
at a reasonable cost or in sufficient amounts to protect the Company against losses due to liability. We intend to expand our insurance
coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development,
but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On
occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful
product liability claim or series of claims brought against the Company could have a material adverse effect on us and, if judgments
exceed our insurance coverage, could significantly decrease our cash position and adversely affect our business.
Our business involves risk associated
with handling hazardous and other dangerous materials.
Our research and development
activities involve the controlled use of hazardous materials, chemicals, human blood and tissue, animal blood and blood products,
animal tissue, biological waste, and various radioactive compounds. The risk of accidental contamination or injury from these materials
cannot be completely eliminated. The failure to comply with current or future regulations could result in the imposition of substantial
fines against the Company, suspension of production, alteration of our manufacturing processes, or cessation of operations.
Our business depends on compliance
with ever-changing environmental and human health and safety laws.
We cannot accurately
predict the outcome or timing of future expenditures that may be required to comply with comprehensive federal, state and local
environmental laws and regulations, as well as laws and regulations designed to protect employees and others who handle hazardous
materials. We must comply with environmental laws that govern, among other things, all emissions, waste water discharge and solid
and hazardous waste disposal, and the remediation of contamination associated with generation, handling and disposal activities.
To date, the Company has not incurred significant costs and is not aware of any significant liabilities associated with its compliance
with federal, state and local environmental laws and regulations. However, both federal and state environmental laws have changed
in recent years and the Company may become subject to stricter environmental standards in the future and may face large capital
expenditures to comply with environmental laws. We have limited capital and we are uncertain whether we will be able to pay for
significantly large capital expenditures that may be required to comply with new laws. Also, future developments, administrative
actions or liabilities relating to environmental matters may have a material adverse effect on our financial condition or results
of operations.
Risks Related to Our Common Stock
We expect that our stock price will
continue to fluctuate significantly.
The stock market, particularly
in recent years, has experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life
sciences company stocks. Our operating results may fluctuate from period to period for a number of reasons, and as a result our
stock price may be subject to significant fluctuations. Factors that could cause volatility in the market price of our common stock
include, but are not limited to:
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our financial condition, including our need for additional capital, as well as the impact of any terms imposed on our business and operations by the providers of additional capital;
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results from, delays in, or discontinuation of, any of the clinical trials for our drug candidates, including delays resulting from slower than expected or suspended patient enrollment or discontinuations resulting from a failure to meet pre-defined clinical endpoints;
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announcements concerning clinical trials and regulatory developments;
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failure or delays in entering drug candidates into clinical trials;
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failure or discontinuation of any of our research or development programs;
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developments in establishing new strategic alliances or with existing alliances;
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failure to satisfy licensing obligations, including our ability to file an IND to meet the milestone requirements under our Exosomes License Agreement;
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market conditions in the pharmaceutical, biotechnology and other healthcare related sectors;
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actual or anticipated fluctuations in our quarterly financial and operating results;
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developments or disputes concerning our intellectual property or other proprietary rights;
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introduction of technological innovations or new commercial products by us or our competitors;
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issues in manufacturing our drug candidates or drugs;
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issues with the supply or manufacturing of any devices or materials needed to manufacture or utilize our drug candidates;
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FDA or other U.S. or foreign regulatory actions affecting us or our industry;
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the risks and costs of increased operations, including clinical and manufacturing operations, on an international basis;
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market acceptance of our drugs, when they enter the market;
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third-party healthcare coverage and reimbursement policies;
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litigation or public concern about the safety of our drug candidates or drugs or the operations of the Company;
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issuance of new or revised securities analysts’ reports or recommendations;
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additions or departures of key personnel;
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potential delisting of our stock from the Nasdaq Stock Market; or
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volatility in the stock prices of other companies in our industry.
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We have never paid dividends and
we do not anticipate paying dividends in the future.
We have never paid
dividends on our capital stock and do not anticipate paying any dividends for the foreseeable future. We anticipate that the Company
will retain its earnings, if any, for future growth. Investors seeking cash dividends should not invest in the Company’s
common stock for that purpose.
We may issue shares of blank check
preferred stock without stockholder approval in the future.
Our certificate of
incorporation authorizes the issuance of up to 5,000,000 shares of preferred stock, none of which are currently issued or currently
outstanding. If issued, our Board of Directors will have the authority to fix and determine the relative rights and preferences
of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our Board
of Directors could authorize the issuance of a series of preferred stock that is senior to our common stock that would grant to
holders preferred rights to our assets upon liquidation, the right to receive dividends, additional registration rights, anti-dilution
protection, and the right to the redemption of such shares, together with other rights, none of which will be afforded holders
of our common stock.
Market and economic conditions may
adversely affect our industry, business and ability to obtain financing.
Recent global market
and economic conditions have been unpredictable and challenging. These conditions and any adverse impact on the financial markets
may adversely affect our liquidity and financial condition, including our ability to access the capital markets to meet our liquidity
needs.
If securities analysts do not publish
research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading market
for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our
business. If no or few analysts maintain coverage of us, the trading price of our stock could decrease. If one or more of the analysts
covering our business downgrade their evaluations of our stock, the price of our stock could also decline. If one or more of these
analysts cease to cover our stock altogether, we could lose visibility in the market for our stock, which in turn could cause our
stock price to decline.
The operational and other projections
and forecasts that we may make from time to time are subject to inherent risks, many of which are beyond our control.
The projections and
forecasts that our management may provide from time to time (including, but not limited to, those relating to timing, progress
and anticipated results of clinical development, regulatory processes, clinical trial timelines and any anticipated benefits of
our product candidates) reflect numerous assumptions made by management, including assumptions with respect to our specific as
well as general business, economic, market and financial conditions and other matters, all of which are difficult to predict and
many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the
projections themselves, will prove inaccurate. There will be differences between actual and projected results, and actual results
may be materially different from those contained in the projections. The inclusion of the projections in (or incorporated by reference
in) this prospectus should not be regarded as an indication that we or our management or representatives considered or consider
the projections to be a reliable prediction of future events, and the projections should not be relied upon as such. Additionally,
final data may differ significantly from preliminary reported data.
Our certificate of incorporation
and by-laws contain provisions that may discourage, delay or prevent a change in our management team that stockholders may consider
favorable.
Our certificate of
incorporation, our bylaws and Delaware law contain provisions that may have the effect of preserving our current management, such
as:
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authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;
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eliminating the ability of stockholders to call special meetings of stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
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These provisions could
make it more difficult for our stockholders to affect our corporate policies or make changes in our Board of Directors and for
a third party to acquire us, even if doing so would benefit our stockholders.
Ownership of the Company’s
common stock is highly concentrated, which may prevent you and other stockholders from influencing significant corporate decisions
and may result in conflicts of interest that could cause the Company’s stock price to decline.
As of December 31,
2019, our executive officers, directors and holders of five percent or more of our outstanding common stock (based upon our review
of filings made with the SEC by such holders), together with their respective affiliates, owned approximately 25% of our outstanding
common stock. The interests of these stockholders may not be the same as, or may even conflict with, the interests of our other
stockholders. These stockholders, acting individually or as a group, will have substantial influence over the outcome of a corporate
action of the Company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of
all or substantially all of the Company’s assets or any other significant corporate transaction. These stockholders may also
exert influence in delaying or preventing a change in control of the Company, even if such change in control would benefit the
other stockholders of the Company. In addition, the significant concentration of stock ownership may adversely affect the market
value of the Company’s common stock due to investors’ perception that conflicts of interest may exist or arise.
A significant number of shares of our common stock are
issuable pursuant to outstanding stock awards and warrants, and we expect to issue additional stock awards and shares of common
stock in the future. Exercise of these awards and warrants, and sales of shares will dilute the interests of existing security
holders and may depress the price of our common stock.
As of December 31,
2019, there were approximately 5.2 million shares of common stock outstanding, approximately 3.2 million pre-funded common warrants
outstanding, and approximately 4.3 million common warrants outstanding, as well as outstanding awards to purchase approximately
0.8 million shares of common stock under various incentive stock plans of the Company. Additionally, as of December 31, 2019, there
were approximately 0.1 million shares of common stock available for future issuance under various incentive plans. We may issue
additional common stock, warrants and other convertible securities from time to time to finance our operations. We may also issue
additional shares to fund potential acquisitions or in connection with additional stock options or other equity awards granted
to our employees, officers, directors and consultants under our various incentive plans. The issuance of additional shares of common
stock, warrants or other convertible securities and the perception that such issuances may occur or exercise of outstanding warrants
or options may have a dilutive impact on other stockholders and could have a material negative effect on the market price of our
common stock.
The Company’s ability to utilize
Nile’s net operating loss and tax credit carryforwards in the future is subject to substantial limitations and may further
be limited as a result of the merger with Capricor.
Federal and state income
tax laws impose restrictions on the utilization of net operating loss, or NOL, and tax credit carryforwards in the event that an
“ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended,
or the Code. In general, an ownership change occurs when stockholders owning 5% or more of a “loss corporation” (a
corporation entitled to use NOL or other loss carryforwards) have increased their aggregate ownership of stock in such corporation
by more than 50 percentage points during any three-year period. If an “ownership change” occurs, Section 382 of the
Code imposes an annual limitation on the amount of post-ownership change taxable income that may be offset with pre-ownership change
NOLs of the loss corporation experiencing the ownership change. The annual limitation is calculated by multiplying the loss corporation’s
value immediately before the ownership change by the greater of the long-term tax-exempt rate determined by the IRS in the month
of the ownership change or the two preceding months. This annual limitation may be adjusted to reflect any unused annual limitation
for prior years and certain recognized built-in gains and losses for the year. Section 383 of the Code also imposes a limitation
on the amount of tax liability in any post-ownership change year that can be reduced by the loss corporation’s pre-ownership
change tax credit carryforwards.
The merger between
Nile Therapeutics, Inc., or Nile, and Capricor resulted in an “ownership change” of Nile. In addition, previous or
current changes in the Company’s stock ownership may have triggered or, in the future, may trigger an “ownership change,”
some of which may be outside our control. Accordingly, the Company’s ability to utilize Nile’s NOL and tax credit carryforwards
may be substantially limited. These limitations could, in turn, result in increased future tax payments for the Company, which
could have a material adverse effect on the business, financial condition, or results of operations of the Company.
The requirements of being a public
company may strain our resources and divert management’s attention.
As a public company,
we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and other
applicable securities rules and regulations, and are subject to the listing requirements of The Nasdaq Stock Market LLC, or Nasdaq.
Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult,
time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that
we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure
controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure
controls and procedures and internal control over financial reporting to meet this standard, significant resources and management
oversight may be required. In addition, these rules and regulations make it more difficult and more expensive for us to obtain
director and officer liability insurance. As a result, management’s attention may be diverted from other business concerns,
which could harm our business and operating results. Although we have hired employees in order to comply with these requirements,
we may need to hire more employees in the future, which will increase our costs and expenses.
Failure to achieve and maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our
business and stock price.
The Sarbanes-Oxley
Act of 2002, as amended, or Sarbanes-Oxley, as well as rules implemented by the Securities and Exchange Commission, Nasdaq and
any market on which the Company’s shares may be listed in the future, impose various requirements on public companies, including
those related to corporate governance practices. The Company’s management and other personnel will need to devote a substantial
amount of time to these requirements. Moreover, these rules and regulations will increase the Company’s legal and financial
compliance costs and will make some activities more time consuming and costly.
Section 404 of Sarbanes-Oxley,
or Section 404, requires that we establish and maintain an adequate internal control structure and procedures for financial reporting.
Our annual reports on Form 10-K must contain an assessment by management of the effectiveness of our internal control over financial
reporting and must include disclosure of any material weaknesses in internal control over financial reporting that we have identified.
The requirements of Section 404 are ongoing and also apply to future years. We expect that our internal control over financial
reporting will continue to evolve as our business develops. Although we are committed to continue to improve our internal control
processes and we will continue to diligently and vigorously review our internal control over financial reporting in order to ensure
compliance with Section 404 requirements, any control system, regardless of how well designed, operated and evaluated, can provide
only reasonable, not absolute, assurance that its objectives will be met. Therefore, we cannot be certain that in the future material
weaknesses or significant deficiencies will not exist or otherwise be discovered. If material weaknesses or other significant deficiencies
occur, these weaknesses or deficiencies could result in misstatements of our results of operations, restatements of our consolidated
financial statements, a decline in our stock price, or other material adverse effects on our business, reputation, results of operations,
financial condition or liquidity.
You may experience future dilution
as a result of future equity offerings.
In order to raise additional
capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable
for our common stock at prices that may not be the same as the price per share paid by any investor. We may sell shares or other
securities in any other offering at a price per share that is less than the price per share paid by any investor, and investors
purchasing shares or other securities in the future could have rights superior to you. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or
lower than the price per share paid by any investor.
If our business plans are not successful,
we may not be able to continue operations as a going concern and our stockholders may lose their entire investment in us.
We have historically
incurred substantial losses to fund our business operations including our research and development activities. We will, in all
likelihood, sustain operating expenses without corresponding revenues for the foreseeable future. This may result in our incurring
net operating losses that will increase continuously until we are able to obtain regulatory approval for, and commercialize, our
product candidates, the occurrence of which cannot be assured. If we cannot continue as a going concern, our stockholders may lose
their entire investment in us.
We may be at risk of securities class
action litigation.
We may be at risk of
securities class action litigation. This risk is especially relevant due to our dependence on positive clinical trial outcomes
and regulatory approvals. In the past, biotechnology and pharmaceutical companies have experienced significant stock price volatility,
particularly when associated with binary events such as clinical trials and product approvals. If we face such litigation, it could
result in substantial costs and a diversion of management’s attention and resources, which could harm our business and result
in a decline in the market price of our common stock.
In the event we fail to satisfy any
of the listing requirements of The NASDAQ Capital Market, our common stock may be delisted, which could affect our market price
and liquidity.
Our common stock is
listed on The NASDAQ Capital Market. For continued listing on The NASDAQ Capital Market, we will be required to comply with the
continued listing requirements, including the minimum market capitalization standard, the minimum stockholders’ equity requirement,
the corporate governance requirements and the minimum closing bid price requirement, among other requirements. In the event that
we fail to satisfy any of the listing requirements of The NASDAQ Capital Market, our common stock may be delisted. For example,
we recently received a letter from the NASDAQ Listings Qualification Department indicating that it had determined that we failed
to comply with Listing Rule 5550(b)(1) based on the Company’s Form 10-Q for the period ended June 30, 2019, evidencing stockholders’
equity below the required threshold of $2.5 million. This failure to comply with Rule 5550(b)(1) was remedied in our subsequent
Form 10-Q filing for the period ended September 30, 2019, but there is no guarantee that we will be able to resolve any NASDAQ
listing deficiencies which may occur in the future. If our securities are delisted from trading on The NASDAQ Stock Market, however,
and we are not able to list our securities on another exchange or to have them quoted on The NASDAQ Stock Market, our securities
could be quoted on the OTC Markets or on the “pink sheets.” As a result, we could face significant adverse consequences
including:
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a limited availability of market quotations for our securities;
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a determination that our common stock is a “penny stock,” which would require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
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a limited amount of news and analyst coverage; and
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a decreased ability to issue additional securities (including pursuant to short-form registration statements on Form S-3) or obtain additional financing in the future.
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