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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission file number: 001-37500
 
 
Chiasma, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
76-0722250
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
140 Kendrick Street, Building C East
Needham, Massachusetts 02494
(Address of principal executive office) (Zip Code)
(617) 928-5300
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, $0.01 par value
  
CHMA
  
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    Yes  ☐    No  ☒
As of August 5, 2020, there were
57,802,283
shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.
 
 
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
contains forward-looking statements. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. The words “anticipate,” “believe,” “could,” “continue,” “should,” “predict,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “will,” “would,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, but are not limited to, statements about:
 
   
our expected commercial launch timing of MYCAPSSA in the United States, if the U.S. Food and Drug Administration, or the FDA, accepts our manufacturing supplement, or
CBE-30
supplement, to our approved NDA;
 
   
our expectations regarding the FDA’s review and acceptance of our
CBE-30
supplement and the second manufacturing supplement we plan to submit;
 
   
our ability to obtain supply of sufficient amounts of octreotide capsules to support our planned commercial launch in the United States and clinical trials;
 
   
our views as to our readiness for commercial launch of MYCAPSSA in the United States, including our plans with respect our customer-facing team, the nature of our planned commercialization activities and strategy, our pricing of MYCAPSSA, and related assumptions;
 
   
our views as to potential future results of our commercialization efforts in the United States with respect to MYCAPSSA, including our expectations with respect to the scope, level and availability of reimbursement by private and government payors;
 
   
our development of octreotide capsules for the treatment of acromegaly;
 
   
our efforts to potentially obtain regulatory approval of octreotide capsules in the European Union by conducting the MPOWERED Phase 3 clinical trial;
 
   
the timing and receipt and announcement of
top-line
and other clinical data, including our ability to release
top-line
data from the MPOWERED trial during the fourth quarter of 2020;
 
   
the therapeutic benefits, effectiveness and safety of octreotide capsules;
 
   
our estimates of the size and characteristics of the markets that may be addressed by octreotide capsules;
 
   
the commercial success and market acceptance of octreotide capsules or any future product candidates that are approved for marketing in the United States or other countries;
 
   
our ability to generate future revenue;
 
   
the safety and efficacy of therapeutics marketed by our competitors that are targeted to indications which octreotide capsules have been developed to treat;
 
   
our ability to leverage our Transient Permeability Enhancer, or TPE, platform to develop and commercialize novel oral product candidates incorporating peptides that are currently only available in injectable or other
non-absorbable
forms;
 
   
the possibility that competing products or technologies may make MYCAPSSA, other product candidates we may develop and commercialize or our TPE technology obsolete;
 
   
our ability to secure collaborators to license, manufacture, market and sell octreotide capsules or any products for which we receive regulatory approval in the future;
 
   
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
   
our product development and operational plans generally; and
 
   
our estimates and expectations regarding our capital requirements, cash and expense levels and liquidity sources.
These forward-looking statements are not exhaustive. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events

and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form
10-Q
and our prior filings with the U.S. Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
Unless the context requires otherwise, references in this Quarterly Report on Form
10-Q
to “we,” “us”, “our” and “Chiasma” refer to Chiasma, Inc. and our subsidiaries. We own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks, including “Chiasma,” “TPE”, “MYCAPSSA” and our corporate logo. Other trademarks or service marks that may appear in this Quarterly Report on Form
10-Q
are the property of their respective holders. For convenience, we do not use the 
®
 and
symbols in each instance in which one of our trademarks appears throughout this Quarterly Report on Form
10-Q,
but this should not be construed as any indication that we will not assert, to the fullest extent under applicable law, our rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Chiasma, Inc.
INDEX
 
        
Page
 
    
Item 1.
  Financial Statements (Unaudited)      1  
  Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019      1  
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019      2  
  Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019      3  
  Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019      4  
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019      6  
  Notes to Condensed Consolidated Financial Statements      7  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      17  
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk      24  
Item 4.
  Controls and Procedures      24  
    
Item 1.
  Legal Proceedings      25  
Item 1A.
  Risk Factors      25  
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds      73  
Item 6.
  Exhibits      74  
  Signatures      75  

PART I — FINANCIAL INFORMATION
 
Item 1.
Financial Statements
Chiasma, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
    
June 30, 2020
   
December 31, 2019
 
    
(in thousands except share data)
 
Assets
    
Current assets
    
Cash and cash equivalents
   $ 52,194     $ 27,855  
Marketable securities
     14,893       64,520  
Prepaid expenses and other current assets
     3,741       3,881  
  
 
 
   
 
 
 
Total current assets
     70,828       96,256  
Property and equipment, net
     617       334  
Other assets
     2,521       2,236  
Restricted cash
     20,000       —    
  
 
 
   
 
 
 
Total assets
   $ 93,966     $ 98,826  
  
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
    
Current liabilities
    
Accounts payable
   $ 7,079     $ 3,253  
Accrued expenses
     8,148       7,576  
Other current liabilities
     716       546  
  
 
 
   
 
 
 
Total current liabilities
     15,943       11,375  
Deferred royalty obligation
     24,601       —    
Long-term liabilities
     1,444       1,682  
  
 
 
   
 
 
 
Total liabilities
     41,988       13,057  
  
 
 
   
 
 
 
Commitments and contingencies (Note 9)
    
Stockholders’ equity:
    
Common stock, $0.01 par value; authorized 125,000,000 shares at
June 30, 2020 and December 31, 2019; issued and outstanding
42,268,932 shares at June 30, 2020 and 42,078,416 shares at December 31, 2019
     423       421  
Preferred stock, $0.01 par value; authorized 5,000,000 shares; none outstanding
     —         —    
Additional
paid-in
capital
     360,977       358,245  
Accumulated other comprehensive income
     26       37  
Accumulated deficit
     (309,448     (272,934
  
 
 
   
 
 
 
Total stockholders’ equity
     51,978       85,769  
  
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 93,966     $ 98,826  
  
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
1

Chiasma, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
    
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
    
2020
   
2019
   
2020
   
2019
 
    
(in thousands except share and per share data)
 
Operating expenses:
        
General and administrative
   $ 10,665     $ 2,644     $ 18,247     $ 5,094  
Research and development
     9,672       5,522       17,797       11,993  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     20,337       8,166       36,044       17,087  
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (20,337     (8,166     (36,044     (17,087
Interest and other income, net
     128       341       526       525  
Interest expense
     (907     —         (907     —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
     (21,116     (7,825     (36,425     (16,562
Provision for income taxes
     12       15       89       28  
  
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
     (21,128     (7,840     (36,514     (16,590
  
 
 
   
 
 
   
 
 
   
 
 
 
Earnings per share
        
Basic
   $ (0.50   $ (0.25   $ (0.86   $ (0.59
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
   $ (0.50   $ (0.25   $ (0.86   $ (0.59
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average shares outstanding:
        
Basic
     42,267,507       31,597,698       42,227,601       28,051,856  
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
     42,267,507       31,597,698       42,227,601       28,051,856  
  
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
2

Chiasma, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
    
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
    
2020
   
2019
   
2020
   
2019
 
    
(in thousands)
 
Net loss
   $ (21,128   $ (7,840   $ (36,514   $ (16,590
Other comprehensive income (loss):
        
Unrealized gain (loss) on available for sale securities, net
     23       50       (11     68  
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other comprehensive income (loss):
     23       50       (11     68  
  
 
 
   
 
 
   
 
 
   
 
 
 
Comprehensive loss
   $ (21,105   $ (7,790   $ (36,525   $ (16,522
  
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
3

Chiasma, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
    
Common Stock
    
Additional
Paid-in
    
Accumulated
Other
Comprehensive
   
Accumulated
   
Total
Stockholders’
 
    
Shares
    
Amount
    
Capital
    
Income (Loss)
   
Deficit
   
Equity
 
    
(in thousands except share data)
 
Balance, December 31, 2019
     42,078,416      $ 421      $ 358,245      $ 37     $ (272,934   $ 85,769  
Stock-based compensation
     —          —          1,162        —         —         1,162  
Exercise of stock options
     186,925        2        230        —         —         232  
Other comprehensive loss
     —          —          —          (34     —         (34
Net loss
     —          —          —          —         (15,386     (15,386
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 2020
     42,265,341        423        359,637        3       (288,320     71,743  
Stock-based compensation
     —          —          1,335        —         —         1,335  
Exercise of stock options
     3,591        —          5        —         —         5  
Other comprehensive income
     —          —          —          23       —         23  
Net loss
     —          —          —          —         (21,128     (21,128
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2020
     42,268,932      $ 423      $ 360,977      $ 26     $ (309,448   $ 51,978  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
4

Chiasma, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
    
Common Stock
    
Additional
Paid-in
    
Accumulated
Other
Comprehensive
   
Accumulated
   
Total
Stockholders’
 
    
Shares
    
Amount
    
Capital
    
Income (Loss)
   
Deficit
   
Equity
 
    
(in thousands except share data)
 
Balance, December 31, 2018
     24,456,120      $ 245      $ 270,509      $ (16   $ (236,614   $ 34,124  
Stock-based compensation
     —          —          622        —         —         622  
Exercise of stock options
     33,839        —          3        —         —         3  
Additional paid in capital on account of vested
portion of restricted stock
     —          —          16        —         —         16  
Other comprehensive income
     —          —          —          18       —         18  
Net loss
     —          —          —          —         (8,750     (8,750
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 2019
     24,489,959        245        271,150        2       (245,364     26,033  
Stock-based compensation
     —          —          627        —         —         627  
Exercise of stock options
     24,110        —          26        —         —         26  
Issuance of common stock in
follow-on
offering, net
     7,263,158        73        32,160        —         —         32,233  
Other comprehensive income
     —          —          —          50       —         50  
Net loss
     —          —          —          —         (7,840     (7,840
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2019
     31,777,227      $ 318      $ 303,963      $ 52     $ (253,204   $ 51,129  
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
5

Chiasma, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
    
Six Months Ended
June 30,
 
    
2020
   
2019
 
    
(in thousands)
 
Operating Activities:
    
Net loss
   $ (36,514   $ (16,590
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
    
Depreciation
     73       29  
Stock-based compensation
     2,497       1,249  
Accretion on marketable securities, net
     (94     (278
Non-cash
lease expense
     247       87  
Amortization of debt discount and issuance costs
     63       —    
Benefit for deferred income taxes
     (8     (13
Changes in operating assets and liabilities:
    
Prepaid expenses and other current assets
     (127     1,093  
Insurance Recovery (Note 9)
     —         18,288  
Accounts payable and accrued expenses
     5,762       (1,237
Settlement Liability (Note 9)
     —         (18,750
Other assets
     (689     54  
Other current and long-term liabilities
     (162     (40
  
 
 
   
 
 
 
Net cash used in operating activities
     (28,952     (16,108
Investing Activities:
    
Purchases of marketable securities
     (8,927     (40,382
Maturities of marketable securities
     58,637       31,750  
Purchases of property and equipment
     (356     (14
  
 
 
   
 
 
 
Net cash provided by (used in) investing activities
     49,354       (8,646
Financing Activities:
    
Proceeds from the issuance of common stock, net
     —         32,233  
Exercise of stock options
     237       29  
Payments of short-term borrowing
     (838     —    
Proceeds from deferred royalty obligation, net
     24,538       —    
  
 
 
   
 
 
 
Net cash provided by financing activities
     23,937       32,262  
  
 
 
   
 
 
 
Net increase in cash, cash equivalents and restricted cash
     44,339       7,508  
Cash, cash equivalents and restricted cash, beginning of period
     27,855       13,060  
  
 
 
   
 
 
 
Cash, cash equivalents and restricted cash, end of period
   $ 72,194     $ 20,568  
  
 
 
   
 
 
 
Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets
    
Cash and cash equivalents
   $ 52,194     $ 20,568  
Restricted cash
     20,000       —    
  
 
 
   
 
 
 
Total cash, cash equivalents and restricted cash
   $ 72,194     $ 20,568  
  
 
 
   
 
 
 
See accompanying notes to these unaudited condensed consolidated financial statements.
 
6

CHIASMA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2020
 
1.
Description of Business and Summary of Significant Accounting Policies
Chiasma, Inc. is a commercial stage biopharmaceutical company incorporated in 2001 under the laws of the State of Delaware. Chiasma, Inc. is headquartered in Massachusetts and has two wholly owned subsidiaries; Chiasma (Israel) Ltd., and Chiasma Securities Corp, collectively referred to as “the Company,” “we,” “us,” “our” or “Chiasma”. We are focused on developing and commercializing oral therapies to improve the lives of patients who
face challenges associated with their existing treatments for rare and serious chronic disease. Employing our Transient Permeability Enhancer
 (“TPE”) technology platform, we seek to develop oral medications that are currently available only as injections. On June 26, 2020, we received approval from the U.S. Food and Drug Administration (“FDA”) of our oral
octreotide
capsules product candidate, MYCAPSSA for long-term maintenance treatment in acromegaly patients who have responded to and tolerated treatment with
octreotide
or
lanreotide
.
 
Our planned U.S. commercial launch of MYCAPSSA is expected to commence in the fourth quarter of 2020.
Acromegaly is a rare and debilitating condition that is caused by the body’s production of excess growth hormone. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. We retain worldwide rights to develop and commercialize octreotide capsules.
We are currently conducting an international Phase 3 clinical trial, referred to as MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union by the European Medicines Agency (“EMA”). The MPOWERED trial is a global, randomized, open-label and active-controlled
15-month
trial initially designed to enroll up to 150 patients. The EMA requested that a minimum of 80 patients who are responders to octreotide capsules per the protocol following the
six-month
run-in
phase be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In June 2019, we completed the enrollment of 146 total patients in MPOWERED and in January 2020 completed the randomization in that trial.
In April 2019, we completed
an
underwritten
 
public offering of 7,263,158 shares of common stock at $4.75 per share for aggregate net proceeds of approximately $32.2 million after underwriting fees and offering expenses. In August 2019, we completed a
follow-on
public offering of common stock in which we sold 10,166,427 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $52.3 million after underwriting fees and offering expenses.
In April 2020, we entered into an Open Market Sales Agreement (“ATM Agreement”) for “at the market offerings” with Jefferies LLC (“Jefferies”),
under
which
we
may
 
offer and sell
from time to time shares of our common stock having an aggregate offering price of
up to $60.0 million through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.
In April 2020, we entered into a Revenue Interest Financing Agreement (the “Revenue Interest Financing Agreement”) with Healthcare Royalty Partners IV, L.P. (“HCR”) for up to $75.0 million. The initial funding of $25.0 million, less certain transaction expenses, was completed in April 2020 and the second funding of $25.0 million, less certain transaction expenses, was completed in July 2020 (see Note 6).
In July 2020, we completed an underwritten public offering of 15,125,000 shares of common stock and
pre-funded
warrants (the
“Pre-Funded
Warrants”) to purchase an aggregate of 5,000,000 shares of common stock for aggregate net proceeds of approximately $75.5 million
less
underwriting fees and offering expenses. The
Pre-Funded
Warrants
are
immediately exercisable at an exercise price per share of $0.0001.
We have incurred substantial operating losses since inception, and we expect our operating losses and negative operating cash flows to continue for the foreseeable future. We are heavily dependent on the commercial success of MYCAPSSA in the United States and the regulatory approval and subsequent commercial success of MYCAPSSA in the European Union, both of which may never occur. We plan to continue to invest in our commercial launch, the manufacturing of octreotide capsules for market consumption, as well as invest in manufacturing
scale-up
activities, and continuing the open label extension portion of our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly and to continue to conduct our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly and, if the MPOWERED trial results are positive, prepare and submit a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, seeking potential regulatory approval of octreotide capsules as a treatment for acromegaly in the European Union. The FDA approved MYCAPSSA on June 26, 2020 and,
 
7

in July 2020, we completed an underwritten public offering of our common stock and
Pre-Funded
Warrants for aggregate net proceeds of approximately $75.5 million and received the Revenue Interest Financing Agreement’s second tranche funding of $25.0 million, less certain transaction expenses. We currently expect our existing cash, cash equivalents and marketable securities to fund our operations for at least one year after the date these condensed consolidated financial statements are issued.
Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. We plan to continue to fund our losses from operations and capital funding needs from existing balances of cash, cash equivalents and marketable securities, the anticipated $15.0 million of additional funding from HCR following the first commercial sale of MYCAPSSA and potentially through equity financings. We may also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing to the extent such sources are identified and available. If our anticipated U.S. revenues are insufficient to fund our operations to attaining and sustaining profitability, additional financing may be required. Such financing, if required, may not be available on a timely basis on terms acceptable to us, or at all. If we are not able to secure adequate additional funding when required, we may be forced to make reductions in spending, extend payment terms with suppliers, suspend or curtail our development opportunities, or it may negatively impact our ability to adequately fund or delay our potential commercial preparations or launch readiness outside the United States if the MPOWERED trial results are positive and MYCAPSSA is approved by the EMA. Any of these actions could materially harm our business, results of operations and future prospects. Failure to successfully commercialize octreotide capsules in acromegaly will prevent us from achieving profitability and positive cash flows, which could raise significant concerns about our continued viability as a business.
Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for annual financial statements have been condensed or omitted. The information included in this quarterly report on Form
10-Q
should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2019. The
year-end
condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as our audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. Interim results are not necessarily indicative of results for a full year or for any other subsequent interim period.
Cash Equivalents
Cash equivalents consist of highly liquid instruments that mature within three months or less from the date of purchase.
Marketable Securities
Our investments primarily consist of commercial paper and corporate and government debt securities. These marketable securities are classified as
available-for-sale,
and as such, are reported at fair value on our condensed consolidated balance sheets. Unrealized holding gains and losses are reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, together with interest on securities, are included in interest and other income, net, on our condensed consolidated statements of operations.
If a decline in the fair value of a marketable security below our cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. The cost of securities sold is based on the specific identification method.
Concentrations of credit risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents and marketable securities. We routinely maintain deposits in financial institutions in excess of government insured limits. Management believes that we are not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality and we have not experienced any
 
8

significant losses in these deposits. We regularly invest excess operating cash in deposits with major financial institutions and money market funds and in notes issued by the U.S. government, as well as in fixed income investments and U.S. bond funds, both of which can be readily purchased and sold using established markets. We believe that the market risk arising from our holdings of these financial instruments is mitigated
based
on the fact that many of these securities are either government backed or of high credit rating.
Inventory
Prior to FDA approval of MYCAPSSA, all costs related to the manufacturing of MYCAPSSA that could potentially be available to support the planned U.S. commercial launch were charged to research and development expense in the period incurred. Generally, inventory may be capitalized if it is probable that future revenues will be generated from the sale of the inventory and that these revenues will exceed the cost of the inventory. Through the FDA approval date of MYCAPSSA, we expensed all of our manufacturing costs due to the high risk inherent in drug development and uncertainty as to whether MYCAPSSA would be approved. The manufacturing-related costs incurred following our June 26, 2020 FDA approval of MYCAPSSA were immaterial to our condensed consolidated financial statements. We will begin to capitalize our manufacturing-related costs to inventory starting July 1, 2020.
We capitalize the costs to manufacture our products incurred after regulatory approval when, based on our judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. In connection therewith, we value our inventories at the lower of cost or estimated net realizable value. We determine the cost of our inventories, which includes amounts related to active pharmaceutical ingredient and other raw materials, third party manufacturing costs and other overhead costs, on
a first-in,
first-out
basis. Inventories that may be used for either research and development or commercial sale are classified as inventory until the material is consumed or otherwise allocated for research and development. If the material is intended to be used for research and development, it is expensed as research and development once that determination is made.
Prospectively, on a quarterly basis, we will review inventory quantities on hand and analyze the provision for excess and obsolete inventory based primarily on remaining product shelf life and our estimated sales forecast which is based on anticipated future demand. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance, and patient usage. Our estimates of future product demand may prove to be imprecise and changes in estimates will result in a change to the provision required for excess and obsolete inventory. Accordingly, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations.
Deferred Royalty Obligation
We treat the deferred royalty obligation, as discussed
further
in Note 6, as a debt obligation, amortized under the effective interest rate method over the estimated life of the agreement. We recognize interest expense thereon using the effective rate, which is based on our current estimates of future revenues over the life of the arrangement. In connection therewith, we periodically assess our expected revenues using internal projections, impute interest on the carrying value of the deferred royalty obligation, and record interest expense using the effective interest rate. To the extent our estimates of future revenues are greater or less than previous estimates or the estimated timing of such payments is materially different than previous estimates, we will account for any such changes by adjusting the effective interest rate on a prospective basis, with a corresponding impact to the reclassification of our deferred royalty obligation between short- and long-term. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short-term and long-term classification of such costs, as well as the period over which such costs will be amortized.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes during the reporting period. We base these estimates and assumptions on historical experience when available, and on various factors that we believe to be reasonable under the specific circumstances. Significant estimates relied upon in preparing the accompanying condensed consolidated financial statements include, but are not limited to, accounting for stock-based compensation, income taxes, the fair value of embedded derivatives and our deferred royalty obligation and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
 
9

Recently Issued Accounting Pronouncements
In June 2016, the FASB issued new guidance which will require more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. On January 1, 2020, we adopted this standard. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
2. Investments
Our investments consisted of the following as of June 30, 2020 and December 31, 2019:
 
    
As of June 30, 2020
 
    
Amortized Cost
    
Gross Unrealized

Gains
    
Gross Unrealized

Losses
    
Estimated Fair

Value
 
    
($ in thousands)
 
Money market funds
   $ 61,918      $ —        $ —        $ 61,918  
Corporate notes
     10,095        7        —          10,102  
Commercial paper
     10,228        19        —          10,247  
U.S. treasury shares
     2,999        —          —          2,999  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 85,240      $ 26      $ —        $ 85,266  
  
 
 
    
 
 
    
 
 
    
 
 
 
 
    
As of December 31, 2019
 
    
Amortized Cost
    
Gross Unrealized

Gains
    
Gross Unrealized

Losses
    
Estimated Fair

Value
 
    
($ in thousands)
 
Money market funds
   $ 23,012      $ —        $ —        $ 23,012  
Corporate notes
     45,584        20        —          45,604  
Commercial paper
     20,899        17        —          20,916  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 89,495      $ 37      $ —        $ 89,532  
  
 
 
    
 
 
    
 
 
    
 
 
 
As of June 30, 2020, we consider those securities that are in an unrealized loss position
as
temporary and not due to credit losses. We have the ability to hold such investments until recovery of the fair value. We utilize the specific identification method in computing realized gains and losses. We had no realized gains and losses on our
available-for-sale
securities for the three and six months ended June 30, 2020 or 2019.
The fair values of our investments by classification in our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 were as follows:
 
    
June 30, 2020
    
December 31, 2019
 
    
($ in thousands)
 
Cash and cash equivalents
   $ 50,373      $ 25,012  
Marketable securities
     14,893        64,520  
Restricted cash
     20,000        —    
  
 
 
    
 
 
 
Total
   $ 85,266      $ 89,532  
  
 
 
    
 
 
 
Cash and cash equivalents in the table above exclude cash of $1.8 million and $2.8 million as of June 30, 2020 and December 31, 2019, respectively. The contractual maturity dates of all of our investments are less than one year.
 
10

3. Fair Value Measurements of Financial Instruments
Certain assets and liabilities are reported at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
 
 
 
Level
 1
— Quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
 
 
 
Level
 2
— Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.
 
 
 
Level
 3
— Inputs that are unobservable for the asset or liability.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The fair value measurements of our financial instruments are summarized in the table below:
 
    
Fair Value Measurements at June 30, 2020
 
Description
  
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
    
Significant Other

Observable Inputs

(Level 2)
    
Significant

Unobservable

Inputs (Level 3)
    
Total
 
Financial assets
  
($ in thousands)
 
Cash equivalents:
           
Money market funds
   $ 61,918      $ —        $ —        $ 61,918  
U.S. treasury shares
     2,999        —          —          2,999  
Corporate notes
     —          2,457        —          2,457  
Commercial paper
     —          2,999        —          2,999  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash equivalents
   $ 64,917      $ 5,456      $ —        $ 70,373  
Marketable securities:
           
Corporate notes
   $ —        $ 7,645      $ —        $ 7,645  
Commercial paper
     —          7,248        —          7,248  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total marketable securities
     —          14,893        —          14,893  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 64,917      $ 20,349      $ —        $ 85,266  
  
 
 
    
 
 
    
 
 
    
 
 
 
Financial
liabilities
           
Derivative liabilities
   $ —        $ —        $
1,308
     $
1,308
 
 
11

    
Fair Value Measurements at December 31, 2019
 
Description
  
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
    
Significant Other

Observable Inputs

(Level 2)
    
Significant

Unobservable

Inputs (Level 3)
    
Total
 
Financial assets
  
($ in thousands)
 
Cash equivalents:
           
Money market funds
   $ 23,012      $ —        $ —        $ 23,012  
Corporate notes
     —          2,000        —          2,000  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total cash equivalents
   $ 23,012      $ 2,000      $ —        $ 25,012  
Marketable securities:
           
Corporate notes
   $ —        $ 43,604      $ —        $ 43,604  
Commercial paper
     —          20,916        —          20,916  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total marketable securities
     —          64,520        —          64,520  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 23,012      $ 66,520      $ —        $ 89,532  
  
 
 
    
 
 
    
 
 
    
 
 
 
Our cash equivalents are composed of money market funds and U.S. treasury shares and are classified as Level 1 assets under the fair value hierarchy as these assets have been valued using quoted market prices in active markets and do not have any restrictions on redemption. Our marketable securities consist of corporate notes and commercial paper and are classified as Level 2 assets under the fair value hierarchy as these assets were primarily determined from independent pricing services, which normally derive security prices from recently reported trades for identical or similar securities, making adjustments based upon other significant observable market transactions. At the end of each reporting period, we perform quantitative and qualitative analysis of prices received from third parties to determine whether prices are reasonable estimates of fair value. After completing our analysis, we did not adjust or override any fair value measurements provided by our pricing services as of June 30, 2020 or December 31, 2019.
In certain cases where there is limited activity or less transparency around inputs to valuation, the related assets or liabilities are classified as Level 3. We recorded derivative liabilities associated with our deferred royalty obligation, as discussed further in Note 6, of
$1.3 
million during the three months ended June 30, 2020. There was no change in the fair value of the derivative liabilities during the three months ended June 30, 2020. These derivative liabilities are measured at fair value using an option pricing Monte Carlo simulation model and is included as a component of the deferred royalty obligation. The embedded derivative liabilities are subject to remeasurement at the end of each reporting period, with changes in fair value recognized as a component of interest and other income, net. The assumptions used in the option pricing Monte Carlo simulation model include: (1) the expected net sales of MYCAPSSA and any of our other future products; (2) our risk-adjusted discount rate that includes a company specific risk premium; (3) our cost of debt; (4) volatility; (5) the probability and timing of a change in control occurring during the term of the instrument; and (6) the probability and timing of an event of default during the term of the instrument. We did not have any Level 3 assets or liabilities being measured at fair value on a recurring basis as of December 31, 2019.
4. Earnings per Share of Common Stock
All common stock warrants and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an anti-dilutive impact due to net losses reported during the three and six months ended June 30, 2020 and 2019.
5. Accrued Expenses
As of June 30, 2020 and December 31, 2019, accrued expenses consisted of the following:
 
    
June 30, 2020
    
December 31, 2019
 
    
($ in thousands)
 
Accrued research and development expenses
   $ 3,498      $ 4,219  
Accrued general, administrative and other expenses
     2,413        1,485  
Accrued payroll and employee benefits
     2,237        1,872  
  
 
 
    
 
 
 
Total accrued expenses
   $ 8,148      $ 7,576  
  
 
 
    
 
 
 
 
12

6. Deferred Royalty Obligation
In April 2020, we entered into the Revenue Interest Financing Agreement with HCR whereby HCR will receive payments from us at a tiered percentage (the “Applicable Tiered Percentage”) of future net revenues of MYCAPSSA and any of our other future products, including worldwide net product sales and upfront payments and milestones received from third parties under license agreements (the “Revenue Interests”). Under the terms of the agreement, we received $25.0 million, less certain transaction expenses, from HCR in April 2020 and an additional $25.0 
million in July 2020 following the FDA approval of MYCAPSSA. We are entitled to receive an additional
 
$
15.0
 million upon conditions related to commercial drug supply availability and first commercial sale of MYCAPSSA, subject to customary closing conditions. We are also entitled to receive an additional $
10.0
 million in early 2022 subject to the achievement of a
revenue
milestone and customary closing conditions. In exchange for the total investment amount (“Investment Amount”) received, HCR will receive a tiered royalty starting in the low double digits on worldwide annual net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues.
HCR’s rights to receive the Revenue Interests shall terminate on the date on which HCR has received payments equal to 195%
of the funded portion of the Investment Amount including the aggregate of all payments made to HCR as of such date, unless the Revenue Interest Financing Agreement is terminated earlier. If HCR has not received payments equal to the 195% of the funded portion of the Investment Amount by the
ten-year
anniversary of the initial closing date and no event of default has occurred or is ongoing, among other things, we shall pay HCR an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return in the low to
mid-teens
less payments previously received. If a change of control of the Company occurs, we must immediately repay HCR the total amount actually funded (including unfunded amounts conditionally eligible to be funded) plus a change of control premium, the amount of which is variable
up
 
to
95
%
based on timing and circumstances of such change of control. Upon the occurrence of an event of default, including the withdrawal, suspension or other termination of the FDA approval of MYCAPSSA as a treatment for acromegaly that continues for sixty days that prevents us from marketing MYCAPSSA, HCR may accelerate payments due under the agreement to the 195% of the funded portion of the Investment Amount. 
If HCR has not received 60% of the
funded portion of the
Investment Amount by September 30, 2023 or 100%
of the funded portion
of the Investment Amount by September 30, 2024, we must make cash payments sufficient to gross HCR up to such minimum amounts. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 
million in securitized cash and investment accounts, which we recorded as restricted cash in the condensed consolidated balance sheet, during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. Our obligations under the Revenue Interest Financing Agreement are secured by a first priority perfected security interest in all of our Chiasma, Inc. cash and cash equivalents (as defined in the Revenue Interest Financing Agreement), all present and future net revenues of MYCAPSSA and all MYCAPSSA-related assets.
We
have evaluated the terms of the deferred royalty obligation and concluded that the features of the Investment Amount are similar to those of a debt instrument. Accordingly, we have accounted for the transaction as long-term debt. We have evaluated the terms of the debt and determined that the repayment of up to 195% of the Investment Amount, less any payments made to date, upon a change of control is an embedded derivative that requires bifurcation from the debt instrument and fair value recognition. In addition, we have determined that the repayment of 195% of the funded portion of the Investment Amount, less any payments made to date, upon an event of default is an embedded derivative that requires bifurcation from the debt instrument and fair value recognition. We determine the fair value of the derivatives using an option pricing Monte Carlo simulation model taking into account the probability and timing of a change of control and an event of default occurring and potential repayment amounts and timing of such payments that would result under various scenarios, as further described in Note 3. The aggregate fair value of the embedded derivative
is $1.3 
million and is
pre
sent
ed in deferred royalty obligation in the condensed consolidated balance sheet. We remeasure the embedded derivative to fair value each reporting period until the time the termination of the Revenue Interest Financing Agreement.
The effective interest rate as of June 30, 2020 was approximately
 
18
%.
In connection with the deferred royalty obligation, we incurred debt issuance costs totaling
 
$
0.6
 million
in the six months ended June 30, 2020. Debt issuance costs have been netted against the deferred royalty obligation and are being amortized over the estimated term of the obligation using the effective interest method, adjusted on a prospective basis for changes in the underlying assumptions and inputs. The assumptions used in determining the expected repayment term of the deferred royalty obligation and amortization period of the issuance costs requires that we make estimates that could impact the short- and long-term classification of these costs, as well as the period over which these costs will be amortized.
 
13

The carrying value of the deferred royalty obligation, as presented on the condensed consolidated balance sheet, approximates fair value as of June 30, 2020 and was measured using Level 3 inputs. The estimated fair value was calculated using an option pricing Monte Carlo simulation model with inputs consistent with those used in determining the embedded derivative values as described in Note 3.
7. Warrants
As of December 31, 2019, there were 3,567,015 common stock warrants outstanding with exercise prices ranging from $0.09 per share to $9.13 per share. Such warrants were issued between October 2012 and February 2015 with expiration dates ranging from March 2022 through December 2024. There were no warrants issued or exercised during the six months ended June 30, 2020. There were 3,567,015 outstanding warrants as of June 30, 2020. As described in Note 1, in July 2020, we issued
Pre-Funded
Warrants in connection with an underwritten public offering to purchase an aggregate of 5,000,000 shares of common stock which
are
immediately exercisable at an exercise price per share of $0.0001.
8. Stock-based Compensation
In 2008, our board of directors adopted the 2008 Stock Incentive Plan (the “2008 Plan”), which provided for the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company up to 3,547,741 shares of common stock. Option awards expire 10 years from the grant date and generally vest over four years but vesting conditions can vary at the discretion of our board of directors.
In July 2015, the Company approved the 2015 Stock Option and Incentive Plan (the “2015 Plan”), which became effective upon our initial public offering. The 2015 Plan allow
s
the grant of incentive stock options, nonqualified stock options, and restricted stock to employees, directors, and nonemployees of the Company initially up to 3,566,296 shares of common stock. In connection with the adoption of the 2015 Plan, no further option grants were permitted under the 2008 Plan and any expirations, cancellations, or terminations under the 2008 Plan are available for issuance under the 2015 Plan. On January 1, 2020, the number of shares reserved and available for issuance under the 2015 Plan increased by 1,683,136 shares of common stock pursuant to a provision in the 2015 Plan that provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2016, by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the board of directors. As of June 30, 2020, the total number of shares authorized for stock award plans is 9,775,418 of which 1,511,498 remain available for grant. There are 7,916,922 stock options outstanding as of June 30, 2020.
Stock-based compensation for the three and six months ended June 30, 2020 and 2019 consisted of the following:
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
 
    
2020
    
2019
    
2020
    
2019
 
    
($ in thousands)
 
General and administrative
   $ 1,060      $ 360      $ 2,013      $ 671  
Research and development
     275        267        484        578  
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
   $ 1,335      $ 627      $ 2,497      $ 1,249  
  
 
 
    
 
 
    
 
 
    
 
 
 
The fair value of each stock option issued was estimated at the date of grant using the Black-Scholes option model with the following weighted-average assumptions:
 
    
Six Months Ended June 30,
 
    
2020
   
2019
 
Expected volatility
     85     98
Expected term (years)
     6.2       6.0  
Risk-free interest rate
     1.11     2.09
Expected dividend yield
     0     0
We granted approximately 1,736,900 stock options in the six months ended June 30, 2020. The weighted-average grant date fair value per share of stock options granted during the six months ended June 30, 2020 was $3.32. We granted approximately 1,533,000 stock options in the six months ended June 30, 2019. The weighted-average grant date fair value per share of options granted during the six months ended June 30, 2019 was $5.19.
 
14

9. Commitments and Contingencies
Manufacturing Commitments
As of June 30, 2020, we had outstanding manufacturing commitments, including the acquisition of API, in the aggregate amount of $25.2 million of which $9.2 million is expected to be incurred in 2020 with the remainder to be incurred throughout 2021. The payments on these commitments will occur following the deliveries of the API or completion of the manufacturing services.
2019 Litigation Settlement
On June 9, 2016, Chiasma, Inc. and certain of our current and former officers were named as defendants in a purported federal securities class action lawsuit filed in the United States District Court for the District of Massachusetts, styled
Gerneth v. Chiasma, Inc., et al
. An amended complaint was filed by the lead plaintiff on February 10, 2017 challenging our statements regarding our first Phase 3 clinical trial methodology and results, and our ability to obtain FDA approval for octreotide capsules, in violation of Sections 11 and 15 of the Securities Act of 1933. The amended complaint added as defendants current and former members of our board of directors, as well as the investment banks that underwrote our initial public offering on July 15, 2015. The plaintiff sought an unspecified amount of compensatory damages on behalf of himself and members of a putative shareholder class, including interest and reasonable costs and expenses incurred in litigating the action, and any other relief the court determines is appropriate. The defendants filed a motion to dismiss the amended complaint on March 27, 2017 and on February 15, 2018, the court denied defendants’ motion to dismiss. The defendants filed an answer to the amended complaint on March 30, 2018. On February 27, 2019, the parties agreed to a settlement of all legal claims in which defendants expressly denied that they have committed any act or omission giving rise to any liability under Sections 11 or 15 of the Securities Act of 1933. On March 14, 2019, the court issued an order of preliminary approval of the settlement. As a result of this settlement agreement, we have recorded a litigation settlement liability of $18.8 million as of December 31, 2018. Additionally, we have recorded a litigation insurance settlement recovery receivable of $18.3 million as of December 31, 2018 which represents the estimated insurance claim proceeds from our insurance carriers. On June 27, 2019, the court issued an order of final approval of the settlement. The litigation insurance settlement recovery and litigation settlement liability were settled during the three months ended June 30, 2019.
10. Leases
We determine if an arrangement is a lease at inception. We have operating leases for our office spaces and certain automobiles.
Right-of-use
assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The
right-of-use
asset also includes direct costs incurred and is reduced by lease incentives. Lease agreements with lease and
non-lease
components are accounted for separately. As our leases do not provide an implicit rate, we use an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We recognize operating lease expense on a straight-line basis over the lease term.
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
 
    
2020
    
2019
    
2020
    
2019
 
    
($ in thousands)
 
The components of lease expense were as follows:
           
Operating lease expense
   $ 171      $ 57      $ 335      $ 104  
  
 
 
    
 
 
    
 
 
    
 
 
 
Supplemental cash flow information related to leases was as follows:
           
Cash paid for amounts included in the measurement of lease liabilities:
           
Operating cash flows from operating leases
   $ 199      $ 55      $ 271      $ 100  
Right-of-use
assets obtained in exchange for lease obligations:
           
Operating leases
   $      $ 86      $ 94      $ 113  
 
1
5

    
June 30, 2020
 
    
($ in thousands)
 
Supplemental balance sheet information related to leases was as follows:
  
Right-of-use
assets
   $ 1,220  
 
 
 
 
 
Other current liabilities
   $ 623  
Long-term liabilities
     785  
  
 
 
 
Total lease liabilities
   $ 1,408  
  
 
 
 
Weighted average remaining lease term—operating leases
     26 Months  
Weighted average discount rate—operating leases
     10.8
Our lease
right-of-use
assets are recorded within other assets on our condensed consolidated balance sheets.
Future lease payments under noncancelable leases as of June 30, 2020 are as follows:
 
    
($ in thousands)
 
Remainder of 2020
   $ 388  
2021
     715  
2022
     487  
  
 
 
 
Total future minimum lease payments
     1,590  
Less: imputed interest
     (182
  
 
 
 
Total
   $ 1,408  
  
 
 
 
 
1
6

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form
10-Q
and the audited financial information and the notes thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on
Form 10-Q, including
information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on
Form 10-Q
and our prior filings with the SEC, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a commercial stage biopharmaceutical company focused on improving the lives of patients who face challenges associated with their existing treatments for rare and serious chronic disease. Employing our proprietary Transient Permeability Enhancer, or TPE
®
, technology platform, we seek to develop oral medications that are currently available only as injections. On June 26, 2020,
the U.S. Food and Drug Administration, or the FDA, approved MYCAPSSA
®
(octreotide) capsules for long-term maintenance treatment in acromegaly patients who have responded to and tolerated treatment with octreotide or lanreotide. MYCAPSSA is the first and only oral somatostatin analog, or SSA, approved by the FDA and the first product approved by the FDA utilizing our TPE technology. The FDA approval of MYCAPSSA was based on the positive results of the randomized, double-blind, placebo-controlled, nine-month Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules, which met the primary endpoint and all four secondary endpoints, as well as safety data from all of Chiasma’s Phase 3 clinical trials of MYCAPSSA. We are focused on the commercialization of MYCAPSSA for the treatment of patients with acromegaly in the United States and developing and seeking regulatory approval of MYCAPSSA in the European Union.
Acromegaly is a rare and debilitating condition that results from the body’s production of excess growth hormone, which in turn elevates insulin-like growth factor 1,
or IGF-1.
These elevated hormone levels result in a number of painful and disfiguring symptoms, including some acute, such as headaches, joint pain and fatigue, and some long-term, such as enlarged hands, feet and internal organs, as well as altered facial features. If not treated promptly, acromegaly can lead to serious illness and is associated with premature death, primarily due to cardiovascular disease. Octreotide is an analog of somatostatin, a natural inhibitor of growth hormone secretion. The current standard of care for patients diagnosed with acromegaly and not otherwise cured by surgical removal of the pituitary tumor consists of lifelong, once-monthly injections of an extended release somatostatin analog. Octreotide capsules have been granted orphan designation in the United States and the European Union for the treatment of acromegaly. The worldwide market for injectable somatostatin analogs is approximately $2.8 billion annually. We estimate the global market for SSAs in the treatment of acromegaly at approximately $800 million of which we estimate the U.S. market at approximately $400 million. We retain worldwide rights to develop and commercialize octreotide capsules.
We are also conducting an international Phase 3 clinical trial, or MPOWERED, of oral octreotide capsules for the maintenance treatment of adult patients with acromegaly to support regulatory approval in the European Union. The MPOWERED trial is a randomized, open-label and
active-controlled 15-month trial
initially designed to enroll up to 150 patients. The European Medicines Agency, or EMA, requested that a minimum of at least 80 patients who are responders to octreotide capsules following
the six-month run-in phase
be randomized to either remain on octreotide capsules or return to injectable somatostatin receptor ligands (octreotide or lanreotide), and then followed for an additional nine months. In June 2019, we completed the enrollment of 146 total patients in MPOWERED. In January 2020, the randomization of patients was completed. Of the 146 patients that entered the
six-month
run-in
phase of the trial, 92 of these patients (or 63%) completed the
run-in
phase and were deemed to be responders to octreotide capsules per protocol
(IGF-1
<1.3 x ULN and GH<2.5 ng/mL). Of the 92 patients who completed the
run-in
phase, 85 patients have completed the trial and four remain in the nine-month, randomized, controlled phase of the trial. MPOWERED has met the EMA requirement of a minimum of 80 patients randomized into the controlled phase of the trial. The primary endpoint will be calculated with time weighted average analysis, therefore missing monthly
IGF-1
values are not anticipated to affect the completion of the primary endpoint analysis. We expect to
release top-line data
from the MPOWERED trial in the fourth quarter of 2020. If the MPOWERED trial results are positive, we plan to prepare and submit a marketing authorization application, or MAA, to the European Medicines Agency, or EMA, seeking potential regulatory approval of oral octreotide as a treatment for acromegaly in the European Union.
 
17

In March 2020, we commenced enrolling patients in the first industry-sponsored disease state registry for acromegaly in the United States known as the Management of Acromegaly Registry, or MACRO Registry. The MACRO Registry is designed to enroll patients from over 40 planned clinical sites in the United States and collect real-world data on treatment burden and effectiveness of various acromegaly treatments.
We were incorporated in 2001 and commenced active operations in the same year. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our TPE technology, identifying potential drug candidates, undertaking nonclinical studies and, beginning in 2010, conducting clinical trials and preparing for regulatory submissions. In addition, we initiated
pre-commercial
activities in anticipation of FDA marketing approval of octreotide capsules in June 2020. In July 2015, we completed our initial public offering, or IPO, in which we raised $106.5 million. In April 2019, we completed a
follow-on
public offering of common stock in which we raised an additional $32.2 million. In August 2019, we completed a
follow-on
public offering of common stock in which we raised an additional $52.3 million. In April 2020, we entered into a Revenue Interest Financing Agreement, or the Revenue Interest Financing Agreement, with Healthcare Royalty Partners IV, L.P., or HCR for up to $75.0 million. In July 2020, we completed a
follow-on
public offering which consisted of common stock and
pre-funded
warrants in which we raised an additional $75.5 million. As of June 30, 2020, our consolidated cash, cash equivalents, marketable securities and restricted cash were $87.1 million, of which $0.4 million was held by Chiasma (Israel) Ltd., our wholly owned Israeli subsidiary. In April 2020, we entered into an Open Market Sales Agreement, or ATM Agreement, for “at the market offerings” under which we may offer and sell from time to time shares of our common stock having an aggregate offering price of up to $60.0 million through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement.
We have incurred significant operating losses since our inception. Our net loss was $36.5 million for the six months ended June 30, 2020 and $36.3 million for the year ended December 31, 2019. As of June 30, 2020, we had an accumulated deficit of $309.4 million. We expect to incur significant operating losses over the next several years. These losses, combined with prior losses will continue to have an adverse effect on our cash resources, stockholders’ equity and working capital. We plan to invest in our commercial launch, manufacture octreotide capsules for market consumption, as well as invest in manufacturing
scale-up
activities, and continue the open label extension portion of our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly and to continue to conduct our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly and, if the MPOWERED trial results are positive, prepare and submit an MAA to the EMA, seeking potential regulatory approval of oral octreotide as a treatment for acromegaly in the European Union. Because of the numerous risks and uncertainties facing our company and associated with developing and commercializing pharmaceutical products generally, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. We plan to continue to fund our losses from operations and capital funding needs from existing balances of cash, cash equivalents and marketable securities, the anticipated $15.0 million of additional funding from HCR following the first commercial sale of MYCAPSSA and potentially through equity financings. We may also opportunistically consider license and collaboration agreements with potential partners or convertible debt financing to the extent such sources are identified and available. If our anticipated U.S. revenues are insufficient to fund our operations to attaining and sustaining profitability, additional financing may be required. Such financing, if required, may not be available on a timely basis on terms acceptable to us, or at all. If we are not able to secure adequate additional funding when required, we may be forced to make reductions in spending, extend payment terms with suppliers, suspend or curtail our development opportunities, or it may negatively impact our ability to adequately fund or delay our potential commercial preparations or launch readiness outside the United States if the MPOWERED trial results are positive and MYCAPSSA is approved by the EMA. Any of these actions could materially harm our business, results of operations and future prospects. Failure to successfully commercialize octreotide capsules in acromegaly will prevent us from achieving profitability and positive cash flows, which could raise significant concerns about our continued viability as a business.
COVID-19
Update
In March 2020, the World Health Organization declared the novel strain of coronavirus, or
COVID-19,
a global pandemic and recommended containment and mitigation measures worldwide. We continue to closely monitor the impact of
COVID-19
on our business and have implemented steps to ensure the well-being of our employees as well as the patients and health care professionals involved in the MPOWERED study and the MACRO Registry. At this time, we continue to plan for the approval of the “changes being effected in 30 days” supplement,
CBE-30
supplement, which we submitted to the FDA on June 29, 2020 seeking a post-approval change to our
FDA-approved
new drug application, or NDA, for MYCAPSSA to provide for the approval of our primary commercial API manufacturer and one of its large-scale manufacturing sites. In addition, we have not observed any significant disruptions to our manufacturing supply chain to date. Our MPOWERED trial is progressing as planned and we continue to expect to
release top-line data
in the fourth quarter of 2020. The
COVID-19
pandemic has caused us to modify our business practices, including taking steps to protect our employees and the broader community, such as curtailing or modifying employee travel, reducing access to our offices, moving employees to remote work where appropriate, and cancelling
in-person
participation in meetings,
 
18

events and conferences, while seeking to ensure our ability to execute our planned commercial launch by utilizing digital engagement and remote interaction with potential customers. However, restrictions on and discouragement of travel, access to hospitals and physicians’ office, and
face-to-face
meetings may make it difficult to drive the awareness and adoption of MYCAPSSA. We are unable to predict the impact
that COVID-19 will
have on our future plans, including timing of FDA approval of our
CBE-30
supplement, if any, for commercialization, and our future financial position and operating results due to numerous uncertainties. The duration and severity of the outbreak and its long-term impact on our business cannot be ascertained at this time.
Commercial Manufacturing Supply
We began implementing launch readiness plans in 2019 in preparation for a commercial launch of MYCAPSSA capsules in the United States in the fourth quarter of 2020, pending the FDA’s approval of our NDA. Following FDA approval of our NDA and to secure commercial supply of our planned launch, we submitted our
CBE-30
supplement on June 29, 2020 to provide for the approval of our primary commercial API manufacturer and one of its large-scale manufacturing sites. At this time, we expect to have sufficient commercial supply of MYCAPSSA to support our planned commercial launch in the fourth quarter of 2020, pending the FDA’s timely acceptance of our
CBE-30
supplement. Unless the FDA determines that this
CBE-30
supplement is not sufficiently complete to permit a substantive review, we expect the FDA will accept the
CBE-30
supplement and set a PDUFA target date in the fourth quarter of 2020 for the completion of its review. If the FDA accepts the
CBE-30
supplement without delay or exception, we currently expect to begin distributing commercial product as part of our U.S. commercial launch as soon as we have commercial supplies of MYCAPSSA available at our third-party logistics provider. In addition, we also plan to file a second manufacturing supplement to the NDA, which we expect will be a prior approval manufacturing supplement, to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the approved NDA. In April 2020, the FDA requested that we include certain stability data in this planned prior approval manufacturing supplement, which we expect will result in a planned submission of this supplement in early 2021.
Financial Overview
Research and Development
Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, nonclinical pharmacology studies, manufacturing process-development and
scale-up
activities, clinical trial and related clinical and
pre-approval
manufacturing expenses, fees paid to contract research organizations, or CROs, investigative sites, and other external expenses. In the early phases of development, our research and development costs included expanding our technology platform as well as early development of specific product candidates. The majority of our research and development expenses has been spent on the development of octreotide capsules, including the
pre-approval
manufacturing expenses, manufacturing of clinical trial material, manufacturing process development and validation, regulatory and clinical activities, and our TPE platform. Now that MYCAPSSA has been approved by the FDA, manufacturing costs related to the production of commercial supplies of MYCAPSSA will no longer be captured in R&D expense but will be capitalized to inventory. We expense research and development costs as incurred.
We have limited research and discovery functions and are currently not materially investing in those areas. We have focused our resources on the clinical development of octreotide capsules, including our two international Phase 3 trials, CHIASMA OPTIMAL and MPOWERED. Product candidates in late stages of development generally have higher development costs than those in earlier stages of development, primarily due to the increased size and duration of late-stage clinical trials. We plan to continue the open label extension portion of our international Phase 3 CHIASMA OPTIMAL clinical trial of octreotide capsules in acromegaly. We also expect to continue to conduct our international Phase 3 MPOWERED clinical trial of octreotide capsules in acromegaly to support potential regulatory approval in the European Union, as well as an open label extension of MPOWERED once the trial is completed. The successful development of octreotide capsules for commercialization outside the United States is highly uncertain.
General and Administrative
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, marketing, patient services, information technology and support functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expenses, travel expenses for our general and administrative personnel and professional fees for auditing, tax, and corporate, litigation and intellectual property-related legal services.
 
19

Marketing expenses consist of professional fees related to preparation for the commercialization of MYCAPSSA, as well as salaries and related benefits for commercial employees. Our marketing expenses for the six months ended June 30, 2019 were immaterial. Following the
positive top-line data
from our CHIASMA OPTIMAL trial, which we released in July 2019, we incurred
pre-commercial marketing
related expenses prior to FDA approval and we expect the commercial expenses to substantially increase as we commercialize MYCAPSSA in the United States following our FDA approval on June 26, 2020. In addition to anticipated future increases in marketing expenses, as we prepare for the potential commercialization of octreotide capsules and grow our operations, we have begun to incur additional other general and administrative expenses which we expect will continue to increase.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income earned on our investments.
Interest Expense
Interest expense consists primarily of interest expense associated with our Revenue Interest Financing Agreement.
Provision for Income Taxes
We are subject to federal and state income taxes for earnings generated in the United States, and foreign taxes on earnings of our wholly-owned Israeli subsidiary. Our consolidated tax expense is primarily affected by the mix of our foreign subsidiary permanent items, discrete items, and unrecognized tax benefits and to a lesser extent our taxable income (loss) in the United States.
Critical Accounting Policies and Use of Estimates
We have adopted various accounting policies to prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our most significant accounting policies are described in Note 1 to our consolidated financial statements included in our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2019. For information on accounting policies as well as new pronouncements adopted in the current period and recently issued standards, see Note 1 to our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our estimates and assumptions include those related to the accounting for stock-based compensation, income taxes, deferred royalty obligations, including embedded derivative liabilities, and accounting for certain accruals. We assess the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
Results of Operations for the Three and Six Months ended June 30, 2020 and 2019
Research and Development
The following is a comparison of research and development expenses for the three and six months ended June 30, 2020 and 2019:
 
    
Three Months Ended June 30,
   
Six Months Ended June 30,
 
    
2020
    
2019
    
$
Change
    
%
Change
   
2020
    
2019
    
$
Change
    
%
Change
 
    
($ in thousands)
 
Research and development
   $ 9,672      $ 5,522      $ 4,150        75   $ 17,797      $ 11,993      $ 5,804        48
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended June 30, 2020, our total research and development expenses increased by $4.2 million to $9.7 million compared to the prior year period. For the six months ended June 30, 2020, our research and development expenses increased by $5.8 million compared to the prior year period. The increases for the three and six months ended June 30, 2020 as compared to the prior year periods were primarily due to an increase in manufacturing of octreotide capsules to support our planned U.S. commercial launch, costs associated with our disease state registry, scientific literature publications and increased regulatory costs which were offset by a decrease in clinical trial costs.
 
20

General and Administrative
The following is a comparison of general and administrative expenses for the three and six months ended June 30, 2020 and 2019:
 
    
Three Months Ended June 30,
   
Six Months Ended June 30,
 
    
2020
    
2019
    
$
Change
    
%
Change
   
2020
    
2019
    
$ Change
    
%
Change
 
    
($ in thousands)
 
General and administrative
   $ 10,665      $ 2,644      $ 8,021        303   $ 18,247      $ 5,094      $ 13,153        258
  
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
    
 
 
 
For the three months ended June 30, 2020, our general and administrative expenses increased by $8.0 million compared to the prior year period. The increase for the three months ended June 30, 2020 as compared to the prior year period was primarily due to our continuing
pre-commercialization
activities of $5.6 million, an increase in compensation-related expenses and increased other administrative costs as we prepare for commercialization of octreotide capsules. For the six months ended June 30, 2020, our general and administrative expenses increased by $13.2 million compared to the prior year period. The increase for the six months ended June 30, 2020 as compared to the prior year period was primarily due to our continuing
pre-commercialization
activities of $8.6 million, an increase in compensation-related expenses and increased other administrative costs as we prepare for commercialization of octreotide capsules.
Interest and Other Income, net
Interest and other income, net totaled $0.5 million for the six months ended June 30, 2020 compared to other income of $0.5 million for the same period in 2019. Our interest income was driven by the increase of our cash equivalents and marketable securities which were effectively offset by a decrease in the interest rate yield on our cash equivalents and marketable securities.
Interest Expense
Interest expense totaled $0.9 million for the six months ended June 30, 2020 primarily driven by interest expense related to our Revenue Interest Financing Arrangement which was entered into in April 2020.
Provision for Income Taxes
Our total tax provision was approximately $89,000 for the six months ended June 30, 2020, representing an effective tax rate of (0.2%), as compared to a tax provision of approximately $28,000 for the six months ended June 30, 2019, representing an effective tax rate of (0.2%).
Our effective tax rate differs from the statutory rate each year mainly due to a full valuation allowance maintained against U.S. deferred tax assets and due to lower tax rates applied to income of our Israeli subsidiary.
Liquidity and Capital Resources
In July 2015, we completed our IPO in which we raised $106.5 million by selling shares of common stock. In April 2019, we completed a
follow-on
public offering of common stock in which we raised an additional $32.2 million in net proceeds to finance our operations. In August 2019, we completed a
follow-on
public offering of common stock in which we raised an additional $52.3 million in net proceeds to finance our operations. In July 2020, we completed a
follow-on
public offering which consisted of common stock and
pre-funded
warrants in which we raised an additional $75.5 million in net proceeds to finance our operations. In April 2020, we entered into the Revenue Interest Financing Agreement with HCR for up to $75.0 million. The initial funding of $25.0 million, less certain transaction expenses, was completed in April 2020 and the second funding of $25.0 million, less certain transaction expenses, was completed in July 2020. The remaining $25.0 million of funding is contingent upon the achievement of certain milestones. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. In April 2020, we also entered into the ATM Agreement with Jefferies, which allows us to offer and sell up to $60.0 million in gross proceeds of common stock from time to time, through Jefferies, acting as our sales agent or principal. To date, we have not sold any common stock under the ATM Agreement. As of June 30, 2020, our cash and cash equivalents were $52.2 million, of which $0.4 million was held by our Israeli subsidiary. In addition, as of June 30, 2020, we had $14.9 million invested in short-term marketable securities and $20.0 million of restricted cash.
 
21

Plan of Operations and Future Funding Requirements
We expect that our primary uses of capital will be associated with the commercialization of MYCAPSSA in the United States and the manufacturing of octreotide capsules for market consumption, seeking regulatory approval of octreotide capsules in the European Union, including clinical trial costs (including our international Phase 3 MPOWERED clinical trial to support regulatory approval of octreotide capsules in the European Union and its planned open label extension once completed, and our international Phase 3 CHIASMA OPTIMAL clinical trial open label extension), medical affairs activities, legal and regulatory expenses related to seeking regulatory approval of octreotide capsules in the European Union, compensation and related expenses, third-party clinical development services, and other general operating costs.
We currently expect our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations, as currently planned, through at least one year after the filing of this Quarterly Report. We cannot estimate the actual amounts necessary to successfully commercialize MYCAPSSA in the United States and complete the development and commercialization of octreotide capsules in the European Union, if at all, or whether, or when, we may achieve profitability. Our future capital requirements will depend on many factors, including, but not limited to:
 
   
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for octreotide capsules and any other future product candidates for which we receive marketing approval;
 
   
proceeds, if any, received from commercial sales of octreotide capsules and any future product candidates for which we receive marketing approval;
 
   
the costs, timing and outcome of the development and regulatory review of octreotide capsules and our
CBE-30
supplement and planned prior approval manufacturing supplement;
 
   
the progress and results of our ongoing clinical trials of octreotide capsules or any future clinical trials or studies we may conduct;
 
   
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
 
   
the extent to which we develop, acquire or
in-license
other product candidates and technologies or explore or consummate other strategic transactions.
We filed a $200.0 million shelf registration statement on Form
S-3
with the SEC in September 2019, which the SEC declared effective in September 2019. In April 2020, we entered into the ATM Agreement with Jefferies, under which we may offer and sell from time to time shares of our common stock having an aggregate offering price of up to $60.0 million through Jefferies, acting as our sales agent or principal. To date, we have not sold any shares of common stock under the ATM Agreement. In July 2020, we completed a
follow-on
public offering which consisted of common stock and
pre-funded
warrants, in which we raised $80.5 million in gross proceeds, or $75.5 million net proceeds less underwriting fees and offering expenses.
To the extent that we raise additional capital through future issuance of equity or convertible debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration or other financing arrangements, we may have to relinquish valuable rights to our current or future product candidates, exploratory programs, technologies or future revenue streams on terms that may not be favorable to us. If we are unable to raise additional funds through equity or other financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts of octreotide capsules or grant rights to develop and market future potential product candidates that we would otherwise prefer to develop and market ourselves.
Revenue Interest Financing Agreement
In April 2020, we entered into a Revenue Interest Financing Agreement with HCR whereby HCR will receive payments from us at a tiered percentage, or the Applicable Tiered Percentage, of future net revenues of MYCAPSSA and any of our other future products, including worldwide net product sales and upfront payments, and milestones, collectively, the Revenue Interests. Under the terms of the agreement, we received $25.0 million, less certain transaction expenses, from HCR in April 2020 and received an additional $25.0 million following the FDA approval of MYCAPSSA in July 2020 , and are entitled to receive an additional $15.0 million upon certain conditions related to commercial drug supply availability and first commercial sale of MYCAPSSA, subject to customary closing conditions, which we expect to receive in the second half of 2020. We are also entitled to receive an additional $10.0 million in early 2022 subject to the achievement of a revenue milestone and customary closing conditions. In exchange for the total investment amount, or
 
22

Investment Amount, received, HCR will receive a tiered royalty in the low double digits on worldwide annual net revenues of MYCAPSSA and any other future products, subject to step-downs upon the achievement of certain annual revenues.
HCR’s rights to receive the Revenue Interests shall terminate on the date on which HCR has received payments equal to 195% of the funded portion of the Investment Amount including the aggregate of all payments made to HCR as of such date, unless the Revenue Interest Financing Agreement is earlier terminated. If HCR has not received payments equal to the 195% of the funded portion of the Investment Amount by the
ten-year
anniversary of the initial closing date and no event of default has occurred or is ongoing, among other things, we shall pay HCR an amount equal to the funded portion of the Investment Amount plus a specific annual rate of return in the low to
mid-teens
less payments previously received. If a change of control of the Company occurs, we must immediately repay HCR the total amount actually funded, including any amount conditionally eligible to be funded, plus a change of control premium, the amount of which is variable up to 95% based on timing and circumstances of such change of control and the amount funded and conditionally eligible to be funded by HCR as of the date of the change of control. Upon the occurrence of an event of default, including the withdrawal, suspension or other termination of the FDA approval of MYCAPSSA as a treatment for acromegaly that continues for sixty days that prevents us from marketing MYCAPSSA, HCR may accelerate payments due under the agreement to the 195% of the funded portion of the Investment Amount.
If HCR has not received 60% of the Investment Amount by September 30, 2023 or 100% of the Investment Amount by September 30, 2024, we must make cash payments sufficient to gross HCR up to such minimum amounts. Further, the Revenue Interest Financing Agreement requires us to maintain a minimum of $20.0 million in securitized cash and investment accounts during any quarter that the trailing four quarters of net revenue of MYCAPSSA is below a certain threshold. Our obligations under the Revenue Interest Financing Agreement are secured by a first priority perfected security interest in all of our cash and cash equivalents (as defined in the Revenue Interest Financing Agreement), all present and future net revenues of MYCAPSSA and all MYCAPSSA-related assets.
Cash Flows
The following is a summary of cash flows for the six months ended June 30, 2020 and 2019:
 
    
Six Months Ended
June 30,
 
    
2020
   
2019
 
    
($ in thousands)
 
Cash flows provided by (used in):
    
Operating activities
   $ (28,952   $ (16,108
Investing activities
     49,354       (8,646
Financing activities
     23,937       32,262  
Operating Activities
Net cash used in operating activities was $29.0 million for the six months ended June 30, 2020, and primarily consisted of $36.5 million in net loss, adjusted for
non-cash
items of $2.7 million (primarily stock-based compensation) and working capital increase of $4.8 million (primarily due to the increase in accounts payable and accrued expenses offset by decreases in prepaid expenses and other assets). Net cash used in operating activities was $16.1 million for the six months ended June 30, 2019, and primarily consisted of $16.6 million in net loss, adjusted for
non-cash
items of $1.1 million (primarily stock-based compensation) and working capital decrease of $0.6 million (primarily due to the decrease in accounts payable and accrued expenses and partially offset by the decrease in prepaid expenses and other current assets). The primary driver for the increase in our cash used in our operating activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was the manufacturing and
pre-commercial
costs incurred as we prepared for the commercialization of octreotide capsules.
Investing Activities
Net cash provided by investing activities was $49.4 million for the six months ended June 30, 2020, primarily related to the net maturities of marketable securities, compared to $8.6 million in cash used in investing activities for the six months ended June 30, 2019, primarily related to the net purchases of marketable securities driven by the net proceeds received from our
follow-on
public offering in April 2019.
 
23

Financing Activities
Net cash provided by financing activities was $23.9 million during the six months ended June 30, 2020, primarily related to the net proceeds from the Revenue Interest Agreement with HCR in April 2020. For the six months ended June 30, 2019, net cash provided by financing activities was $32.3 million, primarily related to the net proceeds received from our
follow-on
public offering in April 2019.
Contractual Obligations
As of June 30, 2020, we had outstanding manufacturing commitments, including the acquisition of API, in the aggregate amount of $25.2 million of which $9.2 million is expected to be incurred in 2020 with the remainder to be incurred throughout 2021. The payments on these commitments will occur following the deliveries of the API or completion of the manufacturing services. As of June 30, 2020, we had future minimum lease payments under
non-cancelable
operating leases in the aggregate amount of $1.6 million.
As of April 7, 2020, we have contractual obligations under the Revenue Interest Financing Agreement with HCR, as noted above and disclosed in Note 6 included under Part I, Item 1 of this Quarterly Report on Form
10-Q.
Off-Balance
Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance
sheet arrangements, as defined in the rules and regulations of the SEC.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of June 30, 2020, we had $72.2 million in cash, cash equivalents and restricted cash, consisting of cash in checking accounts at U.S. and Israeli banking institutions as well as money market funds. In addition, as of June 30, 2020, we had $14.9 million of marketable securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. An immediate 100 basis point increase in interest rates would cause a decrease in the value of our short-term investments of approximately $28,000. As of June 30, 2020, we did not have any outstanding variable interest rate borrowings, and as a result we are not exposed to interest rate risk associated with credit facilities.
In addition, we are subject to currency risk for balances held, or denominated, in currencies other than U.S. dollars. We work to maintain all balances in U.S. dollars until payment in other currencies is required to minimize this currency risk. Fluctuations in the exchange rate between the U.S. dollar and each of the Euro, GBP and NIS over the past 24 months have been approximately (4%), (7%), and 5%, respectively. As of June 30, 2020, we held $0.4 million in Israeli banks and petty cash funds to support our Israeli operations, the majority of which is denominated in U.S. dollars. We contract with CROs internationally, primarily for the execution of clinical trials and manufacturing activities. Transactions with these providers are settled in U.S. dollars, Euros or GBP and, therefore, we believe that we have only minimal exposure to foreign currency exchange risks. We do not currently hedge against foreign currency exchange rate risks.
We do not believe that inflation and changing prices had a significant impact on our results of operations for any periods presented herein.
 
Item 4.
Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e)
or
15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and
 
24

reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of June 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.
We continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
Changes in Internal Control Over Financial Reporting
During the three months ended June 30, 2020, there have been no changes in our internal control over financial reporting, as such term is defined in Rules
13a-15(f)
and
15(d)-15(f)
promulgated under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings
As of the date of this filing, we were not party to any legal matters or claims. In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows.
 
Item 1A.
Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form
10-Q
and in our other public filings before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any such risks or uncertainties actually occur, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and as a result, you may lose all or part of your investment.
Those risk factors below denoted with a “*” are newly added or have been materially updated from our Annual Report on Form
10-K
filed with the Securities and Exchange Commission, or the SEC, on March
 16, 2020
.
 
25

Risks Related to the Development and Potential Regulatory Approval and Commercialization of Octreotide Capsules and any Future Product Candidates
*We are substantially dependent on the successful commercialization of MYCAPSSA, which received approval from the FDA in June 2020. If we are unable to successfully commercialize MYCAPSSA in the United States, including securing and maintaining regulatory approval necessary for distribution of commercial product, and obtain regulatory approval and successfully commercialize octreotide capsules in the European Union, or if we are substantially delayed in doing so, our business may be materially harmed.
On June 26, 2020, the FDA granted approval of oral octreotide capsules, MYCAPSSA
®
, for long-term maintenance treatment in acromegaly patients who have responded to and tolerated treatment with octreotide or lanreotide, which is our only regulatory approval of a product. MYCAPSSA is our only product that has been approved for sale by the FDA. We have not yet begun to commercialize MYCAPSSA and the commercial launch of MYCAPSSA is not expected to commence until the fourth quarter of 2020. We have invested a significant portion of our activities and resources toward the development of MYCAPSSA, and we believe our prospects are highly dependent on, and a significant portion of the value of our company relates to, our ability to successfully commercialize MYCAPSSA in the United States.
Our NDA that was approved by the FDA in June 2020 references one small-scale manufacturing site for the active pharmaceutical ingredient, or API, in octreotide owned by our planned secondary commercial API manufacturer. However, we have not procured commercial API from this manufacturing site for our planned commercial launch. Accordingly, in order to commercially launch octreotide capsules, on June 29, 2020, we submitted to the FDA a manufacturing supplement to the NDA as a “changes being effected in 30 days” supplement, or
CBE-30
supplement, to provide for the approval of our primary API manufacturer and one of its large-scale manufacturing sites. If the FDA accepts the
CBE-30
supplement without delay or exception, we expect to begin distributing commercial product as part of our U.S. commercial launch as soon as we have supplies of MYCAPSSA available at our third-party logistics provider, which we expect by the end of the third quarter of 2020 while the FDA’s review of the
CBE-30
supplement is pending. In addition, we also plan to file a second manufacturing supplement to the NDA, which we expect will be a prior approval manufacturing supplement, to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the approved NDA. In April 2020, the FDA requested that we include certain stability data in this planned prior approval manufacturing supplement, which we expect will result in a planned submission of this supplement in early 2021. If we are unable to obtain the FDA’s approval of our
CBE-30
supplement or our planned second manufacturing supplement in a timely manner or at all, our planned commercial launch could be negatively impacted. The review of any manufacturing supplement to the NDA will require FDA review and approval of the manufacturing process, facility, equipment and procedures in place at each manufacturing site, including
batch-to-batch
comparability and API and drug product stability data, in accordance with the FDA’s cGMP requirements and may require regulatory inspections of each manufacturing site, which could prevent or delay approval of any such manufacturing supplement and prevent or delay our planned commercial launch. If the FDA determines during its review process that it has significant substantive issues with our
CBE-30
supplement, it could require us to cease or restrict our distribution of oral octreotide in the United States or potentially recall distributed drug product. The timing of the FDA’s review process related to our
CBE-30
supplement and planned second manufacturing supplement and the outcome of such reviews are inherently uncertain, and we can provide no assurances that either manufacturing supplement will be approved in a timely manner or at all.
Successful commercialization of MYCAPSSA is subject to many risks. We have never, as an organization, launched or commercialized a product, and there is no guarantee that we will be able to do so successfully with MYCAPSSA for its approved indication. There are numerous examples of other companies that have experienced unsuccessful product launches and failed to meet high expectations of market potential, including pharmaceutical companies with significantly more experience and resources than us.
The future success of MYCAPSSA, including the expected timing of the commercial launch, and the rate and degree of market acceptance, of MYCAPSSA in the United States, will depend on a number of factors, including:
 
   
the efficacy and safety of MYCAPSSA in a larger number of patients in a
non-clinical
setting than those demonstrated in our clinical trials;
 
   
our ability to manufacture sufficient commercial supplies of MYCAPSSA in compliance with regulatory requirements;
 
   
the effectiveness of our sales, marketing and distribution efforts, particularly during the remote,
COVID-19
environment;
 
   
the incidence and prevalence of acromegaly patients in the U.S. that respond to and tolerate treatment with octreotide or lanreotide;
 
   
the timing of market introduction of MYCAPSSA;
 
26

   
the ability of MYCAPSSA to successfully compete against other products; acceptance by the medical community and patients of MYCAPSSA as a safe and effective product;
 
   
the potential and perceived advantages of MYCAPSSA over alternative products;
 
   
the ability to distinguish safety and efficacy from existing alternatives;
 
   
the willingness of medical professionals to prescribe and patients to use MYCAPSSA and continue to use MYCAPSSA instead of alternative products;
 
   
the prevalence and severity of adverse side effects;
 
   
the convenience of prescribing, administrating and initiating patients on MYCAPSSA;
 
   
the potential and perceived value and relative cost of MYCAPSSA over alternative products, including generic products or treatments;
 
   
the availability of coverage and adequate reimbursement and pricing by private and government payors;
 
   
the successful completion of any clinical trials, regulatory approval and commercialization of MYCAPSSA for one or more label expansion indications; and
 
   
our ability to enforce our intellectual property rights with respect to MYCAPSSA.
While we have implemented our commercial launch readiness plans, we will need to incur significant additional expenses and commit significant additional management time to further develop our commercialization capabilities and to continue hiring, developing and training our sales force in order to be prepared to successfully coordinate the launch and commercialization of MYCAPSSA in the United States. We may not be able to successfully establish these capabilities on our expected timing or at all. Even if we are successful in building out our commercial team and sales force, there are many factors that could cause the launch and commercialization of MYCAPSSA to be unsuccessful and/or delayed, including a number of factors that are outside our control.
The commercial success of MYCAPSSA depends on the extent to which medical professionals and patients accept and adopt MYCAPSSA as a product for the for the treatment of acromegaly, and we do not know whether our or others’ revenue estimates in this regard will be accurate. For example, if the patient population suffering from acromegaly is smaller than we estimate or if medical professionals are unwilling to prescribe or patients are unwilling to try and then continue to use MYCAPSSA, the commercial potential of MYCAPSSA will be limited. We also do not know how medical professionals, patients and third-party payors will respond to the pricing of MYCAPSSA. Medical professionals may not prescribe MYCAPSSA and patients may be unwilling to use MYCAPSSA if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost, and we may find it necessary or desirable to provide rebates on MYCAPSSA to customers or third-party payors or to expand existing, or implement new or additional, patient assistance programs, including
co-pay
assistance programs, which could materially adversely affect our profitability.
While the FDA granted approval of MYCAPSSA based on the data included in the NDA, we do not know whether the results when a larger number of patients are exposed to MYCAPSSA, including results related to safety and efficacy, will be consistent with the results from our clinical studies of MYCAPSSA that served as the basis of FDA approval of MYCAPSSA. New data relating to MYCAPSSA, including from any adverse event reports or any negative results during our MPOWERED trial or clinical development for additional indications of oral octreotide capsules, may adversely impact the commercial results and potential of MYCAPSSA. Thus, significant uncertainty remains regarding the commercial potential success of MYCAPSSA. In addition, such new data or any serious or unexpected side effects caused by MYCAPSSA may result in a number of potentially significant negative consequences, including:
 
   
the FDA could withdraw its approval of MYCAPSSA, impose restrictions on its distribution or require the addition of labeling warnings or restrictions;
 
   
we could be required to change the way MYCAPSSA is promoted or administered or conduct additional clinical studies;
 
   
we could be sued and held liable for any harm caused to patients; or
 
   
our reputation may suffer.
If the launch or commercialization of MYCAPSSA is delayed, unsuccessful or perceived as disappointing, our stock price could decline significantly and the long-term success of the product and our company could be materially harmed.
 
27

While the FDA granted approval of MYCAPSSA, such approval does not guarantee FDA approval for any future product candidates. FDA approval of MYCAPSSA also does not guarantee that MYCAPSSA will be approved by the FDA for additional indications or by regulatory entities in countries outside of the United States.
See “Risk Factors—Risks Related to the Development and Potential Regulatory Approval and Commercialization of Octreotide Capsules and any Future Product Candidates” in our Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020, which is incorporated by reference in this prospectus supplement, for a more detailed discussion of the risks related to the manufacturing, commercialization and ongoing regulation of drug products.
*If we are unable to obtain regulatory approval and successfully commercialize octreotide capsules in the European Union, or if we are substantially delayed in doing so, our business may be materially harmed.
In October 2015, the European Medicines Agency, or EMA, accepted the design, enrollment criteria and required duration of our second Phase 3 trial to evaluate the
non-inferiority
of octreotide capsules to injectable somatostatin analogs in adult patients with acromegaly. This clinical trial, which is referred to as MPOWERED and was initiated in March 2016, is a global, randomized, open-label and active-controlled
15-month
trial initially designed to enroll up to 150 patients in Europe, Russia, the United States and certain other countries. This clinical trial is currently designed to show comparative effectiveness as required by the EMA, to support submission of an MAA and potential approval. Our ongoing MPOWERED Phase 3 clinical trial may not be successful, or acceptable to the EMA to support regulatory approval in the European Union.
Importantly, the safety data generated in our completed clinical trials of octreotide capsules, including our first Phase 3 clinical trial and the CHIASMA OPTIMAL clinical trial as well as certain safety data from the MPOWERED clinical trial, as well as the efficacy data from our completed first Phase 3 clinical trial and the CHIASMA OPTIMAL trial, were integrated into the NDA that was approved by the FDA. We expect the safety and efficacy data from all three of our Phase 3 clinical trials to be submitted in our planned MAA filing. While the MPOWERED trial design has been accepted by the EMA, our ultimate success in the regulatory review process of our planned application for marketing approval in the European Union could be negatively impacted by the results from any of our clinical trials.
The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and these regulations differ from country to country and change over time. While we have obtained marketing approval for octreotide capsules in the United States, we are not permitted to market octreotide capsules in the European Union or any other countries outside the United States until we receive the requisite approvals in such countries. In the United States, the FDA generally requires the completion of nonclinical testing and clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development to ensure its quality and other factors before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements and may impose pricing restrictions. Of the large number of drugs in development, only a small percentage result in the submission of an application for marketing authorization and even fewer are approved for commercialization.
Other than the June 2015 submission of our NDA for octreotide capsules as a treatment for acromegaly to the FDA and the December 2019 resubmission of our NDA, we have not yet submitted comparable applications to other regulatory authorities. If our development efforts for octreotide capsules, including our ability to obtain EMA regulatory approval, are not successful for the acromegaly indication or are delayed, if we are unsuccessful or delayed in obtaining regulatory approval of the
CBE-30
supplement and planned manufacturing supplement to our NDA or if adequate demand for octreotide capsules are not generated, our business and ability to generate revenues will be materially harmed. Failure to obtain regulatory approval of the
CBE-30
supplement and planned manufacturing supplement will prevent us from commercializing the product candidate in a timely manner or at all, which could raise significant concerns about our continued viability as a business. The success of octreotide capsules will depend on the receipt of additional regulatory approvals the issuance of such approvals is uncertain and subject to a number of risks, including the following:
 
   
foreign regulatory authorities, institutional review boards, or IRBs, or ethics committees may disagree with the design or conduct of our clinical trials;
 
   
the results of our clinical trials may not provide acceptable evidence of octreotide capsules’ safety and efficacy;
 
   
the results of our clinical trials may not be sufficiently robust or meet the level of statistical or clinical significance required by, the EMA or other regulatory agencies for marketing approval;
 
   
the dosing of octreotide capsules in a particular clinical trial may not be at an optimal level;
 
28

   
patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to octreotide capsules;
 
   
the data collected from our clinical trials may not be sufficient to obtain regulatory approval in the European Union or elsewhere; and
 
   
even if we obtain marketing approval in one or more countries, future safety or other issues could result in the suspension or withdrawal of regulatory approval in such countries.
In particular, we cannot guarantee that regulators will agree with our assessment of the results of the clinical trials we have conducted to date, as was the case with the FDA’s review of our completed first Phase 3 clinical trial contained in the original NDA, or that any current or future trials will be successful. The regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional clinical trials, or nonclinical or other studies, as the FDA strongly recommended in its Complete Response Letter to our NDA that we received in April 2016, or the CRL. We have only limited experience in filing the applications necessary to gain regulatory approvals and have relied before, and expect to continue to rely, on consultants and third-party contract research organizations, or CROs, with expertise in this area to assist us in this process.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved, the jurisdiction in which regulatory approval is sought and the substantial discretion of the regulatory authorities. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application may cause delays in the approval or rejection of an application or may result in future withdrawal of approval. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval, but the failure to obtain approval in one jurisdiction may negatively impact our ability to seek approval in a different jurisdiction.
*Our development, regulatory and commercialization strategy for octreotide capsules continues to depend, in part, on published scientific literature and prior findings regarding the safety and efficacy of approved products containing octreotide.
The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act, or Section 505(b)(2). Section 505(b)(2) permits the submission of an NDA where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person or entity by or for whom the investigations were conducted. The FDA interprets Section 505(b)(2) to permit the applicant to rely, in part, upon published literature or the FDA’s previous findings of safety and efficacy for an approved product. The FDA also requires companies to perform additional clinical trials or measurements to support any difference from the previously approved product. The FDA may then approve the new product candidate for all or some of the label indications for which the listed drug has been approved, as well as for any new indication(s) sought by the Section 505(b)(2) applicant as supported by additional data. The label, however, may require all or some of the limitations, contraindications, warnings or precautions included in the listed drug’s label, including a black box warning, or may require additional limitations, contraindications, warnings or precautions.
We designed our nonclinical and clinical programs to seek regulatory approval for octreotide capsules for registration filing in the United States using the FDA’s 505(b)(2) regulatory pathway and using the hybrid application pathway in the European Union. Our NDA for which we received FDA approval of octreotide capsules as a treatment for acromegaly relied, and we intend that our planned MAA will rely, in part, on previous findings of safety and efficacy for an approved immediate-release injectable octreotide product and published scientific literature for which we have not received a right of reference. Even though we designed our development programs to take advantage of Section 505(b)(2) and the hybrid application pathway to support potential regulatory approval of octreotide capsules in the United States and the European Union and obtained FDA approval of our NDA for octreotide capsules as a treatment for acromegaly, if the MPOWERED trial is successful and we submit an MAA to the EMA, the EMA may require us to perform additional clinical trials or measurements to support approval over and above the clinical trials that we have already completed or initiated. The EMA also may determine that we have not provided sufficient data to justify reliance on prior investigations involving the approved immediate-release injectable octreotide product.
In addition, notwithstanding the approval of many products by the FDA pursuant to Section 505(b)(2), in the past some pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). For example, parties have filed citizen petitions objecting to the FDA approving a Section 505(b)(2) NDA on scientific, legal and
 
29

regulatory grounds. Scientific arguments have included the assertions that for the FDA to determine the similarity of the drug in the 505(b)(2) NDA to the listed drug, the FDA would need to reference proprietary manufacturing information or trade secrets in the listed drug’s NDA; that it would be scientifically inappropriate for the FDA to rely on public or nonpublic information about the listed drug because it differs in various ways from the drug in the 505(b)(2) NDA; or that differences between the listed drug and the drug in the 505(b)(2) NDA may impair the latter’s safety and effectiveness. Legal and regulatory arguments have included the assertion that Section 505(b)(2) NDAs must contain a full report of investigations conducted on the drug proposed for approval, and that approving a drug through the 505(b)(2) regulatory pathway would lower the approval standards. In addition, citizen petitions have made patent-based challenges against 505(b)(2) NDAs. For example, petitioners have asserted that the FDA should refuse to file a 505(b)(2) NDA unless it references a specific NDA as the listed drug, because it is “most similar” to the proposed drug, and provides appropriate patent certification to all patents listed for that NDA; or that when a 505(b)(2) NDA is pending before the FDA, but before it is approved, where the FDA approves an NDA for a drug that is pharmaceutically equivalent to the drug that is the subject of the 505(b)(2) NDA, then the FDA should require that the 505(b)(2) NDA be resubmitted referencing the approved NDA as the listed drug and certifying to the listed patents for that approved drug. However, if the FDA or EMA changes its interpretation of Section 505(b)(2) or the hybrid application pathway, or if the FDA’s or EMA’s interpretation is successfully challenged in court, this could delay or even prevent the FDA or EMA, as applicable, from approving any Section 505(b)(2) NDAs or hybrid application pathway MAAs that we submit. Such a result could require us to conduct additional testing and costly clinical trials, which could substantially delay or prevent the approval and launch of octreotide capsules for the treatment of acromegaly or any future product candidates we may develop.
*Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and our current and future clinical trials may not be successful. Results of earlier studies and trials may not be predictive of future trial results, and approval in one jurisdiction may not be predictive of approval in other jurisdictions.
Conducting clinical trials and developing drugs is a lengthy, time consuming and expensive process. For example, we incurred significant expenses in developing and obtaining the FDA’s approval of octreotide capsules for the treatment of acromegaly with no guarantees that doing so would result in such an approval and we expect to continue to incur significant expenses for our Phase 3 clinical trial of octreotide capsules in acromegaly called MPOWERED to support potential regulatory approval in the European Union and our planned MAA to the EMA if the MPOWERED trial is successful. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain, and we will continue to be subject to these risks. Failure can occur at any time during the clinical trial process and results of past, current or future trials, such as the MPOWERED trial, can adversely affect prospects of securing regulatory approval or regulatory approvals previously received.
The results of nonclinical studies and prior clinical trials may not be predictive of the results of future clinical trials. The results of our completed clinical trials for octreotide capsules in acromegaly, including the CHIASMA OPTIMAL Phase 3 trial, do not ensure that future clinical trials, including the MPOWERED Phase 3 trial designed to support EMA approval, will also generate comparable results. Among other considerations, these trials may be designed in a way that is different from our completed clinical trials. For example, the EMA required that we use multiple time points in the Phase 3 clinical trial that we initiated in March 2016 rather than a single time point for the primary endpoint determination used for our initial Phase 3 clinical trial. While the EMA agreed that we use the same cut off as used in our first Phase 3 clinical trial of
IGF-1
< 1.3 times the upper limit of normal as the threshold for response, the FDA agreed that we use
IGF-1
£
1.0 times the upper limit of normal in the CHIASMA OPTIMAL trial. The fact that we have not used such endpoints previously for regulatory submissions outside the United States introduces an additional level of uncertainty in the outcome of the MPOWERED Phase 3 clinical trial, and the ability for the data from that trial to support regulatory approval from the EMA. We cannot provide assurance that the FDA or EMA will view the results as we do or that any of our ongoing or future trials of octreotide capsules, including our MPOWERED Phase 3 clinical trial in acromegaly, or any clinical trials we may conduct for other indications, if any, will achieve positive results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through nonclinical studies and prior clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in prior trials.
Despite the results reported in earlier nonclinical studies and clinical trials for octreotide capsules for the treatment of acromegaly, any current or future clinical trial results of octreotide capsules may not be successful in acromegaly, or any other indication, if studied. A number of factors could contribute to a lack of favorable safety and efficacy results for octreotide capsules for acromegaly or other indications. For example, such trials could result in increased variability due to varying site characteristics, such as local standards of care, differences in evaluation period, and varying patient characteristics, including demographic factors and health status. If later-stage clinical trials, such as MPOWERED, do not produce favorable results, it will raise substantial doubt about our ability to achieve regulatory approval of octreotide capsules for the treatment of acromegaly or other indications.
 
30

Further, our resubmitted NDA for which we obtained FDA approval relied upon the FDA’s 505(b)(2) regulatory pathway for octreotide capsules in acromegaly in the United States and we expect to rely on a similar hybrid application pathway for the MAA that we plan to submit in the European Union. There can be no assurance that our clinical trials, or the clinical trials conducted by third parties, will demonstrate sufficient safety and efficacy for the EMA to approve octreotide capsules for the treatment of acromegaly or for the FDA or EMA to approve octreotide capsules for any other indication that may be specified in future NDA or MAA submissions. Even though we did obtain approval from the FDA for octreotide capsules for the treatment of acromegaly in the United States, we may not be successful in obtaining approval from the EMA or other regulatory authorities.
*Any negative clinical results from, termination or suspension of, or delays in the commencement or completion of any ongoing or future trials of octreotide capsules for the treatment of acromegaly or for any additional indications, in the United States or other countries, or future clinical trials of product candidates we may develop could result in increased costs to us, delay or limit our ability to generate revenue or achieve or sustain profitability, negatively impact our commercial prospects, cause our market value and stock price to fall and jeopardize our viability as a business.
Delays in the completion of the Phase 3 MPOWERED clinical trial we initiated in March 2016 to support marketing approval of octreotide capsules as a treatment for acromegaly in the European Union, the clinical trials of octreotide capsules for other indications we may pursue, if conducted, or any future clinical trials we may conduct for other product candidates we may develop, or negative findings in those trials, could significantly increase our product development costs and jeopardize our ability to commercialize octreotide capsules. For example, if the topline data from the Phase 3 MPOWERED clinical trial, which we expect to report in the fourth quarter of 2020, are negative, those data could negatively impact the commercial prospects for octreotide capsules in the United States.
Furthermore, in October 2015, the EMA required us to revise our protocol for our MPOWERED Phase 3 clinical trial to extend the control period from six months to nine months. The final protocol accepted by EMA therefore dictated that additional time will be needed to complete our second Phase 3 clinical trial of octreotide capsules. While enrollment and randomization are complete, we do not know whether the MPOWERED Phase 3 trial will be completed on schedule or will be successful. In light of the FDA’s position that the MPOWERED clinical trial would not be sufficient to address the concerns in the CRL, in late 2016 we modified certain elements of the MPOWERED trial in an effort to preserve patients, sites and other resources that were necessary to conduct the CHIASMA OPTIMAL Phase 3 trial. The modifications to the MPOWERED trial, together with our decision in October 2018 to enroll up to 15 additional patients, delayed the expected timing of an MAA submission with the EMA. We now expect
top-line
data from the MPOWERED study in the fourth quarter of 2020. The completion of the MPOWERED Phase 3 trial or other clinical trials we may conduct could be delayed for a number of other reasons, including delays related to:
 
   
the FDA, the EMA or any other relevant regulatory authority failing to grant permission to proceed and placing the clinical trial on hold;
 
   
patient enrollment and variability in the number and types of patients available for clinical trials, which is particularly challenging for orphan indications, including due to other ongoing clinical trials in the same or similar disease state;
 
   
a facility manufacturing octreotide acetate, octreotide capsules, placebo capsules or any other product candidate we may develop being found deficient in its processes, as the FDA noted in the CRL and as was observed in a recent regulatory inspection at the time of our NDA resubmission, or ordered by the FDA, EMA or other government or regulatory authorities to temporarily or permanently shut down due to violations of cGMP requirements or other applicable requirements, or cross-contaminations of product candidates in the manufacturing process;
 
   
any changes to our manufacturing process that may be necessary or desired or a failure to successfully manufacture qualifying clinical trial supplies of oral octreotide capsules or placebo;
 
   
patients choosing an alternative treatment for acromegaly or any of the indications for which we may develop octreotide capsules or potential product candidates, or participating in competing clinical trials;
 
   
difficulty in maintaining contact with patients after treatment, resulting in incomplete or missing data;
 
   
patients experiencing drug-related adverse effects;
 
   
reports from clinical testing on similar technologies and products raising safety and/or efficacy concerns;
 
31

   
third-party clinical investigators losing their licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or employing methods that are inconsistent with the clinical trial protocol, good clinical practice, or GCP, requirements, or other third parties not performing data collection and analysis in a timely or accurate manner;
 
   
inspections of clinical trial sites by the FDA, EMA or other regulatory authorities finding regulatory violations that require us to undertake corrective action, result in suspension or termination of one or more sites or the imposition of a clinical hold on the entire trial, or that prohibit us from using some or all of the data in support of our marketing applications;
 
   
third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or any of the data produced by such contractors in support of our marketing applications;
 
   
one or more IRBs or ethics committees refusing to approve, suspending or terminating the study at an investigational site, precluding enrollment of additional patients, or withdrawing its approval of the trial;
 
   
reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
 
   
deviations of the clinical sites from trial protocols or dropping out of a trial;
 
   
delays in adding new clinical trial sites;
 
   
the inability of the CRO to execute any clinical trials for any reason;
 
   
the inability to enroll patients who participated in prior clinical trials in our current or planned clinical trials; or
 
   
government or regulatory delays or “clinical holds” requiring suspension or termination of a trial.
Product development costs for octreotide capsules in acromegaly or any other future indications we may pursue or for product candidates we may develop in the future will increase if we have delays in testing or approval, such as the delay in approval of octreotide capsules that we experienced due to the CRL, or if we need to perform more or larger clinical studies than planned. If we experience delays in the completion of, or if we, the FDA, other regulatory authorities, IRBs or other reviewing entities, or any of our clinical trial sites suspend or terminate any of our clinical trials of octreotide capsules for any indication or for product candidates we may develop in the future, its commercial prospects may be harmed and our ability to generate product revenues or achieve or sustain profitability will be delayed. Any delays in completing our clinical trials will increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial or even withdrawal of regulatory approval of octreotide capsules for any indication or for product candidates we may develop in the future. In addition, if one or more clinical trials are delayed, our competitors may be able to bring products to market before we do, and the commercial viability of octreotide capsules could be significantly reduced.
Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or ethics committees for
re-examination,
which may impact the costs, timing or successful completion of a clinical trial.
The FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of octreotide capsules and any future product candidates we may develop. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability, which would harm our business, prospects, financial condition and results of operations.
If we are required to conduct additional clinical trials or other studies with respect to octreotide capsules or any future product candidates we may develop beyond those that we may propose to conduct, or if we are unable to successfully complete our clinical trials or other studies, we may be delayed in obtaining regulatory approval of octreotide capsules and any future product candidates we may develop, we may not be able to obtain regulatory approval at all or we may
 
32

obtain approval of indications that are not as broad as intended. Our product development costs will also increase if we experience delays in testing or approvals, and we may not have sufficient funding to complete the testing and approval process for octreotide capsules or any future product candidates we may develop. Significant clinical trial delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our products if and when approved. If any of this occurs, our business would be harmed.
* Changes in funding for, or leadership at, or disruptions at the FDA, the SEC and other government agencies, including due to the novel coronavirus
COVID-19
pandemic, could hinder their ability to hire and retain key personnel, prevent new products and services from being developed, approved or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products or take action with respect to other regulatory matters can be affected by a variety of factors, including prioritization of activities related to managing the novel coronavirus
COVID-19
pandemic, government budget and funding levels, ability to hire and retain key personnel and accept payment of user fees, and statutory, regulatory and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC, the FDA and other government agencies on which our business relies is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved, or for other actions to be taken, by relevant government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. In addition, the FDA is experiencing disruptions related to the novel coronavirus
COVID-19
pandemic, including postponing most foreign inspections and scaling back domestic inspections, and has also warned that it may be unable to sustain its current level of performance for its new drug program and other programs. If a prolonged government shutdown or other disruption occurs or if disruptions related to the outbreak of novel coronavirus
COVID-19
pandemic continue or worsen, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Similarly, a prolonged government shutdown or other disruption could prevent the timely review of patent applications by the United States Patent and Trademark Office, or USPTO, which could delay the issuance of any U.S. patents to which we might otherwise be entitled. Further, in our operations as a public company, future government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
We may find it difficult to enroll patients in our clinical trials, in particular with respect to octreotide capsules and any other product candidates that we may pursue, which could delay or prevent clinical trials of octreotide capsules and any future product candidates we may develop and potentially harm our business.
Identifying and qualifying patients to participate in clinical trials of octreotide capsules and any future product candidates we may develop is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing octreotide capsules and any future product candidates we may develop as well as completion of required
follow-up
periods. If patients are unable or unwilling to participate in our clinical trials for any reason, including if patients choose to enroll in competitive clinical trials for similar patient populations or they are unwilling to enroll and stay in a clinical trial with a placebo-controlled design, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of octreotide capsules and any future product candidates we may develop may be delayed. These delays could result in increased costs, and we may not have sufficient capital on hand or the ability to raise additional capital to cover such costs, delays in advancing octreotide capsules or any future product candidates we may develop, delays in testing the effectiveness of future product candidates, if any, or termination of the clinical trials altogether.
We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a trial, to complete our clinical trials in a timely manner. In particular, the conditions for which we may evaluate octreotide capsules are orphan diseases with limited patient pools from which to draw for clinical trials. The eligibility criteria of our clinical trials will further limit the pool of available trial participants. For example, while we were enrolling patients in the United States, Russia, Europe and other countries, we were not permitted to enroll patients from our prior clinical trials in our ongoing MPOWERED Phase 3 clinical trial to support MAA submission and approval in the European Union. The same limitation was true for our CHIASMA OPTIMAL trial. Further, in light of the FDA’s position that the MPOWERED clinical trial would not be sufficient to address the concerns in the CRL, we modified certain elements of the MPOWERED trial in an effort to preserve patients, sites and other resources necessary to conduct the CHIASMA OPTIMAL Phase 3 trial.
 
33

Patient enrollment is affected by factors including the:
 
   
severity of the disease under investigation;
 
   
design of the clinical trial protocol;
 
   
size and nature of the patient population;
 
   
perceived risks and benefits of the product candidate under trial;
 
   
possibility of receiving placebo rather than active drug in certain controlled trials, such as was the case in the CHIASMA OPTIMAL trial;
 
   
eligibility criteria for the trial in question;
 
   
possibility of being randomized back to current injectable therapies, such as in the MPOWERED trial, or rescued back to current injectable therapies following a loss of biochemical and symptom control, such as was the case in the CHIASMA OPTIMAL trial;
 
   
proximity and availability of clinical trial sites for prospective patients;
 
   
availability of competing therapies and clinical trials;
 
   
perceptions of patients and healthcare providers as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating;
 
   
efforts to facilitate timely enrollment of patients in clinical trials;
 
   
patient referral practices of physicians; and
 
   
ability to monitor patients adequately during and after treatment.
If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials or our clinical trials produce incomplete data, we may be forced to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business. We could encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of octreotide capsules and any future product candidates that we may develop in lieu of prescribing existing treatments that have established safety and efficacy profiles. We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by the FDA, the EMA or other regulatory authorities. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including the:
 
   
difficulty in establishing or managing relationships with CROs and physicians;
 
   
different requirements and standards for conducting clinical trials;
 
   
inability to locate qualified local consultants, physicians and partners; and
 
   
potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatments.
* Even though we received FDA approval of our NDA for octreotide capsules as a treatment for acromegaly, we must also obtain regulatory approval of our
CBE-30
supplement or our other planned manufacturing supplement and may still face additional future development and regulatory challenges, each of which could inhibit or preclude our ability to commercialize octreotide capsules for any indication.
In order to have octreotide capsules available for our planned commercial launch in the fourth quarter of 2020, the FDA must accept our
CBE-30
supplement to our approved NDA in a timely manner. If the FDA accepts the
CBE-30
supplement without exception or delay, we expect to distribute commercial product as part of our U.S. commercial launch while the FDA’s review of the supplement is pending. However, if the FDA determines during its review process that it has significant substantive issues with our
CBE-30
supplement it could require us to cease or restrict our distribution of oral octreotide in the United States or potentially recall distributed drug product. In addition, we also plan to file a second manufacturing supplement to the NDA, which we expect will be a prior approval manufacturing supplement, to provide for a large-scale manufacturing site affiliated with the small-scale manufacturing site currently referenced in the NDA. If we are unable to obtain or are delayed in obtaining regulatory approval of our
CBE-30
supplement or planned second manufacturing supplement, our planned commercial launch could be negatively impacted.
 
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Further, even though we obtained FDA approval of our NDA for octreotide capsules as a treatment of acromegaly and even if we obtain additional regulatory approvals for octreotide capsules as a treatment for acromegaly or for other indications we may pursue, or any other product candidates we may develop, they remain subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing manufacturing, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile of octreotide capsules and any future product candidates we may develop will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If new safety information becomes available after approval of octreotide capsules and any future product candidates we may develop, the FDA or comparable foreign regulatory authorities may require labeling changes or establishment of a Risk Evaluation and Mitigation Strategy, or REMS, or similar strategy, impose significant restrictions on our product candidates, indicated uses or marketing, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the label ultimately approved for octreotide capsules, includes some restrictions on use, which could limit the marketability of octreotide capsules and impair our ability to have octreotide capsules gain market acceptance.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP and other regulations. The third-party contract manufacturers that we utilize or plan to utilize for commercial supply have been subject to ongoing regulatory inspections from time to time that resulted in inspectional observations. For example, in the CRL, the FDA advised that, during a site inspection, certain deficiencies were conveyed to the representative of one of our suppliers. In addition, in connection with the resubmission of our NDA, we did not reference in the NDA resubmission our planned primary commercial API manufacturer due to unresolved observations from a recent regulatory inspection. If we or a regulatory authority discover any new or previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or with any facility where the product is manufactured, we may recall or withdraw the product from the market or a regulatory authority may impose restrictions on that product, the manufacturing facility or us, including requiring suspension of manufacturing. If we, our potential products or the manufacturing facilities for our potential products fail to comply with applicable regulatory requirements, a regulatory authority may, among other things:
 
   
issue warning letters or untitled letters;
 
   
mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
 
   
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;
 
   
seek an injunction or impose civil or criminal penalties or monetary fines;
 
   
suspend or withdraw regulatory approval;
 
   
suspend any ongoing clinical trials;
 
   
refuse to approve pending applications or supplements to applications filed by us;
 
   
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
 
   
seize or detain products, refuse to permit the import or export of products, or request that we initiate a product recall.
The occurrence of any event or penalty described above may inhibit or preclude our ability to commercialize octreotide capsules and any future product candidates we may develop and generate revenue.
We face substantial competition from larger companies with considerable resources that already have somatostatin analogs available in the market, and they or others may also discover, develop or commercialize additional products before or more successfully than we do.
Our industry is highly competitive and subject to rapid and significant technological change as researchers learn more about diseases and develop new technologies and treatments. Our potential competitors include primarily large pharmaceutical, biotechnology and specialty pharmaceutical companies. We expect octreotide capsules will face competition from established drugs and major brand names and also generic versions of these products. Key competitive factors affecting the commercial success of octreotide capsules and any other product candidates we may develop are likely to be efficacy, safety and tolerability profile, reliability, convenience of administration, price and reimbursement and effectiveness of our promotional activities. For example, physicians may choose not to prescribe octreotide capsules
 
35

because a lower percentage of patients met the criteria for response in our first Phase 3 clinical trial after treatment with octreotide capsules compared to their baseline response rates on injectable therapy, similar data was produced in the CHIASMA OPTIMAL trial, or may also occur in the MPOWERED clinical trial. Competition could also force us to lower prices or could result in reduced sales.
The standards of care for patients suffering from acromegaly all involve injectable therapies, other than cabergoline, an oral agent used for the treatment of mild acromegaly. Novartis markets octreotide LAR, which is administered monthly and intramuscularly using a large gauge needle. Ipsen markets lanreotide, another long-acting analog of somatostatin, like octreotide, which is administered monthly using a deep subcutaneous injection. Recordati markets pasireotide LAR, which is another somatostatin analog administered via intramuscular injection. Our
FDA-approved
product label for MYCAPSSA is only indicated for acromegaly patients who have responded to and tolerated treatment with octreotide and lanreotide. Pfizer markets pegvisomant daily injections, which is a growth hormone receptor antagonist. Generic versions of these drugs may also bring additional competition to the treatment landscape. For example, while octreotide LAR and lanreotide currently have no generic competitors in the United States, generic versions are available in some markets in the European Union. In addition, we are aware of other companies involved in early-stage nonclinical and clinical studies of similar somatostatin analogs. Most notably, Camurus AB is developing CAM2029, a subcutaneous octreotide depot for the potential treatment of neuroendocrine tumors and acromegaly. Camurus AB received FDA approval of its IND in June 2019 to initiate a Phase 3 acromegaly trial. MidaTech Pharma PLC also conducted its first in human study and also recently initiated a Phase 1 study of
Q-Octreotide
(MTD201), Midatech’s injectable treatment for acromegaly built on its
Q-Sphera
sustained release platform technology. In 2019, Crinetics Pharmaceuticals, Inc. announced the initiation of two Phase 2 clinical trials to evaluate the safety and efficacy of CRN00808 in acromegaly patients. CRN00808 is a nonpeptide somatostatin agonist designed to be taken orally once per day. In May 2017, Dauntless Pharmaceuticals, Inc., a privately held biopharmaceutical company, announced positive results from its
two-part,
Phase 1 pharmacokinetic/pharmacodynamic study evaluating DP1038, a novel formulation of octreotide acetate for intranasal administration. In 2018, Ionis Pharmaceuticals initiated a Phase 2 trial of
IONIS-GHR-
RX,
its growth hormone receptor antagonist to control growth hormone production in acromegaly patients. In January 2020, Rani Therapeutics (RaniPill
capsule containing octreotide) announced the completion of a Phase 1 study in 58 healthy volunteers, indicating that the RaniPill performed as designed. Per published reports, Rani Therapeutics plans to conduct a
head-to-head
study in acromegaly patients and demonstrate equivalence or
non-inferiority
to the injectable version of octreotide sc. We are also aware that Strongbridge Biopharm (valdoreotide or
COR-005)
may also be actively developing products for the maintenance treatment of acromegaly. If any or a combination of CAM2029, MTD201, CRN00808, DP1038,
IONIS-GHR-
RX
, RaniPill or the other products in development for acromegaly receive regulatory approval in a similar timeframe as our octreotide capsules, or demonstrate superior clinical results to octreotide capsules, we may encounter significant difficulties with our commercial launch of octreotide capsules.
Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. These companies also have long-established relationships within the medical and patient community, including patients, physicians, nurses and commercial third-party payors and government payors. Our ability to compete successfully will depend largely on our ability to:
 
   
develop our product candidate and demonstrate that it is competitive with or superior to other products on the market;
 
   
obtain required regulatory approvals;
 
   
adequately communicate the benefits of octreotide capsules;
 
   
attract and retain qualified personnel;
 
   
obtain and maintain patent and/or other proprietary protection for octreotide capsules and any future product candidates we may develop; and
 
   
in certain geographies, obtain collaboration arrangements to develop and commercialize octreotide capsules and any future product candidates we may develop.
Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of our competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval of drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render octreotide capsules or any future product candidates we may develop obsolete or
non-competitive
before we can recover the expenses of developing and commercializing octreotide capsules or any future product candidates we may develop.
 
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Our competitors may also obtain FDA or other regulatory approval of their products more rapidly than we may obtain approval of ours. We anticipate that we will face intense and increasing competition as new drugs enter the market and more advanced technologies become available. For example, a competitor could develop another oral formulation of either a somatostatin analog or
non-somatostatin
analog or other technology that could make administration of peptide-based therapies more convenient. If we are unable to compete effectively, our opportunity to generate revenue from the sale of octreotide capsules or any future product candidates we may develop, if approved, could be impaired.
The number of patients suffering from acromegaly is small and has not been established with precision. Our assumptions and estimates regarding prevalence may be wrong. If our octreotide capsules product candidate is approved for sale, and the actual number of patients in the applicable market is smaller than we estimate, our revenue could be adversely affected, possibly materially.
We estimate that there are an estimated 69,000 individuals with acromegaly in the developed world. The U.S. National Institutes of Health, or NIH, estimates that there are roughly 20,000 individuals with acromegaly in the United States, based on its published prevalence of an estimated 60 cases per million. In thirteen studies of acromegaly prevalence since 1980, an average of approximately 75 cases per million was determined, suggesting roughly 24,000 individuals with acromegaly in the United States. However, data presented at the Endocrine Society’s Annual Meeting in 2015 suggest that pituitary tumors may be more prevalent than previously thought, and that the global prevalence of acromegaly may be higher, between 85 and 118 cases per million people. NIH also cites an annual incidence of three to four new cases per million each year. Data from a 2017 study by Lavrentaki et. al. suggest that the global prevalence of acromegaly may be between 28 and 137 cases per million people. Based upon our own market research, we believe that approximately 8,000 adult acromegaly patients are chronically treated with somatostatin analogs in the United States. However, there is no guarantee that these estimates are correct. The number of patients with acromegaly, in particular the number of patients for whom our octreotide capsules product is approved for use, could actually be significantly lower than these estimates.
We believe that the actual size of the total addressable acromegaly market in those markets in which our octreotide capsules product is approved, if at all, will be determined only after we have substantial history as a commercial company. If the total addressable market for our products is smaller than we expect, our revenue could be adversely affected, possibly materially.
*Octreotide capsules may not achieve or maintain an adequate level of acceptance by physicians, patients and third-party payors and government payors, and we may not generate sufficient revenue or be able to achieve or sustain profitability.
The commercial success of octreotide capsules will depend in large part on the willingness of physicians to prescribe them to their patients. Octreotide capsules will compete against products that have achieved broad recognition and acceptance among medical professionals. In order to achieve and maintain an acceptable level of prescriptions for octreotide capsules, we must be able to meet the needs of both the medical community and patients with respect to cost, efficacy and other factors.
The degree of market acceptance of octreotide capsules will depend on a number of factors, including:
 
   
the clinical safety, efficacy, tolerability and other factors regarding octreotide capsules observed in our completed ongoing and potential future clinical trials, including relative to injectable somatostatin analogs such as the relative topline data from our MPOWERED trial expected in the fourth quarter of 2020, and any other treatments available at the time;
 
   
the relative convenience, number of capsules that need to be taken, requirement to fast before and after each dose of octreotide capsules, and other factors affecting the ease of administration;
 
   
the prevalence and severity of any adverse effects;
 
   
the incidence and prevalence of acromegaly patients in the United States that respond to and tolerate treatment with octreotide or lanreotide;
 
   
the willingness of physicians to prescribe octreotide capsules and of the target patient population to try new therapies and adhere to them;
 
   
the introduction of any new products that may in the future become available to treat indications for which octreotide capsules may be approved;
 
   
changes in the clinical or economic profiles of alternative treatments;
 
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new procedures or methods of treatment that may reduce the incidences of any of the indications in which octreotide capsules may show utility;
 
   
pricing and cost-effectiveness, particularly compared to alternative treatments;
 
   
the effectiveness of our or any future collaborators’ sales and marketing, as well as disease education and awareness programs;
 
   
the scope of the label approved by the FDA, which does not include efficacy data from our first Phase 3 clinical trial that demonstrated acromegaly symptom improvements in patients who completed the trial or comparable foreign regulatory authorities, and any future labels approved by the FDA or comparable foreign regulatory authorities;
 
   
limitations or warnings contained in labeling approved by the FDA or comparable foreign regulatory authorities;
 
   
our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement from government health care programs, including Medicare and Medicaid, private health insurers and other third-party payors;
 
   
the willingness of patients to pay
out-of-pocket
in the absence of third-party coverage or reimbursement;
 
   
competitor activities, including clinical trials in the United States for participants that are eligible for treatment with MYCAPSSA; and
 
   
our ability to reliably manufacture and supply octreotide capsules.
In addition, even if we obtain the additional necessary regulatory approvals, the timing or scope of any approvals may prohibit or reduce our ability to commercialize octreotide capsules successfully. For example, if the approval process for commercial supply of octreotide capsules in the United States takes too long, which is a greater likelihood as a result of our
CBE-30
submission and planned submission of manufacturing supplement for the approval of the sources of commercial API required in order to have octreotide capsules available for our planned commercial launch, we may miss market opportunities and give other companies the ability to develop competing products or establish market dominance. Any additional regulatory approval we ultimately obtain may be limited or be subject to restrictions or post-approval commitments that render octreotide capsules not commercially viable. For example, regulatory authorities may approve octreotide capsules for more limited indications than we request, may limit approved usage to narrower patient populations, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve octreotide capsules with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that indication. The data from our completed first Phase 3 clinical trial that demonstrated acromegaly symptom improvements in patients who completed the trial, was not included in the
FDA-approved
label, and the CHIASMA OPTIMAL trial was not designed to, and did not, demonstrate validated symptom improvement data. While the MPOWERED trial employs a validated treatment satisfaction questionnaire for patient completion, the final symptom and treatment satisfaction data may be negative when comparing oral octreotide capsules to standard of care somatostatin analog injectables. Any of the foregoing could harm the commercial prospects for octreotide capsules.
Even if octreotide capsules are commercialized in the United States or are approved and commercialized in one or more additional geographies, they may not achieve and maintain an adequate level of acceptance by physicians, healthcare payors and patients, and we may not generate sufficient revenue or be able to achieve or sustain profitability. Any concerns about or negative perception of octreotide capsules or the clinical data of octreotide capsules within the patient or medical communities could significantly impact market adoption and commercial performance of octreotide capsules, even with the FDA approva