UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

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: 001-37695

 

PROTEOSTASIS THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-8436652

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

80 Guest Street, Suite 500

Boston, Massachusetts

02135

(Address of Principal Executive Offices)

(Zip Code)

(617) 225-0096

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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 Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2018, based on the last reported sale price of the registrant’s common stock of $2.79 was $92,932,233.  The calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of February 28, 2019, there were 51,040,615 shares of common stock, $0.001 par value per share, outstanding.

 

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I.

 

 

 

 

 

 

 

Item 1.

 

Business

 

1

Item 1A.

 

Risk Factors

 

34

Item 1B.

 

Unresolved Staff Comments

 

78

Item 2.

 

Properties

 

79

Item 3.

 

Legal Proceedings

 

79

Item 4.

 

Mine Safety Disclosures

 

79

 

 

 

 

 

Part II.

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

80

Item 6.

 

Selected Consolidated Financial Data

 

80

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

80

Item 7A.

 

Quantitative and Qualitative Disclosure About Market Risk

 

93

Item 8.

 

Financial Statements and Supplementary Data

 

93

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

93

Item 9A.

 

Controls and Procedures

 

93

Item 9B

 

Other Information

 

94

 

 

 

 

 

Part III.

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

95

Item 11.

 

Executive Compensation

 

95

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

95

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

95

Item 14.

 

Principal Accounting Fees and Services

 

95

 

 

 

 

 

Part IV.

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

96

Item 16.

 

Form 10-K Summary

 

99

 

 

 

 

 

 

 

Signatures

 

100

 

 


 

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K, or this report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our estimates regarding our clinical trials, including, without limitation, the timing of the initiation of, completion of, enrollment in, and data from our trials;

 

our estimates regarding anticipated filing of INDs and/or amended protocols for nominated drug candidates;

 

our estimates regarding expenses, future revenues and capital requirements;

 

our ability to obtain and maintain regulatory approval of PTI-801, PTI-808 and PTI-428, and our combination solutions, for any indication, and the labeling under any approval we may obtain;

 

our ability to obtain and maintain sanctioning or favorable scoring of our clinical trials or protocols from other third parties, such as the Therapeutics Development Network of the Cystic Fibrosis Foundation or the Clinical Trial Network of the European Cystic Fibrosis Society;

 

intense competition in the cystic fibrosis market and the ability of our competitors, many of whom have greater resources than we do, to run clinical trials that may limit the patients available for our trials, and to offer different, better or lower cost therapeutic alternatives than our product candidates;

 

anticipated regulatory developments in the United States and foreign countries;

 

anticipated developments with respect to, and the commercial availability of, cystic fibrosis transmembrane conductance modulators with which PTI-801 or PTI-428 are intended to be or may in the future be administered, including Vertex’s Kalydeco®, Orkambi® and Symdeko®;

 

our plans to develop and commercialize PTI-801, PTI-428 and our combination solutions, including expected preclinical and clinical results and timing;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

the size and growth of the potential markets for PTI-801, PTI-428 and our combination solutions, and our ability to serve those markets;

 

the rate and degree of market acceptance of PTI-801, PTI-428 and our combination solutions for any indication;

 

the benefits of FDA designations such as, including, without limitation, Fast Track, Orphan Drug and Breakthrough Therapy;

 

our ability to obtain additional financing;

 

the loss of key scientific or management personnel; and

 

other forward-looking statements discussed elsewhere in this report.

 


 

Any forward-looking statements in this report reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part I, Item 1A. Risk Factors and elsewhere in this report. 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.

This report contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, not prove to have been accurate.

Kalydeco, Orkambi and Symdeko/Symkevi are trademarks of Vertex Pharmaceuticals Incorporated.

 

 

 

 


 

PART I

Item 1. Business

Overview

We are a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat cystic fibrosis, or CF, and other diseases caused by an imbalance in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. We focus on identifying therapies that restore protein function. CF is a disease caused by defects in the function or abundance of cystic fibrosis transmembrane conductance regulator, or CFTR protein. Our CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel class of CFTR modulators, we have exploited its novel mechanism of action as a drug screening tool and have subsequently identified correctors and potentiators to be developed as part of combination therapies. Investigational agents representative of all three classes of CFTR modulators are currently in clinical development and include PTI-801 a third generation CFTR corrector, PTI-808, a CFTR potentiator, and PTI-428, a CFTR amplifier. We are pursuing proprietary dual combination of PTI-801 and PTI-808, and triple combination of PTI-801, PTI-808 and PTI-428 as product opportunities. Additionally, we believe that both PTI-801 and PTI-428 have potential as add-on therapy to current and future standard-of-care CFTR modulator treatments. We are developing and, if approved, intend to commercialize our own therapies, including combination and add-on therapies for CF patients who have at least one F508del mutation, representing the majority of the patient population.

The approval of CFTR modulator-based therapy, consisting of a potentiator and a combination of a potentiator and a corrector, has validated the clinical benefit of a small molecule pharmacological approach to improve CFTR function and has become a standard of care for eligible CF patients. These developments have spurred drug discovery and development initiatives that include a combinational approach of multiple modulators. Correctors, such as lumacaftor or tezacaftor, are believed to improve protein folding and trafficking to enable abnormally folded CFTR protein to achieve a higher level of activity without repairing the actual protein mutation. Potentiators, such as ivacaftor, are believed to increase the opening time of the CFTR protein channel resulting in higher ion flow across the cell membrane.

With the advent of CFTR modulators, the CF treatment paradigm is shifting from palliative care, which addresses only the symptoms of CF, to disease-modifying agents that target the sequelae of the genetic cause of the disease which is the mutated CFTR protein. We are developing and, if approved, intend to commercialize a proprietary combination therapy for patients with an F508del mutation of the CFTR gene, the most common CFTR gene mutation.  Approximately 86% of all CF patients in the United States and 82% in Europe have an F508del mutation of the CFTR gene, of which approximately half are homozygous (having two copies of the F508del mutation), and approximately 47% are heterozygous (having an F508del mutation and one other CF causing mutation).

Like other combination drug discovery and development approaches for CF that are built on one potentiator and two correctors discovered through typical phenotypic screening, our triple combination program includes PTI-801, a third-generation corrector/turbocorrector, PTI-808, a potentiator, and PTI-428, an amplifier, a novel CFTR modulator with unique and distinguished molecular properties. All three of our investigational agents are orally bioavailable CFTR modulators. CFTR modulators are compounds that affect the folding, trafficking, function and clearance of CFTR protein and can be classified according to the ways in which they affect CFTR protein. Amplifiers, which include PTI-428, are CFTR modulators that selectively increase the amount of the newly synthesized, unfolded form of CFTR protein, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon. Using industry-standard in vitro studies, we have demonstrated that co-administration of PTI-428 with correctors and potentiators significantly improves the in vitro CFTR protein activity to levels above what can be achieved by these CFTR modulators when used alone.

1


 

In patient-derived human bronchial epithelial, or HBE, cells homozygous for F508del, a double combination of PTI-801, a corrector, and PTI-808, a potentiator, has been shown to restore in vitro CFTR protein activity to levels comparable to those observed in HBE cells derived from healthy carrier individuals. In the same in vitro model, a triple combination regimen that includes PTI-801, a corrector, PTI-808, a potentiator, and PTI-428 has been shown to restore in vitro CFTR protein activity above healthy carrier level.

As of February 2019, all three of our investigational drugs have completed trials in healthy volunteers and are now being investigated in CF patients. Cumulatively, we have tested our investigational agents in clinical studies in over 500 healthy volunteer and patient subjects.

We have completed a 28-day Phase 2 clinical trial for PTI-428 in CF patients randomized to receive either PTI-428 or placebo for 28 days in addition to Orkambi as their background, standard of care therapy to evaluate the efficacy, safety, and tolerability of 50 mg of once-a-day PTI-428 . In December 2017, we announced the results of this trial.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in patients homozygous for the F508del mutation who are receiving Orkambi as background therapy.  Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s) . Also, in March 2018, the FDA granted Orphan Drug Designation for PTI-428. The FDA grants Orphan Drug Designation to promote the development of product candidates for rare conditions affecting fewer than 200,000 U.S. patients annually. This designation provides for a seven-year marketing exclusivity period against competition, as well as certain incentives, including federal grants, tax credits and a waiver of certain administrative filing fees.  

PTI-801, a corrector molecule, received Fast Track designation from the FDA in March 2017 for the investigation of its treatment of CF. The FDA’s Fast Track program is designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs. An investigational drug that receives Fast Track designation is eligible for more frequent communications between the FDA and us relating to the development plan and clinical trial design and may be eligible for priority review if certain criteria are met.

We have completed a 14-day once-a-day dosing study with PTI-801 in CF subjects on background Orkambi therapy and have reported preliminary data from the first 48 subjects who completed dosing with either PTI-801 (100 mg, 200 mg and 400 mg) or placebo in June 2018. Safety and pharmacokinetics, or PK, results were as expected. At higher doses, PTI-801 demonstrated a statistically significant improvement in sweat chloride and body mass index in the 14-day treatment period. An improvement in ppFEV 1 was observed across all dose cohorts, although the change was not statistically significant. Two thirds of subjects in all PTI-801 cohorts were above ppFEV 1 baseline by the end of the treatment period and approached baseline by the end of the 7-day follow up period. In hyperglycemic subjects with Cystic Fibrosis Related Diabetes, PTI-801 led to a statistically significant normalization of blood glucose levels at the three dose levels analyzed. A dditional data were reported in October 2018. We believe these results support the goal of studying PTI-801 as part of our proprietary double and triple combination therapy regimens.

Co-administration of PTI-801, PTI-808 and PTI-428, or triple combination, has been completed in healthy volunteers.  We reported preliminary data from this study in December 2017.

Combination study protocols for trials in CF patients have been reviewed by key patient advocacy and regulatory authorities in the United States, Canada, and Europe. In January 2018, we announced that our triple combination clinical study protocol received endorsement and a high strategic fit score from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsement of the TDN. The TDN and CTN are the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.  In April 2018, the TDN endorsed the study protocol to investigate PTI-428 in CF patients on background Symdeko ® therapy.  

In April 2018, the FDA granted Fast Track designation for our triple combination program for the treatment of cystic fibrosis.

2


 

In October 2018, we provided an update from our proprietary combination development programs including positive preliminary results from three double combination cohorts of the Phase 1, randomized, double-blind, placebo-controlled studies with co-administration of PTI-801 and PTI-808 and an enrollment update from the triple combination studies with PTI-801, PTI-808, and PTI-428, in subjects with CF .

Double combination studies were designed to assess the safety, tolerability, and PK of PTI-801, a third-generation CFTR corrector and PTI-808, a novel CFTR potentiator, compared to placebo over a 14-day dosing period in CF subjects across dose levels of each modulator. Changes in sweat chloride (SC) concentration and in percent predicted FEV 1 (ppFEV 1 ) were assessed and evaluated as endpoints.

Our proprietary triplet combination of PTI-801, PTI-808 and PTI-428, is ongoing; and we expect preliminary data from the remaining double and triple combination cohorts in the first quarter of 2019.

We have exclusive worldwide commercial rights to PTI-801, PTI-808, and PTI-428, as well as our proprietary combinations. Given the well-characterized and clearly identified patient populations with CF in the United States, Canada, Europe and Australia, we intend to independently commercialize our product candidates, including, without limitation, our combination therapy candidates, in those regions. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, ensure product access and secure reimbursement.

In addition to our wholly owned CF programs, in December 2018, we entered into a Technology Transfer and License Agreement, or the Genentech Agreement, with Genentech, Inc., or Genentech. We granted Genentech a worldwide, exclusive license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network. The rights do not include CFTR modulators and are unrelated to our investigational medicines or other ongoing research programs in cystic fibrosis. In connection with the Agreement, we have received an upfront payment and are eligible to receive additional milestone payments in the aggregate of approximately $96.0 million, subject to the achievement of specified development, regulatory and commercial milestones. In addition, Genentech is obligated to pay us tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the Agreement.

Strategy

Our mission is to improve the lives of patients who have rare diseases for which there are limited or no available treatments, with an initial focus on CF. To accomplish our objectives, we intend to:

 

Develop our own proprietary combination product candidates, including a triple combination (PTI-801, PTI-808, PTI-428) and a double combination (PTI-801 and PTI-808), to address a broad spectrum of CFTR gene mutations.

We have identified novel correctors and potentiators that, when combined with an amplifier, have restored in vitro CFTR protein activity to approximately 100% of normal in cells homozygous for F508del. We have nominated PTI-801, a corrector molecule, and PTI-808, a potentiator molecule, as drug development candidates that, when combined with PTI-428, are active components of our triple combination. All three compounds have active INDs under FDA and we have completed co-administration of our triple combination consisting of PTI-801, PTI-808 and PTI-428 in healthy volunteers. Additionally, PTI-428 has completed a Phase 1 study in healthy volunteers and CF patients, as well as a Phase 2 study in CF patients on Orkambi background therapy. Phase 1 studies in healthy volunteers have been completed for PTI-801 and PTI-808 and exploration of PTI-801 in CF patients on background Orkambi have completed.

 

o

Triple Combination .  We believe that the treatment paradigm in CF for the vast majority of patients could be based on combination therapies of CFTR modulators. Based on positive results from our PTI-801 program, we initiated dosing of our triple combination in CF patients in the first half of 2018 with preliminary data expected in the first quarter of 2019. More specifically, our proprietary combination studies explore multiple dose levels of PTI-801 and PTI-808 in combination with PTI-428 in CF patients homozygous for F508del not taking Orkambi or Symdeko.  The TDN and CTN have endorsed the protocol for our triple combination and have assigned it a high strategic fit score.

3


 

 

o

Double Combination .  In addition, we have commenced dosing CF patients for a double combination study consisting of PTI-801 and PTI-808 and produced initial data from low- and mid-dose cohorts in the fourth quarter of 2018. Our high-dose doublet cohort will complete in the first quarter of 2019. In vitro data in patient cells showed that the combination of PTI-801 and PTI-808 restored CFTR protein activity to levels beyond those observed in cells from healthy carriers. The TDN has endorsed the protocol for our double combination study.

 

Rapidly advance clinical development of PTI-801 and PTI-428 as potential add-on therapies to existing and possible future standard of care CFTR modulator therapies by conducting additional studies to support a registrational path as add-on options.

In vitro data showed that our proprietary corrector PTI-801 and amplifier PTI-428 synergize with currently available CFTR modulator combinations ivacaftor/lumacaftor and ivacaftor/tezacaftor, approved as Orkambi and Symdeko, respectively, suggesting that they may provide additional therapeutic benefit in CF subjects who take the approved products as their standard of care.

 

o

PTI-801 as Add-on .  In the first quarter of 2017, we filed an IND for our proprietary corrector, PTI-801, which is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801 and reported initial data on this portion of the study in 2017. We have completed a 14-day once-a-day dosing study with PTI-801 in CF subjects on background Orkambi therapy. In June 2018, we reported preliminary data from the first 48 subjects who were dosed with either PTI-801 (100 mg, 200 mg and 400 mg) or placebo. Additional data were reported in October 2018 on total subjects of 56. We have initiated a clinical study with PTI-801 in subjects on background Symdeko therapy and the study results are expected in the first quarter of 2019.  

 

o

PTI-428 as Add-on .  We have shown that PTI-428, combined with ivacaftor and either lumacaftor or tezacaftor, nearly doubles in vitro CFTR protein activity in cells homozygous for F508del compared to a combination of only ivacaftor and either lumacaftor or tezacaftor. We completed the Phase 1 trial in healthy volunteers which included SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results. In December of 2017, we announced the completion of a Phase 2 study designed to evaluate the efficacy, safety, and tolerability of 50 mg once-a-day PTI-428 over a 28-day treatment period with CF patients on background Orkambi (lumacaftor/ivacaftor); and we initiated a clinical study with PTI-428 in subjects on background Symdeko as planned.  The study results are expected in the first quarter of 2019. In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi as background therapy. Also, in March 2018, the FDA granted Orphan Drug designation for PTI-428.

 

Generate highly selective drug candidates in CF and other diseases caused by dysfunctional protein processing by leveraging our knowledge of small molecules that could help restore protein function and of the proteostasis network.

We are focused on developing drugs based on our unique and comprehensive expertise regarding agents that could help restore protein function, the proteostasis network and its role in protein biosynthesis, folding, trafficking and clearance. We believe that this expertise will enable us to identify and develop drug candidates that are transformative for diseases caused by dysfunctional protein processing. In CF, we are exploiting the mechanism of action of PTI-428 which enhances the yield of High Throughput Screening, or HTS, of small molecule libraries and has enabled the identification of several novel proprietary CFTR modulators. We plan to continue to run HTS campaigns to continue to discover novel drug candidates for diseases caused by dysfunctional protein processing, including diseases where amplifiers can have a clinically meaningful impact.

4


 

 

Enter into additional collaborative partnerships to develop and commercialize novel compounds in indications outside of our key strategic areas.

Our recent corporate alliance with Genentech provides for future aggregate milestone payments of up to approximately $96.0 million. We plan to enter into other arrangements that leverage our expertise. Partnership opportunities will be screened and evaluated based on their potential to generate additional value by giving us a stake in the resulting products’ future revenues and to maximize the value of our assets and screening techniques to discover novel drug candidates for use in additional disease indications.

Industry Overview—Cystic Fibrosis

CF is a rare disease that affects an estimated 70,000 to 100,000 diagnosed patients worldwide, with the vast majority of individuals in the United States, Canada, Europe and Australia. CF is the most common fatal inherited disease in Caucasians. The incidence of CF varies across the globe. CF affects one out of 3,500 births in the United States, one out of 2,000 to 3,000 in Europe, and one out of 2,500 in Australia. There is presently no cure for CF. It is a progressive disease caused by a deficiency in CFTR protein activity, resulting in the accumulation of thick mucus in vital organs, particularly the lungs, pancreas and gastrointestinal tract. As a result, CF patients experience, among many other conditions, respiratory infections, chronic lung inflammation, poor absorption of nutrients and, in most cases, progressive respiratory failure. Although the life expectancy of CF patients has improved, the median age of death in the United States in 2017 was only 30 years, with a vast majority of such deaths resulting from respiratory failure. CF patients require lifelong treatment with multiple daily medications, hours of self-care, frequent hospitalizations and lung transplants, which if available, are life-extending but not curative.

Kalydeco, Orkambi and Symdeko/Symkevi, products that contain CFTR modulators, are the only products currently approved to treat the underlying cause of the disease and are available to eligible CF patients in the United States, and certain other geographies where they have received marketing and reimbursement approvals. The three products combined address genotypes present in approximately half of all CF patients, leaving a substantial portion of the global CF patient population without access to disease targeting therapies either due to label exclusion or lack of market access. In 2018, worldwide net product sales of Orkambi and Kalydeco were approximately $3 billion with analysts currently forecasting the cumulative sales of the two drugs to surpass $10 billion by 2025.

Patient advocacy and charitable not-for-profit organizations play an important role in raising disease awareness and advancing research and development of new therapeutic options.  In the United States, the Cystic Fibrosis Foundation, or CFF, a not-for-profit organization with $4.4 billion in cash, cash equivalents and investments (as of December 31, 2017), contributes to clinical development by funding basic research and clinical trials, and granting awards for development of new drug candidates, thereby shaping the drug development landscape.

5


 

Cause and Pathophysiology

CF is caused by mutations in the gene that encodes for CFTR protein, which plays a critical role in regulating the viscosity of the mucus layer that lines human organs. CFTR protein forms an ion channel that regulates the flow of ions in and out of the cells of vital organs such as the lungs, pancreas and gastrointestinal tract. We refer to this as ion flow. When CFTR protein expels the ions, osmosis draws water out of the cell and hydrates the cell surface. Through regulation of the location of the ions across the cell membrane, the amount of salts in the fluid both inside and outside the cell remains balanced. In CF patients, the CFTR gene is defective, and as a result, CF patients lack the functional CFTR protein ion channel necessary to regulate ion flow. Altered ion concentration gradient between the inside and the outside of the cell reduces the amount of water molecules outside the cell, causing the accumulation of thick mucus on the epithelial surface as shown in Figure 1.

Figure 1: Ion Flow in Normal CFTR Protein Compared to Mutant CFTR Protein

 

 

The deficiency in CFTR protein activity in CF patients is particularly problematic in the lungs, where the build-up of thick mucus obstructs air flow and impairs proper immune response, which leads to chronic infection and persistent inflammation. In the pancreas and the gastrointestinal tract, the build-up of mucus prevents the release of digestive enzymes that help the body break down food and impairs the absorption of nutrients, resulting in poor growth and development.

Classes of CFTR Gene Mutations

CF is an autosomal, recessive genetic rare disease caused by mutations in the CFTR gene. A person must have a mutation in both copies of the CFTR gene to be afflicted. If both mutations are the same, the person has a homozygous mutation. If the mutations on both copies of the genes are different from one another, the person has a heterozygous mutation. If someone has a mutation in only one copy of the CFTR gene and the other copy is normal, he or she is a carrier but will not have CF.

6


 

The vast majority of CF patients whose gene mutations have been identified have gene mutations that can be classified into five classes according to the biological process they affect: “Stop Codon,” “Processing,” “Gating,” “Conductance,” and “Synthesis.”

Table 1: Overview of CFTR Gene Mutation Classes

 

 

 

 

 

 

 

Class

I

Stop Codon
Mutation

II

Processing
Mutation

III

Gating
Mutation

IV

Conductance
Mutation

V

Synthesis
Mutation

Defect

Protein translation prematurely stopped

Misfolded protein fails to reach surface

Regulation
of ion flow
is abnormal

Faulty channel conductance slows ion flow

Less CFTR protein is made

Example Mutation

G542X

F508del

G551D

R117H

3849+10kbC->T

Prevalence in the United States and Canada*

12%

87%

5%

5%

5%

CFTR Modulators with POC**

Read Through Compound

Corrector and

Potentiator

Potentiator

Potentiator

Potentiator

Our Approach

 

*

The sum of the percentages in all classes exceeds 100% because individual CF patients might carry more than one mutation.

**

“POC”, or proof of concept, means demonstrated statistically significant clinical benefit in a controlled clinical trial.

Although F508del is the most common CFTR gene mutation, the frequency of its occurrence in CF patients can vary from region to region. For example, Table 2 summarizes the prevalence of F508del in CF patients in the regions where CF is most common.

Table 2: Summary of Largest CF Patient Populations by Region

 

 

 

Number of Patients in

National CF Registries

 

 

% of Patients

Homozygous for F508del

 

 

% of Patients

Heterozygous for F508del

 

United States

 

 

28,000

 

 

 

47

%

 

 

39

%

Canada

 

 

4,100

 

 

 

49

%

 

 

38

%

Europe (32 countries)

 

 

40,000

 

 

 

44

%

 

 

38

%

Australia

 

 

3,000

 

 

 

52

%

 

 

33

%

 

Epidemiological forecasts predict that the total number of CF patients will grow significantly in the near term due to improvements in the standard of care, which has improved life expectancy. It is anticipated that the European CF population will grow by approximately 40% by 2025, reaching over 57,000 patients. The improvements in life expectancy in the United States and Canada suggest similar trends in CF population growth will likely occur in those territories.

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Current Standard of Care

There presently is no cure for CF. Kalydeco, Orkambi and Symdeko/Symkevi are the only products currently approved to treat the underlying cause of CF. Kalydeco is a potentiator believed to increase CFTR protein activity by keeping the ion channel of the CFTR protein open for longer periods of time and thereby enhance ion flow. However, Kalydeco is presently approved only for the treatment of CF patients with Gating mutations and R117H Conductance mutations, which impact less than 10% of the CF patient population in the United States and Canada. Although other potentiators may be developed, it is expected that potentiators, when used alone as a monotherapy, would likely address only Gating, Conductance and some Synthesis mutations, impacting only approximately 15% of all CF patients in those regions. Orkambi and Symdeko include correctors believed to improve protein folding and trafficking to enable abnormally folded protein to achieve some level of activity without repairing the actual protein, which works together with the same potentiator in Kalydeco, to enhance overall CFTR protein activity. However, both products are only approved for the treatment of CF patients who are homozygous for F508del, a genotype that represents approximately 45% of the CF patient population in the United States and Europe. In the United States, Symdeko is also approved for 22 specific additional mutations based on in vitro evidence with engineered cell lines and some clinical data. In Europe, Symkevi, the brand name of tezacaftor/ivacaftor combination, has a reduced label in terms of genotypes due to the European Medicines Agency, or EMA, not accepting in vitro evidence with engineered cells to define the product label.

The current standard of care for all other CF patients remains the management of the disease symptoms. The thick mucus that builds up in the lungs, the pancreas and gastrointestinal tract leads to airway obstruction and difficulty absorbing nutrients, resulting in poor growth and development. CF patients take numerous prescribed and over-the-counter medications to alleviate symptoms and reduce complications. Primary treatment options include inhaled therapies, which thin the mucus in the lungs, as well as pancreatic enzyme replacement therapy, which improves absorption of nutrients. In addition, because thick mucus in the lungs impairs CF patients’ immune response, they also often develop chronic bacterial lung infections that require treatment with inhaled antibiotics.

Pipeline Approaches to Improving Standard of Care

The current CF drug development pipeline includes several therapeutic approaches aimed at either restoration of CFTR activity or improved symptoms management. One of the most promising approaches includes combinations of complementary CFTR modulators which tackle specific steps in the lifecycle of the mutated protein. The approvals of Orkambi and Symdeko validate the rationale for the combination of CFTR modulators, a corrector and a potentiator.  Two companies are exploring the therapeutic potential of proprietary combinations that involve co-administration of one potentiator and at least one corrector with most advanced studies currently in Phase 3. We believe that disease modifying therapies in CF will shift towards a combination approach which will become the new standard of care.  

In addition to drug candidates targeting CFTR protein several other companies are pursuing different cellular targets that might have a beneficial effect on CF related symptoms. Recently, several companies and academic groups have begun to explore the application of early gene editing technologies, such as CRISPR-Cas9, to CF; if successful, these techniques could potentially address the underlying gene mutation defect. However, these technologies are in their infancy and are expected to take many years to develop and evaluate.

Correlation of CFTR Protein Activity to Clinical Benefit

FEV 1 : Clinical Measurement of Lung Function

Because CF eventually causes significant loss of lung function, the severity of CF progression is often measured by FEV 1 (forced expiratory volume in one second), which is expressed as a percentage of the maximum volume of air that a healthy individual of the same height, sex and race could forcefully exhale from the lungs in one second. Long term FEV 1 is considered to be the industry-standard efficacy endpoint in clinical trials of CF product candidates. Rate of decline in FEV 1 has been demonstrated to correlate with life expectancy and to be the strongest clinical predictor of mortality.

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The decline in lung function is progressive and occurs throughout the life of a CF patient and in the vast majority of cases, leads to respiratory failure and death. The severity of lung disease is categorized as mild (FEV 1 >70%), moderate (40%< FEV 1 <69%) or severe (FEV 1 <40%). The ultimate goal of CF therapy is to halt and reverse the decline of lung function in the hope of extending the life expectancy of patients, eliminating the need for lung transplants, and reclassifying the disease from a lethal to a chronic condition.

Sweat Chloride: Measurement of CFTR Activity

Cystic fibrosis is a multi-system disease with many clinical manifestations. Reduced CFTR function causes a defect in the sweat ducts of CF patients which leads their sweat to contain higher concentration of chloride. Although, the rate of decline in FEV 1 has been demonstrated to correlate with life expectancy and to be the strongest clinical predictor of mortality, it is the sweat test, which measures the amount of chloride in the sweat, that remains the gold standard for diagnosing CF. It is believed that sweat chloride can predict clinical outcomes at the population level, supporting its role as a key outcome measure for clinical trials utilizing corrector and potentiator based mechanisms. Analysis of published clinical data with Kalydeco, a CFTR potentiator, found that short-term changes in the sweat chloride concentration in CF patients show a high likelihood for longer-term improvement in pulmonary function and weight gain.  

Ussing Chamber Assay: In vitro Measurement of CFTR Protein Activity

CFTR modulators are typically evaluated by measuring CFTR protein activity in vitro using the Ussing Chamber Assay. In this assay, HBE cells derived from the lungs of CF patients are cultured in a manner to resemble the lung epithelium and then placed in the Ussing Chamber between two compartments filled with media, one containing ions that can only flow to the other compartment through the epithelium. The CFTR protein activity is measured by recording the electrical current generated by ions flowing across the cultured epithelium. CFTR protein activity is expressed as a percentage of the measured current relative to the current generated by ion flow in HBE cells with normal CFTR protein activity.

Strong Correlation between CFTR Protein Activity and Lung Function

Our analyses of published data on Vertex’s CFTR modulators (the potentiator ivacaftor and correctors lumacaftor and tezacaftor) show a strong correlation between the in vitro CFTR protein activity as measured by the Ussing Chamber Assay and lung function improvement measured by FEV 1 improvement in clinical trials of these CF product candidates. Importantly, as shown in Figure 2, in vitro CFTR protein activity of these modulators at 50% of normal correlates with an absolute improvement of approximately 10% in FEV 1 as seen in clinical trials.

Our Solution

We are developing and, if approved, intend to commercialize proprietary combination therapies for CF patients carrying at least one F508del allele, which may consist of a double and/or a triple combination.  Our current pipeline includes a double comprised of PTI-801, a corrector, and PTI-808, a potentiator, and a triple combination of PTI-428, an amplifier, together with PTI-801 and PTI-808. The three classes of CFTR modulators have pharmacological characteristics and a mechanism of action that is synergistic and act in different cellular compartments as shown in Figure 3. Amplifiers, a novel class of CFTR modulators, have been shown in in vitro studies to selectively increase the amount of the newly synthesized and unfolded form of CFTR protein in the cell, thereby providing additional substrate for other CFTR modulators, such as correctors and potentiators, to act upon, leading to improved overall CFTR protein activity. The combined effect of amplifiers and marketed or investigational correctors and potentiators further increases the CFTR protein activity, which, as described above, is predicted to correlate with improved clinical outcomes in CF.

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Figure 3: CFTR Modulators

 

 

Our approach to building a comprehensive franchise of CFTR modulators has leveraged amplifiers as a screening tool for discovering novel CFTR modulators such as potentiators, correctors and read through agents. We plan to continue drug discovery and development programs and broaden our CF pipeline with additional CFTR modulators that have the potential for combined use and full restoration of CFTR activity in various genotypes.

Our Product Candidates

By combining our understanding of protein homeostasis with our discovery and development expertise, we have built a robust pipeline of programs targeting the key mechanisms underlying CF and other rare diseases. CFTR modulators are compounds that affect the folding, trafficking and clearance of CFTR protein and can be classified according to ways in which they affect CFTR protein. Despite the approval of Kalydeco, a potentiator, and Orkambi and Symdeko, each a combination of a potentiator and corrector, we believe there is still significant potential for improvement in clinical outcomes beyond existing treatments and therapies presently in clinical development for the treatment of CF. We have identified a novel class of CFTR modulators, amplifiers, that we believe are synergistic with Orkambi and Symdeko and could potentially enhance their ability to improve CFTR function. We have subsequently identified proprietary correctors and potentiators that are complementary to our amplifiers and designed to work synergistically to restore CFTR function to approximately normal levels.

PTI-801, our lead corrector agent, and PTI-808, our lead potentiator agent, are drug development candidates in clinical development as a double combination and, when combined with PTI-428, are active components of our triple combination. We initiated a triple combination study during 2018. We submitted an IND for PTI-801, a corrector molecule, to the FDA in the first quarter of 2017, which is now active, and are in clinical development to study PTI-801 as an add-on to CF patients on background Orkambi or Symdeko. We also submitted an IND for PTI-808, during the second quarter of 2017, which is now active. We have completed a Phase 1 study in healthy volunteers of both PTI-808 and a co-administration of our triple combination agents. We believe that the treatment paradigm in CF for the majority of patients could be based on combination therapies of CFTR modulators as a double combination of our proprietary corrector PTI-801 and potentiator PTI-808 and/or as a triple combination anchored by PTI-428.  We also believe that our PTI-801 corrector and PTI-428 amplifier candidates have the potential to be add-on therapies to existing and possible future standard of care CFTR modulator therapies Orkambi and Symdeko.

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Our studies show that amplifiers selectively increase the amount of the newly synthesized, unfolded form of CFTR protein in the cell, thus increasing the amount of CFTR protein available for trafficking. When combined with ivacaftor and either lumacaftor or tezacaftor, PTI-428 nearly doubles the in vitro CFTR protein activity in cells homozygous for F508del in our Ussing Chamber Assays compared to a combination of only ivacaftor and lumacaftor .

Our CF product pipeline is described in more detail in Figure 4.

Figure 4: Our CF Product Pipeline

 

We have identified novel correctors and potentiators that, when combined with an amplifier, have restored in vitro CFTR protein activity to approximately 100% of normal in cells homozygous for F508del. PTI-801 and PTI-808 are drug development candidates which, when combined with PTI-428, are active components of our triple combination. We believe that combinations of our own CFTR modulators in double or triple combination, and PTI-428 and PTI-801 as single agents as add-ons to current and future standard of care CFTR modulator therapies, have the potential to address a significant portion of underserved patients. We have shown that PTI-428, when used in combination with ivacaftor and either lumacaftor or tezacaftor, nearly doubles in vitro CFTR protein activity in the Ussing chamber assay compared to treatment without PTI-428.

We have also demonstrated that the combination of one of our proprietary amplifiers, together with a proprietary corrector and a proprietary potentiator, can achieve mechanistic synergy and restore in vitro CFTR protein activity to approximately 100% of normal in patient-derived HBE cells homozygous for F508del. We believe that with these results, our combination therapies have the potential to deliver a more clinically meaningful benefit to a broader set of mutation classes than those addressed by presently approved therapies and those under development.

Combination Therapies

Combination therapy of compounds that act synergistically on CFTR protein biosynthesis, folding, trafficking and conductance has been validated in preclinical models and clinical studies in CF patients. With the approval of CFTR modulators, the CF treatment paradigm is shifting from palliative care to the advancement of disease-modifying modulators that target the underlying cause of the disease which is CFTR protein malfunction. We are taking advantage of the potential ability of PTI-428 to enhance clinical efficacy of potentiators and correctors to develop novel proprietary combinations.

Using our expertise to screen compounds that are complementary with PTI-428, we are designing and developing correctors and potentiators that are optimized to work more synergistically with our proprietary CFTR modulators than third-party CFTR modulators. In addition to having desirable drug-like properties, the molecules have differentiated features from currently approved modulators such as ivacaftor, lumacaftor and tezacaftor. PTI-801 acts in a complimentary and synergistic way with other correctors, such as lumacaftor, suggesting a binding site.

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Furthermore, we have seen in vitro that it prevents ivacaftor induced destabilization of F508del CFTR upon chronic exposure. PTI-808, unlike the currently approved potentiator ivacaftor which requires twice-a-day dosing, is amenable to once-a-day dosing. PTI-428 is an amplifier, a novel CFTR modulator category that has a differentiated mechanism of action.

We are in clinical development with PTI-801, a corrector molecule, and PTI-808, a potentiator molecule, as a double combination as well as triple combination product candidate, when combined with PTI-428. We have initiated a triple combination study in 2018 with results expected in the first quarter of 2019.

We have demonstrated that our triple combination of PTI-801, our novel corrector, and PTI-808, our novel potentiator, together with PTI-428 can achieve mechanistic synergy leading to a full restoration of in vitro CFTR protein activity in patient-derived HBE cells homozygous for F508del. Additionally, the combination of PTI-801 and PTI-808 has demonstrated superior in vitro efficacy compared to the combination of lumacaftor and ivacaftor. We anticipate that these findings, described in Figure 5 below, could potentially translate into a more clinically meaningful benefit to a broader set of mutation classes than those addressed by therapies that are presently approved or known to be under development.

Figure 5: Amplifier-Based Triple Combination Restored F508del-CFTR Function to Almost Normal CFTR Function in In Vitro Assays

 

Mechanism of Action of PTI-428

While the specific molecular target for PTI-428 remains unknown, our in vitro studies show that PTI-428 has a unique effect on in vitro CFTR protein activity. PTI-428 has been observed to selectively increase the amount of the newly synthesized and unfolded form of CFTR protein in the patient-derived HBE cells.

As shown in Figure 6, during the translation process of mRNA into protein, the signal recognition particle, or SRP, binds to a special portion of the emerging chain of amino acids, called the signal sequence, and shuttles the entire mRNA-ribosome complex to the ER surface, where the emerging chain of amino acids can be properly folded into the protein. Increased SRP recognition of the signal sequence facilitates protein synthesis and, by blocking RNA degradation processes, stabilizes mRNA. Because our in vitro studies show that PTI-428 increases both the CFTR mRNA and the amount of the newly synthesized and unfolded form of the CFTR protein, we believe that PTI-428 improves the translation of CFTR protein at the ER membrane, resulting in more of the newly synthesized and unfolded form of CFTR protein being made. By providing more CFTR protein, PTI-428 can significantly increase the effect of correctors and potentiators on in vitro CFTR protein activity in HBE cells homozygous and heterozygous for F508del.

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Figure 6: PTI-428 Improves the Efficiency of Translation and as a Result Decreases mRNA Decay

 

Although the mechanism of action is not fully characterized, we have confirmed that PTI-428 does not belong to a known class of potentiators or correctors. Potentiators, such as ivacaftor, are believed to increase CFTR protein activity by keeping the ion channel of the CFTR protein open for longer periods of time. The distinguishing feature of potentiators is the so-called “acute effect” observed in vitro as measured by increased CFTR protein activity immediately upon the addition of the molecule to the cells. However, our in vitro studies show that acute addition of PTI-428 does not immediately affect CFTR protein activity.

Likewise, correctors, such as lumacaftor and tezacaftor, alter the ratio of unfolded to fully folded form of CFTR protein by acting on the protein folding process to increase the amount of the mature form. Our in vitro studies show that PTI-428 does not affect the ratio of the two protein forms, but rather leads to increases in the total amount of both forms of CFTR protein in a dose-dependent fashion.

Accordingly, we believe that PTI-428 represents a new class of CFTR modulator, which we call amplifiers, distinct from correctors and potentiators that target CFTR biosynthesis at the upstream translational level by enhancing successful signal-sequence targeting to the ER membrane. Furthermore, the effect on CFTR mRNA is specific and genotype agnostic. PTI-428 does not appear to increase mRNA levels in vitro for the so-called housekeeping genes that are needed for the normal functioning of the cell. In a surface and total protein expression assay, which measures changes in the abundance of proteins both on the plasma membrane and within the cell, PTI-428 was shown to increase the levels of CFTR, but not PgP, a closely related membrane protein. Additionally, we have confirmed that cells exposed to PTI-428 do not activate stress response pathways that are typically triggered by pathological accumulations of unfolded protein, further suggesting the specificity of this pharmacological class and lack of cellular stress induction.

Clinical Development Programs

In December 2015, the investigational new drug application, or IND, that we submitted to the U.S. Food and Drug Administration, or FDA, for a Phase 1 clinical trial to evaluate our PTI-428 product candidate became active. We initiated our first Phase 1 clinical trial in CF patients and healthy volunteers in the first half of 2016. The Phase 1 trial in CF patients included single ascending dose, or SAD, and multiple ascending dose, or MAD, cohorts. The Phase 1 trial in healthy volunteers included SAD and MAD cohorts to assess the safety, pharmacokinetic and exploratory biomarker results. We reported preliminary safety, pharmacokinetic and exploratory biomarker data from SAD and MAD cohorts in the PTI-428 Phase 1 clinical trial in CF subjects receiving PTI-428 or placebo for seven days in addition to Orkambi as their background, standard of care therapy, as well as a cohort of CF subjects receiving PTI-428 or placebo for seven days who were not taking CFTR modulator-based therapies.

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We have completed a 28-day Phase 2 clinical trial for PTI-428 in CF patients randomized to receive either PTI-428 or placebo for 28 days in addition to Orkambi as their background, standard of care therapy to evaluate the efficacy, safety, and tolerability of 50 mg of once-a-day PTI-428 . In December of 2017, we announced the results of the study which showed that the addition of PTI-428 to Orkambi demonstrated mean absolute improvements in ppFEV1 of 5.2 percentage points from baseline compared to placebo (p≤0.05), with mean relative improvements of 9.2 percent (p≤0.05). This treatment effect was achieved by Day 14 and sustained through 28 days of dosing.

In CF subjects on Orkambi therapy, it has been shown in two registrational Phase 3 studies that the magnitude of response to Orkambi varied according to patient lung function at screening suggesting that the overall efficacy captured in these studies was mainly driven by the subgroup with baseline ppFEV 1 below 70% (+3.3 percentage points) while the changes in the group with FEV 1 ≥70% were not statistically significant. A similar analysis was performed in our 28-day study with PTI-428 and it showed an average +6.6 percentage points (p<0.05) increase in absolute ppFEV 1 compared to placebo for patients who had lower baseline ppFEV 1 value (<70%). The results of the subgroup analysis are consistent with phase 3 data with Orkambi, suggesting that PTI-428 potentially amplifies the Orkambi effect in the responder population.

Additional endpoints in the study included measurement of changes in sweat chloride (secondary endpoint) and CFTR expression in nasal epithelia (exploratory endpoint). In this study, a positive increase in CFTR protein from baseline was observed in PTI-428 treated subjects and the magnitude of change was consistent with the changes in CFTR protein levels observed in an in vitro HBE cell model. In contrast, changes in sweat chloride did not correlate with changes in lung function.

In the 28-day study, PTI-428 was generally well tolerated and lacked clinically meaningful drug-drug interactions with ivacaftor and lumacaftor.    Fourteen of 20 subjects receiving PTI-428 and two of four subjects receiving placebo experienced at least one treatment emergent adverse event. There were no serious adverse events and there were two adverse events that led to study discontinuation. Both cases were thrombocytopenia of mild grade and comparable magnitude and value. One occurred while a subject was on Orkambi only and one in a subject receiving PTI-428 with both subjects resolving spontaneously.

In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi as background therapy.  The designation was based on the FDA’s review of available clinical evidence, including the observed increase in FEV 1 and CFTR protein levels in the 28-day study.  Breakthrough Therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). A lso in March 2018, the FDA granted Orphan Drug designation for PTI-428. The FDA grants orphan designation to promote the development of product candidates for rare conditions affecting fewer than 200,000 U.S. patients annually. This designation provides for a seven-year marketing exclusivity period against competition, as well as certain incentives, including federal grants, tax credits and a waiver of certain administrative filing fees.

In the second half of 2018, we initiated a clinical study with PTI-428 in CF subjects on background Symdeko therapy with initial data expected in the first quarter of 2019.  

Our IND for the Phase 1 study of PTI-801, a corrector molecule, was submitted to the FDA in the first quarter of 2017 and is now active. In March 2017, we received Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. We completed dosing of subjects in the key SAD and MAD cohorts of the healthy volunteer portion of this study, to assess the safety and PK of PTI-801 and reported initial data on this portion of the study in 2017.

We have completed a 14-day, once-a-day dosing study with PTI-801 in CF subjects on background Orkambi therapy. The study was designed to evaluate the safety, tolerability and PK of PTI-801 in the randomized, double-blind, placebo-controlled design and was conducted in the U.S. and Europe. 49 subjects on background Orkambi were randomized, and 48 had completed 14 days of dosing with PTI-801 at three escalating dose levels, or placebo.  Sweat chloride (SC) and body mass index (BMI) were evaluated as exploratory endpoints; change in ppFEV 1 was also evaluated.

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Safety and PK results were as expected. At higher doses, PTI-801 demonstrated a statistically significant improvement in SC and BMI in the 14-day treatment period. Overcoming the typical acute drop in FEV 1 associated with lumacaftor exposure, an improvement in ppFEV 1 was observed across all dose cohorts, although the change was not statistically significant. Two thirds of subjects in all PTI-801 cohorts were above ppFEV 1 baseline by the end of the treatment period and approached baseline by the end of the 7-day follow up period. Blood glucose levels were evaluated as part of an ad hoc analysis in subjects with cystic fibrosis-related diabetes (CFRD), a subgroup that made up nearly half of the enrolled subjects. In hyperglycemic CFRD subjects, PTI-801 led to a statistically significant normalization of glucose levels at the three dose levels analyzed.

Our IND for the Phase 1 study of PTI-808, a potentiator molecule, was submitted to the FDA in the second quarter of 2017 and is now active. PTI-808 has completed investigation in 48 healthy volunteers with up to 300 mg in single and multiple dose cohorts. PTI-808 was found to be generally well tolerated.  One subject experienced a serious adverse event from a pre-existing condition of transverse myelitis. This serious adverse event was considered unlikely to be related to the study drug. No adverse events leading to discontinuation of treatment were reported.  All other adverse events that have been reported to date were of mild or moderate severity. Preliminary PK assessment of PTI-808 suggests that it could potentially be suitable for once daily dosing.

Co-administration of PTI-801, PTI-808 and PTI-428 has been completed in 20 healthy volunteer subjects.  Safety and PK profiles achieved with seven days of once-a-day oral dosing of PTI-801, PTI-808 and PTI-428 indicated these compounds were generally well-tolerated and could potentially be amenable for once a day dosing. No SAEs or AEs leading to discontinuation of treatment were reported.  The PK data demonstrated a lack of clinically meaningful drug-drug interactions.  

Combination study protocols for trials in CF patients have been reviewed by key patient advocacy and regulatory authorities in US and Europe. In January of 2018, we announced that our triple combination clinical study protocol received endorsement and a high strategic fit score from the Therapeutics Development Network (TDN) and the Clinical Trial Network (CTN). Our double combination protocol has also received the endorsement of the TDN. The TDN and CTN are the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.

 

Our ongoing clinical trials are summarized as follows:

Combination studies :

We are conducting Phase 1 combination studies with our proprietary drug candidates PTI-801, PTI-808 and PTI-428, in double and triple combination formats.  

 

Double combination:  we have commenced dosing CF subjects homozygous for the F508del mutation in a 14-day double combination study of PTI-801 and PTI-808. Study cohorts are placebo-controlled and are investigating dose escalations of both agents. In October 2018, we reported interim top line data with low- and mid-dose cohorts of PTI-801 and PTI-808 and expect to report data from the high-dose cohort in the first quarter of 2019.

 

Triple combination:  we have commenced dosing of CF subjects homozygous for the F508del mutation in a 21-day study of PTI-801, PTI-808 and PTI-428, consisting of two cohorts with varying doses of PTI-808 and PTI-801 in the second cohort and fixed doses of PTI-428.  This study is placebo-controlled and consists of a seven-day run-in where patients will be dosed solely with PTI-808, followed by a period of 14 days where patients will be taking all three investigational drugs. The first dose cohort has completed enrollment, and the preliminary data from both study cohorts will be reported in the first quarter of 2019.

We have completed 28-day GLP preclinical combination safety studies to support our combination trials.

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Add-on therapy:

PTI-801: We have completed a 14-day once-a-day, placebo-controlled, double-blind, dosing study with PTI-801 in CF subjects on background Orkambi therapy. This Phase 1 study is designed to investigate the effect of PTI-801 in escalating doses in multiple cohorts, with primary objectives of safety and tolerability and secondary objectives of PK and FEV 1 . We are also conducting a 14-day, once-a-day, placebo-controlled, double-blind dosing study with PTI-801 in CF subjects on background Symdeko therapy. This Phase 1 study is designed to investigate the effect of PTI-801 with a single dose level cohort, with the primarily objectives of safety and tolerability and secondary objectives of PK and FEV 1 , with initial data expected in the first quarter of 2019.

PTI-428: We are conducting a double-blind, 28-day clinical study with PTI-428 in CF subjects on background Symdeko therapy, with initial data expected in early 2019. This study is designed to assess the effect of multiple doses of PTI-428 with primary objectives of safety, tolerability, and secondary objectives of PK and FEV 1 .

We have also completed a PTI-428 study in a 14-day, once-a-day, placebo controlled, double-blind, dose-range study in patients on background Kalydeco. Preliminary objectives include safety and PK. Preliminary results were reported in December 2018.

Commercialization

We have exclusive worldwide commercial rights to PTI-801, PTI-808 and PTI-428, as well as our proprietary combinations. We plan to pursue regulatory approval for add-on therapies based on PTI-801 and/or PTI-428 in regions where ivacaftor and lumacaftor (and ivacaftor and tezacaftor, as applicable) are commercially available. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, ensure product access and secure reimbursement. We will explore partnering opportunities across our product portfolio and in various geographies, with the goal of bringing the resources and expertise to maximize the commercial potential of our drug candidates.

The pricing and reimbursement strategy for therapies will be based on the efficacy and safety profile that will be collected during registrational studies. Pharmacoeconomic models that could support our potential pricing considerations for a CFTR modulator have been widely used in territories where the drug is approved and provide us with validated strategies to be used in future pricing and reimbursement negotiations.

Manufacturing and Supply

We do not own or operate, and presently have no plans to establish, any manufacturing facilities. We presently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture of any products that we may commercialize. We have outsourced the manufacturing of current Good Manufacturing Practice, or cGMP-grade, product for preclinical studies and clinical trials. Our contract manufacturers have had, and we believe that they will have, the capacity to produce adequate quantities of PTI-801, PTI-808 and PTI-428 for both our preclinical studies and our clinical trials. We do not presently have arrangements in place for redundant supply for bulk drug substance. For all of our product candidates, we intend to identify and qualify additional manufacturers to provide the active pharmaceutical ingredient and fill-and-finish services prior to submission of an NDA to the FDA.

We have entered into manufacturing and supply agreements with three vendors and these activities are ongoing. As of the date of this report, we believe we have access to sufficient amounts of cGMP-certified material for use in our clinical trials.

All of our compounds are organic compounds of low molecular weight, generally called small molecules. They can be manufactured in reliable and reproducible synthetic processes from inexpensive and readily available starting materials that can be supplied by a number of commercial vendors. The chemistry is amenable to scale-up and does not require unusual equipment in the manufacturing process. We expect to continue to develop drug candidates that can be produced cost effectively at contract manufacturing facilities.

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Regulatory Strategy

We plan to conduct clinical studies for our CF programs in territories with the largest populations of CF patients such as North America, Europe and Australia. We therefore rely on local regulatory and ethics authorities for the approval of our IND or equivalent submissions. All three compounds have active INDs under the FDA in the United States and approvals by regulatory bodies in ex-U.S. territories where the respective study or studies are ongoing and active.

For CF, in addition to regulatory agencies, patient advocacy groups can play a key role in helping access study subjects. In the United States, the TDN has developed a network consisting of 89 CF centers to ensure consistency and high quality of clinical study execution. We believe TDN endorsement is an important factor for CF centers in deciding whether to participate in a CF trial and which trials to prioritize.  In Europe, the CTN, the development arm of the European Cystic Fibrosis Society, acts in a somewhat analogous manner, as a patient advocacy group that reviews and ranks protocols for CF trials. PTI-428 has received the priority score “high medium” by the CTN.  Our triple combination clinical study protocol has received endorsement and a high strategic fit score from the TDN and the CTN. Our double combination protocol has also received the endorsement of the TDN. The TDN and CTN are the drug development arms of the Cystic Fibrosis Foundation (CFF) and the European CF Society (ECFS), respectively.  The protocol for PTI-801 has also been endorsed by both organizations.

 

The CFF and ECFS are the most impactful CF patient advocacy organizations and shepherd the execution of clinical trials in the United States and Europe, respectively.  Both organizations have well established processes to evaluate submitted study protocols based on scientific merit, study design, feasibility and the overall clinical research priorities of the CF community.  Protocols are reviewed by a selected group of experienced CF physician investigators, research coordinators, biostatisticians, people with CF and other specialists.

In the United States, upon the protocol endorsement, the TDN provides access to 89 accredited care centers with demonstrated expertise in clinical research and supports study participant recruitment and execution of studies.  Since its founding in 1998, the TDN has conducted more than 130 clinical studies for CF, including studies of CFTR modulators. Similarly, in Europe, the CTN provides access for endorsed studies to 43 large and experienced CF centers located in 15 different countries, including the United Kingdom, or the U.K. The TDN and the CTN have established a strong partnership for endorsed studies conducted in both the U.S. and Europe.  

In February 2019, we joined the HIT-CF consortium, a pan-European strategic initiative which seeks to validate a personalized therapy approach for CF patients with extremely rare genetic mutations. HIT-CF will collect patient biopsies across ECFS CTN clinical sites from subjects with CF who have rare CFTR mutations and produce organoids for functional assays. Combinations of PTI-801, PTI-808 and PTI-428 are being investigated for their ability to elicit a functional response in vitro in the organoid system and potentially predict clinical outcome in the donors. Based on the functional response, patients may be invited to participate in clinical trials with the investigational drugs to validate the ability of the in vitro response to predict clinical benefit. This project is funded by a €6.7M award from the Horizon 2020 EU funding program.  If translatability of functional i n vitro assays is confirmed with clinical benefit, organoids might offer an additional regulatory path towards approval or product label expansion.

For all of our CF programs, we intend to maintain a proactive relationship with the Cystic Fibrosis Foundation, or CFF, and the TDN. We will continue to access patient-derived HBE cells from the Foundation’s database to conduct ongoing preclinical studies. There is a large number of CF programs in clinical development at this time, including numerous corrector and combination trials from Vertex and other companies with greater resources and experience than us which may increase competition for patients to enroll in our clinical trials.

Competition

The biopharmaceutical industry is highly competitive and subject to rapid and significant technological change. Key competitive factors affecting the commercial success of our product candidates are likely to be efficacy, safety and tolerability profile, reliability, convenience of dosing, price, and reimbursement. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. Many of these potential

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competitors have 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 and have substantially greater financial, technical and human resources than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of competitors. Accordingly, our competitors may be more successful than we may be in obtaining FDA approval for therapies and achieving widespread market acceptance more quickly than we will. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render our therapies obsolete or non-competitive before we can recover development and commercialization expenses. See “Risk Factors—Risks Relating to Commercialization of Our Product Candidates.”

A number of companies are seeking to identify and develop drug candidates for the treatment of CF, including Vertex Pharmaceuticals Incorporated, AbbVie Inc., Flatley Discovery Lab, LLC, F. Hoffmann-LaRoche Ltd., Novartis AG, Gilead Sciences, Inc., Laurent Pharmaceuticals Inc., Pfizer Inc., AstraZeneca, Translate Bio Inc., Sanofi Genzyme, Bayer AG, Corbus Pharmaceuticals Holdings, Inc., Eloxx Pharmaceuticals, Verona Pharma plc, Spyrxx Bioscience Inc., Talee Bio and several other companies. Of these, Vertex’s Kalydeco, Orkambi and Symdeko/Symkevi are the only drugs approved to treat an underlying cause of CF, rather than the symptoms.  

Intellectual Property

Our owned patent applications relate to our amplifiers, correctors, and CFTR modulators and include patent applications directed to new compositions of matter and to methods of treating CF, including combination therapies with existing CFTR modulators and our own proprietary combinations.

As of December 31, 2018, we own three U.S. patent applications and related foreign patent applications, one Patent Cooperation Treaty patent application, and one pending U.S. provisional patent application family directed to composition of matter, methods of use, and combination therapies relating to PTI-428. If we continue to pursue protection, and if any patents issue based on these applications, we expect such patents, if issued, to expire between 2035 and 2038.

As of December 31, 2018, we own one U.S. patent application, and related foreign patent applications, and one Patent Cooperation Treaty patent application relating to composition of matter, methods of use, and combination therapies relating to new correctors, including PTI-801. If we continue to pursue protection, and if any patents issue based on this application family, we expect such patents to expire between 2036 and 2038.

As of December 31, 2018, we own one U.S. patent application, and related foreign patent applications and one Patent Cooperation Treaty patent application relating to new potentiators, and combination therapies including PTI-808. If we continue to pursue protection, and if any patents issue based on this application, we expect such patents to expire in 2037.

We also own three issued U.S. patents, eight pending U.S. patent applications, four Patent Cooperation Treaty patent applications, all of which generally relate to other compounds and methods for our CF program.  If we continue to pursue protection and if any patents issue based on these applications in the United States and in selected jurisdictions worldwide, we expect such patents, if issued, to expire between 2034 and 2037.

We primarily rely on trade secrets and know-how to protect the proprietary nature of our research and discovery platform. However, trade secrets and know-how can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data, know-how and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

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Licenses

Genentech

In December 2018, we entered into the Genentech Agreement, whereby we granted Genentech a worldwide, exclusive license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network, which consists of more than 1,000 proteins organized into pathways that can be regulated or targeted by drugs. Genentech is also entitled to sublicense the rights to these small molecule modulators granted in connection with the agreement. The agreement does not include cystic fibrosis transmembrane conductance regulator (CFTR) modulators and is unrelated to our investigational medicines or other ongoing research programs in cystic fibrosis.

In connection with the agreement, we have received an upfront payment and are eligible to receive milestone payments in aggregate of approximately $96.0 million, subject to the achievement of specified development, regulatory and commercial milestones. In addition, Genentech is obligated to pay the Company tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the agreement. The royalty term shall terminate on a product-by-product and country-by-country basis on the latest of (i) the ten-year anniversary of the first commercial sale of such product in such country, and (ii) the expiration of the last-to-expire licensed patent that covers such product in such country.

CFF Agreement

In March 2012, we entered into a research, development and commercialization agreement with Cystic Fibrosis Foundation, Inc., or CFF, pursuant to which we have collaborated to research, develop and commercialize products for the treatment of CF, non-classical CF, and other pulmonary diseases in the United States or in the European Union. Under this agreement, CFF provided financial support and continues to provide consultation and advice and certain research materials and know-how for our research program.

We expect to make milestone payments based on PTI-428, if approved, and may need to make additional payments for our other product candidates in CF, if approved. We have agreed to make future sales-based milestone payments (which the agreement refers to as royalties) to CFF of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. We have also agreed to pay to CFF royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by us from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by us through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. In the event of a change of control of our company, CFF will receive certain payments, depending on the timing of the change of control and the size of the transaction.

We have the exclusive right to develop, commercialize, market, sell and distribute products worldwide. All joint technology from of the research program is jointly owned by the parties, but we have a license from CFF for all CFF-owned inventions and patents and in the joint inventions and joint patents arising from the collaboration for all purposes. We control and cover the costs of the preparation, prosecution and maintenance and enforcement of all of our patents, CFF-owned patents and joint patents, but CFF is able to use compounds for non-commercial research purposes in the field of treatment of CF, non-classical CF, and other pulmonary diseases.

The agreement will expire when there are no longer any payment obligations, unless terminated earlier. Each party may terminate for an uncured material breach of any material covenants or obligations or if any representation or warranty is materially untrue as of the date made and uncured after 30 days from notice. CFF may also terminate if a case or proceeding under the bankruptcy laws is filed against our company and not dismissed within 60 days, or if we file for insolvency, reorganization, receivership, dissolution or liquidation of our company.

If at any time prior to the first commercial sale, we cease to use commercially reasonable efforts to develop or commercialize any product in the field of treatment of CF, non-classical CF, and other pulmonary diseases, for a continuous period of 180 consecutive days, and fail to present a reasonable plan to resume commercially reasonable efforts, we will grant to CFF an irrevocable, exclusive worldwide interruption license under all of our interest in the

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research plan technology to exploit such product, and CFF will assume all costs and expenses relating to the prosecution, maintenance and enforcement of all joint patents and patents covering such product. Any third-party license granted by us shall be subject to such interruption license.

Terminated Harvard Agreement

In December 2013, we amended and restated an existing license agreement signed on March 29, 2011 with the President and Fellows of Harvard College, or Harvard, in order to enter into a sublicense agreement with Biogen, or the USP 14 agreement, which agreement was subsequently terminated by Biogen, to further develop and commercialize certain products under the USP14 agreement and to retain the services of consultants Drs. Daniel Finley and Randall King for such purpose.

In December 2017, we terminated the license agreement with Harvard University.  Following the termination, all licenses granted by either party to the other under the agreement terminated. Under the surviving provisions of the license agreement, we would owe future development, clinical and commercialization and sales milestone payments up to $2.4 million upon the achievement of certain milestones. We will also owe low single-digit royalties on sales of commercial products, if any, developed using the licensed technologies for ten years following the first commercial sale. As of December 31, 2018, and 2017, we had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved.

Terminated Biogen Agreement

In December 2013, we entered into a collaboration and license agreement, or the USP14 agreement, with Biogen, where we agreed to collaborate to research, develop and commercialize licensed products to attack toxic proteins implicated in the development of Alzheimer’s and Parkinson’s diseases. On December 5, 2016, we received notice from Biogen of termination of the USP14 agreement effective in December 2016.  Following the termination, all licenses granted by either party to the other under the USP14 agreement terminated. Additionally, the exclusivity provisions in the USP14 agreement terminated and now each party is free to research, develop and commercialize products that modulate the target (USP14) either by themselves or with third parties, subject to the intellectual property rights of the other party. In connection with the collaboration, we received from Biogen an initial upfront payment and an equity investment, as well as research and development expense reimbursements. Additionally, we also received a milestone payment of $2.0 million for achieving an initial preclinical milestone in July 2014. Following the termination, no future research and development expense reimbursements, milestones or royalties are payable under the USP14 agreement.

Expired Astellas Agreement

In November 2014, we entered into a collaboration and license agreement, or the Astellas Agreement, with Astellas Pharma Inc., or Astellas, to develop cell assays for high throughput screening, and to identify, develop and commercialize drug candidates relating to the unfolded protein response pathway. The agreement automatically terminated in December 2018 at the end of the research term as defined therein. In connection with the collaboration, we received an initial upfront investment and research expense reimbursements from Astellas. In addition, in June 2016, we received a milestone payment upon achievement of a preclinical milestone. Following the expiration of the agreement, no future research and development expense reimbursements, milestones or royalties are receivable under the agreement.

Government Regulation

Government authorities in the United States at the federal, state and local levels, and in other countries, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing, export and import of products such as those we are developing.

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A number of different regulatory agencies may be involved, depending on the product at issue, and the type and stage of activity. These include the FDA, the U.S. Department of Health & Human Services, or HHS, the Centers for Medicare and Medicaid Services, or CMS, other federal agencies, state boards of pharmacy, state departments of health and more.

U.S. Government Regulation

Drug Development Process

In the United States, the FDA is a primary regulator of drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, the Public Health Service Act, or PHSA, and implementing regulations. The process of obtaining and maintaining regulatory approvals and other compliance with applicable federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources in addition to the commitment of dedicated manufacturing, regulatory and compliance personnel, among others. Failure to comply with applicable requirements at any time during the drug development process, approval process, or after approval, may subject us to adverse consequences and administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include refusal to approve pending applications; withdrawal or restriction of an approval; imposition of a clinical hold or other limitation on both ongoing or future research; enforcement letters; product seizures; total or partial suspension of development, production, or distribution; or injunctions, fines, disgorgement, or civil or criminal payments or penalties.

The process required before a drug may be marketed in the United States generally involves the following:

 

completion of preclinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practice, or GLP, requirements, animal welfare laws and other applicable regulations;

 

submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials, meaning trials in human subjects, may begin in the United States, obtaining similar authorizations in other jurisdictions where clinical research will be conducted and maintaining these authorizations on a continuing basis throughout the time that trials performed and new data collected;

 

performance of adequate and well controlled clinical trials according to Good Clinical Practices, or GCP, requirements to demonstrate whether a proposed drug is safe and effective for its intended use;

 

preparation and submission to the FDA of a new drug application, or NDA;

 

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product will be produced to assess compliance with current good manufacturing practices, or cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity; and

 

FDA review and approval of the NDA.

The development, testing and approval process requires substantial time, effort and financial resources and bears significant inherent risk that the individual products will not exhibit the relevant safety, effectiveness, or quality characteristics or that FDA, or any other regulatory authority, may interpret the data in a manner that does not support marketing approval or authorization. We cannot be certain that any approvals for our product candidates will be granted on a timely basis, or with the specific terms that we desire, if at all.

Clinical trials typically are conducted in three sequential phases that may overlap or be combined:

 

Phase 1. The drug initially is introduced into a small number of patients or human volunteers and information is collected pertaining to the drug’s safety, dosage tolerance, absorption, metabolism, distribution and elimination. These trials are designed to determine the metabolism and pharmacologic actions, side effects with increasing doses and if possible, early evidence of effectiveness.

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Phase 2. Clinical trials include controlled clinical studies initiated in a limited target patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the effectiveness of the drug candidate for a particular indication in patients with the disease or condition under study, and to determine common short-term side effects and risks associated with the drug.

 

Phase 3. Clinical trials are expanded and controlled trials undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to gather additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk profile of the drug candidate and provide an adequate basis for physician labeling and regulatory approval.

A drug being studied in clinical trials may be made available to individual patients in certain circumstances.  Pursuant to the 21st Century Cures Act, or Cures Act, as amended, the manufacturer of an investigational drug for a serious disease or condition is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for individual patient access to such investigational drug. This requirement applies on the earlier of the first initiation of a Phase 2 or Phase 3 trial of the investigational drug, or as applicable, 15 days after the drugs receives a designation as a breakthrough therapy, fast track product, or regenerative advanced therapy.

Progress reports related to clinical trials must be submitted at least annually to the FDA and participating institutional review boards, and more frequent safety reports must be submitted to the FDA and to investigators for serious and unexpected suspected adverse events and certain other events. Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within a specified period, if at all; and study protocols may be amended or terminated by either the FDA or the sponsor. For example, the FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the healthy volunteers or patients are being exposed to an unacceptable health risk or that the investigational product apparently lacks efficacy. Similarly, an institutional review board can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with applicable requirements, including requirements to protect study subjects, or if the drug candidate has been associated with unexpected serious harm to healthy volunteers or patients.

We estimate that it generally takes 10 to 15 years, or possibly longer, to discover, develop and bring to market a new pharmaceutical product in the United States. Several years may be needed to complete each phase of development, including discovery, preclinical studies, Phase 1, 2 or 3 clinical trials, or marketing authorization.

At times during the development of a new drug product, sponsors are given opportunities to meet with the FDA. This commonly occurs prior to submission of an IND, at the end of Phase 2 testing, and before an NDA is submitted. Meetings at other times may also be requested. These meetings provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach agreement on the next phase of development. For example, prior to initiating a Phase 3 study, sponsors have the option to submit a request for Special Protocol Assessment, or SPA, to FDA which, if granted provides FDA’s concurrence that the study, if conducted as designed and if successful, could support a regulatory approval for the drug candidate. A plan for pediatric assessment also must be discussed at the end of the Phase 2 meeting. Concurrent with clinical trials, companies usually complete additional animal studies and develop additional information about the chemistry and physical characteristics of the drug candidate and finalize a process for manufacturing both the drug substance and finished drug product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the finished drug candidate, and the manufacturer must develop methods for confirming the identity, quality, purity, and potency of the final products. Additionally, appropriate packaging must be selected and tested and stability trials must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf-life and distribution pathway.

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Disclosure of Clinical Trial Information

Sponsors (or designated principal investigators) of clinical trials that are applicable clinical trials under the PHSA and the National Institute of Health’s regulation regarding Clinical Trial Registration and Results Information Submission are required to register their trials and disclose certain clinical trial information.  Phase 1 studies are not subject to these requirements.  Information related to the product, comparator, patient population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is made public as part of the registration. Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of certain trials of unapproved new drugs that are still under development or new uses of approved drugs may be delayed, subject to limitations, until 30 calendar days after the new product or new indication being studied has been approved, or the marketing application has been withdrawn for a specified amount of time.  Where a new indication of a previously approved drug is sought, the submission of results information may also be delayed until 30 calendar days after FDA issues a letter that ends the review cycle for the application but does not approve the drug for the use studied in the clinical trial.    In addition, publication policies of major medical journals mandate certain registration and disclosures as a precondition for potential publication, even when this is not presently mandated as a matter of law. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

New Drug Application Review and Approval Processes

The cost of preparing and submitting an NDA is substantial. The results of drug candidate development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on the drug candidate, proposed labeling and other relevant information are submitted to the FDA as part of a new drug application, or NDA, requesting approval to market the drug candidate.

Under PDUFA, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective through September 30, 2019, the user fee for each NDA requiring clinical data is $2,588,478. PDUFA also imposes an annual prescription drug product program fee of $309,915. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.

The FDA reviews each NDA to ensure that it is sufficiently complete for substantive review before it may be filed. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA reviews an NDA to determine, among other things, whether a drug candidate is safe and effective for its intended use and indication for use, including use of a drug as a combination therapy, and whether its manufacturing is cGMP-compliant to assure and preserve the drug candidate’s identity, strength, quality and purity. The FDA may refer the NDA to an advisory committee consisting of a panel of external experts for review and recommendation as to whether the NDA should be approved and under what conditions. Before approving an NDA, the FDA will typically inspect the facility or facilities where the active ingredient and the formulated drug candidate are manufactured and tested.

The FDA has authority to require a Risk Evaluation and Mitigation Strategy (REMS) from manufacturers to ensure that the benefits of a drug outweigh its risks. A sponsor may also voluntarily propose a REMS as part of the NDA submission. The need for a REMS is determined as part of the review of the NDA. Based on statutory standards, elements of a REMS may include “dear doctor letters,” a medication guide, more elaborate targeted educational programs, and in some cases restrictions on distribution. These elements are negotiated as part of the NDA approval, and in some cases may delay the approval date. Once adopted, REMS are subject to periodic assessment and modification.

The approval process is lengthy and difficult, and the FDA may refuse to approve an NDA if the applicable criteria are not satisfied, including if the manufacturing facilities fail to demonstrate cGMP compliance, or it may require additional preclinical, clinical or other data, such as manufacturing data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may interpret data differently than we interpret the same data. The FDA will issue a Complete Response Letter if the agency decides not to approve the NDA in its present form. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional

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clinical trials. Additionally, the Complete Response Letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may resubmit the NDA to address all of the deficiencies identified in the letter, withdraw the application, or request a n opportunity for a hearing.   If a product receives regulatory approval, the approval may be limited to specific diseases, dosages, or indications for use, which could restrict the commercial value of the product. Further, the FDA may require that certain limitations of use, contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require post-approval trials, including Phase 4 clinical trials, to further assess a drug’s safety and effectiveness after NDA approval and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Expedited Development and Review Programs

The FDA has various programs, including fast track, priority review, accelerated approval, and breakthrough therapy designation, that are intended to increase agency interactions, expedite or facilitate the process for reviewing drug candidates, and/or provide for initial approval on the basis of surrogate or intermediate endpoints. Even if a drug candidate qualifies for one or more of these programs, the FDA may later rescind such designation if it determines that the drug candidate no longer meets the conditions for qualification as clinical data and the approved treatment landscape continue to evolve.

In January 2016, we received Fast Track designation from the FDA for the investigation of PTI-428 for the treatment of CF. Additionally, in March 2017 we were granted Fast Track designation from the FDA for the investigation of PTI-801 for the treatment of CF. The Fast Track program is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the product (either alone or in combination with other drugs) and the specific indication for which it is being studied. The sponsor of a new drug may request the FDA to designate the drug as a Fast Track product at any time during the clinical development of the product. Unique to a Fast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fee upon submission of the first section of the application.

Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness compared to available alternatives.   The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review with a goal review time frame of six months versus the standard ten-month review cycle for NDAs. Additionally, a product may be eligible for accelerated approval. Drug candidates studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may qualify for accelerated approval if they demonstrate an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality (IMM) (i.e., an intermediate endpoint), that is reasonably likely to predict an effect on IMM or other clinical benefit.    As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well controlled post-marketing clinical studies. Failure to conduct required post-approval trials, or the inability to confirm a clinical benefit during post-marketing trials, may allow the FDA to withdraw the drug from the market on an expedited basis. In addition, the FDA presently requires as a condition for accelerated approval, preapproval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

The Food and Drug Administration Safety and Innovation Act of 2012 also amended the FDCA to require FDA to expedite the development and review of a breakthrough therapy. A drug can be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more

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clinically significant endpoints. A sponsor may request that a drug be designated as a breakthrough therapy at any time during the clinical development of the product. If so designated, FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to gather nonclinical and clinical data is as efficient as practicable, involving senior managers and experienced review staff in a cross-disciplinary review, assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor, and taking steps to ensure that the design of the clinical trials is as efficient as practicable. In March 2018, the FDA granted Breakthrough Therapy designation for PTI-428 for the treatment of CF in homozygous patients for the F508del mutation who are receiving Orkambi ® as background therapy.    The FDA may rescind such designation if our development program does not continue to meet the criteria for Breakthrough Therapy designation.

Post-Approval Requirements

Any products for which we may receive future FDA approval are subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting and analysis of adverse experiences with the product, providing the FDA with updated safety, efficacy and quality information, product sampling and distribution requirements, maintaining up-to-date labels, warnings, and contraindications, and complying with promotion and advertising requirements. Products may be promoted only for their approved indications and in accordance with their approved labels; products cannot be promoted for unapproved, or off-label, uses, although physicians may prescribe drugs for off-label uses in accordance with the practice of medicine. Manufacturers must continue to comply with cGMP requirements, which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to manufacturing processes often require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to, in some cases, extensive clinical development activities as well as further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. Manufacturers and other entities involved in the manufacturing and distribution of approved products are required to register their establishments with the FDA and certain state agencies and are subject to periodic inspections for compliance with cGMPs and other laws. FDA and state inspections may identify compliance issues at manufacturing sites that may disrupt production or distribution or may require substantial resources to correct.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market, such as adverse events, the existence or severity of which was unknown when the product was approved. Later discovery of previously unknown problems with a product may result in restrictions on the product’s approved uses or distribution or complete withdrawal from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, enforcement letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal payments or penalties.

From time to time, new legislation is enacted that changes the statutory provisions governing the approval, manufacturing, and marketing of products regulated by the FDA. For example, as FDA works to implement its authorities under the 21st Century Cures Act and FDA Reauthorization Act relating to modernization of clinical trial design, endpoints, and incorporation of patient experience data and real-world evidence in new drug development, FDA’s expectations of sponsor drug development activities may change.  In addition, FDA regulations and guidance may be revised or reinterpreted by the agency or reviewing courts in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or regulatory or policy changes will occur or be implemented and what the impact of such changes, if any, may be. Federal budget uncertainties or spending reductions may reduce the capabilities of the FDA, extend the duration of required regulatory reviews, and reduce the availability of clinical research grants.

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Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration, and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents, if issued, may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term to be extended up to five years as compensation for patent term effectively lost due to the FDA’s pre-market approval requirements. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension. Extensions are not granted as a matter of right and the extension must be applied for prior to expiration of the patent and within a 60-day period from the date the product is first approved for commercial marketing. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Where a product contains multiple active ingredients, if any one active ingredient has not been previously approved, it can form the basis of an extension of patent term provided the patent claims that ingredient or the combination.

In the future, we may apply for patent term restoration for some of our presently owned patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA; however, there can be no assurance that any such extension will be granted to us.

Market exclusivity provisions under the United States Federal Food, Drug, and Cosmetic Act, or FDCA, also can delay the submission or the approval of certain applications. The specific scope varies, but fundamentally the FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity never previously approved by the FDA either alone or in combination. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the compound responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or noninfringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability trials, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric Information and Exclusivity

Under the FDCA, NDAs and certain supplements to NDAs must contain data adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDCA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within 60 days of an end-of-phase 2 meeting or as may be agreed between the sponsor and the FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinical studies, early phase clinical trials, and/or other clinical development programs.

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Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drug candidates intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that cost of research and development of the drug for the indication can be recovered by sales of the drug in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Although there may be some increased communication opportunities, orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a drug candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in very limited circumstances, such as if the second applicant demonstrates the clinical superiority of its product. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee. Orphan drug exclusivity could block the approval of our drug candidates for seven years if a competitor obtains approval of the same product as defined by the FDA or if our drug candidates are determined to be contained within the competitor’s product for the same indication or disease.

The Orphan Products Grants Program in the FDA’s Office of Orphan Products Development, supports clinical development of products including drugs, biologics, medical devices and medical foods for use in rare diseases and conditions where no therapy exists or where the proposed product will be superior to the existing therapy. This program provides grants for clinical studies on safety and/or effectiveness that will either result in, or substantially contribute to, market approval of these products.

As in the United States, we may apply for designation of a drug candidate as an orphan drug for the treatment of a specific indication in the European Union before the application for marketing authorization is made. Orphan drugs in the European Union enjoy economic and marketing benefits, including up to ten years of market exclusivity for the approved indication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product. The FDA and foreign regulators expect holders of exclusivity for orphan drugs to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the orphan drug.

In March 2018, the FDA granted Orphan Drug designation for PTI-428.

Pharmaceutical Coverage, Pricing, and Reimbursement

United States

Even if the FDA approves NDAs for our drug candidates, sales of our products will depend, in part, on the availability of coverage and reimbursement by third-party payors, such as government health programs, commercial or private insurance, and managed care organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drugs for a particular indication. A decision by a third-party payor not to cover our product candidates could reduce physician utilization of our products once approved and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

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The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an emphasis on cost containment measures in the United States has increased, and we expect it will continue to increase, the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Further, there have been several recent U.S. congressional inquiries and proposed federal and proposed and enacted state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level, Congress and the Trump administration have each indicated that it will continue to pursue new legislative and/or administrative measures to control drug costs. Individual state legislatures have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing. Some of these measures include price or patient reimbursement constraints, discounts, restrictions on certain product access, marketing cost disclosure and transparency measures, and, in some cases, measures designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once approved, or put pressure on our product pricing.

European Union

In Europe and many other foreign countries, the success of our drug candidates we may develop depends largely on obtaining and maintaining government reimbursement, because in many foreign countries patients are unlikely to use prescription pharmaceutical products that are not reimbursed by their governments. Negotiating reimbursement rates in foreign countries can delay the commercialization of a pharmaceutical product and generally results in a reimbursement rate that is lower than the net price that companies can obtain for the same product in the United States.

In some countries, such as Germany, commercial sales of a product can begin while the reimbursement rate that a company will receive in future periods is under discussion. In other countries, a company must complete the reimbursement discussions prior to the commencement of commercial sales of the pharmaceutical product. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of drugs for which their national health insurance systems provide reimbursement and to control the prices of drugs for human use. A member state may approve a specific price for the drug or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug on the market. Recently, many countries in the European Union have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the European Union. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries.

Other U.S. Healthcare Laws and Compliance Requirements

Pharmaceutical companies also are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and false claims laws, and the reporting of payments to physicians and teaching hospitals. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively, ACA, was enacted, which includes measures that have or will significantly change the way health care is financed by both governmental and private insurers. Among the provisions of ACA of greatest importance to the biopharmaceutical industry are the following:

 

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services, a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. ACA made several changes to the Medicaid Drug Rebate Program, including

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increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic products from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by expanding the population potentially eligible for Medicaid drug benefits. The CMS expanded Medicaid rebate liability to the territories of the United States as well. In addition, ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact our sales.

 

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. ACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the present state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase. Further, on December 27, 2018, the District Court for the District of Columbia invalidated a recent reimbursement formula change under the 340B program. It is unclear how this decision could affect covered hospitals who might purchase our products in the future and affect the rates we may charge such facilities for our approved products.

 

ACA imposed a requirement on manufacturers of branded drugs and biologic products to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap ( i.e. , “donut hole”). However, the Bipartisan Budget Act of 2018, among other things, amends the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”, which will shift costs for name brand drugs away from Part D participants back to the manufacturers, which could have a negative effect on our profits in the event any of our products receive FDA approval and CMS reimbursement.

 

ACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic products, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.

 

A new Patient-Centered Outcomes Research Institute was established pursuant to ACA to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

 

ACA established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.

Some provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Since January 20, 2017, President Trump has signed two Executive Orders designed to delay the implementation of certain provision of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. One Executive Order directs federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost-sharing subsidies that reimburse insurers under the ACA. On June 14, 2018, U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in ACA risk corridor payments to third-party payors who argued were owed to them. The effects of this gap in reimbursement on third-party payors, the viability of the ACA marketplace, providers, and potentially our business, are not yet known.

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In addition, other legislative changes have been proposed and adopted since the ACA was enacted, including aggregate reductions to Medicare payments to providers of 2% per fiscal year through 2027. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Since 2016, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA, such as removing or delaying penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, delaying the implementation of certain ACA mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. On December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was repealed as part of the Tax Cuts and Jobs Act, the remaining provisions of the ACA are invalid as well. The Trump administration and CMS have both stated that the ruling will have no immediate effect, and on December 30, 2018 the same judge issued an order staying the judgment pending appeal. It is unclear how this decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business. Litigation and legislation over the ACA are likely to continue, with unpredictable and uncertain results. We continue to evaluate the effect that the Affordable Care Act and its possible repeal and replacement could have on our business.

Moreover, on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy. We expect that additional foreign, federal and state healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in limited coverage and reimbursement and reduced demand for our products, once approved, or additional pricing pressures.

Anti-kickback Laws

U.S. federal laws, including the federal Anti-Kickback Statute, prohibit fraud and abuse involving state and federal healthcare programs, such as Medicare and Medicaid. These laws are interpreted broadly and enforced aggressively by various federal agencies, including CMS, the Department of Justice, and the Office of Inspector General for HHS, and various state agencies. These anti-kickback laws prohibit, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program. Remuneration is broadly defined to include anything of value, such as cash payments, gifts or gift certificates, discounts, or the furnishing of services, supplies, or equipment. The anti-kickback laws are broad and prohibit many arrangements and practices that are lawful in businesses outside of the healthcare and biopharmaceutical industry. A person or entity need not have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. The penalties for violating the anti-kickback laws can be severe. The sanctions include criminal and civil penalties, and possible exclusion from the federal healthcare programs. Many states have adopted laws similar to the federal anti-kickback laws, and some apply to items and services reimbursable by any payor, including third-party payors.

On January 31, 2019, the HHS and HHS Office of Inspector General, or OIG, proposed an amendment to one of the existing Anti-Kickback safe harbors (42 C.F.R. 1001.952(h)) which would prohibit certain pharmaceutical manufacturers from offering rebates to pharmacy benefit managers, or PBMs, in the Medicare Part D and Medicaid managed care programs. The proposed amendment would remove protection for "discounts" from Anti-Kickback enforcement action and would include criminal and civil penalties for knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or reward the referral of business reimbursable under federal health care programs. At the same time, HHS also proposed to create a new safe harbor to protect point-of-sale discounts that drug manufacturers provide directly to patients and adds another safe harbor to protect certain administrative fees paid by manufacturers to PBMs. If this proposal is adopted, in whole or in part, it could affect the pricing and reimbursement for any products for which we receive approval in the future.

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Federal and State Prohibitions on False Claims

The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment under federal programs (including Medicare and Medicaid). Under the False Claims Act, a person acts knowingly if he has actual knowledge of the information or acts in deliberate ignorance or in reckless disregard of the truth or falsity of the information. Although we would not submit claims directly to government payors, manufacturers can be held liable under the False Claims Act if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state, and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law.

Provisions of the False Claims Act allow a private individual to bring an action on behalf of the federal government and to share in any amounts paid by the defendant to the government in connection with the action. The number of filings under these provisions has increased significantly in recent years. Conduct that violates the False Claims Act may also lead to exclusion from the federal healthcare programs. In addition, various states have enacted similar laws modeled after the False Claims Act that apply to items and services reimbursed under Medicaid and other state healthcare programs, and, in several states, such laws apply to claims submitted to all payers.

Federal Anti-Inducement Law

The anti-inducement law, prohibits, among other things, the offering or giving of remuneration, which includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental program.

Federal Prohibitions on Healthcare Fraud and False Statements Related to Healthcare Matters

A number of related crimes can be prosecuted related to healthcare fraud, false statements relating to healthcare matters, theft or embezzlement in connection with a health benefit program, and obstruction of criminal investigation of healthcare offenses. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including a private insurer. Violation of any of these laws is a felony and may result in fines or exclusion from the federal healthcare programs.

Federal and State Laws Regarding Privacy of Patient Information

There are numerous federal and state laws protecting the privacy and security of protected health information. For example, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, impose, among other things, specified requirements on covered entities and their business associates relating to the privacy and security of individually identifiable health information including mandatory contractual terms and required implementation of technical safeguards of such information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys' fees and costs associated with pursuing federal civil actions. If we submit any of our approved products for reimbursement from third party payors, we may be deemed to be a covered entity subject to HIPAA. State and foreign laws also govern the privacy and security of health information in some circumstances. Such data privacy and security laws may differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.

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Physician Payment Sunshine Act

The Physician Payment Sunshine Act requires most pharmaceutical manufacturers to report annually to the Secretary of HHS any and all financial arrangements, payments, or other transfers of value made by that entity to physicians and teaching hospitals. The payment information is made publicly available in a searchable format on a CMS website. Over the next several years, we will need to dedicate significant resources to establish and maintain systems and processes in order to comply with these regulations. Failure to comply with the reporting requirements can result in significant civil monetary penalties. Similar laws have been enacted or are under consideration in foreign jurisdictions, including France which has adopted the Loi Bertrand , or French Sunshine Act, which became effective in 2013.

The Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing, or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In many countries, the healthcare professionals we regularly interact with may meet the definition of a foreign government official for purposes of the Foreign Corrupt Practices Act.

Other Regulations

In addition to the statutes and regulations described above, we also are subject to regulation in the United States under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other federal, state, local and foreign statutes and regulations, now or hereafter in effect.

Foreign Regulation

In addition to regulations in the United States, we are subject to a variety of foreign regulations governing clinical trials, distribution, and future commercial sales of our products. Whether or not we obtain FDA approval for a drug candidate, we must obtain approval by the comparable regulatory authorities of foreign countries or economic areas, such as the European Union, before we can commence clinical trials or market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter and potentially more rigorous than that required for FDA approval. Clinical studies conducted to support a submission for FDA approval may be inadequate to support a submission for marketing approval or authorization outside the United States and additional clinical studies may be required, such as studies that enroll subjects located in the jurisdiction where the sponsor seeks regulatory approval.  

Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegeneration, or diabetes and optional for those medicines that are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for approval by one or more “concerned” member states based on an assessment of an application performed by one member state, known as the “reference” member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether or not to approve the assessment report and related materials. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.

Since we conduct clinical trials in the European Economic Area, or EEA, we are subject to additional European data privacy laws. The General Data Protection Regulation, (EU) 2016/679, or GDPR, became effective on May 25, 2018 and deals with the processing of personal data and on the free movement of such data. The GDPR imposes a broad range of strict requirements on companies subject to the GDPR, including requirements relating to

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having legal bases for processing personal information relating to identifiable individuals and transferring such information outside the EEA, including to the United States, providing details to those individuals regarding the processing of their personal information, keeping personal information secure, having data processing agreements with third parties who process personal information, responding to individuals’ requests to exercise their rights in respect of their personal information, reporting security breaches involving personal data to the competent national data protection authority and affected individuals, appointing data protection officers, conducting data protection impact assessments, and recordkeeping.

The GDPR increases substantially the penalties to which we could be subject in the event of any non-compliance, including fines of up to 10,000,000 Euros or up to 2% of our total worldwide annual turnover for certain comparatively minor offenses, or up to 20,000,000 Euros or up to 4% of our total worldwide annual turnover for more serious offenses. Given the limited enforcement of the GDPR to date, we face uncertainty as to the exact interpretation of the new requirements on our trials and we may be unsuccessful in implementing all measures required by data protection authorities or courts in interpretation of the new law.

In particular, national laws of member states of the EU are in the process of being adapted to the requirements under the GDPR, thereby implementing national laws which may partially deviate from the GDPR and impose different obligations from country to country, so that we do not expect to operate in a uniform legal landscape in the EEA. Also, as it relates to processing and transfer of genetic data, the GDPR specifically allows national laws to impose additional and more specific requirements or restrictions, and European laws have historically differed quite substantially in this field, leading to additional uncertainty. Further, the impact of the impending “Brexit”, (whereby the United Kingdom is planning to leave the EEA in March of 2019), either with or without a "deal" is uncertain and cannot be predicted at this time.

In the event we continue to conduct clinical trials in the EEA, we must also ensure that we maintain adequate safeguards to enable the transfer of personal data outside of the EEA, in particular to the United States, in compliance with European data protection laws. We expect that we will continue to face uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. If we are investigated by a European data protection authority, we may face fines and other penalties. Any such investigation or charges by European data protection authorities could have a negative effect on our existing business and on our ability to attract and retain new clinical trial or pharmaceutical partners. We may also experience hesitancy, reluctance, or refusal by European or multi-national clients or pharmaceutical partners to continue to use our product candidates and solutions due to the potential risk exposure as a result of the current (and, in particular, future) data protection obligations imposed on them by certain data protection authorities in interpretation of current law, including the GDPR. Such clinical trial or pharmaceutical partners may also view any alternative approaches to compliance as being too costly, too burdensome, too legally uncertain, or otherwise objectionable and therefore decide not to do business with us. Any of the foregoing could materially harm our business, prospects, financial condition and results of operations.

Employees

As of February 28, 2019, we employed 48 full-time employees, including 32 in research and development and 16 in general and administrative, and 1 part-time employee in research and development. We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective-bargaining arrangements. We consider our employee relations to be good.

Corporate and Available Information

We were incorporated in Delaware on December 13, 2006 under the name Proteoguard, Inc., and subsequently changed our name to Proteostasis Therapeutics, Inc., on September 17, 2007. Our principal executive offices are located at 80 Guest Street, Suite 500, Boston, Massachusetts 02135, and our telephone number is (617) 225-0096. Our website address is www.proteostasis.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, available free of charge at our website as soon as reasonably practicable after they have been filed with the SEC. We do not incorporate the information on or accessible through our website into this report, and you should not consider any information contained in, or that can be accessed through, our website as part of this report.

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This report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Except where the context requires otherwise, the terms “Company,” “Proteostasis,” “PTI,” “we,” “us” and “our” used in this report refer to Proteostasis Therapeutics, Inc.

The SEC maintains a website that contains the materials we file with the SEC at www.sec.gov.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information in this Annual Report on Form 10-K, or this report, including our financial statements and related notes, before investing in our common stock. Any of the risks we describe below could adversely affect our business, financial condition or results of operations. The market price of our common stock could decline if one or more of these risks or uncertainties actually occur, causing you to lose all or part of your investment. Additional risks that we currently do not know about, or that we currently believe to be immaterial, may also impair our business. Certain statements below are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this report.

Risks Relating to Our Business

We have incurred significant losses since our inception. We anticipate that we will continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability.

We are a drug research and development company focused primarily on developing our lead product candidates, PTI-801, PTI-808 and PTI-428 for the treatment of CF, as add-ons to existing standard of care therapies and/or as part of our proprietary combination therapy candidates. We have incurred significant net losses in each year since our inception, including net losses of $59.4 million and $61.8 million for the years ended December 31, 2017 and 2018, respectively. As of December 31, 2018, we had an accumulated deficit of $277.5 million.

To date, we have financed our operations primarily through the sale of equity securities and debt financings. We have devoted most of our financial resources to research and development, including our preclinical and clinical development activities. We have not completed the development of any of our product candidates. We expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future. The size of our losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. In particular, we expect to incur substantial and increased expenses as we:

 

continue the clinical development of our lead product candidates, PTI-801, PTI-808 and PTI-428, including, without limitation, as part of our proprietary combination therapy candidates, for the treatment of CF;

 

seek to obtain regulatory approvals for PTI-801, PTI-428, and our proprietary combination therapy candidates, and our other product candidates;

 

seek cooperation and support from third parties, including clinical investigators, industry experts, therapeutic development networks of patient advocacy groups and clinical research organizations, as we enroll patients in our clinical trials;

 

conduct our ongoing clinical trials and prepare for additional clinical trials and potential commercialization of PTI-801, PTI-428, and potential combination therapies, and our other product candidates;

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scale up contracted manufacturing processes and quantities to conduct our ongoing clinical trials and prepare for additional clinical trials and the commercialization of PTI-801, PTI-428 and potential combination therapies, and our other product candidates for any indications for which we receive regulatory approval;

 

establish outsourcing of the commercial manufacturing of PTI-801, PTI-808 and PTI-428 and our other product candidates for any indications for which we may receive regulatory approval;

 

establish an infrastructure for the sales, marketing and distribution of PTI-801, PTI-428, potential combination therapies, and our other product candidates for any indications for which we may receive regulatory approval;

 

continue to advance our combination therapies as potential treatments for CF in clinical trials;

 

prepare for Phase 3 trials, including, without limitation, trial design, conducting additional preclinical studies, manufacturing Phase 3 drug substance and drug product, producing Phase 2 data and other necessary work to support commencement of Phase 3 trials;

 

expand our research and development activities and advance the discovery and development programs for other product candidates, including, without limitation, preclinical laboratory, animal and other testing and reports and the preparation of investigational new drug filings in the United States, and the equivalent in non-U.S. jurisdictions where we may seek to conduct clinical trials;

 

maintain, expand and protect our intellectual property portfolio;

 

continue our research and development efforts and seek to discover additional product candidates, including back-up candidates to existing product candidates; and

 

add clinical, regulatory, operational, financial and management information systems and personnel, including personnel to support our clinical development and commercialization efforts and operations as a public company.

To become and remain profitable, we must succeed in developing and eventually commercializing products with significant market potential. This will require us to be successful in a range of challenging activities, including discovering product candidates, completing preclinical testing and clinical trials of our product candidates, obtaining and maintaining regulatory approval for these product candidates, and manufacturing, marketing and selling those products. We are in the early stages of these activities.

None of our product candidates has been approved or commercialized. We may never succeed in obtaining regulatory approval for or commercializing any of our product candidates. If our product candidates are not approved or commercialized, if any products that do receive regulatory approvals later show unanticipated properties (for example, unexpected safety issues), or if revenues from any products that do receive regulatory approvals are insufficient, we will not achieve profitability and our business may fail.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

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Our ability to generate future revenues from product sales is uncertain and depends upon our ability to successfully develop, obtain regulatory approval for and commercialize our product candidates, as well as the receipt and/or maintenance of regulatory approval of products and product candidates under development by third parties that our product candidates will or may in the future depend on.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with collaborators, to successfully complete the development of, obtain the necessary regulatory approvals for, and commercialize, a product candidate or candidates. Our several development programs are currently focused on demonstrating their respective clinical benefit for CF patients. If either PTI-801 or PTI-428 is approved, it may be approved for co-administration with ivacaftor and lumacaftor (and/or ivacaftor and tezacaftor). We do not anticipate generating revenues from sales of PTI-801, PTI-428 and our proprietary combination therapy candidates, or any other product candidate for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on:

 

Vertex’s continued compliance with regulatory requirements, the continued commercial availability of ivacaftor and lumacaftor (and ivacaftor and tezacaftor), the reimbursement of their cost to CF patients by insurers and their overall success in the market;

 

the successful regulatory approval and commercial launch of CFTR modulators other than ivacaftor and lumacaftor (and ivacaftor and tezacaftor) that we desire to test for administration with PTI-801, PTI-428 and/or our other product candidates;

 

obtaining favorable results for and advancing the development of PTI-801, PTI-808, PTI-428 our proprietary combination therapy candidates, and our other product candidates, including successfully enrolling patients in and completing our ongoing clinical trials and initiating and completing additional clinical trials;

 

obtaining regulatory approval in the United States of PTI-801, PTI-428, our proprietary combination therapy candidates, and our other product candidates for CF and equivalent foreign regulatory approvals;

 

launching and commercializing PTI-801, PTI-428, our proprietary combination therapy candidates, and our other product candidates, including building a production infrastructure and a sales force, and collaborating with third parties;

 

achieving broad market acceptance of PTI-801, PTI-428, our proprietary combination therapy candidates, and our other product candidates in the medical community and with third-party payors; and

 

generating and advancing through clinical development, a pipeline of product candidates in addition to PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, and next-generation CFTR modulators.

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the data necessary to obtain regulatory approval and achieve product sales. Our anticipated development costs would likely increase if we do not obtain favorable results or if development of any product candidate is delayed. In particular, if we are required by the U.S. Food and Drug Administration, or FDA, and comparable regulatory authorities in other countries to perform studies or trials in addition to those that we currently expect to undertake, we would likely incur higher costs and it will likely take more time than we anticipate. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to predict the timing or amount of any increase in our anticipated development costs.

In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if at all. Even if one or more of our product candidates is approved for commercial sale, we anticipate incurring significant costs in connection with commercialization. As a result, we cannot assure you that we will be able to generate revenues from sales of any approved product candidates, or that we will achieve or maintain profitability even if we do generate sales.

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We will require additional capital to fund our operations, including if our operating plan changes. If we fail to obtain additional capital, we would be forced to delay, reduce or eliminate one or more of our product research and development programs, seek corporate partners for the development of our product development programs or relinquish or license on unfavorable terms our rights to technologies or product candidates.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete. We expect our research and development expenses to substantially increase in connection with our ongoing activities, particularly as we advance our clinical programs for PTI-801, PTI-808, PTI-428 our proprietary combination therapy candidates, and our other product candidates.

Based upon our current operating plan, we believe that our existing cash, cash equivalents and short-term investments of $118.4 million as of December 31, 2018 will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the date that these financial statements are issued. A lthough we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards.  If we are unable to obtain funding, we would be forced to delay, reduce or eliminate one or more of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations.

In addition, should our operating plan change, we will be required to reassess our operating capital needs and there can be no assurance that we will have the cash resources to fund any changed operating plan or that additional funding will be available on terms acceptable to us, if at all. Changing circumstances including those beyond our control may cause us to consume capital more rapidly than we currently anticipate, and we may need additional funds sooner than planned. For example, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expect, or the FDA may require us or we may choose to perform studies or trials in addition to those that we currently anticipate. We may need to raise additional funds to support our ongoing programs for PTI-801, PTI-808 and PTI-428, our proprietary combination therapy candidates, and other clinical candidates, through regulatory approval and commercialization, or if we need or opt to seek to obtain regulatory approval for PTI-801 and/or PTI-428 for administration with drugs other than ivacaftor and lumacaftor, such as ivacaftor and tezacaftor.

Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates, including PTI-801, PTI-808 and PTI-428, and our proprietary combination therapy candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

 

significantly delay, scale back or discontinue the research, development or commercialization of our product candidates, including PTI-801, PTI-808 and PTI-428, our proprietary combination therapy candidates, and our other research or preclinical activities;

 

seek corporate partners for PTI-801, PTI-808 and PTI-428, our proprietary combination therapy candidates, or any of our other product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available; or

 

relinquish, or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves.

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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing our development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects and on our ability to develop our product candidates. In addition, if we are unable to raise capital, we will also need to implement cost reductions, and any failure to effectively do so will harm our business, results of operations and prospects.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates on terms unfavorable to us.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs primarily through the sale of equity securities, debt financings and government and foundation grants. We may also seek to raise capital through third-party collaborations, strategic alliances and similar arrangements. We currently do not have any committed external source of funds.

In order to raise additional funds to support our operations, we may sell additional equity or debt securities, enter into collaborations, strategic alliances, or licensing arrangements or other marketing or distribution arrangements. For example, we have three effective universal shelf registration statements on Form S-3 pursuant to which we registered for sale up to $125.0 million, $100.0 million, and $200.0 million, respectively, of any combination of our common stock, preferred stock, debt securities, warrants, rights, purchase contracts and/or units from time to time and at prices and on terms that we may determine, including up to $50.0 million of our common stock available for issuance pursuant to an at-the-market offering program sales agreement that we entered into with Leerink Partners LLC (“Leerink”) in March 2018.  As of March 8, 2019, an aggregate of approximately $271.2 million of securities remain available for issuance under the three shelf registration statements, including up to approximately $27.6 million of our common stock that we may offer and sell, from time to time, at our discretion, through Leerink as our sales agent under the at-the-market offering program sales agreement.  To the extent that we raise additional capital through the sale of equity or debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. For example, our board of directors has the right to issue previously-authorized shares of preferred stock with such preferences without stockholder approval. Debt financing, if available, may involve the right to convert any such debt into equity on favorable conversion terms, which conversion would dilute existing stockholders’ ownership interest. Any such debt financing would also likely include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring dividends, and will impose limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

If we raise additional funds through collaborations, strategic alliances, or licensing arrangements or other marketing or distribution arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts, or grant others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

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We have a limited operating history, which may make it difficult to evaluate the success of our business to date and to assess our future viability.

We were formed and began operations in December 2006. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights and conducting research and development activities for our product candidates. We have not obtained regulatory approval for any of our product candidates. Consequently, any predictions about our future success, performance or viability may not be as accurate as they could be if we had a longer operating history, more experience with clinical development or approved products on the market.

We might not be able to utilize all or a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.

As of December 31, 2018, we had federal and state net operating loss carryforwards of $252.6 million and $240.1 million, respectively, which begin to expire in 2026 and 2030, respectively. As of December 31, 2018, we also had federal and state research and development tax credit carryforwards of $10.0 million and $3.6 million, respectively, which begin to expire in 2027 and 2026, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not determined if we have experienced Section 382 ownership changes in the past and if a portion of our net operating loss and tax credit carryforwards are subject to an annual limitation under Section 382. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. We have a full valuation allowance against our net deferred tax assets.

In addition, under the Tax Cuts and Jobs Act (the Tax Act), the amount of post 2017 NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. The Tax Act generally eliminates the ability to carry back any NOL to prior taxable years, while allowing post 2017 unused NOLs to be carried forward indefinitely. There is a risk that due to changes under the Tax Act, regulatory changes or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

The failure to maintain our license agreement with Genentech, Inc., or the failure of Genentech, Inc. to perform their obligations under the agreement, could negatively impact our business.

We are currently party to a technology transfer and license agreement with Genentech, Inc. (Genentech), in which we granted Genentech a worldwide, exclusive license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network.  We have limited control over the timing and amount of resources that Genentech will dedicate to this arrangement. In particular, we will not be entitled to receive milestone or royalty payments from Genentech absent further development and eventual commercialization of medicines resulting from this license agreement.

We are subject to a number of other risks associated with our dependence on our license agreement with Genentech, including:

 

Genentech may not comply with applicable regulatory requirements with respect to developing or commercializing products under the license agreement, which could adversely impact development, regulatory approval and eventual commercialization of such products;

 

we and Genentech could disagree as to future development plans and Genentech may delay initiation of clinical trials or stop a future clinical trial;

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there may be disputes between us and Genentech, including disagreements regarding the terms of the license agreement, that may result in the delay of or failure to achieve development, regulatory and commercial objectives that would result in milestone or royalty payments to us, the delay or termination of any future development or commercialization of licensed products using our technology, and/or costly litigation or arbitration that diverts our management’s attention and resources;

 

Genentech may not provide us with timely and accurate information regarding development progress and activities under the license agreement, which could adversely impact our ability to report progress to others, including our investors, and otherwise plan our own development of our product candidates;

 

Genentech may fail to meet expected timelines, which could result in the delay of or failure to achieve development, regulatory and commercial objectives;

 

business combinations or significant changes in Genentech’s business strategy may adversely affect Genentech’s ability or willingness to perform its obligations under the license agreement;

 

our license partners and potential license partners may not properly maintain or defend our intellectual property rights in their licensed fields or territories or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential litigation; and

 

the royalties we are eligible to receive from Genentech may be reduced or eliminated based upon their and our ability to maintain or defend our intellectual property rights.

 

This license agreement is subject to early termination, including through Genentech’s right to terminate without cause upon advance notice to us. If the agreement is terminated early, we may not be able to find another licensee for the technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network, on acceptable terms, or at all, and we may otherwise be unable to pursue continued development on our own for these indications.

Risks Relating to the Development and Regulatory Approval of Our Product Candidates

We depend substantially on the success of our lead product candidates, PTI-801, PTI-808 and PTI-428, which are currently in clinical development. We cannot be certain that we will be able to successfully complete the clinical development of, obtain regulatory approval for, or successfully commercialize PTI-801, PTI-808 and PTI-428.

We currently have no products on the market, and our most advanced product candidates, PTI-801, PTI-808 and PTI-428, are currently in clinical development.

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Our business depends substantially on the successful clinical development, regulatory approval and commercialization of PTI-801, PTI-808 and PTI-428, and they will require substantial additional clinical development and regulatory approval efforts before we are permitted to commence commercialization, if ever. The clinical trials and manufacturing and marketing of PTI-801, PTI-808, and PTI-428 and any other product candidates will be subject to extensive and rigorous review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations, including the pediatric population. This process can take many years and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that PTI-801, PTI-808, PTI-428 or any of our other product candidates will be successfully developed or commercialized .

We also depend on the success of our product candidate PTI-801, which is currently in early clinical development. We cannot be certain that we will be able to successfully complete the clinical development of, obtain regulatory approval for, or successfully commercialize PTI-801.

Our business depends on the successful clinical development, regulatory approval and commercialization of PTI-801, a class of CFTR modulator known as a corrector, and it will require substantial additional clinical development and regulatory approval efforts before we are permitted to commence its commercialization, if ever. The clinical trials and manufacturing and marketing of PTI-801 and any other product candidates will be subject to extensive and rigorous review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations, including the pediatric population. This process can take many years and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that PTI-801 or any of our other product candidates will be successfully developed or commercialized.

We are pursuing a development path for PTI-801 to be administered with other CFTR modulators, as an add-on to existing or future standard of care therapies and/or as part of a proprietary double or triple combination together with PTI-808, or with PTI-428 and PTI-808.  The success of PTI-801 is therefore dependent on the success of our other proprietary agents (alone or in combination with each other), the success of possible future standard of care therapies, and/or continued market acceptance of existing standard of care therapies.  If these agents or standard of care therapies are not successful and available in the market, as the case may be, the development of PTI-801 will be hindered, delayed or not possible to complete or achieve.

We also depend on the success of our proprietary combination therapies, including a double and a triple combination, which are currently in early clinical development. We cannot be certain that we will be able to successfully complete the clinical development of, obtain regulatory approval for, or successfully commercialize these combinations. Combination therapies involve additional complexity and risk that could delay or cause our programs to stall or fail; development of such programs may be more costly, may take longer to achieve regulatory approval and may be associated with unanticipated adverse events.

Our business depends on the successful clinical development, regulatory approval and commercialization of combination therapies, including potential proprietary double and triple combinations that will require substantial additional clinical development and regulatory approval efforts before we are permitted to commence commercialization, if ever. The clinical trials and manufacturing and marketing of these combinations will be subject to extensive and rigorous review and regulation by numerous government authorities in the United States, the European Union and other jurisdictions where we intend to test and, if approved, market them. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical

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testing and clinical trials that the product candidate is safe and effective for use in each target indication, and potentially in specific patient populations, including the pediatric population. This process can take many years and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources beyond the proceeds we have currently raised. Of the large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully complete the FDA or European Medicines Agency, or EMA, regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that our proprietary combination therapies or any of our other product candidates will be successfully developed or commercialized.

Clinical development and commercialization of combination therapies, such as our potential proprietary double and triple combinations, and our PTI-801 and PTI-428 candidates being tested in the clinic with patients taking background standard of care therapies, involve additional complexity and risk, including without limitation, those involving preclinical studies, drug-drug interactions, dose selection, unanticipated adverse events, clinical design and approvals of regulatory bodies and therapeutic development networks of patient advocacy groups. For example, if we or regulatory bodies identify concerns in preclinical combination toxicology studies, we may need to run additional studies before commencing or continuing clinical development. Combination therapy clinical development may also involve more restrictive inclusion criteria based on the profiles of multiple investigational products, which could delay enrollment. We have limited experience developing and commercializing combination therapies and are competing with industry players with greater resources than us. If we are unable to manage the additional complexities and risks of the development and commercialization of combination therapies, our proposed combination program could be delayed, halted or otherwise fail to receive approval.

The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time-consuming and inherently unpredictable. Agency requirements that differ from our assumptions or change can result in delays in starting, conducting and finishing clinical trials that are needed before we can apply for the next phase of development and, if successful, marketing approvals. If we are ultimately unable to obtain regulatory approval for PTI-801, PTI-808, PTI-428, our potential combination therapies, or our other product candidates, our business will be substantially harmed.

We are not permitted to market PTI-801, PTI-808, PTI-428, our potential combination therapies, or any of our other product candidates in the United States or the European Union until we receive approval of a New Drug Application, or NDA, from the FDA or a Marketing Authorization Application, or MAA, from the European Commission, respectively. Prior to submitting an NDA to the FDA or an MAA to the EMA for approval of any of our product candidates for a specific indication, we will need to complete preclinical and toxicology studies, as well as Phase 1, Phase 2 and Phase 3 clinical trials.

Successfully initiating and completing our clinical program and obtaining approval of an NDA or an MAA is a complex, lengthy, expensive and uncertain process, and the FDA, the EMA or other comparable foreign regulatory authorities may delay, limit or deny approval of any of our candidates for many reasons, including, among others:

 

we may not be able to demonstrate that our product candidates are safe and effective to the satisfaction of the FDA or the EMA;

 

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or the EMA for marketing approval;

 

the FDA or the EMA may disagree with the number, design, size, conduct or implementation of our clinical trials or the requirements for or adequacy of the information and data needed to support the next phase of development (including, without limitation, Phase 3) for one or more of our product candidates, such as PTI-801, PTI-428 or our combination therapy candidates;

 

the FDA or the EMA may require that we conduct additional clinical trials or cohorts or run cohorts sequentially, all of which could delay our trial completion timelines;

 

the FDA or the EMA may not approve the formulation, labeling or specifications of PTI-801, PTI-808, PTI-428, or our other product candidates;

 

the clinical research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;

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the FDA or the EMA may find the data from preclinical studies and clinical trials insufficient to demonstrate that PTI-801, PTI-808, PTI-428, our potential combination therapies, and/or our other product candidates’ clinical and other benefits outweigh their safety or other risks, including, without limitation, the potential for drug-drug interaction;

 

the FDA or the EMA may disagree with our interpretation of data from our preclinical studies and clinical trials, including our characterization of observed toxicities;

 

the FDA or the EMA may not accept data generated at our clinical trial sites;

 

if our NDAs or MAAs, if and when submitted, are reviewed by the FDA or the EMA, as applicable, the regulatory agency may have difficulties scheduling the necessary review meetings in a timely manner, may recommend against approval of our application or may recommend that the FDA or the EMA, as applicable, require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

the FDA may require development of a Risk Evaluation and Mitigation Strategy as a condition of approval or post-approval, and the EMA may grant only conditional approval or impose specific obligations as a condition for marketing authorization, or may require us to conduct post-authorization safety studies;

 

the FDA or the EMA may find deficiencies with or not approve the manufacturing processes or facilities of third-party manufacturers with which we contract; or

 

the FDA or the EMA may change their approval policies or adopt new regulations.

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market PTI-801, PTI-808, PTI-428, our potential combination therapies, or any of our other product candidates. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.

In addition to the United States and the European Union, we intend to market our product candidates, if approved, in other international markets. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country-to-country and may require additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDA or EMA approval. In addition, in many countries, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA or the EMA. The regulatory approval process in other international markets may include all of the risks associated with obtaining FDA or EMA approval.

Our lead product candidates, PTI-801 and PTI-428, are designed to be administered with other CF therapies. Developing product candidates for administration with other therapies may lead to unforeseen side effects or failures in our clinical trials that could delay or prevent their regulatory approval or limit the commercial profile of an approved label. Such other therapies could also be removed from or supplanted in the market and result in significant negative consequences.

We are studying our lead product candidates PTI-801 and PTI-428 in clinical trials as a combination therapy with therapies that are approved and commercially available to the patients we plan to enroll in such clinical trials. We are also exploring proprietary combination therapies consisting of combinations of PTI-801 and PTI-808, as a double combination, and PTI-801, PTI-808 and PTI-428, as a triple combination.  We anticipate that if one or more of our product candidates is approved for marketing, it will be approved to be administered only with other therapies. Our development programs and planned studies carry all the risks inherent in drug development activities, including the risk that they will fail to demonstrate meaningful efficacy or acceptable safety. In addition, our development programs are subject to additional regulatory, commercial, manufacturing and other risks because of the use of other therapies in combination with our product candidates. For example, the other therapies may lead to toxicities that are improperly attributed to our product candidates or the combination of our product candidates with

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other therapies may result in toxicities that the product candidate or other therapy does not produce when used alone. As these other therapies are not owned by us, we have less access to and information about them than if they were proprietary agents, which limits our understanding of these products. The other therapies we are using in combination may be removed from the market, or we may not be able to secure adequate quantities of such materials for which we have no guaranteed supply contract, and thus be unavailable for testing or commercial use with any of our approved products. The other therapies we may use in combination with our product candidates may be supplanted in the market by newer, safer and/or more efficacious products or combinations of products. For example, we have or are currently testing PTI- 801 and PTI- 428 in clinical trials where we provide our investigational product to CF patients stable on background therapy of ivacaftor and lumacaftor.  The manufacturer of this background therapy has recently received marketing approval from the FDA to market ivacaftor and tezacaftor as Symdeko®, and is conducting testing of Symdeko’s components together with additional corrector modulators as part of triple combinations, any of which, if approved, could supplant the existing therapy. Symdeko could supplant Orkambi as, or become its own independent, standard of care.  Testing product candidates in combination with other therapies may increase the risk of significant adverse effects or test failures, or impact from drug-drug interactions. The timing, outcome and cost of developing products to be used in combination with other therapies is difficult to predict and dependent on a number of factors that are outside our reasonable control. If we experience safety or toxicity issues in our clinical trials or with any approved products, we may not receive approval to market any products, which could prevent us from ever generating revenues or achieving profitability.

If the data from our existing, ongoing and planned preclinical studies and clinical trials of PTI-801 and PTI-428 each as a combination therapy administered with ivacaftor and lumacaftor and/or as a combination therapy administered with ivacaftor and tezacaftor, and/or as part of a proprietary combination therapy, in each case regarding the safety or efficacy of these combinations are not favorable, the FDA and comparable foreign regulatory authorities may not approve these combination therapies and we may be forced to delay or terminate the development of any of these combination therapies, which would materially harm our business. Further, even if we gain marketing approvals for any of these combination therapies from the FDA and comparable foreign regulatory authorities in a timely manner, we cannot be certain that they will be commercially successful. If the results of the anticipated or actual timing of marketing approvals for these combination therapies, or the market acceptance of these combination therapies, if approved, including treatment reimbursement levels agreed to by third-party payors, do not meet the expectations of investors or public market analysts, the market price of our common stock would likely decline.  Currently, some jurisdictions outside of the United States do not provide reimbursement for all or some of the standard of care therapies included in some of our combination therapies. Government and other third-party payors seek to contain costs of health care through legislative and other means. If they fail to provide coverage and adequate reimbursement rates for these products, it could increase the cost of our trials in such jurisdictions and decrease the possible market for any approved combination therapy that includes these co-administered drugs.

Failures or delays in the commencement, progress or completion of our clinical trials of our product candidates, including PTI-801, PTI-808 and PTI-428, and our proprietary combination therapy candidates, including due to competition from competing trials for CF patients, amended or additional trials or cohorts, lack of sufficient approvals including from the FDA, local regulatory and ethics bodies and those of therapeutic development networks of patient advocacy groups, or trial holds or stoppage due to interim results or safety concerns, could result in increased costs to us and could delay, prevent or limit our ability to generate clinical trial data, advance our product candidates in the clinic, submit an NDA (or foreign equivalent) for any of our product candidates for U.S. or foreign marketing approval, derive revenue and continue our business.

Successful completion of the clinical trials for PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, and our other candidates is a prerequisite to submitting an NDA to the FDA or a MAA to the EMA and, consequently, the ultimate approval and commercial marketing of PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, and our other candidates in the United States and the European Union. Similar prerequisites apply in other foreign jurisdictions and for all of our product candidates in any jurisdiction. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A product candidate can unexpectedly fail at any stage of clinical development. The historical failure rate for product candidates is high due to scientific feasibility, safety, tolerability, toxicology, efficacy, changing standards of medical care and other variables. If the FDA requires us to complete, or we choose to implement, amended or additional studies beyond what we currently expect or assume, or to run additional cohorts or conduct cohorts sequentially, we may be delayed in completing our clinical trials and our expenses will increase. Conducting

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our trials in Europe and other ex-U.S. jurisdictions has and will continue to require IND-equivalent submissions to, and the approval of, local regulatory and ethics bodies, and we cannot assure you we will receive these approvals, or receive them in a timely manner. If therapeutic development networks of CF patient advocacy groups in the United States and/or other jurisdictions such as Europe do not timely sanction or highly rate or score our trials, or prioritize trials of other sponsors over our trials, we may not be able to enroll sufficient patients to conduct our trials at their member sites, or it may take longer to conduct these trials and we may need to look to other jurisdictions where we can more efficiently run our trials.  Many CF clinical trial sites place importance on the review, ranking and sanctioning of therapeutic development networks of CF patient advocacy groups. In the U.S., we believe many sites consider sanctioning from the Protocol Review Committee, or PRC, of the Therapeutic Development Network of the U.S.-based Cystic Fibrosis Foundation, or the TDN, when deciding whether and when to participate in a trial or which trials to prioritize. For example, the TDN deferred sanctioning of PTI-428, which we believe contributed to a delay in our now completed PTI-428 Phase 2 trial. There is also a large number of CF programs in clinical development at this time, including numerous corrector and combination trials from Vertex, including, without limitation, Vertex’s Phase 3 triple combination studies with CF patients on Symdeko therapy taking an additional Vertex investigational corrector, and other companies with greater resources and experience than us.  We face intense competition for eligible CF patients, which has and could continue to hamper our recruitment efforts. We do not know whether all of our clinical trials will begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others :

 

delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

inadequate quantity or quality of or access to a product candidate or other materials, such as combination therapies for co-administration in our trials that are marketed by other firms, necessary to conduct clinical trials;

 

difficulties obtaining institutional review board, or IRB, or ethics committee approval to conduct a clinical trial at a prospective site or sites;

 

challenges in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population, the proximity of patients to clinical sites (including, without limitation, if U.S. trial sites include international subjects coming to the U.S. on a visa), eligibility criteria for the clinical trial, the nature of the clinical trial protocol (including, without limitation, patient factors such as the time commitment involved in the required number of trial-related visits and procedures and the inability to take certain existing therapies during the trial), risks included in the signed informed consent and any new or amended consents required by each study participant, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;

 

unfavorable review of or a decision to defer sanctioning or not to sanction one or more of our clinical trials by the TDN, or the CTN, each of which may not sanction our trials for conduct at prospective trial sites, may change or alter any approval it may grant, or may provide a ranking or revised ranking of an amended protocol that adversely impacts recruitment in our clinical trials compared with other investigational new drugs in CF; while the TDN approved and favorably ranked our triple combination (for PTI-801, PTI-808 and PTI-428), double combination (for PTI-801 and PTI-808 ), PTI-801 protocols as well as our PTI-801 and PTI-428 trials in patients on background Symdeko , we cannot assure you that it will sanction any of our other trials; the CTN has approved and favorably ranked the protocols for our PTI-801, PTI-428 and triple combination trials and we are actively working to continue to expand into Europe with its member sites, subject to regulatory and ethics approvals in local jurisdictions, but we cannot assure you that such expansion will be successful

 

severe or unexpected drug-related side effects experienced by patients in our clinical trials or by individuals using drugs similar to our product candidates;

 

reports from preclinical or clinical testing of other similar therapies that raise safety or efficacy concerns; or

 

difficulties retaining and/or obtaining data from patients who have enrolled in a clinical trial but may be prone to withdraw due to lack of efficacy, side effects, personal issues, loss of interest, difficulty travelling to the trial site or returning for required check-ins, or other factors, some of which are out of our control.

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There are an unprecedented number of CF clinical trials ongoing in the United States and in other countries. As a result of this and other factors described above, the activation of clinical trial sites for our ongoing trials, and securing our target subject enrollment for these clinical trials, has been delayed from what we had originally planned. If we are unable to increase our enrollment, we will not have a substantially complete data set for these trials by our target dates.

We expanded our clinical trial protocols for PTI-801, PTI-808 and PTI-428 to include CF patients. These expansions required protocol amendments to our INDs that are in effect with the FDA and other regulatory authorities, which are subject to comments from the FDA and regulatory authorities where the study is being conducted. We are required to receive IRB and Ethics Committee, or EC, approval for these amended protocols but there is no guarantee that IRBs and ECs of our existing and prospective clinical trial sites will approve these expansions. Any failure or delay in obtaining necessary permissions from the relevant IRBs and ECs to expand our trials may delay their completion and our overall development plan.

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended, placed on clinical hold or terminated by us, the FDA, other regulatory authorities or the IRBs/ECs at the sites where the IRBs/ECs are overseeing a clinical trial, or a data safety monitoring board, or DSMB, may recommend that the sponsor suspend or terminate a trial, due to a number of factors, including, among others:

 

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

 

inspection of the clinical trial operations or trial sites by the FDA, the EMA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;

 

unforeseen safety issues, including any that could be identified in our ongoing toxicology studies, adverse side effects or lack of effectiveness, including as part of ambiguous or negative interim results;

 

changes in government regulations or administrative actions;

 

problems with clinical supply materials; and

 

lack of adequate funding to continue the clinical trial.

Positive results from preclinical or in vitro and in vivo testing of PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, or our other candidates are not necessarily predictive of the results of our ongoing and future clinical trials of these candidates. If we cannot achieve positive results in our clinical trials for PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, or our other candidates, we may be unable to successfully develop, obtain regulatory approval for and commercialize PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, or our other candidates.

Positive results from our preclinical testing of PTI-801, PTI-808, PTI-428, our proprietary combination therapy candidates, and our other candidates in vitro and in vivo may not necessarily be predictive of the results from our clinical trials in humans (including, without limitation, as part of any predicted correlation between in vitro CFTR protein activity as measured by an Ussing Chamber Assay and lung function improvement measured by FEV 1 improvement in clinical trials). Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical trials after achieving positive results in preclinical in vitro and in vivo studies, and we, or the third parties whose drug candidates we expect to be co-administered with PTI-801 and PTI-428, may face similar setbacks. For example, CFTR mRNA levels in target tissues of rats and monkeys exposed to PTI-428 were observed to increase proportionally with exposure to PTI-428. Additionally, preliminary exploratory biomarker nasal CFTR mRNA and protein data from the SAD and MAD cohorts in our Phase 1 clinical trial for PTI-428 in healthy volunteers confirm target engagement. However, later clinical trials may not show that this biomarker is predictive of clinical efficacy or we may not be able to successfully obtain sufficient biomarker data to analyze. Preclinical and clinical data are often susceptible to varying interpretations and analyses, and the FDA or other regulatory agencies may require changes to our protocols or other aspects of our clinical trials or require additional studies. Additionally, many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval. If we fail to produce positive results in our clinical trials of one or more of our product candidates, the development timeline and regulatory approval and commercialization prospects for those product candidates, and, correspondingly, our business and financial prospects, would be materially adversely affected.  These risks could also impair our ability to successfully commence, progress or complete studies of our proprietary combination therapy candidates.

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Even if we obtain positive clinical results for PTI-801 or PTI-428 or our proprietary combination therapy candidates in early-stage clinical trials (including, without limitation, those involving a relatively short duration in a small number of subjects, with the publication of interim, initial, preliminary or final results), those positive results may not be repeated in later-stage clinical trials.  

Before obtaining regulatory approval for the sale of our product candidates, including PTI-801, PTI-428, and any proprietary combination therapy candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Successful completion of such clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of PTI-801 and PTI-428 and any proprietary combination therapy candidates in the United States. Similar requirements apply in the European Union and other foreign jurisdictions. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and preliminary, initial or interim results of a clinical trial do not necessarily predict final results. Our current CF trials involve relatively short duration in a small number of patients, resulting in limited data sets. From time to time, we may publish or report interim, initial or preliminary data from our clinical trials. Interim, initial or preliminary data from clinical trials that we may conduct may not be indicative of the final results of the trial and are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Interim, initial or preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the interim, initial or preliminary data. We may also experience delays in analyzing or an inability to analyze samples, including, without limitation, biomarker data, due to insufficient sample size, errors in collection procedures at one or more sites, or other factors. As a result, interim, initial or preliminary data should be viewed with caution until the final data are available.  

Negative or inconclusive results of our clinical trials of PTI-801 or PTI-428, any proprietary combination therapy candidates, or any other clinical trials we conduct, could mandate repeated or additional clinical studies. We do not know whether our clinical trials of any product candidate will demonstrate adequate efficacy and safety to result in regulatory approval to market such product candidate. Even if early-stage clinical results are favorable, if later-stage clinical trials (including, without limitation, those for longer duration with greater numbers of patients) do not produce favorable results, our ability to obtain regulatory approval for our product candidates, including PTI-801 and PTI-428, and any proprietary combination therapy candidates, may be adversely impacted.

Our product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. It is possible that, during the course of the development of PTI-801, PTI-428, our proprietary combination therapy candidates, or our other product candidates, results of our studies and clinical trials could reveal an unacceptable severity and prevalence of side effects and/or drug-drug interactions. For example, in preclinical testing of PTI-428 we observed reduced platelet counts in the animals we tested following administration at doses in excess of the doses we expect to administer in our clinical trials. As a result of this or any other side effects, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development, or deny approval, of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims or result in delays in the trials due to requirements to provide new informed consents to patients to disclose new or changed risks or side effects.  Even if approved for marketing, our product candidates could face label restrictions based on the above factors or others.

Additionally, if one or more of our product candidates receive marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:

 

regulatory authorities may withdraw approvals of such product or impose restrictions on its distribution in a form of a modified Risk Evaluation and Mitigation Strategy;

 

regulatory authorities may require additional labeling, such as warnings or contraindications;

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we may be required to change the way the product is administered or to conduct additional clinical studies;

 

we could be sued and held liable for harm caused to patients; and

 

our reputation may suffer.

Any of these events could delay or prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations and prospects.

If we cannot demonstrate an acceptable safety and toxicity profile for our product candidates in our clinical studies, we will not be able to continue our clinical trials or obtain approval for our product candidates.

In order to obtain approval of a product candidate, we must demonstrate safety in various nonclinical and clinical tests. At the time of initiating human clinical trials, we may not have conducted or may not conduct the types of nonclinical testing ultimately required by regulatory authorities, or future nonclinical tests may indicate that our product candidates are not safe for use. Nonclinical testing and clinical testing are both expensive and time-consuming and have uncertain outcomes. For example, results of an earlier laboratory study of PTI-130, a former amplifier candidate, in non-rodent species suggested potential hematologic and reproductive toxicology issues that we believe are specific to the non-rodent species. We cannot predict whether future safety and toxicology studies may produce these same problems or cause other undesirable effects. We also observed certain undesired hematological (including reduced platelet count) side effects in animals dosed at levels of PTI-428 that are higher than those intended for our clinical studies. We plan to complete additional toxicity studies of reproductive toxicity, carcinogenicity and long-term side effects prior to or concurrent with any Phase 3 clinical trials of our product candidates, and we cannot exclude the possible occurrence of these or other side effects in future nonclinical or clinical studies. In addition, success in initial tests does not ensure that later testing will be successful. We may experience numerous unforeseen events during, or as a result of, the testing process, which could delay or prevent our ability to develop or commercialize our product candidates, including:

 

our preclinical and nonclinical testing may produce inconclusive or negative safety results, which may require us to conduct additional nonclinical testing or to abandon product candidates;

 

our product candidates may have unfavorable pharmacology or toxicity characteristics or suggest possible drug-drug interaction;

 

our product candidates may cause undesirable side effects; and

 

the FDA or other regulatory authorities may determine that additional safety testing is required.

Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

PTI-428 is based on a novel technology, which may raise development issues we may not be able to resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able to develop our product candidates.

Our product candidate PTI-428 is based on our novel amplifier technology. We are not aware of other drugs that work in a manner that we believe our amplifier technology does. We cannot assure you that development problems related to our novel technology will not arise in the future that could cause significant delays or that we are not able to resolve.

Clinical development and regulatory approval of novel product candidates such as ours can be more expensive and take longer than other, more well-known or extensively studied pharmaceutical product candidates due to our, investigators’ and regulatory agencies’ lack of experience with them. These factors also apply to patient advocacy groups and sanctioning by their affiliated therapeutic development center arms, such as the TDN. To our knowledge, there are no other amplifiers in clinical development and none have been approved to date. The novelty of our technology may lengthen the clinical development timeline and regulatory review process, require us to conduct

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additional studies or clinical trials, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. For example, the FDA could require additional studies or characterization that may be difficult or impossible to perform.

In addition, if we are unable to hire and retain the necessary personnel, the rate and success at which we can develop and commercialize product candidates will be limited. Any such events would increase our costs and could delay or prevent our ability to commercialize our product candidates, which could adversely impact our business, financial condition and results of operations.

Even if we meet safety and efficacy endpoints in clinical trials, we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates and we cannot, therefore, predict the timing of any future revenue from PTI-801, PTI-428, our proprietary combination therapy candidates or any of our other product candidates.

We cannot commercialize our product candidates, including PTI-801, PTI-428, and our proprietary combination therapy candidates, until the appropriate regulatory authorities, such as the FDA, have reviewed and approved the product candidate. The regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval for PTI-801, PTI-428, proprietary combination therapy candidates, or our other product candidates at all. Additional delays may result if PTI-801, PTI-428, proprietary combination therapy candidates, or any other product candidate is brought before an FDA advisory committee or an analogous foreign body, which could recommend restrictions on approval or recommend non-approval of the product candidate. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical studies and the review process. As a result, we cannot predict when, if at all, we will receive any future revenue from commercialization of any of our product candidates, including PTI-801, PTI-428, and proprietary combination therapy candidates.

Even if we obtain regulatory approval for PTI-801, PTI-428, our proprietary combination therapy candidates and/or our other product candidates, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if we obtain regulatory approval in the United States, the FDA may still impose significant restrictions on the indicated uses or marketing of our product candidates, including PTI-801 and PTI-428 and our proprietary combination therapy candidates, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance, including Phase 4 clinical trials. For example, the labeling, if approved for our product candidates, including PTI-801 and PTI-428 and our proprietary combination therapy candidates, will likely include restrictions on use due to the specific patient population and manner of use in which the drug was evaluated and the safety and efficacy data obtained in those evaluations.  

PTI-801, PTI-428, our proprietary combination therapy candidates and our other product candidates will also be subject to additional ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report adverse events and any failure of a product to meet the specifications described in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practice, or cGMP, requirements and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously unknown problems with a product, such as quality issues or adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requesting a recall or requiring withdrawal of the product from the market or suspension of manufacturing.

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If we fail to comply with applicable regulatory requirements following approval of our product candidate, a regulatory agency may:

 

issue an untitled or warning letter asserting that we are in violation of the law;

 

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 a pending NDA or supplements to an NDA submitted by us; or

 

request a recall and/or seize product.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize PTI-801, PTI-428, our proprietary combination therapy candidates and our other product candidates and inhibit our ability to generate revenues.

Even if we obtain FDA approval for PTI-801, PTI-428, our proprietary combination therapy candidates or any of our other product candidates in the United States, we may never obtain approval for or commercialize PTI-801, PTI-428, our proprietary combination therapy candidates or any of our other product candidates outside of the United States, which would limit our ability to realize their full market potential.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements on a country-by-country basis regarding safety and efficacy. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates in those countries. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our product candidates will be unrealized.

If we are not able to obtain orphan product status for PTI-801, PTI-808 or other current product candidates (or maintain orphan drug designation for PTI-428) or obtain such status for future product candidates for which we seek this status, we will not be able to claim the tax credits for our clinical trials of such products provided by this status or potentially take advantage of other benefits of orphan drug status.

Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a disease or condition that fewer than 200,000 individuals in the United States have been diagnosed as having at the time of the submission of the request for orphan drug designation. Under Regulation No. (EC) 141/2000 on Orphan Medicinal Products, a medicinal product may be designated as an orphan medicinal product if, among other things, it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 people in the European Union when the application is made. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of market exclusivity. This exclusivity precludes the EMA or the FDA, as applicable, from approving another marketing application for the same or, in the European Union, a similar drug for the same indication for that time period, unless, among other things, the later product is clinically superior. The exclusivity period is seven years in the United States and ten years in the European Union following marketing approval. The EU exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation, for example if the drug is sufficiently profitable so that market exclusivity is no longer justified.

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In the United States, orphan drug exclusivity may be lost if the FDA withdraws or revokes the orphan-drug designation as permitted by law, we withdraw the marketing application for the drug, we consent to another’s marketing application for approval of the same use or indication as the designated orphan drug, or we fail to assure a sufficient quantity of the drug as required by law. Similarly, in the European Union, exclusivity may be lost if we request the removal of the orphan-drug designation or the drug no longer meets any of the criteria that made it eligible for orphan-drug status at the outset. Even after an orphan drug is approved, the same or, in the European Union, a similar drug can subsequently be approved for the same condition if the competent regulatory agency concludes that the later drug is clinically superior to the original orphan drug by providing a significant therapeutic advantage over and above that drug .

If we do not obtain orphan drug exclusivity or if our competitors obtain orphan drug exclusivity for other rare diseases or conditions we are targeting before we do, we may be delayed in obtaining marketing authorization or we may lose out on the potential benefits of market exclusivity associated with the orphan drug designation. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee. If we do not obtain orphan designation for PTI-801 or our other product candidates (and maintain such designation as to PTI-428), we will lose out on such benefits associated with orphan designation.

Use of social media platforms presents new risks.

Social media increasingly is being used to communicate about our product candidates and the diseases our therapies are designed to treat. We believe that members of the CF community may be more active on social media as compared to other patient populations. Social media practices in the pharmaceutical and biotechnology industries are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to our business. For example, patients may use social media platforms to comment on the effectiveness of, or adverse experiences with, a drug candidate, which could result in reporting obligations. In addition, there is a risk of inappropriate disclosure of sensitive information or negative or inaccurate posts or comments about us on any social networking website. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face restrictive regulatory actions or incur other harm to our business.

Risks Relating to Our Dependence on Third Parties

If third parties on which we depend to conduct our preclinical studies or any ongoing or future clinical trials do not perform as contractually required, fail to satisfy regulatory or legal requirements or miss expected deadlines, our development program could be delayed with materially adverse effects on our business and prospects.

We rely on clinical research organizations, clinical data management organizations and consultants, collectively referred to as CROs, to design, conduct, supervise and monitor preclinical and clinical studies of our product candidates and plan to do the same for our ongoing and future clinical trials for PTI-801, PTI-808, PTI-428, proprietary combination therapy candidates and any other clinical trials. We and our CROs are required to comply with various regulations, including Good Clinical Practice, or GCP, requirements, which are enforced by the FDA, and guidelines of the Competent Authorities of the Member States of the European Economic Area, and comparable foreign regulatory authorities to ensure that the health, safety and rights of patients are protected in clinical development and clinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance with these requirements through periodic inspections of trial sponsors, principal investigators and trial sites, as well as third party contractors. If we or any of our CROs fail to comply with applicable requirements, or the CRO does not perform its contractually required obligations (or makes errors or mistakes), the clinical data, including, without limitation, biomarker data, generated in our clinical trials may not be collected or may be collected but be deemed unreliable, and the FDA, the EMA or other comparable foreign regulatory authorities may require us (or we may choose ourselves) to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with such requirements. In addition, our clinical trials must be conducted with products produced under cGMP requirements, which mandate the methods, facilities and controls used in manufacturing, processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require us to delay or repeat preclinical and clinical trials, which would delay the regulatory approval process.

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Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs. We generally represent a small percentage of these firms’ overall business, which could limit our ability to receive priority allocation of their resources. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed .

We also rely on clinical investigators and clinical research organizations, as well as therapeutics development arms of patient advocacy groups, such as the TDN and CTN, to assist in the design and review of our clinical trials, including supporting the enrollment of qualified patients.  If these third parties do not approve or sanction our trial protocols to facilitate enrollment, our ability to conduct clinical trials may be impeded.  Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated or inadvertently be made publicly-available. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely affected. Though we carefully manage our relationships with our CROs, and other third parties, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

If we cannot contract with acceptable third parties on commercially reasonable terms, or at all, or if these third parties do not carry out their contractual duties, satisfy legal and regulatory requirements for the conduct of preclinical studies or clinical trials or meet expected deadlines, our clinical development programs could be delayed and otherwise adversely affected. In all events, we are responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. The FDA and the EMA require clinical trials to be conducted in accordance with GCP, including for conducting, recording and reporting the results of preclinical studies and clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Any such event could have a material adverse effect on our business, financial condition, results of operations and prospects.

We rely on third-party manufacturers and suppliers and we intend to rely on third parties to produce preclinical, clinical and commercial supplies of PTI-801, PTI-808, PTI-428 and any future product candidates. These third parties may not perform as contractually required or expected and issues may arise that could delay the commencement or completion of clinical trials.

We rely on third parties to supply the materials and components for our research and development, preclinical and clinical trial supplies. We do not own manufacturing facilities or supply sources for such components and materials. There can be no assurance that our supply of research and development, preclinical and clinical development drugs and other materials will not be limited, interrupted, restricted in certain geographic regions or of satisfactory quality or continue to be available at acceptable prices. Any replacement of these third parties could require significant effort and expertise because there may be a limited number of qualified replacements.

The manufacturing process for a product candidate is subject to FDA, EMA and other foreign regulatory authority review. Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required by regulatory authorities to comply with regulatory standards such as cGMP. In the event that any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, our regulatory filings may be delayed, our preclinical studies or clinical trials may be delayed or suspended, and we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party,

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which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills or technology to another third party and a feasible alternative may not exist; even if it exists, it may be cost-prohibitive and time-prohibitive to engage in technology transfer to switch vendors for drug substance and/or product candidate manufacturing. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our drug substance and/or product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.  Drug formulation is an inherently uncertain process with numerous steps, some of which may need to be repeated, to ensure quality, accuracy and yield; unexpected variances may occur, which could delay our manufacturing efforts and delay commencement or completion of preclinical studies and/or clinical trials .

We expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize our product candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number of ways, including:

 

preventing us from initiating or continuing preclinical studies or clinical trials of product candidates under development;

 

delaying our trials and/or delaying submissions of regulatory applications or receipt of regulatory approvals for product candidates;

 

preventing a collaborator from cooperating with us;

 

subjecting our product candidates to additional inspections by regulatory authorities;

 

requiring us to cease distribution or to recall batches of our product candidates; and

 

in the event of approval to market and commercialize a product candidate, preventing us from meeting commercial demands for our products.

If a current or future collaborative partner terminates or fails to perform its obligations under an agreement with us, or if research does not produce viable lead candidates or meet specified criteria during the applicable research term, the development and commercialization of the product candidates could be delayed or terminated.

If our collaborative partner does not devote sufficient time and resources to a collaboration arrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be materially adversely affected.

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Much of the potential revenue from our collaboration consists of contingent payments, such as payments for achieving scientific or regulatory milestones or royalties payable on sales of drugs. The milestone and royalty revenue that we may receive under collaborations will depend upon our collaborators’ ability to successfully develop, introduce, market and sell new products. Our collaboration partners may fail to develop or effectively commercialize their products using our products or technologies or otherwise discontinue their research activities because they :

 

exercise their unilateral right to terminate the collaboration agreement, which, for example, our former collaboration partner, Biogen, did in December 2016, including, without limitation, if research does not produce a viable lead candidate or meet specified criteria during the applicable research term;

 

decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite expertise, limited cash resources or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining marketing approval or may potentially generate a greater return on investment;

 

decide to pursue other technologies or develop other product candidates, either on their own or in collaboration with others, including our competitors, to treat the same diseases targeted by our own collaborative programs;

 

do not have sufficient resources necessary to carry the product candidate through clinical development, marketing approval and commercialization; or

 

cannot obtain the necessary marketing approvals.

Competition may negatively impact a partner’s focus on and commitment to our relationship and, as a result, could delay or otherwise negatively affect the commercialization of our products, which would have a material adverse effect on our operating results and financial condition. Terminated collaborations include the risk that the former partner maintains rights to exploit certain co-developed technology, and the risk that, to the extent the program is desired to continue, funding formerly provided by the partner will need to come from alternative sources such as us or a new partner and such funding may not be available on terms acceptable to us, if at all.  These factors can cause a delay or abandonment of technology programs and could negatively affect commercialization of our products, which would have a material adverse effect on our operating results and financial condition.

We face a number of challenges in seeking future collaborations. Collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors, such as the design or results of our clinical trials, the potential market for our product candidates, the costs and complexities of manufacturing and delivering our product candidates to patients, the potential of competing products, the existence of uncertainty with respect to ownership or the coverage of our intellectual property, and industry and market conditions generally. If we determine that additional collaborations for our product candidates are necessary and are unable to enter into such collaborations on acceptable terms, we might elect to delay or scale back the development or commercialization of our product candidates in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner, or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. If a current or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be delayed, diminished or terminated.

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Risks Relating to Commercialization of Our Product Candidates

The commercial success of PTI-801, PTI-428, any proprietary combination therapy candidates and our other product candidates will depend upon the acceptance of those products, if approved, by the medical community, including physicians, patients and health care payors.

Even if PTI-801, PTI-428, any proprietary combination therapy candidates or our other product candidates are approved for sale, they may not achieve sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. If these product candidates, if approved, do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any of our product candidates, including PTI-801 and PTI-428 and any proprietary combination therapy candidates, will depend on a number of factors, including:

 

demonstration of safety and efficacy in our clinical trials and in any post-marketing studies;

 

the relative convenience, ease of administration and acceptance by physicians, patients and health care payors;

 

the prevalence and severity of any adverse effects;

 

limitations or warnings contained in the FDA-approved label for the relevant product candidate;

 

availability of alternative treatments;

 

pricing and cost-effectiveness;

 

the effectiveness of our or any future collaborators’ sales and marketing strategies; and

 

our ability to obtain and maintain healthcare payor approval or reimbursement, which may vary from country to country and within a country.

If any of our product candidates, including PTI-801 and PTI-428 and any proprietary combination therapy candidates, is approved but does not achieve an adequate level of acceptance by physicians, patients and health care payors, we may not generate sufficient revenue and we may not become or remain profitable.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we may not be successful in commercializing our product candidates if and when they are approved.

We do not have a sales or marketing infrastructure, and we have limited experience in the sales, marketing or distribution of pharmaceutical products. Our commercialization strategy will target key prescribing physicians and advocacy groups, as well as provide patients with support programs, and seek to ensure product access and secure reimbursement. Outside of the United States, Canada, Europe and Australia, we may seek a partner to commercialize our products. In the future, we may choose to build a focused sales and marketing infrastructure to market or co-promote our product candidates if and when they are approved, which would be expensive and time-consuming. Alternatively, we may elect to outsource these functions to third parties. Either approach carries significant risks. For example, recruiting and training a sales force is expensive and time-consuming and, if done improperly, could delay a product launch and result in limited sales. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

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Factors that may inhibit our efforts to commercialize our product candidates on our own include:

 

inability to recruit, manage and retain adequate numbers of effective sales and marketing personnel;

 

the inability of marketing personnel to develop effective marketing materials;

 

the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;

 

the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 

unforeseen costs and expenses associated with creating an independent sales and marketing organization.

We may also not be successful in entering into additional arrangements with third parties to sell and market our product candidates or doing so on terms that are favorable to us. Even if we do enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product candidates are likely to be lower than if we were to market and sell our products ourselves. In addition, we likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

If our competitors develop technologies or product candidates more rapidly than we do or their technologies are more effective, our ability to develop and successfully commercialize our products may be adversely affected. Competitive products for treatment of CF may reduce or eliminate the commercial opportunity for our product candidates.

The clinical and commercial landscape for CF is highly competitive and subject to rapid and significant technological change. New data from clinical-stage products continue to emerge. It is possible that these data may alter the current standard of care, completely precluding us from further developing PTI-801, PTI-428, our proprietary combination therapy candidates or our other product candidates for CF. Further, it is possible that we may advance our clinical trials only to find that data from competing products make it impossible for us to complete enrollment in these trials, resulting in our inability to file for marketing approval with regulatory agencies. Even if PTI-801, PTI-428, proprietary combination therapy candidates or our other product candidates are approved for marketing, they may have limited sales due to particularly intense competition in the CF market.

Competitive therapeutic treatments include those that are currently in development and any new treatments that enter the market. We believe that a significant number of products are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop product candidates. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. Examples include Vertex, AbbVie Inc., Galapagos NV, ProQR Therapeutics N.V., Flatley Discovery Lab, LLC, F. Hoffmann-LaRoche Ltd., Novartis AG, Gilead Sciences, Inc., Laurent Pharmaceuticals Inc., Pfizer Inc., AstraZeneca, Translate Bio Inc., Sanofi Genzyme, Bayer AG, Corbus Pharmaceuticals Holdings, Inc., Eloxx Pharmaceuticals, Verona Pharma plc, Spyryx Biosciences Inc., Talee Bio, and several other companies.

Although PTI-801 and PTI-428 are being developed as individual therapies to be administered with ivacaftor and lumacaftor, Vertex or other competitors could develop other drugs or combinations that may obviate the applicability of PTI-801 and PTI-428. Changes in standard of care or use patterns could also make our combination therapy obsolete. For example, Vertex has developed tezacaftor and ivacaftor as a combination therapy on its own and was recently granted marketing approval for this combination under the name Symdeko.  While we are conducting studies of PTI-801 and PTI-428, each to be administered with ivacaftor and tezacaftor, Vertex is also in clinical development and is in Phase 3 for several combinations of ivacaftor and tezacaftor as part of potential triple combination therapies that add an additional Vertex corrector to that combination. If PTI-801 or PTI-428 is approved for marketing as a combination therapy to be administered with ivacaftor and lumacaftor but use of another therapy becomes more prevalent than ivacaftor and lumacaftor, the availability of ivacaftor and lumacaftor may be limited, sales of PTI-801 or PTI-428 could be negatively impacted and our financial results and stock price

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would be adversely affected.  Additionally, if one or more of Vertex’s triple combinations is approved for marketing and becomes prevalent, the availability of ivacaftor and tezacaftor alone may be limited, sales of our products, if approved, could be negatively impacted and our financial results and stock price would be adversely affected .

Many of our competitors have greater financial, technical, manufacturing, clinical development, marketing, sales and supply resources, technical and human resources or experience than us and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of product candidates and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA and other regulatory approvals for therapies and achieving widespread market acceptance. Our competitors’ products may be more effective, or more effectively marketed and sold, than any product candidate we may commercialize and may render our therapies obsolete or non-competitive before we can recover development and commercialization expenses.

If we successfully obtain approval for any product candidate, we will face competition based on many different factors, including the efficacy, safety and tolerability of our products, the ease with which our products can be administered,  the extent to which physicians and patients accept combination therapies and, for PTI-428, new classes of modulators, the timing and scope of regulatory approvals for these products, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage and patent position. Competing products could present superior treatment alternatives, including being more effective, safer, or less expensive, or could be marketed and sold more effectively than any products we may develop. Competitive products may make any products we develop, or products with which we are approved for use in combination, obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. Such competitors could also recruit our employees, which could negatively impact our level of expertise and our ability to execute our business plan. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a small number of competitors.

We also compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. For example, actual or perceived risks of our product candidates, such as PTI-428, PTI 801, or our proprietary combination therapy candidates, or actual or perceived benefits of product candidates of our competitors, may negatively affect potential clinical trial participants or patients when deciding whether to participate in our clinical trials, and could result in patients seeking alternative clinical trials or commercial therapies from our competitors. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market. Further, research and discoveries by others may result in breakthroughs that render our product candidates obsolete even before they begin to generate any revenue.

In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of any of our product candidates that receive marketing approval. If the FDA approves the commercial sale of any of our product candidates, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect competition among products will be based on product efficacy and safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities, product price, reimbursement coverage by government and private third-party payors, and patent position. Our profitability and financial position will suffer if we cannot compete effectively in the marketplace, even if our products receive regulatory approval.

Payor approval and reimbursement may not be available for PTI-801, PTI-428, any proprietary combination therapy candidates and our other product candidates, or third party therapies taken with our drugs, which could make it difficult or impossible for us to sell our products profitably.

Market acceptance and sales of PTI-801 or PTI-428, any proprietary combination therapy candidates, or any other product candidates that we develop, will depend in part on the extent to which reimbursement for these products and related third party treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third-party payors, such as private health insurers, health maintenance organizations and pharmacy benefit management organizations, decide which medications they will pay for, at what tier level and establish reimbursement levels. A primary trend in the United States healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications.

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Increasingly, third-party payors are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Even if we are successful in gaining reimbursement in one country, that does not mean we will achieve reimbursement at the same levels or at all in any other country. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. Obtaining reimbursement for our products may be particularly difficult because of the higher prices often associated with products administered under the supervision of a physician. Reimbursement levels may be impacted by factors including, without limitation, the perceived safety and efficacy of our products relative to the cost (and relative to the perceived safety and efficacy and cost for available competitive products), the views of independent research organizations on drug pricing and the political climate, many of which factors we cannot control.  Also, reimbursement amounts may reduce the demand for, or the price of, our products. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize PTI- 801 , PTI- 428 , any proprietary combination therapy candidates, or any other product candidates that we develop. We will also be required to establish systems and programs that assist patients in determining the reimbursement level and in some instances establishing patient economic support programs to alleviate the economic burden of co-pays and/or co-insurance. These patient support programs are complex, costly and require knowledge and expertise that we currently do not possess .

There have been a number of legislative and regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell any future products profitably. These legislative and regulatory changes may negatively impact the reimbursement for any future products, following approval. The availability of generic treatments may also substantially reduce the likelihood of reimbursement for any future products, including PTI-801 and PTI-428 or any proprietary combination therapy candidates. The application of user fees to generic drug products will likely expedite the approval of additional generic drug treatments. We expect to experience pricing pressures in connection with the sale of PTI-801, PTI-428, any proprietary combination therapy candidates, and any other product candidate that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes.

In addition, there may be significant delays in obtaining reimbursement for approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or regulatory authorities in other countries. Moreover, eligibility for reimbursement does not imply that any product will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Payment rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for lower cost products that are already reimbursed, and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of products from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, however reimbursement and levels of reimbursement may also vary within a country based on the individual decisions of private payors.

Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any of our product candidates, including PTI-801 and PTI-428 and any proprietary combination therapy candidates, could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

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We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success .

The success of our business depends primarily on our ability to identify, develop and commercialize product candidates. Because we have limited financial and managerial resources, we focus on research programs and product candidates for the indications that take advantage of our deep expertise and knowledge and that we believe are the most scientifically and commercially promising. Our resource allocation decisions may cause us to fail to capitalize on viable scientific or commercial products or profitable market opportunities. In addition, we may spend valuable time and managerial and financial resources on research programs and product candidates for specific indications that ultimately do not yield any scientifically or commercially viable products. If we do not accurately evaluate the scientific and commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in situations where it would have been more advantageous for us to retain sole rights to development and commercialization.

Risks Relating to Regulation of Our Industry

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and health information privacy and security laws. Some of these laws were recently amended, and their interpretation following such amendments remains unclear. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly, or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal anti-kickback statute. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

the federal anti-kickback statute which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid;

 

the federal false claims laws and civil monetary penalties, including civil whistleblower or qui tam actions, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;

 

the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which, among other things, imposes criminal liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statement using or making any false or fraudulent document, in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, and as amended by the final HIPAA omnibus rule, Modifications to the HIPAA Privacy, Security, Enforcement, and Breach Notification Rules Under HITECH and the Genetic Information Nondiscrimination Act; Other Modifications to HIPAA, published in January 2013, which imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without appropriate authorization by entities subject to the rule, such as health plans, clearinghouses and healthcare providers;

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the Federal Food, Drug, and Cosmetic Act, or FDCA, which prohibits, among other things, the distribution of adulterated or misbranded drugs or medical devices;

 

the federal Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively referred to herein as the Affordable Care Act, or the ACA, and its implementing regulations, which requires certain manufacturers of drugs, devices, biologicals and medical supplies to report to the Centers for Medicare and Medicaid Services information related to payments and other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value, or ownership or investment interests that are not reported; and

 

analogous state laws and regulations, including: state anti-kickback and false claims laws, which may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by state governmental and non-governmental third-party payors, including private insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; and state laws and regulations that require manufacturers to file reports relating to pricing and marketing information, which requires tracking gifts and other remuneration and items of value provided to healthcare professionals and entities.

Further, the ACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity can now be found guilty of fraud or false claims under ACA without actual knowledge of the statute or specific intent to violate it. In addition, ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from Medicare, Medicaid and other government programs and forfeiture of amounts collected in violation of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.

In addition, regulators globally are also imposing greater monetary fines for privacy violations. For example, in 2016, the E.U. adopted a new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR applies to any company established in the E.U. as well as to those outside the E.U. if they collect and use personal data in connection with the offering goods or services to individuals in the E.U. or the monitoring of their behavior.  The GDPR enhances data protection obligations for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements and onerous new obligations on services providers. Non-compliance with the GDPR may result in monetary penalties of up to €20 million or 4% of worldwide revenue, whichever is higher. The GDPR and other changes in laws or regulations associated with the enhanced protection of certain types of personal data, such as healthcare data or other sensitive information, could greatly increase our cost of providing our products and services or even prevent us from offering certain services in jurisdictions that we operate in.

In addition, there has been a trend of increased state regulation of payments made to physicians for marketing. Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking and reporting of gifts, compensation, and other remuneration to physicians.

The scope and enforcement of these laws is uncertain and subject to change in the current environment of health care reform, especially in light of the lack of applicable precedent and regulations. Such changes are impossible to predict. It is possible that some of our business activities could be subject to challenge by federal or state regulatory authorities under one or more of these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations, and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming, and could have a material adverse effect on our business, financial condition and results of operations.

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Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we have established, comply with federal and state health-care fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.

Health care reform measures could adversely affect our business.

In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs. The ACA, which includes measures to significantly change the way health care is financed by both governmental and private insurers, was enacted in March 2010. Among the provisions of the ACA of greatest importance to the pharmaceutical and biotechnology industry are the following:

 

an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic products, apportioned among these entities according to their market share in certain government healthcare programs;

 

new requirements to report certain financial arrangements with physicians and teaching hospitals, including reporting any “transfer of value” made or distributed to physicians and teaching hospitals and reporting any ownership interests held by physicians and their immediate family members;

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and

 

establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

At this time, the full effect that the ACA would have on our business remains unclear. As a result of the 2016 election in the United States, there is great political uncertainty concerning the fate of the ACA and other healthcare laws. Legislation has been drafted to repeal and replace parts of the ACA, but it is uncertain when a bill would be passed and what any replacement law would encompass. We cannot predict any initiatives that may be adopted in the future.

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Individual states have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and designed to encourage importation from other countries and bulk purchasing. Legally mandated price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce ultimate demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects .

In addition, given recent federal and state government initiatives directed at lowering the total cost of healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While we cannot predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to generate revenues. Increases in importation or re-importation of pharmaceutical products from foreign countries into the United States could put competitive pressure on our ability to profitably price our products, which, in turn, could adversely affect our business, results of operations, financial condition and prospects. We might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we generate from our product sales. It is also possible that other legislative proposals having similar effects will be adopted.

Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety and efficacy can change over time and can be affected by many factors, such as the emergence of new information, including on other products, changing policies and agency funding, staffing and leadership. We cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our business prospects. For example, average review times at the FDA for marketing approval applications can be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy changes.

The Referendum of the United Kingdom’s Membership of the European Union creates uncertainty and could negatively impact our business.

We conduct trials in the United Kingdom, or the U.K., and, if approved, expect to market our products in the U.K.  On June 23, 2016, the U.K., held a referendum in which voters approved an exit from the European Union, or the E.U., commonly referred to as “Brexit.” As a result of the referendum, the British government is negotiating the terms of the U.K.’s withdrawal from the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. would have and how such withdrawal would affect us.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we could, if we ever commercialize a product, conduct business. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause third-party payors, including governmental organizations, to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition and operating results, particularly if we receive approval to commercialize a product.

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Inadequate funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business 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 can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the 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 and other government agencies on which our operations may rely, including those that fund research and development activities, is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including most recently from December 22, 2018 to January 25, 2019, 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. If a prolonged government shutdown occurs, 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.

Risks Relating to Protecting Our Intellectual Property

It is difficult and expensive to protect our intellectual property rights and we cannot ensure that they will prevent third parties from competing against us. If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.

Our success will depend, in part, on our ability to obtain and maintain intellectual property rights, both in the United States and other countries, successfully defend this intellectual property against third-party challenges and successfully enforce this intellectual property to prevent third-party infringement. We rely upon a combination of patents, trade secret protection and confidentiality agreements.

Our ability to protect any of our product candidates and technologies from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents in both the United States and other countries. Patent matters in the biotechnology and pharmaceutical industries can be highly uncertain and involve complex legal and factual questions. Changes in the patent laws, their implementing regulations or their interpretations may diminish the value of our patent rights.

There can be no assurance that we will discover or develop patentable products or processes or that patents will issue from any pending patent applications owned or licensed by us, or if issued, the breadth of such patent coverage. We currently have no issued patents covering any of our product candidates, including PTI-801, PTI-808, PTI-428 and our combination therapies, or our technologies, and many of our patent applications related to our CF program are in the earliest stages, including several provisional patent applications, although we do have three (3) issued patents covering early CFTR modulator compounds not currently in development. We cannot provide any assurances that any of our pending patent applications will lead to issued patents and, if they do, that such patents will include claims with a scope sufficient to protect our product candidates or otherwise provide any competitive advantage. Even if issued, we cannot guarantee that claims of issued patents owned or licensed to us are or will be held valid or enforceable by the courts or, even if unchallenged, will provide us with exclusivity or commercial value for our product candidates or technology or any significant protection against competitive products or prevent others from designing around our claims. Further, if we encounter delays in regulatory approvals, the period of time during which we could market our product candidates under patent protection could be reduced. Our patent rights also depend on our compliance with technology and patent licenses upon which our patent rights are based and upon the validity of assignments of patent rights from consultants and other inventors that were, or are, not employed by us.

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The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to derivation or adversarial proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents, should they issue, that we may own or exclusively license may not provide any protection against competitors .

Patent applications are generally maintained in confidence until publication. In the United States, for example, patent applications are maintained in secrecy for up to 18 months after their filing. Similarly, publication of discoveries in scientific or patent literature often lags behind actual discoveries. Consequently, we cannot be certain that we were the first to file patent applications on our product candidates. There is also no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which could be used by a third party to challenge validity of our patents, should they issue, or prevent a patent from issuing from a pending patent application.

In addition, even if patents do successfully issue, third parties may challenge any such patent we own or license through adversarial proceedings in the issuing offices, which could result in the invalidation or unenforceability of some or all of the relevant patent claims. If a third party asserts a substantial new question of patentability against any claim of a U.S. patent we own or license, the U.S. Patent and Trademark Office, or USPTO, may grant a request for reexamination, which may result in a loss of scope of some claims or a loss of the entire patent. The adoption of the Leahy-Smith America Invents Act, or the Leahy-Smith Act, on September 16, 2011, established additional opportunities for third parties to invalidate U.S. patent claims, including inter partes review and post-grant review, on the basis of a lower legal standards than reexamination and additional grounds.

We will incur significant ongoing expenses in maintaining our patent portfolio. Should we lack the funds to maintain our patent portfolio or to enforce our rights against infringers, we could be adversely impacted. Moreover, the failure of any patents that may issue to us or our licensors to adequately protect our product candidates or technology could have an adverse impact on our business.

We will not be able to seek and obtain protection for our intellectual property in all jurisdictions throughout the world, and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.

Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Competitors may manufacture and sell our potential products in those foreign countries where we do not file for and obtain patent protection or where patent protection may be unavailable, not obtainable or ultimately not enforceable. Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets and, further, may be able to export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.

The statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our patent applications. For PTI-801, PTI-808 and PTI-428, all of the statutory deadlines have passed.  For certain patent applications related to our CFTR modulators, their use, and related technology, the relevant statutory deadlines have not yet expired. Thus, for each of these patent families, particularly those that we believe provide coverage for these product candidates, we will need to decide whether and where to pursue protection outside the United States by the relevant deadlines, and we will only have the opportunity to obtain patent protection in those jurisdictions where we file for protection, and prosecute and obtain issued claims.

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The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The scope and available coverage thus may vary significantly. Outside of the United States, patents we own or license, if issued, may become subject to patent opposition in the European Patent Office or similar proceedings, which may result in loss of scope of some claims or loss of the entire patent. Participation in adversarial proceedings is very complex and expensive, and may divert our management’s attention from our core business and may result in unfavorable outcomes that could adversely affect our ability to prevent third parties from competing with us.

The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries, including India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including India and China, have been listed in the report every year since 1989. If we encounter difficulties in protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

Proceedings to enforce our patent rights, if obtained, in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Intellectual property rights do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

Others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of any patents, should they issue, that we own or have exclusively licensed.

 

We or our licensors or strategic collaborators might not have been the first to make the inventions covered by any issued patent or pending patent application that we own or have exclusively licensed.

 

We or our licensors or strategic collaborators might not have been the first to file patent applications covering certain of our inventions.

 

Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

 

Our pending patent applications may not lead to issued patents.

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Patents, should they issue, that we own or that we have exclusively licensed, if any, may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

 

Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

 

We may not develop additional proprietary technologies that are patentable.

 

The patents of others may have an adverse effect on our business.

Should any of these events occur, they could significantly harm our business, results of operations and prospects.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.

The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business, our current and pending patent portfolio and future intellectual property strategy. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

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

Periodic maintenance fees on any issued patent are due to be paid to the USPTO, the European Patent Office and other foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign national or international patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limited to, failure to file non-provisional applications claiming priority to our provisional applications by the statutory deadlines, failure to timely file national and regional stage patent applications based on an international patent application, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

The patent protection and patent prosecution for some of our product candidates is dependent or may be dependent in the future on third parties.

While we normally seek and gain the right to fully prosecute the patents relating to our product candidates, there may be times when platform technology patents or product-specific patents that relate to our product candidates are controlled by our licensors or collaboration partners. In addition, our licensors and/or licensees and/or collaboration partners may have back-up rights to prosecute patent applications in the event that we do not do so or choose not to do so, and our licensees and/or collaboration partners may have the right to assume patent prosecution rights after certain milestones are reached. If any of our licensing partners fails to appropriately prosecute and maintain patent protection for patents covering any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products.

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We have entered into and may in the future enter into licenses to licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing a product candidate, if approved, that relied on such licensed intellectual property .

We are currently a party to and may in the future be party to license agreements under which we are or will be granted rights to intellectual property that are important to our business. Certain of our existing and terminated license agreements impose, and we expect that future license agreements will impose on us, various diligence obligations, payment of milestones and/or royalties and other obligations, including, without limitation, patent prosecution, research and development and efforts to meet milestones under mutually-agreed development plans. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to continue to use the rights granted under the license, or develop or market products covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms.

We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business, and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.

Licensing of intellectual property involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:

 

the scope of rights granted under the license agreement and other interpretation-related issues;

 

whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and

 

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

If disputes over intellectual property that we license now or in the future prevent or impair our ability to maintain our licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.

We may be subject to litigation alleging that we are infringing the intellectual property rights of third parties or litigation or other adversarial proceedings seeking to invalidate our patents or other proprietary rights, and we may need to resort to litigation to protect or enforce our patents or other proprietary rights, all of which will be costly to defend, uncertain in its outcome and may prevent or delay development and commercialization efforts or otherwise harm our business.

Our success also will depend, in part, on our refraining from infringing patents or otherwise violating intellectual property owned or controlled by others. Numerous patents and pending applications are owned by third parties in the fields in which we are developing product candidates, both in the United States and elsewhere. It is difficult for industry participants, including us, to identify all third-party patent rights that may be relevant to our product candidates and technologies because patent searching is imperfect due to differences in terminology among

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patents, incomplete databases and the difficulty in assessing the meaning and scope of patent claims. Moreover, because some patent applications are maintained in secrecy until the patents publish, we cannot be certain that third parties have not filed patent applications that cover our products and technologies. We may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to our technology. In addition, we may be unaware of one or more issued patents that would be infringed by the manufacture, sale, importation or use of a current or future product candidate, or we may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent applications can, subject to certain limitations, be later amended in a manner that could cover our technologies, our future products or the manufacture or use of our future products. Pharmaceutical companies, biotechnology companies, universities, research institutions and others may have filed patent applications or have received, or may obtain, issued patents in the United States or elsewhere relating to aspects of our technology, including our products, processes for testing, manufacture, formulation or methods of use, including combination therapy. It is uncertain whether the issuance of any third-party patents will require us to alter our product candidates or processes, obtain licenses, or cease certain activities .

If patents issued to third parties contain blocking, dominating or conflicting claims we may choose to or, if such claims are ultimately determined to be valid, be required to obtain licenses to these patents or to develop or obtain alternative non-infringing technology and cease practicing those activities, including, potentially, the manufacture or marketing of any products deemed to infringe those patents. If any licenses are required, there can be no assurance that we will be able to obtain any such licenses on commercially favorable terms, if at all, and if these licenses are not obtained, we might be prevented from pursuing the development and commercialization of certain of our potential products entirely or for certain indications. Even if a license can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. Our failure to obtain a license to any technology that we may require to commercialize our products on favorable terms may have a material adverse impact on our business, financial condition and results of operations.

We may be exposed to, or threatened with, future litigation by third parties, including our competitors, having patent or other intellectual property rights alleging that our technologies, including our products, processes for manufacture or methods of use, including combination therapy, or other proprietary technologies infringe, either literally or under the doctrine of equivalents, their intellectual property rights. Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful infringement or other intellectual property claim against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our affected products, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Parties making successful claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. We cannot provide any assurances that third-party patents do not exist which might be enforced against our products or product candidates, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties. Any of those occurrences would have a material adverse impact on our business.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or any other patent litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

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We may be involved in lawsuits to protect or enforce our intellectual property, which could be time consuming, expensive and unsuccessful, and issued patents covering our product candidates could be found invalid or unenforceable if challenged in court .

Competitors may infringe our patents or the patents of our licensors, assuming patents issue from patent applications we own or license. Litigation, which could result in substantial costs to us (even if determined in our favor), may also be necessary to enforce any patents issued or licensed to us. The cost to us in initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor, could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question.

If we were to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates or our technology, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States and in most European countries, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one or more of our products or certain aspects of our platform technology. Such a loss of patent protection could have a material adverse impact on our business. Patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without legally infringing our patents or other intellectual property rights.

An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing. Any of these outcomes would not only have an adverse effect on our patent portfolio but may also have an adverse effect on our business if we are unable to prevent the competitive activities of third parties.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or any other patent litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

We rely on trade secrets to protect technology especially where patent protection is not believed to be appropriate or obtainable or where patents have not issued. We attempt to protect our proprietary technology and processes, in part, with confidentiality agreements and assignment of invention agreements with our employees and confidentiality agreements with our consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. We may fail in certain circumstances to obtain the necessary confidentiality agreements, or their scope or term may not be sufficiently broad to protect our interests.

If our trade secrets or other intellectual property become known to our competitors, it could result in a material adverse effect on our business, financial condition and results of operations. To the extent that we or our consultants or research collaborators use intellectual property owned by others in work for us, disputes may also arise as to the rights to related or resulting know-how and inventions.

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We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property .

We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific advisors, and sponsored researchers. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Moreover, we may not obtain these agreements in all circumstances.

Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

We may be subject to claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of our employees’ or consultants’ former employers or their clients. These claims may be costly to defend and if we do not successfully do so, we may be required to pay monetary damages and may lose valuable intellectual property rights or personnel.

Many of our employees and consultants were previously or concurrently employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees, consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could compromise our ability to commercialize, or prevent us from commercializing, our product candidates, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks Relating to Our Business Operations and Industry

Our future success depends on our ability to retain executives and to attract, retain and motivate key personnel in a competitive environment for skilled biotechnology personnel.

Because of the specialized scientific nature of our business and the unique properties of our technology, our success is highly dependent upon our ability to attract and retain qualified scientific and technical personnel, consultants and advisors. We are dependent on the principal members of our scientific and management staff, particularly Ms. Meenu Chhabra, Ms. Shelia Wilson, and Drs. Po-Shun Lee, Geoffrey Gilmartin, Benito Munoz and Marija Zecevic, who have extensive knowledge of and experience developing our technology. The loss of any of their services might significantly delay or prevent the achievement of our research, development and business objectives.

We will need to recruit a significant number of additional personnel in order to achieve our operating goals. In order to pursue our product development and marketing and sales plans, we will need to hire additional qualified scientific personnel to perform research and development, and preclinical studies, as well as personnel with expertise in clinical operations, clinical testing, government regulation, compliance, manufacturing, marketing and sales, which may strain our existing managerial, operational, regulatory compliance, financial and other resources. We also rely on consultants and advisors to assist in formulating our research and development strategy and adhering to complex regulatory requirements. We face strong competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions, many of which have greater financial and other resources than us. There can be no assurance that we will be able to attract and retain such individuals on acceptable terms, if at all. Additionally, our facilities are located in Massachusetts, which may make attracting and retaining qualified scientific and technical personnel from outside of Massachusetts difficult. The failure to attract and retain qualified personnel, consultants and advisors could have a material adverse effect on our business, financial condition and results of operations.

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As our product candidates advance through clinical trials we may experience difficulties in managing our growth and expanding our operations, including, without limitation, managing international clinical trials.

We have limited experience in drug development. As our product candidates advance through preclinical studies and clinical trials, we will need to expand our development, regulatory and manufacturing capabilities or contract with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators or partners, suppliers and other organizations, including, without limitation, international clinical trials. Our ability to manage our operations and future growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

We are exposed to potential product liability or similar claims, and insurance against these claims may not be sufficient to cover our liabilities, or may not be available to us at a reasonable rate in the future or at all.

Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. Clinical trials involve the testing of product candidates on human subjects or volunteers under a research plan, and carry a risk of liability for personal injury or death to patients due to unforeseen adverse side effects, improper administration of the product candidate, or other factors. Many of these patients are already seriously ill and are therefore particularly vulnerable to further illness or death.  Our trials may include third party drugs taken with ours that could injure trial subjects for whose damages we would be liable and, even if we were not, we nevertheless may not be able to show or prove that our product was not a cause of the injury.

We carry clinical trial liability insurance. However, there can be no assurance that we will be able to obtain the amount of insurance necessary to cover potential claims or liabilities. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim outside the scope of indemnity or insurance coverage, if the indemnity is not performed or enforced in accordance with its terms, or if our liability exceeds the amount of applicable insurance. In addition, there can be no assurance that insurance, if obtained, will continue to be available on terms acceptable to us. Similar risks would exist upon the commercialization or marketing of any products by us or our collaborators.

Regardless of their merit or eventual outcome, product liability claims may result in:

 

decreased demand for our product;

 

injury to our reputation and significant negative media attention;

 

withdrawal of clinical trial volunteers or subjects;

 

costs of litigation;

 

distraction of management; and

 

substantial monetary awards to plaintiffs.

Should any of these events occur, it could have a material adverse effect on our business and financial condition.

We may become involved in securities class action litigation that could divert management’s attention and adversely affect our business and could subject us to significant liabilities.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of pharmaceutical and biotechnology companies. These broad market fluctuations as well a broad range of other factors, including the realization of any of the risks described in this “Risk Factors” section of this report, may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and pharmaceutical companies generally experience significant stock price volatility. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business. Any adverse determination in any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.

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Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

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

We must comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and biological materials in certain aspects of our business and are subject to a variety of U.S. federal, state and local laws and regulations governing the use, generation, manufacture, distribution, storage, handling, treatment and disposal of these materials. Although we believe our safety procedures for handling and disposing of these materials and waste products comply with these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, manufacture, distribution, storage, handling, treatment or disposal of hazardous materials. In the event of contamination or injury, or failure to comply with environmental, occupational health and safety and export control laws and regulations, we could be held liable for any resulting damages and any such liability could exceed our assets and resources, including any available insurance.

Risks Relating to Our Common Stock

Our stock price will likely continue to be volatile and an active, liquid and orderly trading market may not develop for our common stock. As a result, you may not be able to resell your shares at or above your purchase price.

The market price of our common stock may fluctuate substantially as a result of many factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of the value of your investment in our common stock. Factors that could cause fluctuations in the market price of our common stock include the following:

 

the development status of our product candidates and when our products receive regulatory approval or are granted special regulatory designations, or lose such designations;

 

the results, and the timing of results, of our preclinical studies and clinical trials, including, without limitation, the publication or delay in publication of preliminary, interim or final results, adverse events, side effects, safety or efficacy data or other information;

 

the support and approval, if any, that we receive from our collaboration partners, the TDN and other interested parties;

 

performance of third parties on whom we rely to conduct preclinical studies, manage our clinical trials, and manufacture our products, product components and product candidates, including their ability to comply with regulatory requirements;

 

the success of, and fluctuation in, the sales of our product candidates, if approved;

 

our execution of our sales and marketing, manufacturing and other aspects of our business plan;

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results of operations that vary from those of our competitors and the expectations of securities analysts and investors;

 

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

changes in expectations as to our future preclinical or clinical results or prospects, including those of securities analysts and investors;

 

our announcement of significant licensing or collaboration arrangements, or the termination of such arrangements;

 

our announcement of significant contracts, acquisitions, or capital commitments;

 

announcements by our competitors of competing products, clinical data, or other initiatives, including, without limitation, those that lead to the development of a new standard of care;

 

announcements by third parties of significant claims or proceedings against us;

 

regulatory and reimbursement developments in the United States and abroad;

 

future sales of our common stock or debt securities;

 

additions or departures of key personnel; and

 

general domestic and international economic conditions unrelated to our performance.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance of individual companies. These broad market factors may adversely affect the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in significant liabilities and, regardless of the outcome, could result in substantial costs and the diversion of our management’s attention and resources.

Prior to our initial public offering in February 2016, there was no public market for shares of our common stock. The listing of our common stock on The NASDAQ Global Market does not assure that a meaningful, consistent and liquid trading market exists. Although our common stock is listed on The NASDAQ Global Market, trading volume in our common stock has been limited and an active trading market for our shares may never develop or be sustained. If an active market for our common stock does not develop, you may be unable to sell your shares when you wish to sell them or at a price that you consider attractive or satisfactory. The lack of an active market may also adversely affect our ability to raise capital by selling securities in the future, or impair our ability to license or acquire other product candidates, businesses or technologies using our shares as consideration.

We could be subject to securities class action litigation.

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

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts or investors publish about us or our business. We do not have any control over these analysts or investors. If one or more of the analysts who covers us downgrades our stock or analysts or investors publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

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Our principal stockholders have and will have a controlling influence over our business affairs and may make business decisions with which you disagree and which may adversely affect the value of your investment .

Our executive officers, directors and principal stockholders and their affiliates beneficially own or control, directly or indirectly, a majority of the outstanding shares of our common stock. As a result, if some of these persons or entities act together, they will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and by-laws and the approval of any business combination. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for shares of our common stock, which could prevent our stockholders from receiving a premium for their shares. Some of these persons or entities who make up our principal stockholders may have interests different from yours.

Future sales, or the expectation of future sales, of a substantial number of our common shares could depress the trading price of our common stock.

If we or our stockholders sell substantial amounts of shares of our common stock in the public market or if the market anticipates that these sales could occur, the market price of shares of our common stock could decline. These sales may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions. Stock sales by us could include private placements of stock and/or public offerings, including without limitation underwritten offerings and sales under our at-the-market common stock sales program with Leerink acting as our sales agent.

Pursuant to our 2016 Stock Option and Incentive Plan, or the 2016 Plan, our board is authorized to grant stock options and other equity-based awards to our employees, directors and consultants. The number of shares available for future grant under the 2016 Plan automatically increases each year by up to 3% of all shares of our capital stock outstanding as of December 31 of the prior calendar year, subject to the ability of our board of directors or compensation committee to take action to reduce the size of the increase in any given year. Currently, we plan to register the increased number of shares available for issuance under the 2016 Plan each year. If our board of directors or compensation committee elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

A significant portion of our total outstanding shares may be sold into the market. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market believes that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.

The holders of a significant portion of shares of our common stock, or their transferees, have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares, they could be freely sold in the public market. If these additional shares are sold, or if it is believed that they will be sold, in the public market, the trading price of our common stock could decline.

Actual or potential sales of our common stock by our employees, including our executive officers, pursuant to pre-arranged stock trading plans could cause our stock price to fall or prevent it from increasing for numerous reasons, and actual or potential sales by such persons could be viewed negatively by other investors.

In accordance with the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and our policies regarding stock transactions, our employees and executive officers may adopt stock trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Generally, sales under such plans by our executive officers and directors require public filings. Actual or potential sales of our common stock by such persons could cause the price of our common stock to fall or prevent it from increasing for numerous reasons. For example, a substantial number of shares of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing. Also, actual or potential sales by such persons could be viewed negatively by other investors.

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We have broad discretion in the use of our cash and cash equivalents and may not use them effectively or may use them in a way with respect to which stockholders do not approve.

Our management will have broad discretion in the use of our cash and could spend it in ways that do not improve our results of operations or enhance the value of shares of our common stock. The failure by our management to utilize our cash effectively could result in financial losses that could have a material adverse effect on our business, cause the market price of shares of our common stock to decline and delay the development of our product candidates. We may invest our cash in a manner that does not produce income or that loses value. If we do not invest our cash in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of shares of our common stock to decline.

As an “emerging growth company,” we are allowed to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the Securities and Exchange Commission, or SEC. This reduced disclosure could make our common stock less attractive to investors.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.07 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;

 

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

 

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a period of at least 12 months and (3) has filed at least one annual report pursuant to the Exchange Act.

Under this definition, we are an “emerging growth company” and could remain an “emerging growth company” for more than five years. For so long as we are an “emerging growth company,” we will, among other things:

 

not be required to comply with the auditor attestation requirements of section 404(b) of Sarbanes-Oxley;

 

not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

 

not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

 

be exempt from any rule adopted by the Public Company Accounting Oversight Board, requiring mandatory audit firm rotation or a supplemental auditor discussion and analysis; and

 

be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This permits an emerging growth company to 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 other companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

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In this report and our other periodic reports we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive for relying on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile .

As a public reporting company, we are and will be subject to rules and regulations established from time to time by the SEC and the Public Company Accounting Oversight Board, or PCAOB, regarding our internal control over financial reporting. We may not complete improvements to our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the market price of our common stock could decline and you could lose all or part of your investment.

We are a public reporting company subject to the rules and regulations established from time to time by the SEC and the PCAOB. These rules and regulations require, among other things, that we establish and periodically evaluate procedures with respect to our internal controls over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

In addition, as a public company we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, so that our management can certify as to the effectiveness of our internal controls over financial reporting, which will require us to continue to document and make changes to our internal controls over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an “emerging growth company,” as defined in the JOBS Act, although, as described in the preceding risk factor, we could potentially qualify as an “emerging growth company” for more than five years. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting once we cease to be an emerging growth company, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

We are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures as well as internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are and will be met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

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Operating as a public company has significantly increased our costs and requires our management to devote substantial time to compliance efforts.

As a public company, we are incurring and will continue to incur significant legal, accounting, insurance and other expenses that we did not incur as a private company. The Dodd-Frank Act and the Sarbanes-Oxley Act, as well as related rules implemented by the SEC and The NASDAQ Stock Market, have required changes in corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to the Dodd-Frank Act are expected to require additional changes. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costlier. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. We expect that we will need to hire additional accounting, finance and other personnel in connection with our efforts to comply with the requirements of being a public company, and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costlier. Although the JOBS Act may for a limited period of time somewhat lessen the cost of complying with these additional regulatory and other requirements, we nonetheless expect a continued increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our business, results of operations and financial condition.

Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated by-laws and the Delaware General Corporation Law contain provisions that may enable our board of directors to resist a change in control of our company even if a change in control were to be considered favorable by you and other stockholders. These provisions:

 

provide that directors can be removed only for cause, and then only by a supermajority stockholder vote;

 

establish advance notice requirements for nominating directors and proposing matters to be voted on by stockholders at stockholder meetings;

 

require majority stockholder voting to effect certain amendments to our certificate of incorporation and by-laws;

 

create a classified board of directors whose members serve staggered three-year terms;

 

specify that special meetings of our stockholders can be called only by our board of directors;

 

prohibit stockholder action by written consent;

 

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

specify that no stockholder is permitted to cumulate votes at any election of directors;

 

expressly authorize our board of directors to modify, alter or repeal our amended and restated by-laws, subject to any limitations set forth therein;

 

require supermajority votes of the holders of our common stock to amend specified provisions of our amended and restated certificate of incorporation; and

 

require supermajority votes of the holders of our common stock to amend our amended and restated by-laws, unless such amendments have been recommended to the stockholders, in which case only a majority vote is necessary.

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In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock.

A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. We have not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.

We do not expect to pay any dividends on our common stock for the foreseeable future.

We currently expect to retain all future earnings, if any, for future operations, expansion and repayment of debt and have no current plans to pay any cash dividends to holders of our common stock for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

Our by-laws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our by-laws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our by-laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees or stockholders (including beneficial owners), which may discourage such lawsuits against us and our directors, officers, other employees or stockholders (including beneficial owners). Alternatively, if a court were to find the choice of forum provision contained in our by-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Item 1B. Unresolved Staff Comments

None.

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Item 2. P roperties

We lease our office and laboratory space, which consists of approximately 30,000 square feet of laboratory and office space located in Boston, Massachusetts. This lease commencement date was April 15, 2018. Prior to our Boston headquarters lease, we leased office and laboratory space in Cambridge, Massachusetts. This lease expired in May 2018.

Item 3. Legal Proceedings

We are not a party to any legal proceedings, and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to claims arising from our 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 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been trading on the NASDAQ Global Market under the symbol “PTI” since February 11, 2016.

Stockholders

As of February 28, 2019, there were 20 stockholders of record of our common stock. The actual number of holders of our common stock is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers or held by other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

Dividend Policy

We have never declared or paid dividends on our capital stock. We do not anticipate paying any dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. Investors should not purchase our common stock with the expectation of receiving cash dividends .

Equity Compensation Plans

The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by reference. Refer to Item 12 of Part III of this Annual Report on Form 10-K for additional information.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Annual Report.

 

Item 6. Selected Financial Data.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item  7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K, or the “Annual Report.” In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this report, including those set forth under Item 1A. “Risk Factors” and under “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report.

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Overview

We are a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat cystic fibrosis, or CF, and other diseases caused by an imbalance in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. We focus on identifying therapies that restore protein function. CF is a disease caused by defects in the function or abundance of cystic fibrosis transmembrane conductance regulator, or CFTR protein. Our CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel class of CFTR modulators, we have exploited its novel mechanism of action as a drug screening tool and have subsequently identified correctors and potentiators to be developed as part of combination therapies. We currently have investigational agents representative of all three classes of CFTR modulators in clinical development and include PTI-801 a third generation CFTR corrector, PTI-808, a CFTR potentiator, and PTI-428, a CFTR amplifier. Additionally, we are pursuing proprietary dual combination of PTI-801 and PTI-808, and triple combination of PTI-801, PTI-808 and PTI-428 as product opportunities. We believe that both PTI-801 and PTI-428 have potential as add-on therapy to current and future standard-of-care CFTR modulator treatments. We are developing and, if approved, intend to commercialize our own therapies, including combination and add-on therapies for CF patients who have at least one F508del mutation, representing the majority of the patient population.

Since our inception in 2006, we have devoted substantially all our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date with proceeds from the sale of preferred stock, the issuance of convertible promissory notes, proceeds from our initial public offering in February 2016, proceeds from our follow-on public offerings, and payments received in connection with collaboration agreements and a research grant, as well as funds from the sale of stock under the at-the-market offering program described below.

In the fourth quarter of 2018, we completed a follow-on public offering whereby we sold 12,650,000 shares of common stock at a price of $6.75 per share, which included 1,650,000 shares issued pursuant to the exercise by the underwriters of their option to purchase additional shares of common stock. We received net proceeds of approximately $80.1 million, after deducting underwriting discounts and commissions and other offering expenses.

In March 2018, we entered into a sales agreement with Leerink Partners LLC, or Leerink, with respect to an at-the-market, or ATM, offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having aggregate gross proceeds of up to $50.0 million. Leerink is not required to sell any specific amount but acts as our sales agent on a commercially reasonable efforts basis consistent with its normal trading and sales practices.  Common stock will be sold at prevailing market prices at the time of the sale; and as a result, prices may vary. We will pay Leerink up to 3% of the gross proceeds from any common stock sold under the sales agreement.  As of December 31, 2018, we have sold an aggregate of 3,475,166 shares of our common stock for total net proceeds of approximately $21.6 million and $27.6 million of common stock remains available for sale pursuant to the ATM program.

In December 2017, we completed a follow-on public offering whereby we sold 9,200,000 shares of our common stock at a price to the public of $5.00 per share, which included 1,200,000 shares issued pursuant to the exercise by the underwriters of their option to purchase additional shares of common stock.  We received net proceeds of $42.9 million, after deducting underwriting discounts and commissions and other offering expenses.

Since our inception, we have incurred significant operating losses. Our net losses were $61.8 million and $59.4 million for the years ended December 31, 2018 and 2017. As of December 31, 2018, we had an accumulated deficit of $277.5 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities, as we:

 

expand our Phase 2 studies and/or advance our add-on and proprietary combination therapy candidates, PTI-801, PTI-808, and PTI-428, into Phase 3 clinical trials;

 

seek regulatory approval for our product candidates;

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seek support and approval from our collaboration partners, the TDN, the CTN, and other interested parties;

 

hire personnel to support our product development, manufacturing, commercialization and administrative efforts; and

 

advance the research and development efforts of our CF and other product candidates, including, without limitation, back-up compounds;

 

scale up our manufacturing processes and capabilities to support our ongoing preclinical activities and clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval.  

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution. In addition, we will continue to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of public or private equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

As of December 31, 2018, we had cash, cash equivalents and short-term investments of $118.4 million. We believe that our existing cash, cash equivalents, and short-term investments are sufficient to fund our projected operating expenses and capital requirements for at least the next 12 months. We expect that our research and development and general and administrative expense will continue to increase. As a result, we will need additional capital to fund our operations. We intend to obtain additional funding through public or private financing or collaborative arrangements with strategic partners to increase the funds available to support its operating and capital needs.   Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards. If we are unable to obtain funding, we would be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.  See “ Liquidity and Capital Resources.”

Components of our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. All our revenue for the years ended December 31, 2018 and 2017 has been derived from our agreement with Astellas.

We adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers , or ASC 606, on January 1, 2018. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

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Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates and include:

 

employee-related expenses, including salaries and related benefits, travel and stock-based compensation expense for employees engaged in research and development functions;

 

expenses incurred in connection with the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs and contract manufacturing organizations, or CMOs;

 

costs of research services incurred in connection with our collaboration agreements;

 

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies; and

 

payments made under third-party licensing agreements.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors, CROs, and CMOs in connection with our clinical trials and preclinical development activities. We do not allocate employee costs, costs associated with our platform technology and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources to manage our preclinical development activities and perform data analysis for such activities. These employees work across multiple development programs and, therefore, we do not track employee and other shared costs by program.

The table below summarizes our research and development expenses incurred by development program:

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

CF

 

$

32,660

 

 

$

32,681

 

UPR

 

 

1,477

 

 

 

1,602

 

Unallocated expenses

 

 

16,175

 

 

 

19,371

 

Total research and development expenses

 

$

50,312

 

 

$

53,654

 

 

We expect that our expenses will increase substantially in connection with our ongoing clinical trials, preclinical development, and commercialization activities. At this time, we cannot reasonably estimate the costs for completing the clinical development of PTI-801, PTI-808, or PTI-428, or our proprietary combination therapies for the treatment of CF or the cost associated with the development of any of our other product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 

the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;

 

establishing an appropriate safety profile with IND-enabling studies;

 

successful patient enrollment in, and the initiation and completion of, clinical trials;

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the cooperation and approval we receive from third parties including clinical investigators, CROs, the TDN and CTN;

 

the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

 

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

 

significant and changing government regulation;

 

launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and

 

maintaining a continued acceptable safety profile of the product candidates following approval.

Any changes in the outcome of any of these variables, or others identified within this filing, with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, travel, and stock-based compensation for personnel in executive, finance and administrative functions. General and administrative expenses also include facilities, which include direct and allocated expenses for rent and maintenance of facilities, depreciation, insurance and supplies as well as professional fees for legal, consulting, accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, patent, regulatory, compliance, director and officer insurance costs and director expenses, as well as investor and public relations expenses associated with being a public company.

Interest Income

Interest income consists primarily of interest income earned on cash, cash equivalents and short-term investments.

Other Income (Expense), Net

Other income (expense), net, primarily consists of the amortization of premium on our short-term investments and also includes the gains or losses associated with the change in the fair value of our derivative liability related to a cash settlement option associated with the change of control provision in our CFF collaboration agreement. We remeasure the fair value of our derivative liability at each reporting period and record the change in the fair value in other income (expense), net.

Income Taxes

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. The legislation resulted in significant changes to the U.S. corporate income tax system, including reducing the U.S. corporate tax rate from a top marginal rate of 35% down to a flat rate of 21%

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effective for tax years beginning after December 31, 2017, elimination, reduction or limitation of certain domestic deductions and credits, limitation of the deduction for NOLs to 80% of current year taxable income, elimination of NOL carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits, including the orphan drug tax credit. As a result of the enacted tax law, in 2017 we revalued the deferred tax assets and liabilities at the new rate. The revaluation resulted in a reduction in deferred tax assets of $24.0 million with a corresponding reduction in the valuation allowance. Therefore, there was no net effect on the 2017 tax provision affecting our statement of operations.

As of December 31, 2018, we had federal and state net operating loss carryforwards of $252.6 million and $240.1 million, respectively, which begin to expire in 2026 and 2030, respectively. As of December 31, 2018, we also had federal and state research and development tax credit carryforwards of $10.0 million and $3.6 million, respectively, which begin to expire in 2027 and 2026, respectively.

Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing at the end of this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Effective January 1, 2018, we adopted Accounting Standards Codification, or ASC Topic 606  Revenue from Contracts with Customers , or ASC 606, using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We enter into licensing agreements which are within the scope of ASC 606, under which we may exclusively license rights to research, develop, manufacture and commercialize our product candidates to third parties. The terms of these arrangements typically include payment to us of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

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As part of the accounting for these arrangements, we must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. We use judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of the transaction price between multiple performance obligations.

For a complete discussion of our accounting policy for revenue recognition, see Note 2, “Summary of Significant Accounting Policies,” included in the notes to our financial statements appearing at the end of this Annual Report.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. However, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

vendors in connection with the preclinical development activities;

 

contract manufacturers in connection with the production of preclinical and clinical trial materials;

 

CROs in connection with preclinical studies and clinical trials; and

 

investigative sites in connection with clinical trials.

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

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Stock-Based Compensation

We measure stock options and other stock-based awards granted to employees based on the fair value on the date of the grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is usually the vesting period of the respective award. Generally, we issue stock option awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We measure stock-based awards granted to nonemployees based on the fair value of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services are rendered until completed. At the end of each financial reporting period prior to completion of the service, we remeasure the fair value of these awards using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model. We do not recognize compensation expense for awards with performance-based vesting conditions granted to nonemployees for which satisfaction of the performance conditions is not solely within the control of the holder until the performance conditions have been met.

We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Use of this model requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Prior to our February 11, 2016 initial public offering, we were a private company and lacked company-specific historical and implied volatility information. Accordingly, we estimate our expected volatility based on the historical volatility of a publicly traded group of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our publicly traded stock price.  The expected term of our options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options, while the expected term of our options granted to consultants and nonemployees has been determined based on the contractual term of the options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future. We account for forfeitures as they occur.

Valuation of Derivative Liability

We identified an embedded derivative resulting from the cash settlement option associated with the change of control provision in our CFF collaboration agreement. Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as separate financial instruments. We initially recorded this derivative at fair value and have classified it as a liability.  At the end of each reporting period, we remeasure its fair value and gains and losses arising from changes in fair value are recorded as a component of other income (expense), net, in the statement of operations.

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply until the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering in February 2016 or until we no longer meet the other requirements for being an “emerging growth company,” whichever occurs first.

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Results of Operations

Comparison of the Years Ended December 31, 2018 and 2017

The following table summarizes our results of operations for the years ended December 31, 2018 and 2017 (in thousands):

 

 

 

Years Ended

December 31,

 

 

Increase

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

Revenue

 

$

2,840

 

 

$

5,341

 

 

$

(2,501

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

50,312

 

 

 

53,654

 

 

 

(3,342

)

General and administrative

 

 

15,710

 

 

 

11,660

 

 

 

4,050

 

Total operating expenses

 

 

66,022

 

 

 

65,314

 

 

 

708

 

Loss from operations

 

 

(63,182

)

 

 

(59,973

)

 

 

3,209

 

Interest income

 

 

872

 

 

 

641

 

 

 

231

 

Other income (expense), net

 

 

478

 

 

 

(100

)

 

 

578

 

Net loss

 

$

(61,832

)

 

$

(59,432

)

 

$

2,400

 

 

Revenue

Revenue was $2.8 million for the year ended December 31, 2018, compared to $5.3 million for the year ended December 31, 2017, all of which was derived from our collaboration agreement with Astellas. The decrease of $2.5 million is primarily the result of the adoption of ASC 606 on January 1, 2018 of $1.1 million and completion of all of our performance obligations under the Astellas agreement during the third quarter of 2018.  

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2018 and 2017 (in thousands):

 

 

 

Years Ended

December 31,

 

 

Increase

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

Direct research and development by program:

 

 

 

 

 

 

 

 

 

 

 

 

CF

 

$

32,660

 

 

$

32,681

 

 

$

(21

)

UPR

 

 

1,477

 

 

 

1,602

 

 

 

(125

)

Unallocated expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Employee-related

 

 

10,065

 

 

 

12,708

 

 

 

(2,643

)

Facility related

 

 

2,397

 

 

 

2,954

 

 

 

(557

)

Other

 

 

3,713

 

 

 

3,709

 

 

 

4

 

Total research and development expenses

 

$

50,312

 

 

$

53,654

 

 

$

(3,342

)

 

Research and development expenses were $50.3 million for the year ended December 31, 2018, compared to $53.6 million for the year ended December 31, 2017. The decrease of $3.3 million was primarily due to a decrease in employee-related expenses of $2.6 million resulting from a decrease in the headcount of research and development employees from 2017 to 2018. Additionally, facility related expenses decreased by $0.6 million due the decreased headcount, which resulted in a reduction in the allocation of facility expenses to research and development.

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General and Administrative Expenses

General and administrative expenses were $15.7 million for the year ended December 31, 2018 compared to $11.7 million for the year ended December 31, 2017. The increase of $4.0 million was related to an increase in employee-related expenses of $1.9 million, an increase in professional fees of $1.4 million, and an increase in facility costs of $0.8 million due to increasing complexity of our operations as a public company with multiple clinical programs.  

Interest Income

We recorded $0.9 million of interest income for the year ended December 31, 2018, compared to $0.6 million of interest income for the year ended December 31, 2017. The increase of $0.3 million was due to an increase in interest earned on cash equivalents and short-term investments held during the year ended December 31, 2018 compared to the year ended December 31, 2017 due to an increase in invested cash.  

Other Income (Expense), Net

We recorded $0.5 million of other income for the year ended December 31, 2018, as compared to other expense of $0.1 million for the year ended December 31, 2017. The increase of $0.6 million in other income (expense) is primarily due to net accretion of discounts on short-term securities in 2018 compared to net amortization of premiums on marketable securities in 2017.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from our collaboration agreements and research grant. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development; and we do not expect to generate revenue from sales of any product for several years, if at all. We have funded our operations to date with proceeds received from our initial public offering and subsequent follow-on offerings, the sale of preferred stock, the issuance of convertible promissory notes and, payments received in connection with collaboration agreements and a research grant, as well as sales of our common of stock under our ATM offering program.

As of December 31, 2018, we had cash, cash equivalents and short-term investments of $118.4 million. As of December 31, 2018, we had an accumulated deficit of $277.5 million. During the year ended December 31, 2018, we incurred a loss of $61.8 million and used $58.8 million of cash in operations. We expect that our cash, cash equivalents and short-term investments as of December 31, 2018 will enable us to fund our operating expenses and capital requirements, based upon our current operating plan, for at least the next 12 months. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all.  If we are unable to obtain funding, we could be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations .

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Cash used in operating activities

 

$

(58,844

)

 

$

(52,395

)

Cash provided by (used in) investing activities

 

 

(44,805

)

 

 

21,883

 

Cash provided by financing activities

 

 

101,613

 

 

 

43,279

 

Net increase (decrease) in cash, cash

   equivalents and restricted cash

 

$

(2,036

)

 

$

12,767

 

 

89


 

Operating Activities

During the year ended December 31, 2018, we used $58.8 million of cash for operating activities, primarily resulting from our net loss of $61.8 million, $2.8 million from changes in our operating assets and liabilities, and partially offset by non-cash charges of $5.8 million. Changes in operating assets and liabilities were primarily related to an increase of $1.1 million in prepaids and other current assets, a decrease of $1.3 million in operating lease liabilities, a decrease of $0.2 million in accrued expenses, and a decrease of $0.2 million in accounts payable.

During the year ended December 31, 2017, we used $52.4 million of cash for operating activities, primarily resulting from our net loss of $59.4 million, partially offset by non-cash charges of $5.2 million and changes in our operating assets and liabilities of $1.8 million. Changes in operating assets and liabilities were primarily related to a decrease of $2.7 million in prepaids and other current assets, a decrease of $1.8 million in deferred revenue, an increase of $1.5 million in accrued expenses, and a decrease of $1.3 million in operating lease liabilities.

Investing Activities

During the year ended December 31, 2018, cash used for investing activities totaled $44.8 million, consisting of purchases of our short-term investments of $111.2 million and purchases of property and equipment of $0.4 million, partially offset by proceeds received from maturities of short-term investments of $66.8 million.

During the year ended December 31, 2017, cash provided by investing activities totaled $21.9 million, consisting of proceeds received from maturities of our short-term investments of $83.2 million, partially offset by purchases of short-term investments of $61.2 million and purchases of property and equipment of $0.1 million.

Financing Activities

During the year ended December 31, 2018, net cash provided by financing activities was $101.6 million, primarily resulting from $80.3 million of net proceeds from issuance of common stock in connection with the completion of a follow-on public offering and $21.7 million of net proceeds from the issuance of common stock related to our at-the-market offering program.

During the year ended December 31, 2017, net cash provided by financing activities was $43.3 million, primarily resulting from $43.2 million of net proceeds from issuance of common stock in connection with the completion of a follow-on public offering.

Operating Capital Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates in development. In addition, we expect to incur additional costs associated with operating as a public company.

Our expenses will also increase as we:

 

continue to pursue the clinical development of our most advanced product candidates, including PTI-801, PTI-808 and PTI-428, as well as our combination therapies;

 

seek support and approval from our collaboration partners, the TDN and other interested parties;

 

continue the research and development of our other product candidates;

 

seek to identify and develop additional product candidates;

 

seek marketing approvals for any of our product candidates that successfully complete clinical development;

 

develop and expand our sales, marketing and distribution capabilities for our product candidates for which we obtain marketing approval;

90


 

 

scale up our manufacturing processes and capabilities to support our ongoing preclinical activities and clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval;

 

maintain, expand and protect our intellectual property portfolio;

 

expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company; and

 

increase our product liability and clinical trial insurance coverage as we initiate additional clinical trials, expand our existing clinical trials and launch commercialization efforts.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

 

the number and characteristics of the product candidates we pursue;

 

the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;

 

the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;

 

the timing of, and costs involved in, manufacturing our drug candidates and any drugs we successfully commercialize;

 

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

 

delays that may be caused by changing regulatory requirements;

 

cost and timing of hiring new employees to support our continued growth;

 

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

 

the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

Until such time, if ever, as we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaborations agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

91


 

Based upon our current operating plan, we believe our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements , based on our current operating plan, for at least 12 months from the date that these financial statements are issued . We intend to obtain additional funding through public or private financing or collaborative arrangements with strategic partners to increase the funds available to support our operating and capital needs. In the event sufficient funds are not available, we may be required to delay or reduce expenditures to conserve cash, which could involve scaling back or curtailing development and general and administrative activities. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards.

Commitments

Under various agreements, we will be required to make milestone payments and pay royalties and other amounts to third parties.

Under a license agreement with Presidents and Fellows of Harvard College, or Harvard, which we terminated in December 2017, we had agreed to make future milestone payments under the surviving provisions of the Harvard license agreement of up to $2.4 million upon achieving specified development and clinical and commercialization milestones. We have also agreed under surviving contractual provisions to pay Harvard tiered royalties, at rates in the low single-digit percentages, on annual net sales of each developed product utilizing any technologies developed under this agreement for ten years following the first sale of a commercial product. As of December 31, 2018, we had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved.

Under the CFF agreement, we have agreed to make future sales-based milestone payments (which the agreement refers to as royalties) to CFF of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. We have also agreed to pay to CFF royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by us from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by us through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. All services required by us under the CFF agreement had been completed by December 31, 2014. As of December 31, 2018, we had not developed a commercial product in connection with this collaboration, and we had not sold, licensed or transferred rights in the technology resulting from this collaboration to a third party.

We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

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 Securities and Exchange Commission.

Recently Issued and Adopted Accounting Pronouncements

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our financial statements appearing at the end of this Annual Report, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.

92


 

Item 7A. Quantitative and Qualitat ive Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 8. Financial Statements and Supplementary Data

The information required by this item may be found on pages F-1 through F-27 of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our President and Chief Executive Officer, who is our principal executive officer, and our Interim Vice President of Finance, who is our principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

As of December 31, 2018, our management, with the participation of our principal executive officer and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). 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 and accounting officer have concluded based upon the evaluation described above that, as of December 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.

Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2018, our internal control over financial reporting was effective.

This annual report does not include an attestation report of our registered public accounting firm on internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

93


 

Item 9B. Other Information

Election of a Director

On March 6, 2019, the Board of Directors (the “Board”) elected David Arkowitz as a Class II director whose term will expire at the Company’s 2020 annual meeting of shareholders, effective immediately.

For his service on the Board, Mr. Arkowitz will receive compensation as a non-employee director in accordance with the Company’s non-employee director compensation practices described under the “Director Compensation” section of the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 15, 2018.

There are no arrangements or understandings between Mr. Arkowitz and any other persons pursuant to which Mr. Arkowitz was named as a director. Mr. Arkowitz is not a party to any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.

In connection with his election to the Board, Mr. Arkowitz will execute the Company’s standard form of indemnification agreement for directors.

Mr. Arkowitz, age 57, has served as the chief financial officer of Flexion Therapeutics, Inc. (NASDAQ: FLXN) since May 2018.  From September 2013 to May 2018, Mr. Arkowitz served as Chief Operating Officer and Chief Financial Officer at Visterra, (acquired by Otsuka Pharmaceutical Co.,) where he led the finance, business development, corporate planning and other functions. Mr. Arkowitz was Chief Financial Officer and General Manager at Mascoma Corporation from June 2011 to September 2013. Previously, Mr. Arkowith served as Chief Financial Officer and Chief Business Officer at AMAG Pharmaceuticals (NASDAQ: AMAG), and Chief Financial Officer of Idenix Pharmaceuticals (acquired by Merck & Co., Inc. (NYSE: MRK). Prior to Idenix, Mr. Arkowitz spent more than 13 years at Merck & Co., Inc. where he held roles of increasing responsibility, including Vice President and Controller of the U.S. Human Health division and Controller of the Global Research and Development division, and Chief Financial Officer of the Canadian subsidiary. Mr. Arkowitz serves on the board of directors and as chair of the audit committee of Spring Bank Pharmaceuticals (NASDAQ: SBPH). Mr. Arkowitz has a BA in Mathematics from Brandeis University and an MBA in Finance from Columbia University Business School.

Appointment of Officer

On March 6, 2019, the Board appointed Sandra Zimmerman, who is currently serving as our interim Vice President of Finance and Principal Financial Officer, as Principal Accounting Officer, effective immediately.

94


 

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2019 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2019 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2019 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2019 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 14. Principal Accounting Fees and Services

The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2019 Annual Meeting of Stockholders, which we intend to file with the Securities and Exchange Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

 

95


 

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this report:

(1) Financial Statements:

 

 

(2) Financial Statement Schedules:

All other financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.

(3) Exhibits. The exhibits filed as part of this Annual Report on Form 10-K are set forth on the Exhibit Index immediately following our financial statements. The Exhibit Index is incorporated herein by reference.

 

96


 

Exhibit List

 

 

 

 

 

Incorporated by Reference

 

Exhibit

No.

 

Exhibit Title

 

Form

 

File No.

 

Exhibit

No.

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

    3.1

 

Fifth Amended and Restated Certificate of Incorporation of the Registrant

 

S-3

 

333-228529

 

3.1

 

November 23, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    3.2

 

Second Amended and Restated By-laws of the Registrant

 

S-1/A

 

333-208735

 

3.4

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.1

 

Specimen Common Stock Certificate

 

S-1/A

 

333-208735

 

4.1

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.2

 

Third Amended and Restated Stockholders’ Agreement of the Registrant

 

S-1/A

 

   333-208735

 

   4.2

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.3

 

Form of Preferred Stock Warrant

 

S-1

 

333-208735

 

4.3

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.4

 

Form of Senior Indenture

 

S-3

 

333-228529

 

4.6

 

November 23, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    4.5

 

Form of Subordinated Indenture

 

S-3

 

333-228529

 

4.7

 

November 23, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.1†

 

Research, Development and Commercialization Agreement by and between the Registrant and Cystic Fibrosis Foundation Therapeutics, Inc., dated March 20, 2012, as amended on May 6, 2013, and January 1, 2014

 

S-1

 

333-208735

 

10.1

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.3#

 

2008 Equity Incentive Plan, as amended, and forms of award agreements thereunder

 

S-1

 

333-208735

 

10.5

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.4#

 

2016 Stock Option and Incentive Plan and forms of award agreements thereunder

 

S-1/A

 

333-208735

 

10.6

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.5

 

Lease by and between the Registrant and Are-Tech Square, LLC, dated March 31, 2009, as amended on April 16, 2009, March 9, 2011, and June 25, 2014

 

S-1

 

333-208735

 

10.7

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.6

 

Form of Indemnification Agreement, between the Registrant and its officers and directors

 

S-1

 

333-208735

 

10.8

 

December 23, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.7#

 

Senior Executive Cash Incentive Bonus Plan

 

S-1/A

 

333-208735

 

10.10

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.8#

 

Form of Offer Letter by and between the Registrant and the executive officers of the Registrant

 

S-1/A

 

333-208735

 

10.11

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.12#

 

2016 Employee Stock Purchase Plan

 

S-1/A

 

333-208735

 

10.15

 

February 1, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.13#

 

Non-Employee Director Compensation Policy

 

10-K

 

001-37695

 

10.13

 

March 14, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.14

 

Amendment No. 4 to Collaboration and License Agreement by and between Registrant and Astellas Pharma, Inc., dated as of May 23, 2016 (effective as of January 31, 2016)

 

8-K

 

001-37695

 

10.1

 

May 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.15#

 

Consulting Agreement, by and between the Registrant and Stelios Papadopoulos, dated as of May 25, 2016

 

8-K

 

001-37695

 

10.2

 

May 27, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

97


 

 

 

 

 

Incorporated by Reference

 

Exhibit

No.

 

Exhibit Title

 

Form

 

File No.

 

Exhibit

No.

 

Filing Date

 

  10.16

 

Amendment No. 5 to Collaboration and License Agreement by and between the Registrant and Astellas Pharma, Inc., dated as of July 31, 2016

 

10-Q

 

001-37695

 

10.9

 

August 15, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.17#

 

Amended and Restated Employment Agreement, by and between the Registrant and Meenu Chhabra, dated October 21, 2016

 

10-Q

 

001-37695

 

10.2

 

November 10, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.18#

 

Amended and Restated Employment Agreement, by and between the Registrant and Po-Shun Lee, dated October 21, 2016

 

10-Q

 

001-37695

 

10.3

 

November 10, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.19#

 

Employment Agreement between the Company and Helen Boudreau, dated as of July 25, 2017

 

8-K

 

001-37695

 

10.1

 

July 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.20

 

Lease Between the Company, as Tenant, and Ice Box, LLC, as Landlord, dated as of September 19, 2017.

 

10-Q

 

001-37695

 

10.2

 

November 14, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.21#

 

Employment Agreement between the Company and Benito Munoz, dated as of October 17, 2016

 

10-K

 

001-37695

 

10.21

 

March 14, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.22#

 

Sales Agreement by and between the Company and Leerink Partners LLC, dated March 23, 2018

 

10-Q

 

001-37695

 

10.2

 

May 9, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.23

 

Fourth Amendment to Lease by and between ARE-Tech Square, LLC and the Company, dated April 13, 2018

 

10-Q

 

001-37695

 

10.3

 

August 8, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

     10.24

 

First Amendment to Lease by and between Ice Box, LLC and the Company

 

10-Q

 

001-37695

 

10.2

 

August 8, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    10.25#

 

Consulting Agreement by and between the Company and Danforth Advisors, LLC, dated May 7, 2018

 

10-Q

 

001-37695

 

10.4

 

August 8, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    10.26#

 

Offer Letter by and between the Company and Sandra Zimmerman, dated August 3, 2018

 

10-Q

 

001-37695

 

10.5

 

August 8, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    10.27#

 

Employment Agreement between the Company and Marija Zecevic, dated as of March 8, 2017

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    10.28#

 

Employment Agreement between the Company and Sheila Wilson, dated as of May 18, 2017

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

98


 

 

 

 

 

Incorporated by Reference

 

Exhibit

No.

 

Exhibit Title

 

Form

 

File No.

 

Exhibit

No.

 

Filing Date

 

    10 .29# †

 

Technology Transfer and License Agreement between the Company and Genentech, Inc., dated December 13, 2018

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    10.30

 

Assignment and Release Agreement between the Company and Cystic Fibrosis Foundation, dated December 19, 2018

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    23.1

 

Consent of PricewaterhouseCoopers LLP, Independent register public accounting firm

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    24.1

 

Power of Attorney (included on signature page)

 

 

 

 

 

 

 

Furnished herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    31.1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

    32.1

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

Furnished herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Document

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Link Document

 

 

 

 

 

 

 

Filed herewith

 

 

Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

#

Represents management contract or compensation plan, contract, or agreement.

 

 

Item 16. Form 10-K Summary

Not applicable.

99


 

SIGNAT URES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

PROTEOSTASIS THERAPEUTICS, INC.

 

 

 

 

 

Date: March 8, 2019

 

By:

 

/s/ Meenu Chhabra

 

 

 

 

Meenu Chhabra

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

SIGNATURES AND POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Meenu Chhabra and Sandra Zimmerman, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney in fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys in fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue of this Power of Attorney.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated below and on the dates indicated:

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Meenu Chhabra

 

President and Chief Executive Officer

 

March 8, 2019

Meenu Chhabra

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Sandra Zimmerman

 

Interim Vice President of Finance

 

March 8, 2019

Sandra Zimmerman

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

/s/ M. James Barrett

 

Chairman of the Board of Directors

 

March 8, 2019

M. James Barrett, Ph.D.

 

 

 

 

 

 

 

 

 

/s/ Franklin M. Berger

 

Director

 

March 8, 2019

Franklin M. Berger, CFA

 

 

 

 

 

 

 

 

 

/s/ Jeffery W. Kelly

 

Director

 

March 8, 2019

Jeffery W. Kelly, Ph.D.

 

 

 

 

 

 

 

 

 

/s/ Kim C. Drapkin

 

Director

 

March 8, 2019

Kim C. Drapkin

 

 

 

 

/s/ Emmanuel Dulac

 

Director

 

March 8, 2019

Emmanuel Dulac

 

 

 

 

/s/ David Arkowitz

 

Director

 

March 8, 2019

David Arkowitz

 

 

 

 

 

 

 

100


 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Proteostasis Therapeutics, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Proteostasis Therapeutics, Inc. (the “Company”) as of December 31, 2018 and 2017, and the related statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, including the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.  

Change in Accounting Principles

As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers and the manner in which it accounts for leases in 2018.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter

As discussed in Note 1 to the financial statements, the Company will require additional financing to fund future operations. Management’s plans in regard to this matter are described in Note 1.

 

 

 

/s/ PricewaterhouseCoopers LLP

 

Boston, Massachusetts

March 8, 2019

 

We have served as the Company's auditor since 2010.

F-1


 

PROTEOSTASIS THERAPEUTICS, INC.

BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,810

 

 

$

29,724

 

Short-term investments

 

 

89,569

 

 

 

44,738

 

Restricted cash

 

 

 

 

 

294

 

Prepaids and other current assets

 

 

2,481

 

 

 

1,377

 

Total current assets

 

 

120,860

 

 

 

76,133

 

Operating lease, right-of-use asset

 

 

13,849

 

 

 

472

 

Property and equipment, net

 

 

605

 

 

 

424

 

Other assets

 

 

 

 

 

33

 

Restricted cash, net of current portion

 

 

828

 

 

 

1,656

 

Total assets

 

$

136,142

 

 

$

78,718

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,884

 

 

$

2,098

 

Accrued expenses

 

 

5,661

 

 

 

6,120

 

Deferred revenue

 

 

 

 

 

1,108

 

Operating lease liabilities

 

 

1,056

 

 

 

559

 

Total current liabilities

 

 

8,601

 

 

 

9,885

 

Derivative liability

 

 

3

 

 

 

25

 

Operating lease liabilities, net of current portion

 

 

13,196

 

 

 

 

Total liabilities

 

 

21,800

 

 

 

9,910

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares

     issued and outstanding as of December 31, 2018 and 2017

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized;

     50,808,422 and 34,416,088 shares issued and outstanding as of

     December 31, 2018 and 2017, respectively

 

 

51

 

 

 

35

 

Additional paid-in capital

 

 

391,825

 

 

 

285,583

 

Accumulated other comprehensive income (loss)

 

 

1

 

 

 

(2

)

Accumulated deficit

 

 

(277,535

)

 

 

(216,808

)

Total stockholders’ equity

 

 

114,342

 

 

 

68,808

 

Total liabilities and stockholders’ equity

 

$

136,142

 

 

$

78,718

 

 

The accompanying notes are an integral part of these financial statements.

F-2


 

PROTEOSTASIS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Revenue

 

$

2,840

 

 

$

5,341

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

50,312

 

 

 

53,654

 

General and administrative

 

 

15,710

 

 

 

11,660

 

Total operating expenses

 

 

66,022

 

 

 

65,314

 

Loss from operations

 

 

(63,182

)

 

 

(59,973

)

Interest income

 

 

872

 

 

 

641

 

Other income (expense), net

 

 

478

 

 

 

(100

)

Net loss

 

$

(61,832

)

 

$

(59,432

)

Net loss per share—basic and diluted

 

$

(1.61

)

 

$

(2.34

)

Weighted average common shares outstanding—basic and diluted

 

 

38,495,103

 

 

 

25,407,943

 

 

The accompanying notes are an integral part of these financial statements.

F-3


 

PROTEOSTASIS THERAPEUTICS, INC.

STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(61,832

)

 

$

(59,432

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

3

 

 

 

20

 

Comprehensive loss

 

$

(61,829

)

 

$

(59,412

)

 

The accompanying notes are an integral part of these financial statements.

 

 

 

F-4


 

PROTEOSTASIS THERAPEUTICS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Other Comprehensive

 

 

Accumulated

 

 

Total Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2016

 

 

25,000,734

 

 

$

26

 

 

$

238,902

 

 

$

(22

)

 

$

(157,450

)

 

$

81,456

 

Exercise of stock options

 

 

11,714

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,965

 

 

 

 

 

 

 

 

 

2,965

 

Issuance of common stock pursuant to employee stock purchase

   plan

 

 

10,829

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Issuance of common stock upon exercise of common stock

   warrant

 

 

4,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for payment of consulting services

 

 

188,462

 

 

 

 

 

 

767

 

 

 

 

 

 

 

 

 

767

 

Issuance of common stock upon completion of follow-on offering

   including overallotment, net

 

 

9,200,000

 

 

 

9

 

 

 

42,875

 

 

 

 

 

 

 

 

 

42,884

 

Impact of adoption of ASC 842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

74

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,432

)

 

 

(59,432

)

Balance at December 31, 2017

 

 

34,416,088

 

 

 

35

 

 

 

285,583

 

 

 

(2

)

 

 

(216,808

)

 

 

68,808

 

Exercise of stock options

 

 

8,775

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,526

 

 

 

 

 

 

 

 

 

3,526

 

Issuance of common stock pursuant to employee stock purchase plan

 

 

18,903

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

55

 

Issuance of common stock for payment of consulting services

 

 

239,490

 

 

 

 

 

 

 

889

 

 

 

 

 

 

 

 

 

889

 

Issuance of common stock related to at-the-market offering program, net

 

 

3,475,166

 

 

 

3

 

 

 

21,638

 

 

 

 

 

 

 

 

 

21,641

 

Issuance of common stock upon completion of follow-on offering,

   including overallotment, net

 

 

12,650,000

 

 

 

13

 

 

 

80,113

 

 

 

 

 

 

 

 

 

80,126

 

Impact of adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,105

 

 

 

1,105

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(61,832

)

 

 

(61,832

)

Balance at December 31, 2018

 

 

50,808,422

 

 

$

51

 

 

$

391,825

 

 

$

1

 

 

$

(277,535

)

 

$

114,342

 

 

The accompanying notes are an integral part of these financial statements.

 

F-5


 

PROTEOSTASIS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(61,832

)

 

$

(59,432

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,778

 

 

 

1,402

 

Amortization (accretion) of short-term investments

 

 

(438

)

 

 

178

 

Stock-based compensation expense

 

 

3,526

 

 

 

2,965

 

Stock issued for consulting services

 

 

889

 

 

 

767

 

Change in fair value of derivative liability

 

 

(22

)

 

 

(66

)

Loss on disposal of property and equipment

 

 

41

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

668

 

Prepaids and other current assets

 

 

(1,104

)

 

 

2,682

 

Other assets

 

 

33

 

 

 

35

 

Accounts payable

 

 

(204

)

 

 

67

 

Accrued expenses

 

 

(239

)

 

 

1,481

 

Deferred revenue

 

 

(3

)

 

 

(1,848

)

Operating lease liabilities

 

 

(1,269

)

 

 

(1,294

)

Net cash used in operating activities

 

 

(58,844

)

 

 

(52,395

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(111,240

)

 

 

(61,220

)

Proceeds received from maturities of short-term investments

 

 

66,850

 

 

 

83,221

 

Purchases of property and equipment

 

 

(415

)

 

 

(118

)

Net cash provided by (used in) investing activities

 

 

(44,805

)

 

 

21,883

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon completion of follow-on public

   offering, net

 

 

80,265

 

 

 

43,240

 

Proceeds from issuance of common stock related to at-the-market offering

   program, net

 

 

21,703

 

 

 

 

Proceeds from exercise of stock options

 

 

21

 

 

 

31

 

Proceeds from issuance of stock pursuant to employee stock purchase plan

 

 

55

 

 

 

43

 

Deferred offering costs

 

 

(431

)

 

 

(35

)

Net cash provided by financing activities

 

 

101,613

 

 

 

43,279

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(2,036

)

 

 

12,767

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

31,674

 

 

 

18,907

 

Cash, cash equivalents and restricted cash at end of year

 

$

29,638

 

 

$

31,674

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Addition of operating lease, right-of-use asset

 

$

14,962

 

 

$

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

230

 

 

$

321

 

The accompanying notes are an integral part of these financial statements.

F-6


 

PROTEOSTASIS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

1. Nature of the Business

Proteostasis Therapeutics, Inc. (the “Company”) was incorporated in Delaware on December 13, 2006. The Company is a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat cystic fibrosis (“CF”) and other diseases caused by an imbalance in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. The Company focuses on identifying therapies that restore protein function. CF is a disease caused by defects in the function or abundance of cystic fibrosis transmembrane conductance regulator (“CFTR”). The Company’s CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel class of CFTR modulators, the Company has exploited its novel mechanism of action as a drug screening tool and has subsequently identified correctors and potentiators to be developed as part of combination therapies. Investigational agents representative of all three classes of CFTR modulators are currently in clinical development and include PTI-801 a third generation CFTR corrector, PTI-808, a CFTR potentiator, and PTI-428, a CFTR amplifier . The Company is pursuing proprietary dual combination of PTI-801 and PTI-808, and triple combination of PTI-801, PTI-808 and PTI-428 as product opportunities. Additionally, the Company believes that both PTI-801 and PTI-428 have potential as add-on therapy to current and future standard-of-care CFTR modulator treatments. The Company is developing and, if approved, intends to commercialize their own therapies, including add-on and proprietary combination therapies for CF patients who have at least one F508del mutation, representing the majority of the patient population.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In accordance with ASC 205-40, Going Concern (“ASC 205-40”), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. As of December 31, 2018, the Company had an accumulated deficit of $277.5 million. The Company has incurred losses and negative cash flows from operations since its inception, including net losses of $61.8 million and $59.4 million for the years ended December 31, 2018 and 2017, respectively. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. The Company currently expects that its cash, cash equivalents and short-term investments of $118.4 million will be sufficient to fund its operating expenses and capital requirements, based upon its current operating plan, for at least 12 months from the date that these financial statements are issued. However, additional funding will be necessary to complete the funding of critical path activities in 2020. The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances and licensing arrangements. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all, and the Company may not be able to enter into collaborations or other arrangements. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

F-7


 

In October 2017, the Company reduced headcount through the elimination of 13 positions. As a result of this action, which was completed in the fourth quarter of 2017, the Company incurred one-time severance and related costs of $0.2 million in the fourth quarter of 2017.

Public Offerings

In the fourth quarter 2018, the Company completed a follow-on public offering whereby the Company sold 12,650,000 shares of common stock at a public offering price of $6.75 per share, which included 1,650,000 shares issued pursuant to the exercise by the underwriters of their option to purchase additional shares of common stock. The Company received net proceeds of approximately $80.1 million, after deducting underwriting discounts and commissions and other offering expenses.

In March 2018, the Company entered into a sales agreement with Leerink Partners LLC (“Leerink”) with respect to an at-the-market (“ATM”) offering program under which the Company may issue and sell, from time to time at its sole discretion, shares of its common stock, resulting in aggregate gross offering proceeds of up to $50.0 million. Leerink is not required to sell any specific amount but acts as the Company’s sales agent on a commercially reasonable efforts basis consistent with its normal trading and sales practices. Common stock will be sold at prevailing market prices at the time of the sale; and as a result, prices may vary. The Company will pay Leerink up to 3% of the gross proceeds from any common stock sold through the sales agreement. As of December 31, 2018, the Company had sold an aggregate of 3,475,166 shares of its common stock for total net proceeds of approximately $21.6 million under the ATM program. At December 31, 2018, $27.6 million of common stock remains available for sale under the ATM.

In December 2017, the Company completed a follow-on public offering whereby the Company sold 9,200,000 shares of common stock at a public offering price of $5.00 per share, which included 1,200,000 shares issued pursuant to the exercise of the underwriters of their option to purchase additional shares of common stock. The Company received net proceeds of $42.9 million after deducting underwriting discounts and commissions and other offering expenses.    

2.

Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses, including clinical trials, stock-based compensation, determining the value of the operating lease right of use asset and the valuation of the derivative liability. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Concentrations of Credit Risk and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and short-term investments. The Company mitigates its risk with respect to cash, cash equivalents and short-term investments by maintaining its balances at two accredited financial institutions, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company’s only customer in

F-8


 

2018 was Astellas Pharma Inc. (“Astellas”) and as of December 31, 2018, the Astellas Agreement (as defined below) had completed and all amounts were paid in full.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of December 31, 2018 and 2017, the Company’s cash equivalents consisted of money market funds, U.S. government-sponsored securities and U.S. treasury securities.  

Restricted Cash

As of December 31, 2018 and 2017, long-term restricted cash represents cash pledged as collateral to secure the Company’s long-term Boston lease obligation. As of December 31, 2017, short-term restricted cash represents cash pledged as collateral to secure the Company’s Cambridge lease obligation, which expired in May 2018, resulting in a decrease of $0.3 million in short-term restricted cash. Amounts are reported as noncurrent unless the restrictions are expected to be released in the next 12 months. Long-term restricted cash decreased by $0.8 million from December 31, 2017 as the Company was entitled to reduce the amount of the letter of credit and the corresponding restricted cash upon meeting certain conditions noted within the lease agreement.  

Short-Term Investments

Short-term investments represent holdings of available-for-sale debt securities in accordance with the Company’s investment policy and cash management strategy. Short-term investments mature within one year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The cost of marketable securities sold is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income (expense), net, in the accompanying statement of operations.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the estimated useful life of each asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values.

F-9


 

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. 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 on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s investments and its derivative liability are carried at fair value determined according to the fair value hierarchy described above (see Note 4). The carrying value of accounts payable and accrued expenses approximate their fair value due to the short-term nature of these liabilities.

Segment Information

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s singular focus is developing therapeutics to treat protein conformational diseases. All of the Company’s tangible assets are held in the United States. To date, all of the Company’s revenue is collaboration revenue earned from activities in the United States.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

Under ASC 605, the Company recognized revenue for each unit of accounting when all of the following criteria were met: persuasive evidence of an arrangement existed; delivery had occurred or services had been rendered; the seller’s price to the buyer was fixed or determinable; and collectability was reasonably assured. The Company was recognizing revenue related to collaboration agreements over the expected research and development period using the proportional performance method.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

F-10


 

The Company enters into licensing agreements which are within the scope of ASC 606, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance obligations. The Company recognizes a contract asset or liability for the difference between the Company’s performance (i.e., the goods or services transferred to the customer) and the customer’s performance (i.e., the consideration paid by, and unconditionally due from, the customer).

Exclusive Licenses

If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

Research and Development Services

The promises under the Company’s collaboration and license agreements generally include research and development services to be performed by the Company on behalf of the collaboration partner. As the provision of research and development services is a part of the Company’s central operations, when the Company is principally responsible for the performance of these services under the agreements, the Company recognizes revenue on a gross basis for research and development services in accordance with the ASC 606 framework described above.

Customer Options

If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the

F-11


 

customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative stand-alone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

Milestone Payments

At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones or other variable consideration should be included in the transaction price. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue  at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. For a complete discussion of accounting for collaboration revenues, see Note 10, “Significant Agreements.”

Embedded Derivatives

Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. An embedded derivative exists associated with an alternate payment option upon change of control within the research, development and commercialization agreement with Cystic Fibrosis Foundation, Inc. (“CFF”) (see Note 4). The embedded derivative has been bifurcated and is classified as a liability on the balance sheet and separately accounted for at its fair value. The derivative liability is marked-to-market every reporting period. Changes in fair value of the derivative liability are recognized as a component of other income (expense), net, in the accompanying statement of operations.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facilities costs, depreciation, third-party license fees, and external costs of outside vendors engaged to conduct preclinical development activities and clinical trials. Research and development expenses include the Company’s costs of performing services in connection with its collaboration agreements and research grant. Research and development costs that are paid in advance of performance are capitalized as prepaid expenses and expensed over the period that the goods or services are provided or until it is no longer expected that the goods will be delivered or the services rendered.

F-12


 

Research Contract Costs and Accruals

The Company has entered into various research and development contracts with research institutions and other companies both inside and outside of the United States. These agreements are generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

Patent Costs

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

Stock-Based Compensation

The Company measures all stock-based awards granted to employees based on the fair value on the date of the grant and recognizes compensation expense of those awards over the requisite service period, which is usually the vesting period of the respective award. Generally, the Company issues stock options and restricted stock awards to employees with service-based vesting conditions and records the expense for these awards using the straight-line method.

The Company measures stock-based awards granted to nonemployees based on the fair value of the award on the date on which the related service is complete. Compensation expense is recognized over the period during which services are rendered. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model. The Company does not recognize compensation expense for awards with performance-based vesting conditions granted to consultants and nonemployees for which satisfaction of the performance conditions is not solely within the control of the holder until the performance conditions have been met.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. Due to the lack of complete company-specific historical and implied volatility data for the full expected term of the stock-based awards, the Company estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. The expected term of stock options granted to employees is determined utilizing the “simplified” method, whereby the expected term equals the average of the vesting term and the original contractual term of the option. The expected term of stock options granted to nonemployees is equal to the contractual term of the option. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based upon the fact the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. The Company accounts for forfeitures as they occur and classifies stock-based compensation expense in its statement of operations in the same manner that the award recipients’ payroll costs are classified or in which the award recipients’ service payments are classified.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders.   

F-13


 

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Net Loss per Share

Basic and diluted net loss per share have been calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted net income per share is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common equivalent shares outstanding for the period, including any dilutive effect from outstanding stock options, unvested restricted stock, restricted stock units, and employee stock purchase plan stock using the treasury stock method. Basic net loss is based solely on the number of common shares outstanding during the year. Since the Company is reporting a net loss for all periods presented, all common stock equivalents are considered anti-dilutive and are excluded from the calculation of diluted net loss per share.

Recently Adopted Accounting Pronouncements

ASU No. 2014-09,  Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 606, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition (“ASC 605”), and creates a new topic, ASC 606. In 2015 and 2016, the FASB issued additional ASUs related to ASC 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification performance obligations and licensing , and other improvements and practical expedients. Companies have the option of applying this new guidance retrospectively to each prior reporting period presented (the full retrospective method) or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application (the modified retrospective method). The Company adopted this new standard on January 1, 2018, using the modified retrospective method for adoption. As of January 1, 2018, t he Company only had one contract (see Note 10) within the scope of ASC 606. The Company has elected to use the practical expedient that is permitted under the rules of the adoption and has not retrospectively restated its contracts that have been amended at each amendment date as is generally required under ASC 606. Instead, upon adoption, the Company reflected the aggregate effect of all modifications that occurred before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations; determining the transaction price; and allocating the transaction price to the satisfied and unsatisfied performance obligations.

F-14


 

On January 1, 2018, the Company recorded a cumulative-effect decrease to the opening accumulated deficit of $1.1 million and a corresponding decrease to deferred revenue due to the adoption of ASC 606. As of December 31, 2018, the impact of the adoption of ASC 606 on the Company’s financial statement was as follows (in thousands):

 

 

 

December 31, 2018

 

 

 

As Reported

under ASC

606

 

 

Balance without

Adoption of

ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, current

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue for the 12 months

   ended December 31, 2018

 

$

2,840

 

 

$

3,945

 

 

$

(1,105

)

 

The most significant change related to the Company’s determination of transaction price at inception and each reporting period as well as the revenue recognition pattern for the Astellas Agreement (as defined below) with Astellas as well as treatment of variable consideration in the form of milestone payments. Under ASC 605, the research funding support payments, reimbursement of third-party costs, and milestone payments were being recognized by the Company as revenue on a straight-line basis over the year research term of the agreement, which commenced in January 2015, with a cumulative catch-up for the elapsed portion of the research term being recognized at the time any such payments are earned. Under ASC 606, the Company is recognizing the revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. For further discussion of the adoption of this standard, see Note 10.

ASU No. 2016-02, Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. Under this new lease standard, leases are required to be recognized on the balance sheet as right-of-use assets and operating lease liabilities. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.

Due to the Company commencing a new lease in Boston, Massachusetts, in January 2018, the Company elected to early adopt the standard effective January 1, 2018, as permitted by the guidance, in order to enhance overall transparency within financial reporting. The Company has implemented the standard using the required modified retrospective approach and has also elected to utilize the package of practical expedients. The expedients used by the Company are as follows: (1) allowing an entity to not reassess the lease classification for any expired or existing leases, (2) allowing an entity to not reassess the treatment of initial direct costs as they related to existing leases, and (3) allowing an entity to not reassess whether expired or existing contracts are or contain leases. The company also elected the practical expedient to use hindsight in determining the appropriate lease term and in assessing impairment of its right-of- use assets. In using the modified retrospective approach, the Company is required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented.

During 2017, the Company was deemed the accounting owner of the construction project for the build-to-suit lease in Boston, Massachusetts, because of the Company’s involvement in the build-out of the space. Under the new standard, the Company is no longer considered the accounting owner of the leased space due to (1) not having the right to obtain or control the leased premises during the construction period, (2) having no right of payment for the partially constructed assets, and the leased premises are not of a specialized nature and, thus, could be potentially leased to another tenant, and (3) not legally owning or controlling the land on which the property improvements will be constructed. As such, upon transition, the existing construction-in-progress balance within property and equipment, and the corresponding build-to-suit facility lease financing obligation balance within other liabilities,

F-15


 

current and noncurrent, have been derecognized. Prior period results have been restated to this effect through to the earliest period presented. The adoption of this standard has had a material impact on the Company’s financial position but did not significantly affect the Company’s results of operations. See Impacts on Previously Reported Results below.

Impact to Previously Reported Results

The impact of the adoption of the new leasing standard on the balance sheet as of December 31, 2017, is as follows (in thousands):

 

 

 

December 31, 2017

 

 

 

As

Previously

Reported

 

 

New Lease

Standard

Adjustment

 

 

As restated

 

Operating lease right-of-use assets, net

 

$

 

 

$

472

 

 

$

472

 

Property and equipment, net

 

 

16,567

 

 

 

(16,143

)

 

 

424

 

Deferred rent, current

 

 

87

 

 

 

(87

)

 

 

 

Operating lease liabilities, current

 

 

 

 

 

559

 

 

 

559

 

Other liabilities, current

 

 

902

 

 

 

(902

)

 

 

 

Other liabilities, net of current

 

 

15,315

 

 

 

(15,315

)

 

 

 

Accumulated deficit

 

 

(216,882

)

 

 

74

 

 

 

(216,808

)

 

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . The new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new standard also clarifies that an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The new standard was effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash (“ASU 2016-18”).  ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. The new standard was effective for the Company on January 1, 2018. This resulted in the $0.8 million and $2.0 million of restricted cash for the years ended December 31, 2018 and 2017, respectively, being displayed within the overall change in the cash balance on the statement of cash flows.

F-16


 

ASU 2017-09, Compensation – Stock Compensation (Topic 719): Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 719): Scope of Modification Accounting . The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new standard was effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations as there were no changes to terms or conditions of share-based payments during the year ended December 31, 2018.

Recently Issued Accounting Pronouncements

ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new standard will be effective beginning January 1, 2019, and early adoption is permitted. The Company has determined the adoption of this standard will not have a material impact on its financial statements.

ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measure in Topic 820, including removals of existing disclosures, modifications of existing disclosures, and additions of new disclosures. Certain amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair values measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim of annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all period presented upon their effective date. Early adoption is permitted for any removed or modified disclosure. The new standard is effective for the Company on January 1, 2020. The Company is currently evaluating the impact that the adoption of ASU 2018-13 will have on its results of operations.

3.

Short-Term Investments

The following is a summary of the Company’s short-term investments as of December 31, 2018 and 2017 (in thousands) :

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

41,478

 

 

$

2

 

 

$

(3

)

 

$

41,477

 

U.S. treasury securities

 

 

48,090

 

 

 

3

 

 

 

(1

)

 

$

48,092

 

 

 

$

89,568

 

 

$

5

 

 

$

(4

)

 

$

89,569

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

9,817

 

 

$

 

 

$

(1

)

 

$

9,816

 

U.S. treasury securities

 

 

34,923

 

 

 

1

 

 

 

(2

)

 

 

34,922

 

 

 

$

44,740

 

 

$

1

 

 

$

(3

)

 

$

44,738

 

 

F-17


 

The Company did not have any realized gains or losses on its short-term investments for the years ended December 31, 2018 and 2017. There were no other-than-temporary impairments recognized for the years ended December 31, 2018 and 2017.

4.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

Fair Value Measurements as of December 31, 2018 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

26,806

 

 

$

 

 

$

 

 

$

26,806

 

U.S. treasury securities

 

 

 

 

 

500

 

 

 

 

 

 

500

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

41,477

 

 

 

 

 

 

41,477

 

U.S. treasury securities

 

 

 

 

 

48,092

 

 

 

 

 

 

48,092

 

 

 

$

26,806

 

 

$

90,069

 

 

$

 

 

$

116,875

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

 

 

Fair Value Measurements as of December 31, 2017 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,871

 

 

$

 

 

$

 

 

$

13,871

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

8,960

 

 

 

 

 

 

8,960

 

U.S. treasury securities

 

 

 

 

 

3,497

 

 

 

 

 

 

3,497

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise

   securities

 

 

 

 

 

9,816

 

 

 

 

 

 

9,816

 

U.S. treasury securities

 

 

 

 

 

34,922

 

 

 

 

 

 

34,922

 

 

 

$

13,871

 

 

$

57,195

 

 

$

 

 

$

71,066

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

25

 

 

$

25

 

 

During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.

Derivative Liability

The derivative liability relates to a cash settlement option associated with the changes of control provision in the Company’s Cystic Fibrosis Foundation, Inc. (“CFF”) agreement, which meets the definition of an embedded derivative. The fair value of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments. The fair value of the derivative liability was not material at December 31, 2018 or 2017.

F-18


 

5. Prepaids and Other Current Assets

Prepaids and other current assets consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid clinical, manufacturing and scientific

   expenses

 

$

1,660

 

 

$

568

 

Prepaid insurance expenses

 

 

108

 

 

 

55

 

Other prepaid expenses and other current assets

 

 

713

 

 

 

754

 

 

 

$

2,481

 

 

$

1,377

 

 

6.

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

Useful Life

 

December 31,

 

 

 

(Years)

 

2018

 

 

2017

 

Laboratory equipment

 

5 years

 

$

2,715

 

 

$

3,299

 

Furniture and fixtures

 

5 years

 

 

368

 

 

 

157

 

Computer and office equipment

 

3 – 5 years

 

 

209

 

 

 

169

 

Construction-in-progress

 

 

 

 

8

 

 

 

 

 

 

 

 

 

3,300

 

 

 

3,625

 

Less: Accumulated depreciation and

   amortization

 

 

 

 

(2,695

)

 

 

(3,201

)

 

 

 

 

$

605

 

 

$

424

 

 

Depreciation and amortization expense was $1.8 million and $1.4 million for the years ended December 31, 2018 and 2017, respectively. As part of the move from the Cambridge office to the Boston office, the Company retired $1.1 million of fixed assets with a net book value of less than $0.1 million.

7.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued payroll and related expenses

 

$

2,746

 

 

$

1,542

 

Accrued research and development expenses

 

 

1,965

 

 

 

3,930

 

Accrued professional fees

 

 

799

 

 

 

556

 

Accrued other

 

 

151

 

 

 

92

 

 

 

$

5,661

 

 

$

6,120

 

 

 

F-19


 

8. Common and Preferred Stock

As of December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 125,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share, all of which is undesignated. Each share of common stock entitles the holder to one vote for the election of directors and on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of the preferred stockholders.

The Company has reserved for future issuance the following number of shares of common stock:

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

2016 and 2008 Stock option incentive plan

 

 

4,258,783

 

 

 

3,474,566

 

2016 Employee stock purchase plan

 

 

386,539

 

 

 

266,685

 

 

 

 

4,645,322

 

 

 

3,741,251

 

 

9.

Stock-Based Compensation

2016 Stock Option and Incentive Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Plan, which became effective on February 9, 2016. The 2016 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards and other stock-based awards. The number of shares initially reserved for issuance under the 2016 Plan is 1,581,839 shares. The number of shares of common stock that may be issued under the 2016 Plan will automatically increase on each January 1, beginning on January 1, 2017, by the lesser of 3% of the shares of the Company’s common stock outstanding on the immediately preceding December 31 or an amount determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, repurchased or are otherwise terminated by the Company under the 2016 Plan and the 2008 Equity Incentive Plan, as amended (the “2008 Plan”) will be added back to the shares of common stock available for issuance under the 2016 Plan. As of December 31, 2018, the total number of shares reserved under the 2016 Plan and 2008 Plan was 4,258,783 and the Company had 936,682 shares available for future issuance under the 2016 Plan.

2016 Employee Stock Purchase Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which became effective in on February 9, 2016. A total of 138,757 shares of common stock were reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the 2016 ESPP will automatically increase on each January 1, beginning on January 1, 2017 and ending on January 1, 2026, by the least of (i) 138,757 shares of common stock, (ii) 1% of the Company’s shares of common stock outstanding on the immediately preceding December 31 and (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors. During the years ended December 31, 2018 and 2017, 18,903 and 10,829 shares were issued under this plan, respectively. As of December 31, 2018, the total number of shares reserved under the 2016 ESPP was 386,539 shares. The Company recognized less than $0.1 million of stock-based compensation during 2018 related to this plan.

Stock Option Grants and Shares to Nonemployees

Prior to 2013, the Company issued options to purchase 203,964 shares of common stock to nonemployees, primarily members of the Company’s scientific advisory board, that vest upon the achievement of specified development and clinical milestones. As of December 31, 2018, options for the purchase of 83,250 shares held by nonemployees remained unvested, pending achievement of the specified milestones, and had an aggregate fair value of $0.1 million. During the years ended December 31, 2018 and 2017, the Company did not grant any options to nonemployees under this plan.  

F-20


 

Bonus Restricted Stock Units (RSUs)

On February 1, 2018, the Company’s board approved executive bonuses for the year ended December 31, 2017, and elected payment to be made through a grant of an equivalent number of RSUs based on the February 1, 2018, closing share price of the Company’s common stock.  The requisite service period for the awards is from February 1, 2018, to February 1, 2019 (the vesting period).  The Company recognizes employee stock-based compensation expense for the bonus RSU grants on a straight-line basis over the vesting period of the awards.  The grants do not meet the criteria for liability classification as there is a fixed number of shares to be issued, and there is no variability in the number of shares which have been granted.  As of December 31, 2018, there are 163,425 RSUs are remaining to vest. Total expense recognized for the year ended December 31, 2018 was $0.5 million.

A summary of the Company’s restricted stock unit activity and related information is as follows:

 

 

 

Number

of Shares

 

 

Weighted

Average

Grant Date Fair Value

 

Unvested balance at December 31, 2017

 

 

 

 

$

 

Granted

 

 

197,265

 

 

 

3.20

 

Vested

 

 

 

 

 

 

Forfeited

 

 

(33,840

)

 

 

3.20

 

Unvested balance at December 31, 2018

 

 

163,425

 

 

$

3.20

 

 

Stock Option Valuation

The fair value of each option awards was estimated on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:  

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Risk-free interest rates

 

 

2.68

%

 

 

2.00

%

Expected term (in years)

 

 

6.00

 

 

 

5.96

 

Expected volatility

 

 

78.47

%

 

 

75.18

%

Expected dividend yield

 

 

 

 

 

 

 

Stock Options

The following table summarizes the Company’s stock option activity (in thousands except share and per share amounts):

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average Remaining

Contractual Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(Years)

 

 

 

 

 

Outstanding at December 31, 2017

 

 

2,838,558

 

 

$

6.69

 

 

 

8.10

 

 

$

3,213

 

Granted

 

 

1,004,025

 

 

 

3.22

 

 

 

 

 

 

 

 

 

Exercised

 

 

(8,775

)

 

 

2.43

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(675,132

)

 

 

5.14

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2018

 

 

3,158,676

 

 

$

5.93

 

 

 

7.53

 

 

$

471

 

Vested and expected to vest at December 31, 2018

 

 

3,075,426

 

 

$

6.03

 

 

 

7.67

 

 

$

399

 

Options exercisable at December 31, 2018

 

 

1,697,979

 

 

$

6.44

 

 

 

6.92

 

 

$

280

 

 

F-21


 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2018 and 2017 was less than   $0.1 million.

The Company received cash proceeds from the exercise of stock options of less than $0.1 million during the years ended December 31, 2018 and 2017.

The weighted average grant-date fair value of stock options granted during the years ended December 31, 2018 and 2017, was $3.22 and $4.57, respectively.

The total fair value of options vested during the years ended December 31, 2018 and 2017, was $3.5 million and $2.5 million, respectively.

Stock-based Compensation

Stock-based compensation expense was classified in the statements of operations as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Research and development

 

$

1,571

 

 

$

1,326

 

General and administrative

 

 

2,844

 

 

 

2,406

 

 

 

$

4,415

 

 

$

3,732

 

 

As of December 31, 2018, total unrecognized compensation cost related to the unvested stock-based awards was $4.3 million, which is expected to be recognized over a weighted average period of 2.02 years.

10.

Significant Agreements

Genentech

In December 2018, the Company entered into a Technology Transfer and License Agreement (the “Genentech Agreement”) with Genentech, Inc. (Genentech) under which the Company granted Genentech an exclusive worldwide license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network.  The rights do not include CFTR modulators and are unrelated to the Company’s investigational medicines or other ongoing research programs in cystic fibrosis.

In connection with the terms of the Genentech Agreement, the Company is entitled to a nonrefundable cash payment of $5.0 million following the successful completion of the technology and materials transfer to Genentech and future milestone payments in the aggregate of approximately $96.0 million upon the achievement of specified development, regulatory and commercial milestones.  In addition, Genentech is obligated to pay the Company tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the Genentech Agreement.  There are no cancellation, termination or refund provisions in the Genentech Agreement that contain material financial consequences to the Company.  Unless earlier terminated, the Genentech Agreement continues in full force and effect until the passing or expiration of all royalty payment obligations.  Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy.  Genentech may terminate the Genentech Agreement in its entirety for convenience upon thirty days’ notice to the Company.  

The Company evaluated the Genentech Agreement in accordance with the provisions of ASC 606.  The Company’s obligations under the Genentech Agreement are the following promises: (i) exclusive license to certain intellectual property associated with a specific target and (ii) technology and materials transfer related to the intellectual property underlying the licensed technology. The Company determined that the exclusive license is not distinct from the associated technology and materials transfer because the customer cannot benefit from or utilize the license without the technology and materials transfer.  Specifically, the Company concluded that the exclusive license is not capable of being distinct from the associated technology and materials transfer because Genentech

F-22


 

does not have the knowledge or expertise to fully exploit potential product candidates without the accompanying technology and materials provided pursuant to the transfer and no other third party can perform the transfer due to the Company’s proprietary knowledge and specialized expertise with respect to the licensed intellectual property.  Accordingly, the Company concluded that these promises should be combined into a single performance obligation (the License and Transfer Performance Obligation ).

As of December 31, 2018, the Company has measured the transaction price solely in reference to the $5.0 million payment due upon receipt of notice from Genentech regarding the satisfactory completion of the technology and materials transfer.  None of the variable consideration payable under the arrangement has been included in the transaction price as of December 31, 2018.  Through December 31, 2018, the Company has not achieved any research, development, regulatory or commercial milestones or earned any royalties under the Genentech Agreement.  The Company utilizes the most likely amount method to estimate the amount of research, development and regulatory milestone payments to be received.  As part of the evaluation for the research and development milestone payments, the Company considers several factors, including the stage of research and development of the compounds included in the arrangement, the risk associated with the remaining research and development work required to achieve the milestone and the Company’s level of involvement in the research and development activities.  All research and development milestone payments have been excluded from the transaction price through December 31, 2018 due to the uncertainty of achieving the associated research outcome and the uncertainty of initiating the specified phase of clinical research.  Regulatory milestone payments are triggered upon the first commercial sale following receipt of regulatory approval from the FDA or other global regulatory authorities; therefore, such amounts will be excluded from the transaction price until the associated regulatory approval is received.  The commercial milestone payments and royalties are subject to the royalty recognition constraint whereby such amounts will be recognized as revenue upon the later of:  (i) when the related sales occur or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied, or partially satisfied, because the exclusive license is deemed to be the sole or predominant item to which the payments relate.  The Company will update its assessment of the estimated transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur.  The Company did not adjust the promised amount of consideration for the effects of a significant financing component because the Company expects that the period between when the promised goods and services are transferred and when the customer pays for those goods and services will be one year or less.  There were no changes in the transaction price during the year ended December 31, 2018.  

The Company allocated the transaction price of $5.0 million to the sole identified performance obligation in its entirety.  Amounts allocated to the combined performance obligation comprised of the exclusive license and the associated technology and materials transfer will be recognized as revenue at a point in time based on the date on which Genentech provides notice regarding the satisfactory completion of the technology and materials transfer.  Upon the successful execution of the technology and materials transfer, control is considered to be transferred to both the exclusive license and the technology and materials transfer promises due primarily to the payment contingency and timing of the conveyance of risks and rewards of ownership.  

The Company did not recognize any revenue associated with the Genentech Agreement through December 31, 2018 because the technology and materials transfer had not yet been completed.  In February 2019, the Company completed the technology and materials transfer and received the upfront payment of $5.0 million.  As of December 31, 2018, the Company did not have any receivables or deferred revenue related to the Genentech Agreement because neither had any payments under the arrangement become due nor had the underlying performance obligation been transferred.  

Astellas Pharma Inc.

In November 2014, the Company entered into the Collaborative Research, Development, Commercialization and License Agreement (the “Astellas Agreement”) with Astellas. The focus of the Astellas Agreement was to identify, develop and commercialize therapeutic candidates relating to the Unfolded Protein Response (“UPR”) pathway. The Astellas Agreement ended in December 2018.

F-23


 

Financial Terms

Under terms of the Astellas Agreement, Astellas purchased from the Company convertible promissory notes totaling $5.0 million with terms consistent with those of other investors that purchased convertible promissory notes issued during 2014. In addition, the Company was eligible to receive research funding support, based on the establishment of an annual research budget, and future research, development and sales milestone payments of up to $398.5 million, as well as tiered royalty payments ranging in the mid single-digit to low double-digit percentages of net sales, as defined in the agreement. Under the agreement, the companies conducted research during the initial research term, which was 3 ½ years, to identify lead compounds for clinical development. At the end of the research term, Astellas, in its sole discretion, could designate a development compound and make a milestone payment to the Company. The Company had the right, but not the obligation, to co-develop the compound.  If the Company did not exercise its option to co-develop the compound, Astellas had an exclusive right to the compound and sole right and responsibility for the development of the compound.

Term and Termination

The term of the Astellas Agreement commenced in November 2014 and would continue in full force and effect, unless terminated under the conditions described below, until expiration of all applicable royalty terms with respect to all licensed products in all countries in the territory defined as per the agreement.

The agreement was set to automatically terminate at the end of the 3 ½ year research term, in the second quarter of 2018, if Astellas had not designated at least one development compound, unless mutually agreed to be extended. In April 2018, the Company and Astellas entered into Amendment No. 6 (“Amendment No. 6”) to the Astellas Agreement.  Amendment No. 6 was effective beginning in April 2018 and extended the research term for the initial project under the Astellas Agreement to December 2018. As of December 31, 2018, the Astellas Agreement was complete; and all of the Company’s performance obligations under the contract had been satisfied. Astellas had the unilateral right to terminate the agreement on a project-by-project basis by providing written notice to the Company. Reciprocal termination rights under the agreement included termination for breach and termination for bankruptcy.

Accounting Analysis

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Astellas, is a customer. The Company identified the following material promises as of the most recent amendment in April 2018: (1) the research license; (2) the research services to be provided over the research term; and (3) participation in the Joint Research Committee (the “Committee”) to be provided over the research term of the agreement. The Company determined that the license and research services were not distinct from one another, as the license has limited value without the performance of the research and development activities. Participation in the Committee to oversee the research activities was determined to be quantitatively and qualitatively immaterial and therefore is excluded from performance obligations. As such, the Company determined that these promises should be combined into a single performance obligation.            

The Company evaluated the Astellas option right to designate a development compound, as described above, to determine whether it provides Astellas with a material right. The Company concluded that the option was not issued at a significant and incremental discount and Astellas has only the right to pursue negotiations for additional projects, and therefore does not provide a material right. As such, they are excluded from performance obligations at the inception of the arrangement.

Under the Astellas Agreement, in order to evaluate the appropriate transaction price as of the adoption of ASC 606, the Company determined that the payments received to date for research funding support and reimbursement of third-party costs, the estimated payments that will be received for research funding support and reimbursement of third-party costs over the remaining research term, and the milestone payments received to date represent the transaction price, which was allocated to the single performance obligation. The transaction price as of the adoption of ASC 606 and December 31, 2018 was $13.8 million. The option exercise fee that may be received is excluded

F-24


 

from the transaction price until the customer option is exercised. Future potential milestone payments were excluded from the transaction price, as all milestone amounts were fully constrained due to Astellas having only the right to pursue negotiations for additional projects.

Revenue associated with the performance obligation was recognized as the research and development services were provided using an input method, according to the costs incurred as related to the research and development activities and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control occurred over this period and in management’s judgment, was the best measure of progress towards satisfying the performance obligation. As of December 31, 2018, the research and development services related to this performance obligation were complete. The Company recognized revenue of $2.8 million and $5.3 million for the years ended December 31, 2018 and 2017, respectively. Amounts recorded as deferred revenue under the Astellas Agreement totaled $1.1 million as of December 31, 2017.

Presidents and Fellows of Harvard College Licensing Agreement

The Company has acquired certain exclusive and nonexclusive rights to use, research, develop and offer for sale certain products and patents under a licensing agreement, as amended in December 2013, with Presidents and Fellows of Harvard College (the “Harvard Agreement”). The Harvard Agreement was terminated in December 2017. The surviving rights obligate the Company to make payments to the licensor for milestones and royalties. Due to the termination of the Harvard Agreement, the future development, clinical and commercialization and sales milestone payments under the licensing agreement are up to $2.4 million. Under the surviving provisions of the licensing agreement, the Company will also owe low single-digit royalties on sales of commercial products, if any, developed using the licensed technologies for ten years following the first commercial sale. As of December 31, 2018 and 2017, the Company had not developed a commercial product using the licensed technologies and no pre-commercialization milestones had been achieved.

Cystic Fibrosis Foundation, Inc.

In March 2012, the Company entered into a Research, Development and Commercialization Agreement (the “CFF Agreement”) with CFF. Under terms of the CFF Agreement, which was subsequently amended in May 2013 and January 2014, CFF agreed to provide up to $5.7 million (the “Award’) in research funding to the Company over two non-consecutive one-year periods from March 2012 to March 2013 and from January 2014 to December 2014. The Company did not recognize any revenue under the CFF Agreement during the years ended December 31, 2018 and 2017.

Under the CFF agreement, the Company has agreed to make future sales-based milestone payments, which the agreement refers to as royalties, to CFF of up to $34.2 million upon achieving specified commercialization milestones with respect to the first of any product developed utilizing any compound covered under the collaboration agreement. The Company has also agreed to pay to CFF royalties of a mid single-digit percentage, up to an aggregate of $22.8 million, on any amounts received by the Company from the sale, license or transfer to a third party of rights in the technology developed as a result of this collaboration. Any such royalty payments shall be credited against the first three sales-based milestone payments owed by the Company through the second anniversary of the first commercial sale of a product developed as a result of this collaboration. As of December 31, 2018 and 2017, the Company had not developed a commercial product in connection with this collaboration, and it had not sold, licensed or transferred rights in the technology resulting from this collaboration.

In lieu of the milestone and royalty payments described above, in the event of a change of control of the Company, CFF may elect to accept a one-time payment equal to the consideration CFF would have received if it had owned (a) 268,265 shares of the Company’s common stock if the change of control occurs prior to the selection by the Company of a compound intended for product approval, or (b) 444,025 shares of the Company’s common stock if the change of control occurs after the selection by the Company of a compound intended for product approval. This alternative payment option upon a change of control would be cash settled in the event of a change of control and meets the definition of an embedded derivative. The Company estimated the fair value of this liability and concluded that the liability was immaterial as of the inception date of the CFF Agreement. The Company estimated the fair value of this derivative liability to be less than $0.1 million as of December 31, 2018 and 2017 (see Note 4). The CFF Agreement will expire when there are no longer any payment obligations, unless terminated earlier. Each

F-25


 

party may terminate for an uncured material breach of any material covenants or obligations or if any representation or warranty is materially untrue as of the date made and uncured after 30 days from notice. CFF may also terminate if a case or proceeding under the bankruptcy laws is filed against the Company and not dismissed within 60 days, or if the Company files for insolvency, reorganization, receivership, dissolution or liquidation.

 

11.

Income Taxes

During the years ended December 31, 2018 and 2017, the Company recorded no income tax benefits for the net operating losses incurred in each year or interim period, due to its uncertainty of realizing a benefit from those items. All the Company’s losses before income taxes were generated in the United States.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Federal statutory income tax rate

 

 

(21.0

)%

 

 

(34.0

)%

State income taxes, net of federal benefit

 

 

(6.1

)

 

 

(5.6

)

Research and development tax credit

   carryforwards

 

 

(3.9

)

 

 

(3.2

)

Return to provision

 

 

(0.6

)

 

 

 

Nondeductible expenses

 

 

0.4

 

 

 

0.7

 

Change in deferred tax asset valuation allowance

 

 

31.2

 

 

 

2.0

 

Effect of U.S. Tax Reform

 

 

 

 

 

40.1

 

Effective income tax rate

 

 

(0.0

)%

 

 

(0.0

)%

 

Net deferred tax assets as of December 31, 2018 and 2017 consisted of the following (in thousands):

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Net operating loss carryforwards

 

 

68,219

 

 

$

52,861

 

Research and development tax credit carryforwards

 

 

12,799

 

 

 

9,232

 

Accrued expenses and other

 

 

2,066

 

 

 

1,583

 

Total deferred tax assets before valuation allowance

 

 

83,084

 

 

 

63,676

 

Valuation allowance

 

 

(82,965

)

 

 

(63,660

)

Net deferred tax assets

 

 

119

 

 

 

16

 

Depreciation

 

 

(119

)

 

 

(16

)

Net deferred tax assets

 

$

 

 

$

 

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. The legislation resulted in significant changes to the U.S. corporate income tax system, including reducing the U.S. corporate tax rate from a top marginal rate of 35% to a flat rate of 21% effective for tax years beginning after December 31, 2017, elimination, reduction or limitation of certain domestic deductions and credits, limitation of the deduction for NOLs to 80% of current year taxable income, elimination of NOL carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits, including the orphan drug tax credit. As a result of the enacted tax law, the Company revalued the deferred tax assets and liabilities in 2017 at the new rate. The revaluation resulted in a reduction in deferred tax assets as of December 31, 2017 of $24.0 million with a corresponding reduction in the valuation allowance. Therefore, there was no net effect on the 2017 tax provision affecting the Company’s statement of operations.

 

F-26


 

As of December 31, 2018, the Company had federal and state net operating loss carryforwards (“NOLs”) of $ 252.6 million and $2 40.1 million, respectively, which may be available to offset future taxable income and federal and state NOLs begin to expire in 2026 and 2030, respectively. As of December 31, 2018, the Company also had federal and state research and development tax credit carryforwards of $10. 0 million and $3. 6 million, respectively, which may be available to offset future income tax liabilities. Federal and state research and development tax credit carryforwards begin to expire in 2027 and 2026, respectively.

Utilization of the net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not currently completed an evaluation of ownership changes through December 31, 2018 to assess whether utilization of the Company’s net operating loss or research and development credit carryforwards would be subject to an annual limitation under Section 382. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject to limitation. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.

The Company has not yet conducted a study of its research and development credit carryforwards. This study may result in an increase or decrease to the Company’s credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the statements of operations and comprehensive loss or statements of cash flows if an adjustment were required.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets, which are comprised principally of net operating losses and research and development tax credit carryforwards. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2018 and 2017. Management reevaluates the positive and negative evidence at each reporting period.

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2018 and 2017 related primarily to the increases in net operating loss carryforwards and research and development tax credit carryforwards and were as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2018

 

 

2017

 

Valuation allowance at beginning of year

 

$

(63,660

)

 

$

(62,442

)

Increases recorded to income tax provision

 

 

(19,305

)

 

 

(1,218

)

Valuation allowance at end of year

 

$

(82,965

)

 

$

(63,660

)

 

The Company has not yet recorded any amounts for unrecognized tax benefits, interest or penalties historically through December 31, 2018. The Company files income tax returns in the U.S. federal and state jurisdictions in which it operates. The Company’s income tax returns are generally subject to tax examinations for the tax years ended December 31, 2015 to the present. There are currently no pending income tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period.

F-27


 

12.

Net Loss per Share

Basic and diluted net loss per share was calculated as follows (in thousands except share and per share amounts):

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(61,832

)

 

$

(59,432

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding—basic and diluted

 

 

38,495,103

 

 

 

25,407,943

 

Net loss per share—basic and diluted

 

$

(1.61

)

 

$

(2.34

)

 

The following common stock equivalents have been excluded from the computation of diluted weighted-average shares outstanding, because such securities had an antidilutive impact:

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

3,158,676

 

 

 

2,838,558

 

Restricted stock units

 

 

163,425

 

 

 

 

 

 

 

3,322,101

 

 

 

2,838,558

 

 

13.

Leases

The Company has operating leases of office and laboratory space. In September 2017, the Company entered into a lease agreement for its new corporate headquarters, consisting of approximately 30,000 square feet of laboratory and office space located in Boston, Massachusetts. The new lease commenced in January 2018, and rent payments began in April 2018. This lease has a ten-year initial term with an option to extend for seven additional years.  The Company’s prior lease in Cambridge, Massachusetts, expired in May 2018.

F-28


 

The lessee has the right to terminate the lease in the event of the inability to use the space due to substantial damage while the lessor has the right to terminate the lease for tenant’s default of lease financial obligations.  Per the terms of the lease agreement, the Company does not have any residual value guarantees.  In calculating the present value of the lease payments, the Company has utilized its incremental borrowing rate based on electing the original lease term to account for each lease component and its associated non-lease components as a single lease component. It has allocated all the contract consideration across lease components only. This may result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied.  The Company’s real estate leases in Cambridge and Boston are net leases, as their non-lease components (i.e. common area maintenance) are paid separately from rent based on actual costs incurred. Therefore, the non-lease components were not included in the right-of-use asset and liability and are reflected as an expense in the period incurred.  As of December 31, 2018 and 2017, assets under operating lease were $13.8 million and $0.5 million, respectively.  The elements of lease expense were as follows (in thousands):

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

 

2017

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

2,232

 

 

$

1,143

 

Variable lease cost (1)

 

 

366

 

 

 

 

Total lease cost

 

$

2,598

 

 

$

1,143

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

Operating cash flows used for operating leases

 

$

1,634

 

 

$

1,344

 

Operating lease liabilities arising from obtaining

   right-of-use assets

 

$

14,252

 

 

$

 

Weighted-average remaining lease term

 

9.34 years

 

 

0.34 years

 

Weighted-average discount rate

 

 

4.50

%

 

 

4.06

%

 

(1)

The variable lease costs for the year ended December 31, 2018 include adjustments to the initial direct costs for the Boston lease along with common area maintenance charges.

As of December 31, 2018, minimum rental commitments under this lease are as follows (in thousands):

 

2019

 

$

1,686

 

2020

 

 

1,733

 

2021

 

 

1,780

 

2022

 

 

1,829

 

2023

 

 

1,880

 

Thereafter

 

 

8,757

 

Total lease payments

 

 

17,665

 

Less: imputed interest

 

 

(3,413

)

Total

 

$

14,252

 

 

14.

Commitments and Contingencies   

Dr. Stelios Papadopoulos

In May 2016, the Company entered into a Letter Agreement with Dr. Stelios Papadopoulos with an effective date of July 1, 2016, and a term of 36 months. Under the terms of the Letter Agreement, Dr. Papadopoulos will provide certain consulting and advisory services to the Company as and when requested. The Company will pay a quarterly retainer of $0.2 million to Dr. Papadopoulos for the duration of the Letter Agreement with aggregate fees totaling $2.5 million over the term of the Letter Agreement. The retainer may be paid in cash, common stock of the Company or a combination of the two at the discretion of the Company. Any common stock issued in settlement of payments due under this agreement will be valued at the average closing price of the stock for 20 trading days, as listed on the NASDAQ, ending three trading days prior to the issuance of the shares. Additionally, under the terms

F-29


 

of the Letter Agreement, if the Company consummates a merger and acquisition (“M&A”) transaction, as defined in the Letter Agreement, with another party during the term of the Agreement or the 12-month period following the expiration of the Letter Agreement, Dr. Papadopoulos will be entitled to a M&A transaction fee equal to 1% of the value of the transaction, as defined in the Letter Agreement. During the years ended December 31, 2018 and 2017, under this consulting agreement, the Company issued 239,490 and 188,462 shares, respectively, for $0.9 million and $0.8 million, respectively, which is recorded within general and administrative expense in the accompanying statements of operations. Future retainer payments due under the Letter Agreement total $0.4 million as of December 31, 2018.

Legal Proceedings

The Company is not currently a party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs due to such indemnifications. The Company is not aware of any claims under indemnification arrangements, and it has not accrued any liabilities related to such obligations in its financial statements as of December 31, 2018 or 2017.

Purchase Commitments

Purchase commitments represent non-cancelable contractual commitments associated with certain clinical trial activities within the Company’s clinical research organization.

15.

401(k) Savings Plan

The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Company’s board of directors. As of December 31, 2018, no contributions have been made to the plan by the Company.

F-30


 

16.

Quarterly Financial Data (Unaudited)

The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include all recurring adjustments necessary for a fair statement of such information (in thousands except for share and per share amounts).

 

 

 

Three Months Ended

 

 

 

March 31,

2018

 

 

June 30,

2018

 

 

September 30,

2018

 

 

December 31,

2018

 

Revenue

 

$

942

 

 

$

843

 

 

$

1,055

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,400

 

 

 

12,604

 

 

 

15,591

 

 

 

13,717

 

General and administrative

 

 

3,823

 

 

 

3,957

 

 

 

4,150

 

 

 

3,780

 

Total operating expenses

 

 

12,223

 

 

 

16,561

 

 

 

19,741

 

 

 

17,497

 

Loss from operations

 

 

(11,281

)

 

 

(15,718

)

 

 

(18,686

)

 

 

(17,497

)

Interest income

 

 

165

 

 

 

194

 

 

 

171

 

 

 

342

 

Other income (expense), net

 

 

90

 

 

 

46

 

 

 

87

 

 

 

255

 

Net loss

 

$

(11,026

)

 

$

(15,478

)

 

$

(18,428

)

 

$

(16,900

)

Net loss per share—basic and diluted

 

$

(0.32

)

 

$

(0.43

)

 

$

(0.50

)

 

$

(0.36

)

Weighted average common shares

   outstanding—basic and diluted

 

 

34,474,004

 

 

 

36,009,109

 

 

 

36,694,957

 

 

 

46,687,910

 

 

 

 

Three Months Ended

 

 

 

March 31,

2017

 

 

June 30,

2017

 

 

September 30,

2017

 

 

December 31,

2017

 

Revenue

 

$

1,021

 

 

$

1,147

 

 

$

1,551

 

 

$

1,622

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,108

 

 

 

15,370

 

 

 

12,894

 

 

 

12,282

 

General and administrative

 

 

3,170

 

 

 

2,902

 

 

 

2,741

 

 

 

2,847

 

Total operating expenses

 

 

16,278

 

 

 

18,272

 

 

 

15,635

 

 

 

15,129

 

Loss from operations

 

 

(15,257

)

 

 

(17,125

)

 

 

(14,084

)

 

 

(13,507

)

Interest income

 

 

191

 

 

 

169

 

 

 

155

 

 

 

126

 

Other income (expense), net

 

 

(30

)

 

 

(2

)

 

 

(25

)

 

 

(43

)

Net loss

 

$

(15,096

)

 

$

(16,958

)

 

$

(13,954

)

 

$

(13,424

)

Net loss per share—basic and diluted

 

$

(0.60

)

 

$

(0.68

)

 

$

(0.56

)

 

$

(0.51

)

Weighted average common shares

   outstanding—basic and diluted

 

 

25,020,337

 

 

 

25,040,131

 

 

 

25,093,344

 

 

 

26,465,521

 

 

F-31

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