Overview
XBiotech Inc. (“XBiotech” or the “Company) is a
pre-market biopharmaceutical company engaged in discovering and developing True Human™ monoclonal antibodies for treating
a variety of diseases. True Human™ monoclonal antibodies are those which occur naturally in human beings—as opposed
to being derived from animal immunization or otherwise engineered. We believe that naturally occurring monoclonal antibodies have
the potential to be safer and more effective than their non-naturally occurring counterparts. While focused on bringing our lead
product candidate to market, we also have developed a True Human™ pipeline and manufacturing system.
The majority of our efforts to date have been concentrated on developing
our lead product candidate (also known as Xilonix™, MABp1, CA-18C3, CV-18C3, RA-18C3, and T2-18C3), a therapeutic antibody
which specifically neutralizes interleukin-1 alpha (IL-1
a
). IL-1
a
is a pro-inflammatory protein produced by leukocytes and other cells, where it plays a key role in inflammation. When unchecked,
inflammation can contribute to the development and progression of a variety of different diseases, such as cancer, vascular disease,
inflammatory skin disease, and diabetes. Our clinical studies have shown that blocking IL-1
a
with our lead product candidate may have a beneficial effect on several diseases.
XBiotech has completed a Phase III study in Europe for the treatment
of symptomatic colorectal cancer and is in the process of seeking marketing approval for our lead product candidate with the European
Medicines Agency (EMA) with a Marketing Authorization Application (MAA) submission in March 2016. Data from this Phase III study
was published in
The Lancet Oncology
in January 2017. In the fourth quarter of 2016, the Company received the Day 180 List
of Outstanding Issues (D180LOI) from the EMA’s Committee for Medicinal Products for Human Use (CHMP) in connection with the
Company's MAA. Clinical objections pertain primarily to benefit risk justification of the therapy and pharmacokinetics. Quality
objections relate to qualification of the cell line used to produce the antibody and scaled down systems used to demonstrate robustness
of the purification process as well as clarification of critical process controls. No objections remain regarding non-clinical
aspects of the application.
In February 2017, the Company reported that it was granted an additional
30 days to submit its responses, extending the “clock-stop” period to March 22, 2017. This extension will allow sufficient
time for the Company to complete a phase I pharmacokinetic (PK) study in healthy subjects. Data from this study is intended to
generate additional time points for PK analysis. This new PK data is intended to address relevant technical questions in the D180LOI
and will be included in the Company’s response submission scheduled for March 22, 2017.
We received fast track designation from the Food and Drug Administration
(FDA) in October 2012 to develop our lead product candidate as a treatment in the setting of metastatic colorectal cancer. The
purpose of the fast track designation is to aid in the development, and expedite the review of drugs that have the potential to
treat a serious or life-threatening disease. Enrollment was completed in late 2016 in a global double-blind, placebo-controlled
Phase III study for the treatment of advanced colorectal cancer with overall survival as the primary endpoint.
In February 2017, the Company announced an affirmative outcome in
the first interim analysis of this study, prospectively planned to occur at 50% of events (or 276 deaths). The Independent Data
Monitoring Committee (IDMC) performed the unblinded analysis and reported the study had no safety concerns and that indications
of efficacy thus far were sufficient to recommend proceeding with the study without modification. Per the IDMC charter, this was
the first of two interim efficacy analyses planned prior to the final analysis for overall survival. Survival analyses are also
to be performed at 414 (75%) and 552 (100%) events at the respective stages. The study may be stopped for efficacy or futility
at the second remaining interim analysis. This is also the case at the final analysis. Patients are otherwise followed for up to
18 months in order to determine overall survival. Based on a successful outcome of the FDA Phase III study, we will seek marketing
approval for our lead product candidate with the FDA. Assuming such marketing approvals are obtained, we would distribute and sell
this product through our own direct sales force or with a commercial partner.
We have also investigated our lead product candidate in clinical
trials for other inflammatory conditions, including vascular disease (which led to fast track designation from the FDA to develop
MABp1 as a therapy to reduce the need for re-intervention after treatment of peripheral vascular disease with angioplasty or other
endovascular methods of treatment), type II diabetes, acne, psoriasis, pyoderma gangrenosum (PG) and hidradenitis suppurativa
(HS). Data from each of these trials have been published in journals, with the exception of PG and HS. You can find a listing of
these publications in the
Summary of Clinical Findings to Date
section of this document.
The Company completed enrollment in a double-blinded, placebo-controlled
investigator-sponsored study for hidradenitis suppurativa (HS), an inflammatory skin disease of such severity that is often treated
through surgical removal of lesions. Twenty patients with moderate to severe hidradenitis that had progressed on standard therapies
were enrolled in this study. Patients received MABp1 for 12 weeks and were then followed an additional 12 weeks to observe durability
of treatment. Efficacy measures include assessment of Hidradenitis Suppurativa Clinical Response (HiSCR) scores, a validated method
for evaluating efficacy in HS patients, as well as quality of life assessment (as measured by the Dermatology Life Quality Index,
(DLQI). The Company announced topline results from this study in February 2017, reporting a response rate in patients treated with
MABp1 versus placebo of 60% vs 10%, respectively (p=0.035).
The Company has completed enrollment in its Phase I/II study evaluating
dosing, safety and efficacy of its novel antibody, 514G3. 514G3 was developed from a healthy human donor with natural antibodies
effective at neutralizing Methicillin-resistant
Staphylococcus aureus
(MRSA) and non-MRSA forms of
Staphylococcus
aureus (S. aureus)
. 514G3 works to eliminate the principle immune evasion mechanism of the bacteria, allowing white blood cells
to detect and destroy the bacteria. 514G3 has potential to treat all strains of MRSA and can be used without consideration for
strain-specific resistance to various antibiotics. As a True Human monoclonal antibody, 514G3 is expected to be well tolerated
without the side effects or risks of antibiotics, including the lack of risk of antibiotic resistance. This proprietary antibody
received Fast Track Designation by the FDA for the treatment of all forms of
S. aureus
infections, including Methicillin-resistant
S. aureus
(MRSA). Top line results from this study are anticipated to be reported in first quarter 2017.
The Company is also developing other infectious disease therapies in its pipeline. XBiotech is using its True
Human™ antibody technology to develop a first-in-class oral monoclonal antibody against
clostridium difficile (C. diff)
.
C. diff
is a bacterium that can cause severe infections in the gastrointestinal tract. The infection is greatest for individuals
who are being treated with antibiotics, those that are hospitalized or the elderly, particularly those in care facilities. Additionally,
about 1 in 5 patients that become infected with
C. diff
experience a relapse and need to be
re-treated. Recent outbreaks and increased virulence of
C.
diff
suggest the urgent need to identify
novel approaches to treat the disease. We have now shortlisted several anti-C. diff antibody candidates, which are now being tested
in-vivo efficacy studies in C. diff infection models. The Company has shortlisted therapeutic antibody candidates against herpes
zoster that will be tested in-vitro for efficacy in second quarter 2017. The isolation of candidate True human therapeutic antibodies
against influenza are ongoing.
Our True Human™ antibody therapeutics are developed in-house
using our proprietary discovery platform. Identifying True Human™ antibodies useful for therapeutics may involve screening
thousands of blood donors. To distinguish the clinically relevant antibodies from irrelevant background antibody molecules in donor
bloods, we use our Super High Stringency Antibody Mining (SHSAM™) technology. After we identify donors, we undertake the
complex process of identifying the unique genes for producing the native antibody. Once the nucleic acid sequence is isolated,
we are able to introduce these sequences into engineered production cells to manufacture large quantities of product candidate
for use in humans. All patents and other intellectual property relating to both the composition of matter and methods of use of
our True Human™ antibodies were developed internally by us. We manufacture these antibodies using a proprietary expression
system licensed from Lonza Sales AG. The manufacturing process we have developed incorporates both proprietary and non-proprietary
technology.
A key aspect of our manufacturing system involves the use of simple
disposable bioreactor technology. Our manufacturing operations are currently located within our 86,000ft
2
operations
in Austin, Texas. Part of this includes a nearly 40,000 ft
2
commercial manufacturing facility that the Company opened
in August 2016. This new facility is located on XBiotech’s own 48-acre location just 15 minutes from the Texas capital
in Austin. The building will provide a significant increase in the Company’s manufacturing and quality operations in
anticipation of commercialization of the Company’s product pipeline. The new facility will increase about ten-fold the Company’s
current production capacity. Completion of this building is the first phase in the Company’s plan to develop the 48-acre
property to house additional production facilities, laboratories and administrative operations, creating a headquarter campus as
the center of its global operations.
A Background on Therapeutic Antibodies
A century ago scientists and physicians envisioned being able to
custom design therapeutic agents that were highly specific for a single biological target. By selectively attacking disease while
sparing healthy tissue, these “magic bullets” were thought to be ideal therapeutic agents. It was not until the early
1970’s, however, that this vision was realized when Kohler and Milstein developed a ground-breaking method for making target-specific
monoclonal antibodies—a Nobel prize-winning endeavor. Using this new approach, numerous monoclonal antibody-based research,
diagnostic, and therapeutic products have been developed.
Kohler and Milstein’s discovery was based on their knowledge that the immune system of higher animals
produces antibodies as a method of protecting them from various, potentially damaging, agents, such as viruses, bacteria, and diseased
cells. White blood cells, known as B cells, produce billions of different types of antibodies, each with a unique potential to
selectively attach to and neutralize different disease targets. The vast array of possible treatments based on antibodies led to
the development of what is now a major industry around the use of
True Human™ Antibodies
White blood cells in the human body secrete billions of different
antibodies that circulate through the blood to react and protect us from toxins, infectious agents or even other unwanted substances
produced by our body. True Human™ antibodies, as the name implies, are simply those that are derived from a natural antibody
identified from the blood of an individual.
To develop a True Human™ antibody therapy, donors are screened
to find an individual that has a specific antibody that matches the desired characteristics needed to obtain the intended medical
benefit. White blood cells from that individual are obtained, the unique gene that produced the antibody is cloned, and the genetic
information is used to produce an exact replica of the antibody sequence. A True Human™ antibody is therefore not to be confused
with other marketed antibodies, such as so-called fully human antibodies—where antibody reactivity is developed through gene
sequence engineering in the laboratory.
Fundamental Science of True Human™ Antibodies
To appreciate the background safety and tolerability of True Human™
antibodies, it is important to consider the fundamental biology of natural antibody production.
Billions of different white blood cells secrete billions of unique
antibodies every day into circulation. The vast number of different antibodies (and cells that produce them), are essential to
enable adequate molecular diversity to ward off all potential infectious or toxic threats. In other words, since antibodies act
to bind and thereby neutralize unwanted agents, any given circulating antibody must be able to react with a potentially limitless
number of existing or evolving disease entities.
The staggering number of different antibodies needed to achieve
this level of preparedness, however, is a daunting concept from a genetics point of view. If an individual antibody gene was needed
to encode each of a billion different antibodies, there would be 20,000 times as many genes needed just for antibodies as there
would be needed to encode the rest of the entire human genome. Individual cells would need to be gigantic, and monumental resources
would be required to make, copy and maintain all of the DNA. Clearly, the system of antibodies could not have evolved to protect
us, had not an elegant solution emerged to deal with this genetic conundrum.
Thus, a hallmark of the immune physiology of all vertebrates (all
have antibodies) is the ability to recombine and selectively mutate a relatively small number of gene segments to create a phenomenal
and effectively unlimited number of antibody genes. By rearranging, recombining and mutating the genetic code, specialized white
blood cells, or B lymphocytes, are able to create an unlimited array of antibody genes. The consequence of this genetic engineering,
however, is that each antibody gene is unique to the individual B lymphocyte that created it—and no copy of the gene exists
in the human germline. The only place to find a unique antibody gene is in the individual cells that created it.
The extraordinary process of gene rearrangement and mutation results
in a multitude of unique B lymphocytes and consequently an incredibly diverse repertoire of antibodies in any given individual.
Elucidating the mechanisms behind the production of unique antibody
genes must be considered one of the major achievements of medical research in the 20th century. Yet unfolding this mystery created
another problem to solve: If antibodies were not produced from genes encoded in the human genome and the products of these genes
were new to the body, why were these antibody molecules not recognized by the immune system as foreign substances—like any
other foreign substance that they were intended to eradicate? How could the body distinguish the apparently “foreign”
antibody molecules from the bona fide infectious intruders?
Unraveling the genetics of antibody production led to another major
advance in medicine: the discovery of how an endless array of antibody proteins could be made in a way that individual molecules
were always tolerated by the body.
In the early 1990s research began to demonstrate that the production
of antibodies was not an unregulated process. Rather, it was learned that the antibodies produced by each and every B lymphocyte
were subject to intense scrutiny. Studies showed that B lymphocytes which produced acceptable antibodies were stimulated to grow
while those that produced “autoreactive” antibodies were not. B lymphocytes that produced “good” antibodies
were stimulated to proliferate, and enabled to produce copious amounts of antibody in the event it was needed to ward off a harmful
agent. B lymphocytes that rearranged genes to produce antibodies that were ineffective or were autoreactive were given signals
that instructed them to engage in a process of programmed cell death. Thus B lymphocytes producing harmful or useless antibodies
are simply killed off. This mechanism for creating antibody diversity on the one hand, while protecting the individual from a mass
of unwanted or intolerable antibody molecules on the other, was as elegant as it was fundamental to the success of vertebrate immune
physiology.
This process of “selection” has been elucidated in great
detail. There can be no more important feature of immune physiology than the process of selection. Selection is a fundamental step
to enable the body to produce an extremely diverse set of antibody molecules without, in the process, producing an array of novel
molecules that cause harm.
Industry Context
Until now each and every therapeutic antibody on the market has
been derived from animals and/or through gene sequence modification in the laboratory to produce a desired antibody reactivity.
Marketed antibodies to date, described as “fully human”, are not derived from human gene sequences that have undergone
the crucial process of selection in a human.
Without exception, all marketed products to date that are described
as “fully human”, are in fact engineered and are not selected based on natural tolerance in the human body. The use
of the term fully human to describe these products has thus created considerable confusion. To our knowledge, there are at present
no True Human™ antibodies manufactured using recombinant protein technology currently marketed. If successful in clinical
development, our lead product candidate is expected to be the first True Human™ therapeutic antibody to be commercialized.
Platform Technology
There are significant technical challenges in identifying and cloning
genes for True Human™ antibodies. A key problem to overcome can be to first identify individuals with the desired antibody
reactivity. This can involve screening hundreds of donors to enable the identification of a single, clinically relevant antibody—discovered
from literally trillions of irrelevant background antibody molecules in the blood of donors. We screen human donors to find an
individual who has in his or her blood a specific antibody that we believe will be protective against a certain disease. White
blood cells from that individual can then be isolated, and the unique gene that produced the antibody obtained. We currently obtain
blood donor samples through a Research and Collaboration Agreement with the South Texas Blood & Tissue Center, a Texas 501(c)(3)
non-profit corporation. See "Intellectual Property- Other Commercial Licenses."
Novel cloning technologies developed at XBiotech have enabled us
to clone the crucial antibody gene sequences from these donors in order to reproduce a True Human™ antibody for use in clinical
therapy. A True Human™ monoclonal antibody should therefore not be confused with other marketed therapeutic monoclonal antibodies,
such as those currently referred to as fully human antibodies.
Market Opportunity
We have a number of indications in various stages of clinical or pre-clinical development with significant
market opportunities. These include oncology, diabetes, dermatology and other inflammatory conditions, as well as infectious disease
indications. At present, our therapy for colorectal cancer, in which we have completed one Phase III study and have another ongoing,
is the most advanced.
Cancer Business and the Market for Colorectal Therapies
The development of new therapies for the treatment of cancer continues
to be a fundamental area of focus and growth in the pharmaceutical and biopharmaceutical industry. Detailed and thorough analysis
of the oncology business, including that for colorectal cancer, is available from a number of research specialists and other independent
sources.
In brief, the three major regional markets for cancer drugs are the
United States, EU5 (Germany, UK, Italy, France & Spain) and Japan, with sales from these regions representing close to two-thirds
of the market share. The market for colorectal cancer drugs is expected to grow at a compound annual growth rate of 5%, to reach
approximately $8.0 billion in annual sales by 2021 (per Datamonitor Healthcare).
An intense industry focus on developing new therapies for colorectal
cancer is not surprising since this a highly prevalent form of cancer. According to the American Cancer Society, Surveillance Research
2015, nearly 130,000 men and women in the United States were diagnosed with colorectal cancer in 2015. This represents almost
8% of all forms of cancer that were diagnosed. In terms of mortality, as many as 50,000 people died from the disease in 2015 and
many more were refractory to existing therapy.
Our lead therapeutic antibody is being evaluated as a monotherapy
to treat advanced stages of CRC. If our lead product candidate proves successful in both its Phase III studies, it will have demonstrated
the ability to not only increase survival of patients, but also to facilitate recovery and reduce debilitating symptoms of the
disease. While the market for colorectal cancer drugs is competitive and dynamic, in the event marketing approval is established
for our lead product candidate, we expect this therapy to be a highly valued and unique therapy in oncology, providing for broad
utility in the treatment of advanced colorectal cancer.
Our Strategy
Our objective is to fundamentally change the way therapeutic antibodies
are developed and commercialized, and become a leading biopharmaceutical company focused on the discovery, development and commercialization
of therapeutic True Human™ antibodies. The key goals of our business strategy are to:
|
•
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Obtain regulatory approval to market and sell our lead product candidate in the United States, Europe and other markets, and
begin commercial sale;
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•
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Continue our research and clinical work on infectious diseases, including S.
aureus
;
|
|
•
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Advance our pipeline of therapeutic antibodies and other possible clinical programs in strategic therapeutic areas;
|
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•
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Discover other True Human™ antibody therapies using our proprietary platform; and
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•
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Leverage our manufacturing technology.
|
Product Pipeline
Our product development status for the fourth quarter of 2016 was
as follows:
Competition
The therapeutic antibody space is dynamic as there continues to be
a highly active commercial pipeline of therapeutic antibodies globally, involving a complex array of development cycles as products
reach the end of their patent life and as new candidate products proceed into pivotal studies and approach registration. There
are numerous independent reviews on the subject in both trade journals and academic press (one such example being Reichert JM,
Antibodies to watch in 2017 MAbs. 2017 Feb/Mar;9(2):167-181. Epub 2016 Dec 14).
We believe True Human™ therapeutic antibodies have important
differentiating factors from other monoclonal antibodies currently marketed. The unique activity of our lead anti-cancer therapeutic
is being tested for its ability to both improve well-being and extend life. If proven in our Phase III studies, we feel our lead
product candidate will be highly differentiated in the market place for cancer therapeutics. However, regardless of the potential
advantages or uniqueness of our lead product candidate in the market, we do expect these products to compete head-to-head with
the numerous existing candidate antibody products in development, including emerging biosimilar therapeutic antibodies.
Current Clinical Activity
European Registration Study Oncology
XBiotech has completed a Phase III study in Europe for treatment
of symptomatic CRC and is in the process of seeking marketing approval for our lead product candidate with the European Medicines
Agency (EMA). In the fourth quarter of 2016, the Company continued its efforts to seek marketing approval for its lead product
candidate in connection with the Marketing Authorization Application (MAA) with the EMA Committee for Medicinal Products for Human
Use (CHMP). The Company received the Day 180 List of Outstanding Issues (D180LOI) in December 2016 and received a clock stop extension
from the EMA, prompting a response submission deadline of February 2017. The Company received a second clock stop extension in
February 2017 after a clarification meeting was held between XBiotech and the EMA. The EMA granted an additional 30 days to submit
D180LOI responses to allow the Company sufficient time to conduct a PK study evaluating the antibody therapy’s half-life
in healthy volunteers.
The MAA includes data from the completed, double-blinded, placebo-controlled
Phase III registration study in Europe which evaluated XBiotech’s lead product candidate as an anticancer therapy in patients
with symptomatic CRC. The results of this study were published in
The Lancet Oncology
in January 2017 in an article titled,
“
MABp1 as a Novel Antibody Treatment for Advanced Colorectal Cancer: A Randomised, Double-Blind, Placebo-Controlled, Phase
3 Study.”
In the double-blind placebo-controlled Phase III study, 309 patients
were randomized (2:1) to receive Xilonix™ plus best supportive care (BSC) versus placebo plus BSC. Study participants had
failed all available chemotherapy and had metastatic disease with one or more symptoms of metabolic dysfunction and functional
impairment (i.e., elevated systemic inflammation, unintentional weight loss, pain, fatigue, anorexia). Patients were required to
have an Eastern Cooperative Oncology Group (ECOG) function status of only 1 or 2. Elderly patients (>70 years of age) were eligible
as well, in contrast to many studies of anti-cancer therapies in advanced disease. The primary endpoint in the study was a composite
measure of stable or increased lean body mass (as measured by dual energy X-ray absorptiometry (DEXA)) and stability or improvement
of two of three symptom measures of the EORTC QLQ-C30 (pain, fatigue, or anorexia) at week 8 compared with baseline measurements.
Secondary endpoints evaluated paraneoplastic thrombocytosis and systemic inflammation.
US Registration Study Oncology
Enrollment was recently completed in the global randomized, double-blind,
placebo-controlled Phase III study evaluating the Company’s lead product candidate as a treatment for advanced CRC. The
Phase III study is being conducted under Fast Track designation from the FDA and involves over 600 advanced cancer patients
from various countries world wide.
In February 2017, the Company announced an affirmative outcome in
the first interim analysis of this study, prospectively planned to occur at 50% of events (or 276 deaths). The Independent Data
Monitoring Committee (IDMC) performed the unblinded analysis and reported the study had no safety concerns and that indications
of efficacy thus far were sufficient to recommend proceeding with the study without modification. Per the DMC charter, this was
the first of two interim efficacy analyses planned prior to the final analysis for overall survival. Survival analyses are also
to be performed at 414 (75%) and 552 (100%) events at the respective stages. The study may be stopped for efficacy or futility
at the second remaining interim analysis. This is also the case at the final analysis. Patients are otherwise, followed for up
to 18 months in order to determine overall survival.
The double-blind, placebo-controlled Phase III study is randomized 2:1 with patients receiving Xilonix™
or placebo plus best supportive care. Patients are required to have metastatic CRC, and are required to have failed regimens that
include flouropyrimidines, oxaliplatin, irinotecan, and Cetuximab or Panitumumab for patients with V-Ki-ras2Kirsten rat sarcoma
(
KRAS) mutation. Patients continue on the study until there is evidence of radiographic progression.
The primary endpoint of this study is overall survival, with secondary endpoints including objective response rate, progression
free survival, change in lean body mass as measured by DEXA, and patient reported quality of life using the validated European
Organization for Research and Treatment of Cancer Quality of Life in cancer Questionnaire (EORTC QLQ C30 questionnaire).
Phase II Study Pyoderma Gangrenosum (PG)
A phase II open-label exploratory study to evaluate our lead product
candidate for treatment of the rare skin disorder PG (IND # 112,459) has completed enrollment. PG is a chronic condition characterized
by inflamed, non-healing skin ulcerations. The study is evaluating safety and efficacy of the therapy to facilitate wound healing
and was conducted at 5 clinical trial sites in the United States. Primary endpoints of study involve clinicians’ and
patients’ global assessment at day 28 from baseline. Patients who are found to be responding to therapy, but who have not
yet experienced complete resolution of their lesion(s) after 28 days of therapy may participate in up to 3 additional 28-day cycles.
Data from this study is anticipated to be announced soon.
Phase I/II Study for Staphylococcus aureus
In December 2016, the Company completed enrollment in its randomized, placebo-controlled
Phase I/II study evaluating dosing, safety and efficacy of the Company’s novel antibody therapy, 514G3. This proprietary
antibody therapy has received Fast Track Designation by the FDA for the treatment of all forms of
Staphylococcus
aureus
infections, including Methicillin-resistant
S. aureus
(MRSA). The Company reports that top-line
findings from the 514G3 study should be reported in the first quarter of 2017.
Patients enrolled in the Phase II portion of the study were randomized to receive the
highest dose of 514G3, as determined by the Phase I portion of the study, plus standard of care antibiotics vs. placebo plus antibiotics.
Patients were treated in hospital settings at sites in the United States, Germany, Taiwan and Korea. In
addition to safety and tolerability evaluation, the study includes efficacy measures, such as time to clearance of bacteremia (as
measured by blood culture), duration of fever, serious adverse events, length of hospitalization and survival. The randomized,
blinded Phase II portion has enrolled 36 patients, with 24 of those patients randomized to receive 514G3.
Phase II Study for Hidradenitis Suppurativa (HS)
The Company completed enrollment in a double-blinded, placebo-controlled
investigator-sponsored study for HS, an inflammatory skin disease of such severity that is often treated through surgical removal
of lesions. Twenty patients with moderate to severe HS that had progressed on standard therapies were enrolled in this study. Patients
received MABp1 for 12 weeks and were then followed for an additional 12 weeks to observe durability of treatment. Efficacy measures
include assessment of Hidradenitis Suppurativa Clinical Response (HiSCR) scores, a validated method for evaluating efficacy in
HS patients, as well as quality of life assessment (as measured by DLQI. The Company announced topline results from this study
in February 2017, reporting a response rate in patients treated with MABp1 versus placebo of 60% vs 10%, respectively (p=0.035).
Summary of Clinical Findings to Date
Safety
Our lead product under development is derived from a natural human
immune response. We expected that this would facilitate better tolerability when used as a therapeutic compared to humanized or
“fully human” monoclonal antibodies. Antibody therapies are known to be associated with significant risk for infusion
reactions, including serious anaphylactic reactions. We believe that these reactions are the result of using antibodies that were
not derived from natural human immunity but rather had engineered specificities. Based on scientific principles of antibody physiology,
a fundamentally important premise was that our True Human
TM
antibody therapy should be safer and result in less infusion-related
complications than engineered human antibodies when used in clinical studies.
Therapeutic monoclonal antibodies, even those so-called “fully
human,” have been associated with infusion reactions. Comparably administration of our lead product candidate is associated
with a reduced number of infusion related reactions.
To date the Company has published data from 6 of its clinical studies.
The table below outlines each of these publications.
Indication
|
Journal
|
Title
|
Oncology
|
The Lancet Oncology
|
MABp1 as a novel antibody treatment for advanced colorectal cancer: a randomised, double-blind, placebo-controlled, phase 3 study
|
Oncology
|
The Lancet Oncology
|
MABp1, a first-in-class true human antibody targeting interleukin-1α in refractory cancers: an open-label, phase 1 dose-escalation and expansion study
|
Oncology
|
Investigational New Drugs
|
Xilonix, a novel true human antibody targeting the inflammatory cytokine interleukin-1 alpha, in non-small cell lung cancer
|
Psoriasis
|
JAMA Dermatology
|
Open-label trial of MABp1, a true human monoclonal antibody targeting interleukin 1α, for the treatment of psoriasis
|
Acne
|
Journal of Drugs in Dermatology
|
An open label, phase 2 study of MABp1 monotherapy for the treatment of acne vulgaris and psychiatric comorbidity
|
Cardiovascular
|
Journal of Vascular Surgery
|
A randomized phase II study of Xilonix, a targeted therapy against interleukin 1α, for the prevention of superficial femoral artery restenosis after percutaneous revascularization
|
Diabetes
|
Journal of Diabetes and Its Complications
|
Safety, pharmacokinetics, and preliminary efficacy of a specific anti-IL-1alpha therapeutic antibody (MABp1) in patients with type 2 diabetes mellitus
|
Intellectual Property
XBiotech has developed a large international intellectual property
(IP) portfolio to protect important aspects of its technology, services and products, including patents, trademarks and trade secrets.
As of December 31, 2016, XBiotech’s patent portfolio consisted of 16 patent families, and included 69 issued patents or allowed
patent applications, and 126 pending patent applications in various countries around the world. XBiotech’s IP portfolio
is designed to protect XBiotech’s drug products, therapies and to some extent, its discovery technology. It includes patents
and applications that protect the Company’s lead product candidate as a composition of matter and methods of using anti-IL-1⍺
antibodies for the treatment of various diseases including cancer, vascular disorders, inflammatory skin diseases, diabetes, and
arthritis. XBiotech’s IP portfolio also includes patents and applications directed to some aspects of our proprietary antibody
discovery platform, as well as treating and preventing
S. aureus
infections.
XBiotech owns or licenses the rights to the patent families described
in more detail below.
A. Interleukin-1 Alpha Antibodies and Methods of Use.
This patent family relates
to the development of IL-1⍺-specific True Human
TM
monoclonal antibodies, including MABp1. As of December 31, 2016,
XBiotech has been granted 28 patents in this family, including eight in the U.S., and others in Australia, Chile, China, Europe,
Hong Kong, Indonesia, Israel, Japan, South Korea, Malaysia, Mexico, New Zealand, the Philippines, Russia, Singapore, and South Africa.
Unless extended, patents in this family expire in 2029.
B. Treatment of Cancer with Anti- IL-1α Antibodies.
This patent family relates
to the use of anti- IL-1α antibodies to inhibit the metastatic potential of tumors by interrupting the role that tumor-derived
IL-1α plays in tumor metastasis. As of December 31, 2016, XBiotech has been granted four patents for this family; including
one in Australia, one in Canada, one in Japan, and one in Europe. Unless extended, patents in this family expire in 2027.
C. Treatment of Neoplastic Diseases.
This patent family relates to the administration
of anti- IL-1α antibodies to treat various tumor-associated diseases and the administration of a monoclonal antibody that
specifically binds IL-1α to reduce the size of tumors in human patients suffering from cancer. As of December 31, 2016,
XBiotech has been granted six patents for this family including two in Australia, one in New Zealand, one in the Philippines, one
in Singapore, and one in South Africa. Patent applications pending in Europe and Mexico were allowed. Unless extended, patents
in this family expire in 2031.
D. Diagnosis, Treatment, and Prevention of Vascular Disorders.
This patent family
relates to methods of diagnosing, treating and preventing a variety of vascular disorder using IL-1⍺ autoantibody. As of
December 31, 2016, Xbiotech has been granted six patents in this family, including two in the U.S., one in Australia, one in Europe
and two in Japan. Unless extended, patents in this family expire in 2026.
E. IL-1 Alpha Immunization Induces Autoantibodies Protective Against Atherosclerosis.
This patent family relates to the use of IL-1α in a vaccine to generate anti-IL-1⍺ antibodies to protect against
atherosclerosis. As of December 31, 2016, XBiotech has been granted patents for this family in Australia and Europe. Unless extended,
patents in this family expire in 2027.
F. Targeting Pathogenic Monocytes.
This patent family relates to the discovery
that IL-1α is expressed on the proinflammatory, disease-associated CD14+CD16+ monocyte subset in humans, and describes targeting
IL-1α to deplete these pathogenic cells or to modulate their function. As of December 31, 2016, XBiotech has been granted
four patents in this family; including two in the U.S., one in Australia, and one in Japan. Unless extended, patents in this family
expire in 2029.
G. Arthritis Treatment.
This patent family relates to the administration of anti-
IL-1α antibodies to treat conditions associated with arthritis. As of December 31, 2016, XBiotech has been granted one Australian
patent in this family. Another Australian patent application was allowed. Unless extended, patents in this family expire in 2031.
H. Cachexia Treatment.
This patent family relates to the administration of anti-
IL-1α antibodies to treat cachexia. As of December 31, 2016, a South African patent application was allowed. Unless
extended, the patent in this family expire in 2032.
I. Treatment of Diabetes.
This patent family relates to the administration of
anti- IL-1α antibodies to treat diabetes. As of December 31, 2016, one U.S. patent application was allowed. Unless extended,
the patent in this family expire in 2033.
J. Treating Vascular Disease and Complications Thereof.
This patent family relates
to the administration of IL-1α targeting agents to reduce the chance or severity of a major adverse clinical event occurring
in a patient who has received or is expected to receive surgical treatment for a stenosed blood vessel. As of December 31, 2016,
XBiotech has not been granted any patents in this family, although applications were pending in the U.S., Australia, Canada, China,
Europe, Israel, Japan, Mexico, New Zealand, Russia, South Korea, Hong Kong, and South Africa. Unless extended, patents in
this family expire in 2033.
K. Treatment of Inflammatory Skin Disease and Psychiatric Conditions.
This patent
family relates to the administration of anti- IL-1α antibodies to treat inflammatory skin diseases such as acne and psoriasis,
as well as to treat psychiatric conditions such as anxiety. As of December 31, 2016, XBiotech has been granted one Japanese patent
in this family and one Australian patent application was allowed. Other applications were pending in the U.S., Australia, Canada,
China, Europe, Japan, Hong Kong, and South Korea Unless extended, patents in this family expire in 2033.
L. Methods, compositions, and kits for reducing anti-antibody responses.
This
patent family relates to methods and compositions for reducing immune system-mediated reactions to allotypic determinants on administered
antibody products. As of December 31, 2016, XBiotech has been granted one Australian patent in this family. Unless extended, the
patent in this family expire in 2030.
M. Identifying Affinity-Matured Human Antibodies.
This patent family relates to
methods and compositions for identifying affinity-matured True Human
TM
monoclonal antibodies from donors. As of December
31, 2016, XBiotech has been granted four patents in this family (three in the U.S. and one in China), and applications were pending
in Australia, Canada, China, Europe, India, Israel, Japan, Mexico, Hong Kong, Russia, and South Korea. Unless extended, the
patent in this family expire in 2032.
N. Compositions and Methods for Treating
S. Aureus
Infections.
This patent
family relates to antibodies for preventing and treating
S. aureus
infections. As of December 31, 2016, XBiotech has been
granted two U.S. patents in this family, and applications were pending in the U.S., Australia, Brazil, Canada, Chile, China, Colombia,
Europe, India, Indonesia, Israel, Japan, Malaysia, Mexico, New Zealand, the Philippines, Russia, Singapore, South Korea, and South Africa.
Unless extended, patents in this family expire in 2035.
O. Antibacterial antibodies and Methods of Use.
This patent family relates to
antibodies for preventing and treating
S. aureus
infections. XBiotech acquired the use of patents within this family pursuant
to its exclusive license agreement with STROX Biopharmaceuticals, LLC. As of December 31, 2016, this patent family includes three
patents in the U.S., each expiring in 2019, unless extended.
P. Staphylococcus Aureus-Specific Antibody Preparations.
This patent family relates
to antibodies for preventing and treating
S. aureus
infections. XBiotech acquired use of patents within this family pursuant
to its exclusive license agreement with STROX Biopharmaceuticals, LLC. As of December 31, 2016, this patent family includes one
Australian patent. Unless extended, patents in this family expire in through 2029.
Because the patent positions of pharmaceutical, biotechnology, and
diagnostics companies are highly uncertain and involve complex legal and factual questions, the patents owned and licensed by us,
or any future patents, may not prevent other companies from developing similar or therapeutically equivalent products or ensure
that others will not be issued patents that may prevent the sale of our products or require licensing and the payment of significant
fees or royalties. Furthermore, to the extent that any of our future products or methods are not patentable, that such products
or methods infringe upon the patents of third parties, or that our patents or future patents fail to give us an exclusive position
in the subject matter claimed by those patents, we will be adversely affected. We may be unable to avoid infringement of third
party patents and may have to obtain a license, defend an infringement action, or challenge the validity of the patents in court.
A license may be unavailable on terms and conditions acceptable to us, if at all. Patent litigation is costly and time consuming,
and we may be unable to prevail in any such patent litigation or devote sufficient resources to even pursue such litigation.
Employees
At December 31, 2016, we had 106 employees, 16 of whom hold
a Ph.D. or M.D. (or equivalent) degree. None of our employees are represented by a labor union or covered by a collective bargaining
agreement, nor have we experienced work stoppages. We believe that relations with our employees are good.
Corporate Information
XBiotech Inc. was incorporated in Canada on March 22, 2005. XBiotech USA Inc., a wholly-owned subsidiary of the
Company, was incorporated in Delaware, United States in November 2007. XBiotech Switzerland AG, a wholly-owned subsidiary
of the Company, was incorporated in Zug, Switzerland in August 2010. XBiotech Japan KK, a wholly-owned subsidiary of the Company,
was incorporated in Tokyo, Japan in March 2013. XBiotech Germany GmbH, a wholly-owned subsidiary of the Company, was incorporated
in Germany in January 2014. The Company’s headquarters are located in Austin, Texas.
Investor Information
We maintain an Internet website at
http://www.xbiotech.com.
The information on our website is not incorporated by reference into this annual report on Form 10-K and should not be considered
to be a part of this annual report on Form 10-K. Our reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, our quarterly reports on Form 10-Q and our current reports on Form 8-K,
and amendments to those reports, are accessible through our website, free of charge, as soon as reasonably practicable after these
reports are filed electronically with, or otherwise furnished to, the SEC. We also make available on our website the charters of
our audit committee, compensation committee, nominating and corporate governance committee, as well as our corporate governance
guidelines and our code of business conduct and ethics. In addition, we intend to disclose on our web site any amendments to, or
waivers from, our code of business conduct and ethics that are required to be disclosed pursuant to the SEC rules.
Risks Related to our Financial Condition and Capital Requirements
We have incurred significant losses every quarter since our inception and anticipate
that we will continue to incur significant losses in the future.
We are a pre-market pharmaceutical company with no revenue and a limited operating history. Investment in
pharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant
risk that any potential product candidate will fail to demonstrate adequate efficacy or an acceptable safety profile, gain regulatory
approval or become commercially viable. We do not have any products approved by regulatory authorities for marketing or commercial
sale and have not generated any revenue from product sales, or otherwise, to date, and we continue to incur significant research,
development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in
every reporting period since our inception in 2005.
For the years ended December 31, 2014, 2015,
and 2016, we reported a net loss of $21.7, million, $37.5 million and $52.8 million respectively. As of December 31, 2016, we had
an accumulated deficit since inception of approximately $183.4 million.
We expect to continue to incur significant expenses and operating
losses for the foreseeable future. We anticipate these losses will increase as we continue the research and development of, and
seek regulatory approvals for our lead product candidate in oncology and any of our other product candidates, and potentially begin
to commercialize any products that may achieve regulatory approval. We may encounter unforeseen expenses, difficulties, complications,
delays and other unknown factors that may adversely affect our financial condition. The amount of our future net losses will depend,
in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future
losses have had, and will continue to have, an adverse effect on our financial condition. If our lead product candidate or any
other product candidate fails in clinical trials or does not gain regulatory approval, or if approved and fails to achieve market
acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability
in subsequent periods. We will need to raise significant additional funding, which may not be available on acceptable terms, if
at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development
efforts or other operations.
Since inception, we have dedicated a majority of our resources to
the discovery and development of our proprietary preclinical and clinical product candidates, and we expect to continue to expend
substantial resources doing so for the foreseeable future. These expenditures will include costs associated with conducting research
and development, manufacturing product candidates and products approved for sale, conducting preclinical experiments and clinical
trials and obtaining and maintaining regulatory approvals, as well as commercializing any products later approved for sale. During
the year ending December 31, 2016, we recognized approximately $42.5 million in expenses associated with research and development
and clinical trials.
We completed our initial public offering on April 15, 2015 and a
registered direct offering in March 2017. However, the net proceeds from these offerings and cash on hand may not be sufficient
to complete clinical development of any of our product candidates nor may it be sufficient to commercialize any product candidate.
Accordingly, we may require substantial additional capital beyond the offering to continue our clinical development and potential
commercialization activities. Our future capital requirements depend on many factors, including but not limited to:
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the number and characteristics of the future product candidates we pursue;
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the scope, progress, results and costs of researching and developing any of our future product candidates, and conducting preclinical
research and clinical trials;
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the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop;
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the cost of future commercialization activities for our lead product candidate and the cost of commercializing any future products
approved for sale;
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the cost of manufacturing our future products; and
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the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs
and the outcome of any such litigation.
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We are unable to estimate the funds we will actually require to
complete research and development of our product candidates or the funds required to commercialize any resulting product in the
future or the funds that will be required to meet other expenses. Our operating plan may change as a result of many factors currently
unknown to us, and our expenses may be higher than expected. We may need to seek additional funds sooner than planned, through
public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and
other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. Raising funds in the
future may present additional challenges and future financing may not be available in sufficient amounts or on terms acceptable
to us, if at all.
Raising additional capital may cause dilution to our existing shareholders, restrict
our operations or require us to relinquish rights to our technologies or product candidates.
The terms of any financing arrangements we enter into may adversely
affect the holdings or the rights of our shareholders and the issuance of additional securities, by us, or the possibility of such
issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute
all of our shareholders. The incurrence of indebtedness would result in increased fixed payment obligations and, potentially, the
imposition of restrictive covenants. Those covenants may include limitations on our ability to incur additional debt, 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. We could also be required to seek funds through arrangements with collaborators or otherwise
at an earlier stage than otherwise would be desirable resulting in the loss of rights to some of our product candidates or other
unfavorable terms, any of which may have a material adverse effect on our business, operating results and prospects. Additional
fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop
and commercialize our products.
We are subject to an ongoing shareholder class action lawsuit in California, which
may adversely affect our business, financial condition, results of operations and cash flows.
We and certain of our executive officers and directors are defendants
in a federal securities class action lawsuit filed in state court in California. The federal securities class action lawsuit in
Texas was dismissed in October 2016. The California lawsuit and the previous lawsuit in Texas, including the current status, are
described in Part I, Item 3 “Legal Proceedings” in this Form 10-K. We continue to believe the ongoing lawsuit to be
without merit and intend to vigorously defend ourselves, however we cannot guarantee any particular outcome. These and any similar
future matters may divert our attention from our ordinary business operations, and we may incur significant expenses associated
with them (including, without limitation, substantial attorneys’ fees and other fees of professional advisors and potential
obligations to indemnify the underwriter for our initial public offering and current and former officers and directors who are
or may become parties to or involved in such matters). Depending on the outcome of such matters, we could be required to pay material
damages and/or suffer other penalties, remedies or sanctions. Accordingly, the ultimate resolution of this pending matter or any
similar future matters could have a material adverse effect on our business, financial condition, results of operations, cash flows,
liquidity and could negatively impact the trading price of our common stock. Any existing or future shareholder lawsuits could
also adversely impact our reputation, our relationships with our customers and our ability to generate revenue.
Risks Related to Our Business
We currently have no source of product revenue and may never become profitable.
To date, we have not generated any revenues from commercial product
sales, or otherwise. Our ability to generate revenue in the future from product sales and achieve profitability will depend upon
our ability, alone or with any future collaborators, to commercialize products successfully, including our lead product candidate
or any future product candidates that we may develop, in-license or acquire in the future. Even if we are able to achieve regulatory
approval successfully for our lead product candidate or any future product candidates, we do not know when any of these products
will generate revenue from product sales, if at all. Our ability to generate revenue from product sales from our lead product candidate
or any of our other product candidates also depends on a number of additional factors, including our ability to:
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complete development activities, including the necessary clinical trials;
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complete and submit new drug applications, or NDAs, to the US Food and Drug Administration, or FDA, and obtain regulatory approval
for indications for which there is a commercial market;
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complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities such as the European
Medicines Agency, or EMA;
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establish our manufacturing operations;
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develop a commercial organization capable of sales, marketing and distribution for our lead product candidate and any products
for which we obtain marketing approval and intend to sell ourselves in the markets in which we choose to commercialize on our own;
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find suitable distribution partners to help us market, sell and distribute our approved products in other markets;
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obtain coverage and adequate reimbursement from third-party payers, including government and private payers;
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achieve market acceptance for our products, if any;
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establish, maintain and protect our intellectual property rights; and
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attract, hire and retain qualified personnel.
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In addition, because of the numerous risks and uncertainties associated
with pharmaceutical product development, including that our lead product candidate or any other product candidates may not advance
through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of increased
expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations
if we decide to or are required by the FDA, or foreign regulatory authorities, to perform studies or trials in addition to those
that we currently anticipate. Even if we are able to complete the development and regulatory process for our lead product candidate
or any other product candidates, we anticipate incurring significant costs associated with commercializing these products.
Even if we are able to generate revenues from the sale of our lead
product candidate or any other product candidates that may be approved, we may not become profitable and may need to obtain additional
funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then
we may be unable to continue our operations at planned levels and be forced to reduce our operations.
Our future success is dependent on the regulatory approval and commercialization
of our lead product candidate and any of our other product candidates.
We do not have any products that have gained regulatory approval. Our lead product candidate completed enrollment
in a Phase III clinical trial study in the U.S. in Q4 2016 and completed a Phase III clinical trial study in Q4 2015 in Europe.
As a result, our near-term prospects, including our ability to finance our operations and generate revenue, are substantially dependent
on our ability to obtain regulatory approval for, and, if approved, to successfully commercialize our lead product candidate in
a timely manner. We cannot commercialize our lead product candidate or our other product candidates in the U.S. without first obtaining
regulatory approval for each product from the FDA; similarly, we cannot commercialize our lead product candidate or our other product
candidates outside of the U.S. without obtaining regulatory approval from comparable foreign regulatory authorities, including
the EMA. The FDA review process typically takes years to complete and approval is never guaranteed. Before obtaining regulatory
approvals for the commercial sale of our lead product candidate or any of our other potential product candidates for a target indication,
we must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical studies, including two well-controlled
Phase III studies, and, with respect to approval in the U.S. to the satisfaction of the FDA, and in Europe, to the satisfaction
of the EMA, that the product candidate is safe and effective for use for that target indication; and that the manufacturing facilities,
processes and controls are adequate. Obtaining regulatory approval for marketing of our lead product candidate or our future product
candidates in one country does not ensure we will be able to obtain regulatory approval in other countries. A failure or delay
in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.
Even if our lead product candidate or any of our other product candidates
were to successfully obtain approval from the FDA or comparable foreign regulatory authorities, any approval might contain significant
limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject
to burdensome post-approval studies or risk management requirements. If we are unable to obtain regulatory approval for our lead
product candidate in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain
sufficient funding or generate sufficient revenue to continue the development of any of our other product candidates that we are
developing or may discover, in-license, develop or acquire in the future. Also, any regulatory approval of our lead product candidate
or our other product candidates, once obtained, may be withdrawn. Furthermore, even if we obtain regulatory approval for our lead
product candidate, its commercial success will depend on a number of factors, including the following:
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development of a commercial organization within XBiotech or establishment of a commercial collaboration with a commercial infrastructure;
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establishment of commercially viable pricing and obtaining approval for adequate reimbursement from third-party and government
payers;
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our ability to manufacture quantities of our lead product candidate using commercially satisfactory processes and at a scale
sufficient to meet anticipated demand and enable us to reduce our cost of manufacturing;
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our success in educating physicians and patients about the benefits, administration and use of our lead product candidate;
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the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
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the effectiveness of our own or our potential strategic collaborators’ marketing, sales and distribution strategy and
operations;
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acceptance of our lead product candidate as safe and effective by patients and the medical community; and
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a continued acceptable safety profile of our lead product candidate following approval.
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Many of these factors are beyond our control. If we are unable to
successfully commercialize our lead product candidate, we may not be able to earn sufficient revenues to continue our business.
New laws or regulations may be promulgated or modified in
the United States, in Europe, or other jurisdictions that could impact our ability to receive the necessary approvals to successfully
market and commercialize our lead product candidate or any of our other product candidates.
The pharmaceutical and biotechnology industry is one of the most
regulated on a state, federal and international level. There are a number of laws, regulations, and court decisions which impact
the daily activities of our business. As a result, we must ensure that strategies and planning in relation to our product candidates
are in line with the current regulations governing our industry. When there are changes in leadership, whether within the U.S.,
or elsewhere, we must anticipate the possibility of shifts in regulatory policies as they pertain to our business. New or modified
regulations may impact our ability to quickly respond with updates to our programs. While we may be able to anticipate certain
changes, policy statements often are not always translated into actionable legislation. We continue to track updates and changes
internally to ensure we are in compliance with regulatory authority guidelines and expectations. Court decisions at both the state
and federal level can also impact the way in which we operate and make specific product related program decisions. New laws, regulations,
or court orders could materially alter or impact our ability to receive necessary approvals from regulatory authorities to market
and commercialize our lead product candidate or any of our other product candidates.
We submitted a Marketing Authorization Application to the
EMA for our lead product candidate after successfully completing a Phase III study in Europe. Even if the EMA approves our lead
product candidate there are a number of obstacles to consider in the post-marketing approval and commercialization processes in
Europe.
In March 2016, we submitted a MAA, to the EMA Committee for Human
Medicinal Products, or CHMP, for the Phase III study of our lead product candidate completed in Europe during Q4 2015. The regulatory
assessment process at the EMA is both long and expensive and may not lead to subsequent approval. The initial MAA submission to
the EMA was validated by the regulatory body and is currently undergoing its official assessment.
We continue to work collaboratively with the EMA, under the
Centralised Procedure, to address follow-up questions regarding our application. The EMA has the ability to “stop the clock”
of the assessment timeline if there are any questions about the application that arise. We are given a specific amount of time
to respond to such questions, and must do so to the satisfaction of the EMA before the clock resumes. This can cause further delays
and overall uncertainty as to when we receive an official decision as to whether or not our application is approved.
During the assessment period, our manufacturing facilities were audited. They were determined,
by the EMA, to have met the standards of Good Manufacturing Practices, (GMP) in October 2016. Additionally, our new manufacturing
facility, which opened in September 2016, will go through validation with the EMA. The new facility might fail validation or not
meet EMA standards for a commercial manufacturing facility. Also, during the assessment period, our clinical research sites engaged
to recruit patients into the clinical trial were audited to ensure standards of Good Clinical Practice, (GCP). Even though there
were no major findings resulting from the audit of the selected clinical research site, this was merely a sampling by the EMA and
may not be representative of other research sites that participated in the clinical trial.
There are a few possibilities surrounding the regulatory approval
status of our lead product candidate at the EMA: 1) The EMA may not approve our lead product candidate due to our failure to prove
our endpoints to the satisfaction of the CHMP committee members, who may be different individuals or share a different thinking
from the Scientific Advice Working Group at the EMA with whom we worked to design the study, thus there may be a general lack of
buy-in from the reviewing committee, or other unforeseeable disagreement for a number of reasons, including but not limited to,
the study design or clinical trial study results; 2) The EMA may approve our lead product candidate , but with caveats such as
conducting follow up clinical trials to show further safety data or additional data for endpoints established in the study protocol.
Conducting additional studies would be expensive and time consuming, and present further roadblocks to full approval and commercialization,
thus preventing us from generating revenue for the company; or 3) The EMA may approve our lead product candidate. If the EMA approves
our lead product candidate there are additional steps we must take for full marketing and commercialization of the product. EMA
approval does not guarantee country specific reimbursement across the EU. We still must pursue review of our lead product candidate
for pricing and reimbursement, which requires additional time and cost. Even though the EMA may approve our lead product candidate
this does not necessarily guarantee certain EU countries will accept our product for reimbursement. We could face no acceptance
for reimbursement in any country, or reimbursement in very few countries, thus minimizing our ability to generate sufficient revenue.
In addition to seeking approval in the EU, we must also gain reimbursement
approval in specific EU countries, as well as, buy-in from patients and health care professionals alike for the use of our lead
product candidate to treat advanced metastatic CRC. If we do not receive reimbursement from countries or private payers in the
EU, our lead product candidate may not reach or be accessible to patients or health care professionals. Even if our lead product
candidate is approved for reimbursement in EU countries, it may not always maintain its reimbursement status. There are a number
of scenarios where we may encounter tight price controls, continuous negotiations, and other variety of outcomes that could challenge
our ability to effectively sell the product in certain EU countries. Some countries may decide to no longer reimburse our lead
product candidate for a number of reasons. Further, patients and health care professionals may reject our lead product candidate
as a standard of care treatment for advanced metastatic CRC. If patients and healthcare professionals reject our lead product candidate
as a treatment for advanced metastatic CRC, then it will be difficult to generate revenue for the company.
If our lead product candidate is approved by the EMA, we do not have a sufficient number of personnel
engaged as employees to conduct an effective marketing and commercialization strategy. In June 2016, we hired industry veteran,
Trey Benson as Vice President (VP) of Commercial Development and Marketing. Nevertheless, we would need to build a larger team
to support Mr. Benson and any wide-ranging commercialization efforts in the EU. As a result, we must build an in-house team of
seasoned commercialization professionals, or pursue a strategic partnership through a contractual arrangement with an organization
with the appropriate expertise, or a combination of both. The cost-benefit of such an arrangement may not actualize profit and
generate revenues on a short-term basis. If we entrusted commercialization to an outside organization, there may be any number
of issues that arise that we cannot foresee. We may not find a suitable strategic partner or fail to identify appropriate candidates
to hire onto a commercialization team, thus potentially limiting our ability to effectively commercialize our lead product candidate.
Because the results of earlier clinical trials are not necessarily predictive of
future results, product candidates we advance into clinical trials, may not have favorable results in later clinical trials or
receive regulatory approval.
Success in preclinical testing and early clinical trials does not
ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug.
A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience,
have suffered significant setbacks in clinical trials, even after seeing promising results in earlier clinical trials. Despite
the results reported in earlier clinical trials for our lead product candidate, we do not know whether the clinical trials we are
conducting, or may conduct, will demonstrate adequate efficacy and safety to result in regulatory approval to market our lead product
candidate or any of our other product candidates in any particular jurisdiction. Even if we believe that we have adequate data
to support an application for regulatory approval to market our product candidates, the FDA or other comparable foreign regulatory
authorities may not agree and could require us to conduct additional research studies, including late-stage clinical trials. If
late-stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for any of our product
candidates may be adversely impacted.
If we are unable to enroll subjects in clinical trials, we will be unable to complete
these trials on a timely basis.
Patient enrollment, a significant factor in the timing of clinical
trials, is affected by many factors including the size and nature of the patient population, the proximity of subjects to clinical
sites, the eligibility criteria for the trial, the design of the clinical trial, ability to obtain and maintain patient consents,
risk that enrolled subjects will drop out before completion, competing clinical trials and clinicians’ and patients’
perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new
drugs that may be approved for the indications we are investigating. Furthermore, we rely on Clinical Research Organizations (CRO’s)
and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing
their committed activities, we have limited influence over their actual, day-to-day performance. We may experience delays in starting-up
clinical trial sites in a timely manner, enrolling subjects in our trials, and may not be able to enroll a sufficient number of
subjects to complete the trials.
If we experience delays in the completion or if there is termination
of, any clinical trial of our lead product candidate or any future product candidates, the commercial prospects of our product
candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In
addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and
approval process and could shorten any periods during which we may have the exclusive right to commercialize our product candidates
or allow our competitors to bring products to market before we do, and jeopardize our ability to commence product sales, which
would impair our ability to generate revenues and may harm our business, results of operations, financial condition and cash flows
and future prospects. In addition, many of the factors that could cause a delay in the commencement or completion of clinical trials
may also ultimately lead to the denial of regulatory approval of our lead product candidate or our other product candidates.
The regulatory approval processes of the FDA and comparable foreign regulatory
authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval
for our lead product candidate or our other product candidates, our business may fail.
The time required to obtain approval by the FDA and comparable foreign
regulatory authorities is unpredictable, but typically takes several years following the commencement of preclinical studies and
clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities and any shifts
in regulatory policy. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval
may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not
obtained regulatory approval for any product candidate, and it is possible that neither our lead product candidates nor any other
product candidates we are developing or may discover, in-license or acquire and seek to develop in the future will ever obtain
regulatory approval.
Our product candidates could fail to receive marketing approval
from the FDA or a comparable foreign regulatory authority for many reasons, including but not limited to:
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disagreement over the design or implementation of our clinical trials;
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failure to demonstrate that a product candidate is safe and effective;
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failure of clinical trials to meet the level of statistical significance required for approval;
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failure to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
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disagreement over our interpretation of data from preclinical studies or clinical trials;
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disagreement over whether to accept efficacy results from clinical trial sites outside the United States where the standard
of care is potentially different from that in the United States;
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the insufficiency of data collected from clinical trials of our lead product candidate or our other product candidates to support
the submission and filing of an NDA or other submission or to obtain regulatory approval;
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irreparable or critical compliance issues relating to our manufacturing and/clinical trial processes; or
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changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.
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The FDA or a comparable foreign regulatory authority may require
more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and
our commercialization plans, or we may decide to abandon the development program altogether. Even if we do obtain regulatory approval,
our lead product candidate or our other product candidates may be approved for fewer or more limited indications than we request,
approved contingent on the performance of costly post-marketing clinical trials, or approved with a label that does not include
the labeling claims necessary or desirable for the successful commercialization of that product candidate. In addition, if our
lead product candidate or our other product candidate produces undesirable side effects or safety issues, the FDA may require the
establishment of Risk Evaluation Mitigation Strategies, or REMS, or a comparable foreign regulatory authority may require the establishment
of a similar strategy, that may, restrict distribution of our products and impose burdensome implementation requirements. Any of
the foregoing scenarios could materially harm the commercial prospects for our product candidates.
Even if we believe our current or planned clinical trials are successful,
the FDA or a comparable foreign regulatory authority may not agree that our completed clinical trials provide adequate data on
the safety or efficacy of our lead product candidate or our other product candidates, permitting us to proceed to additional clinical
trials. Approval by comparable foreign regulatory authorities does not ensure approval by the FDA and approval by one or more foreign
regulatory authorities does not ensure approval by regulatory authorities in other countries or by the FDA. However, a failure
or delay in obtaining regulatory approval in one country may have a negative impact on the regulatory process in others. We may
not be able to file for regulatory approvals, and even if we file we may not receive the necessary approvals to commercialize our
products in any market.
Our lead product candidate or our other product candidates may cause undesirable
side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an
approved label, or result in significant negative consequences following any marketing approval.
Undesirable side effects caused by our lead product candidate or
our other product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result
in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority.
If toxicities occur in our current or future clinical trials they could cause delay or even the discontinuation of further development
of our lead product candidate or other product candidates, which would impair our ability to generate revenues and would have a
material adverse effect our business, results of operations, financial condition and cash flows and future prospects. There can
be no assurance that side effects from our lead product candidate in future clinical trials or that side effects in general will
not prompt the discontinued development or possible market approval of our lead product candidate or other product candidates.
If serious side effects or other safety or toxicity issues are experienced in our clinical trials in the future, we may not receive
approval to market our lead product candidate or any other product candidates, which could prevent us from ever generating revenues
or achieving profitability. Results of our trials could reveal an unacceptably high severity and prevalence of side effects. In
such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order
us to cease further development of 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 subjects to complete the trial or result in potential
product liability claims. Any of these occurrences may have a material adverse effect on our business, results of operations, financial
condition and cash flows and future prospects.
Additionally, if our lead product candidate or any of our other
product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such product,
a number of potentially significant negative consequences could result, including:
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we may be forced to suspend marketing of such product;
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regulatory authorities may withdraw their approvals of such product;
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regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial
success of such product;
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the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications
containing warnings about such product;
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the FDA may require the establishment or modification of REMS or a comparable foreign regulatory authority may require the
establishment or modification of a similar strategy that may, for instance, restrict distribution of our product and impose burdensome
implementation requirements on us;
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we may be required to change the way the product is administered or conduct additional clinical trials;
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we could be sued and held liable for harm caused to subjects or patients;
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we may be subject to litigation or product liability claims; and
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our reputation may suffer.
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Any of these events could prevent us from achieving or maintaining
market acceptance of the particular product candidate, if approved.
Even if our lead product candidate or our other product candidates receive regulatory
approval, they may still face future development and regulatory difficulties.
Even if we obtain regulatory approval for our lead product candidate
or another product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities
governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance,
import, export, advertising, promotion, recordkeeping and reporting of safety and other post-market information. The safety profile
of any product will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If
the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of our lead product
candidate or any other product candidate, they may require labeling changes or establishment of a REMS or similar strategy, impose
significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly
post-approval studies or post-market surveillance. For example, the label ultimately approved for our lead product candidate, if
it achieves marketing approval, may include restrictions on use.
In addition, manufacturers of drug products and their facilities
are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current
good manufacturing practices, or cGMP, and other regulations. If we or a regulatory agency discover previously unknown problems
with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product
is manufactured, a regulatory agency may impose restrictions on that product, our manufacturing facility, including requiring recall
or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or our manufacturing
facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
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issue warning letters or untitled letters;
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impose restrictions on the marketing or manufacturing of the product candidates;
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mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
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require us or any future collaborator to enter into a consent decree, which can include imposition of various fines, reimbursements
for inspection costs, required due dates for specific actions and penalties for noncompliance;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to applications filed by us;
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suspend or impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.
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The occurrence of any event or penalty described above may inhibit our ability to commercialize
our lead product candidate or any other product candidates and generate revenue.
The FDA strictly regulates the advertising and promotion of drug
products, and drug products may only be marketed or promoted for their FDA approved uses, consistent with the product’s approved
labeling. Advertising and promotion of any product candidate that obtains approval in the U.S., and is covered by federal insurance
programs such as Medicare or Medicaid, will be heavily scrutinized by the FDA, the Department of Justice, ( DOJ), the Office of
Inspector General of the Department of Health and Human Services, (HHS), state attorneys general, members of Congress and the public.
Violations, including promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries
and investigations, and civil, criminal and/or administrative sanctions by the FDA and/or the DOJ. Additionally, advertising and
promotion of, any product candidate that obtains approval outside of the U.S. will be heavily scrutinized by comparable foreign
regulatory authorities.
In the U.S., engaging in impermissible promotion of our future products
for off-label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil, criminal
and/or administrative penalties and fines and corporate integrity agreements that materially restrict the manner in which we promote
or distribute our drug products. The federal False Claims Act, allows any individual to bring a lawsuit against a pharmaceutical
company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false
or fraudulent claims, for payment by a federal program, such as Medicare or Medicaid. If the government prevails in the lawsuit,
the individual may share in any fines or settlement funds. Since 2004, False Claims Act lawsuits against pharmaceutical companies
have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements based on certain
sales practices promoting off-label drug uses. This growth in litigation has increased the risk that a pharmaceutical company will
have to defend a false claims action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance
obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote
our approved products, we may become subject to such litigation and, if we are not successful in defending against such actions,
those actions could have a material adverse effect on our business, results of operations, financial condition and cash flows and
future prospects.
Existing government regulations may change and additional government
regulations may be enacted that could prevent, limit or delay regulatory approval of our lead product candidate or any other product
candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies,
or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and/or be
subject to fines or enhanced government oversight and reporting obligations, which would adversely affect our business, prospects
and ability to achieve or sustain profitability.
Failure to obtain regulatory approval in foreign jurisdictions would prevent our
lead product candidate or any other product candidates from being marketed in those jurisdictions.
In order to market and sell our products in the European Union and
many other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements.
The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ
substantially from that required to obtain FDA approval. The regulatory approval process outside the U.S. generally includes all
of the risks associated with obtaining FDA approval. Additionally, in many countries outside the U.S., it is required that the
product be approved for reimbursement before the product can be effectively commercialized in that country. Obtaining foreign regulatory
approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us
and could delay or prevent the introduction of our products in certain countries. We may not obtain approvals from regulatory authorities
outside the U.S. on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other
countries or jurisdictions, and approval by one regulatory authority outside the U.S. does not ensure approval by regulatory authorities
in other countries or jurisdictions or by the FDA. A failure or delay in obtaining regulatory approval in one country may have
a negative effect on the regulatory approval process in others. We may not be able to file for marketing approvals and may not
receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval of our lead product
candidate for any of our other product candidates by regulatory authorities in the European Union or another jurisdiction, the
commercial prospects of that product candidate may be significantly diminished and our business prospects could decline.
Even if we are able to commercialize our lead product candidate or our other product
candidates, the products may not receive coverage and adequate reimbursement from third-party payers, which could harm our business.
Our ability to commercialize any products successfully will depend,
in part, on the extent to which coverage and adequate reimbursement for these products and related treatments will be available
from government authorities, private health insurers, health maintenance organizations and third-party payers. Patients who are
prescribed medications for the treatment of their conditions generally rely on third-party payers to reimburse all or part of the
costs associated with their prescription drugs. Coverage and adequate reimbursement from government healthcare programs, such as
Medicare and Medicaid, and private health insurers are critical to new product acceptance. Patients are unlikely to use our lead
product candidate or our other product candidates unless coverage is provided and reimbursement is adequate to cover a significant
portion of the cost of our product candidates. A primary trend in the US healthcare industry and elsewhere is cost containment.
As a result, government authorities and other third-party payers have attempted to control costs by limiting coverage and the amount
of reimbursement for particular medications. Increasingly, third-party payers are requiring that drug companies provide them with
predetermined discounts from list prices and are challenging the prices charged for medical products. Third-party payers may also
seek additional clinical evidence, beyond the data required to obtain marketing approval, demonstrating clinical benefits and value
in specific patient populations before covering our products for those patients. We cannot be sure that coverage and adequate reimbursement
will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will
be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing
approval. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully
commercialize any product candidate for which we obtain marketing approval.
There may be significant delays in obtaining coverage and reimbursement
for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable
foreign regulatory authorities. Moreover, obtaining coverage does not imply that any drug will be paid for in all cases or at a
rate that covers our costs, including research, development, manufacture, sales and distribution. Interim reimbursement levels
for new drugs, if applicable, may also be insufficient to cover our costs, and may only be temporary. Reimbursement rates may vary
according to the use of the drug and the clinical setting in which it is used. Reimbursement rates may also be based in part on
existing reimbursement amounts for lower cost drugs or may be bundled into the payments for other services. Net prices for drugs
may be reduced by mandatory discounts or rebates required by government healthcare programs or private payers and by any future
relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the U.S..
Coverage and reimbursement for drug products can differ significantly from payer to payer. As a result, the coverage and reimbursement
determination process is often a time-consuming and costly process with no assurance that coverage and adequate reimbursement will
be obtained or applied consistently. Third-party payers often rely upon Medicare coverage policy and payment limitations in setting
their own coverage and reimbursement policies. Our inability to promptly obtain coverage and profitable reimbursement rates from
both government-funded and private payers for any approved products that we develop could have a material adverse effect on our
operating results, our ability to raise capital needed to commercialize products, and our overall financial condition.
We have never marketed a drug before, and if we are unable to establish an effective
sales force and marketing infrastructure, or enter into acceptable third-party sales and marketing or licensing arrangements, we
may be unable to generate any revenue.
We do not currently have a comprehensive infrastructure for the
sales, marketing and distribution of pharmaceutical drug products. The cost of establishing and maintaining such an infrastructure
may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA and comparable foreign
regulatory authorities, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements
with third parties to perform these services for which we would incur substantial costs. If we are unable to establish adequate
sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product
revenue and may not become profitable. We will be competing with many companies that have extensive and well-funded sales and marketing
operations. Without an internal commercial organization or the support of a third party to perform sales and marketing functions,
or a combination of both, we may be unable to compete successfully against more established companies.
Our lead product candidate and our other product candidates, if approved, may not
achieve adequate market acceptance among physicians, patients, and healthcare payers and others in the medical community necessary
for commercial success.
Even if we obtain regulatory approval for our lead product candidate
or any of our other product candidates, such product(s) may not gain market acceptance among physicians, healthcare payers, patients
or the medical community within the U.S. or globally. Our commercial success also depends on coverage and adequate reimbursement
of our product candidates by third-party payers, including government payers, generally, which may be difficult or time-consuming
to obtain, may be limited in scope and may not be obtained in all jurisdictions in which we may seek to market our products. Market
acceptance of any of our product candidates for which we receive approval depends on a number of factors, including:
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the efficacy and safety of such product candidates as demonstrated in clinical trials;
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the clinical indications for which the product candidate is approved;
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acceptance by physicians and patients of the product candidate as a safe and effective treatment;
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the potential and perceived advantages of product candidates over alternative treatments;
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the safety of product candidates seen in a broader patient group, including a product candidate’s use outside the approved
indications;
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the prevalence and severity of any side effects;
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product labeling or product insert requirements of the FDA or other regulatory authorities;
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the timing of market introduction of our products as well as competitive products;
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the cost of treatment in relation to alternative treatments;
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the availability of coverage and adequate reimbursement and pricing by third-party payers and government authorities;
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relative convenience and ease of administration;
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the effectiveness of our sales and marketing efforts and those of our collaborators; and
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unfavorable publicity relating to the product candidate or the Company.
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In the last couple of years, XBiotech has positioned itself with
a pipeline of potential drug candidates at all stages of development, from pre-clinical through Phase III clinical trial stage.
Even though we have many drugs in development at this time, none of these research programs may succeed. There are several reasons
why a drug program may fail:
Our research programs may not succeed
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In the last couple of years, XBiotech has positioned itself with
a pipeline of potential drug candidates at a all stages of development, from pre-clinical through Phase III. Even though we have
many drugs in development at this time, none of these research programs may succeed. There are several reasons why a drug program
may fail:
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In the development stage, we may be unable to develop a therapy, which would mean us succeeding in isolating appropriate antibodies
to reach the clinical trial stage
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Any partnerships for the development of antibodies could fail to produce results that would necessitate clinical trials
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We may not receive approval from regulatory bodies to move from early stage clinical trials to later stage clinical trials
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Even if we are able to move to later stage clinical trials, it may prove to be difficult to enroll patients into the studies
according to schedule, or at all
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During the clinical trial, there could be unexpected serious adverse events causing severe injury or death in patients, requiring
us to cease further enrollment or causing regulatory authorities to place the trial on clinical hold for an indefinite period of
time
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If a clinical trial is completed, we may not have the appropriate personnel to submit a marketing application to regulatory
authorities for approval, and to further respond to the variety of follow up questions that regulatory authorities may have during
the review process
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Regulatory authorities may reject drug candidates for a variety of reasons, preventing us from proceeding with marketing and
commercialization of approved products
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We may run out of the funds necessary to complete development for any of our potential drug candidates
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Even an effective drug candidate might not be commercially successful
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Even if we ultimately succeed in creating a safe and effective drug,
as determined by regulatory authorities, based on our current product pipeline, there is no assurance it would be commercially
successful. Competitive products might become available faster or with lower costs or adverse risks to patients, resulting in few
sales of any product developed by XBiotech. Occurrences of certain disease indications, such as those in our pipeline, might become
sufficiently rare, or victims might be sufficiently impoverished, that commercial production is uneconomic. XBiotech’s promises
regarding donation of five percent of any gross revenues from an Ebola drug developed using the blood sample it received may adversely
impact XBiotech and its shareholders. Furthermore, we must have sufficient buy-in from patients and healthcare professionals to
guarantee market exposure for our drug candidates. If the end-users are not reached with our products, then it will be difficult
to generate revenue from our development efforts. And even though we could obtain regulatory approval for any of our drug candidates,
it is not necessarily the case that government or third-party payers will decide to add our products to their respective prescription
drug formularies for reimbursement, thus inhibiting the ability for our drug candidates to reach the target patient populations,
and health care professionals serving those patients.
We face substantial competition, which may result in others discovering, developing
or commercializing products before or more successfully than we do.
The development and commercialization of new drug products is highly
competitive. We face competition with respect to our current lead product candidate for the treatment of CRC, as well as all other
indications. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or
are pursuing the development of products for the treatment of the disease indications for which we are developing our future product
candidates. Some of these competitive products and therapies are based on scientific approaches that are the same as or similar
to our approach, and others are based on entirely different approaches. Potential competitors include academic institutions, government
agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative
arrangements for research, development, manufacturing and commercialization.
More established companies may have a competitive advantage over
us due to their greater size, cash flows and institutional experience. Compared to us, many of our competitors may have significantly
greater financial, technical and human resources. As a result of these factors, our competitors may obtain regulatory approval
of their products before we do, which will limit our ability to develop or commercialize our lead product candidate or any of our
other product candidates. In addition, many companies are developing new therapeutics to supplant or expand upon the standard of
care for a number of diseases, as a result, we cannot predict what the standard of care will be as our product candidates progress
through clinical development.
Our failure to successfully identify, acquire, develop and commercialize additional
product candidates or approved products other than our lead product candidate could impair our ability to grow.
Although a substantial amount of our efforts will focus on the continued
clinical testing and potential approval of our most advanced lead product candidate, a key element of our growth strategy is to
acquire, develop and/or market additional products and product candidates. All of these potential product candidates remain in
the discovery and clinical study stages. Research programs to identify product candidates require substantial technical, financial
and human resources, whether or not any product candidates are ultimately identified. Because our internal research capabilities
are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to
sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select
and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a
license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with
substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates
and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products,
businesses and technologies and integrate them into our current infrastructure. Moreover, we may devote resources to potential
acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such
efforts. Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive
clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks
of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown
to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any
products that we develop or approved products that we acquire will be manufactured profitably or achieve market acceptance.
Product liability lawsuits against us could cause us to incur substantial liabilities
and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to
the testing of our lead product candidate and any other product candidates in clinical trials and will face an even greater risk
if we commercially sell any products that we may develop. Product liability claims may be brought against us by subjects enrolled
in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully
defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities.
Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for any product candidates or products that we may develop;
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termination of clinical trial sites or entire clinical trial programs;
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injury to our reputation and significant negative media attention;
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withdrawal of clinical trial participants;
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significant costs to defend the related litigation;
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substantial monetary awards to clinical trial subjects or patients;
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diversion of management and scientific resources from our business operations; and
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the inability to commercialize our product candidates.
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We will obtain insurance coverage for products to include the sale
of commercial products if we obtain marketing approval for our lead product candidate or our other product candidates, but we may
be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments
have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim
or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely
affect our business.
We will need to expand our operations and grow the size of our organization, and
we may experience difficulties in managing this growth.
As of March 16, 2017, we had 104 employees. As our development and
commercialization plans and strategies develop, or as a result of any future acquisitions, we will need additional managerial,
operational, sales, marketing, scientific, and financial headcount and other resources. Our management, personnel and systems currently
in place may not be adequate to support this future growth. Future growth would impose significant added responsibilities on members
of management, including:
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managing our clinical trials effectively, which we anticipate being conducted at numerous clinical sites on a global scale;
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identifying, recruiting, maintaining, motivating and integrating additional employees with the expertise and experience we
will require;
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managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees,
contractors and other third parties;
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managing additional relationships with various strategic partners, suppliers and other third parties;
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improving our managerial, development, operational and finance reporting systems and procedures; and
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expanding our facilities.
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Our failure to accomplish any of these tasks could prevent us from successfully growing
our Company.
We are highly dependent on our Chief Executive Officer.
Our future success depends in significant part on the continued
service of our Chief Executive Officer, John Simard. Mr. Simard is critical to the strategic direction and overall management
of our company as well as our research and development process. Although we have an employment agreement with Mr. Simard,
it has no specific duration. The loss of Mr. Simard could adversely affect our business, financial condition and operating
results.
We depend on key personnel to operate our business, and many members of our current
management team are new. If we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully
grow our business could be harmed.
In addition to the continued services of Mr. Simard, we believe
that our future success is highly dependent on the contributions of our significant employees, as well as our ability to attract
and retain highly skilled and experienced sales, research and development and other personnel in the United States and abroad.
Some of our significant employees include our Medical Director, our Senior Vice President of Operations, our Vice President of
Research and Development, our Director of Quality Control, and our Vice President of Finance and Human Resources. Changes in our
management team may be disruptive to our business.
All of our employees, including our Chief Executive Officer, are
free to terminate their employment relationship with us at any time, subject to any applicable notice requirements, and their knowledge
of our business and industry may be difficult to replace. If one or more of our executive officers or significant employees leaves,
we may not be able to fully integrate new personnel or replicate the prior working relationships, and our operations could suffer.
Qualified individuals with the breadth of skills and experience in the pharmaceutical industry that we require are in high demand,
and we may incur significant costs to attract them. Many of the other pharmaceutical companies that we compete against for qualified
personnel have greater financial and other resources, different risk profiles and a longer history in the industry than we do.
They also may provide more diverse opportunities and better chances for career advancement. Our failure to attract and retain key
personnel could impede the achievement of our research, development and commercialization objectives.
If we fail to comply with environmental, health and safety laws and regulations,
we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws
and regulations in the U.S. and elsewhere, including, as a result of our leased laboratory space, those governing laboratory procedures
and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous
and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We
generally contract with third parties for the disposal of these materials and wastes.
We cannot eliminate the risk of contamination or injury from these
materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any
resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or
criminal fines and penalties.
Although we maintain insurance for employee injury to cover us for
costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance
may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic
tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials. In
addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations.
These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with
these laws and regulations may also result in substantial fines, penalties or other sanctions.
Business disruptions could seriously harm our future revenues and financial condition
and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages,
telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics
and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We do not carry
insurance for all categories of risk that our business may encounter. The occurrence of any of these business disruptions could
seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-parties to supply various
items which are critical for producing our product candidates. Our ability to produce clinical supplies of product candidates could
be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.
The ultimate impact on us, our significant suppliers and our general infrastructure of being consolidated in certain geographical
areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural
disaster. Further, any significant uninsured liability may require us to pay substantial amounts, which would adversely affect
our business, results of operations, financial condition and cash flows from future prospects.
Risks Related to Intellectual Property
If
we are unable to obtain or protect intellectual property
rights, our competitive position could be harmed.
We depend on our ability to protect our proprietary technology.
We rely on trade secret, patent, copyright and trademark laws, and confidentiality, licensing and other agreements with employees
and third parties, all of which offer only limited protection. Our commercial success will depend in large part on our ability
to obtain and maintain patent protection in the U.S. and other countries with respect to our proprietary technology and products.
Where we deem appropriate, we seek to protect our proprietary position by filing patent applications in the U.S. and abroad related
to our novel technologies and products that are important to our business. The patent positions of biotechnology and pharmaceutical
companies generally are highly uncertain, involve complex legal and factual questions and have in recent years been the subject
of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patents, including those
patent rights licensed to us by third parties, are highly uncertain.
The steps we have taken to protect our proprietary rights may not
be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both
inside and outside the U.S. The rights already granted under any of our currently issued patents and those that may be granted
under future issued patents may not provide us with the proprietary protection or competitive advantages we are seeking. If we
are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained
is not sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and our
ability to successfully commercialize our technology and products may be adversely affected.
With respect to patent rights, we do not know whether any existing
patents or pending patent applications for any of our technologies or product candidates will result in the issuance of patents
that protect such technologies or products candidates, or if any of our issued patents will effectively prevent others from commercializing
competitive technologies and products. Our pending patent applications cannot be enforced against third parties practicing the
technology claimed in such applications unless and until a patent issues from such applications. Further, the examination process
may require us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may
be obtained if these applications issue. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity
or enforceability, issued patents that we own or have licensed from third parties may be challenged in the courts or patent offices
in the U.S. and abroad. Such challenges may result in the loss of patent protection, the narrowing of claims in such patents or
the invalidity or unenforceability of such patents, which could limit our ability to stop others from using or commercializing
similar or identical technology and products, or limit the duration of the patent protection for our technology and products. Protecting
against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult
and, in some cases, not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation
of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement may be even more
difficult.
Intellectual property rights do not necessarily address all potential threats to
any competitive advantage we may have.
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:
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Others may be able to make compounds that are the same as or similar to our lead product candidate or our future product candidates
but that are not covered by the claims of the patents that we own or have exclusively licensed.
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We might not have been the first to make the inventions covered by the issued patent or pending patent application that we
own or have exclusively licensed.
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We or any of our licensors or strategic partners might not have been the first to file patent applications covering certain
of our inventions.
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Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing
our intellectual property rights.
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It is possible that our pending patent applications will not lead
to issued patents.
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Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held
invalid or unenforceable, as a result of legal challenges by our competitors.
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Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor
from patent infringement claims for certain research and development activities, as well as 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.
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We may not develop additional proprietary technologies that are patentable.
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The patents of others may have an adverse effect on our business.
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Our technology may be found to infringe upon third-party intellectual property
rights.
Third parties, may in the future, assert claims or initiate litigation
related to their patent, copyright, trademark and other intellectual property rights in technology that is important to us. The
asserted claims and/or litigation could include claims against us, our licensors or our suppliers alleging infringement of intellectual
property rights with respect to our products or components of those products. Regardless of the merit of the claims, they could
be time consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a
non-infringing technology or enter into license agreements. We cannot assure you that licenses will be available on acceptable
terms, if at all. Furthermore, because of the potential for significant damage awards, which are not necessarily predictable, it
is not unusual to find even arguably unmeritorious claims resulting in large settlements. If any infringement or other intellectual
property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license
the proprietary rights on commercially reasonable terms and conditions, our business, operating results and financial condition
could be materially and adversely affected.
If our products, methods, processes and other technologies infringe upon the proprietary
rights of other parties, we could incur substantial costs and we may have to:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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abandon an infringing drug or therapy candidate;
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redesign our products or processes to avoid infringement;
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stop using the subject matter claimed in the patents held by others;
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defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial
diversion of our financial and management resources.
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We may need to license intellectual property from third parties, and such licenses
may not be available or may not be available on commercially reasonable terms.
A third party may hold intellectual property, including patent rights
that are important or necessary to the development of our products. It may be necessary for us to use the patented or proprietary
technology of a third party to manufacture, or otherwise commercialize, our own technology or products, in which case we would
be required to obtain a license from such third party. Licensing such intellectual property may not be available or may not be
available on commercially reasonable terms, which could have a material adverse effect on our business and financial condition.
Several companies in our industry have licensed U.S. patent nos. 6,331,415 and 7,923,221. These patents appear to relate to antibody
production techniques, and have been reported to remain in force until December 18, 2018, unless determined to be invalid or unenforceable
before that date. Should a license to these patents be necessary, we cannot be certain that such a license would be available on
commercially reasonable terms.
If we are unable to protect the confidentiality of our trade secrets, our business
and competitive position would be harmed.
In addition to seeking patents for some of our technology and product
candidates, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain
our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality
agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators,
contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent
assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements
and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such
breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming,
and the outcome is unpredictable. In addition, some courts inside and outside of the U.S.are less willing or unwilling to protect
trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have
no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If
any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be
harmed.
Risks Related to Owning Shares of Our Common Stock
Our share price may be volatile, which could subject us to additional securities
class action lawsuits and prevent you from being able to sell your shares at or above the offering price.
Our stock could be subject to wide fluctuations in response to many
risk factors listed in this section, and others beyond our control, including:
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results of our clinical trials;
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results of clinical trials of our competitors’ products;
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regulatory actions with respect to our products or our competitors’ products;
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actual or anticipated fluctuations in our financial condition and operating results;
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actual or anticipated changes in our growth rate relative to our competitors;
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actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
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competition from existing products or new products that may emerge;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations
or capital commitments;
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issuance of new or updated research or reports by securities analysts;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
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additions or departures of key management or scientific personnel;
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disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain
patent protection for our technologies;
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announcement or expectation of additional financing efforts;
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sales of our common stock by us, our insiders or our other shareholders;
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market conditions for biopharmaceutical stocks in general; and
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general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations
often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry
fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of shares of our common stock. In addition, such fluctuations could
subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention
from other business concerns, which could seriously harm our business. If the market price of shares of our common stock does not
exceed your buying price, you may not realize any return on your investment in us and may lose some or all of your investment.
Insiders continue to have substantial control
over our company since our initial public offering in April 2015 and could delay or prevent a change in corporate control.
As of December 31, 2016, our
directors, executive officers and principal shareholders, together with their affiliates, beneficially own, in the aggregate, at
least 10 million shares or approximately 31% of our outstanding common stock, and could own approximately 13.8 million shares or
approximately 42% of our outstanding common stock if they fully exercise their outstanding stock options. As a result, these shareholders,
if acting together, have the ability to determine the outcome of matters submitted to our shareholders for approval, including
the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons,
acting together, have the ability to control the management and affairs of the Company. Accordingly, this concentration of ownership
may harm the market price of our common stock by:
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delaying, deferring or preventing a change in control of the Company;
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impeding a merger, consolidation, takeover or other business combination involving the Company; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
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We have broad discretion in the use of the net proceeds from our initial public
offering in April 2015 and subsequent offerings and may not use them effectively.
We intend to continue to allocate the net proceeds that we received
from the April 2015 offering and subsequent offerings as described below “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities—Use of Proceeds from IPO.” However, our management will
have broad discretion in the actual application of the net proceeds, and we may elect to allocate proceeds differently from that
described in “Use of Proceeds” if we believe it would be in our best interests to do so. Our shareholders may not agree
with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply
these funds effectively could have a material adverse effect on our business. We may invest the net proceeds from this offering
in a manner that does not produce income or that loses value.
Provisions in our charter documents under Canadian law could make an acquisition
of us, which may be beneficial to our shareholders, more difficult .
Our authorized preferred capital stock is available for issuance
from time to time at the discretion of our Board of Directors, without shareholder approval. Our Articles of Incorporation (“Articles”)
grant our Board of Directors the authority, subject to the corporate law of British Columbia, to determine or alter the special
rights and restrictions granted to or imposed on any wholly unissued series of preferred shares, and such rights may be superior
to those of our common stock.
Limitations on the ability to acquire and hold our common stock
may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition of Canada to review any
acquisition of a significant interest in us. This legislation grants the Commissioner jurisdiction to challenge such an acquisition
before the Canadian Competition Tribunal if the Commissioner believes that it would, or would be likely to, result in a substantial
lessening or prevention of competition in any market in Canada. The Investment Canada Act (Canada) subjects an acquisition of control
of a company by a non-Canadian to government review if the value of our assets as calculated pursuant to the legislation exceeds
a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely
to be a net benefit to Canada.
Any of the foregoing could prevent or delay a change of control
and may deprive or limit strategic opportunities for our shareholders to sell their shares and/or affect the market price of our
shares.
We may be a passive foreign investment company for US tax purposes which may negatively
affect US investors.
For US federal income taxation purposes, we will be a passive foreign
investment company (PFIC) if in any taxable year either: (a) 75% or more of our gross income consists of passive income; or
(b) 50% or more of the value of our assets is attributable to assets that produce, or are held for the production of, passive
income. If we meet either test, our shares held by a US person in that year will be PFIC shares for that year and all subsequent
years in which they are held by that person. In previous taxable years, our gross income consisted mostly of interest, and we have
been considered a PFIC. We may also be a PFIC in future taxable years. Gain realized by a US investor from the sale of PFIC shares
is taxed as ordinary income, as opposed to a capital gain, and subject to an interest charge unless the US person timely made certain
tax elections.
We are governed by the corporate laws in British Columbia, Canada which in some
cases have a different effect on shareholders than the corporate laws in Delaware, United States.
The material differences between the BCBCA as compared to the Delaware
General Corporation Law (DGCL) which may be of most interest to shareholders include the following: (i) for material corporate
transactions (ie mergers and amalgamations, other extraordinary corporate transactions, amendments to our Articles) the BCBCA generally
requires two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote of shareholders; (ii) the
quorum for shareholders meetings is not prescribed under the BCBCA and is only two persons representing 20% of the issued shares
under our Articles, whereas under DGCL, quorum requires a minimum of one-third of the shares entitled to vote to be present and
companies’ certificates of incorporation frequently require a higher percentage to be present; (iii) under the BCBCA,
a holder of 5% or more of our common stock can requisition a special meeting at which any matters that can be voted on at our annual
meeting can be considered, whereas the DGCL does not give this right; (iv) our Articles require two-thirds majority vote by
shareholders to pass a resolution for one or more directors to be removed, whereas DGCL only requires the affirmative vote of a
majority of the shareholders; however, many public company charters limit removal of directors to a removal for cause; and (v) our
Articles may be amended by resolution of our directors to alter our authorized share structure, including to consolidate or subdivide
any of our shares, whereas under DGCL, a majority vote by shareholders is generally required to amend a corporation’s certificate
of incorporation and a separate class vote may be required to authorize alterations to a corporation’s authorized share structure.
We cannot predict if investors will find our common stock less attractive because of these material differences. 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 share
price may be more volatile.
Future sales, or the possibility of future sales, of a substantial number of our
common stock could adversely affect the price of the shares and dilute shareholders.
Future sales of a substantial number of our common stock, or the
perception that such sales will occur, could cause a decline in the market price of our common stock. As of December 31, 2016,
we had 32,627,691 common stock outstanding.
In the future, we may issue additional common stock or other equity
or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements
or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and could cause our common share
price to decline.
We are an “emerging growth company” as that term is used in the Jumpstart
Our Business Startups Act of 2012 ( JOBS Act) and we intend to take advantage of reduced disclosure and governance requirements
applicable to emerging growth companies, which could result in our common stock being less attractive to investors and adversely
affect the market price of our common stock or make it more difficult to raise capital as and when we need it.
We are an “emerging growth company” as that term is
used in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote
on executive compensation and shareholder approval of any golden parachute payments not previously approved and exemptions from
any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement
to the auditor’s report on the financial statements. We currently intend to take advantage of some, but not all, of the reduced
regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an “emerging
growth company.” For example, so long as we qualify as an “emerging growth company,” we may elect not to provide
you with certain information, including certain financial information and certain information regarding compensation of our executive
officers, that we would otherwise have been required to provide in filings we make with the Securities and Exchange Commission
(SEC) which may make it more difficult for investors and securities analysts to evaluate the Company.
We cannot predict if investors will find our common stock less attractive
because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions
until we are no longer an emerging growth company, which in certain circumstances could be for up to five years.
Due to the exemptions from various reporting requirements provided
to us as an “emerging growth company” we may be less attractive to investors and it may be difficult for us to raise
additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry
if they believe that our financial statements are not as transparent as other companies in our industry. If we are unable to raise
additional capital as and when we need it, our business, results of operations, financial condition and cash flows and future prospects
may be materially and adversely affected.
If we fail to maintain an effective system of internal control over financial reporting,
we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence
in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary
for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent
fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause
us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 or any
subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial
statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors
to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common
stock.
We will be required to disclose changes made in our internal controls
and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually.
However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting
firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404.
We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our
internal controls could detect problems that our management’s assessment might not.