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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission file number 001-37581
Incorporated under the Laws of the
State of Delaware
I.R.S. Employer Identification No.
46-0571712
ACLARIS THERAPEUTICS, INC.
640 Lee Road, Suite 200
Wayne, PA 19087
(484) 324-7933
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class:
Common Stock, $0.00001 par value
Name of Each Exchange on which Registered
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ◻ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ☒ No ◻
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ☒
Non-accelerated filer ◻
(Do not check if a
smaller reporting company)
Smaller reporting company ◻
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ☒
As of June 30, 2017, the last business day of the registrant’s last completed second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant was approximately $639.2 million based on the closing price of the registrant’s common stock, as reported by the Nasdaq Global Select Market, on such date.
As of March 9, 2018, 30,901,492 shares of common stock, $0.00001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2018 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, that involve substantial risks and uncertainties. The forward-looking statements are contained
principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. In some
cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,”
“expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and
“ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future.
These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from the information expressed or implied by these
forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement
contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors
currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements
include statements about:
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our plans to commercialize ESKATA in the United States;
our plans to develop and commercialize our other drug candidates;
the timing of our planned clinical trials of our drug candidates;
the timing of the submission of our NDA for A-101 45% Topical Solution for the treatment of common warts;
the timing of and our ability to obtain and maintain regulatory approvals for our drug candidates;
the clinical utility of our drug candidates;
our commercialization, marketing and manufacturing capabilities and strategy;
our expectations about the willingness of patients to pay out of pocket for procedures using ESKATA for the
treatment of SK;
our expectations about the willingness of dermatologists to use ESKATA for the treatment of SK;
the timing of our INDs for our immunology drug candidates;
our efforts to obtain five year NCE exclusivity from the FDA and a patent term extension from the USPTO;
our intellectual property position;
our plans to in-license or acquire additional drug candidates for other dermatological conditions to build a fully
integrated dermatology company; and
our estimates regarding future revenue, expenses and needs for additional financing.
You should refer to “Item 1A. Risk Factors” in this Annual Report for a discussion of important factors that may
cause our actual results to differ materially from those expressed or implied by our forward‑looking statements. As a result of
these factors, we cannot assure you that the forward‑looking statements in this Annual Report will prove to be accurate.
Furthermore, if our forward‑looking statements prove to be inaccurate, the inaccuracy may be material. In light of the
significant uncertainties in these forward‑looking statements, you should not regard these statements as a representation or
warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The
forward-looking statements in this Annual Report represent our views as of the date of this Annual Report. We anticipate that
subsequent events and developments may cause our views to change. However, while we may elect to update these forward-
looking statements at some point in the future, we undertake no obligation to publicly update any forward‑looking
statements, whether as a result of new information, future events or otherwise, except as required by law. You should,
therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this
Annual Report.
All brand names or trademarks appearing in this Annual Report, including ESKATA, are the property of their
respective owners. Unless the context requires otherwise, references in this report to “Aclaris,” the “Company,” “we,” “us,”
and “our” refer to Aclaris Therapeutics, Inc. and its subsidiaries.
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Table of Contents
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Matters
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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Item 1. Business
Overview
PART I
We are a dermatologist-led biopharmaceutical company focused on identifying, developing and commercializing
innovative and differentiated therapies to address significant unmet needs in medical and aesthetic dermatology and
immunology. Our lead product, ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, is a proprietary
formulation of high-concentration hydrogen peroxide topical solution that has been approved by the U.S. Food and Drug
Administration, or FDA, as a prescription treatment for raised seborrheic keratosis, or SK, a common non-malignant skin
tumor. The FDA approved our New Drug Application, or NDA, for ESKATA for the treatment of raised SKs in December
2017, making ESKATA the first drug approved by the FDA for the treatment of raised SKs. We also submitted a Marketing
Authorization Application, or MAA, for ESKATA in the European Union in July 2017. We are also developing another high-
concentration formulation of hydrogen peroxide, A-101 45% Topical Solution, as a prescription treatment for common warts,
also known as verruca vulgaris. Additionally, in 2015, we in-licensed exclusive, worldwide rights to certain inhibitors of the
Janus kinase, or JAK, family of enzymes, for specified dermatological conditions, including alopecia areata, or AA, as well
as vitiligo and androgenetic alopecia, or AGA, also known as male or female pattern baldness. In 2016, we acquired
additional intellectual property rights for the development and commercialization of certain JAK inhibitors for specified
dermatological conditions. We intend to continue to in-license or acquire additional drug candidates and technologies to
build a fully integrated dermatology company.
SK lesions are among the most common non-malignant skin tumors and one of the most frequent diagnoses made
by dermatologists. SK lesions typically have a waxy, scaly, slightly elevated appearance, and multiple lesions are often
present. Though the lesions are non-malignant, patients often elect to have their condition treated by a dermatologist, either
because the lesions have become inflamed or because the patient feels they are cosmetically unattractive. SK lesions are
usually treated by cryosurgery, electrodesiccation, curettage or excision. Each of these methods may be painful or can result
in pigmentary changes or scarring at the treatment site.
We are developing our sales, marketing and product distribution capabilities for ESKATA in order to support a
commercial product launch in the United States, which we expect to occur in the second quarter of 2018. We have also hired
a targeted sales force of 50 sales representatives which we believe will allow us to reach the approximately 6,000 health care
providers in the United States with the highest potential for using ESKATA. A study published in the Journal of The
American Academy of Dermatology in 2006, which we refer to as the AAD study, estimated that SK affects over 83 million
people in the United States. Based on a market survey we commissioned in 2014, we estimate that there are 18.5 million
patient visits to dermatologists for SK and dermatologists perform approximately 8.3 million procedures to remove SK
lesions annually in the United States. We estimate that the cost of these procedures to third-party payors and patients is more
than $1.2 billion annually.
We are developing A-101 45% Topical Solution for the treatment of common warts. Although common warts are
generally not harmful and in most cases eventually clear without medical treatment, they may be painful and aesthetically
unattractive and are contagious. On an annual basis, approximately 2.0 million people are diagnosed with common
warts. As with SK lesions, cryosurgery is the most frequently used in-office treatment for common warts. Common warts
can also be removed with slow-acting, over-the-counter products containing salicylic acid. No prescription drugs have been
approved by the FDA for the treatment of common warts. In January 2018, we reported top line results from two Phase 2
clinical trials of A-101 45% Topical Solution, WART-202 and WART-203, to assess the dose frequency in adult and pediatric
patients with common warts. In these trials, we observed clinically and statistically significant outcomes for all primary and
secondary endpoints of each trial. Based on these results, we expect to initiate Phase 3 clinical trials of A-101 45% Topical
Solution for the treatment of common warts in the second half of 2018. Patients in both Phase 2 trials are continuing in a 3-
month drug-free follow-up phase of these trials. We expect to report data from the Phase 3 clinical trials of A-101 45%
Topical Solution in the second half of 2019 and, if positive, submit an NDA to the FDA.
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We are developing our JAK inhibitor drug candidates, ATI-501, formerly ATI-50001, and ATI-502, formerly ATI-
50002, which we in-licensed from Rigel Pharmaceuticals, Inc., or Rigel, as potential treatments for AA. AA is an
autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on the scalp and body. More
severe forms of AA include total scalp hair loss, known as alopecia totalis, or AT, and total hair loss on the scalp and body,
known as alopecia universalis, or AU. AA affects up to 2.0% of people globally at some point during their lifetime (i.e.
incidence) and up to 0.2% of people are affected at any given time (i.e. prevalence) - with two-thirds of affected individuals
being 30 years old or younger at the time of disease onset. Treatment options for the less severe, patchy forms of AA include
corticosteroids, either topically applied or injected directly into the scalp where the bare patches are located, or the induction
of an allergic reaction at the site of hair loss using a topical contact sensitizing agent, an approach known as topical
immunotherapy. The same treatment options are utilized for the more severe forms of AA, although utilization of these
treatment options for the more severe forms of AA is limited due to limited efficacy, certain side effects, and their
impracticality for extensive surface areas. We are also developing ATI-502 for the treatment of vitiligo and another series of
JAK inhibitors for the treatment of AGA.
In August 2017, we acquired Confluence Life Sciences, Inc. or Confluence. The acquisition of Confluence added
small molecule drug discovery and preclinical development capabilities that allow us to bring early-stage research and
development activities in-house that we previously outsourced to third parties. Through the acquisition of Confluence, we
also acquired several preclinical drug candidates, including additional JAK inhibitors known as “soft” JAK inhibitors,
inhibitors of the MK-2 signaling pathway and inhibitors of interleukin-2-inducible T cell kinase, or ITK. We expect to
submit an investigational new drug application, or IND, to the FDA for ATI-450, an MK-2 inhibitor, in mid-2019, and for our
soft JAK inhibitors and ITK inhibitors in the second half of 2019.
Our intellectual property portfolio contains issued patents directed to methods of use for high-concentration
hydrogen peroxide compositions of at least 23% or more hydrogen peroxide, including ESKATA and A-101 45% Topical
Solution and issued patents directed to our JAK inhibitor drug candidates, ATI-501 and ATI-502. Our issued patents relating
to the use of A-101 high-concentration hydrogen peroxide compositions including ESKATA and A-101 45% Topical
Solution, begin to expire in 2022, subject to any applicable patent term extension that may be available in a particular
country. Our intellectual property portfolio also contains an issued U.S. patent, European and other foreign country patent
applications directed to, among other things, formulations and methods of use for high concentration hydrogen peroxide
compositions, including ESKATA and A-101 45% Topical Solution and a single-use, self-contained, pre-filled, disposable
pen-type applicator for use with such formulations. The issued U.S. formulation patent expires in 2035 and the pending U.S.,
European and other foreign country formulation patent applications, if they issue as patents, would also be expected to expire
in 2035, subject to any applicable patent term adjustment or extension that may be available in a particular country. With
respect to our JAK inhibitor drug candidates ATI-501 and ATI-502, the issued U.S. and foreign patents that specifically cover
the composition of matter for these compounds begin to expire in 2030, subject to any applicable patent term extension that
may be available in a particular country. Our intellectual property portfolio also contains issued patents and pending
applications directed to, among other things, the use of JAK inhibitors for treating hair loss disorders that expire, or are
expected to expire, in 2031, subject to any applicable patent term adjustment or extension that may be available in a
particular country.
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Our Drug Candidates
We have utilized our experience to establish a pipeline of drug candidates that we believe will address significant
unmet needs in dermatology and immunology. Our pipeline of drug candidates is summarized in the table below:
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ESKATA for the Treatment of Raised Seborrheic Keratosis
ESKATA, our lead product, is the first FDA-approved drug for the treatment of raised SKs. SK lesions typically
have a waxy, scaly, slightly elevated appearance, and multiple lesions are often present. The lesions can vary in color from
light tan to dark brown or black and typically appear on the face, trunk and extremities. Though the lesions are non-
malignant, patients often elect to have their condition treated by a dermatologist, either because the lesions have become
inflamed or because the patient feels they are cosmetically unattractive.
In November 2016, we completed two pivotal Phase 3 clinical trials of ESKATA in a combined 937 patients who
each had a total of four target SK lesions located on the face, trunk and extremities. Each trial met all primary and secondary
endpoints for that trial, achieving clinically and statistically significant clearance of SK lesions. Additionally, we completed
an open-label safety trial of ESKATA in November 2016, in which we enrolled 147 subjects. Across all three clinical trials,
there were no treatment-related serious adverse events among patients treated with ESKATA, and the most common adverse
events reported were nasopharyngitis and sinusitis which were determined to be unrelated to ESKATA. Based on these
results, we submitted an NDA for ESKATA for the treatment of raised SKs to the FDA in February 2017, and the NDA was
approved by the FDA in December 2017. We also submitted an MAA in the European Union for ESKATA in July 2017.
We are developing our sales, marketing and product distribution capabilities for ESKATA in order to support a
commercial product launch in the United States, which we expect to occur in the second quarter of 2018. We have also hired
a targeted sales force of 50 sales representatives which we believe will allow us to reach the approximately 6,000 health care
providers in the United States with the highest potential for prescribing ESKATA to their patients.
A-101 45% Topical Solution for Treatment of Common Warts
We are developing A-101 45% Topical Solution for the treatment of common warts. Although common warts are
generally not harmful and in most cases eventually clear without medical treatment, they may be painful and aesthetically
unattractive and are contagious. On an annual basis, approximately 2.0 million people are diagnosed with common warts. As
with SK lesions, cryosurgery is the most frequently used in-office treatment for common warts. Common warts can also be
removed with slow-acting, over-the-counter products containing salicylic acid. No prescription drugs have been approved by
the FDA for the treatment of common warts. We completed a Phase 2 clinical trial, WART-201, in August 2016 evaluating
40% and 45% concentrations of A-101 for the treatment of common warts, in which we observed statistically significant
improvements in the mean change in the Physician’s Wart Assessment, or PWA, score and in complete clearance of common
warts in patients treated with the 45% concentration of A-101 compared to placebo. The PWA score is a four-point scale of
the investigators assessment of the severity of a target wart at a particular time point.
In June 2017, we commenced two additional Phase 2 clinical trials, WART-202 and WART-203, of A-101 45%
Topical Solution to assess the dose frequency in adult and pediatric patients with common warts. Both trials evaluated the
safety and efficacy of A-101 45% as compared to placebo, or vehicle. The two randomized, double-blind, vehicle-controlled
trials were designed to understand the effects of dose frequency and to explore additional clinical endpoints that will be
further evaluated in a planned Phase 3 development program. We enrolled a total of 316 patients at 34 investigational centers
in the United States across both trials. In January 2018, we reported top line results from these two Phase 2 clinical trials of
A-101 45% Topical Solution. The results demonstrated clinically and statistically significant outcomes for primary,
secondary and exploratory endpoints, analyzed to date, of each of the two additional Phase 2 trials. There were no treatment-
related serious adverse events among patients treated with A-101 45% Topical Solution.
The WART-202 trial evaluated 157 patients who self-administered either A-101 45% Topical Solution or placebo
once weekly through Day 56, for a total of 8 treatments. Each patient had between one and four warts at baseline. The trial
achieved its primary endpoint, which was mean change from baseline in the PWA score of the target wart at Day 56 (one
week after the last treatment). The mean reduction in PWA score at Day 56 on the target warts was 0.77 points in patients
who received A-101 45% Topical Solution, compared to a reduction of 0.23 points for the target warts that received placebo,
a result that was also statistically significant (p<0.001).
The WART-203 trial evaluated 159 patients who self-administered either A-101 45% Topical Solution or placebo
twice weekly through Day 56, for a total of 16 treatments. Each patient had between one and six warts at baseline. The
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WART-203 trial achieved its primary endpoint, which was mean change from baseline in the PWA scale score at Day 56
(Visit 10 or one week after the last treatment). The mean reduction in PWA score at Day 56 on the target warts was 0.87
points in patients who received A-101 45%, compared to a reduction of 0.17 points for the target warts that received placebo,
a result that was statistically significant (p<0.001).
Patients in both Phase 2 trials, WART-202 and WART-203, are continuing in a 3-month drug-free follow-up phase of
these trials. Based on the results of these Phase 2 clinical trials, we expect to initiate Phase 3 clinical trials of A-101 45%
Topical Solution for the treatment of common warts in the second half of 2018. We expect to report data from these Phase 3
clinical trials of A-101 45% Topical Solution in the second half of 2019 and, if positive, submit an NDA to the FDA.
ATI-501 and ATI-502
We are developing the JAK inhibitors, ATI-501 and ATI-502, which we in-licensed from Rigel as potential
treatments for AA. AA is an autoimmune dermatologic condition typically characterized by patchy non-scarring hair loss on
the scalp and body. More severe forms of AA include AT, which is total scalp hair loss, and AU, which is total hair loss on
the scalp and body. AA affects up to 2.0% of people globally at some point during their lifetime (i.e. incidence) and up to
0.2% of people are affected at any given time (i.e. prevalence) - with two-thirds of affected individuals being 30 years old or
younger at the time of disease onset. Treatment options for the less severe, patchy forms of AA include corticosteroids, either
topically applied or injected directly into the scalp where the bare patches are located, or the induction of an allergic reaction
at the site of hair loss using a topical contact sensitizing agent, an approach known as topical immunotherapy. The same
treatment options are utilized for the more severe forms of AA, although utilization of these treatment options for the more
severe forms of AA is limited due to limited efficacy, certain side effects, and their impracticality for extensive surface areas.
We are developing ATI-501 as an oral treatment for AA. We submitted an IND to the FDA for ATI-501 in October
2016, and we completed a Phase 1 clinical trial to evaluate the pharmacokinetic and pharmacodynamic, or PK/PD, properties
of this drug candidate in the first quarter of 2017.
We are developing ATI-502 as a topical treatment for AA, vitiligo, AGA and loss of eyebrow hair. We submitted an
IND to the FDA for ATI-502 for the treatment of AA in July 2017. We are also developing another series of JAK inhibitors
for the treatment of AGA. The following table summarizes the status of our ongoing Phase 2 clinical trials of ATI-501 and
ATI-502, including their indications, trial objectives and expected timing for initiation and receipt of preliminary results:
Study
Indication
Objective
Patients
Expected
Initiation
P
Preliminary
Results
Expected
ATI-501-AUAT-201
AT/AU
Dose-ranging
120-160
1H 2018
Mid 2019
ATI-502-AA-201
ATI-502-AA-202
ATI-502-AUATB-201
ATI-502-VITI-201
ATI-502-AGA-201
AA
AA
Eyebrow
Vitiligo
AGA
Dose-ranging
PK/PD
Open-label study
Open-label study
Open-label study
120
12
24
24
24
2H 2017
2H 2017
2H 2017
2H 2017
1H 2018
2H 2018
1H 2018
Mid 2018
1H 2019
1H 2019
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Manufacturing and Supply
We do not have any manufacturing facilities. We rely on third parties for the manufacture of preclinical and clinical
supplies for all of our drug candidates. We also rely on third parties for the commercial manufacture of ESKATA. We have
entered into an exclusive, ten-year, automatically renewable supply agreement with PeroxyChem LLC, or PeroxyChem,
which goes into effect on the date of first commercial sale of ESKATA, to provide hydrogen peroxide, the active
pharmaceutical ingredient, or API, that can be used in ESKATA for the treatment of raised SKs and a number of other
specified dermatological indications. We or PeroxyChem may terminate the supply agreement with prior written notice
immediately for specified financial reasons, after a 10-day and 60-day cure period for material monetary and non-monetary
material breaches, respectively, and in the event of a force majeure event, that continues for 90 consecutive days. In addition,
we may terminate the PeroxyChem supply agreement, with prior written notice, for PeroxyChem's failure to supply API to us
for more than 90 cumulative days in a year.
We have entered into an exclusive commercial supply agreement with James Alexander Corporation, or James
Alexander, for the manufacture of the finished dosage form of ESKATA. We must meet a minimum purchase requirement
each year between 2018 and 2022. Additionally, during the term of the agreement, James Alexander will not manufacture
any competitive product, as defined in the agreement. In the event that we do not meet the purchase minimum requirements
James Alexander’s exclusivity obligation will cease. The term of the agreement with James Alexander is five years from the
date of the first commercial sale of ESKATA and thereafter will be renewed automatically for one-year periods. Either party
may terminate the agreement for any reason upon 180 days prior written notice. In addition, either party has the right to
immediately terminate the supply agreement under certain circumstances including (i) the other party files for bankruptcy, (ii)
the other party materially breaches the supply agreement and such breach is not cured within a specified period and (iii) any
required license, permit or certificate required of the other party to perform its obligations under the supply agreement is not
approved or issued or is revoked by an applicable governmental regulatory authority.
Replacement of any of these third-party manufacturers would require us to qualify new manufacturers and negotiate
and execute contractual agreements with them. If any of our supply or service agreements with third-party manufacturers are
terminated, we will experience delays and additional expenses in the commercialization of ESKATA.
Commercialization
We are planning to commercialize ESKATA ourselves in the United States, and to establish collaborations with third
parties to commercialize it outside the United States, if approved. We are developing our sales, marketing and product
distribution capabilities for ESKATA, and we have hired a targeted sales force of 50 sales representatives, in order to support
a commercial product launch in the United States, which we expect to occur in the second quarter of 2018. We believe a
scientifically oriented, customer-focused team of 50 sales representatives will allow us to reach the approximately 6,000
health care providers in the United States with the highest potential for prescribing ESKATA to their patients. We estimate
these health care providers will continue to account for over 70% of in-office SK treatments performed in the United
States. Our sales force will be supported by sales and marketing management, internal sales and marketing, a direct-to-
consumer advertising campaign, and commercial product distribution.
We believe dermatologists will be inclined to adopt ESKATA to treat their patients with SK lesions not only because
of its clinical profile, but also because it may provide an expanded source of revenue for their practices. Dermatologists
expect declining reimbursements from third-party payors for providing medical services. In addition, a greater portion of the
cost of medical care has been shifted to patients, in the form of higher deductibles and co‑insurance. Collecting from patients
can be difficult and costly for physician practices. We believe many dermatologists are interested in expanding the cash-pay
aesthetic portion of their practices, meaning the portion of procedures that are not medically necessary and not reimbursed by
third-party payors, by treating new aesthetic patients and by offering new services to current aesthetic patients. Though SK
patients typically come into the dermatology practice seeking a medical diagnosis, we believe they often are willing to pay
for removal of SK lesions to improve appearance even after they learn that the lesions are non-malignant, and that removal
may not be reimbursed. In addition, since ESKATA can be administered by non-physician staff, we believe it could provide
incremental practice revenue with minimal time commitment by the dermatologist after the diagnosis is made.
We believe dermatologists tend to be particularly focused on the safety of pharmaceutical products because, while
skin diseases can have profound effects on patients' quality of life, few are life-threatening. As a result, we believe that
dermatologists, as well as their patients, often prefer to use topical treatments when possible to limit the risk of systemic
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side effects. Dermatologists also tend to place a high level of emphasis on products that are easy to use because they often
manage high volumes of patients. We believe this also contributes to a general preference for topical treatments. Finally, in
our experience, dermatologists tend to engage with sales and medical affairs personnel from the pharmaceutical industry
regarding the scientific evidence supporting dermatology products and the challenges experienced by physicians and patients
in the use of these products. Dermatologists often rely on trusted relationships with scientifically oriented, customer-focused
sales representatives who can provide them with the necessary information to support their use of appropriate treatments.
Competition
The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong
emphasis on proprietary drugs. While we believe that our knowledge, experience and scientific resources provide us with
competitive advantages, we face potential competition from many different sources, including major pharmaceutical,
biotechnology and specialty pharmaceutical companies, academic institutions and governmental agencies and public and
private research institutions. Any drug candidates that we successfully develop and commercialize will compete with existing
treatments and new treatments that may become available in the future.
The key competitive factors affecting the success of ESKATA for the treatment of raised SKs, are likely to be its
efficacy, safety, non-invasiveness, pain profile and ability to be administered by non-physician staff. With respect to
ESKATA for the treatment of raised SKs, we are aware of the following companies that are developing treatments for SK:
BioLineRx Ltd. is developing an over-the-counter drug candidate targeting multiple skin conditions, including SK;
Skincential Sciences, Inc. currently markets a line of cosmetic products targeting skin conditions, including SK; and
Epipharm, AG is developing a topical drug candidate targeting multiple skin conditions, including SK. We are also aware of
early research being conducted with Akt inhibitors as a potential treatment for SK. None of these products have been
approved by the FDA for the treatment of SK in the United States.
With respect to A-101 45% Topical Solution for the treatment of common warts, we are aware of the following
companies that are developing treatments for common warts: Nielsen BioSciences, Inc. is developing a drug candidate for the
treatment of common warts; BioLineRx Ltd. is developing an over-the-counter drug candidate targeting multiple skin
conditions, including common warts; Cutanea Lifesciences, Inc. is developing a drug candidate for the treatment of common
warts; and RXi Pharmaceuticals, Inc. is also developing a drug candidate for the treatment of common warts. In addition,
other drugs have been used off-label as treatments for common warts. We could also encounter competition from over-the-
counter treatments for common warts.
With respect to ATI-501 and ATI-502 for the treatment of AA, we anticipate competing with sensitizing agents such
as diphencyprone, and topical, intralesional and systemic corticosteroids, which have been found to occasionally reduce
symptoms of AA. Other treatments utilized for patchy AA include anthralin and minoxidil solution. We may also compete
with companies developing chemical agents to be used in topical immunotherapies, as well as companies developing
biologics, immunosuppressive agents, laser therapy, phototherapy, other JAK inhibitors and prostaglandin analogues to treat
AA.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs
that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than ESKATA
or any other drug that we may develop. Our competitors also may obtain FDA or other regulatory approval for their drugs
more rapidly than we may obtain approval for our drug candidates, which could result in our competitors establishing a
strong market position before we are able to enter the market. Many of the companies against which we are competing, or
against which we may compete in the future, have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing
approved drugs than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even
more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also
prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and
establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies complementary
to, or that may be necessary for, our programs.
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Intellectual Property
Our success depends in large part upon our ability to obtain and maintain proprietary protection for our drug
candidates and to operate without infringing the proprietary rights of others. We seek to avoid the latter by monitoring patents
and publications that may affect our business, and to the extent we identify such developments, evaluate and take appropriate
courses of action. Our policy is to protect our proprietary position by, among other methods, filing for patent applications on
inventions that are important to the development and conduct of our business with the U.S. Patent and Trademark Office, or
USPTO, and its foreign counterparts.
With respect to ESKATA and A-101 45% Topical Solution, we do not currently rely on licenses to any third party's
intellectual property. We own two U.S. patents that include claims that cover the use of high-concentration hydrogen
peroxide of at least 23%, including ESKATA and A-101 45% Topical Solution, for the alleviation of SK and acrochordons.
The patents in Australia, New Zealand and India include claims that cover the use of high-concentration hydrogen peroxide
of at least 23%, including ESKATA and A-101 45% Topical Solution, for the alleviation of various skin conditions including
SK, acrochordons, corns, tags, acne, warts and rosacea. The patents in Germany, the United Kingdom, Mexico and Singapore
include claims that cover the use of high-concentration hydrogen peroxide of at least 23%, including ESKATA and A-101
45% Topical Solution for the alleviation of acrochordons. The issued patents relating to the use of ESKATA and A-101 45%
Topical Solution begin to expire in 2022, subject to any applicable patent term extension that may be available in a particular
country.
We also own one issued U.S. patent and pending U.S., European and other foreign patent applications directed to
various formulations comprising high-concentration hydrogen peroxide, including ESKATA and A-101 45% Topical
Solution dosing regimens for such formulations, applicators for use with such formulations, and methods of treating various
skin conditions, including SK and common warts, by the topical administration of such formulations. Our U.S. formulation
patent expires in 2035 and any claims that issue from the pending formulation applications will expire in 2035, subject to any
applicable patent term adjustment or extension that may be available in a particular country. In addition, we own a U.S. and
PCT patent application directed to the use of high-concentration hydrogen peroxide, including ESKATA and A-101 45%
Topical Solution, for the treatment of warts. Any claims that issue from these applications will expire in 2037, subject to any
applicable patent term adjustment or extension that may be available in a particular country.
With respect to ATI-501 and ATI-502, we exclusively licensed from Rigel multiple families of patents and
applications relating to these compounds and the uses thereof in the field of dermatology. In particular, we exclusively
licensed patents and applications with claims that specifically cover the composition of matter for these compounds in the
United States, the European Union, and other major foreign markets. The issued patents specifically directed to these
compounds begin to expire in 2030, subject to any applicable patent term extension that may be available in a particular
country. We also exclusively licensed an issued U.S. patent and pending applications in the United States, Australia, Canada,
the European Union and Japan with claims that cover the use of these compounds for the treatment of alopecia areata. The
U.S. patent, and any claims that issue from these applications, expire, or will expire, in 2034, subject to any applicable patent
term adjustment or extension that may be available in a particular country. We also licensed a family of patents and
applications that relate to ATI-501 and ATI-502 that expire in 2023, subject to any applicable patent term extension that may
be available in a particular country.
We also exclusively licensed patents and applications from Columbia University relating to the use of JAK
inhibitors to induce hair growth and treat hair loss disorders, including AA and AGA. In particular, we exclusively licensed
multiple U.S. patents with claims directed to the use of certain third-party JAK inhibitors for the treatment of hair loss
disorders, including AA and AGA, and inducing hair growth, which expires in 2031. We also exclusively licensed patents
and applications with claims directed to the use of certain JAK1, JAK2 or JAK3 inhibitors for the treatment of hair loss
disorders, including AA and AGA, and inducing hair growth in the U.S., the European Union, Japan and South Korea. Any
claims that issue from the pending applications begin to expire in 2031, subject to any applicable patent term adjustment or
extension that may be available in a particular country. In addition, we exclusively licensed patent applications in the United
States and other foreign countries directed to methods of inducing hair growth with JAK1, JAK2 or JAK3 inhibitors as well
as biomarkers for AA, which if claims issue, would expire in 2036, subject to any applicable patent term adjustment or
extension that may be available in a particular country.
With respect to our inhibitors of the MK-2 signaling pathway, we own one U.S. patent and pending applications in
the European Union and other foreign countries that cover our lead candidate. The U.S. patent expires in 2034 and any
claims that issue from the pending applications expire in 2034, subject to any applicable patent term adjustment or
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extension that may be available in a particular country. We also own six U.S. patents and pending foreign patent applications
directed to other inhibitors of the MK-2 signaling pathway, which expire or will expire in 2031 and 2032, subject to any
applicable patent term adjustment or extension that may be available in a particular country.
With respect to our “soft” JAK inhibitors, we have filed a number of provisional applications directed to various
novel inhibitors of JAK1 and/or JAK3 and methods of using the same. Any claims that may issue would expire in 2038,
subject to any applicable patent term adjustment or extension that may be available in a particular country.
With respect to our ITK inhibitors, we own multiple U.S. patents and pending applications in the United States and
foreign countries directed to novel inhibitors of ITK and methods of using the same. The patents and pending applications, if
issued, expire between 2035 and 2038, subject to any applicable patent term adjustment or extension that may be available in
a particular country.
We also use other forms of protection, such as trademark, copyright, and trade secret protection, to protect our
intellectual property, particularly where we do not believe patent protection is appropriate or obtainable. We aim to take
advantage of all of the intellectual property rights that are available to us and believe that this comprehensive approach will
provide us with proprietary positions for our drug candidates, where available.
Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in
various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from
country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the
country. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional
patent application. In the United States, a patent term may be shortened if a patent is terminally disclaimed over another
patent or as a result of delays in patent prosecution by the patentee, and a patent's term may be lengthened by patent term
adjustment, which compensates a patentee for administrative delays by the USPTO in granting a patent or by patent term
extension, which compensates a patentee for delays at the FDA. The patent term of a European patent is 20 years from its
filing date; however, unlike in the United States, the European patent does not grant patent term adjustments. The European
Union does have a compensation program similar to patent term extension called supplementary patent certificate that would
effectively extend patent protection for up to five years.
We also protect our proprietary information by requiring our employees, consultants, contractors and other advisors
to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or
engagement. Agreements with our employees also prevent them from bringing the proprietary rights of third parties to us. In
addition, we also require confidentiality or service agreements from third parties that receive our confidential information or
materials.
Assignment Agreement and Finder's Services Agreement
In August 2012, we entered into an assignment agreement with the Estate of Mickey Miller, or the Miller Estate,
under which we acquired some of the intellectual property rights covering ESKATA and A-101 45% Topical Solution. The
assignment of intellectual property rights covers specified know-how, along with modifications of, improvements to and
variations on A-101 that meet defined chemical properties. Under the agreement, we have the sole and exclusive right, but
not the duty, to develop, obtain marketing approval for and commercialize ESKATA and A-101 45% Topical Solution in
various countries throughout the world. We are required to use commercially reasonable efforts to develop and
commercialize at least one product for at least one indication in the United States. In connection with obtaining the
assignment of the intellectual property from the Miller Estate, we also entered into a separate finder's services agreement
with KPT Consulting, LLC.
Under the terms of the assignment agreement and the finder's services agreement, we made aggregate upfront
payments of $0.6 million in 2012 and one-time milestone payments of $0.4 million in 2013 upon the dosing of the first
human subject with ESKATA in our Phase 2 clinical trial. There are no remaining potential milestone payments under the
assignment agreement. Under the finder's services agreement, we made a one-time milestone payment of $0.3 million in
February 2016 upon the dosing of the first human subject with ESKATA in our Phase 3 clinical trial, and a one-time
milestone payment of $1.0 million in April 2017 upon the achievement of specified development and regulatory
milestones. We are obligated to make additional milestone payments up to an aggregate of $4.5 million upon the
achievement of specified commercial milestones. Under each of the assignment agreement and the finder's services
agreement, we are also obligated to pay royalties on sales of ESKATA or related products, at low single-digit percentages
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of net sales, subject to reduction in specified circumstances. We have not made any royalty payments to date under either
agreement. Both agreements will terminate upon the expiration of the last pending, viable patent claim of the patents
acquired under the assignment agreement, but no sooner than 15 years from the effective date of the agreements.
License Agreement with Rigel
In August 2015, we entered into an exclusive, worldwide license and collaboration agreement with Rigel for the
development and commercialization of products containing two specified JAK inhibitors, ATI-501 and ATI-502. Under this
agreement, we intend to develop these JAK inhibitors for the treatment of AA and potentially for other dermatological
conditions. We paid Rigel an upfront non-refundable payment of $8.0 million and have agreed to make aggregate payments
of up to $80.0 million upon the achievement of specified pre-commercialization milestones, such as clinical trials and
regulatory approvals. Further, we have agreed to pay up to an additional $10.0 million to Rigel upon the achievement of a
second set of development milestones. With respect to any products we commercialize under the agreement, we will pay
Rigel quarterly tiered royalties on our annual net sales of each product at a high single-digit percentage of annual net sales,
subject to specified reductions, until the date that all of the patent rights for that product have expired, as determined on a
country-by-country and product-by-product basis or, in specified countries under specified circumstances, ten years from the
first commercial sale of such product.
The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party
for a material breach. We may also terminate the agreement without cause at any time upon advance written notice to Rigel.
Rigel, after consultation with us, will be responsible for maintaining and prosecuting the patent rights, and we will have final
decision-making authority regarding such patent rights for a product in the United States and the European Union. To the
extent that we jointly develop intellectual property, we will confer and decide which party will be responsible for filing,
prosecuting and maintaining those patent rights. The agreement also establishes a joint steering committee composed of an
equal number of representatives for each party, which will monitor progress of the development of products.
Stock Purchase Agreement with Vixen Pharmaceuticals, Inc.
On March 24, 2016, we entered into a stock purchase agreement with Vixen Pharmaceuticals, Inc., or Vixen, and
JAK1, LLC, JAK2, LLC and JAK3, LLC, all together with Vixen, the Selling Stockholders, and Shareholder Representative
Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Selling
Stockholders. Pursuant to the stock purchase agreement, we acquired all shares of Vixen’s capital stock from the Selling
Stockholders, the Vixen Acquisition. Following the Vixen Acquisition, Vixen became a wholly-owned subsidiary of
us. Pursuant to the stock purchase agreement, we paid $0.6 million upfront and issued an aggregate of 159,420 shares of our
common stock to the Selling Stockholders. We are obligated to make annual payments of $0.1 million on March 24 of each
year, through March 2022, with such amounts being creditable against specified future payments that may be paid under the
stock purchase agreement.
th
Under the stock purchase agreement, we agreed to use commercially reasonable efforts to develop and
commercialize at least one product for the treatment of AA in humans and at least one product for the treatment of AGA in
humans, in each case for commercial sale and distribution throughout the United States and such other areas of the world as
we determine to be commercially prudent. In the event we do not comply with these obligations, we are obligated to license,
on a non-exclusive basis, certain intellectual property rights related to the products to the Selling Stockholders or their
designee, on terms to be mutually agreed to by the parties, among other rights exercisable by the Selling Stockholders.
We are obligated to make aggregate payments of up to $18.0 million to the Selling Stockholders upon the
achievement of specified pre-commercialization milestones for three products in the United States, the European Union and
Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial milestones. With
respect to any commercialized products covered by the stock purchase agreement, we are obligated to pay low single-digit
royalties on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent
rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified
circumstances, ten years from the first commercial sale of such product. If we sublicense any of Vixen’s patent rights and
know-how acquired pursuant to the stock purchase agreement, we will be obligated to pay a portion of any consideration we
receive from such sublicenses in specified circumstances.
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License Agreement with Columbia University
As a result of the Vixen Acquisition, we became party to the Exclusive License Agreement, by and between Vixen
and the Trustees of Columbia University in the City of New York, or Columbia, dated as of December 31, 2015, or the
Columbia License Agreement. Pursuant to the Columbia License Agreement, Vixen was granted an exclusive, worldwide
license under specified Columbia patent rights and a non-exclusive, worldwide license under specified Columbia know-how
in all fields to develop and commercialize a product that otherwise infringes a Columbia patent right or uses Columbia know-
how. Vixen’s rights to this Columbia intellectual property cover the use of specified JAK inhibitor compounds for the
potential treatment of AA, AGA and other dermatological conditions.
We are obligated to pay Columbia an annual license fee of $10,000, subject to specified adjustments for patent
expenses incurred by Columbia and creditable against any royalties that may be paid under the Columbia License
Agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified commercial
milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-how, and
royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or know-how,
subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired pursuant to the
Columbia License Agreement, we will be obligated to pay Columbia a portion of any consideration received from such
sublicenses in specified circumstances. The royalties, as determined on a country-by-country and product-by-product basis,
are payable until the date that all of the patent rights for that product have expired, the expiration of any market exclusivity
period granted by a regulatory body or, in specified circumstances, ten years from the first commercial sale of such product.
We have agreed to use commercially reasonable efforts to develop and commercialize at least one product. In the
event we do not comply with this obligation, Columbia has the option to terminate the license or convert the exclusive patent
license to a non-exclusive patent license. Further, in the event we do not comply with our obligations under the Vixen stock
purchase agreement to develop and commercialize products, our rights under the Columbia License Agreement may revert to
a party to be designated by the Selling Stockholders. Columbia is responsible for maintaining and prosecuting the patent
rights, giving due consideration to our reasonable comments related thereto.
The Columbia License Agreement terminates on the date of expiration of all royalty obligations thereunder unless
earlier terminated by either party for a material breach, subject to a specified cure period. We may also terminate the
Columbia License Agreement without cause at any time upon advance written notice to Columbia.
Agreement and Plan of Merger with Confluence
In August 2017, we entered into an Agreement and Plan of Merger with Confluence, Aclaris Life Sciences, Inc., our
wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the equity holders of Confluence, or
the Agreement and Plan of Merger. Pursuant to the terms of the Agreement and Plan of Merger, the Merger Sub merged with
and into Confluence, with Confluence surviving as a wholly-owned subsidiary of Aclaris, resulting in our acquisition of
100% of the outstanding shares of Confluence. Pursuant to the terms of the Agreement and Plan of Merger, we gave
aggregate consideration with a fair value of $24.3 million to the equity holders of Confluence.
We also agreed to pay the Confluence equity holders aggregate contingent consideration of up to $80.0 million,
based upon the achievement of certain development, regulatory and commercial milestones set forth in the Agreement and
Plan of Merger. Of the contingent consideration, $2.5 million may be paid in shares of our common stock upon the
achievement of a specified development milestone. In addition, we have agreed to pay the Confluence equity holders
specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified
reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as
determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first
commercial sale of such product. In addition, if we sell, license or transfer any of the intellectual property acquired from
Confluence pursuant to the Agreement and Plan of Merger to a third party, we will be obligated to pay the Confluence equity
holders a portion of any incremental consideration (in excess of the development and milestone payments described above)
that we receive from such sale, license or transfer in specified circumstances.
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Government Regulation and Product Approval
Governmental authorities in the United States, at the federal, state and local level, and analogous authorities in other
countries extensively regulate, among other things, the research, development, testing, manufacture, safety surveillance,
efficacy, quality control, labeling, packaging, distribution, record keeping, promotion, storage, advertising, distribution,
marketing, sale, export and import, and the reporting of safety and other post-market information of products such as the one
we are developing. A drug candidate must be approved by the FDA before it may be legally promoted in the United States
and by comparable foreign regulatory authorities before marketing in other jurisdictions. The process of obtaining regulatory
approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the
expenditure of substantial time and resources. Failure to comply with the applicable U.S. requirements at any time during the
product development process, approval process or after approval may subject an applicant and/or sponsor to a variety of
administrative or judicial sanctions, including refusal by regulatory authorities to approve applications, withdrawal of an
approval, imposition of a clinical hold, import/export delays, issuance of warning letters and untitled letters, product recalls,
product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,
restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by FDA and the Department of
Justice or other governmental entities.
United States Government Regulation
NDA Approval Processes
In the United States, the FDA regulates drug and medical device products under the Federal Food, Drug, and
Cosmetic Act, or FDCA, and its implementing regulations. Certain of our drug candidates are comprised of both a drug
component (the hydrogen peroxide solution or gel) and a pen-type applicator. In the case of our drug candidates, the FDA's
Center for Drug Evaluation and Research has primary jurisdiction over the premarket development, review and approval of
our drug candidates. Accordingly, we are investigating our drug candidates pursuant to IND applications and expect to seek
approval through the NDA pathway. Based on our discussions with the FDA to date, we do not anticipate that the FDA will
require us to submit a separate marketing application for the pen-type applicator that will be used with certain of our drug
candidates, but this could change during the course of the FDA's review of the respective NDA.
An applicant seeking approval to market and distribute a new drug product in the United States must typically
undertake the following:
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completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA's
good laboratory practice regulations;
submission to the FDA of an IND which must take effect before clinical trials may begin;
approval by an independent institutional review board, or IRB, representing each clinical site before clinical testing
may be initiated at the clinical site;
performance of adequate and well-controlled clinical trials in accordance with good clinical practice, or GCP,
regulations to establish the safety and efficacy of the proposed drug product for each indication;
preparation and submission to the FDA of an NDA;
review of the NDA by a FDA advisory committee, if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the
product or its components are produced to assess compliance with current good manufacturing practices, or cGMP,
regulations to assure that the facilities, methods and controls are adequate to preserve the product's identity, strength,
quality and purity;
payment of user fees and securing FDA approval of the NDA; and
compliance with any post-approval requirements, including potential requirements for a risk evaluation and
mitigation strategy and post-approval studies required by the FDA.
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Once a drug candidate is identified for development, it enters the preclinical or nonclinical testing stage. Preclinical
studies include laboratory evaluations of product chemistry, pharmacology, toxicity and formulation. An IND sponsor must
submit the results of the preclinical studies, together with manufacturing information and analytical data, to the FDA as part
of the IND. Some preclinical studies may continue even after the IND is submitted. In addition to including the results of the
preclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the
parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an
efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within
the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, and
may affect one or more specific clinical trials or all clinical trials conducted under the IND.
All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with
current Good Clinical Practices regulations. They must be conducted under protocols detailing the objectives of the trial,
dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials
must be submitted to the FDA annually. Sponsors also must timely report to FDA serious and unexpected adverse reactions,
any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or
investigator brochure, or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans
exposed to the drug. An institutional review board, or IRB, at each institution participating in the clinical trial must review
and approve the protocol before the clinical trial commences at that institution and must also approve the information
regarding the trial and the consent form that must be provided to each research subject or the subject's legal representative,
monitor the study until completed and otherwise comply with IRB regulations.
Clinical trials are typically conducted in three sequential phases that may overlap or be combined:
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Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance,
absorption, metabolism, distribution and elimination. In the case of some products for severe or life-threatening
diseases, such as cancer, and especially when the product may be inherently too toxic to ethically administer to
healthy volunteers, the initial human testing is often conducted in patients who already have the condition.
Phase 2. Clinical trials are performed on a limited patient population intended to identify possible adverse effects
and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.
Phase 3. If a drug candidate is found to be potentially effective and to have an acceptable safety profile in Phase 2
clinical trials, the clinical trial program will be expanded to Phase 3 clinical trials to further evaluate dosage, clinical
efficacy and safety in an expanded patient population at geographically dispersed clinical trial sites. These studies
are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product
approval and labeling claims.
Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the
intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval
regulations, or when otherwise requested by the FDA in the form of post-market requirements or commitments. Failure to
promptly conduct any required Phase 4 clinical trials could result in withdrawal of approval.
Clinical trials are inherently uncertain, and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed.
The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research
subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of
a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB's requirements or if the
drug has been associated with unexpected serious harm to patients. In some cases, clinical trials are overseen by an
independent group of qualified experts organized by the trial sponsor, which is called the clinical monitoring board or data
safety monitoring board. This group provides authorization for whether or not a trial may move forward at designated check
points. These decisions are based on the limited access to data from the ongoing trial.
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During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points.
These points may be prior to the submission of an IND, at the end-of-Phase 2 and before an NDA is submitted. Meetings at
other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data
gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at
the end-of-Phase 2 to discuss their Phase 2 clinical trial results and present their plans for the pivotal Phase 3 clinical trial or
trials that they believe will support the approval of the new drug.
Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop
additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing
commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of
consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity
and potency of the drug. Additionally, appropriate packaging must be selected and tested, and stability studies must be
conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.
The results of product development, preclinical studies and clinical trials, along with descriptions of the
manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are
submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to
the payment of user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA reviews all
NDAs submitted for a period of 60 days to ensure that they are sufficiently complete for substantive review before it accepts
them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be
resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it
for filing.
During the approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or
REMS, is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the
application must submit a proposed REMS, and the FDA will not approve the application without an approved REMS, if
required. A REMS can substantially increase the costs of obtaining approval. The FDA could also require a special warning,
known as a boxed warning, to be included in the product label in order to highlight a particular safety risk.
Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA reviews an NDA to
determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is
cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the
application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory
committee, but it generally follows such recommendations. NDAs receive either standard or priority review. A drug
representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. A
priority review designation is intended to direct overall attention and resources to the evaluation of such applications, and to
shorten the FDA's goal for taking action on the NDA from ten months to six months from FDA filing of the NDA. After the
FDA evaluates the NDA and conducts inspections of manufacturing facilities where the drug product and/or its API will be
produced, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing
of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the
review cycle of the application is complete, and the application is not ready for approval. A Complete Response Letter may
require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and
time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such data and
information are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
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Post-approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by
the FDA and other governmental agencies, including, among other things, requirements relating to recordkeeping, periodic
reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the
product. Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not
maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with
a product may result in restrictions on the product or even complete withdrawal of the product from the market. After
approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review and approval. There also are continuing, annual user fee
requirements for products and the establishments at which such products are manufactured, as well as new application fees
for certain supplemental applications. In addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing
of a product based on the results of these post-marketing programs.
Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required
to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections
by the FDA and some state agencies for compliance with GMP regulations and other laws. The FDA has promulgated
specific requirements for drug cGMPs and device cGMPs embodied in the Quality System Regulation. Changes to the
manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA
regulations also require investigation and correction of any deviations from cGMP requirements and impose reporting and
documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to
maintain cGMP compliance.
Failure to comply with the applicable U.S. requirements at any time during the product development process or
approval process, or after approval, may subject us to administrative or judicial sanctions, any of which could have a material
adverse effect on us. These sanctions could include:
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refusal to approve pending applications;
withdrawal of an approval;
imposition of a clinical hold;
warning letters;
product seizures or detention, or refusal to permit the import or export of products;
restrictions on the marketing or manufacturing of the product;
total or partial suspension of production or distribution or product recalls; or
injunctions, fines, disgorgement, or civil or criminal penalties.
The FDA strictly regulates the marketing, labeling, advertising and promotion of drug products that are placed on
the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved
label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and
a company that is found to have improperly promoted off-label uses may be subject to significant liability.
From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the
statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition,
FDA regulations and guidance are often issued revised or reinterpreted by the agency in ways that may significantly affect
our business and our products. It is impossible to predict whether legislative changes will be enacted, or whether FDA
regulations, guidance or interpretations will be issued or changed or what the impact of such changes, if any, may be.
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Non-patent Exclusivity
The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first
applicant to obtain approval of an NDA for a new chemical entity, or NCE. A drug is an NCE if the FDA has not previously
approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of
the drug substance. If market exclusivity is granted for an NCE, during the exclusivity period, the FDA may not accept for
review or approve an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for
another version of such drug where the applicant does not own or have a legal right of reference to all the data required for
approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-
infringement to one of the patents listed with the FDA by the innovator NDA holder.
The FDCA also provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new
clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by
the FDA to be essential to the approval of the application, for example new indications, dosages, dosage forms or strengths of
an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and
prohibits the FDA from approving an ANDA, or a 505(b)(2) NDA submitted by another company with overlapping
conditions associated with the new clinical investigations for the three-year period. Clinical investigation exclusivity does
not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year
exclusivity will not delay the submission or approval of an NDA for the same drug. However, an applicant submitting an
NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-
controlled clinical trials necessary to demonstrate safety and effectiveness.
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Regulation Outside of the United States
In addition to regulations in the United States, we will be subject to regulations of other countries governing our
business activities, including, our clinical trials and the commercial sale and distribution of our product. Even if we obtain
FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the
United States before we can commence clinical trials in such countries and approval of the regulators of such countries or
economic areas, such as the European Union before we may market products in those countries or areas. The approval
process and requirements governing the conduct of clinical trials, product licensing and promotion, pricing and
reimbursement vary greatly by geographic region, and the time may be longer or shorter than that required for FDA approval.
In the European Economic Area, or EEA, which is composed of the 28 Member States of the European Union plus
Norway, Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing
Authorization, or MA.
There are two types of MAs:
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The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the
opinion of the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency, or
EMA, and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for
certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicinal
products indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral
diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in
the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in
the interest of public health in the EU. Under the Centralized Procedure, the maximum timeframe for the evaluation
of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral
information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated evaluation
might be granted by the CHMP in exceptional cases, when the authorization of a medicinal product is of major
interest from the point of view of public health and, in particular, from the viewpoint of therapeutic innovation.
Under the accelerated procedure, the standard 210 days review period is reduced to 150 days.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their
respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure.
Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be
recognized in another Member States through the Mutual Recognition Procedure. If the product has not received a
National MA in any Member State at the time of application, it can be approved simultaneously in various Member
States through the Decentralized Procedure.
In the EEA, upon receiving marketing authorization, new chemical entities generally receive eight years of data
exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in
the European Union from referencing the innovator's data to assess a generic application. During the additional two-year
period of market exclusivity, a generic marketing authorization can be submitted, and the innovator's data may be referenced,
but no generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a
product will be considered by the European Union's regulatory authorities to be a new chemical entity, and products may not
qualify for data exclusivity.
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Other Healthcare Laws
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role
in the recommendation and prescription of ESKATA and any other drug candidates for which we obtain marketing
approval. Our current and future arrangements with third-party payors, health care professionals and customers may expose
us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal
Anti-Kickback Statute and the federal civil False Claims Act, that may constrain the business or financial arrangements and
relationships through which we sell, market and distribute any drugs for which we obtain marketing approval. In addition, we
may be subject to transparency laws and patient privacy regulation by the federal government and by the U.S. states and
foreign jurisdictions in which we conduct our business.
The federal Anti-Kickback Statute makes it illegal for any person or entity, including a prescription drug
manufacturer (or a party acting on its behalf) to knowingly and willfully, directly or indirectly, solicit, receive, offer, or pay
any remuneration that is intended to induce the referral of business, including the purchase, order, or lease of any good,
facility, item or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid.
The term "remuneration" has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been
interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers,
formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe
harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices
that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be
subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular
applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback
Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all
its facts and circumstances. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback
Statute has been violated. Violations of this law are punishable by up to five years in prison, and can also result in criminal
fines, civil money penalties, administrative penalties and exclusion from participation in federal healthcare programs.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and
Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the
Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute
or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law
that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act.
Federal false claims and false statement laws, including the federal civil False Claims Act, prohibits, among other
things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal
programs, including Medicare and Medicaid, claims for items or services, including drugs, that are false or fraudulent or not
provided as claimed. Entities can be held liable under these laws if they are deemed to "cause" the submission of false or
fraudulent claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-
label, or for providing medically unnecessary services or items. In addition, our future activities relating to the sale and
marketing of our product are subject to scrutiny under this law. Penalties for the federal civil False Claims Act violations may
include up to three times the actual damages sustained by the government, plus mandatory civil penalties of between $10,957
and $21,916 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and,
although the federal civil False Claims Act is a civil statute, False Claims Act violations may also implicate various federal
criminal statutes. For example, the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created
federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a
scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling
or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or
fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the Anti-
Kickback Statute, the Affordable Care Act amended the intent standard for the healthcare fraud statute under HIPAA such
that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have
committed a violation.
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The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is
determined to have presented or caused to be presented a claim to a federal health program that the person knows or should
know is for an item or service that was not provided as claimed or is false or fraudulent.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply
regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. Additionally, to
the extent that our product is sold in a foreign country, we may be subject to similar foreign laws.
In addition, legislation imposing marketing restrictions and transparency requirements on pharmaceutical
manufacturers has been enacted at the state and federal levels. For example, the Affordable Care Act imposed, among other
things, annual reporting requirements for covered manufacturers for certain payments and other transfers of value provided to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate
family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of
value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of $165,786 per year
and up to an aggregate of $1,105,241 per year for "knowing failures." Certain states also mandate implementation of
compliance programs, impose restrictions on drug manufacturer marketing practices, require registration of certain
employees engaged in marketing activities in the location, and/or require the tracking and reporting of gifts, compensation
and other remuneration to physicians.
Because we intend to commercialize products that could be reimbursed under a federal healthcare program and
other governmental healthcare programs, we intend to continue to develop a comprehensive compliance program that
establishes internal controls to facilitate adherence to the rules and program requirements to which we will or may become
subject. Although the development and implementation of compliance programs designed to establish internal controls and
facilitate compliance can mitigate the risk of investigation, prosecution, and penalties assessed for violations of these laws, or
any other laws that may apply to us, the risks cannot be entirely eliminated. If our operations are found to be in violation of
any of such laws or any other governmental regulations, we may be subject to penalties, including, without limitation,
administrative, civil, and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm,
diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in
federal and state healthcare programs, additional reporting requirements and oversight if we become subject to a corporate
integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and individual
imprisonment, any of which could adversely affect our ability to operate our business and our financial results.
We may also be subject to data privacy and security regulation by both the federal government and the states in
which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical
Health Act, or HITECH, and their implementing regulations, including the final omnibus rule published on January 25, 2013,
mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common
healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health
information, which require the adoption of administrative, physical and technical safeguards to protect such information.
Among other things, HITECH makes HIPAA's security standards directly applicable to "business associates", namely
independent contractors or agents of HIPAA covered entities that create, receive or obtain protected health information in
connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal
penalties that may be imposed against covered entities and business associates, and gave state attorneys general new
authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek
attorney's fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and
security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which
differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to
comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties.
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Health Care Reform
In the United States, there have been and continue to be a number of significant legislative initiatives to contain
healthcare costs. For example, in March 2010, the Affordable Care Act was passed, which has had, and is expected to
continue to have, a significant impact on the healthcare industry. The Affordable Care Act was designed to expand coverage
for the uninsured and at the same time containing overall healthcare costs. With regard to pharmaceutical products, among
other things, the Affordable Care Act expanded and increased industry rebates for drugs covered under Medicaid programs;
addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the rebate program to individuals
enrolled in Medicaid managed care organizations; established annual fees and taxes on manufacturers of certain branded
prescription drugs; made changes to the coverage requirements under the Medicare prescription drug benefit; and established
a new Medicare Part D coverage gap discount program, in which manufacturers, as a condition for their outpatient drugs to
be covered under Medicare Part D, must agree to offer 50% (and 70% commencing January 1, 2019) point-of-sale discounts
off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period. Moreover, the
Affordable Care Act provided incentives to programs that increase the federal government's comparative effectiveness
research and implemented payment system reforms including a national pilot program on payment bundling meant to
encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare
services.
Since its enactment there have been judicial and Congressional challenges to, as well efforts by the Trump
Administration to repeal or replace certain aspects of the Affordable Care Act. For example, since January 2017, President
Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements
mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and
replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, two bills
affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and
Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment
imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a
year that is commonly referred to as the “individual mandate”. Additionally, on January 22, 2018, President Trump signed a
continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain Affordable Care Act-
mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual
fee imposed on certain health insurance providers based on market share, and the medical device excise tax on non-exempt
medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the Affordable Care
Act, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut
hole”. Congress may consider other legislation to repeal or replace elements of the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted.
For example, in August 2011, the President signed into law the Budget Control Act of 2011, which, among other things,
created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The
Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal
years 2012 through 2021, triggering the legislation's automatic reduction to several government programs. This includes
aggregate reductions in Medicare payments to providers of 2% per fiscal year, which went into effect beginning on April 1,
2013 and, due to subsequent legislative amendments to the statute, including the BBA, will stay in effect through 2027,
unless additional Congressional action is taken. Additionally, in January 2013, the American Taxpayer Relief Act of 2012
was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, cancer
treatment centers and imaging centers. Moreover, the Drug Supply Chain Security Act imposes new obligations on
manufacturers of pharmaceutical products related to product tracking and tracing. Legislative and regulatory proposals have
been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices
for their marketed products. Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted
federal and state legislation designed to, among other things, bring more transparency to product pricing, review the
relationship between pricing and manufacturer patient programs, and reform government program reimbursement
methodologies for products. At the federal level, the Trump Administration’s budget proposal for fiscal year 2019 contains
further drug price control measures that could be enacted during the 2019 budget process or in other future legislation,
including, for example, measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part
B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic drugs for
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low-income patients. While any proposed measures will require authorization through additional legislation to become
effective, Congress and the Trump Administration have both stated that they will continue to seek new legislative and/or
administrative measures to control drug costs. At the state level, legislatures have become increasingly aggressive in passing
legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price
or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and
transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
The Affordable Care Act, as well as other federal and state healthcare reform measures that have been and may be
adopted in the future, could harm our future revenue. Additional legislative actions may be taken in the future which may
change current regulations, guidance and interpretations. The impact of such actions on our business, if any, cannot presently
be determined.
The Hatch Waxman Amendments to the FDC Act
Orange Book Listing
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose
claims cover the applicant's product or a method of using the product. Upon approval of a drug, each of the patents listed in
the application for the drug is then published in the FDA's Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential
competitors in support of approval of an ANDA or an application covered by Section 505(b)(2) of the Federal Food, Drug,
and Cosmetic Act, or FDCA. An ANDA provides for marketing of a drug product that has the same active ingredients,
generally in the same strengths and dosage form, as the listed drug and has been shown through pharmacokinetic, or PK,
testing to be bioequivalent to the listed drug. Drugs approved in this way are commonly referred to as "generic equivalents"
to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug. Other
than the requirement for bioequivalence testing, ANDA applicants are generally not required to conduct, or submit results of,
preclinical studies or clinical tests to prove the safety or effectiveness of their drug product. Section 505(b)(2) applications
provide for marketing of a drug product that may have the same active ingredients as the listed drug and contains full safety
and effectiveness data as an NDA, but at least some of this information comes from studies not conducted by or for the
applicant. This alternate regulatory pathway enables the applicant to rely, in part, on the FDA's findings of safety and efficacy
for an existing product, or published literature, in support of its application. The FDA may then approve the new drug
candidate for all or some of the labeled indications for which the referenced product has been approved, as well as for any
new indication sought by the 505(b)(2) applicant.
The ANDA or Section 505(b)(2) applicant is required to certify to the FDA concerning any patents listed for the
approved product in the FDA's Orange Book. Specifically, the applicant must certify that: (i) the required patent information
has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date
and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product.
The ANDA or Section 505(b)(2) applicant may also elect to submit a statement certifying that its proposed ANDA label does
not contain, or carves out, any language regarding a patented method of use rather than certify to such listed method of use
patent. If the applicant does not challenge the listed patents by filing a certification that the listed patent is invalid or will not
be infringed by the new product, the ANDA or Section 505(b)(2) application will not be approved until all the listed patents
claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product's listed patents, or that such
patents are invalid, is called a Paragraph IV certification. If the ANDA or Section 505(b)(2) applicant has provided a
Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and
patent holders once the ANDA or Section 505(b)(2) application has been accepted for filing by the FDA. The NDA and
patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The
filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the
FDA from approving the ANDA or Section 505(b)(2) application until the earliest of 30 months, expiration of the patent,
settlement of the lawsuit, and a decision in the infringement case that is favorable to the ANDA or Section 505(b)(2)
applicant. This prohibition is generally referred to as the 30-month stay. Thus, approval of an ANDA or 505(b)(2) NDA
could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference
drug sponsor's decision to initiate patent litigation.
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The ANDA or Section 505(b)(2) application also will not be approved until any applicable non-patent exclusivity
listed in the Orange Book for the referenced product has expired.
Patent Term Extension
In the United States, after NDA approval, owners of relevant drug patents may apply for up to a five year patent
extension, which provides patent term restoration as compensation for the patent term lost during the FDA regulatory review
process for the first permitted commercial marketing of a drug product. The Drug Price Competition and Patent Term
Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration
of the patent. The allowable patent term extension is calculated as half of the drug's testing phase, which is the time between
the IND submission becoming effective and the NDA submission, and all of the review phase, which is the time between
NDA submission and approval, up to a maximum extension of five years. The time can be shortened if the FDA determines
that the applicant did not pursue approval with due diligence. Patent extension cannot extend the remaining term of a patent
beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be
extended.
Similar provisions are available in the European Union and other foreign jurisdictions to extend the term of a patent
that covers an approved drug. For example, in Japan, it may be possible to extend the patent term for up to five years and in
the European Union, it may be possible to obtain a supplementary patent certificate that would effectively extend patent
protection for up to five years.
Coverage and Reimbursement
We do not expect third-party payors to cover and reimburse customers who use ESKATA on patients for the
treatment of raised SKs. Payors generally do not reimburse the provider for the product used to remove non-malignant
lesions, including SK. In addition, they do not generally reimburse providers for the procedure removing such lesions, since
the procedure is considered to be cosmetic in nature, unless there is a medical need to remove the lesion such as confirming a
diagnosis with a biopsy or treating SK that are causing the patient physical discomfort. We anticipate that in some cases,
ESKATA may be used to remove SK lesions that are inflamed and causing the patient discomfort. Any reduction in
reimbursement for the procedure to remove inflamed SK may result in a higher percentage of patients needing to pay out of
pocket for treatment with ESKATA. Accordingly, the commercial success of ESKATA depends on the extent to which
patients are willing to pay out of pocket for the in-office procedure using our product. By contrast, in the case of A-101 45%
Topical Solution, if approved, for the treatment of common warts, we believe our success will depend on continued coverage
and adequate reimbursement for in-office wart treatment procedures or in the absence of coverage and adequate
reimbursement, on the extent to which patients will be willing to pay out of pocket for the in-office procedures that include
our product.
Third-party payors determine which medical procedures they will cover and establish reimbursement levels. Even if
a third-party payor covers a particular procedure, the resulting reimbursement payment rates may not be adequate. Patients
who are treated in-office for a medical condition generally rely on third-party payors to reimburse all or part of the costs
associated with the procedure and may be unwilling to undergo such procedures for the removal of warts in the absence of
such coverage and reimbursement. Physicians may be unlikely to offer procedures for the treatment of warts if they are not
covered by insurance and may be unlikely to purchase and use our product for warts unless coverage is provided, and
reimbursement is adequate.
Reimbursement by a third-party payor may depend upon a number of factors, including: the third-party payor's
determination that a procedure is neither cosmetic, experimental, nor investigational; safe, effective, and medically
necessary; appropriate for the specific patient; cost-effective; supported by peer-reviewed medical journals; and included in
clinical practice guidelines.
In the United States, no uniform policy of coverage and reimbursement for medical procedures exists among third-
party payors. Therefore, coverage and reimbursement for procedures can differ significantly from payor to payor. Decisions
regarding the extent of coverage and amount of reimbursement to be provided for an in-office procedure to remove warts are
made on a plan by plan basis. One payor's determination to provide coverage for a procedure does not assure that other
payors will also provide coverage, and adequate reimbursement.
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In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party
payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine
reimbursement amounts. To the extent the procedure using our drug candidates would be covered, the cost of our drugs
generally is recovered by the healthcare provider as part of the payment for performing a procedure and not separately
reimbursed. Accordingly, these updates could impact the demand for our drug candidates. An example of payment updates is
the Medicare program's updates to hospital and physician payments, which are done on an annual basis using a prescribed
statutory formula. In the past, when the application of the formula resulted in lower payment, Congress has passed interim
legislation to prevent the reductions. The Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, ended the
use of the statutory formula, and provided for a 0.5% annual increase in payment rates under the Medicare Physician Fee
Schedule through 2019, but no annual update from 2020 through 2025. MACRA also introduced a merit based incentive
bonus program for Medicare physicians beginning in 2019. At this time, it is unclear how the introduction of the merit based
incentive program will impact overall physician reimbursement under the Medicare program.
Foreign governments also have their own healthcare reimbursement systems, which vary significantly by country
and region, and we cannot be sure that coverage and adequate reimbursement will be made available with respect to the
treatments in which our drugs are used under any foreign reimbursement system.
Employees
As of December 31, 2017, we had 96 full-time and part-time employees. All of our employees are located in the
United States. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We
consider our relationship with our employees to be good.
Information about Segments
We currently operate in two business segments, dermatology therapeutics and contract research. Our dermatology
therapeutics segment is focused on identifying, developing and commercializing innovative and differentiated therapies to
address significant unmet needs in medical and aesthetic dermatology. Our contract research segment is focused on
providing laboratory services under contract research arrangements to pharmaceutical and biotech companies looking to
supplement their research and development efforts with difficult-to-execute specialty skills and programs. See “Note 2—
Summary of Significant Accounting Policies—Segment Data” to our consolidated financial statements contained in Part II,
Item 8 of this Annual Report.
Corporate Information
We were incorporated under the laws of the State of Delaware in July 2012. Our principal executive offices are
located at 640 Lee Road, Suite 200, Wayne, PA 19087. Our telephone number is (484) 324-7933. We completed our initial
public offering in October 2015 and our common stock is listed on the Nasdaq Global Select Market under the symbol
“ACRS”.
Available Information
Our internet website address is www.aclaristx.com. In addition to the information contained in this Annual Report,
information about us can be found on our website. Our website and information included in or linked to our website are not
part of this Annual Report.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge through our website as soon as reasonably practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission, or SEC. The public may read and copy the materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an
internet site that contains reports, proxy and information statements and other information. The address of the SEC’s website
is www.sec.gov.
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Item 1A. Risk Factors
Our business is subject to numerous risks. You should carefully consider the following risks and all other
information contained in this Annual Report, as well as general economic and business risks, together with any other
documents we file with the SEC. If any of the following events actually occur or risks actually materialize, it could have a
material adverse effect on our business, operating results and financial condition and cause the trading price of our common
stock to decline.
Risks Related to Our Financial Position and Capital Needs
We have incurred significant losses since our inception. We expect to incur losses over the next several years and
may never achieve or maintain profitability.
We have a limited operating history. Since inception, we have incurred significant net losses. We incurred net losses
of $68.5 million and $48.1 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017,
we had an accumulated deficit of $159.4 million. We have financed our operations since inception from sales of our
convertible preferred stock and, beginning with our initial public offering in October 2015, from public offerings and a
private placement of our common stock. We currently have only one product, ESKATA, approved for commercialization and
have never generated any revenue from product sales.
We have devoted substantially all of our financial resources and efforts to date to the development of our drug
candidates, including preclinical studies and clinical trials. We expect to continue to incur significant expenses and operating
losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We
anticipate that our expenses will increase substantially as we:
·
·
·
·
·
·
begin to commercialize ESKATA in the United States;
pursue marketing approval for ESKATA in the European Union for the treatment of SK;
continue our ongoing clinical trials evaluating A-101 45% Topical Solution for the treatment of common warts and
pursue marketing approvals for A-101 45% Topical Solution and for any other drug candidates that successfully
complete clinical trials;
initiate and continue clinical trials of our other drug candidates, including ATI-501 and ATI-502 for the treatment of
AA, vitiligo and AGA;
seek to discover and develop additional drug candidates;
establish a commercialization infrastructure and scale up external manufacturing and distribution capabilities to
commercialize ESKATA and any other drug candidates for which we may obtain marketing approval;
seek to in-license or acquire additional drug candidates for other dermatological conditions;
adapt our regulatory compliance efforts to incorporate requirements applicable to marketed drugs;
·
·
· maintain, expand and protect our intellectual property portfolio;
hire additional clinical, manufacturing and scientific personnel;
·
add operational, financial and management information systems and personnel, including personnel to support our
·
drug development and planned future expanded commercialization efforts; and
incur additional legal, accounting, investor relations and other administrative expenses in operating as a public
company.
·
To become and remain profitable, we must succeed in developing and eventually commercializing drug candidates
that generate significant revenue. This will require us to be successful in a range of challenging activities, including
completing preclinical testing and clinical trials of our drug candidates, obtaining marketing approval, and manufacturing,
marketing and selling any drug candidates for which we may obtain marketing approval, as well as discovering and
developing additional drug candidates. We are only in the early stages of most of these activities. We may never succeed in
these activities and, even if we do, may never generate revenue that is significant enough to achieve profitability.
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For ESKATA and for any other drug candidates for which we are successful in obtaining marketing approval, our
revenue will be dependent, in part, upon the size of the markets in the territories for which we gain marketing approval, the
accepted price for the product, the ability to obtain coverage and reimbursement, if any, and whether we own the commercial
rights for that territory. If the number of our addressable patients is not as significant as we estimate, the indication approved
by regulatory authorities is narrower than we expect, or the treatment population is narrowed by competition, physician
choice or treatment guidelines, we may not generate significant revenue from sales of such drug products, even if approved.
Because of the numerous risks and uncertainties associated with drug development, we are unable to accurately
predict the timing or amount of expenses or when, or if, we will be able to achieve profitability. If we are required by
regulatory authorities to perform studies in addition to those expected, or if there are any delays in the initiation and
completion of our clinical trials or the development of any of our drug candidates, our expenses could increase.
Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual
basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to
raise capital, expand our business, maintain our development efforts, obtain marketing approvals for our drugs, diversify our
offerings or continue our operations. A decline in the value of our company could also cause you to lose all or part of your
investment.
We will need substantial additional funding to meet our financial obligations and to pursue our business
objectives. If we are unable to raise capital when needed, we could be forced to curtail our planned operations and the
pursuit of our growth strategy.
Identifying potential drug candidates and conducting preclinical testing and clinical trials is a time-consuming,
expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results
required to obtain marketing approval and achieve product sales. We expect to continue to incur significant expenses and
operating losses over the next several years as we begin to commercialize ESKATA and conduct clinical trials of and seek
marketing approval for our drug candidates. In addition, ESKATA, and our other drug candidates, if approved, may not
achieve commercial success. Though ESKATA has been approved by the FDA, we do not expect to generate substantial
revenue from sales of ESKATA in the near term, if at all. In addition, if we obtain marketing approval for A-101 45%
Topical Solution for the treatment of common warts or any other drug candidates that we develop, we expect to incur
additional significant commercialization expenses related to product sales, marketing, distribution and manufacturing. We
also expect an increase in our expenses associated with creating additional infrastructure to support our continuing operations
as a public company.
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As of December 31, 2017, we had cash, cash equivalents and marketable securities of $208.9 million. We believe
that our existing cash and cash equivalents as of the date of this Annual Report will enable us to fund our operating expenses
and capital expenditure requirements for a period greater than 12 months from the date of this report based on our current
operating assumptions. These assumptions may prove to be wrong, and we could use our available capital resources sooner
than we expect. Changes may occur beyond our control that would cause us to consume our available capital before that
time, including changes in and progress of our development activities, acquisitions of additional drug candidates, and
changes in regulation. Our future capital requirements will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
·
the progress and success of commercializing ESKATA for the treatment of raised SKs in the United States;
the progress of obtaining marketing approval for ESKATA in the European Union;
the progress and results of the Phase 2 and Phase 3 clinical trials evaluating A-101 45% Topical Solution as a
potential treatment for common warts;
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other
drug candidates, including ATI-501 and ATI-502;
the extent to which we in-license or acquire other drug candidates and technologies;
the number and development requirements of other drug candidates that we may pursue;
the costs, timing and outcome of regulatory review of our drug candidates;
the costs and timing of future commercialization activities, including drug manufacturing, marketing, sales and
distribution, for any of our drug candidates for which we receive marketing approval;
the revenue received from commercial sales of ESKATA and any of our other drug candidates for which we receive
marketing approval;
our ability to establish collaborations to commercialize ESKATA outside the United States; and
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our
intellectual property rights and defending any intellectual property-related claims.
In connection with the commercial launch of ESKATA in the United States, we expect to incur significant
commercialization expenses related to product manufacturing, sales, marketing and distribution. We also expect that we will
require additional capital to complete the clinical trials for and potentially commercialize A-101 45% Topical Solution for the
treatment of common warts. Additional funds may not be available on a timely basis, on commercially acceptable terms, or
at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-term business strategy.
If we are unable to raise sufficient additional capital, we could be forced to curtail our planned operations and the pursuit of
our growth strategy.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to
relinquish rights to our technologies or drug candidates.
Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through a
combination of equity offerings, debt financings and license and collaboration agreements. We do not currently have any
committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if
available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing
arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams
or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds
through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug
development or future commercialization efforts or grant rights to develop and market drug candidates that we would
otherwise prefer to develop and market ourselves.
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We have a limited operating history and no history of commercializing drugs, which may make it difficult for you
to evaluate the success of our business to date and to assess our future viability.
We commenced operations in 2012, and our operations to date have been largely focused on raising capital,
developing ESKATA for the treatment of raised SKs, including undertaking preclinical studies and conducting clinical trials,
and acquiring new drug candidates and related intellectual property. ESKATA, A-101 45% Topical Solution and ATI-501 are
our only product and drug candidates for which we have completed clinical trials. We have not yet demonstrated our ability
to successfully manufacture a drug on a commercial scale, or arrange for a third party to do so on our behalf, or conduct sales
and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our
future success or viability may not be as accurate as they could be if we had a longer operating history or a history of
successfully developing and commercializing drugs.
We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in
achieving our business objectives. We will need to transition at some point from a company with a development focus to a
company capable of supporting commercial activities. We may not be successful in such a transition.
Risks Related to the Development of Our Drug Candidates
If we are unable to successfully develop, receive marketing approval for and commercialize our drug candidates,
or experience significant delays in doing so, our business will be harmed.
We currently only have one product that is approved for commercial sale. We have invested substantially all of our
efforts and financial resources in the development of ESKATA for the treatment of raised SKs, as well as the development of
our other drug candidates and the identification of potential drug candidates. Our ability to generate substantial revenue from
our drug candidates, which we do not expect will occur in the near term, will depend heavily on their successful
development, marketing approval and eventual commercialization of these drug candidates. The success of ESKATA and any
drug candidates that we develop, including A-101 45% Topical Solution, ATI-501 and ATI-502, will depend on several
factors, including:
·
·
·
·
·
·
·
·
·
successful completion of preclinical studies and our clinical trials;
successful development of our manufacturing processes for ESKATA and for any of our drug candidates that receive
marketing approval;
receipt of timely approvals from applicable regulatory authorities;
commercial launch of ESKATA and, if approved, our other drug candidates;
acceptance of ESKATA and our drug candidates, if approved, by patients, the medical community and third-party
payors, and willingness of patients to pay out of pocket for procedures using our drug candidates when third-party
payor coverage and reimbursement is limited or unavailable;
our success in educating physicians and patients about the benefits, administration and use of ESKATA or, if
approved, any other drug candidates;
the prevalence and severity of adverse events experienced with our other drug candidates;
the availability, perceived advantages, cost, safety and efficacy of alternative treatments for SK and common warts;
obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity for our drug
candidates and otherwise protecting our rights in our intellectual property portfolio;
· maintaining compliance with regulatory requirements, including current good manufacturing practices, or cGMPs;
·
· maintaining a continued acceptable safety, tolerability and efficacy profile of our drugs following approval.
competing effectively with other treatment procedures; and
Whether marketing approval will be granted is unpredictable and depends upon numerous factors, including the
substantial discretion of the regulatory authorities. Our drug candidates’ success in clinical trials will not guarantee marketing
approval. If, following submission, our NDA for any drug candidate is not accepted for substantive review, or even if it is
accepted for substantive review, the FDA or other comparable foreign regulatory authorities may require that we conduct
additional studies or clinical trials, provide additional data, take additional manufacturing steps, or require other conditions
before they will reconsider or approve our application. If the FDA or other comparable foreign regulatory authorities require
additional studies, clinical trials or data, we would incur increased costs and delays in the marketing
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approval process, which may require us to expend more resources than we have available. In addition, the FDA or other
comparable foreign regulatory authorities may not consider sufficient any additional required studies, clinical trials, data or
information that we perform and complete or generate, or we may decide to abandon the program.
It is possible that our drug candidates currently in development will never obtain marketing approval, even if we
expend substantial time and resources seeking such approval. If we do not achieve one or more of these factors in a timely
manner or at all, we could experience significant delays or an inability to successfully commercialize our drug candidates,
which would harm our business.
Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur
additional costs or experience delays in completing, or ultimately be unable to complete, the development and
commercialization of our drug candidates.
The risk of failure for our drug candidates is high. It is impossible to predict when or if any of our drug candidates
other than ESKATA will prove effective or safe in humans or will receive marketing approval. Before obtaining approval
from regulatory authorities for the sale of any drug candidate, we must complete preclinical development and then conduct
extensive clinical trials to demonstrate the safety and efficacy of our drug candidates in humans. Clinical testing is expensive,
difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. A failure of
one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may
not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final
results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many
companies that have believed their drug candidates performed satisfactorily in preclinical studies and clinical trials have
nonetheless failed to obtain marketing approval of their drugs.
We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent
our ability to receive marketing approval or commercialize our drug candidates, including:
·
·
·
·
·
·
·
·
·
regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or
conduct a clinical trial at a prospective trial site;
we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical
trial protocols with prospective trial sites or prospective contract research organizations, or CROs, the terms of
which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
clinical trials of our drug candidates may produce negative or inconclusive results, including failure to demonstrate
statistical significance, and we may decide, or regulators may require us, to conduct additional clinical trials or
abandon drug development programs;
the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment
in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials or fail to
return for post-treatment follow-up at a higher rate than we anticipate;
our drug candidates may have undesirable side effects or other unexpected characteristics, causing us or our
investigators, regulators or institutional review boards to suspend or terminate the trials;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to
us in a timely manner, or at all;
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical
development for various reasons, including noncompliance with regulatory requirements or a finding that the
participants are being exposed to unacceptable health risks;
the cost of clinical trials of our drug candidates may be greater than we anticipate; and
the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug
candidates may be insufficient or inadequate.
We could also encounter delays if a clinical trial is suspended or terminated by us, by the institutional review boards
of the institutions in which such trials are being conducted, by the data safety monitoring board for such trial or by the FDA
or other regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors,
including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection
of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical
hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using
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a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical
trial. If we experience delays in the completion of, or termination of, any clinical trial of our drug candidates, the commercial
prospects of our drug candidates will be harmed, and our ability to generate product revenues from any of these drug
candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our
drug candidate development and approval process and jeopardize our ability to commence product sales and generate
revenues. Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many
of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to
the denial of marketing approval of our drug candidates. If we are required to conduct additional clinical trials or other testing
of our drug candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of
our drug candidates or other testing, if the results of these trials or tests are not favorable or if there are safety concerns, we
may:
·
·
·
·
·
·
be delayed in obtaining marketing approval for our drug candidates;
not obtain marketing approval at all;
obtain marketing approval for indications or patient populations that are not as broad as intended or desired;
obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings;
be subject to additional post-marketing testing requirements; or
have the drug removed from the market after obtaining marketing approval.
Our drug development costs will also increase if we experience delays in testing or marketing approvals. We do not
know whether any of our preclinical studies or clinical trials will begin as planned, will need to be restructured or will be
completed on schedule, or at all. Significant preclinical study or clinical trial delays also could shorten any periods during
which we may have the exclusive right to commercialize our drug candidates or allow our competitors to bring drugs to
market before we do and impair our ability to successfully commercialize our drug candidates.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary
marketing approvals could be delayed or prevented.
Successful and timely completion of clinical trials will require that we enroll a sufficient number of patients. 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. Trials may be subject to delays as a result of patient enrollment taking longer than anticipated or patient
withdrawal. We may not be able to initiate or continue clinical trials for our drug candidates if we are unable to locate and
enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory
authorities outside the United States. We cannot predict how successful we will be at enrolling subjects in future clinical
trials. Subject enrollment is affected by other factors including:
·
·
·
·
·
·
·
the eligibility criteria for the trial in question;
the perceived risks and benefits of the drug candidate in the trial;
the availability of drugs approved to treat the skin disease in the trial;
the efforts to facilitate timely enrollment in clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment; and
the proximity and availability of clinical trial sites for prospective patients.
Our inability to enroll a sufficient number of patients for clinical trials would result in significant delays and could
require us or them to abandon one or more clinical trials altogether. Enrollment delays in these clinical trials may result in
increased development costs for our drug candidates, which would cause the value of our company to decline and limit our
ability to obtain additional financing. Furthermore, we rely on and expect to continue to rely on CROs and clinical trial sites
to ensure the proper and timely conduct of our clinical trials and we will have limited influence over their performance.
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Our clinical trials may fail to demonstrate the safety and efficacy of our drug candidates, or serious adverse or
unacceptable side effects may be identified during the development of our drug candidates, which could prevent or delay
marketing approval and commercialization, increase our costs or necessitate the abandonment or limitation of the
development of some of our drug candidates.
Before obtaining marketing approvals for the commercial sale of our drug candidates, we must demonstrate through
lengthy, complex and expensive preclinical testing and clinical trials that our drug candidates are both safe and effective for
use in each target indication, and failures can occur at any stage of testing. Clinical trials often fail to demonstrate safety and
efficacy of the drug candidate studied for the target indication.
If our drug candidates are associated with side effects in clinical trials or have characteristics that are unexpected,
we may need to abandon their development or limit development to more narrow uses in which the side effects or other
characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. The FDA or an institutional
review board may also require that we suspend, discontinue, or limit our clinical trials based on safety information. Such
findings could further result in regulatory authorities failing to provide marketing authorization for our drug candidates.
Many drug candidates that initially showed promise in early stage testing have later been found to cause side effects that
prevented further development of the drug candidate.
Additionally, if we or others identify undesirable side effects caused by our drugs, a number of potentially
significant negative consequences could result, including:
·
·
·
·
·
regulatory authorities may withdraw approval to market such product;
regulatory authorities may require additional warnings on the labels;
we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;
we could be sued and held liable for harm caused to patients; and
our reputation and physician or patient acceptance of our products may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug
candidate and could significantly harm our business, results of operations and prospects.
Changes in methods of drug candidate manufacturing or formulation may result in additional costs or delay.
As drug candidates are developed through preclinical studies to late-stage clinical trials towards approval and
commercialization, it is common that various aspects of the development program, such as manufacturing methods and
formulation, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they
will not achieve these intended objectives, and may also require additional testing, FDA notification or FDA approval. Any
of these changes could cause our drug candidates to perform differently and affect the results of planned clinical trials or
other future clinical trials conducted with the altered materials. This could delay completion of clinical trials, require the
conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of
our drug candidates and jeopardize our ability to commence sales and generate revenue.
We may not be successful in our efforts to increase our pipeline of drug candidates, including by in-licensing or
acquiring additional drug candidates for other dermatological conditions.
A key element of our strategy is to build and expand our pipeline of drug candidates. In addition, we intend to in-
license or acquire additional drug candidates for other dermatological conditions to build a fully integrated dermatology
company. We may not be able to identify or develop drug candidates that are safe, tolerable and effective. Even if we are
successful in continuing to build our pipeline, the potential drug candidates that we identify, in-license or acquire may not be
suitable for clinical development, including as a result of being shown to have harmful side effects or other characteristics
that indicate that they are unlikely to be drugs that will receive marketing approval and achieve market acceptance.
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We may expend our limited resources to pursue a particular drug candidate or indication and fail to capitalize on
drug candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and management resources, we focus on development programs and drug
candidates that we identify for specific indications. As such, we are currently primarily focused on the commercialization of
ESKATA and the development of A-101 45% Topical Solution for the treatment of common warts. As a result, we may
forego or delay pursuit of opportunities with other drug candidates or for other indications that later prove to have greater
commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or
profitable market opportunities. Our spending on current and future development programs and drug candidates for specific
indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target
market for a particular drug candidate, we may relinquish valuable rights to that drug candidate through collaboration,
licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole
development and commercialization rights to such drug candidate.
Risks Related to the Commercialization of Our Drug Candidates
ESKATA, and any of our drug candidates that receive marketing approval, may fail to achieve the degree of
market acceptance by physicians, patients, third-party payors and others in the medical community necessary for
commercial success.
ESKATA, and any of our drug candidates that receive marketing approval, may fail to gain sufficient market
acceptance by physicians, patients, third-party payors and others in the medical community. If ESKATA and our drug
candidates do not achieve an adequate level of acceptance, we may not generate significant revenue and we may not become
profitable. The degree of market acceptance of ESKATA and, if approved, any drug candidate, will depend on a number of
factors, including:
·
·
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·
·
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·
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·
the efficacy, safety and potential advantages compared to alternative treatments;
our ability to offer our products for sale at competitive prices;
the convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new treatments and of physicians to prescribe these treatments;
our ability to hire and retain a sales force in the United States;
the strength of marketing and distribution support;
the willingness of patients to pay out of pocket for procedures using ESKATA for the treatment of raised SKs;
the availability of third-party coverage and adequate reimbursement;
the prevalence and severity of any side effects; and
any restrictions on the use of our products together with other medications.
If we are unable to establish sales, marketing and distribution capabilities for ESKATA, or a drug candidate that
may receive marketing approval, we may not be successful in commercializing ESKATA or those drug candidates if and
when they are approved.
To achieve commercial success for ESKATA and any other drug candidate for which we may obtain marketing
approval, we will need to build a focused sales and marketing infrastructure to market or co-promote ESKATA and, if
approved, some of our drug candidates in the United States. We have begun this process, but there are risks involved with
establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is
expensive and time consuming and could delay any drug launch. If the commercial launch of a drug candidate for which we
recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have
prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be
lost if we cannot retain or reposition our sales and marketing personnel. Factors that may inhibit our efforts to commercialize
our drugs on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to
prescribe any future drugs;
the lack of complementary drugs to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we are unable to establish our own sales, marketing and distribution capabilities and enter into arrangements with
third parties to perform these services, our revenue and our profitability, if any, are likely to be lower than if we were to sell,
market and distribute any drugs that we develop ourselves. In addition, we may not be successful in entering into
arrangements with third parties to sell, market and distribute our drug candidates or may be unable to do so on terms that are
favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary
resources and attention to sell and market our drugs effectively. If we do not establish sales, marketing and distribution
capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our drug candidates.
We face substantial competition, which may result in others discovering, developing or commercializing drugs
before or more successfully than we do.
The development and commercialization of new drugs is highly competitive. We face competition with respect to
our current drug candidates, and will face competition with respect to any drug candidates that we may seek to develop or
commercialize in the future, from many different sources, including major pharmaceutical, biotechnology and specialty
pharmaceutical companies, academic institutions and governmental agencies and public and private research institutions.
With respect to ESKATA for the treatment of raised SKs, we are aware of two biopharmaceutical companies
developing drug candidates which target SK, and another company that currently markets a line of cosmetic products
targeting skin conditions, including SK. We are also aware of early research being conducted with Akt inhibitors as a
potential treatment for SK.
With respect to A-101 45% Topical Solution for the treatment of common warts, we are aware of four companies
developing drug candidates for the treatment of common warts. In addition, other drugs have been used off-label as
treatments for common warts. We could also encounter competition from over-the-counter treatments for common warts.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs
that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than ESKATA
or any other drug that we may develop. Our competitors also may obtain FDA or other regulatory approval for their drugs
more rapidly than we may obtain approval for our drug, which could result in our competitors establishing a strong market
position before we are able to enter the market.
With respect to ATI-501 and ATI-502 for the treatment of AA, we anticipate competing with sensitizing agents such
as diphencyprone, and topical, intralesional and systemic corticosteroids, which have been found to occasionally reduce
symptoms of AA. Other treatments utilized for patchy AA include anthralin and minoxidil solution. We may also compete
with companies developing chemical agents to be used in topical immunotherapies, as well as companies developing
biologics, immunosuppressive agents, laser therapy, phototherapy, other JAK inhibitors and prostaglandin analogues to treat
AA.
Many of the companies against which we are competing, or against which we may compete in the future, have
significantly greater financial resources and expertise in research and development, manufacturing, preclinical and clinical
development, obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number
of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and
retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical
trials, as well as in acquiring technologies complementary to, or that may be necessary for, our programs.
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We expect third-party payors generally will not cover the use of ESKATA for the treatment of raised SKs and,
accordingly, our success will be dependent upon the willingness of patients to pay out of pocket for ESKATA.
We do not expect third-party payors to cover and reimburse providers who use ESKATA on patients for the
treatment of raised SKs. Payors generally do not reimburse the provider for the product used to remove non-malignant
lesions, including SK. In addition, they do not generally reimburse providers for the procedure removing such lesions, since
the procedure is considered to be cosmetic in nature, unless there is a medical need to remove the lesion such as confirming a
diagnosis with a biopsy or treating SK that are causing the patient physical discomfort. We anticipate that in some cases,
ESKATA will be used to remove SK lesions that are inflamed and causing the patient discomfort. Any reduction in
reimbursement for the procedure to remove inflamed SK may result in a higher percentage of patients needing to pay out of
pocket for ESKATA. Accordingly, the commercial success of ESKATA depends on the extent to which patients will be
willing to pay out of pocket for the in-office procedure.
The success of our drug candidates for the treatment of common warts will depend significantly on continued
coverage and adequate reimbursement or the willingness of patients to pay for these procedures.
In the case of A-101 45% Topical Solution, if approved, for the treatment of common warts, we believe our success
depends on continued coverage and adequate reimbursement for in-office wart treatment procedures or, in the absence of
coverage and adequate reimbursement, on the extent to which patients will be willing to pay out of pocket for the in-office
procedures that include our drug candidates.
Third-party payors determine which medical procedures they will cover and establish reimbursement levels. Even if
a third-party payor covers a particular procedure, the resulting reimbursement payment rates may not be adequate. Patients
who are treated in-office for a medical condition generally rely on third-party payors to reimburse all or part of the costs
associated with the procedure and may be unwilling to undergo such procedures for the removal of warts in the absence of
such coverage and reimbursement. Physicians may be unlikely to offer procedures for the treatment of warts if they are not
covered by insurance and may be unlikely to purchase and use our product for warts unless coverage is provided and
reimbursement is adequate.
Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s
determination that a procedure is neither cosmetic, experimental, nor investigational; safe, effective, and medically
necessary; appropriate for the specific patient; cost-effective; supported by peer-reviewed medical journals; and included in
clinical practice guidelines.
Further, from time to time, typically on an annual basis, payment rates are updated and revised by third-party
payors. To the extent that the procedures using our drug candidates, are covered, the cost of our products are generally
recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed.
Accordingly, these updates could impact the demand for our drug candidates. An example of payment updates is the
Medicare program updates to physician payments, which is done on an annual basis. In the past, when the application of the
formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. MACRA ended the
use of the statutory formula and provided for a 0.5% annual increase in payment rates under the Medicare Physician Fee
Schedule through 2019, but no annual update from 2020 through 2025. MACRA also introduced a merit based incentive
bonus program for Medicare physicians beginning in 2019. At this time, it is unclear how the introduction of the merit based
incentive program will impact overall physician reimbursement under the Medicare program. Any resulting decrease in
payment under the merit based reimbursement system may adversely affect our revenue and results of operations. In addition,
the Medicare Physician Fee Schedule has been adapted by some private payors into their plan-specific physician payment
schedule. We cannot predict how pending and future healthcare legislation will impact our business, and any changes in
coverage and reimbursement that further restricts coverage of our drug candidates or lowers reimbursement for procedures
using our products could harm our business.
Foreign governments also have their own healthcare reimbursement systems, which vary significantly by country
and region, and we cannot be sure that coverage and adequate reimbursement will be made available with respect to the
treatments in which our drugs are used under any foreign reimbursement system.
There can be no assurance that our drug candidates for the treatment of common warts, if they are approved for sale
in the United States or in other countries, will be considered medically reasonable and necessary, that they will be considered
cost-effective by third-party payors, that coverage or an adequate level of reimbursement will be available, or
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that reimbursement policies and practices in the United States and in foreign countries where our products are sold will not
adversely affect our ability to sell our drugs candidates profitably if they are approved for sale.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization
of any drugs that we may develop.
We face an inherent risk of product liability exposure related to the testing of our drug candidates in human clinical
trials and will face an even greater risk if and when we begin commercially selling ESKATA. If we cannot successfully
defend ourselves against claims that our drug candidates or drugs caused injuries, we will incur substantial liabilities.
Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for any drug candidates or drugs that we may develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards paid to trial participants or patients;
loss of revenue;
reduced resources of our management to pursue our business strategy; and
the inability to commercialize any drugs that we may develop.
We currently hold $10 million in product liability insurance coverage in the aggregate, with a per incident limit of
$10 million, which may not be adequate to cover all liabilities that we may incur. We may need to increase our insurance
coverage as we expand our clinical trials or if we commence commercialization of our drug candidates. Insurance coverage is
increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to
satisfy any liability that may arise.
Our business and operations would suffer in the event of computer system failures, cyber-attacks or a deficiency
in our cyber-security.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which
we rely, are vulnerable to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and
electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization,
or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through
cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have
increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of
our drug development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical
trials could result in delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the
data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, or
inappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, damage
to our reputation, and the further development or commercialization of our drug candidates could be delayed.
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Risks Related to Our Dependence on Third Parties
We will rely on third parties to conduct our future clinical trials for drug candidates, and those third parties may
not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We engage CROs to conduct clinical trials of our drug candidates. We expect to continue to rely on third parties,
such as clinical data management organizations, medical institutions and clinical investigators, to conduct those clinical
trials. If any of our relationships with these third parties terminate, we may not be able to timely enter into arrangements with
alternative third parties or to do so on commercially reasonable terms, if at all. In addition, any third parties conducting our
clinical trials will not be our employees, and except for remedies available to us under our agreements with such third parties,
we cannot control whether or not they devote sufficient time and resources to our clinical programs. If these third parties do
not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if
the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be
able to obtain marketing approval for or successfully commercialize our drug candidates. Consequently, our results of
operations and the commercial prospects for our drug candidates would be harmed, our costs could increase substantially and
our ability to generate revenue could be delayed significantly.
Switching or adding CROs involves substantial cost and requires management time and focus. In addition, there is a
natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our
ability to meet our desired clinical development timelines. Though we intend to carefully manage our relationships with our
CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or
challenges will not have a material adverse impact on our business, financial condition and prospects.
We rely on these parties for execution of our preclinical studies and clinical trials, and generally do not control their
activities. Our reliance on these third parties for research and development activities will reduce our control over these
activities but will not relieve us of our responsibilities. For example, we will remain responsible for ensuring that each of our
clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA
requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording
and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights,
integrity and confidentiality of trial participants are protected. We also are required to register ongoing clinical trials and post
the results of completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes.
Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. If we or any of our CROs fail to
comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA
or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our
marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority
will determine that any of our clinical trials complies with GCP regulations. In addition, our clinical trials must be conducted
with product produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat
clinical trials, which would delay the marketing approval process.
We also rely on other third parties to store and distribute drug supplies for the commercialization of ESKATA and
for our clinical trials. Any performance failure on the part of our distributors could delay clinical development or marketing
approval of our drug candidates or commercialization of our drugs, producing additional losses and depriving us of potential
revenue.
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We contract with third parties for the manufacture of commercial quantities of ESKATA and supply of our drug
candidates for preclinical and clinical testing. This reliance on third parties increases the risk that we will not have
sufficient quantities of ESKATA and our drug candidates or such quantities at an acceptable cost, which could delay,
prevent or impair our development or commercialization efforts.
We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for
the manufacture of commercial quantities of ESKATA and supply of our drug candidates for preclinical and clinical
testing. For example, we have entered into an exclusive, ten-year, automatically renewable supply agreement with
PeroxyChem, a manufacturer of hydrogen peroxide, to provide the active pharmaceutical ingredient that can be used in
ESKATA for the treatment of raised SKs. This reliance on third parties increases the risk that we will not have sufficient
quantities of our drug candidates at an acceptable cost and/or quality, which could delay, prevent or impair our ability to
timely conduct our clinical trials or our other development or commercialization efforts.
The facilities used by our contract manufacturers to manufacture our drug candidates must be approved by the FDA
or other regulatory authorities pursuant to inspections that will be conducted after we submit our NDA or comparable
marketing application to the FDA or other regulatory authority. We do not have control over a supplier’s or manufacturer’s
compliance with laws, regulations and applicable cGMP standards and other laws and regulations, such as those related to
environmental health and safety matters. If our contract manufacturers cannot successfully manufacture material that
conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and
maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract
manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable
foreign regulatory authority does not approve these facilities for the manufacture of our drug candidates or if it withdraws
any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact
our ability to develop, obtain regulatory approval for or market our drug candidates.
We may be unable to establish any agreements with future third-party manufacturers or to do so on acceptable
terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers
entails additional risks, including:
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reliance on the third party for regulatory compliance and quality assurance;
the possible breach of the manufacturing agreement by the third party;
the possible misappropriation of our proprietary information, including our trade secrets and know-how;
the possible increase in costs by PeroxyChem for the active pharmaceutical ingredient in ESKATA;
the possible increase in costs by James Alexander for the finished dosage form of ESKATA; and
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for
us.
Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements
outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations
could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension
or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect supplies of our products.
Our products and drug candidates that we may develop may compete with other products and drug candidates for
access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that
might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could
delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a
second source for the components of ESKATA.
If our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers.
We may incur added costs and delays in identifying and qualifying any such replacement.
We expect to continue to depend on third-party contract manufacturers for the foreseeable future. Our current and
anticipated future dependence upon others for the manufacture of our products and drug candidates may adversely affect our
future profit margins and our ability to commercialize any drugs that receive marketing approval on a timely and competitive
basis.
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We may seek collaborations with third parties for the development or commercialization of our drug candidates.
If those collaborations are not successful, we may not be able to capitalize on the market potential of these drug
candidates.
We may seek third-party collaborators for the development and commercialization of our drug candidates, including
for the commercialization of any of our drug candidates that are approved for marketing outside the United States. Our likely
collaborators for any collaboration arrangements include large and mid-size pharmaceutical companies, regional and national
pharmaceutical companies and biotechnology companies. If we do enter into any such arrangements with any third parties,
we will likely have limited control over the amount and timing of resources that our collaborators dedicate to the
development or commercialization of our drug candidates. Our ability to generate revenue from these arrangements will
depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements.
Collaborations involving our drug candidates would pose the following risks to us:
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collaborators have significant discretion in determining the efforts and resources that they will apply to these
collaborations;
collaborators may not perform their obligations as expected;
collaborators may not pursue development and commercialization of any drug candidates that achieve marketing
approval or may elect not to continue or renew development or commercialization programs based on clinical trial
results, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition,
that divert resources or create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or
abandon a drug candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for
clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly
with our products or drug candidates if the collaborators believe that competitive products are more likely to be
successfully developed or can be commercialized under terms that are more economically attractive than ours;
drug candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their
own products or drug candidates, which may cause collaborators to cease to devote resources to the
commercialization of our products;
a collaborator with marketing and distribution rights to one or more of our drug candidates that achieve marketing
approval may not commit sufficient resources to the marketing and distribution of such drug candidates;
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the
preferred course of development, might cause delays or termination of the research, development or
commercialization of drug candidates, might lead to additional responsibilities for us with respect to drug
candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
collaborators may not properly maintain or defend our or their intellectual property rights or may use our or their
proprietary information in such a way as to invite litigation that could jeopardize or invalidate such intellectual
property or proprietary information or expose us to potential litigation;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and
potential liability; and
collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to
raise additional capital to pursue further development or commercialization of the applicable drug candidates.
Collaboration agreements may not lead to development or commercialization of drug candidates in the most
efficient manner or at all. If a present or future collaborator of ours were to be involved in a business combination, the
continued pursuit and emphasis on our drug development or commercialization program could be delayed, diminished or
terminated.
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If we are not able to establish collaborations, we may have to alter our development and commercialization plans.
Our drug development programs and the potential commercialization of our drug candidates will require substantial
additional capital. For some of our drug candidates, we may decide to collaborate with pharmaceutical and biotechnology
companies for the development and potential commercialization of those drug candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a
collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms
and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors
may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities
outside the United States, the potential market for the subject drug candidate, the costs and complexities of manufacturing
and delivering such drug candidate to patients, the potential of competing products, the existence of uncertainty with respect
to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the
challenge and industry and market conditions generally. The collaborator may also consider alternative drug candidates or
technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more
attractive than the one with us for our drug candidate. Collaborations are complex and time-consuming to negotiate and
document. In addition, there have been a significant number of recent business combinations among large pharmaceutical
companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to
do so, we may have to curtail the development of such drug candidate, reduce or delay its development program or one or
more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing
activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we
elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain
additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may
not be able to further develop our drug candidates or bring them to market and generate revenue.
Our sublease could terminate if the master lease is terminated for any reason, thus terminating our rights to our
corporate headquarters.
We sublease space for our corporate headquarters. While the term of the sublease extends until October 2023, if for
any reason the master lease is terminated or expires prior to October 2023, our sublease will also automatically terminate. In
such an event, we would need to obtain a new direct lease with the master landlord or negotiate and enter into a new lease for
office space at a different location, which we may not be able to do on commercially reasonable terms, if at all.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain patent protection for our drug candidates, or if the scope of the patent
protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and drugs
similar or identical to ours, and our ability to successfully commercialize our technology and drug candidates may be
impaired.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and
other countries with respect to our drug candidates. We seek to protect our proprietary position by filing patent applications
in the United States and abroad related to our drug candidates.
The patent prosecution process is expensive and time-consuming, however, and we may not be able to file and
prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we
will fail to identify patentable aspects of our development output before it is too late to obtain patent protection. We may not
have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents
licensed to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent
with the best interests of our business.
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The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex
legal and factual questions and has in recent years been the subject of much litigation. In addition, the laws of foreign
countries may not protect our rights to the same extent as the laws of the United States or vice versa. For example, European
patent law restricts the patentability of methods of treatment of the human body more than U.S. law does. Publications of
discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and
other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot
know with certainty whether we or our licensors were the first to make the inventions claimed in our patents or pending
patent applications, or that we or our licensors were the first to file for patent protection of such inventions. As a result, the
issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and
future patent applications may not result in patents being issued that protect our technology or drugs, in whole or in part, or
which effectively prevent others from commercializing competitive technologies and drugs. Changes in either the patent laws
or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow
the scope of our patent protection.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents
Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S.
patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent
litigation. The United States Patent Office recently developed new regulations and procedures to govern administration of the
Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular,
the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the
Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could
increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of
our issued patents, all of which could have a material adverse effect on our business and financial condition.
Moreover, we may be subject to a third-party preissuance submission of prior art to the U.S. Patent and Trademark
Office, or USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or
interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such
submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to
commercialize our technology or drugs and compete directly with us, without payment to us, or result in our inability to
manufacture or commercialize drugs without infringing third-party patent rights. In addition, if the breadth or strength of
protection provided by our patents and patent applications that we own, or license is threatened, it could dissuade companies
from collaborating with us to license, develop or commercialize current or future drug candidates.
Even if our patent applications that we own or license issue as patents, they may not issue in a form that will provide
us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any
competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative
technologies or drugs in a non-infringing manner. For example, the patents and patent applications that we exclusively
licensed from Columbia University that are primarily directed to methods of treating hair loss disorders with JAK inhibitors
may not issue or may issue with claims directed to the use of specific JAK inhibitors, which may not be relevant to the JAK
inhibitors we intend to commercialize or the JAK inhibitors that our competitors may commercialize.
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In addition, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our
patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss
of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in
part, which could limit our ability to stop others from using or commercializing similar or identical technology and drugs, or
limit the duration of the patent protection of our technology and drugs. Our issued U.S. patents, with claims directed to
treatment of SK and acrochordons with high-concentration hydrogen peroxide of at least 23%, including ESKATA and A-101
45% Topical Solution, are scheduled to expire in 2022, and our issued U.S. formulation patent with claims directed to high-
concentration hydrogen peroxide formulations, including ESKATA and A-101 45% Topical Solution, and methods of use is
scheduled to expire in 2035. Certain issued U.S. patents relating to our JAK inhibitors, ATI-501 and ATI-502, are scheduled
to expire in 2023 and additional U.S. patents, with claims specifically directed to such JAK inhibitors, are scheduled to expire
in 2030. The issued U.S. and Japanese patents that we exclusively licensed from Columbia University with claims directed
to the use of third party JAK inhibitors for the treatment of hair loss disorders, including AA and AGA, and inducing hair
growth, expire in 2031. We currently do not have any patents issued directed to our “soft” JAK inhibitors, but any claims
that may issue would expire in 2038. Our issued U.S. patent covering our lead inhibitors of the MK-2 signaling pathway
inhibitor, expires in 2034 and other issued patents covering different MK-2 signaling pathway inhibitors expire in 2031 and
2032. Our issued patents covering our novel inhibitors of ITK expire between 2035 and 2038. Given the amount of time
required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might
expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with
sufficient rights to exclude others from commercializing drugs similar or identical to ours.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could
be expensive, time-consuming and unsuccessful. Further, our issued patents could be found invalid or unenforceable if
challenged in court.
Competitors may infringe our issued patents or other intellectual property. Our pending applications cannot be
enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from
such applications. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be
expensive and time-consuming. Any claims we assert against perceived infringers could provoke these parties to assert
counterclaims against us alleging that we infringe their patents or that our patents are invalid or unenforceable. Grounds for a
validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty,
obviousness, non-enablement or insufficient written description. Grounds for an unenforceability assertion could be an
allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a
misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, in post-grant
proceedings such as ex parte reexaminations, inter partes review, or post-grant review, or oppositions or similar
administrative proceedings outside the United States, in parallel with litigation or, even outside the context of litigation. The
outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question,
for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware
during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least
part, and perhaps all, of the patent protection on our drug candidates. Such a loss of patent protection would harm our
business.
In such a proceeding, a court or administrative board may decide that a patent of ours is invalid or unenforceable, in
whole or in part, construe the patent’s claims narrowly or refuse to stop the other party from using the technology at issue on
the grounds that our patents do not cover the technology. An adverse result in any such proceeding could put one or more of
our patents at risk of being invalidated or interpreted narrowly. We may find it impractical or undesirable to enforce our
intellectual property against some third parties. For instance, we are aware of third parties that have marketed high-
concentration hydrogen peroxide solutions over the internet for the treatment of SK and warts. These parties do not appear to
have regulatory authority, and we have not authorized them in any way to market these products. However, to date we have
refrained from seeking to enforce our intellectual property rights against these third parties due to the transient nature of their
activities.
Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to
determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require
us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be
harmed if the prevailing party does not offer us a license on commercially reasonable terms.
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Furthermore, because of the substantial amount of discovery required in connection with intellectual property
litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of
litigation.
With respect to ATI-501 and ATI-502, if we do not elect to exercise our first right to do so, Rigel may enforce the
licensed patents relating to ATI-501 and ATI-502 against any infringing third party in the field of dermatology. In addition,
Rigel has the first right, but not the obligation, to enforce the licensed patents relating to ATI-501 and ATI-502 against any
infringing party outside of the field of dermatology. With respect to the licensed patents from Columbia University,
Columbia University has the first right to initiate, control and defend any proceedings related to the validity, enforceability or
infringement of the licensed patent rights and in doing so, has no obligation to assert more than one licensed patent in one
jurisdiction against a third party. With respect to the licensed patents from Columbia University, if Columbia University does
not elect to exercise its first right to do so, we may enforce the licensed patent rights relating to an infringement of the
licensed patent rights against any infringing third party.
If we breach our license agreement with Rigel, it could compromise our development and commercialization
efforts for our JAK inhibitors ATI-501 and ATI-502.
In August 2015, we entered into an exclusive license agreement with Rigel, which grants us the rights to certain patent
rights and other intellectual property owned by them relating to the JAK inhibitors ATI-501 and ATI-502 in the field of
dermatology. If we materially breach or fail to perform any provision under this license agreement, including failure to make
payments to Rigel when due for royalties and failure to use commercially reasonable efforts to develop and commercialize a
JAK inhibitor, Rigel has the right to terminate our license, and upon the effective date of such termination, our right to
practice the licensed Rigel’s patent rights and other intellectual property would end. Any uncured, material breach under the
license agreement could result in our loss of rights to practice the patent rights and other intellectual property licensed to us
under the license agreement with Rigel.
If we breach our agreement with the selling stockholders of Vixen, it could compromise our development and
commercialization efforts for our JAK inhibitors.
In March 2016, we entered into a stock purchase agreement with the stockholders of Vixen, pursuant to which we
purchased all of the stock of Vixen and assumed its license agreement with Columbia University. If we fail to use
commercially reasonable efforts to develop and commercialize a JAK inhibitor for AA and a JAK inhibitor for AGA, the
license agreement with Columbia University will be transferred to the selling stockholders of Vixen following any adverse
resolution of any dispute relating thereto. Upon the effective date of such transfer, our right to practice the licensed
Columbia University patent rights and know-how would end.
If we breach our agreement with Columbia University, it could compromise our development and
commercialization efforts for our JAK inhibitors.
In March 2016, as part of the Vixen acquisition, we assumed a license agreement with Columbia University, which
grants us the right under certain patent rights and know-how owned by Columbia University relating to the use of JAK
inhibitors to treat hair-loss disorders. If we materially breach or fail to perform any provision under this license agreement,
including failure to make payments to Columbia University when due for royalties and failure to use commercially
reasonable efforts to develop and commercialize a licensed product, Columbia University has the right to terminate our
license, and upon the effective date of such termination, our right to practice the licensed Columbia University patent rights
and know-how would end. Any uncured, material breach under the license agreement could result in our loss of rights to
practice the patent rights and know-how licensed to us under the license agreement, and, to the extent such patent rights and
know-how relate to our JAK inhibitors, it could compromise our development and commercialization efforts for ATI-501 or
ATI-502.
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We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our drug candidates in all countries throughout the world would be
prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive
than those in the United States. For example, the use of ESKATA for the treatment of raised SKs is currently covered by
patents in the United States, Australia, India and New Zealand, but not in the European Union or other countries. The use of
A-101 45% Topical Solution for the treatment of warts is currently covered by issued patents in the United States, Australia,
India and New Zealand, but not in the European Union or other countries. A U.S. patent is issued, and patent applications are
pending in the United States, the European Union and other foreign countries directed to high-concentration hydrogen
peroxide formulations, including ESKATA and A-101 45% Topical Solution and methods of use. Our JAK inhibitors, ATI-
501 and ATI-502, are currently covered in patents and applications in the United States, the European Union, and other major
foreign markets. Additionally, U.S. and Japanese patents have issued in the patent portfolio licensed from Columbia
University, which are directed to the use of certain third party JAK inhibitors for the treatment of hair loss disorders and
applications are pending in the United States, the European Union, Japan and South Korea. In addition, the laws of some
foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United
States. Consequently, we may not be able to prevent third parties from practicing our invention in such countries.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own
products and may export otherwise infringing products to territories where we have patent protection, but enforcement rights
are not as strong as those in the United States. These products may compete with our drug candidates and our patents or
other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in
foreign jurisdictions. The legal systems of some countries do not favor the enforcement of patents and other intellectual
property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to
enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any
lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.
Many countries, including European Union countries, India, Japan and China, have compulsory licensing laws
under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In those
countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party,
which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly,
our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property that we develop or license.
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 drug candidates. For example, we exclusively licensed intellectual property from Rigel in the field of
dermatology related to our JAK inhibitors, ATI-501 and ATI-502. We also exclusively licensed intellectual property from
Columbia University related to the use of JAK inhibitors for the treatment of hair loss disorders. It may be necessary for us
to use the patented or proprietary technology of third parties to commercialize our drug candidates, in which case we would
be required to obtain a license from these third parties on commercially reasonable terms, or our business could be harmed,
possibly materially.
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Our third-party licensors may develop JAK inhibitors, including those related to our drug candidates, outside of
the field of dermatology.
We exclusively licensed intellectual property from Rigel in order to develop, use, manufacture, sell and
commercialize ATI-501 and ATI-502 in the field of dermatology. Rigel has retained the rights under such intellectual
property to develop, use, manufacture, sell and commercialize ATI-501 and ATI-502 outside of the field of dermatology. If
Rigel were to commercialize such JAK inhibitors outside the field of dermatology, such a product could possibly be used off-
label for a dermatology indication, which could negatively impact sales of our drug candidates, if approved. Rigel also
retained the intellectual property rights to develop, use, manufacture, sell and commercialize other structurally similar JAK
inhibitors. If Rigel commercializes a structurally similar JAK inhibitor, such a product could directly compete with our drug
candidates, if approved.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the
outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability to develop, manufacture, market and sell our drug candidates and
use our proprietary technologies without infringing the proprietary rights of third parties. There is considerable intellectual
property litigation in the biotechnology and pharmaceutical industries. We may become party to, or threatened with, future
adversarial proceedings or litigation regarding intellectual property rights with respect to our drugs and technology, including
interference or derivation proceedings before the USPTO. Numerous U.S. and foreign issued patents and pending patent
applications owned by third parties exist in the fields in which we are developing our drug candidates. Third parties may
assert infringement claims against us based on existing patents or patents that may be granted in the future.
If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from
such third party to continue developing and marketing our drugs and technology. However, we may not be able to obtain any
required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-
exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by
court order, to cease commercializing the infringing technology or drug. In addition, we could be found liable for monetary
damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding of
infringement could prevent us from commercializing our drug candidates or force us to cease some of our business
operations. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including
treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing product or obtain one or
more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. Claims that
we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on
our business.
We may be subject to claims by third parties asserting that we, our employees or our licensors have
misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees and our licensor’s employees were previously employed at other biotechnology or
pharmaceutical companies. Although we and our licensor try to ensure that our employees and our licensors’ employees do
not use the proprietary information or know-how of others in their work for us, we or our licensors may be subject to claims
that these employees, our licensors or we have used or disclosed intellectual property, including trade secrets or other
proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these
claims.
In addition, while it is our policy to require our employees and contractors who may be involved in the development
of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing
such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their
assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third
parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual
property.
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If we or our licensors fail in prosecuting or defending any such claims, in addition to paying monetary damages, we
may lose valuable intellectual property rights or personnel. Even if we and our licensors are successful in prosecuting or
defending against such claims, litigation could result in substantial costs and be a distraction to management.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from
their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause
us to incur significant expenses, and could distract our technical and management personnel from their normal
responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim
proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our
operating losses and reduce the resources available for development activities or any future sales, marketing or distribution
activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some
of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of
their greater financial resources. Some of our competitors are larger than we are and have substantially greater resources.
They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. Accordingly,
despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual
property. Litigation could result in substantial costs and diversion of management resources, which could harm our business.
In addition, the uncertainties associated with litigation could compromise our ability to raise the funds necessary to continue
our clinical trials, continue our internal research programs, or in-license needed technology or other drug candidates. There
could also be public announcements of the results of the hearing, motions, or other interim proceedings or developments. If
securities analysts or investors perceive those results to be negative, it could cause the price of shares of our common stock to
decline. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could
compromise our ability to compete in the marketplace, including compromising our ability to raise the funds necessary to
continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into
development collaborations that would help us commercialize our drug candidates.
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 our drug 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 our 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 the United States 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.
The validity, scope and enforceability of any of our patents that cover ESKATA, A-101 45% Topical Solution or
any of our other drug candidates can be challenged by competitors.
The likelihood that a third party will challenge our patents covering ESKATA is increased now that it has received
marketing approval from the FDA. The challenge may come in the form of a patent office proceeding, such as an inter partes
review, challenging the validity of the patents or a district court proceeding, such as a paragraph IV litigation arising out of
the filing of an Abbreviated New Drug Application, or ANDA.
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If a third party files an ANDA for a generic drug containing ESKATA, and relies in whole or in part on studies
conducted by or for us, the third party will be required to certify to the FDA that either: (1) there is no patent information
listed in the FDA’s Orange Book with respect to our NDA for the applicable approved drug candidate; (2) the patents listed in
the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is
sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of
the third party’s generic drug. A certification that the new drug will not infringe the Orange Book-listed patents for the
applicable approved drug candidate, or that such patents are invalid, is called a paragraph IV certification. If the third party
submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the
third party’s ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the
notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA
from approving the third party’s ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is
settled, or the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patent
infringement lawsuit within the required 45-day period, the third party’s ANDA will not be subject to the 30-month stay of
FDA approval. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in
nature, may be very expensive and time-consuming, may divert our management’s attention from our core business, and may
result in unfavorable results that could limit our ability to prevent third parties from competing with ESKATA.
If A-101 45% Topical Solution, our JAK inhibitors, or any of our other drug candidates advance through
development or is approved by the FDA, one or more third parties may challenge the current patents, or patents that may
issue in the future, within our portfolio covering these drug candidates. Any such challenge could result in the invalidation of,
or render unenforceable, some or all of the relevant patent claims or a finding of non-infringement.
If we do not obtain protection under the Hatch-Waxman Act by extending the patent term and obtaining data
exclusivity for our drug candidates, our business may be materially harmed.
Our commercial success will largely depend on our ability to obtain and maintain patent and other intellectual
property in the United States and other countries with respect to our proprietary technology, drug candidates and our target
indications. Our issued U.S. patent with claims directed to treatment of SK with ESKATA is scheduled to expire in 2022 and
our issued U.S. formulation patent with claims directed to high-concentration hydrogen peroxide formulations, including
ESKATA and A-101 45% Topical Solution, and methods of use is scheduled to expire in 2035. Certain issued U.S. patents
relating to our JAK inhibitors, ATI-501 and ATI-502, are scheduled to expire in 2023 and additional U.S. patents, with claims
specifically directed to such JAK inhibitors, are scheduled to expire in 2030. The issued U.S. and Japanese patents licensed
from Columbia University relating to the use of certain third party JAK inhibitor for the treatment of hair loss disorders,
including AA and AGA, and inducing hair growth, expire in 2031. Given the amount of time required for the development,
testing and regulatory review of new drug candidates, patents protecting our drug candidates might expire before or shortly
after such candidates begin to be commercialized. We expect to seek extensions of patent terms in the United States and, if
available, in other countries where we are prosecuting patents.
Depending upon the timing, duration and specifics of FDA marketing approval of our drug candidates, one or more
of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term
Restoration Act of 1984, referred to as the Hatch-Waxman Act, for a drug candidate. The Hatch-Waxman Act permits a
patent extension term of up to five years beyond the normal expiration of the patent as compensation for patent term lost
during development and the FDA regulatory review process, which is limited to the approved indication (or any additional
indications approved during the period of extension). This extension is limited to only one patent per regulatory review
period that covers the approved product. However, the applicable authorities, including the FDA and the USPTO in the
United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such
extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we
request. We may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to
apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable
time period or the scope of patent protection afforded could be less than we request. We believe that ESKATA is eligible for
patent term extension and we have filed an application with the USPTO requesting patent term extension for one patent that
covers ESKATA; however, the USPTO and/or the FDA may disagree with our interpretation.
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If we are unable to extend the expiration date of our existing patents or obtain new patents with longer expiry dates,
our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical
and preclinical data to obtain approval of competing products following our patent expiration and launch their product earlier
than might otherwise be the case. For example, even if we obtain new chemical entity, or NCE, exclusivity for ESKATA, we
could be subject to generic competition as early as the end of the applicable exclusivity period, if our patent portfolio does
not have sufficient term or scope to prevent such generic competition.
Any trademarks we have obtained or may obtain may be infringed or successfully challenged, resulting in harm
to our business.
We expect to rely on trademarks as one means to distinguish any of our drug candidates that are approved for
marketing from the products of our competitors. Once we select new trademarks and apply to register them, our trademark
applications may not be approved. Third parties may oppose or attempt to cancel our trademark applications or trademarks,
or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be
forced to rebrand our drugs, which could result in loss of brand recognition and could require us to devote resources to
advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate
resources to enforce our trademarks.
Outside of the United States we cannot be certain that any country’s patent or trademark office will not
implement new rules that could seriously affect how we draft, file, prosecute and maintain patents, trademarks and patent
and trademark applications.
We cannot be certain that the patent or trademark offices of countries outside the United States will not implement
new rules that increase costs for drafting, filing, prosecuting and maintaining patents, trademarks and patent and trademark
applications or that any such new rules will not restrict our ability to file for patent protection. For example, we may elect not
to seek patent protection in some jurisdictions or for some drug candidates in order to save costs. We may be forced to
abandon or return the rights to specific patents due to a lack of financial resources.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property
rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The
following examples are illustrative:
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others may be able to make formulations or compositions that are the same as or similar to ESKATA and A-101
45% Topical Solution but that are not covered by the claims of the patents that we own;
others may be able to make a JAK inhibitor that is similar to the JAK inhibitors we intend to commercialize that is
not covered by the patents that we exclusively licensed and have the right to enforce;
we, our licensor or any collaborators might not have been the first to make the inventions covered by the issued
patents or pending patent applications that we own;
we, our licensor might not have been the first to file patent applications covering certain of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our intellectual property rights;
it is possible that our pending patent applications will not lead to issued patents;
issued patents that we own may not provide us with any competitive advantages, or may be held invalid or
unenforceable as a result of legal challenges;
our competitors might conduct research and development activities in the United States 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; and
we may not develop additional proprietary technologies that are patentable.
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Risks Related to Regulatory Approval of Our Drug Candidates and Other Legal Compliance Matters
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able
to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.
Our drug candidates and the activities associated with their development and commercialization, including their
design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and
distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by
the European Commission and EU Member State Competent Authorities and similar regulatory authorities outside the United
States. Failure to obtain marketing approval for a drug candidate will prevent us from commercializing the drug candidate.
Other than the approval of ESKATA in the United States, we have not received approval to market any of our drug candidates
from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications
necessary to gain marketing approvals. Securing marketing approval requires the submission of extensive preclinical and
clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the drug
candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the drug
manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Our drug candidates may
not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or
other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use. If any of our
drug candidates receive marketing approval, the accompanying label may limit the approved use of our drug in this way,
which could limit sales of the drug.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive and may take
many years if additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a
variety of factors, including the type, complexity and novelty of the drug candidates involved. Changes in marketing
approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes
in regulatory review for each submitted drug application, may cause delays in the approval or rejection of an application.
Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may
decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition,
varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing
approval of a drug candidate. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-
approval commitments that render the approved drug not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of our drug candidates, the commercial
prospects for our drug candidates may be harmed and our ability to generate revenue will be materially impaired.
Failure to obtain marketing approval in international jurisdictions would prevent our drug candidates from
being marketed abroad.
In order to market and sell our drugs in the European Union and any 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 United States generally includes all of the risks
associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the drug
be approved for reimbursement before the drug can be approved for sale in that country. We may not obtain approvals from
regulatory authorities outside the United States 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 United States
does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However, failure to
obtain approval in one jurisdiction may impact our ability to obtain approval elsewhere. We may not be able to file for
marketing approvals and may not receive necessary approvals to commercialize our drugs in any market.
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A variety of risks associated with marketing our drug candidates internationally could harm our business.
We are seeking marketing approval for ESKATA outside of the United States, and we may also seek marketing
approval for our drug candidates currently in development and, accordingly, we expect that we will be subject to additional
risks related to operating in foreign countries if we obtain the necessary approvals, including:
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differing regulatory requirements in foreign countries;
the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher
local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;
unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
foreign reimbursement, pricing and insurance regimes;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other
obligations incident to doing business in another country;
difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not
respect and protect intellectual property rights to the same extent as the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
logistical challenges resulting from distributing ESKATA or our drug candidates to foreign countries; and
business interruptions resulting from geo-political actions, including war and terrorism.
These and other risks associated with our international operations may compromise our ability to achieve or
maintain profitability.
ESKATA, or any drug candidate for which we obtain marketing approval, could be subject to post-marketing
restrictions or recall or withdrawal from the market, and we may be subject to penalties if we fail to comply with
regulatory requirements or if we experience unanticipated problems with our drug candidates, when and if any of them
are approved.
ESKATA, or any drug candidate for which we obtain marketing approval, along with the manufacturing processes,
post-approval clinical data, labeling, advertising and promotional activities for such drug candidate, will be subject to
continual requirements of and review by the FDA and other regulatory authorities. These requirements include submissions
of safety and other post-marketing information and reports, registration and listing requirements, cGMP requirements relating
to manufacturing, quality control, quality assurance and corresponding maintenance of records and documents, requirements
regarding the distribution of samples to physicians and recordkeeping. Even if marketing approval of a drug candidate is
granted, the approval may be subject to limitations on the indicated uses for which the drug candidate may be marketed or to
the conditions of approval, including the requirement to implement a risk evaluation and mitigation strategy. If any of our
drug candidates receives marketing approval, the accompanying label may limit the approved use of our drug, which could
limit sales of the drug.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to
monitor the safety or efficacy of the drug. The FDA closely regulates the post-approval marketing and promotion of drugs to
ensure drugs are marketed only for the approved indications and in accordance with the provisions of the approved labeling.
The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we do not market
our drugs for their approved indications, we may be subject to enforcement action for off-label marketing. Violations of the
Federal Food, Drug, and Cosmetic Act relating to the promotion of prescription drugs may lead to investigations alleging
violations of federal and state healthcare fraud and abuse laws, as well as state consumer protection laws.
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In addition, later discovery of previously unknown adverse events or other problems with our drugs, manufacturers
or manufacturing processes, or failure to comply with regulatory requirements, may have negative consequences, including:
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restrictions on such drugs, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a drug;
restrictions on drug distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning letters;
recall or withdrawal of the drugs from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
clinical holds;
fines, restitution or disgorgement of profits or revenue;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our drugs;
drug seizure; or
injunctions or the imposition of civil or criminal penalties.
Non-compliance with the European Union’s requirements regarding safety monitoring or pharmacovigilance, and
with requirements related to the development of drugs for the pediatric population, can also result in significant financial
penalties. Similarly, failure to comply with the European Union’s requirements regarding the protection of personal
information can also lead to significant penalties and sanctions.
Our current and future relationships with third-party payors, health care professionals and customers in the
United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false
claims, physician payment transparency, health information privacy and security and other healthcare laws and
regulations, which could expose us to significant penalties.
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role
in the recommendation and prescription of any drug candidates for which we obtain marketing approval. Our current and
future arrangements with third-party payors, health care professionals and customers may expose us to broadly applicable
fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute
and the federal civil False Claims Act, that may constrain the business or financial arrangements and relationships through
which we sell, market and distribute any drugs for which we obtain marketing approval. In addition, we may be subject to
transparency laws and patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in
which we conduct our business. The applicable federal, state and foreign healthcare laws and regulations that may affect our
ability to operate include the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and
willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce
or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of, any
good or service, for which payment may be made under federal and state healthcare programs such as Medicare and
Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to
have committed a violation. Further, several courts have interpreted the statute's intent requirement to mean that if
any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered
business, the Anti-Kickback Statute has been violated. The intent standard was further amended by the Affordable
Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute
or specific intent to violate it in order to have committed a violation. Moreover, the government may assert that a
claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the False Claims Act;
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federal civil and criminal false claims laws, including, without limitation, the federal civil False Claims Act (that
can be enforced through civil whistleblower or qui tam actions), and the civil monetary penalties law, which impose
criminal and civil penalties, against individuals or entities for knowingly presenting, or causing to be presented, to
the federal government, including the Medicare and Medicaid programs, claims for payment that are false or
fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal
government;
HIPAA, which imposes criminal and civil liability for, among other things, executing a scheme to defraud any
healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-
Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to
violate it to have committed a violation;
HIPAA, as amended by HITECH, and their respective implementing regulations, which impose obligations on
covered healthcare providers, health plans, and healthcare clearinghouses, as well as their business associates that
create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity,
with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal Open Payments program, created under Section 6002 of the Affordable Care Act and its implementing
regulations, which requires specified manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific
exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to
payments or other “transfers of value” made to physicians, which is defined to include doctors, dentists,
optometrists, podiatrists and chiropractors, and teaching hospitals and applicable manufacturers to report annually to
CMS ownership and investment interests held by physicians and their immediate family members by the 90 day of
each calendar year. All such reported information is publicly available; and
th
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may
apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-
governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
healthcare providers; state, local and foreign laws that require drug manufacturers to report information related to
payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and/or
that require registration of certain employees engaged in marketing activities in the location; and state and foreign
laws governing the privacy and security of health information in certain circumstances, many of which differ from
each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and
regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business
practices, including our relationships with physicians and other healthcare providers, some of whom may recommend,
purchase and/or prescribe our drug candidates, may not comply with current or future statutes, regulations or case law
involving applicable fraud and abuse or other healthcare laws and regulations. By way of example, some of our consulting
arrangements with physicians may not meet all of the criteria of the personal services safe harbor under the federal Anti-
Kickback Statute. Accordingly, they may not qualify for safe harbor protection from government prosecution. A business
arrangement that does not substantially comply with a safe harbor, however, is not necessarily illegal under the Anti-
Kickback Statute, but may be subject to additional scrutiny by the government.
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If our operations are found to be in violation of any of these laws or any other governmental regulations that may
apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation,
damages, fines, disgorgement, individual imprisonment, exclusion from participation in government healthcare programs,
such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity
agreement or similar agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring
of our operations, which could have a material adverse effect on our business. If any of the physicians or other healthcare
providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, it may be
subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare
programs, which could also materially affect our business.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval
of and commercialize our drug candidates and affect the prices we may obtain.
In the United States, and some foreign jurisdictions, there have been a number of legislative and regulatory changes
and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our drug candidates,
restrict or regulate post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain
marketing approval.
Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting
changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding
access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been
significantly affected by major legislative initiatives. The Affordable Care Act, which was signed into law in March 2010, is
a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending,
enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
Among the provisions of the Affordable Care Act of importance to our potential drug candidates are the following:
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an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and
biologic agents, apportioned among these entities according to their market share in certain government healthcare
programs;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to
23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;
expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, which
include, among other things, new government investigative powers and enhanced penalties for non-compliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (and 70%
commencing January 1, 2019) point-of-sale discounts off negotiated prices of applicable brand drugs to eligible
beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered
under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid
coverage to additional individuals, thereby potentially increasing manufacturers’ Medicaid rebate liability;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
the new requirements under the federal Open Payments program and its implementing regulations;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative
clinical effectiveness research, along with funding for such research.
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Since its enactment there have been judicial and Congressional challenges to, as well efforts by the Trump
Administration to repeal or replace certain aspects of the Affordable Care Act. As a result, there have been delays in the
implementation of, and action taken to repeal or replace, certain aspects of the Affordable Care Act. For example, since
January 2017, President Trump has signed two executive orders and other directives designed to delay, circumvent, or loosen
certain requirements mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would
repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal
legislation two bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law.
The Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared
responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health
coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, on January 22,
2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation
of certain Affordable Care Act-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-
sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the
medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among
other things, amends the Affordable Care Act, effective January 1, 2019, to close the coverage gap in most Medicare drug
plans, commonly referred to as the “donut hole”. Congress may consider other legislation to repeal or replace elements of
the Affordable Care Act. We continue to evaluate the impact of the Affordable Care Act and efforts to repeal or replace the
Affordable Care Act on our business.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted.
These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year that became effective
on April 1, 2013 and, due to subsequent legislative amendments to the statute, including the BBA, will stay in effect through
2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, which was signed into law
in January 2013, among other things, further reduced Medicare payments to several providers, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years. Any similar new laws
may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on
customers for ESKATA and, if approved, our drug candidates, and, accordingly, our financial operations.
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the
future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any
approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms
may prevent us from being able to generate revenue, attain profitability, or commercialize our drugs.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and
promotional activities for drugs. In addition, there has been heightened governmental scrutiny in the United States of
pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in
several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient
programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump
Administration’s budget proposal for fiscal year 2019 contains further drug price control measures that could be enacted
during the 2019 budget process or in other future legislation, including, for example, measures to permit Medicare Part D
plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under
Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. While any proposed measures will require
authorization through additional legislation to become effective, Congress and the Trump Administration have both stated
that they will continue to seek new legislative and/or administrative measures to control drug costs. At the state level,
legislatures have become increasingly aggressive in passing legislation and implementing regulations designed to control
pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on
certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage
importation from other countries and bulk purchasing We cannot be sure whether additional legislative changes will be
enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on
the marketing approvals of our drug candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the
FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent drug
labeling and post-marketing testing and other requirements.
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If ESKATA is not granted NCE exclusivity from the FDA, our period of marketing exclusivity for ESKATA will
be shorter than previously anticipated, and our business could be harmed.
Under the Food, Drug and Cosmetic Act, or FDCA, as amended by the Hatch-Waxman Act, a drug that is granted
regulatory approval may be eligible for five years of marketing exclusivity in the United States following regulatory approval
if that drug is classified as an NCE. A drug can be classified as an NCE if the FDA has not previously approved any other
drug containing the same active moiety.
The FDA published a determination on the marketing exclusivity of ESKATA in a cumulative supplement to its
Orange Book and determined that ESKATA is eligible for a three-year period of exclusivity for a new product, which would
continue until December 14, 2020, rather than the five-year exclusivity for an NCE. While we believe we are entitled to an
NCE determination for ESKATA, to date the FDA has not agreed with our position. We are in the process of reviewing our
options as it relates to the FDA’s determination. Even if we appeal the FDA’s decision, there can be no assurance that
ESKATA will be granted NCE exclusivity, or that the FDA will make a determination on any such appeal of their exclusivity
decision in a timely manner.
NCE marketing exclusivity, if granted, would preclude approval during the five-year exclusivity period of certain
505(b)(2) applications or abbreviated new drug applications that rely upon the FDA’s findings of safety and efficacy for
ESKATA. However, such an application may be submitted after four years if it contains a certification of patent invalidity or
non-infringement. In this case, we may be afforded the benefit of a 30-month stay against the launch of such a competitive
product that would extend from the end of the five-year exclusivity period, and may also be afforded other extensions under
applicable regulations, including a judicial extension if applicable requirements are met. If we are not able to gain or exploit
the period of marketing exclusivity, we may face significant competitive threats from other manufacturers, including the
manufacturers of generic alternatives. Further, even if ESKATA is considered to be an NCE and we are able to gain five-year
marketing exclusivity, another company could challenge that decision to seek to overturn the FDA’s determination.
ESKATA has been granted three years of new product exclusivity under the Hatch-Waxman Amendments. A three-
year period of exclusivity is granted under the Hatch-Waxman Amendments for a drug product that contains an active moiety
that has been previously approved when the application contains reports of new clinical investigations (other than
bioavailability studies) conducted by the sponsor that were essential to approval of the application. Our clinical trials of
ESKATA were new clinical investigations that were essential to the approval of our NDA. We are entitled to at least three-
year exclusivity even if the FDA determines that the hydrogen peroxide moiety was previously approved because our clinical
investigations were essential for the approval of our new drug product, ESKATA.
Such three-year exclusivity protection precludes the FDA from approving a marketing application for 505(b)(2)
NDA or ANDA for the same conditions of approval as ESKATA for a period of three years from the date of ESKATA’s FDA
approval, i.e., through December 14, 2020 although the FDA may accept and commence review of such applications during
the exclusivity period. This three-year form of exclusivity may also not prevent the FDA from approving an NDA that relies
only on its own data to support the change or innovation. Any loss of exclusive marketing rights to ESKATA through
introduction of generic or competing products would harm our financial position.
Governments outside the United States tend to impose strict price controls, which may adversely affect our
revenue, if any.
In some countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a drug. To obtain coverage and reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other
available procedures. If reimbursement of our drugs is unavailable or limited in scope or amount, or if pricing is set at
unsatisfactory levels, our business could be harmed, possibly materially.
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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 harm our business.
We are subject to numerous environmental, health and safety laws and regulations, including 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 for
failure to comply with such laws and regulations.
Although we maintain workers’ compensation insurance 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, hazardous or radioactive 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 development or production efforts.
Our failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
The inherent dangers in production and transportation of hydrogen peroxide could cause disruptions and could
expose us to potentially significant losses, costs or liabilities.
Our operations are subject to significant hazards and risks inherent in the use and transport of hydrogen peroxide,
the active ingredient of ESKATA and A-101 45% Topical Solution. Hydrogen peroxide can decompose in the presence of
organic materials and is categorized as an oxidizer and is corrosive. Hydrogen peroxide should be stored in cool, dry, well-
ventilated areas and away from any flammable or combustible substances. The hazards and risks associated with producing
and transporting hydrogen peroxide include fires, explosions, third-party interference (including terrorism) and mechanical
failure of equipment at our facilities or those of our supplier of hydrogen peroxide. The occurrence of any of these events
could result in production and distribution difficulties and disruptions, personal injury or wrongful death claims and other
damage to properties.
We are subject to governmental economic sanctions and export and import controls that could impair our ability
to compete in international markets or subject us to liability if we are not in compliance with applicable laws.
As a U.S. company, we are subject to U.S. import and export controls and economic sanctions laws and regulations,
and we are required to import and export our product and drug candidates, technology and services in compliance with those
laws and regulations, including the U.S. Export Administration Regulations, the International Traffic in Arms Regulations,
and economic embargo and trade sanction programs administered by the Treasury Department’s Office of Foreign Assets
Control.
U.S. economic sanctions and export control laws and regulations prohibit the shipment of certain products and
services to countries, governments and persons targeted by U.S. sanctions. While we are currently taking precautions to
prevent doing any business, directly or indirectly, with countries, governments and persons targeted by U.S. sanctions and to
ensure that our drug candidates, are not exported or used by countries, governments and persons targeted by U.S. sanctions,
such measures may be circumvented.
Furthermore, if we export our drug candidates, the exports may require authorizations, including a license, a license
exception or other appropriate government authorization. Complying with export control and sanctions regulations for a
particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to comply with
export control and sanctions regulations for a particular sale may expose us to government investigations and penalties.
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If we are found to be in violation of U.S. sanctions or import or export control laws, it could result in civil and
criminal, monetary and non-monetary penalties, including possible incarceration for those individuals responsible for the
violations, the loss of export or import privileges and reputational harm.
We are subject to anti-corruption and anti-money laundering laws with respect to our operations and non-
compliance with such laws can subject us to criminal and/or civil liability and harm our business.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. domestic
bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act and possibly other anti-bribery and
anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and
prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or
indirectly, improper payments or benefits to recipients in the public or private sector. As we commercialize our drug
candidates and eventually commence international sales and business, we may engage with collaborators and third-party
intermediaries to sell our products abroad and to obtain necessary permits, licenses and other regulatory approvals. We or our
third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or
state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party
intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such
activities.
Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints,
investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines,
damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain
persons, the loss of export privileges, reputational harm, adverse media coverage and other collateral consequences.
Responding to any action will likely result in a materially significant diversion of management’s attention and resources and
significant defense costs and other professional fees.
Risks Related to Employee Matters and Managing Our Growth
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified
personnel.
We are highly dependent on the management, development, clinical, financial, legal and business development
expertise of Dr. Neal Walker, our Chief Executive Officer, Christopher Powala, our Chief Regulatory and Development
Officer, Dr. Stuart Shanler, our Chief Scientific Officer, Frank Ruffo, our Chief Financial Officer, Brett Fair, our Chief
Commercial Officer, and Kamil Ali-Jackson, our Chief Legal Officer, as well as the other members of our scientific and
clinical teams. Although we have entered into employment agreements with our executive officers, each of them may
currently terminate their employment with us at any time. We do not maintain “key person” insurance for any of our
executives or employees other than Dr. Walker and Mr. Powala.
Recruiting and retaining qualified scientific and clinical personnel and, if we progress the development of our drug
pipeline toward scaling up for commercialization, manufacturing and sales and marketing personnel, will also be critical to
our success. The loss of the services of our executive officers or other key employees could impede the achievement of our
development and commercialization objectives and seriously harm our ability to successfully implement our business
strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of
time because of the limited number of individuals in our industry with the breadth of skills and experience required to
successfully develop, gain marketing approval of and commercialize drugs. Competition to hire from this limited pool is
intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition
among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the
hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and
advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization
strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under
consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to
attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.
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We expect to expand our development and regulatory capabilities and implement sales, marketing and
distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our
operations.
As of December 31, 2017, we had 96 full-time and part-time employees. As our development progresses, we expect
to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of
drug development, regulatory affairs, sales, marketing and distribution. To manage our anticipated future growth, we must
continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to
recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our
management team in managing a company with such anticipated growth, we may not be able to effectively manage the
expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to
significant costs and may divert our management and business development resources. Any inability to manage growth could
delay the execution of our business plans or disrupt our operations.
Our employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs
and vendors may engage in misconduct or other improper activities, including non-compliance with regulatory standards
and requirements.
We are exposed to the risk that our employees, independent contractors, consultants, commercial collaborators,
principal investigators, CROs and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these
parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates
FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA,
manufacturing standards, federal and state healthcare laws and regulations, and laws that require the true, complete and
accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive
practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion,
sales commission, customer incentive programs and other business arrangements. Misconduct by these parties could also
involve the improper use of individually identifiable information, including, without limitation, information obtained in the
course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a
code of business conduct and ethics, but it is not always possible to identify and deter misconduct, and the precautions we
take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with
such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business, including the imposition of significant
civil, criminal and administrative penalties, including, without limitation, damages, fines, disgorgement, imprisonment,
exclusion from participation in government healthcare programs, such as Medicare and Medicaid, additional reporting
obligations and oversight if we are subject to a corporate integrity agreement or other agreement to resolve allegations of
non-compliance with these laws, and the curtailment or restructuring of our operations.
We may not realize the anticipated benefits of our acquisition of Confluence.
In August 2017, we acquired Confluence Life Sciences, Inc., or Confluence, including several preclinical drug
candidates and Confluence’s contract research services business. Acquisitions are inherently risky, and we may not realize
the anticipated benefits of the acquisition of Confluence. Specifically, we are subject to the risks that:
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we fail to successfully develop or integrate Confluence’s preclinical drug candidates into our pipeline in order to
achieve our strategic objectives;
we are unable to adequately integrate or continue operating Confluence’s contract research services business;
we receive inadequate or unfavorable data from preclinical studies or clinical trials evaluating the acquired
preclinical drug candidates; and
our due diligence processes in connection with the acquisition failed to identify significant problems, liabilities or
other shortcomings or challenges of Confluence, including problems, liabilities or other shortcomings or challenges
with respect to intellectual property, product quality and safety and other known and unknown liabilities.
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If we are unable to successfully integrate Confluence’s business and employees, it could have an adverse effect
on our future results and the market price of our common stock.
The success of our acquisition of Confluence will depend, in large part, on our ability to realize operating synergies
from combining our business with Confluence’s business. To realize these anticipated benefits, we must successfully
integrate Confluence’s business and employees. This integration will be complex and time-consuming.
The failure to successfully integrate and manage the challenges presented by the integration process may result in
our failure to achieve some or all of the anticipated benefits of the merger. Potential difficulties that may be encountered in
the integration process include the following:
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complexities associated with managing the larger combined company with distant business locations;
integrating personnel from the two companies;
current and prospective employees may experience uncertainty regarding their future roles with our company, which
might adversely affect our ability to retain, recruit and motivate key personnel;
lost revenue and customers as a result of customers of Confluence’s contract research services business deciding not
to do business with the combined company;
potential unknown liabilities and unforeseen expenses associated with the merger; and
performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused
by completing the merger and integrating the companies’ operations.
If any of these events were to occur, the ability of the combined company to maintain relationships with customers,
suppliers and employees or our ability to achieve the anticipated benefits of the merger could be adversely affected, or could
reduce our future earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect
the market price of our common stock.
Charges to earnings resulting from the acquisition of Confluence may cause our operating results to suffer.
Under accounting principles, we will allocate the total purchase price of the merger to Confluence’s net tangible
assets and intangible assets based on their fair values as of the date of the merger, and we will record the excess of the
purchase price over those fair values as goodwill. Our management’s estimates of fair value will be based upon assumptions
that they believe to be reasonable but that are inherently uncertain. The following factors, among others, could result in
material charges that would cause our financial results to be negatively impacted:
·
·
·
impairment of goodwill;
charges for the amortization of identifiable intangible assets and for stock-based compensation; and
accrual of newly identified pre-merger contingent liabilities that are identified subsequent to the finalization of the
purchase price allocation.
Additional costs may include costs of employee redeployment, relocation and retention, including salary increases
or bonuses, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to
be accounted for as expenses that would negatively impact our results of operations.
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock may not continue to develop or be sustained.
Prior to our initial public offering in October 2015, there was no public market for our common stock. Although our
common stock is listed on The Nasdaq Global Select Market, we cannot assure you that an active trading market for our
shares will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is
not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the
shares or to sell the shares at all.
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The trading price of the shares of our common stock has been and is likely to continue to be volatile.
Since our initial public offering, our stock price has been and is likely to continue to be volatile. The stock market in
general and the market for biotechnology companies in particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell
their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by
many factors, including:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
the commencement, enrollment or results of any clinical trials we may conduct, or changes in the development
status of our drug candidates;
any delay in our regulatory filings for any of our drug candidates and any adverse development or perceived adverse
development with respect to the applicable regulatory authority’s review of such filings, including without limitation
the FDA’s issuance of a “refusal to file” letter or a request for additional information;
adverse results from, delays in or termination of clinical trials;
adverse regulatory decisions, including failure to receive marketing approval of our drug candidates;
unanticipated serious safety concerns related to the use of ESKATA or any other drug candidate;
changes in financial estimates by us or by any securities analysts who might cover our stock;
conditions or trends in our industry;
changes in the market valuations of similar companies;
stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the
biotechnology industry;
publication of research reports about us or our industry or positive or negative recommendations or withdrawal of
research coverage by securities analysts;
announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
investors’ general perception of our company and our business;
recruitment or departure of key personnel;
overall performance of the equity markets;
trading volume of our common stock;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to
obtain patent protection for our technologies;
significant lawsuits, including patent or stockholder litigation;
general political and economic conditions; and
other events or factors, many of which are beyond our control.
In addition, in the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology
companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against
us, could cause us to incur substantial costs and divert management’s attention and resources from our business.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about
us, our business or our market, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that equity research analysts
publish about us or our business, our market and our competitors. Equity research analysts may elect not to initiate or
continue to provide research coverage of our common stock, and such lack of research coverage may adversely affect the
market price of our common stock. Even if we have equity research analyst coverage, we will not have any control over the
analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity
research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research
analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease,
which in turn could cause our stock price or trading volume to decline.
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The issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive
plan or otherwise will dilute all other stockholders.
Our certificate of incorporation authorizes us to issue up to 100,000,000 shares of common stock and up to
10,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors.
Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities
convertible into our common stock from time to time in connection with a financing, acquisition, investment, our equity
incentive plan or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the
trading price of our common stock to decline.
Sales of a substantial number of shares of our common stock into the market could cause the market price of our
common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our
stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the
public market, the market price of our common stock could decline significantly.
In addition, we have filed registration statements on Form S-8 under the Securities Act registering the issuance of
shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity
incentive plans. Shares registered under these registration statements are available for sale in the public market subject to
vesting arrangements and exercise of options, and the restrictions of Rule 144 under the Securities Act in the case of our
affiliates.
Additionally, certain holders of shares of our common stock, or their transferees, have rights, subject to some
conditions, to require us to file one or more registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders. If we were to register the resale of these shares,
they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in
the public market, the trading price of our common stock could decline.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our
stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of
our common stock may be lower as a result.
There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to
acquire, or attempt to acquire, control of our company, even if a change of control was considered favorable by some or all of
our stockholders. For example, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock.
The board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any
further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change of control
transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be
adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.
Our charter documents also contain other provisions that could have an anti-takeover effect, including:
·
·
·
·
·
only one of our three classes of directors is elected each year;
stockholders are not entitled to remove directors other than by a 66 % vote and only for cause;
stockholders are not permitted to take actions by written consent;
stockholders cannot call a special meeting of stockholders; and
stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder
meetings.
2/3
In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business
combinations with particular stockholders of those companies. These provisions could discourage potential acquisition
proposals and could delay or prevent a change of control transaction. They could also have the effect of discouraging others
from making tender offers for our common stock, including transactions that may be in your best interests. These provisions
may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
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Concentration of ownership of our common stock among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their
respective affiliates beneficially own a substantial portion of our common stock. As a result, these persons, acting together,
would be able to significantly influence all matters requiring stockholder approval, including the election and removal of
directors, any merger, consolidation, sale of all or substantially all of our assets, or other significant corporate transactions.
The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.
We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements
applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS
Act, and we intend to take advantage of some of the exemptions from reporting requirements that are applicable to other
public companies that are not emerging growth companies, including:
·
·
·
·
·
being permitted to provide only two years of audited financial statements, in addition to any required unaudited
interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” disclosure in this report;
not being required to comply with the auditor attestation requirements in the assessment of our internal control over
financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and
registration statements; and
not being required to hold a nonbinding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved.
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. We will remain an emerging growth company until the earlier of (1) December 31, 2020, (2)
the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the
fiscal year in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is
held by non-affiliates exceeds $700 million as of the prior June 30th and (4) any date on which we have issued more than
$1.0 billion in non-convertible debt during the prior three-year period.
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of
this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements
on a timely basis could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and
regulations of the stock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures and internal control over financial reporting, and perform
system and process evaluation and testing of our internal control over financial reporting to allow management to report on
the effectiveness of our internal control over financial reporting. This requires that we incur substantial additional
professional fees and internal costs to expand our accounting and finance functions and that we expend significant
management efforts.
We may identify weaknesses in our system of internal financial and accounting controls and procedures that could
result in a material misstatement of our consolidated financial statements. Our internal control over financial reporting will
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not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud will be detected.
If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and
accurate financial statements, and we may conclude that our internal control over financial reporting is not effective. If that
were to happen, the market price of our stock could decline, and we could be subject to sanctions or investigations by the
stock exchange on which our common stock is listed, the SEC, or other regulatory authorities.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and
development tax credit carryforwards.
As of December 31, 2017, we had federal and state net operating loss carryforwards of $77.2 million and $119.3
million, respectively, which begin to expire in 2032. As of December 31, 2017, we also had federal research and
development tax credit carryforwards of $2.2 million which begin to expire in 2032, and state research and development tax
credit carryforwards of $0.1 million which begin to expire in 2022. These net operating loss and tax credit carryforwards
could expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal
Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership
change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period,
the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its
post-change income may be limited. We have completed an analysis under Section 382 for net operating loss carryforwards
generated from July 13, 2012 through December 31, 2016. Although we have experienced Section 382 ownership changes
since 2012, we have concluded that we should have sufficient ability to utilize net operating loss carryforwards accumulated
during the periods tested. We have not yet determined if a Section 382 ownership change has occurred during the year ended
December 31, 2017, or for Confluence prior to the acquisition. In addition, we may experience ownership changes in the
future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If we determine
that an ownership change has occurred and our ability to use our historical net operating loss and tax credit carryforwards is
materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law which significantly revised the Internal
Revenue Code of 1986, as amended. The newly enacted federal income tax law, among other things, contains significant
changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of
21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses),
limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating
loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination
of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and
credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is
uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various states
will respond to the newly enacted federal tax law. The impact of this tax reform on holders of our common stock is also
uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this
legislation and the potential tax consequences of investing in or holding our common stock.
We have broad discretion in the use of proceeds from our equity financing transactions and may invest or spend
the proceeds in ways with which you do not agree and in ways that may not increase the value of your investment.
We have broad discretion over the use of proceeds from our equity financing transactions over the last several years.
You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment. We expect to
use the net proceeds from those transactions to fund our research and development expenses and for working capital and
general corporate purposes. Our failure to apply the net proceeds effectively could compromise our ability to pursue our
strategy and we might not be able to yield a significant return, if any, on our investment of these net proceeds. Stockholders
will not have the opportunity to influence our decisions on how to use these net proceeds.
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We do not anticipate paying any cash dividends on our common stock in the foreseeable future and our stock
may not appreciate in value.
We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future
earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt
agreements may preclude us from paying dividends. There is no guarantee that shares of our common stock will appreciate in
value or that the price at which our stockholders have purchased their shares will be able to be maintained.
We will incur increased costs and demands upon management as a result of being a public company.
As a public company listed in the United States, we have begun, and will continue, particularly after we cease to be
an “emerging growth company,” to incur significant additional legal, accounting and other costs. These additional costs could
negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance
and public disclosure, including regulations implemented by the SEC and The Nasdaq Stock Market, may increase legal and
financial compliance costs and make some activities more time-consuming. These laws, regulations and standards are subject
to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and
this investment may result in increased general and administrative expenses and a diversion of management’s time and
attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws,
regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business
may be harmed.
Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance,
including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of
directors or as members of senior management.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of
Delaware is the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our
stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware
is the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for
breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action
asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated
certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal
affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it
finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against
us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision
contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may
incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business
and financial condition.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
We currently sublease 33,019 square feet of space for our headquarters in Wayne, Pennsylvania. Subject to the
consent of Chesterbrook Partners, LP, the Landlord, as set forth in the lease by and between them and Auxilium
Pharmaceuticals, LLC, the Sublandlord, the term of our sublease has a term through October 2023. If for any reason the
lease between the Landlord and Sublandlord is terminated or expires prior to October 2023, our sublease will automatically
terminate. We also lease an additional 2,534 square feet of space in Malvern, Pennsylvania with a term through November
2019, and we occupy 3,689 square feet of office and laboratory space in St. Louis, Missouri under the terms of an agreement
which expires in December 2018. We believe that our facilities are suitable and adequate to meet our current needs.
Item 3. Legal Proceedings
We are not subject to any material legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information for Common Stock
Our common stock commenced trading on the Nasdaq Global Select Market under the symbol “ACRS” in October
2015. Prior to our initial public offering, there was no public market for our common stock. The following table sets forth for
the periods indicated the high and low sales prices of our common stock as reported on the Nasdaq Global Select Market.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
33.25 $
33.10
30.08
28.62
27.94 $
23.58
25.76
31.80
24.83
22.75
22.31
21.32
14.12
16.86
17.90
20.15
On March 9, 2018, the last reported bid price for our common stock was $21.28 per share.
Dividend Policy
We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our
future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in
the foreseeable future.
Stockholders
As of March 9, 2018, we had 30,901,492 shares of common stock outstanding held by 70 holders of record. The
actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial
owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does
not include stockholders whose shares may be held in trust by other entities.
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Performance Graph
The following graph compares the performance of our common stock since October 7, 2015, the date on which our
common stock commenced trading on the Nasdaq Global Select Market, with the performance of the Nasdaq Composite
Index (U.S.) and the Nasdaq Biotechnology Index. The comparison assumes a $100 investment on October 7, 2015 in our
common stock, the stocks comprising the Nasdaq Composite Index, and the stocks comprising the Nasdaq Biotechnology
Index, and assumes reinvestment of the full amount of all dividends, if any. Historical stockholder return is not necessarily
indicative of the performance to be expected for any future periods.
Comparison of Cumulative Total Return
Among Aclaris Therapeutics, Inc., the Nasdaq Composite Index and the Nasdaq Biotechnology Index
The performance graph shall not be deemed to be incorporated by reference by means of any general statement
incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended or the Exchange Act,
except to the extent that we specifically incorporate such information by reference, and shall not otherwise be deemed filed
under such acts.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Parties
None.
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Item 6. Selected Consolidated Financial Data
The following selected consolidated statement of operations data for the years ended December 31, 2017, 2016 and
2015, and consolidated balance sheet data as of December 31, 2017 and 2016 is derived from our audited consolidated
financial statements included within this Annual Report. The consolidated balance sheet data as of December 31, 2015, 2014
and 2013, and the consolidated statement of operations data for the year ended December 31, 2014 and 2013 have been
derived from our audited consolidated financial statements which are not included herein. Our historical results are not
necessarily indicative of the results to be expected in the future. The selected financial data should be read together with Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the
consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report.
Consolidated Statement of Operations
Data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Provision for (benefit from) income taxes
Net loss
Accretion of convertible preferred stock
Net loss attributable to common
stockholders
Net loss per share attributable to common
stockholders, basic and diluted
Weighted average common shares
outstanding, basic and diluted
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities
Working capital
Total assets
Convertible preferred stock
Total stockholders’ equity (deficit)
(a)
2017
2016
Year Ended December 31,
2015
(in thousands)
2014
2013
$
$
$
$
1,683
1,207
476
— $
—
—
— $
—
—
— $
—
—
39,790
33,109
72,899
(72,423)
2,070
(1,830)
(68,523)
-
(68,523)
(2.44)
33,476
15,091
48,567
(48,567)
488
—
(48,079)
-
15,339
5,328
20,667
(20,667)
104
—
(20,563)
(2,566)
6,507
2,026
8,533
(8,533)
16
—
(8,517)
(2,054)
$
$
(48,079)
$ (23,129)
$ (10,571)
(2.25)
$
(3.79)
$
(6.15)
$
$
—
—
—
3,488
1,769
5,257
(5,257)
21
—
(5,236)
(1,740)
(6,976)
(6.45)
28,102,386
21,415,733
6,107,042
1,720,082
1,081,347
2017
2016
As of December 31,
2015
(in thousands)
2014
2013
$ 208,854
187,459
243,509
$ 174,134
132,333
176,085
-
-
$ 92,038
84,969
94,076
-
225,262
169,490
92,521
$
16,648
14,883
17,377
36,677
(20,755)
$ 14,126
13,019
14,207
23,000
(9,163)
(a) Working capital is defined as current assets minus current liabilities
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in
conjunction with the consolidated financial statements and the related notes to those statements included later in this Annual
Report. In addition to historical financial information, the following discussion contains forward‑looking statements that
reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of
events could differ materially from those discussed in these forward‑looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in “Item 1A.
Risk Factors” and “Special Note Regarding Forward‑Looking Statements.”
Overview
We are a dermatologist-led biopharmaceutical company focused on identifying, developing and commercializing
innovative and differentiated therapies to address significant unmet needs in medical and aesthetic dermatology. Our lead
product ESKATA (hydrogen peroxide) topical solution, 40% (w/w), or ESKATA, is a proprietary formulation of high-
concentration hydrogen peroxide topical solution that has been approved by the U.S. Food and Drug Administration, or FDA,
as a prescription treatment for raised seborrheic keratosis, or SK, a common non-malignant skin tumor. The FDA approved
our New Drug Application, or NDA, for ESKATA for the treatment of raised SKs in December 2017. We also submitted a
Marketing Authorization Application, or MAA, for ESKATA in the European Union in July 2017. We are also developing
another high-concentration formulation of hydrogen peroxide, A-101 45% Topical Solution, as a prescription treatment for
common warts, also known as verruca vulgaris. Additionally, in 2015, we in-licensed exclusive, worldwide rights to certain
inhibitors of the Janus kinase, or JAK, family of enzymes, for specified dermatological conditions, including alopecia areata,
or AA, vitiligo and androgenetic alopecia, or AGA, also known as male or female pattern baldness. In 2016, we acquired
additional intellectual property rights for the development and commercialization of certain JAK inhibitors for specified
dermatological conditions. We intend to continue to in-license or acquire additional drug candidates and technologies to
build a fully integrated dermatology company.
In August 2017, we acquired Confluence Life Sciences, Inc. or Confluence. The acquisition of Confluence adds
small molecule drug discovery and preclinical development capabilities which has allowed us to bring early-stage research
and development activities in-house that we previously outsourced to third parties. Through the acquisition of Confluence,
we also acquired several preclinical product candidates, including inhibitors of the MK-2 signaling pathway, additional JAK
inhibitors known as “soft” JAK inhibitors, and inhibitors of interleukin-2-inducible T cell kinase, or ITK.
Since our inception in July 2012, we have devoted substantially all of our resources to organizing and staffing our
company, business planning, raising capital, developing ESKATA for the treatment of raised SKs, building our intellectual
property portfolio, developing our supply chain and engaging in other discovery and clinical activities in dermatology. We
have financed our operations with sales of our convertible preferred stock, as well as net proceeds from our initial public
offering, or IPO, in October 2015, a private placement of our common stock in June 2016, public offerings of our common
stock in November 2016 and August 2017, and an at-the-market facility with Cowen and Company LLC, or Cowen, that we
entered into in November 2016.
Since our inception, we have incurred significant operating losses. Our net loss was $68.5 million for the year ended
December 31, 2017 and $48.1 million for the year ended December 31, 2016. As of December 31, 2017, we had an
accumulated deficit of $159.4 million. We expect to incur significant expenses and operating losses related to product
manufacturing, marketing, sales and distribution over the next several years as we begin to commercialize ESKATA. In
addition, ESKATA and our other drug candidates, if approved, may not achieve commercial success. Though ESKATA has
been approved by the FDA, we do not expect to generate substantial revenue from sales of ESKATA in the near term, if at
all. We also expect to incur significant expenses and operating losses for the foreseeable future as we advance our other drug
candidates from discovery through preclinical development and clinical trials. In addition, if we obtain marketing approval
for any of our other drug candidates, we expect to incur significant commercialization expenses related to product
manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-license or
acquisition of additional drug candidates. Furthermore, we have incurred and expect to continue to incur significant costs
associated with operating as a public company, including legal, accounting, investor relations and other expenses. As a
result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until
such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the
sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other
strategic transactions. We may be unable to raise additional funds or enter into such other agreements
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or arrangements when needed on commercially acceptable terms, or at all. If we fail to raise capital or enter into such
agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and
commercialization of one or more of our drug candidates or delay our pursuit of potential in-licenses or acquisitions.
License Agreement with Rigel
In August 2015, we entered into an exclusive, worldwide license and collaboration agreement with Rigel
Pharmaceuticals, Inc., or Rigel, for the development and commercialization of products containing two specified JAK
inhibitors. Under this agreement, we intend to develop these JAK inhibitors for the treatment of alopecia areata, or AA, and
potentially for other dermatological conditions. We paid Rigel an upfront nonrefundable payment of $8.0 million in
September 2015. In addition, we have agreed to make aggregate payments of up to $80.0 million upon the achievement of
specified pre-commercialization milestones, such as clinical trials and regulatory approvals. Further, we have agreed to pay
up to an additional $10.0 million to Rigel upon the achievement of a second set of development milestones. With respect to
any products we commercialize under the agreement, we will pay Rigel quarterly tiered royalties on our annual net sales of
each product at a high single digit percentage of annual net sales, subject to specified reductions until the date that all of the
patent rights for that product have expired, as determined on a country-by-country and product-by-product basis or, in
specified countries under specified circumstances, 10 years from the first commercial sale of such product.
The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party
for a material breach. We may also terminate the agreement without cause at any time upon advance written notice to Rigel.
Rigel, after consultation with us, will be responsible for maintaining and prosecuting the patent rights, and we will have final
decision-making authority regarding such patent rights for a product in the United States and the European Union. To the
extent that we jointly develop intellectual property, we will confer and decide which party will be responsible for filing,
prosecuting and maintaining those patent rights. The agreement also establishes a joint steering committee composed of an
equal number of representatives for each party, which will monitor progress in the development of products.
We accounted for the license and collaboration agreement with Rigel as an asset acquisition since the arrangement
did not meet the definition of a business pursuant to the guidance prescribed in Accounting Standards Codification Topic
805, Business Combinations. Accordingly, we recorded the $8.0 million upfront payment as research and development
expense in the year ended December 31, 2015. We will record contingent milestone payments and royalties as research and
development expense or cost of revenues, respectively, in the period in which such liabilities are incurred.
We concluded the licensing arrangement with Rigel did not meet the definition of a business because the transaction
principally resulted in its acquisition of intellectual property. As part of the transaction, we did not acquire employees,
tangible assets, processes, protocols or operating systems. In addition, at the time of the acquisition, there were no activities
being conducted related to the licensed patents. We expensed the acquired intellectual property asset upon acquisition
because we will use it in our research and development activities and believe it has no alternative future uses.
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Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia University
In March 2016, we entered into a stock purchase agreement with Vixen Pharmaceuticals, Inc., or Vixen, and JAK1,
LLC, JAK2, LLC and JAK3, LLC, all together with Vixen, the Selling Stockholders, and Shareholder Representative
Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Selling
Stockholders. Pursuant to the Vixen Agreement, we acquired all shares of Vixen’s capital stock from the Selling
Stockholders, or the Vixen Acquisition. Following the Vixen Acquisition, Vixen became a wholly-owned subsidiary of us.
Pursuant to the Vixen Agreement, we paid $0.6 million upfront and issued an aggregate of 159,420 shares of our common
stock to the Selling Stockholders. We are obligated to make annual payments of $0.1 million on March 24 of each year,
through March 2022, with such amounts being creditable against specified future payments that may be paid under the Vixen
Agreement.
th
We are obligated to make aggregate payments of up to $18.0 million to the Selling Stockholders upon the
achievement of specified pre-commercialization milestones for three products in the United States, the European Union and
Japan, and aggregate payments of up to $22.5 million upon the achievement of specified commercial milestones. With
respect to any commercialized products covered by the Vixen Agreement, we are obligated to pay low single-digit royalties
on net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for
that product have expired, as determined on a country-by-country and product-by-product basis or, in specified
circumstances, ten years from the first commercial sale of such product. If we sublicense any of Vixen’s patent rights and
know-how acquired pursuant to the Vixen Agreement, we will be obligated to pay a portion of any consideration we receive
from such sublicenses in specified circumstances.
As a result of the transaction with Vixen, we became party to the Exclusive License Agreement, by and between
Vixen and the Trustees of Columbia University in the City of New York, or Columbia, dated as of December 31, 2015, or the
License Agreement. Under the License Agreement, we are obligated to pay Columbia an annual license fee of $10,000
subject to specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be
paid under the License Agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of
specified commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or
know-how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights
and/or know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired
pursuant to the License Agreement, we will be obligated to pay Columbia a portion of any consideration received from such
sublicenses in specified circumstances. The royalties, as determined on a country-by-country and product-by-product basis,
are payable until the date that all of the patent rights for that product have expired, the expiration of any market exclusivity
period granted by a regulatory body or, in specified circumstances, ten years from the first commercial sale of such
product. The License Agreement terminates on the date of expiration of all royalty obligations thereunder unless earlier
terminated by either party for a material breach, subject to a specified cure period. We may also terminate the License
Agreement without cause at any time upon advance written notice to Columbia.
We accounted for the transaction with Vixen as an asset acquisition as the arrangement did not meet the definition of
a business pursuant to the guidance prescribed in Accounting Standards Codification Topic 805, Business Combinations. We
concluded the transaction with Vixen did not meet the definition of a business because the transaction principally resulted in
the acquisition of the License Agreement. We did not acquire tangible assets, processes, protocols or operating systems. In
addition, at the time of the transaction, there were no activities being conducted related to the licensed patents. We expensed
the acquired intellectual property as of the acquisition date on the basis that the cost of intangible assets purchased from
others for use in research and development activities, and that have no alternative future uses, are expensed at the time the
costs are incurred. Accordingly, we recorded the $0.6 million upfront payment, the fair value of the shares of common stock
issued of $2.4 million, and the present value of the six non-contingent annual payments as research and development expense
in the year ended December 31, 2016. Additionally, we will record as expense any contingent milestone payments or
royalties in the period in which such liabilities are incurred.
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Agreement and Plan of Merger with Confluence
In August 2017, we entered into an Agreement and Plan of Merger with Confluence, Aclaris Life Sciences, Inc., our
wholly-owned subsidiary, or Merger Sub, and Fortis Advisors LLC, as representative of the holders of Confluence equity, or
the Agreement and Plan of Merger. Pursuant to the terms of the Agreement and Plan of Merger, the Merger Sub merged with
and into Confluence, with Confluence surviving as our wholly-owned subsidiary. Pursuant to the terms of the Agreement
and Plan of Merger, we paid $10.3 million in cash and issued 349,527 shares of our common stock with a value of $9.7
million.
We also agreed to pay the Confluence equity holders aggregate contingent consideration of up to $80.0 million,
based upon the achievement of certain development, regulatory and commercial milestones set forth in the Agreement and
Plan of Merger. Of the contingent consideration, $2.5 million may be paid in shares of our common stock upon the
achievement of a specified development milestone. In addition, we have agreed to pay the Confluence equity holders
specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified
reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as
determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first
commercial sale of such product. In addition, if we sell, license or transfer any of the intellectual property acquired from
Confluence pursuant to the Agreement and Plan of Merger to a third party, we will be obligated to pay the Confluence equity
holders a portion of any incremental consideration (in excess of the development and milestone payments described above)
that we receive from such sale, license or transfer in specified circumstances.
Other Third-Party Agreements
Under an assignment agreement, pursuant to which we acquired intellectual property, we have agreed to pay
royalties on sales of ESKATA, or other related products, at rates ranging in low single-digit percentages of net sales, as
defined in the agreement. Under this assignment agreement, we have paid aggregate milestone payments of $0.2 million and
there are no remaining milestone payment obligations.
In connection with the assignment agreement, we also entered into a finder’s services agreement under which we
have paid aggregate milestone payments of $1.5 million upon the achievement of specified pre-commercialization
milestones, such as clinical trials and regulatory approvals, as described in the agreement. We have also agreed to make
aggregate payments of up to $4.5 million upon the achievement of specified commercial milestones. In addition, we have
agreed to pay royalties on sales of ESKATA, or other related products, at a low single-digit percentage of net sales, as defined
in the agreement.
Components of Our Results of Operations
Revenue
We earn revenue from the provision of laboratory services to clients through Confluence, our wholly-owned
subsidiary. Laboratory service revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-
price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related to
these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the
contracts.
We also receive revenue from grants under the Small Business Innovation Research program of the National
Institutes of Health, or NIH. Through our Confluence subsidiary, we currently have two active grants from NIH which are
related to early-stage research. We recognize revenue related to these grants as amounts become reimbursable under each
grant, which is generally when research is performed, and the related costs are incurred.
Our contract research segment has earned all of our revenue to date. We have never received revenue in our
dermatology therapeutics segment.
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Cost of Revenue
Cost of revenue consists of costs incurred in connection with the provision of laboratory services to our clients
through Confluence. Cost of revenue primarily includes:
·
·
·
·
·
employee-related expenses, which include salaries, benefits and stock-based compensation;
outsourced professional scientific services;
depreciation of laboratory equipment;
facility-related costs; and
laboratory materials and supplies used to support the services provided.
Research and Development Expenses
Research and development expenses consist of expenses incurred in connection with the discovery and development
of our drug candidates. We expense research and development costs as incurred. These expenses include:
·
expenses incurred under agreements with contract research organizations, or CROs, as well as investigative
sites and consultants that conduct our clinical trials and preclinical studies;
· manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial
materials and commercial materials, including manufacturing validation batches;
outsourced professional scientific development services;
employee-related expenses, which include salaries, benefits and stock-based compensation;
depreciation of manufacturing equipment;
payments made under agreements with third parties under which we have acquired or licensed intellectual
property;
expenses relating to regulatory activities, including filing fees paid to regulatory agencies; and
laboratory materials and supplies used to support our research activities.
·
·
·
·
·
·
We expense research and development costs as incurred. Our direct research and development expenses primarily
consist of external costs including fees paid to CROs, consultants, investigator sites, regulatory agencies and third parties that
manufacture our preclinical and clinical trial materials, and are tracked on a program-by-program basis. We do not allocate
personnel costs, facilities or other indirect expenses, which are included within “Personnel and other costs” in the table
below, to specific research and development programs.
The following table summarizes our research and development expenses for the periods presented:
ESKATA and A-101 45% Topical Solution
JAK inhibitors
Vixen acquisition
Rigel up-front payment
Other research expenses
Total project-related expenses
Personnel and other costs
Stock-based compensation
Total research and development expenses
Year Ended
December 31,
2016
2017
$
10,712 $
11,789
—
—
1,253
23,754
10,565
5,471
15,357 $
7,314
3,435
—
190
26,296
4,889
2,291
$
39,790 $
33,476 $
2015
4,578
29
—
8,253
201
13,061
2,021
257
15,339
Research and development activities are central to our business model. Drug candidates in later stages of clinical
development generally have higher development costs than those in earlier stages of clinical development, primarily due to
the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase
significantly over the next several years as we increase personnel costs, including stock-based compensation, continue to
conduct clinical trials of A-101 45% Topical Solution for the treatment of common warts, and conduct preclinical and clinical
development activities and prepare regulatory filings for our other drug candidates.
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The successful development of our drug candidates is highly uncertain. At this time, we cannot reasonably estimate
or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or
when, if ever, material net cash inflows may commence from any of our drug candidates. This uncertainty is due to the
numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life
of a project as a result of many factors, including:
·
·
·
·
·
·
the number of clinical sites included in the trials;
the length of time required to enroll suitable patients;
the number of patients that ultimately participate in the trials;
the number of doses patients receive;
the duration of patient follow-up; and
the results of our clinical trials.
Our expenditures are subject to additional uncertainties, including the terms and timing of marketing approvals, and
the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may
never succeed in achieving marketing approval for any of our drug candidates. We may obtain unexpected results from our
clinical trials. We may elect to discontinue, delay or modify clinical trials of some drug candidates or focus on others. A
change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant
change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or other
regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we
experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional
financial resources and time on the completion of clinical development. Drug commercialization will take several years and
millions of dollars in development costs.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive,
administrative, finance and legal functions, including stock-based compensation, travel expenses and recruiting expenses.
Other general and administrative expenses include facility-related costs, patent filing and prosecution costs, professional fees
for marketing, legal, auditing and tax services, insurance costs, as well as payments made under our related party services
agreement and milestone payments under our finder’s services agreement.
We anticipate that our general and administrative expenses will increase as a result of increased personnel costs,
including stock-based compensation, expanded infrastructure and higher consulting, legal and tax-related services associated
with maintaining compliance with Nasdaq and SEC requirements, accounting and investor relations costs, and director and
officer insurance premiums associated with being a public company. Additionally, we anticipate a significant increase in
payroll, marketing, sales and other expenses as a result of our preparation for commercial operations related to the launch of
ESKATA.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and marketable securities.
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Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States. The preparation of our consolidated financial statements and related disclosures requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of expenses during the reported period. We base
our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis.
Our actual results may differ from these estimates under different assumptions and conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are
those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue when the earnings process is complete, which under SEC Staff Accounting Bulletin No. 104,
Topic No. 13, “Revenue Recognition,” is when revenue is realized or realizable and earned, there is persuasive evidence a
revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and
collectability is reasonably assured.
We earn revenue from the provision of laboratory services to clients through Confluence, our wholly-owned
subsidiary. Laboratory service revenue is generally evidenced by contracts with clients which are on an agreed upon fixed-
price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related to
these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the
contracts.
We also receive revenue from grants under the Small Business Innovation Research program of the NIH. Through
our Confluence subsidiary, we currently have two active grants from NIH which are related to early-stage research. We
recognize revenue related to these grants as amounts become reimbursable under each grant, which is generally when
research is performed, and the related costs are incurred.
Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our research
and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our
applicable personnel to identify services that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual
costs. The majority of our preclinical development activities and clinical trials are performed pursuant to quotes and contracts
with multiple vendors, including research institutions and CROs, that conduct and manage such activities on our
behalf. Many of the contracts with our vendors require advance payments; while others invoice us in arrears for services
performed, or on a pre-determined schedule, or upon the successful enrollment of patients, or when contractual milestones
are met. We record expenses for preclinical development activities and clinical trials based upon estimates of the total cost of
the services to be provided by the vendor and the time period over which the vendor is to perform those services. Estimates
of research and development expenses included in our consolidated financial statements are based on facts and circumstances
known to us at that time. The financial terms of our agreements are subject to negotiation, vary from contract to contract, and
may result in uneven payment flows. There may be times when payments made to a vendor exceed the level of services
provided, resulting in a prepayment for work to be performed. We may confirm the accuracy of our estimates with the
service providers, or make adjustments to our estimates based upon new or updated facts and circumstances, as
necessary. For example, if the timing and/or cost of services to be performed is materially different from our previous
estimates, we would make a prospective adjustment for the change in our estimates in the period in which we become aware
of the new cost and/or timing. Although we do not expect our estimates to be materially different from actual amounts
incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services
performed may vary and may result in reporting amounts that are too high or too low in any
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particular period. To date, we have not made any material adjustments to our estimates of research and development
expenses.
Stock-Based Compensation
We measure the compensation expense of stock-based awards granted to employees and directors using the grant
date fair value of the award. We have issued stock options and restricted stock unit, or RSU, awards with service-based
vesting conditions, as well as with performance-based vesting conditions. We have not issued awards that include market-
based conditions. For service-based awards we recognize stock-based compensation expense on a straight-line basis over the
requisite service period. For performance-based awards we recognize stock-based compensation expense on a straight-line
basis over the requisite service period beginning in the period that it becomes probable the performance conditions will
occur. At each balance sheet date, we evaluate whether any performance conditions related to a performance-based award
have changed. The effect of any change in performance conditions would be recognized as a cumulative catch-up adjustment
in the period such change occurs, and any remaining unrecognized compensation expense would be recognized on a straight-
line basis over the remaining requisite service period. The impact of forfeitures is recognized in the period in which they
occur.
We initially measure the compensation expense of stock-based awards granted to consultants using the grant date
fair value of the award. We recognize compensation expense over the period during which services are rendered by the
consultant. At the end of each financial reporting period prior to the completion of services being rendered, we re-measure
the compensation expense related to these awards using the then current fair value of our common stock for RSUs, or based
upon updated assumptions in the Black-Scholes option-pricing model for stock option awards.
We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. We estimate
expected volatility based on historical volatility of a set of peer companies, which are publicly traded, and we expect to
continue to do so until we have adequate historical data regarding the volatility of our own publicly-traded stock price. The
expected term of our stock options has been determined using the “simplified” method for awards that qualify as “plain
vanilla” options. The expected term of stock options we granted to non-employees is equal to the contractual term of the
option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of
grant of the award for time periods approximately equal to the expected term of the award. We use an expected dividend
yield of zero because we have not paid cash dividends to date, and have no intention of paying cash dividends in the
future. Prior to our IPO, we valued our common stock using a hybrid method which used market approaches to estimate our
enterprise value. The hybrid method used was a probability-weighted expected return method which was a scenario-based
methodology that estimated the fair value of our common stock based upon an analysis of future values for the company
assuming various outcomes. The hybrid method used calculated equity values using an option pricing model in one or more
of scenarios, and also considered the rights of each class of stock.
The fair value of each restricted RSU is measured using the closing price of our common stock on the date of grant.
Income Taxes
Since our inception in 2012, we have not recorded U.S. federal or state income tax benefits for the net operating
losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of
realizing a benefit from those items. As of December 31, 2017, we had federal and state net operating loss carryforwards of
$77.2 million and $119.3 million, respectively, which begin to expire in 2032. As of December 31, 2017, we also had federal
research and development tax credit carryforwards of $2.2 million which begin to expire in 2032, and state research and
development tax credit carryforwards of $0.1 million which begin to expire in 2022.
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Intangible Assets
Our intangible assets include both finite-lived and indefinite-lived assets. Finite-lived intangible assets are
amortized over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise
used up. If that pattern cannot be reliably determined, the straight-line method of amortization is used. Our finite-lived
intangible assets consist of a research technology platform acquired through the acquisition of Confluence. Indefinite-lived
intangible assets consist of an in-process research and development, or IPR&D, drug candidate acquired through the
acquisition of Confluence. IPR&D assets are considered indefinite-lived until the completion or abandonment of the
associated research and development efforts. The cost of IPR&D assets is either amortized over their estimated useful life
beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if
development of the drug candidate is abandoned.
Finite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least
annually, which we perform during the fourth quarter, or when indicators of an impairment are present. We recognize an
impairment loss when and to the extent that the estimated fair value of an indefinite-lived intangible asset is less than its
carrying value.
Goodwill
Goodwill is not amortized, but rather, is subject to testing for impairment at least annually, which we perform during
the fourth quarter, or when indicators of an impairment are present. We consider each of our operating segments,
dermatology therapeutics and contract research, to be a reporting unit since this is the lowest level for which discrete
financial information is available. We have attributed the full amount of the goodwill in connection with the acquisition of
Confluence, or $18.5 million, to our dermatology therapeutics segment. We perform an impairment test annually which is a
qualitative assessment based upon current facts and circumstances related to operations of the dermatology therapeutics
segment. If our qualitative assessment indicates an impairment may be present, we would perform the required quantitative
analysis and an impairment charge would be recognized to the extent that the estimated fair value of the reporting unit is less
than its carrying amount. However, any loss recognized would not exceed the total amount of goodwill allocated to that
reporting unit.
Contingent Consideration
We initially recorded the contingent consideration related to future potential payments based upon the achievement
of certain development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at its estimated
fair value on the date of acquisition. Changes in fair value reflect new information about the likelihood of the payment of the
contingent consideration and the passage of time. For example, if the timing of the development of an acquired drug
candidate, or the size of potential commercial opportunities related to an acquired drug, differ from our assumptions, then the
fair value of contingent consideration would be adjusted accordingly. Future changes in the fair value of the contingent
consideration, if any, will be recorded as income or expense in our consolidated statement of operations.
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Results of Operations
Comparison of Years Ended December 31, 2017 and 2016
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Provision for income taxes
Net loss
Revenue
Year Ended December 31,
2017
2016
(In thousands)
Change
$
$
1,683 $
1,207
476
39,790
33,109
72,899
(72,423)
2,070
(70,353)
(1,830)
(68,523) $
— $
—
—
1,683
1,207
476
33,476
15,091
48,567
(48,567)
488
(48,079)
—
(48,079) $
6,314
18,018
24,332
(23,856)
1,582
(22,274)
(1,830)
(20,444)
Revenue was $1.7 million for the year ended December 31, 2017, and was comprised primarily of fees earned from
the provision of laboratory services to clients through Confluence, which we acquired in August 2017. We did not generate
any revenue in the year ended December 31, 2016.
Cost of Revenue
Cost of revenue was $1.2 million for the year ended December 31, 2017, and was comprised entirely of costs
incurred to provide laboratory services to our clients through Confluence, which we acquired in August 2017. We did not
incur any cost of revenue in the year ended December 31, 2016.
Research and Development Expenses
Research and development expenses were $39.8 million for the year ended December 31, 2017, compared to $33.5
million for the year ended December 31, 2016. The increase of $6.3 million was primarily driven by an increase of $3.4
million of expenses related to our Phase 2 clinical trials of A-101 45% Topical Solution, an increase of $4.5 million in
preclinical and clinical trial development expenses related to our JAK inhibitor technology, an increase of $2.4 million in
payroll-related expenses due to higher headcount, an increase of $3.2 million in stock-based compensation expense, and a
$2.9 million increase in expenses related to medical affairs activities. We also incurred $0.7 million of expenses related to
drug discovery research performed by Confluence in the year ended December 31, 2017. The increases noted above were
partially offset by a $7.7 million decrease in costs associated with the development of ESKATA as a result of the completion
of our Phase 3 clinical trials in November 2016, and $3.4 million in expenses associated with the acquisition of Vixen in the
year ended December 31, 2016, for which there was no similar transaction in 2017.
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General and Administrative Expenses
General and administrative expenses were $33.1 million for the year ended December 31, 2017, compared to $15.1
million for the year ended December 31, 2016. The increase of $18.0 million was primarily attributable to increases of $5.2
million in market research expenses and $0.9 million in sales operations expenses, both related to pre-commercial launch
activities for ESKATA, an increase of $3.0 million in payroll-related expenses due to increased headcount, $6.3 million in
higher stock-based compensation expense, and $1.3 million in higher facilities-related costs including a one-time charge to
rent expense of $0.5 million in connection with the early termination of our sublease with NST Consulting, LLC. In
addition, milestone payments pursuant to the finder’s services agreement related to ESKATA increased by $0.7 million in
2017 compared to 2016. We also incurred $0.6 million of professional fees in conjunction with our acquisition of
Confluence, for which there were no similar amounts in 2016.
Other Income, net
The $1.6 million increase in other income, net was primarily due to higher invested balances of marketable
securities as a result of funds received from our financing transactions in 2016 and 2017.
Provision for Income Taxes
Provision for income taxes was a net benefit of $1.8 million for the year ended December 31, 2017 and was
comprised primarily of the revaluation of our deferred tax assets, net resulting from the Tax Cuts and Jobs Act which was
enacted on December 22, 2017.
Comparison of Years Ended December 31, 2016 and 2015
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Net loss
$
Year Ended December 31,
2016
2015
(In thousands)
Change
— $
—
—
— $
—
—
—
—
—
33,476
15,091
48,567
(48,567)
488
(48,079) $
15,339
5,328
20,667
(20,667)
104
(20,563) $
18,137
9,763
27,900
(27,900)
384
(27,516)
$
Research and Development Expenses
Research and development expenses were $33.5 million for the year ended December 31, 2016, compared to $15.3
million for the year ended December 31, 2015. The increase of $18.1 million was primarily attributable to a $10.2 million
increase in costs associated with the development of ESKATA for the treatment of raised SKs, an increase of $7.3 million in
preclinical development expenses related to our JAK inhibitor technology, a $0.5 million increase in costs related to the
development of A-101 45% Topical Solution for the treatment of common warts, an increase of $2.2 million in payroll-
related expenses due to increased headcount, and an increase of $2.0 million in stock-based compensation expense. The
increases noted above were partially offset by a decrease of $4.6 million in licensing expenses as we incurred $3.4 million of
expenses associated with the Vixen acquisition in the year ended December 31, 2016, compared to $8.0 million of expense
resulting from the upfront payment made to Rigel for the ATI-501 and ATI-502 JAK inhibitor drug candidates during the
year ended December 31, 2015.
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General and Administrative Expenses
General and administrative expenses were $15.1 million for the year ended December 31, 2016, compared to $5.3
million for the year ended December 31, 2015. The increase of $9.8 million was primarily attributable to increases of $2.2
million in payroll-related expenses due to increased headcount, $3.2 million in stock-based compensation expense, $0.4
million in legal and patent expenses related to the Vixen acquisition, $1.5 million in professional fees associated with being a
public company, and $1.5 million in market research expenses related to pre-commercial activities for ESKATA, as well as a
$0.3 million one-time milestone payment made during the year ended December 31, 2016 pursuant to the finder’s services
agreement related to A-101.
Other Income, net
The increase in other income, net was primarily due to interest income received from higher invested balances of
marketable securities as a result of funds received from our IPO in October 2015, our private placement in June 2016 and our
follow-on public offering in November 2016.
Liquidity and Capital Resources
Since our inception, we have incurred net losses and negative cash flows from our operations. Prior to our
acquisition of Confluence in August 2017, we did not generate any revenue. We have financed our operations since
inception through sales of our convertible preferred stock, as well as net proceeds from our IPO in October 2015, our private
placement in June 2016, our public offerings in November 2016 and August 2017 and an at-the-market facility with Cowen.
As of December 31, 2017, we had cash, cash equivalents and marketable securities of $208.9 million. Cash in
excess of immediate requirements is invested in accordance with our investment policy, primarily with a view towards
liquidity and capital preservation.
We currently have no ongoing material financing commitments, such as lines of credit or guarantees that are
expected to affect our liquidity over the next five years, other than our lease and sublease obligations and contingent
obligations under intellectual property licensing arrangements, as described below under “Contractual Obligations and
Commitments.”
Initial Public Offering
In October 2015, we closed our IPO in which we sold 5,750,000 shares of common stock at a price to the public of
$11.00 per share, for aggregate gross proceeds of $63.3 million. We paid underwriting discounts and commissions of $4.4
million, and we also incurred expenses of $2.3 million in connection with the IPO. As a result, the net offering proceeds to
us, after deducting underwriting discounts and commissions and offering expenses, were $56.6 million.
Private Placement
In June 2016, we closed a private placement in which we sold an aggregate of 1,081,082 shares of common stock at
a price of $18.50 per share, for gross proceeds of $20.0 million. We incurred placement agent fees of $1.3 million, and
expenses of $0.2 million in connection with the private placement. As a result, the net offering proceeds received by us, after
deducting placement agent fees and transaction expenses, were $18.5 million.
November 2016 Public Offering
In November 2016, we closed our follow-on public offering in which we sold 4,600,000 shares of common stock at
a price to the public of $22.75 per share, for aggregate gross proceeds of $104.7 million. We paid underwriting discounts and
commissions of $6.3 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the
net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $98.2
million.
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At-The-Market Facility
In April 2017, we sold 635,000 shares of our common stock at a weighted average price per share of $31.50, for
aggregate gross proceeds of approximately $20.0 million. We paid underwriting discounts and commissions of $0.6 million,
and we also incurred expenses of $0.1 million in connection with this sale. The shares were sold through Cowen pursuant to
a sales agreement with them dated November 2, 2016. As of the date of this report, we may offer and sell additional shares
of our common stock having an aggregate offering price of up to approximately $55.0 million from time to time through
Cowen pursuant to the sales agreement.
August 2017 Public Offering
In August 2017, we closed our follow-on public offering in which we sold 3,747,602 shares of common stock at a
price to the public of $23.02 per share, for aggregate gross proceeds of $86.3 million. We paid underwriting discounts and
commissions of $5.2 million, and we also incurred expenses of $0.2 million in connection with the offering. As a result, the
net offering proceeds received by us, after deducting underwriting discounts, commissions and offering expenses, were $80.9
million.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
Net cash used in operating activities
Net cash used in by investing activities
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Operating Activities
2017
Year Ended December 31,
2016
(In thousands)
2015
$
(54,663) $
(55,692)
100,386
$
(9,969) $
(34,603) $
(61,903)
116,826
20,320 $
(20,369)
(76,951)
96,414
(906)
During the year ended December 31, 2017, operating activities used $54.7 million of cash, primarily resulting from
our net loss of $68.5 million partially offset by changes in our operating assets and liabilities of $0.9 million and non-cash
adjustments of $13.0 million. Net cash used by changes in our operating assets and liabilities during the year ended
December 31, 2017 consisted of a $4.3 million increase in prepaid expenses and other current assets offset by a $5.2 million
increase in accounts payable and accrued expenses. The increase in prepaid expenses and other current assets was primarily
due to a $2.0 million PDUFA fee paid to the FDA in conjunction with the filing of the NDA for ESKATA, as well as deposits
made for clinical supplies and development activities that are expected to be incurred during the first quarter of 2018. The
increase in accounts payable and accrued expenses was primarily due to an increase of $1.2 million in accrued bonuses
payable due to increased headcount, $0.6 million payable to NST Consulting LLC in connection with the early termination of
our sublease with them, as well as expenses incurred, but not yet paid, in connection with our Phase 2 clinical trials for A-101
45% Topical Solution, ATI-501 and ATI-502. Non-cash expenses of $13.0 million included stock-based compensation
expense of $14.4 million, and $0.4 million of depreciation and amortization, partially offset by an adjustment to our deferred
tax liability, net of $1.8 million which was the result of the Tax Cuts and Jobs Act enacted on December 22, 2017.
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During the year ended December 31, 2016, our operating activities used $34.6 million of cash, primarily resulting
from our net loss of $48.1 million partially offset by cash provided by changes in our operating assets and liabilities of $4.5
million and by non-cash expenses of $9.0 million. Net cash provided by changes in our operating assets and liabilities during
the year ended December 31, 2016 consisted primarily of a $4.3 million increase in accounts payable and accrued expenses.
The increase in accounts payable and accrued expenses was primarily due to expenses incurred, but not yet paid, in
connection with preclinical development expenses related to our JAK inhibitor technology and the timing of vendor
invoicing and payments. In addition, we had $1.7 million of employee-related accruals as of December 31, 2016, compared
to $0 as of December 31, 2015. The increase in employee-related accruals resulted from bonuses earned in 2016 which were
paid after December 31, 2016, while all bonuses earned in 2015 were paid before December 31, 2015. Non-cash expenses of
$9.0 million primarily included $6.1 million related to share-based compensation expense, and $2.8 million resulting from
the Vixen acquisition.
During the year ended December 31, 2015, our operating activities used $20.4 million of cash, primarily resulting
from our net loss of $20.6 million and net cash used in our operating assets and liabilities of $1.1 million, partially offset by
non-cash increases of $0.9 million in stock-based compensation expense and a $0.3 million write-down of equipment held for
sale to net realizable value. Net cash used in changes in our operating assets and liabilities during the year ended December
31, 2015 consisted primarily of a $1.3 million increase in prepaid expenses and other current assets and a $0.4 million
decrease in accounts payable, partially offset by a $0.6 million increase in accrued expenses. The increase in accrued
expenses was primarily due to the timing of invoices for licensing fees and legal expenses relating to our wholly-owned
subsidiary. The increase in prepaid expenses and other current assets was primarily due to prepayments for clinical trials and
prepayments of insurance policies.
Investing Activities
During the year ended December 31, 2017, we used cash of $55.7 million in investing activities, consisting of
purchases of marketable securities of $197.3 million, $9.6 million for the acquisition of Confluence and purchases of
property and equipment of $1.2 million, partially offset by proceeds from sales and maturities of marketable securities of
$152.5 million.
During the year ended December 31, 2016, we used cash of $61.9 million in investing activities, consisting of
purchases of marketable securities of $148.8 million and purchases of equipment of $0.2 million, partially offset by proceeds
from sales and maturities of marketable securities of $87.1 million.
During the year ended December 31, 2015, we used cash of $77.0 million in investing activities, consisting of
purchases of marketable securities of $82.5 million and purchases of equipment of $0.5 million, partially offset by proceeds
from sales and maturities of marketable securities of $6.1 million.
Financing Activities
During the year ended December 31, 2017, net cash provided by financing activities was $100.4 million consisting
primarily of $19.3 million of net proceeds received from the sale of common stock under our sales agreement with Cowen in
April 2017, $80.9 million of net proceeds received from our public offering of common stock in August 2017, and $0.2
million of cash received from the exercise of employee stock options, partially offset by $0.1 million of capital lease
payments for laboratory equipment.
During the year ended December 31, 2016, net cash provided by financing activities was $116.8 million, consisting
primarily of $18.5 million of net proceeds received from the private placement of our common stock in June 2016, net
proceeds of $98.2 million received from our follow-on public offering of common stock in November 2016, as well as $0.1
million of cash received from the exercise of employee stock options.
During the year ended December 31, 2015, net cash provided by financing activities was $96.4 million, consisting
of $39.8 million of net proceeds received from our issuance of convertible preferred stock in August 2015 and net proceeds
of $56.6 million received from our IPO in October 2015.
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Funding Requirements
We plan to focus in the near term on the commercialization of ESKATA for the treatment of raised SKs and the
clinical development of our drug candidates. We anticipate we will incur net losses for the next several years as we
commercialize ESKATA, continue the clinical development of A-101 45% Topical Solution for the treatment of common
warts and continue research and development of ATI-501 and ATI-502 for the treatment of AA, and potentially for other
dermatological conditions, as well as the identification, research and development of other compounds. We plan to continue
to invest in discovery efforts to explore additional drug candidates, build commercial capabilities and expand our corporate
infrastructure. We may not be able to complete the development and initiate commercialization of these programs if, among
other things, our clinical trials are not successful or if the FDA does not approve or our drug candidates currently in clinical
trials when we expect, or at all.
Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical
costs, external research and development services, laboratory and related supplies, sales, marketing and direct-to-consumer
advertising costs, legal and other regulatory expenses, and administrative and overhead costs. Our future funding
requirements will be heavily determined by the resources needed to support development of our drug candidates.
As a publicly traded company, we have incurred and will continue to incur significant legal, accounting and other
expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as
rules adopted by the SEC and the Nasdaq Stock Market, requires public companies to implement specified corporate
governance practices that were not applicable to us prior to our IPO. We expect ongoing compliance with these rules and
regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and
costly.
We believe our existing cash, cash equivalents and marketable securities are sufficient to fund our operating and
capital expenditure requirements for a period greater than 12 months from the date of issuance of our consolidated financial
statements based on our current operating assumptions including the commercialization of ESKATA, completion of our
Phase 2 clinical trials and initiation of Phase 3 clinical trials for A-101 45% Topical Solution for the treatment of common
warts and the continued development of ATI-501 and ATI-502 as potential treatments for AA. These assumptions may prove
to be wrong, and we could utilize our available capital resources sooner than we expect. We expect that we will require
additional capital to complete the clinical development and, if approved, commercialize A-101 45% Topical Solution for the
treatment of common warts, and to pursue in-licenses or acquisitions of other drug candidates. We also expect to incur
significant expenses related to the commercialization of ESKATA including product manufacturing, sales, marketing, direct-
to-consumer advertising and distribution costs. Additional funds may not be available on a timely basis, on commercially
acceptable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to implement our long-
term business strategy. If we are unable to raise sufficient additional capital, we may need to substantially curtail our planned
operations and the pursuit of our growth strategy.
We may raise additional capital through the sale of equity or convertible debt securities. In such an event, your
ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect
the rights of a holder of our common stock.
Because of the numerous risks and uncertainties associated with research, development and commercialization of
pharmaceutical drugs, we are unable to estimate the exact amount of our working capital requirements. Our future funding
requirements will depend on many factors, including:
·
·
·
·
·
·
the number and characteristics of the drug candidates we pursue;
the scope, progress, results and costs of researching and developing our drug candidates, and conducting
preclinical studies and clinical trials;
the timing of, and the costs involved in, obtaining marketing approvals for our drug candidates;
the cost of manufacturing commercial quantities of ESKATA and any drug candidates we successfully
commercialize;
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial
terms of such agreements;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims,
including litigation costs and the outcome of such litigation; and
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·
the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future
drug candidates, if any.
See “Risk Factors” for additional risks associated with our substantial capital requirements.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2017 and the effect such obligations
are expected to have on our liquidity and cash flows in future periods:
Total
Less Than
1 Year
Payments Due by Period
1 ‑ 3
Years
(in thousands)
4 ‑ 5
Years
More than
5 Years
Operating lease commitments
Capital lease commitments
Vixen annual commitment
Total
$ 3,639 $ 664 $ 1,821 $ 1,154 $
403
500
142
100
261
300
—
100
$ 4,542 $ 906 $ 2,382 $ 1,254 $
—
—
—
—
We occupy space for our headquarters in Wayne, Pennsylvania under a sublease agreement which has a term
through October 2023. We lease office space in Malvern, Pennsylvania under an operating lease agreement which has a term
through November 2019. We occupy office and laboratory space in St. Louis, Missouri under an operating lease agreement
which has a term through December 2018.
We lease laboratory equipment used in our laboratory space in St. Louis, Missouri under two capital lease financing
arrangements which have terms through October 2020 and December 2020.
Under various agreements, we will be required to make milestone payments and pay royalties and other amounts to
third parties. We have not included any contingent payment obligations, such as milestones or royalties, in the table above as
the amount, timing and likelihood of such payments are not known.
Under the assignment agreement pursuant to which we acquired intellectual property, we have agreed to pay
royalties on sales of ESKATA or other related products at rates ranging in low single-digit percentages of net sales, as defined
in the agreement. Under the related finder’s services agreement, we have also agreed to make aggregate payments of up to
$4.5 million upon the achievement of specified commercial milestones. In addition, we have agreed to pay royalties on sales
of ESKATA or other related products at a low single-digit percentage of net sales, as defined in the agreement.
Under a commercial supply agreement with a third party, we have agreed to pay a termination fee of up to $0.4
million in the event we terminate the agreement without cause or the third party terminates the agreement for cause.
Under a license agreement with Rigel that we entered into in August 2015, we have agreed to make aggregate
payments of up to $80.0 million upon the achievement of specified pre-commercialization milestones, such as clinical trials
and regulatory approvals. Further, we have agreed to pay up to an additional $10.0 million to Rigel upon the achievement of
a second set of development milestones. With respect to any products we commercialize under the agreement, we will pay
Rigel quarterly tiered royalties on our annual net sales of each product developed using the licensed JAK inhibitors at a high
single digit percentage of annual net sales, subject to specified reductions.
Under a stock purchase agreement with the selling stockholders of Vixen, we are obligated to make aggregate
payments of up to $18.0 million upon the achievement of specified pre-commercialization milestones for three products
covered by the Vixen patent rights in the United States, the European Union and Japan, and aggregate payments of up to
$22.5 million upon the achievement of specified commercial milestones for products covered by the Vixen patent rights. We
are also obligated to make a payment of $0.1 million on March 24th of each year, through March 24, 2022, which amounts
are creditable against any specified future payments that may be paid under the stock purchase agreement. With respect to
any products we commercialize under the stock purchase agreement, we are obligated to pay low single-digit percentage of
annual net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights
for that product have expired, as determined on a country-by-country and product-by-product basis or, in specified
circumstances, ten years from the first commercial sale of such product. If we sublicense any of the patent rights
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and know-how acquired pursuant to the stock purchase agreement, we will be obligated to pay a portion of any consideration
we receive from such sublicenses in specified circumstances.
Under a license agreement with Columbia, we are obligated to pay an annual license fee of $10,000, subject to
specified adjustments for patent expenses incurred by Columbia and creditable against any royalties that may be paid under
the license agreement. We are also obligated to pay up to an aggregate of $11.6 million upon the achievement of specified
commercial milestones, including specified levels of net sales of products covered by Columbia patent rights and/or know-
how, and royalties at a sub-single-digit percentage of annual net sales of products covered by Columbia patent rights and/or
know-how, subject to specified adjustments. If we sublicense any of Columbia’s patent rights and know-how acquired
pursuant to the license agreement, we will be obligated to pay Columbia a portion of any consideration Vixen receives from
such sublicenses in specified circumstances.
Under a merger agreement with Confluence we are obligated to make aggregate payments of up to $80.0 million
upon the achievement of specified development, regulatory and commercialization milestones. With respect to any covered
products we commercialize, we are obligated to pay a low single-digit percentage of annual net sales, subject to specified
reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as
determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first
commercial sale of such product. If we sublicense any of the patent rights and know-how acquired pursuant to the merger
agreement, we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified
circumstances.
We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies
and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for
termination upon notice, and therefore we believe that our non-cancelable obligations under these agreements are not
material.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as
defined in the rules and regulations of the SEC.
Recently Issued and Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or
ASU, 2017-01, Business Combinations-Clarifying the Definition of a Business (Topic 805). The amendments in this ASU
provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a
group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of
transactions that meet the definition of a business. ASU 2017-01 is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those years, and early adoption was permitted. We are currently
evaluating the potential impact of the adoption of this standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other-Simplifying the Test for Goodwill
Impairment (Topic 350). Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU
eliminate Step 2 from the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15,
2019, and early adoption is permitted. We adopted the provisions of this standard early, the impact of which on our
consolidated financial statements was not significant.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU
introduces a new model for recognizing credit losses on financial instruments based upon estimated expected credit
losses. ASU 2016-13 will apply to loans, accounts receivable, financial assets measured at amortized cost and at fair value
through other comprehensive income, loan commitments and certain off-balance sheet credit exposures. ASU 2016-13 is
effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, and
early adoption is permitted. We are assessing the potential impact of ASU 2016-13 on our consolidated financial statements.
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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This
ASU requires all tax effects of share-based payment settlements to be recorded through the income statement. Currently, tax
benefits in excess of compensation cost, or “windfalls”, are recorded in equity, and tax deficiencies, or “shortfalls”, are
recorded to equity to the extent of previous windfalls, and then to the income statement. In addition, under the new guidance,
companies will be permitted to make a policy election to recognize the impact of forfeitures either when they occur, or on an
estimated basis. Finally, this update simplifies withholding requirements to allow companies to withhold up to an employee’s
maximum tax rate without resulting in liability classification for the award. ASU 2016-09 is effective for annual reporting
periods beginning after December 15, 2016. We adopted the provisions of this standard early, the impact of which on our
consolidated financial statements was not significant.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use,
or ROU, model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. The new standard is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements, with certain practical expedients available. We are
currently evaluating the potential impact of the adoption of this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities. The amendments in this update revise the accounting related to the classification and measurement of
investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair
value. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption was permitted. We are currently evaluating the potential impact of the
adoption of this standard.
In November 2015, the FASB, issued ASU 2015- 17, Balance Sheet Classification of Deferred Taxes. The
amendments in this update simplify the presentation of deferred income taxes to require that deferred tax liabilities and assets
are classified as noncurrent in a statement of financial position. The amendments are effective for annual reporting periods
beginning after December 15, 2016 and interim reporting periods within those annual periods. Early application is permitted.
We adopted the provisions of ASU 2015-17 early, the impact of which on our consolidated financial statements was not
significant.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this
ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in
exchange for goods and services provided. ASU 2014-09 is effective for annual reporting periods beginning after December
15, 2017. We adopted this standard as of January 1, 2018 and are assessing the impact of ASU 2014-09 on our consolidated
financial statements.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as
us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public
companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this
provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by
public companies that are not emerging growth companies.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in interest rates. Our cash equivalents and marketable securities
consist of money market funds, asset-backed securities, commercial paper, corporate debt securities and government agency
debt. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S.
interest rates. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase.
However, due to the short-term nature and low-risk profile of our investment portfolio, we do not expect that an immediate
10% change in market interest rates would have a material effect on the fair market value of our investment portfolio. We
have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2016 and
2015
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity for the years ended December 31,
2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Aclaris Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aclaris Therapeutics, Inc. and its subsidiaries as
of December 31st, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, statements
of convertible preferred stock and stockholders’ equity, and statements of cash flows for each of the three years in the period
ended December 31st, 2017 including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31st, 2017 and 2016, and the results of their operations and their cash flows for
each of the three years in the period ended December 31st, 2017 in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 12, 2018
We have served as the Company’s auditor since 2015.
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ACLARIS THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2017
2016
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Marketable securities
Property and equipment, net
Intangible assets
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Contingent consideration
Other liabilities
Deferred tax liability
Total liabilities
Stockholders’ Equity:
$
20,202 $
30,171
107,051
—
1,334
138,556
36,912
481
—
—
136
$ 243,509 $ 176,085
173,655
481
5,883
200,221
14,997
2,159
7,349
18,504
279
$
7,822 $
4,940
12,762
4,378
558
549
18,247
2,845
3,378
6,223
—
372
—
6,595
Preferred stock, $0.00001 par value; 10,000,000 shares authorized and no shares issued or
outstanding at December 31, 2017 and December 31, 2016
—
—
Common stock, $0.00001 par value; 100,000,000 shares authorized at December 31, 2017
and December 31, 2016; 30,856,505 and 26,059,181 shares issued and outstanding at
December 31, 2017 and December 31, 2016, respectively
Additional paid‑in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
384,943
(246)
(159,435)
225,262
—
260,671
(269)
(90,912)
169,490
$ 243,509 $ 176,085
The accompanying notes are an integral part of these consolidated financial statements.
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ACLARIS THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
Year Ended
December 31,
2016
2017
2015
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Loss before income taxes
Provision for (benefit from) income taxes
Net loss
Accretion of convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and diluted
Weighted average common shares outstanding, basic and diluted
Other comprehensive loss:
Unrealized (loss) gain on marketable securities, net of tax of $0
Foreign currency translation adjustments
Total other comprehensive income (loss)
Comprehensive loss
$
$
$
1,683 $
1,207
476
39,790
33,109
72,899
(72,423)
2,070
(70,353)
(1,830)
(68,523)
—
(68,523) $
(2.44) $
— $
—
—
—
—
—
33,476
15,091
48,567
(48,567)
488
(48,079)
—
(48,079)
—
(48,079) $
(2.25) $
15,339
5,328
20,667
(20,667)
104
(20,563)
—
(20,563)
(2,566)
(23,129)
(3.79)
6,107,042
28,102,386
21,415,733
$
$
(121) $
144
23
(68,500) $
105
(225)
(120)
(48,199) $
(148)
5
(143)
(20,706)
The accompanying notes are an integral part of these consolidated financial statements.
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ACLARIS THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Balance at December 31, 2014
Issuance of Series C convertible
preferred stock, net of issuance costs
of $136
Issuance of common stock in
connection with IPO, net of offering
costs of $2,272
Issuance of common stock upon
conversion of convertible preferred
stock
Unrealized loss on marketable securities
Foreign currency translation adjustment
Stock-based compensation expense
Accretion of redeemable convertible
preferred stock to redemption value
Net loss
Balance at December 31, 2015
Issuance of common stock in
connection with Vixen acquisition
Issuance of common stock in
connection with private placement,
net of offering costs of $1,453
Issuance of common stock in
connection with follow-on public
offering, net of offering costs of
$6,492
Exercise of stock options and vesting of
RSUs
Unrealized gain on marketable
securities
Foreign currency translation adjustment
Stock-based compensation expense
Net loss
Balance at December 31, 2016
Issuance of common stock under the at-
the-market sales agreement, net of
offering costs of $691
Issuance of common stock in
connection with public offering, net
of offering costs of $5,352
Issuance of common stock in
connection with the acquisition of
Confluence
Exercise of stock options and vesting of
RSUs
Unrealized loss on marketable securities
Foreign currency translation adjustment
Stock-based compensation expense
Net loss
Balance at December 31, 2017
Series A, B and C
Convertible
Preferred Stock
Shares
Amount
27,341,057 $ 36,677
Common Stock Additional
Accumulated
Other
Total
Shares
Par Paid‑in Comprehensive Accumulated Stockholders’
Value Capital
Equity
Deficit
Loss
2,730,427 $ — $
— $
(6) $
(20,749) $
(20,755)
12,944,984 39,864
—
—
—
—
—
5,750,000
—
56,550
(40,286,041) (78,305)
—
—
—
—
—
—
11,677,076
—
—
—
—
—
—
—
78,305
—
—
891
—
—
—
1,764
—
—
—
—
20,157,503
—
—
—
(243)
—
135,503
—
—
159,420
—
2,355
—
—
—
(148)
5
—
—
—
(149)
—
—
—
—
56,550
—
—
—
—
(1,521)
(20,563)
(42,833)
78,305
(148)
5
891
(1,764)
(20,563)
92,521
—
2,355
—
—
1,081,082
—
18,547
—
—
18,547
—
—
4,600,000
—
98,158
—
—
61,176
—
4
—
—
—
—
—
—
—
—
—
— 26,059,181
—
—
—
—
—
—
—
—
— 260,671
—
—
6,104
—
—
—
105
(225)
—
—
(269)
—
—
—
—
—
(48,079)
(90,912)
98,158
4
105
(225)
6,104
(48,079)
169,490
—
—
635,000
—
19,311
—
—
19,311
—
—
3,747,602
—
80,918
—
—
80,918
349,527
9,675
—
—
—
—
—
—
— $
—
—
—
—
—
— 30,856,505 $ — $ 384,943 $
65,195
—
—
—
—
(62)
—
—
14,430
—
—
—
—
—
—
—
(121)
144
—
—
(246) $
—
—
—
—
—
(68,523)
(159,435) $
9,675
(62)
(121)
144
14,430
(68,523)
225,262
The accompanying notes are an integral part of these consolidated financial statements.
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ACLARIS THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation expense
Deferred taxes
Write-down of property and equipment held for sale
Non-cash charges related to Vixen acquisition
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of Confluence, net of cash acquired
Purchases of marketable securities
Proceeds from sales and maturities of marketable securities
Net cash used in investing activities
Cash flows from financing activities:
Year Ended
December 31,
2016
2017
2015
$ (68,523) $ (48,079) $ (20,563)
402
14,430
(1,837)
—
—
(4,306)
4,564
607
(54,663)
120
6,104
—
216
2,784
90
891
—
289
—
(8)
1,810
2,450
(34,603)
(1,269)
(359)
552
(20,369)
(1,235)
(9,647)
(197,337)
152,527
(55,692)
(232)
—
(148,764)
87,093
(61,903)
(507)
—
(82,513)
6,069
(76,951)
Proceeds from issuance of common stock under the at-the-market sales
agreement, net of issuance costs
Proceeds from issuance of common stock in connection with public offering, net
of issuance costs
Proceeds from issuance of common stock in connection with private placement,
net of issuance costs
Proceeds from initial public offering, net of issuance costs
Proceeds from issuance of redeemable convertible preferred stock, net of
issuance costs
Capital lease payments
Proceeds from the exercise of employee stock options
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of non-cash investing and financing activities:
Additions to property and equipment included in accounts payable
Fair value of stock issued in connection with Confluence acquisition
Fair value of stock issued in connection with Vixen acquisition
Offering costs included in accounts payable
Accretion of convertible preferred stock to redemption value
$
$
$
$
$
$
19,311
—
80,918
98,158
—
—
—
—
18,547
—
—
56,550
—
(78)
235
100,386
(9,969)
30,171
20,202 $
—
—
121
116,826
20,320
9,851
30,171 $
39,864
—
—
96,414
(906)
10,757
9,851
274 $
9,675 $
— $
20 $
— $
11 $
—
2,355 $
250 $
— $
2
—
—
—
1,764
The accompanying notes are an integral part of these consolidated financial statements.
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ACLARIS THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. Organization and Nature of Business
Overview
Aclaris Therapeutics, Inc. was incorporated under the laws of the State of Delaware in 2012. In July 2015, Aclaris
Therapeutics International Limited (“ATIL”) was established under the laws of the United Kingdom as a wholly-owned
subsidiary of Aclaris Therapeutics, Inc. In March 2016, Vixen Pharmaceuticals, Inc. (“Vixen”) became a wholly-owned
subsidiary of Aclaris Therapeutics, Inc. (see Note 12). In August 2017, Confluence Life Sciences Inc. (“Confluence”) was
acquired by Aclaris Therapeutics, Inc. and became a wholly-owned subsidiary thereof (see Note 3). Aclaris Therapeutics,
Inc., ATIL, Vixen and Confluence are referred to collectively as the “Company”. The Company is a dermatologist-led
biopharmaceutical company focused on identifying, developing and commercializing innovative and differentiated therapies
to address significant unmet needs in medical and aesthetic dermatology. The Company’s lead drug, ESKATA (Hydrogen
Peroxide) Topical Solution, 40% (w/w) (“ESKATA”), is a proprietary high‑concentration formulation of hydrogen peroxide
that the Company is commercializing as a prescription treatment for raised seborrheic keratosis (“SK”), a common
non‑malignant skin tumor. In February 2017, the Company submitted a New Drug Application (“NDA”) for ESKATA to the
U.S. Food and Drug Administration (“FDA”). The NDA was approved by the FDA in December 2017.
Liquidity
The Company’s consolidated financial statements have been prepared on the basis of continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary course of business. At December 31, 2017, the Company
had cash, cash equivalents and marketable securities of $208,854 and an accumulated deficit of $159,435. Since inception,
the Company has incurred net losses and negative cash flows from its operations. Prior to the acquisition of Confluence in
August 2017, the Company had never generated any revenue. There is no assurance that profitable operations will ever be
achieved, and, if achieved, will be sustained on a continuing basis. In addition, development activities, clinical and pre-
clinical testing, and commercialization of the Company’s drug candidates will require significant additional financing. The
Company expects that its cash, cash equivalents and marketable securities as of December 31, 2017 will be sufficient to fund
its operations for a period greater than 12 months from the date of issuance of these consolidated financial statements based
on its current operating assumptions. The future viability of the Company is dependent on its ability to generate cash from
operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when
needed could have a negative impact on its financial condition and ability to pursue its business strategies.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“GAAP”). The financial statements include the consolidated accounts of
the Company and its wholly-owned subsidiaries, Confluence, ATIL and Vixen. All significant intercompany transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and
assumptions reflected in these financial statements include, but are not limited to, research and development expenses,
contingent consideration and the valuation of stock-based awards.
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Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could
differ from the Company’s estimates.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, which under SEC Staff Accounting
Bulletin No. 104, Topic No. 13, “Revenue Recognition,” is when revenue is realized or realizable and earned, there is
persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company earns revenue from the provision of laboratory services to clients through Confluence, its wholly-
owned subsidiary. Laboratory service revenue is generally evidenced by contracts with clients which are on an agreed upon
fixed-price, fee-for-service basis and are generally billed on a monthly basis in arrears for services rendered. Revenue related
to these contracts is generally recognized as the laboratory services are performed, based upon the rates specified in the
contracts.
The Company also receives revenue from grants under the Small Business Innovation Research program of the
National Institutes of Health (“NIH”). The Company, through its Confluence subsidiary, currently has two active grants from
NIH which are related to early-stage research. The Company recognizes revenue related to these grants as amounts become
reimbursable under each grant, which is generally when research is performed and the related costs are incurred.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses include salaries,
stock-based compensation and benefits of employees, fees paid under licensing agreements, fees paid under a third party
assignment agreement and other operational costs related to the Company’s research and development activities, including
depreciation expenses and the cost of research and development contracts which the Company has entered into with outside
vendors to conduct both preclinical studies and clinical trials. Significant judgment and estimates are made in determining
the amount of research and development costs recognized in each reporting period. The Company analyzes the progress of
its preclinical studies and clinical trials, completion of milestone events, invoices received and contracted costs when
estimating research and development costs. Actual results could differ from the Company’s estimates. The Company’s
historical estimates for research and development costs have not been materially different from the actual costs.
Foreign Currency Translation
The reporting currency of the Company is the U.S. Dollar. The functional currency of ATIL, the Company’s wholly-
owned subsidiary, is the British Pound. Assets and liabilities of ATIL are translated into U.S. Dollars based on exchange
rates at the end of each reporting period. Revenues and expenses are translated at average exchange rates during the reporting
period. Gains and losses arising from the translation of assets and liabilities are included as a component of accumulated
other comprehensive loss within the Company’s consolidated balance sheet. Gains and losses resulting from foreign currency
transactions are reflected within the Company’s consolidated statements of operations. The Company has not utilized foreign
currency hedging strategies to mitigate the effect of its foreign currency exposure.
Stock-Based Compensation
The Company measures the compensation expense of stock-based awards granted to employees and directors using
the grant date fair value of the award. The Company has issued stock options and restricted stock unit (“RSU”) awards with
service-based vesting conditions, as well as with performance-based vesting conditions. The Company has not issued awards
that include market-based conditions. For service-based awards the Company recognizes stock-based compensation expense
on a straight-line basis over the requisite service period. For performance-based awards the Company recognizes stock-based
compensation expense on a straight-line basis over the requisite service period beginning in the period that it becomes
probable the performance conditions will occur. At each balance sheet date, the Company evaluates whether any
performance conditions related to a performance-based award have changed. The effect of any change in performance
conditions would be recognized as a cumulative catch-up adjustment in the period such change occurs, and any remaining
unrecognized compensation expense would be recognized on a straight-line basis over the remaining requisite service
period. The impact of forfeitures is recognized in the period in which they occur.
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The Company initially measures the compensation expense of stock-based awards granted to consultants using the
grant date fair value of the award. Compensation expense is recognized over the period during which services are rendered
by such consultants. At the end of each financial reporting period prior to completion of services being rendered, the
compensation expense related to these awards is remeasured using the then current fair value of the Company’s common
stock for RSUs, or based upon updated assumptions in the Black-Scholes option pricing model for stock option awards.
The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in
the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service
payments are classified.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing
model. The Company estimates its expected stock volatility based on the historical volatility of a set of peer companies,
which are publicly traded, and expects to continue to do so until it has adequate historical data regarding the volatility of its
own publicly-traded stock price. The expected term of the Company’s stock options has been determined using the
“simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-
employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the
U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected
term of the award. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid
cash dividends and does not expect to pay cash dividends in the future. Prior to the IPO, the Company valued its common
stock using a hybrid method to estimate its enterprise value. The hybrid method used was a probability-weighted expected
return method which was a scenario-based methodology that estimated the fair value of the Company’s common stock based
upon an analysis of future values for the Company assuming various outcomes. The hybrid method used calculated equity
values using an option pricing model in one or more of scenarios, and also considered the rights of each class of stock.
The fair value of each RSU is measured using the closing price of the Company’s common stock on the date of
grant.
Patent Costs
All patent related costs incurred in connection with filing and prosecuting patent applications are expensed as
incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and
administrative expenses.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the
financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences
are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The
Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it
believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax
assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for
recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and
feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by
applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated
to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is
deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize
in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a
greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of
any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and
penalties.
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Reverse Stock Split
In September 2015, the Company effected a 1‑for‑3.45 reverse stock split of its issued and outstanding shares of
common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s then-
outstanding convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in these
consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse
stock split and adjustment of the preferred stock conversion ratios.
Accretion of Convertible Preferred Stock
Accretion of convertible preferred stock included the accretion of accruing dividends on and issuance costs of the
Company’s Series A, B and C convertible preferred stock. The carrying values of the Series A and Series B convertible
preferred stock were accreted to their respective redemption values, using the effective interest method, from the date of
issuance through August 28, 2015. In connection with the closing of the Company’s Series C convertible preferred stock
financing on August 28, 2015, the redemption rights of the Series A and B convertible preferred stock were
removed. Subsequent to August 28, 2015, the Company was no longer required to record the accumulated undeclared
dividends on its balance sheet, but was thereafter required to deduct accumulated undeclared dividends as part of its earnings
per share calculation. In October 2015, in connection with the Company’s IPO, all of the Company’s convertible preferred
stock was converted to common stock.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from
transactions and economic events other than those with stockholders. Comprehensive loss is comprised of net loss, foreign
currency translation adjustments and unrealized gains (losses) on marketable securities.
Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding
during the period, plus the weighted average number of potential shares of common stock from the assumed exercise of stock
options, and the assumed vesting of RSUs and restricted stock granted by the Company upon its formation, if dilutive. Prior
to the IPO, the Company applied the two-class method of calculating its basic and diluted net loss per share attributable to
common stockholders since its convertible preferred stock and common stock were participating securities. The Company’s
convertible preferred stock contractually entitled the holders of such shares to participate in dividends, but not in losses, of
the Company. Since the Company was in a net loss position, and preferred stockholders did not participate in losses, basic
and diluted net loss per share was the same for each of the periods presented.
Cash Equivalents
The Company considers all short term, highly liquid investments with original maturities of 90 days or less at
acquisition date to be cash equivalents. Cash equivalents, which have consisted of money market accounts, commercial paper
and corporate debt securities with original maturities of less than three months, are stated at fair value.
Marketable Securities
Marketable securities with original maturities of greater than three months and remaining maturities of less than one
year from the balance sheet date are classified as short term. Marketable securities with remaining maturities of greater than
one year from the balance sheet date are classified as long term.
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The Company classifies all of its marketable securities as available-for-sale securities. The Company’s marketable
securities are measured and reported at fair value using quoted prices in markets that are not active for identical or similar
securities. Unrealized gains and losses are reported as a separate component of stockholders’ equity. The cost of securities
sold is determined on a specific identification basis, and realized gains and losses, if any, are included in other income, net
within the consolidated statement of operations and comprehensive loss. If any adjustment to fair value reflects a decline in
the value of the investment, the Company considers available evidence to evaluate the extent to which the decline is “other
than temporary” and reduces the investment to fair value through a charge to the statement of operations and comprehensive
loss.
Assets Held for Sale
In order for an asset to be classified as held for sale, several criteria must be achieved. These criteria include, among
others, an active program to market an asset and locate a buyer, as well as the probable disposition of the asset within one
year. Upon being classified as held for sale, the recoverability of the carrying value of an asset must be assessed and
evaluated. After the valuation process is completed, the held for sale asset is reported at the lower of its carrying value or fair
value less cost to sell, and no additional depreciation expense is recognized related to the asset. Once an asset is classified as
held for sale, all of its historical balance sheet information is included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. During the year ended December 31, 2015, the Company determined that several
pieces of machinery used in the Company’s scale-up operations would no longer be part of the Company’s future
operations. The Company engaged a third-party to market the assets and locate a buyer in the fourth quarter of 2015. During
the year ended December 31, 2016, the Company was unable to locate a buyer for the machinery and, therefore, wrote the
remaining value of the machinery down to zero. The Company recorded impairment charges of $216 and $289 in the years
ended December 31, 2016 and 2015, respectively. The impairment charges are included in research and development
expense on the Company’s consolidated statement of operations and comprehensive loss. The Company had no assets
classified as held for sale as of December 31, 2017 and 2016.
Other Assets
In February 2017, the Company paid a $2.0 million PDUFA fee to the FDA in conjunction with the filing of its
NDA for ESKATA. The Company requested a waiver and refund of this PDUFA fee, which was approved by the FDA in
December 2017. The amount paid by the Company has been recorded in prepaid expenses and other current assets on the
Company’s consolidated balance sheet since the refund was not received until after December 31, 2017.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the
fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
·
·
·
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for
similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or
liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to
determining the fair value of the assets or liabilities, including pricing models, discounted cash flow
methodologies and similar techniques.
The Company’s cash equivalents, marketable securities and contingent consideration are carried at fair value,
determined according to the fair value hierarchy described above. The carrying value of the Company’s accounts payable
and accrued expenses approximate fair value due to the short-term nature of these liabilities.
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Concentration of Credit Risk and of Significant Customers and Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash,
cash equivalents and marketable securities. The Company holds all cash, cash equivalents and marketable securities balances
at one accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it
is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company’s top five customers represented 70% of total laboratory service revenues earned from August 3,
2017, the date of acquisition of Confluence, through December 31, 2017.
The Company is dependent on third party manufacturers to supply products for research and development activities
of its programs, including preclinical and clinical testing. These programs could be adversely affected by a significant
interruption in the supply of active pharmaceutical ingredients and other components.
Deferred Offering Costs
The Company recorded legal, accounting and other third-party fees associated directly with the filing of its
registration statement on Form S-3 in November 2016, in other assets on its consolidated balance sheet. These deferred
offering costs are recorded in stockholders’ equity as a reduction of the proceeds generated from offerings consummated
under the Form S-3 on a pro rata basis. The Company may also record legal, accounting and other third-party fees directly
associated with in-process equity financings as deferred offering costs (non-current) until such financings are
completed. The deferred costs related to an in-process equity financing are recorded in stockholders’ equity as a reduction of
the proceeds generated from the related offering when it is completed. Deferred offering costs were $62 and $116 as of
December 31, 2017 and 2016, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using
the straight-line method over the useful life of the asset. Computer equipment is depreciated over three years. Manufacturing
and laboratory equipment is depreciated over five years. Furniture and fixtures are depreciated over five years. Leasehold
improvements are depreciated over the shorter of the lease term or their useful life. Expenditures for repairs and maintenance
of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation of assets
disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.
Impairment of Long Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for
recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include
significant underperformance of the business in relation to expectations, significant negative industry or economic trends and
significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long lived
asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and
eventual disposition of the long lived asset to its carrying value. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment
loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on
discounted cash flows.
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Intangible Assets
Intangible assets include both finite-lived and indefinite-lived assets. Finite-lived intangible assets are amortized
over their estimated useful life based on the pattern over which the intangible assets are consumed or otherwise used up. If
that pattern cannot be reliably determined, the straight-line method of amortization is used. Finite-lived intangible assets
consist of a research technology platform the Company acquired through the acquisition of Confluence. Indefinite-lived
intangible assets consist of an in-process research and development (“IPR&D”) drug candidate acquired through the
acquisition of Confluence. IPR&D assets are considered indefinite-lived until the completion or abandonment of the
associated research and development efforts. The cost of IPR&D assets is either amortized over their estimated useful life
beginning when the underlying drug candidate is approved and launched commercially, or expensed immediately if
development of the drug candidate is abandoned.
Finite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least
annually, which the Company performs during the fourth quarter, or when indicators of an impairment are present. The
Company recognizes impairment losses when and to the extent that the estimated fair value of an indefinite-lived intangible
asset is less than its carrying value.
Goodwill
Goodwill is not amortized, but rather is subject to testing for impairment at least annually, which the Company
performs during the fourth quarter, or when indicators of an impairment are present. The Company considers each of its
operating segments, dermatology therapeutics and contract research, to be a reporting unit since this is the lowest level for
which discrete financial information is available. The Company has attributed the full amount of the goodwill acquired with
Confluence, or $18,504, to the dermatology therapeutics segment. The annual impairment test performed by the Company is
a qualitative assessment based upon current facts and circumstances related to operations of the dermatology therapeutics
segment. If the qualitative assessment indicates an impairment may be present, the Company would perform the required
quantitative analysis and an impairment charge would be recognized to the extent that the estimated fair value of the
reporting unit is less than its carrying amount. However, any loss recognized would not exceed the total amount of goodwill
allocated to that reporting unit.
Contingent Consideration
The Company initially recorded the contingent consideration related to future potential payments based upon the
achievement of certain development, regulatory and commercial milestones, resulting from the acquisition of Confluence, at
its estimated fair value on the date of acquisition. Changes in fair value reflect new information about the likelihood of the
payment of the contingent consideration and the passage of time. Future changes in the fair value of the contingent
consideration, if any, will be recorded as income or expense in the Company’s consolidated statement of operations.
Segment Data
The Company operates in two segments, dermatology therapeutics and contract research, for the purposes of
assessing performance and making operating decisions. The Company’s dermatology therapeutics segment, which has not
generated any revenue to date, is focused on identifying, developing and commercializing innovative and differentiated
therapies to address significant unmet needs in medical and aesthetic dermatology and immunology. The Company’s
contract research segment is focused on providing laboratory services under contract research arrangements to
pharmaceutical and biotech companies looking to supplement their research and development efforts with difficult-to-execute
specialty skills and programs.
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Recently Issued and Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2017-01, Business Combinations-Clarifying the Definition of a Business (Topic 805). The amendments in this ASU
provide a screen to determine when a set of acquired assets and/or activities is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a
group of similar identifiable assets, the set is not a business. The amendments in this ASU will reduce the number of
transactions that meet the definition of a business. ASU 2017-01 is effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those years, and early adoption is permitted. The Company is assessing
the potential impact of ASU 2017-01 on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other-Simplifying the Test for Goodwill
Impairment (Topic 350). Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU
eliminate Step 2 from the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15,
2019, and early adoption is permitted. The Company adopted the provisions of this standard early, the impact of which on its
consolidated financial statements was not significant.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU
introduces a new model for recognizing credit losses on financial instruments based upon estimated expected credit
losses. ASU 2016-13 will apply to loans, accounts receivable, financial assets measured at amortized cost and at fair value
through other comprehensive income, loan commitments and certain off-balance sheet credit exposures. ASU 2016-13 is
effective for annual reporting periods beginning after December 15, 2019, including interim periods within those years, and
early adoption is permitted. The Company is assessing the potential impact of ASU 2016-13 on its consolidated financial
statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this
ASU, entities should recognize revenue in an amount that reflects the consideration to which they expect to be entitled to in
exchange for goods and services provided. ASU 2014-09 is effective for annual reporting periods beginning after December
15, 2017. The Company is assessing the potential impact of ASU 2014-09 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This
ASU requires all tax effects of share-based payment settlements to be recorded through the income statement. Currently, tax
benefits in excess of compensation cost, or “windfalls”, are recorded in equity, and tax deficiencies, or “shortfalls”, are
recorded to equity to the extent of previous windfalls, and then to the income statement. In addition, under the new guidance,
companies will be permitted to make a policy election to recognize the impact of forfeitures either when they occur, or on an
estimated basis. Finally, this update simplifies withholding requirements to allow companies to withhold up to an employee’s
maximum tax rate without resulting in liability classification for the award. ASU 2016-09 was effective for annual reporting
periods beginning after December 15, 2016. The Company adopted the provisions of this standard early, the impact of which
on its consolidated financial statements was not significant.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15,
2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective
transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements, with certain practical expedients available. The
Company is currently evaluating the potential impact of the adoption of this standard.
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In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities. The amendments in this update revise the accounting related to the classification and measurement of
investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair
value. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of
the adoption of this standard.
In November 2015, the FASB issued ASU 2015- 17, Balance Sheet Classification of Deferred Taxes. The
amendments in this update simplify the presentation of deferred income taxes to require that deferred tax liabilities and assets
are classified as noncurrent in a statement of financial position. The amendments are effective for annual reporting periods
beginning after December 15, 2016 and interim reporting periods within those annual periods. Early application is
permitted. The Company adopted the provisions of this standard early, the impact of which on its consolidated financial
statements was not significant.
3. Confluence Acquisition
In August 2017, the Company entered into an Agreement and Plan of Merger with Confluence, Aclaris Life
Sciences, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), and Fortis
Advisors LLC, as representative of the holders of Confluence equity (the “Agreement and Plan of Merger”). Pursuant to the
terms of the Agreement and Plan of Merger, the Merger Sub merged with and into Confluence, with Confluence surviving as
a wholly-owned subsidiary of the Company, resulting in the Company’s acquisition of 100% of the outstanding shares of
Confluence. Pursuant to the terms of the Agreement and Plan of Merger, the Company gave aggregate consideration with a
fair value of $24,322 to the equity holders of Confluence, subject to a post-closing working capital adjustment. Confluence
was a privately held biotechnology company focused on the discovery and development of kinase inhibitors to treat
inflammatory and immunological disorders and cancer. Confluence also provided laboratory services under contract research
arrangements to pharmaceutical and biotechnology companies looking to supplement their research and development efforts
with difficult-to-execute specialty skills and programs. The acquisition of Confluence has added small molecule drug
discovery and preclinical development capabilities, which has allowed the Company to bring early-stage research and
development activities in-house that were previously outsourced to third parties.
The Company also agreed to pay the Confluence equity holders contingent consideration of up to $80,000, based
upon the achievement of certain development, regulatory and commercial milestones set forth in the Agreement and Plan of
Merger. Of the contingent consideration, $2,500 may be paid in shares of the Company’s common stock upon the
achievement of a specified development milestone. In addition, the Company has agreed to pay the Confluence equity
holders specified future royalty payments calculated as a low single-digit percentage of annual net sales, subject to specified
reductions, limitations and other adjustments, until the date that all of the patent rights for that product have expired, as
determined on a country-by-country and product-by-product basis or, in specified circumstances, ten years from the first
commercial sale of such product. In addition, if the Company sells, licenses or transfers any of the intellectual property
acquired from Confluence pursuant to the Agreement and Plan of Merger to a third party, the Company will be obligated to
pay the Confluence equity holders a portion of any incremental consideration (in excess of the development and milestone
payments described above) that the Company receives from such sales, licenses or transfers in specified circumstances.
The following table summarizes the fair value of total consideration given to the Confluence equity holders pursuant
to the Agreement and Plan of Merger:
Cash consideration paid
Aclaris common stock issued
Contingent consideration
Total fair value of consideration to Confluence equity holders
The Company funded the acquisition and transaction expenses with cash on hand.
$
$
10,269
9,675
4,378
24,322
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The Company accounted for this transaction as a business combination using the acquisition method of
accounting. Under the acquisition method of accounting, the assets acquired and liabilities assumed in this transaction were
recorded at their respective fair values on the date of acquisition using assumptions that are subject to change. The Company
expects to finalize its allocation of the purchase price upon the finalization of valuations for the identified intangible assets,
final resolution of the post-closing working capital adjustment and certain tax accounts that are based on the best estimates of
management. The completion and filing of federal and state tax returns for the acquired entity may result in adjustments to
the carrying value of assets and liabilities.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed in the
acquisition of Confluence as of the acquisition date:
Cash and cash equivalents
Accounts receivable, net
Other current assets
Property and equipment
Other intangible assets
IPR&D
Goodwill
Total assets acquired
Accounts payable and accrued expenses
Deferred tax liability
Other liabilities
Total liabilities assumed
Total net assets acquired
$
622
574
89
268
751
6,629
18,504
27,437
656
2,386
73
3,115
$
24,322
The estimated fair value of the IPR&D, and other identified intangibles, acquired was determined using a
replacement cost method, which estimates the cost that would be required to rebuild the intangible assets identified in the
acquisition of Confluence. The acquisition of Confluence resulted in the recognition of goodwill in the amount of $18,504
which represents the value of new products and technologies to be developed in the future as well as the value of the
employee workforce acquired.
The following supplemental unaudited pro forma information presents the Company’s financial results, for the
periods presented, as if the acquisition of Confluence had occurred on January 1, 2015. This supplemental unaudited pro
forma financial information has been prepared for comparative purposes only, and is not necessarily indicative of what actual
results would have been had the acquisition of Confluence occurred on January 1, 2015, nor is this information indicative of
future results.
Revenue
Gross profit
Total operating expenses
Net loss
Year Ended
December 31,
2016
2017
2015
$
4,365 $
1,347
73,810
(70,391)
3,693 $
1,652
51,277
(49,148)
2,630
1,302
24,151
(22,803)
The supplemental unaudited pro forma financial results for the year ended December 31, 2017 includes an
adjustment to exclude $1,351 of acquisition-related expenses, as well as $888 to exclude revenue billed to the Company by
Confluence. The supplemental unaudited pro forma financial results for the year ended December 31, 2017 also includes an
adjustment for amortization expense related to the other intangible assets acquired.
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There were no acquisition-related expenses incurred, or revenue billed to the Company by Confluence, for the years
ended December 31, 2016 and 2015, and accordingly, no adjustments are necessary for these items in the supplemental pro
forma financial results for those years. The supplemental unaudited pro forma financial results for the years ended December
31, 2016 and 2015 includes an adjustment for amortization expense related to the other intangible assets acquired.
4. Fair Value of Financial Assets and Liabilities
The following tables present information about the fair value measurements of the Company’s financial assets and
liabilities which are measured at fair value on a recurring basis, and indicate the level of the fair value hierarchy utilized to
determine such fair values:
Assets:
Cash equivalents
Marketable securities
Total Assets
Liabilities:
Level 1
Level 2
Level 3
Total
December 31, 2017
$ 19,339 $
— $
—
188,652
$ 19,339 $ 188,652 $
— $ 19,339
—
188,652
— $ 207,991
Acquisition-related contingent consideration
Total liabilities
$
$
— $
— $
— $ 4,378
$
— $ 4,378 $
4,378
4,378
Assets:
Cash equivalents
Marketable securities
Total
Level 1
Level 2
Level 3
Total
December 31, 2016
$ 11,522 $ 12,691 $
—
143,963
$ 11,522 $ 156,654 $
— $ 24,213
—
143,963
— $ 168,176
As of December 31, 2017 and 2016, the Company’s cash equivalents consisted of investments with maturities of
less than three months and included a money market fund which was valued based upon Level 1 inputs, and commercial
paper and corporate debt securities which were valued based upon Level 2 inputs. In determining the fair value of its Level 2
investments the Company relied on quoted prices for identical securities in markets that are not active. These quoted prices
were obtained by the Company with the assistance of a third‑party pricing service based on available trade, bid and other
observable market data for identical securities. Quarterly, the Company compares the quoted prices obtained from the
third‑party pricing service to other available independent pricing information to validate the reasonableness of the quoted
prices provided. The Company evaluates whether adjustments to third-party pricing is necessary and, historically, the
Company has not made adjustments to quoted prices obtained from the third-party pricing service. During the years ended
December 31, 2017 and 2016, there were no transfers between Level 1, Level 2 and Level 3.
As of December 31, 2017 and 2016, the fair value of the Company’s available-for-sale marketable securities by type
of security was as follows:
December 31, 2017
Gross
Gross
Amortized Unrealized Unrealized
Gain
Loss
Cost
Fair
Value
Marketable securities:
Corporate debt securities
Commercial paper
Asset-backed securities
U.S. government agency debt securities
Total marketable securities
$ 37,401 $
85,202
16,708
49,511
$ 188,822 $
— $
—
—
—
— $
(68) $ 37,333
85,202
—
16,695
(13)
(89)
49,422
(170) $ 188,652
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December 31, 2016
Gross
Gross
Amortized Unrealized Unrealized
Gain
Loss
Cost
Fair
Value
Marketable securities:
Corporate debt securities
Commercial paper
Asset-backed securities
U.S. government agency debt securities
Total marketable securities
5. Property and Equipment, Net
Property and equipment, net consisted of the following:
$ 51,352 $
20,463
28,692
43,505
$ 144,012 $
— $
—
6
8
14 $
(59) $ 51,293
20,463
—
28,697
(1)
43,510
(3)
(63) $ 143,963
Computer equipment
Manufacturing equipment
Lab equipment
Furniture and fixtures
Leasehold improvements
Property and equipment, gross
Accumulated depreciation
Property and equipment, net
December 31,
2017
2016
$
650 $
511
721
327
430
2,639
(480)
$ 2,159 $
310
149
—
115
33
607
(126)
481
Depreciation expense was $370, $120 and $90 for the years ended December 31, 2017, 2016 and 2015,
respectively.
6. Accrued Expenses
Accrued expenses consisted of the following:
Employee compensation expenses
Research and development expenses
Payable to NST
Vixen contract payable
Capital leases, current portion
Other
Total accrued expenses
December 31,
2017
2016
$ 3,010 $ 1,732
1,166
—
100
—
380
$ 4,940 $ 3,378
627
590
100
142
471
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7. Stockholders’ Equity
Preferred Stock
As of December 31, 2017 and 2016, the Company’s amended and restated certificate of incorporation authorized the
Company to issue 10,000,000 shares of undesignated preferred stock. There were no shares of preferred stock outstanding as
of December 31, 2017 and 2016.
The Company previously issued Series A, Series B and Series C convertible preferred stock (collectively, the
“Preferred Stock”). Through August 28, 2015, the Company had issued an aggregate of 11,677,076 shares of Preferred Stock
in the Series A, Series B and Series C offerings. Upon the closing of the Company’s IPO in October 2015, all of the then
outstanding Preferred Stock was converted into an aggregate total of 11,677,076 shares of common stock. Also in connection
with the IPO, the Company amended and restated its certificate of incorporation and authorized 10,000,000 shares of
undesignated preferred stock.
Common Stock
As of December 31, 2017 and 2016, the Company’s certificate of incorporation, as amended and restated, authorized
the Company to issue 100,000,000 shares of $0.00001 par value common stock.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s
stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any,
subject to any preferential dividend rights of any series of preferred stock that may be outstanding. No dividends have been
declared through December 31, 2017.
Restricted Common Stock
In July 2012, the Company issued 2,730,427 shares of restricted common stock with time-based vesting to its
founders in connection with the formation of the Company. Unvested shares of restricted common stock could not be sold or
transferred by the holders of those shares. Of the shares issued in July 2012, 1,918,834 shares were subject to vesting
pursuant to restricted stock agreements with 25% vesting in July 2013 and the remaining 75% vesting in equal monthly
installments over a three-year period thereafter. Upon the Company’s IPO in October 2015, all remaining unvested shares of
restricted common stock vested immediately. The estimated grant‑date fair value of the restricted common stock issued was
$0.00001 per share, equal to the par value of each share issued. The aggregate fair value of restricted common stock that
vested during the years ended December 31, 2017, 2016 and 2015 was $0, $0 and $6,423, respectively. As of December 31,
2017 and 2016, no shares were subject to repurchase.
Initial Public Offering
In October 2015, the Company’s registration statement on Form S-1 relating to its initial public offering of its
common stock (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The Company’s
common stock began trading on the Nasdaq Global Select Market on October 7, 2015. The IPO closed on October 13, 2015,
and 5,000,000 shares of common stock were sold at a price to the public of $11.00 per share, for aggregate gross proceeds of
$55,000. In addition, upon the closing of the IPO, all of the Company’s outstanding convertible preferred stock was
converted into an aggregate total of 11,677,076 shares of common stock. The conversion of the convertible preferred stock
was a non-cash transaction which has been excluded from the Consolidated Statements of Cash Flows.
On October 12, 2015, the underwriters of the IPO exercised in full their option to purchase additional shares, and on
October 13, 2015, the Company sold 750,000 additional shares of common stock at a price to the public of $11.00 per share,
for aggregate gross proceeds of $8,250.
The Company paid underwriting discounts and commissions of $4,428 to the underwriters in connection with the
IPO, including the underwriters’ exercise of their option to purchase additional shares. In addition, the Company incurred
expenses of $2,272 in connection with the IPO. The net offering proceeds received by the Company, after deducting
underwriting discounts, commissions and offering expenses, were $56,550.
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Private Placement
In June 2016, pursuant to a securities purchase agreement with certain accredited investors dated May 27, 2016, the
Company closed a private placement in which it sold an aggregate of 1,081,082 shares of common stock at a price of $18.50
per share, for gross proceeds of $20,000. The Company incurred placement agent fees of $1,300 and expenses of $153 in
connection with the private placement. The net offering proceeds received by the Company, after deducting placement agent
fees and transaction expenses, were $18,547.
November 2016 Public Offering
In November 2016, the Company’s registration statement on Form S-3 was declared effective by the SEC. On
November 23, 2016, the Company closed a follow-on public offering in which 4,000,000 shares of common stock were sold
to the public at a price of $22.75 per share, for gross proceeds of $91,000. On November 17, 2016, the underwriters
exercised in full their option to purchase 600,000 additional shares of common stock at a price to the public of $22.75 per
share, for gross proceeds of $13,650.
The Company paid underwriting discounts and commissions of $6,279 to the underwriters in connection with the
offering, including the underwriters’ exercise of their option to purchase additional shares. In addition, the Company
incurred expenses of $188 in connection with the offering. The net offering proceeds received by the Company, after
deducting underwriting discounts, commissions and offering expenses, were $98,158.
At-The-Market Equity Offering
In November 2016, the Company entered into an at-the-market sales agreement with Cowen and Company, LLC to
sell the Company’s securities under the Company’s registration statement on Form S-3. During the year ended December 31,
2017, the Company issued 635,000 shares of common stock under the at-the-market sales agreement. As of December 31,
2017, the Company had issued and sold an aggregate of 635,000 shares of common stock under the at-the-market sales
agreement at a weighted average price per share of $31.50, for aggregate gross proceeds of $20,003. The Company incurred
expenses of $691 in connection with the shares issued under the at-the-market sales agreement.
August 2017 Public Offering
In August 2017, the Company entered into an underwriting agreement pursuant to which the Company issued and
sold 3,747,602 shares of common stock under the Company’s registration statement on Form S-3, including the underwriters’
partial exercise of their option to purchase additional shares. The shares of common stock were sold to the public at a price
of $23.02 per share, for gross proceeds of $86,270.
The Company paid underwriting discounts and commissions of $5,176 to the underwriters in connection with the
offering. In addition, the Company incurred expenses of $176 in connection with the offering. The net offering proceeds
received by the Company, after deducting underwriting discounts and commissions and offering expenses, were $80,918.
8. Stock‑Based Awards
2017 Inducement Plan
In July 2017, the Company’s board of directors adopted the 2017 Inducement Plan (the “2017 Inducement
Plan”). The 2017 Inducement Plan is a non-shareholder approved stock plan adopted pursuant to the “inducement exception”
provided under Nasdaq listing rules. The only employees eligible to receive grants of awards under the 2017 Inducement
Plan are individuals who satisfy the standards for inducement grants under Nasdaq rules, generally including individuals who
were not previously an employee or director of the Company. Under the terms of the 2017 Inducement Plan the Company
may grant up to 1,000,000 shares of common stock pursuant to nonqualified stock options, stock appreciation rights,
restricted stock awards, RSUs, and other stock awards. The shares of common stock underlying any awards that expire, or
are otherwise terminated, settled in cash or repurchased by the Company under the 2017 Inducement Plan will be added back
to the shares of common stock available for issuance under the 2017 Inducement Plan. As of December 31, 2017, 489,884
shares of common stock were available for grant under the 2017 Inducement Plan.
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2015 Equity Incentive Plan
In September 2015, the Company’s board of directors adopted the 2015 Equity Incentive Plan (the “2015 Plan”),
and the Company’s stockholders approved the 2015 Plan. The 2015 Plan became effective in connection with the Company’s
IPO. Beginning at the time the 2015 Plan became effective, no further grants may be made under the Company’s 2012
Equity Compensation Plan, as amended and restated (the “2012 Plan”). The 2015 Plan provides for the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock
awards, cash-based awards and other stock-based awards. The number of shares initially reserved for issuance under the 2015
Plan was 1,643,872 shares of common stock. The number of shares of common stock that may be issued under the 2015 Plan
will automatically increase on January 1 of each year, beginning on January 1, 2016 and ending on January 1, 2025, in an
amount equal to the lesser of (i) 4.0% of the shares of the Company’s common stock outstanding on December 31 of the
preceding calendar year or (ii) an amount determined by the Company’s board of directors. The shares of common stock
underlying any awards that expire, are otherwise terminated, settled in cash or repurchased by the Company under the 2015
Plan and the 2012 Plan will be added back to the shares of common stock available for issuance under the 2015 Plan. As of
December 31, 2017, 1,404,498 shares remained available for grant under the 2015 Plan. As of January 1, 2018, the number
of shares of common stock that may be issued under the 2015 Plan was automatically increased by 1,234,260 shares.
2012 Equity Compensation Plan
Upon the 2015 Plan becoming effective, no further grants can be made under the 2012 Plan. The Company granted
a total of 1,140,524 stock options under the 2012 Plan, of which 984,720 and 1,049,667 were outstanding as of December 31,
2017, and 2016, respectively. Stock options granted under the 2012 Plan vest over four years and expire after ten years. As
required, the exercise price for the stock options granted under the 2012 Plan was not less than the fair value of common
shares as determined by the Company as of the date of grant.
Stock Option Valuation
The weighted average assumptions the Company used to estimate the fair value of stock options granted during the
years ended December 31, 2017, 2016 and 2015 were as follows:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
Year Ended
December 31,
2016
2017
2015
1.93 %
6.2
94.19 %
0 %
2.06 %
6.5
94.86 %
0 %
1.78 %
6.3
93.90 %
0 %
The Company recognizes compensation expense for awards over their vesting period. Compensation expense for
awards includes the impact of forfeiture in the period when they occur.
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Stock Options
The following table summarizes stock option activity for the years ended December 31, 2017, 2016 and 2015:
Weighted
Number
of Shares
Price
Weighted Average
Average
Exercise
Remaining Aggregate
Contractual
Term
(in years)
Intrinsic
Value
Outstanding as of December 31, 2014
Granted
Exercised
Forfeited and canceled
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited and canceled
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited and cancelled
Outstanding as of December 31, 2017
Options vested and expected to vest as of December 31, 2017
Options exercisable as of December 31, 2017
500,262 $
1,238,262
—
—
1,738,524
1,083,919
(51,980)
(68,113)
2,702,350 $
790,100
(36,738)
(126,955)
3,328,757 $
3,328,757 $
1,239,736
$
(1)
1.22
18.08
—
—
13.23
27.12
—
—
18.94
26.21
6.40
22.05
20.69
20.69
15.56
9.77 $
305
9.51
24,722
9.05 $ 24,434
8.28 $ 19,812
8.28 $ 19,812
7.43 $ 13,414
(1) All options granted under the 2012 Plan are exercisable immediately, subject to a repurchase right in the Company’s
favor that lapses as the option vests. This amount reflects the number of shares under options that were vested, as
opposed to exercisable, as of December 31, 2017.
The weighted average grant date fair value of stock options granted during the years ended December 31, 2017,
2016 and 2015 was $20.28, $21.16 and $13.84 per share, respectively.
The intrinsic value of a stock option is calculated as the difference between the exercise price of the stock option and
the fair value of the underlying common stock, and cannot be less than zero.
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Restricted Stock Units
The following table summarizes RSU activity for the years ended December 31, 2017, 2016 and 2015.
Outstanding as of December 31, 2014
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2015
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2016
Granted
Vested
Forfeited and cancelled
Outstanding as of December 31, 2017
Stock‑Based Compensation
Weighted
Average
Grant Date
Fair Value
Per Share
28.68
28.68
27.16
28.68
28.68
27.43
26.27
26.89
27.53
27.02
Number
of Shares
—
53,800 $
—
—
53,800
180,764
(12,950)
(2,000)
219,614 $
117,883
(40,705)
(13,239)
283,553 $
The following table summarizes stock-based compensation expense recorded by the Company for the years ended
December 31, 2017, 2016 and 2015:
Year Ended
December 31,
2017
2016
2015
Cost of revenue
Research and development
General and administrative
Total stock-based compensation expense
$
211 $
— $
2,291
3,813
$ 14,430 $ 6,104 $
5,471
8,748
—
257
634
891
As of December 31, 2017, the Company had unrecognized stock‑based compensation expense for stock options and
RSUs of $36,150 and $5,849, respectively, which is expected to be recognized over weighted average periods of 2.93 years
and 2.93 years, respectively.
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9. Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
Numerator:
Net loss
Accretion of redeemable convertible preferred stock
Net loss attributable to common stockholders
Denominator:
Weighted average shares of common stock outstanding
Less: Weighted average shares of unvested restricted common stock
outstanding
Weighted average common shares outstanding used in calculating net
loss per share attributable to common stockholders, basic and diluted
Net loss per share attributable to common stockholders, basic and diluted
Year Ended
December 31,
2016
2017
2015
$
$
(68,523) $
—
(68,523) $
(48,079) $
—
(48,079) $
(20,563)
(2,566)
(23,129)
28,102,386
21,415,733
6,637,678
—
—
(530,636)
28,102,386
$
(2.44) $
21,415,733
6,107,042
(3.79)
(2.25) $
To calculate net loss attributable to common stockholders the Company reduced the net loss for the accretion of
issuance costs and cumulative dividends accrued but not paid through August 28, 2015, and the remaining cumulative
dividends accrued but not paid through October 13, 2015, the date on which all convertible preferred stock converted to
common stock.
The Company’s potential dilutive securities, which included stock options, RSUs, preferred stock, and shares of
restricted common stock that were issued but not yet vested, have been excluded from the computation of diluted net loss per
share since the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares
outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The
following table presents potential common shares excluded from the calculation of diluted net loss per share attributable to
common stockholders for the years ended December 31, 2017, 2016 and 2015. All share amounts presented in the table
below represent the total number outstanding as of December 31.
Options to purchase common stock
Restricted stock unit awards
Total potential common shares
10. Commitments and Contingencies
Agreements for Office Space
Year Ended
December 31,
2016
2015
2017
3,328,757
283,553
3,612,310
2,702,350 1,738,524
53,800
2,921,964 1,792,324
219,614
In November 2017, the Company entered into a sublease agreement with a third party. The Company subleases
33,019 square feet of office space under the terms of the agreement for its headquarters in Wayne, Pennsylvania. Subject to
the consent of Chesterbrook Partners, LP (“Landlord”) as set forth in the lease by and between them and Auxilium
Pharmaceuticals, LLC (“Sublandlord”), the sublease has a term that runs through October 2023. If for any reason the lease
between the Landlord and Sublandlord is terminated or expires prior to October 2023, the Company’s sublease will
automatically terminate.
In November 2016, the Company entered into a lease agreement with a third party for additional office space in the
Malvern, Pennsylvania with a term beginning in February 2017, and ending in November 2019. The Company also occupies
office and laboratory space in St. Louis, Missouri under the terms of an agreement which it entered into in January 2018 and
which expires in December 2018.
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Rent expense was $946, $254 and $119 for the years ended December 31, 2017, 2016 and 2015, respectively. The
Company recognizes rent expense on a straight-line basis over the term of the agreement and has accrued for rent expense
incurred but not yet paid.
As of December 31, 2017, future minimum lease payments under the sublease were as follows:
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
664
627
589
605
622
532
3,639
Capital Leases for Laboratory Equipment
The Company leases laboratory equipment which is used in its laboratory space in St. Louis, Missouri under two
capital lease financing arrangements which the Company entered into in August 2017 and October 2017. The capital leases
have terms which end in October 2020 and December 2020.
Stock Purchase Agreement with Vixen Pharmaceuticals, Inc
Pursuant to the stock purchase agreement with Vixen the Company is obligated to make annual payments of $100
on March 24 of each year, through March 2022, with such amounts being creditable against specified future payments.
th
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to
vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising
out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the
Company has entered into indemnification agreements with members of its board of directors that will require the Company,
among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors
or officers. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result
of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements
will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities
related to such obligations in its consolidated financial statements as of December 31, 2017 or 2016.
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11. Income Taxes
The Tax Cuts and Jobs Act (the "TCJA") was enacted on December 22, 2017 and became effective January 1, 2018.
The Tax Act made significant changes to U.S. tax law, including lowering U.S. corporate income tax rates, implementing a
territorial tax system, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries and
modifying the taxation of other income and expense items.
The TCJA reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to
21% under the TCJA, the Company revalued its deferred tax liabilities, net as of December 31, 2017. The impact of
revaluation of the deferred tax liabilities, net was $18,507 of income tax expense, which was more than offset by a reduction
in the valuation allowance of $20,344 resulting in a net impact of a $1,837 tax benefit. The net tax benefit recorded was
primarily the result of tax law changes which impacted the deferred tax liability the Company recorded for IPR&D related to
the acquisition of Confluence. Under GAAP, IPR&D is an indefinite lived intangible that is capitalized on the balance sheet,
but which does not have a cost basis under U.S. tax law.
The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign
subsidiary earnings and profits. The Company did not have consolidated accumulated earnings and profits attributable to its
foreign subsidiary; accordingly, the Company did not record any income tax expense related to the transition tax.
Due to the timing of the enactment of the TCJA and the substantial changes it brings, the Staff of the SEC issued
SAB 118 which provides a measurement period to report the impact of the TCJA. During the measurement period,
provisional amounts for the effects of the law are recorded to the extent a reasonable estimate can be made. To the extent that
all information necessary is not available, prepared or analyzed, companies may recognize provisional estimated amounts for
a period of up to one year following enactment of the TCJA.
During the years ended December 31, 2017, 2016 and 2015, the Company did not record an income tax benefit for
net operating losses incurred in each year due to the uncertainty of realizing a benefit from those items.
Loss before income taxes is allocated as follows:
Year Ended December 31,
U.S. operations
Foreign operations
Loss before income taxes
2017
2016
$ (63,665) $ (40,597) $ (11,823)
(8,740)
$ (70,353) $ (48,079) $ (20,563)
(6,688)
(7,482)
2015
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as
follows:
Federal statutory income tax rate
State taxes, net of federal benefit
Research and development tax credits
Permanent differences
Foreign rate differential
Change in deferred tax asset valuation allowance
Impact of U.S. tax reform
Effective income tax rate
114
Year Ended December 31,
2016
(34.0)%
(5.2)
(2.0)
1.8
3.2
36.2
—
— %
2017
(34.0)%
(9.7)
(1.1)
0.4
1.7
17.4
22.7
(2.6)%
2015
(34.0)%
(3.8)
(1.5)
—
6.0
33.3
—
— %
Table of Contents
Deferred tax liabilities, net as of December 31, 2017 and 2016 consisted of the following:
Deferred tax assets:
Net operating loss carryforwards
Capitalized start up costs
Research and development tax credit carryforwards
Capitalized research and development expenses
Intangible asset
Stock‑based compensation expenses
Property and equipment
Other
Total deferred tax assets
Deferred tax liabilities:
Section 481(a) adjustment
Intangible asset
Other
Total deferred tax liabilities
Valuation allowance
Deferred tax liabilities, net
$
$
December 31,
2017
2016
26,566 $ 16,836
8,840
9,940
1,480
2,296
594
3,595
1,403
—
2,629
6,220
199
86
2
280
31,983
48,983
(498)
(1,843)
(313)
(2,654)
(46,878)
(549) $
(1,257)
—
—
(1,257)
(30,726)
—
As of December 31, 2017, the Company had federal and state net operating loss carryforwards of $76,310 and
$117,808, respectively, which begin to expire in 2032. As of December 31, 2017, the Company also had federal research and
development tax credit carryforwards of $2,202 which begin to expire in 2032, and state research and development tax credit
carryforwards of $118 which begin to expire in 2022. The Company also has $1,292 of loss carry forwards in the United
Kingdom which can be carried forward indefinitely. Utilization of the net operating loss carryforwards and research and
development tax credit carryforwards in the United States may be subject to a substantial annual limitation under Section 382
of the Internal Revenue Code of 1986 due to ownership changes that may have occurred previously or that could occur in the
future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable
income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of
certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company
has completed an analysis under Section 382 for NOLs generated from July 13, 2012 through December 31, 2016. Although
the Company has experienced Section 382 ownership changes since 2012, the Company has concluded that it should have
sufficient ability to utilize NOLs accumulated during the periods tested. The Company has not yet determined if a Section
382 ownership change has occurred during the year ended December 31, 2017, or for Confluence prior to the acquisition. In
addition, the Company may experience ownership changes in the future as a result of subsequent shifts in its stock
ownership, some of which may be outside of the Company’s control.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax
assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of
commercialization of any products or generation of any revenue from product sales since inception and has concluded that it
is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation
allowance has been established against the deferred tax assets as of December 31, 2017 and 2016. The Company evaluates
positive and negative evidence of its’ ability to realize deferred tax assets at each reporting period.
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Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017, 2016, and
2015 related primarily to the increases in net operating loss carryforwards, capitalized start-up costs, and research and
development tax credit carryforwards and were as follows:
Valuation allowance at beginning of year
Decreases recorded as benefit to income tax provision
Increases resulting from the acquisition of Confluence
Increases recorded to income tax provision
Valuation allowance as of end of year
$
$
2017
Year Ended December 31,
2016
(30,726) $ (13,286) $
2015
(6,444)
—
—
—
—
—
(4,176)
(11,976)
(6,842)
(17,440)
(46,878) $ (30,726) $ (13,286)
During the year ended December 31, 2015, the Company recorded unrecognized tax benefits in the amount of
$4,400 related to start-up costs that were previously deducted beginning in the initial return filing period ended December 31,
2012. During the year ended December 31, 2016, the Company filed a method of accounting change with the IRS related to
the start-up costs, and reversed the related unrecognized tax position. During the year ended December 31, 2017, the
Company recorded uncertain tax benefits related to tax positions from the acquired Confluence business. The following table
summarizes the changes in the Company’s unrecognized tax benefits:
Unrecognized tax benefits at beginning of year
Increases related to prior year tax provisions
Decreases related to prior year tax provisions
Increases related to current year tax provisions
Unrecognized tax benefits as of end of year
Year ended December 31,
2017
— $
(43)
—
—
(43) $
2016
(4,400) $
—
4,400
—
— $
2015
—
(2,624)
—
(1,776)
(4,400)
$
$
The total amount of unrecognized tax benefits that, if recognized, would impact the Company’s effective tax rate
were $36 and $0 as of December 31, 2017 and 2016, respectively. The Company accrues interest and penalties related to
unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and comprehensive
loss. During each of the years ended December 31, 2017, 2016 and 2015, the Company recognized expense (benefit) of $3,
$0 and $0, respectively, related to interest and penalties.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal
course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are
currently no pending income tax examinations. The Company’s tax years are still open under statute from 2012 to the
present. All open years may be examined to the extent that tax credit or net operating loss carryforwards are used in future
periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.
12. Related Party Transactions
In August 2013, the Company entered into a sublease agreement with NeXeption, Inc. ("NeXeption"), which was
subsequently amended and restated in March 2014 and further amended in December 2014. In August 2015, pursuant to an
Assignment and Assumption Agreement, NeXeption, Inc. assigned all interests, rights, duties and obligations under the
sublease to NST Consulting, LLC, a wholly-owned subsidiary of NST, LLC. Following the Assignment and Assumption
Agreement, the sublease was further amended in August 2015, February 2016, October 2016 and July 2017. On November
30, 2017, the Company entered into an agreement with NST Consulting, LLC to terminate the sublease effective March 31,
2018. The Company agreed to pay $590 to NST Consulting, LLC, which amount represents accelerated rent payments. The
Company recorded a one-time charge of $506 in the year ended December 31, 2017 which is included in general and
administrative expenses in the consolidated statement of operations. Total payments made under the sublease during the
years ended December 31, 2017, 2016 and 2015, were $318, $253 and $127, respectively.
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Table of Contents
In February 2014, the Company entered into a services agreement with NST, LLC (the “NST Services Agreement”),
pursuant to which NST, LLC provided certain pharmaceutical development, management and other administrative services to
the Company. The NST Services Agreement was amended in January 2015 pursuant to which NST, LLC assigned all
interests, rights, duties and obligations under the NST Services Agreement to NST Consulting, LLC. Under the NST
Services Agreement, as amended, the Company also provided services to another company under common control with the
Company and NST Consulting, LLC and was reimbursed by NST Consulting, LLC for those services. The Company may
offset any payments owed by the Company to NST Consulting, LLC against payments that are owed by NST Consulting,
LLC to the Company for the provision of personnel, including consultants, to the Company. In November 2017, the
Company provided notice of termination of the NST Services Agreement to NST Consulting, LLC effective December 31,
2017.
Mr. Stephen Tullman, the chairman of the Company’s board of directors, was an executive officer of NeXeption and
is also the manager of NST Consulting, LLC and NST, LLC, and three of the Company’s executive officers are and have
been members of entities affiliated with NST, LLC.
During the years ended December 31, 2017, 2016 and 2015 amounts included in the consolidated statement of
operations for the NST Services Agreement are summarized in the following table:
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
General and administrative expense, net
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
Research and development expense, net
Services provided by NST Consulting, LLC
Services provided to NST Consulting, LLC
Total, net
Year Ended
December 31,
2017
2016
2015
225 $
(17)
208 $
— $
—
— $
323
(56)
267
246
(97)
149
225 $
(17)
208 $
569
(153)
416
$
$
$
$
$
$
455
(294)
161
52
(259)
(207)
507
(553)
(46)
$
$
$
$
$
$
Net payments made to (received from) NST Consulting, LLC
$
300 $
325 $
(46)
The Company had a net amount payable of $570 and $91 due to NST Consulting, LLC under the NST Services
Agreement as of December 31, 2017, and December 31, 2016, respectively.
13. Agreements Related to Intellectual Property
Assignment Agreement and Finder’s Services Agreement
In August 2012, the Company entered into an assignment agreement with the Estate of Mickey Miller (the “Miller
Estate”) under which the Company acquired some of the intellectual property rights covering A-101. The assignment of
intellectual property rights covers specified know-how, along with modifications of, improvements to and variations on A-
101 that meet defined chemical properties. Under the agreement, the Company has the sole and exclusive right, but not the
duty, to develop, obtain regulatory approval for and commercialize A-101 in various countries throughout the world. The
Company is required to use commercially reasonable efforts to develop and commercialize at least one product for at least
one indication in the United States. In connection with obtaining the assignment of the intellectual property from the Miller
Estate, the Company also entered into a separate finder’s services agreement with KPT Consulting, LLC.
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Under the terms of the assignment agreement and the finder’s services agreement, the Company made one-time
milestone payments of $400 in 2013 upon the dosing of the first human subject with ESKATA in the Company’s Phase 2
clinical trial. There are no remaining potential milestone payments under the assignment agreement. Under the finder’s
services agreement, the Company made one-time milestone payments of $300 in the year ended December 31, 2016 upon the
dosing of the first human subject with ESKATA in the Company’s Phase 3 clinical trial and $1,000 in the year ended
December 31, 2017 upon the achievement of specified regulatory milestones. The Company is obligated to make additional
payments of up to $4,500 upon the achievement of specified commercial milestones under the finder’s services
agreement. The Company recorded both milestone payments made under the finder’s services agreement as general and
administrative expense in the consolidated statement of operations. Under each of the assignment agreement and the finder’s
services agreement, the Company is also obligated to pay royalties on sales of ESKATA or related products, at low single-
digit percentages of net sales, subject to reduction in specified circumstances. The Company has not made any royalty
payments to date under either agreement. Both agreements will terminate upon the expiration of the last pending, viable
patent claim of the patents acquired under the assignment agreement, but no sooner than 15 years from the effective date of
the agreements.
License Agreement with Rigel Pharmaceuticals, Inc.
In August 2015, the Company entered into an exclusive, worldwide license and collaboration agreement with Rigel
Pharmaceuticals, Inc. (“Rigel”) for the development and commercialization of products containing specified JAK inhibitors
developed by Rigel. Under this agreement, the Company intends to develop these JAK inhibitors for the treatment of
alopecia areata and potentially for other dermatological conditions. During the year ended December 31, 2015, the Company
made an upfront non-refundable payment of $8,000 to Rigel. In addition, the Company has agreed to make aggregate
payments of up to $80,000 upon the achievement of specified pre‑commercialization milestones, such as clinical trials and
regulatory approvals. Further, the Company has agreed to pay up to an additional $10,000 to Rigel upon the achievement of a
second set of development milestones. With respect to any products the Company commercializes under the agreement, the
Company will pay Rigel quarterly tiered royalties on its annual net sales of each product at a high single‑digit percentage of
annual net sales, subject to specified reductions, until the date that all of the patent rights for that product have expired, as
determined on a country‑by‑country and product‑by‑product basis or, in specified countries under specified circumstances,
ten years from the first commercial sale of such product.
The agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party
for a material breach. The Company may also terminate the agreement without cause at any time upon advance written notice
to Rigel. Rigel, after consultation with the Company, will be responsible for maintaining and prosecuting the patent rights,
and the Company will have final decision making authority regarding such patent rights for a product in the United States
and the European Union. To the extent that the Company and Rigel jointly develop intellectual property, the parties will
confer and decide which party will be responsible for filing, prosecuting and maintaining those patent rights. The agreement
also establishes a joint steering committee composed of an equal number of representatives for each party which will monitor
progress in the development of products.
The Company accounted for the transaction as an asset acquisition as the licensing arrangement did not meet the
definition of a business pursuant to the guidance prescribed in ASC Topic 805, Business Combinations. Accordingly, the
Company recorded the $8,000 upfront payment as research and development expense in the year ended December 31, 2015.
The Company will record as expense any contingent milestone payments or royalties in the period in which such liabilities
are incurred. The Company concluded that licensing arrangement with Rigel did not meet the definition of a business because
the transaction principally resulted in its acquisition of intellectual property. As part of the transaction, the Company did not
acquire any employees or tangible assets, or any processes, protocols or operating systems. In addition, at the time of the
acquisition, there were no activities being conducted related to the licensed patents. The Company will expense the acquired
intellectual property asset as of the acquisition date on the basis that costs of intangible assets that are purchased from others
for use in research and development activities and that have no alternative future uses are research and development costs at
the time the costs are incurred.
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Stock Purchase Agreement with Vixen Pharmaceuticals, Inc. and License Agreement with Columbia University
In March 2016, the Company entered into a stock purchase agreement (the “Vixen Agreement”) with Vixen, JAK1,
LLC, JAK2, LLC and JAK3, LLC (all together with Vixen, the “Selling Stockholders”) and Shareholder Representative
Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Selling Stockholders.
Pursuant to the Vixen Agreement, the Company acquired all shares of Vixen’s capital stock from the Selling Stockholders
(the “Vixen Acquisition”). Following the Vixen Acquisition, Vixen became a wholly-owned subsidiary of the Company.
Pursuant to the Vixen Agreement, the Company paid $600 upfront and issued an aggregate of 159,420 shares of the
Company’s common stock to the Selling Stockholders. The Company is obligated to make annual payments of $100 on
March 24 of each year, through March 2022, with such amounts being creditable against specified future payments that may
be paid under the Vixen Agreement.
th
The Company is obligated to make aggregate payments of up to $18,000 to the Selling Stockholders upon the
achievement of specified pre-commercialization milestones for three products in the United States, the European Union and
Japan, and aggregate payments of up to $22,500 upon the achievement of specified commercial milestones. With respect to
any commercialized products covered by the Vixen Agreement, the Company is obligated to pay low single-digit royalties on
net sales, subject to specified reductions, limitations and other adjustments, until the date that all of the patent rights for that
product have expired, as determined on a country-by-country and product-by-product basis or, in specified circumstances, ten
years from the first commercial sale of such product. If the Company sublicenses any of Vixen’s patent rights and know-how
acquired pursuant to the Vixen Agreement, the Company will be obligated to pay a portion of any consideration the
Company receives from such sublicenses in specified circumstances.
As a result of the transaction with Vixen, the Company became party to the Exclusive License Agreement, by and
between Vixen and the Trustees of Columbia University in the City of New York (“Columbia”), dated as of December 31,
2015 (the “License Agreement”). Under the License Agreement, the Company is obligated to pay Columbia an annual
license fee of $10, subject to specified adjustments for patent expenses incurred by Columbia and creditable against any
royalties that may be paid under the License Agreement. The Company is also obligated to pay up to an aggregate of $11,600
upon the achievement of specified commercial milestones, including specified levels of net sales of products covered by
Columbia patent rights and/or know-how, and royalties at a sub-single-digit percentage of annual net sales of products
covered by Columbia patent rights and/or know-how, subject to specified adjustments. If the Company sublicenses any of
Columbia’s patent rights and know-how acquired pursuant to the License Agreement, it will be obligated to pay Columbia a
portion of any consideration received from such sublicenses in specified circumstances. The royalties, as determined on a
country-by-country and product-by-product basis, are payable until the date that all of the patent rights for that product have
expired, the expiration of any market exclusivity period granted by a regulatory body or, in specified circumstances, ten years
from the first commercial sale of such product. The License Agreement terminates on the date of expiration of all royalty
obligations thereunder unless earlier terminated by either party for a material breach, subject to a specified cure period. The
Company may also terminate the License Agreement without cause at any time upon advance written notice to Columbia.
The Company accounted for the transaction with Vixen as an asset acquisition as the arrangement did not meet the
definition of a business pursuant to the guidance prescribed in ASC Topic 805, Business Combinations. The Company
concluded the transaction with Vixen did not meet the definition of a business because the transaction principally resulted in
the acquisition of the License Agreement. The Company did not acquire tangible assets, processes, protocols or operating
systems. In addition, at the time of the transaction, there were no activities being conducted related to the licensed patents.
The Company expensed the acquired intellectual property as of the acquisition date on the basis that the cost of intangible
assets purchased from others for use in research and development activities, and that have no alternative future uses, are
expensed at the time the costs are incurred. Accordingly, the Company recorded the $600 upfront payment, the fair value of
the shares of common stock issued of $2,355, and the present value of the six non-contingent annual payments as research
and development expense in the year ended December 31, 2016. Additionally, the Company will record as expense any
contingent milestone payments or royalties in the period in which such liabilities are incurred.
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Table of Contents
14. 401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees who meet minimum age and service requirements and allows participants to defer a
portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of
the Company’s board of directors. The Company has elected to match 100% of employee contributions to the 401(k) Plan up
to 4% of the employee’s earnings, subject to certain limitations. Company contributions under the 401(k) Plan were $270,
$176 and $99 for the years ended December 31, 2017, 2016 and 2015, respectively.
15. Segment Information
The Company has two reportable segments, dermatology therapeutics and contract research. The dermatology
therapeutics segment is focused on identifying, developing and commercializing innovative and differentiated therapies to
address significant unmet needs in medical and aesthetic dermatology. The Company’s lead drug, ESKATA, is a proprietary
formulation of high-concentration hydrogen peroxide topical solution that the Company is commercializing as a prescription
treatment for raised SKs, a common non-malignant skin tumor, and which will be distributed by a wholesaler. The contract
research segment earns revenue from the provision of laboratory services to clients through Confluence, the Company’s
wholly-owned subsidiary. Laboratory service revenue is generally evidenced by contracts with clients which are on an
agreed upon fixed-price, fee-for-service basis. The Company does not report balance sheet information by segment since it is
not reviewed by the chief operating decision maker, and all of the Company’s tangible assets are held in the United States.
Year Ended December 31, 2017
Revenue
Cost of revenue
Research and development
General and administrative
Loss from operations
Year Ended December 31, 2016
Revenue
Cost of revenue
Research and development
General and administrative
Loss from operations
Year Ended December 31, 2015
Revenue
Cost of revenue
Research and development
General and administrative
Loss from operations
120
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
1,683
— $ 3,202 $ (1,519) $
(1,519)
— 2,726
1,207
39,790
—
—
33,109
18,445
673
$ (53,781) $ (197) $ (18,445) $ (72,423)
39,790
13,991
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
— $
—
— $
—
—
—
—
33,476
—
—
15,091
11,641
— $ (11,641) $ (48,567)
— $
—
33,476
3,450
$ (36,926) $
Total
Dermatology Contract Corporate
Therapeutics Research and Other Company
$
— $
—
— $
—
—
—
—
15,339
—
—
5,328
4,133
— $ (4,133) $ (20,667)
— $
—
15,339
1,195
$ (16,534) $
Table of Contents
Foreign Subsidiary
The Company’s wholly-owned subsidiary, ATIL, was formed and operates in the United Kingdom. ATIL is utilized
for research and development, regulatory and administrative functions and had $175 and $4,786 of net assets, composed
principally of cash, as of December 31, 2017 and 2016, respectively.
Intersegment Revenue
Revenue for the contract research segment includes $1,519 for services performed on behalf of the dermatology
therapeutics segment for the period between August 3, 2017, the acquisition date for Confluence, and December 31,
2017. All intersegment revenue has been eliminated in the Company’s consolidated statement of operations.
16. Quarterly Financial Information (unaudited)
The following table summarizes the unaudited consolidated financial results of operations for the quarters indicated:
2017 Quarter Ended
Revenue
Gross profit
Operating expenses
Other income, net
Net loss
Net loss per share, basic and diluted
Revenue
Gross profit
Operating expenses
Other income, net
Net loss
Net loss per share, basic and diluted
March 31, June 30,
$
— $
—
— $
—
12,930 15,295
457
(12,559) (14,838)
$
(0.56) $
September 30, December 31,
999
684 $
231
245
25,687
18,987
678
564
(22,934)
(18,192)
(0.74)
(0.63) $
(0.48) $
371
2016 Quarter Ended
March 31, June 30,
$
— $
—
— $
—
13,139 12,989
118
(13,039) (12,871)
$
(0.62) $
September 30, December 31,
—
— $
—
—
11,627
10,812
152
118
(11,475)
(10,694)
(0.49)
(0.50) $
(0.65) $
100
Net loss per share is computed independently for each quarter and, therefore, the sum of the quarterly per share
amounts may not equal the year-to-date per share amount.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our management, including our chief executive officer, who is
our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2017, the end of the period
covered by this Annual Report. The term “disclosure controls and procedures,” as set forth in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a
company that are designed to provide reasonable assurance that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including
its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as
of December 31, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation
required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2017
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public
Accounting Firm
Our management is responsible for establishing and maintaining an adequate system of internal control over
financial reporting, as defined in the Exchange Act Rule 13a-15(f). Management conducted an assessment of our internal
control over financial reporting based on the framework established in 2013 by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control—Integrated Framework. We have excluded our 2017 acquisition of
Confluence from the assessment of internal control over financial reporting as of December 31, 2017 because it was acquired
by us in a business combination in August 2017. The acquisition of Confluence represented approximately 2% of our
consolidated total assets and all of our consolidated net revenues as of, and for the year ended, December 31, 2017. Based on
the assessment, management concluded that, as of December 31, 2017, our internal control over financial reporting was
effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal
control over financial reporting as required by Section 404(c) of the Sarbanes-Oxley Act of 2002. Because we qualify as an
emerging growth company under the JOBS Act, management's report was not subject to attestation by our independent
registered public accounting firm.
Item 9B. Other Information
Not applicable.
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Table of Contents
PART III
We will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders, or the 2018 Proxy
Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly,
certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections
of the 2018 Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference to the sections of the 2018 Proxy
Statement under the captions "Information Regarding the Board of Directors and Corporate Governance," "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference to the sections of the 2018 Proxy Statement
under the captions "Executive Compensation" and "Non-Employee Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference to the sections of the 2018 Proxy
Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Securities
Authorized for Issuance under Equity Compensation Plans."
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference to the sections of the 2018 Proxy
Statement under the captions "Transactions with Related Persons" and "Independence of the Board of Directors."
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference to the sections of the 2018 Proxy
Statement under the caption "Ratification of Selection of Independent Auditors."
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Item 15. Exhibits and Financial Statement Schedules.
PART IV
(a)Exhibits
Exhibit
Number
Description of Document
2.1# Stock Purchase Agreement, by and among the Registrant, Vixen Pharmaceuticals, Inc., JAK1, LLC, JAK2,
LLC, JAK3, LLC and Shareholder Representative Services LLC, dated as of March 24, 2016 (incorporated by
reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the
SEC on May 11, 2016).
2.2# Agreement and Plan of Merger, dated as of August 3, 2017, by and among the Registrant, Aclaris Life
Sciences, Inc., Confluence Life Sciences, Inc. and Fortis Advisors LLC (incorporated by reference to Exhibit
2.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on November
7, 2017).
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1
to the Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on October 13,
2015).
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37581), filed with the SEC on October 13, 2015).
4.1 Specimen stock certificate evidencing shares of Common Stock (incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 25, 2015).
10.1# Clinical and Commercial Supply Agreement, by and between the Registrant and PeroxyChem LLC, dated as of
August 6, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-206437), filed with the SEC on August 17, 2015).
10.2# Assignment Agreement, by and between the Registrant and Mickey J. Miller, II, as personal representative of
the estate of Mickey J. Miller, dated as of August 20, 2012 (incorporated by reference to Exhibit 10.3 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 25, 2015).
10.3# Finder's Services Agreement, by and between the Registrant and KPT Consulting, LLC, dated as of August 25,
2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-206437), filed with the SEC on August 17, 2015).
10.4 Second Amended and Restated Investors' Rights Agreement, dated as of August 28, 2015, by and among the
Registrant and certain of its stockholders (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on September 4,
2015).
10.5+ Amended and Restated 2012 Equity Compensation Plan (incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with
the SEC on September 4, 2015).
10.6+ Form of Stock Option Grant under Amended and Restated 2012 Equity Compensation Plan (incorporated by
reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed
with the SEC on August 17, 2015).
2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement
on Form S-8 (File No. 333-207434), filed with the SEC on October 15, 2015).
10.7+
10.8+ Form of Stock Option Grant Notice and Stock Option Agreement under 2015 Equity Incentive Plan
(incorporated by reference to Exhibit 10.10 to Amendment No. 2 to the Registrant’s Registration Statement on
Form S-1 (File No. 333-206437), filed with the SEC on September 25, 2015).
10.9+ Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under 2015 Equity
Incentive Plan (incorporated by reference to Exhibit 10.11 to Amendment No. 2 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on September 25, 2015).
10.10 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.12 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on August 17, 2015).
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Table of Contents
10.11+ Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.13 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on
September 25, 2015).
10.12# License and Collaboration Agreement, by and between Aclaris Therapeutics International Limited and Rigel
Pharmaceuticals, Inc., dated as of August 27, 2015 (incorporated by reference to Exhibit 10.14 to Amendment
No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-206437), filed with the SEC on
October 1, 2015).
10.13+ Amended and Restated Employment Agreement, by and between the Registrant and Neal Walker, dated as of
October 5, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
(File No. 001-37581), filed with the SEC on November 18, 2015).
10.14+ Employment Agreement, by and between the Registrant and Stuart Shanler, dated as of October 4, 2015
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-
37581), filed with the SEC on November 18, 2015).
10.15+ Employment Agreement, by and between the Registrant and Christopher Powala, dated as of September 17,
2015 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File
No. 001-37581), filed with the SEC on November 18, 2015).
10.16# Exclusive License Agreement, by and between The Trustees of Columbia University in the City of New York
and Vixen Pharmaceuticals, Inc., dated as of December 31, 2015 (incorporated by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on May 11, 2016).
10.17 Amendment to Assignment Agreement, by and between the Registrant and Mickey J. Miller, II, as personal
representative of the estate of Mickey J. Miller, dated as of June 15, 2016 (incorporated herein by reference to
Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212095), filed with the
SEC on June 2, 2016).
10.18 Common Stock Sales Agreement, dated November 2, 2016, by and between the Registrant and Cowen and
Company, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
(File No. 001-37581), filed with the SEC on November 2, 2016).
10.19 Employment Agreement with Kamil Ali-Jackson, dated as of September 17, 2015 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37581), filed with the SEC on
May 9, 2017).
10.20 Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
10.21 Form of Stock Option Grant Notice and Stock Option Agreement used in connection with the Aclaris
Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
10.22 Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement used in connection
with the Aclaris Therapeutics, Inc. Inducement Plan (incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K (File No. 001-37581), filed with the SEC on August 1, 2017).
10.23 Sublease, dated November 2, 2017, by and between the Company and Auxilium Pharmaceuticals, LLC
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-
37581), filed with the SEC on November 2, 2017).
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
24.1* Power of Attorney (contained on signature page hereto).
31.1* Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the
Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *† Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) and
15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
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Table of Contents
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
*
† This certification is being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are
not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
Indicates management contract or compensatory plan.
+
# Confidential treatment has been granted with respect to portions of this exhibit (indicated by asterisks) and those portions
have been separately filed with the SEC.
Item 16. Form 10-K Summary.
Not applicable.
126
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ACLARIS THERAPEUTICS, INC.
By:
/s/ Neal Walker
Neal Walker
President and Chief Executive Officer
Date: March 12, 2018
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Neal Walker, Kamil Ali-Jackson and Frank Ruffo, jointly and severally, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities,
to sign this Annual Report on Form 10-K of Aclaris Therapeutics, Inc., and any or all amendments (including post-effective
amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Neal Walker
Neal Walker
/s/ Frank Ruffo
Frank Ruffo
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
March 12, 2018
March 12, 2018
/s/ Stephen A. Tullman
Stephen A. Tullman
Chairman of the Board of Directors
March 12, 2018
/s/ Christopher Molineaux
Christopher Molineaux
Director
/s/ Anand Mehra, M.D.
Anand Mehra, M.D.
Director
/s/ William Humphries
William Humphries
Director
/s/ Andrew Powell
Andrew Powell
/s/ Andrew Schiff
Andrew Schiff
Director
Director
127
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
March 12, 2018
Subsidiaries of Aclaris Therapeutics, Inc.
Exhibit 21.1
Name of Subsidiary
Aclaris Therapeutics International, Ltd.
Vixen Pharmaceuticals, Inc.
Confluence Life Sciences, Inc.
Jurisdiction of Incorporation or
Organization
United Kingdom
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-214384) and Form
S-8 (No. 333-207434, No. 333-210379, No. 333-216703, No. 333-220149) of our report dated March 12, 2018 relating to the
financial statements, which appears in this Form 10-K.
EXHIBIT 23.1
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 12, 2018
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Neal Walker, certify that:
1. I have reviewed this annual report on Form 10-K of Aclaris Therapeutics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 12, 2018
/s/ Neal Walker
Neal Walker
President & Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank Ruffo, certify that:
1. I have reviewed this annual report on Form 10-K of Aclaris Therapeutics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 12, 2018
/s/ Frank Ruffo
Frank Ruffo
Chief Financial Officer
(principal financial officer and principal accounting officer)
CERTIFICATIONS OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Neal Walker,
President and Chief Executive Officer of Aclaris Therapeutics, Inc. (the “Company”), and Frank Ruffo, Chief Financial
Officer of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2017 (the “Annual Report”), to
which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Exchange Act, and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of
the Company as of the end of the period covered by the Annual Report and results of operations of the Company
for the periods covered by the Annual Report.
In Witness Whereof, the undersigned have set their hands hereto as of the 12th day of March, 2018.
/s/ Neal Walker
Neal Walker
President & Chief Executive Officer
/s/ Frank Ruffo
Frank Ruffo
Chief Financial Officer
* This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as
amended, or the Exchange Act (whether made before or after the date of the Form 10-K), irrespective of any general
incorporation language contained in such filing.