UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2016
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-37722
AEGLEA BIOTHERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
901 S. MoPac Expressway
Barton Oaks Plaza One
Suite 250
Austin, TX
(Address of Principal Executive Offices)
46-4312787
(I.R.S. Employer
Identification No.)
78746
(Zip Code)
Registrant’s Telephone Number, including area code: (512) 942-2935
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Common Stock, $0.0001 Par Value Per Share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
(Nasdaq Global Market)
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 website, 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 Rule 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definite 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 or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “Smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
Large accelerated filer ☐
Non-accelerated filer
☒
Accelerated filer
Smaller reporting company
☐
☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2016 (the last business day of the
Registrant’s second fiscal quarter), based upon the closing price of $4.86 of the Registrant’s common stock as reported on the NASDAQ Global
Market, was approximately $24.6 million.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common stock, $0.0001 par value per share
Outstanding at March 23, 2017
13,452,260 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement (“Proxy Statement”) relating to the 2017 Annual Meeting of Stockholders will be
filed with the Commission within 120 days after the end of the Registrant’s 2016 fiscal year and is incorporated by reference into Part III of this
Report.
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................................................................................................................
Item 1A.Risk Factors ........................................................................................................................................................
Item 1B.Unresolved Staff Comments ...............................................................................................................................
Item 2. Properties ............................................................................................................................................................
Item 3. Legal Proceedings...............................................................................................................................................
Item 4. Mine Safety Disclosures......................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Page
4
30
64
64
64
64
65
Securities ..........................................................................................................................................................
67
Item 6. Selected Financial Data ......................................................................................................................................
70
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations...............................
81
Item 7A.Quantitative and Qualitative Disclosures About Market Risk ..............................................................................
82
Item 8. Financial Statements and Supplementary Data ..................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 110
Item 9A.Controls and Procedures..................................................................................................................................... 110
Item 9B.Other Information ................................................................................................................................................ 110
PART III
Item 10. Directors, Executive Officers and Corporate Governance .................................................................................. 111
Item 11. Executive Compensation..................................................................................................................................... 111
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............ 111
Item 13. Certain Relationships and Related Transactions, and Director Independence................................................... 111
Item 14. Principal Accountant Fees and Services............................................................................................................. 111
PART IV
Item 15.........Exhibits and Financial Statement Schedules ...................................................................................................... 112
Form 10-K Summary ........................................................................................................................................... 112
Item 16.........
SIGNATURES .............................................................................................................................................................. 113
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or Annual Report, contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and section 27A of the Securities
Act of 1933, as amended, or the Securities Act. All statements contained in this Annual Report other than statements of
historical fact, including statements regarding our future clinical development activities, expected results of clinical trials,
future results of operations and financial position, our business strategy and plans and our objectives for future
operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue.” “aim,”
“anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future
events or outcomes are intended to identify forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those
described in Item 1A, “Risk Factors” and elsewhere in this Annual Report. Moreover, we operate in a very competitive and
rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statements we may
make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in
this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied
in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results,
levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or
occur. We undertake no obligation to update publicly any forward-looking statements to conform these statements to
actual results or to changes in our expectations, except as required by law. You should read this Annual Report with the
understanding that our actual future results, levels of activity, performance and events and circumstances may be
materially different from what we expect.
Unless the context indicates otherwise, as used in this Annual Report, the terms “Aeglea,” “we,” “us” and “our” refer
to Aeglea BioTherapeutics, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.
“Aeglea” and all product candidate names are our common law trademarks. This Annual Report contains additional trade
names, trademarks and service marks of other companies, which are the property of their respective owners. We do not
intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or
endorsement or sponsorship of us by, these other companies.
3
ITEM 1. BUSINESS
Overview
PART I
We are a biotechnology company committed to developing enzyme-based therapeutics in the field of amino acid
metabolism to treat rare genetic diseases and cancer. Our engineered human enzymes are designed to degrade specific
amino acids in the blood to target these diseases. In inborn errors of metabolism, or IEM, a subset of rare genetic
diseases, we are seeking to reduce the toxic levels of amino acids in patients to the normal range. In oncology, we are
seeking to reduce amino acid blood levels below the normal range where we believe we will be able to exploit the
dependence of certain cancers on specific amino acids.
Our lead product candidate, AEB1102 (pegzilarginase), is engineered to degrade the amino acid arginine and is
being developed to treat two extremes of arginine metabolism, including arginine excess in patients with Arginase I
deficiency, an IEM, as well as some cancers which have been shown to have a metabolic dependence on arginine.
AEB1102 has demonstrated clinical proof of mechanism in both scenarios. In a Phase 1 clinical trial for the treatment of
patients with Arginase I deficiency, a dose-proportional reduction in plasma arginine levels was observed in two patients.
A reduction in blood arginine levels was also observed in Phase 1 clinical trials for the treatment of patients with advanced
solid tumors and the hematological malignancies relapsed refractory acute myeloid leukemia, or AML, and
myelodysplastic syndrome, or MDS. These preliminary results support its potential use as a therapeutic of both Arginase I
deficiency and certain cancers associated with abnormal amino acid metabolism.
We are conducting three clinical trials for AEB1102, consisting of one Phase 1/2 clinical trial for the treatment of
Arginase I deficiency and two Phase 1 clinical trials for the treatment of certain cancers.
Arginase I Deficiency. Following completion of dosing for the first two adult patients in our Phase 1 clinical
trial for the treatment of patients with Arginase I deficiency, we submitted a protocol amendment in
November 2016 to broaden the scope of our Phase 1 trial into a Phase 1/2 trial. The amended protocol
includes dosing of pediatric patients (two and older) and weekly repeat dosing, with the intent to assess the
safety, tolerability, pharmacokinetics, pharmacodynamics, and clinical response of AEB1102 in patients with
this IEM. In the first quarter of 2017, we received IRB approval for the Phase 1/2 protocol for the treatment
of patients with Arginase I deficiency at multiple clinical trial sites. In March 2017, we received an
information request from the FDA which included comments and recommendations on the protocol
amendment and a request for supporting documents based on their review of our completed toxicology
studies, our dose escalation plan and our information to support the inclusion of pediatric patients. As
recommended by the FDA, we replied with supporting information and requested a follow-up meeting. At
this time, we believe our Phase 1/2 protocol provides an appropriate path to evaluate the safety and
tolerability of AEB1102 in pediatric patients, and pending FDA feedback, we plan to initiate dosing in
pediatric patients in the middle of 2017. In March 2017, we announced results from the first two adult
patients in our Phase 1 clinical trial for the treatment of Arginase I deficiency at the 2017 American College
of Medical Genetics and Genomics Annual Clinical Genetics Meeting, or ACMG Annual Meeting. We intend
to continue enrollment of adult patients and plan to dose additional adult patients in the middle of 2017.
Topline data from this trial is expected in the first half of 2018..
Advanced Solid Tumors. In October 2015, we initiated enrollment for a Phase 1 dose escalation trial for
cancer patients with advanced solid tumors. In this ongoing trial, patients have demonstrated a reduction in
blood arginine levels from the dosing of AEB1102, providing proof-of-mechanism. We expect to announce
results of this Phase 1 dose escalation in patients with advanced solid tumors and anticipate initiating
expansion arms in specific solid tumor types, potentially in combination with existing or emerging standards
of care, in the fourth quarter of 2017 or the first quarter of 2018.
Hematological Malignancies. In July 2016, we initiated a Phase 1 clinical trial in patients with the
hematological malignancies AML and MDS in the United States and Canada. As demonstrated in the trial
for patients with advanced solid tumors, the first three cohorts of this trial have demonstrated proof-of-
mechanism. We expect to announce results of the Phase 1 dose escalation trial in patients with AML and
MDS in the fourth quarter of 2017 or the first quarter of 2018.
Our pipeline of engineered human enzyme product candidates in preclinical development includes: AEB3103, an
enzyme that degrades the amino acid cysteine, and its oxidized form cystine, to target a widely recognized, but previously
4
underexploited vulnerability of cancer to oxidative stress; AEB2109, an enzyme that degrades the amino acid methionine
to target methionine-dependent cancers and AEB4104, an engineered human enzyme to treat another IEM by degrading
the amino acid homocysteine. We plan to continue preclinical development of AEB3103, AEB2109, AEB4104 and related
variants of these candidates with the aim of submitting an IND for one or more of these development candidates in 2018.
We are a patient-focused organization conscious of the fact that IEM and oncology patients have limited treatment
options, and we recognize that their lives and well-being are highly dependent upon our efforts and the efforts of others to
develop improved therapies. For this reason, we are passionate about discovering and developing therapeutics to
address IEM and oncology indications where there is a significant unmet medical need. Our goal is to create a world-class
company committed to efficiently developing a portfolio of product candidates to treat these diseases.
Our Strategy
Our goal is to build a fully integrated biotechnology company dedicated to the development and commercialization of
engineered human enzymes targeting abnormal metabolism to transform the lives of patients. To execute our strategy, we
intend to:
Successfully advance our lead product candidate, AEB1102, through clinical development.
For Arginase I deficiency, we have received orphan drug designation from the U.S. Food and Drug
Administration, or FDA, and the European Medicines Agency, or EMA, and Fast Track Designation from the FDA.
We initiated a Phase 1/2 dose escalation trial in the United States to assess the safety, tolerability,
pharmacokinetics, pharmacodynamics, and clinical response of AEB1102. If the results from the trial are
supportive, we anticipate initiating a Phase 3 registration directed trial in the United States in 2018. For our
oncology indications, we are conducting Phase 1 trials in patients with advanced solid tumors and in patients with
the hematological malignancies AML and MDS. We plan to initiate single agent expansion arms in patients with
selected solid tumors and hematological malignancies. Additionally, we plan to initiate a Phase 1b/2 trial,
potentially in combination with existing or emerging standards of care in one or more solid tumor types and
hematological malignancies. If we see compelling evidence of anti-tumor activity in the expansion phase of our
solid tumor or hematological malignancies clinical trials, we plan to meet with regulatory authorities to discuss
expedited regulatory strategies such as Breakthrough Therapy and Fast Track designations.
Target enzyme-based therapeutic opportunities within IEM and oncology that have a defined blood-base
mechanism of action and known disease pathways.
Our focus is on those rare genetic diseases and cancers where we have a deep understanding of their biology
and have proof-of-mechanism that our approach plays a crucial role in addressing unmet needs in cancer and
rare genetic diseases. Our lead product candidate AEB1102 has shown proof-of-mechanism in degrading blood
arginine levels in patients with Arginase I deficiency, advanced solid tumors, and the hematological malignancies
AML and MDS. Similarly, the dependence of various cancers on arginine is well understood and documented in
the scientific and medical literature. We believe that developing product candidates that directly impact known
disease pathways will increase the probability of success of our development programs.
Develop and implement our precision medicine strategy to increase the probability of clinical success.
An integral part of our product development programs is a precision medicine strategy designed to identify
patients that will benefit most from amino acid depletion therapy. In the United States, we are working to optimize
newborn screening methods to more accurately identify patients with Arginase I deficiency. In oncology, we are
exploring the predictive value of candidate biomarkers to identify patients with tumors sensitive to amino acid
deprivation. We believe that targeting these patients may lead to potential proof-of-concept earlier in clinical
development and a greater chance of success of treating their cancers effectively. When necessary, we intend to
facilitate the development of companion diagnostics with the help of technology partners to aid us in identifying
patients whose tumors may be susceptible to amino acid depletion therapy.
Concurrently develop and commercialize multiple product candidates.
Development of multiple engineered human enzyme therapeutics generates organizational efficiencies and
economies of scale. As a result, we believe we can concurrently develop several clinical-stage product
candidates, resulting in a more diversified portfolio that provides multiple opportunities to create value. In addition,
we have built an internal team of research scientists to work independently in our own research laboratory to
5
leverage our relationships with the University of Texas at Austin and other academic institutions to expand our
portfolio of product candidates. Similarly, our Clinical Operations and Medical Sciences teams have created a
network of leading medical institutions eager to investigate our pipeline in future clinical trials.
Seek global approval and commercialization of our product candidates.
We retain worldwide intellectual property rights for all of our product candidates. We will pursue clinical and
regulatory programs for approval in the United States and internationally. Our plan is to establish a focused
commercial organization in the United States and strategically evaluate partnership opportunities internationally.
Our Focus—Abnormal Amino Acid Metabolism
Our company was founded to develop therapeutics for diseases characterized by abnormal amino acid metabolism.
Metabolism refers to fundamental chemical reactions that are critical to life-sustaining processes. Metabolism follows
specific pathways that are comprised of various biochemical reactions generally catalyzed by proteins known as enzymes.
Enzymes accelerate complex reactions and serve as key regulators of metabolic pathways by responding to changes in
the cell’s environment or signals from other cells.
An in-depth understanding of abnormal metabolic pathways is crucial to developing therapies that may address
various disease states, including rare genetic diseases and cancer. Our core capability of exploiting the metabolic
pathways of IEMs has allowed us to develop engineered human enzyme therapies with the potential to reduce toxic levels
of amino acids that may lead to novel, disease-modifying treatments for these rare genetic diseases. In addition, with our
focus on the innovative field of cancer cell metabolism, we strive to leverage our engineered human enzyme product
candidates to degrade the key nutrients needed for cancer cell survival and proliferation. The mechanism of action of our
drugs also presents the potential for novel combination therapies when used together with existing or emerging standards
of care.
Background on inborn errors of metabolism
Enzymatic defects in metabolic processes contribute to a class of genetic diseases known as IEM. These are a
broad group of hundreds of rare genetic diseases where the defect in a single metabolic enzyme disrupts the normal
functioning of a metabolic pathway. These defects lead either to abnormal accumulation of upstream metabolites that may
be toxic or interfere with normal function, or to a reduced ability to synthesize essential downstream metabolites.
Most of these diseases often have severe or life-threatening characteristics. The incidence of a single IEM often
occurs in fewer than one per 100,000 live births. Many IEMs are likely to be under-diagnosed. Current treatment options
for many of these disorders are limited. Diet modification or nutrient supplementation can be beneficial in some IEMs.
Several of these disorders have been treated successfully with enzyme therapy. We are targeting a urea cycle disorder,
Arginase I deficiency, for our lead product candidate, AEB1102. This cycle has the principle function of detoxifying
ammonia, a normal byproduct of amino acid metabolism. Arginase I reduces arginine levels, and is the final step of the
urea cycle, releasing urea for secretion by the kidney. While a protein restricted diet is part of the treatment regimen for
Arginase I deficiency, it is not effective in normalizing blood arginine due to the body’s continued production and
processing of ammonia that results in continued production of arginine. Symptoms resulting from defects in the urea cycle
metabolic pathway, such as hyperammonemic encephalopathy, have been the successful target of other drug
development efforts including RAVICTI (glycerol phenylbutyrate) and BUPHENYL (sodium phenylacetate) which help to
remove ammonia. Despite the acceptance of dietary restrictions and these drugs, they do not treat the underlying cause
of the disease. We believe that AEB1102 represents a potential therapeutic candidate to treat the excess levels of
arginine resulting from Arginase I deficiency.
Emerging areas in cancer therapy
Cancer is the second-leading cause of death in the United States. The National Cancer Institute estimates that in
2016 there were approximately 1.7 million new cases and approximately 596,000 deaths from cancer in the United States.
Cancer originates from defects in the cell’s genetic code, or DNA, that disrupt the mechanisms that normally prevent
uncontrolled cell growth.
Beyond chemotherapeutics and targeted drug therapies, several new approaches to the development of novel
cancer treatments are underway. These approaches include, but are not limited to treatment with drugs or other methods
that stimulate the immune system to attack cancer cells, antibody drug conjugates that carry a powerful chemotherapy
payload that is only released into targeted cancer cells, drugs that target the changes in gene activity that occur in cancer
cells and drugs that target oncogenic drivers in patients with tumor types that harbor genetically similar alterations.
6
We believe that the altered metabolism of cancer cells—the atypical uptake and break down of nutrients—also
provides an opportunity to develop important new cancer treatments. Cancer cells rapidly change how they take-up and
utilize nutrients. These adaptations fuel tumor growth and protect cancer cells from the damage caused by reactive
oxygen species, or ROS, and various immune system responses. However, while cancer cell metabolic abnormalities fuel
tumor growth, they also expose vulnerabilities that can be targeted to selectively destroy tumor cells. It is our belief that
depriving cancer cells of key amino acids that are essential for cell survival and tumor growth will provide an effective
treatment for some cancers, both as single agent and in combination with existing or emerging standards of care.
Additionally, even though the dependence of different cancers on specific amino acids has been known for many years, it
has not been widely exploited in the clinical setting.
Enzyme-based therapies that degrade amino acids have shown clinical benefit in the treatment of cancer. For
example, Oncaspar (pegaspargase) and Erwinaze (asparaginase Erwinia chrysanthemi) were approved as part of a multi-
agent chemotherapeutic regimen for the treatment of patients with acute lymphoblastic leukemia. Degrading the amino
acid asparagine with an E. coli-derived enzyme, Oncaspar (pegaspargase) in combination with chemotherapy generates
much improved remission rates as compared to chemotherapy alone. In addition, arginine dependence of tumors has
been reported in the scientific and medical literature to result in responses to a microbial-derived arginine-degrading
enzyme in trials with AML, mesothelioma, and melanoma. However, despite the reported clinical impact, this microbial-
derived arginine degrading enzyme elicited an immune response that neutralizes the activity of the drug and therefore
may result in limited clinical utility.
The use of microbial enzymes as therapeutics is often limited by an immune response to a foreign protein. We
expect our enzyme product candidates, which are engineered from human proteins, will be less likely to elicit an immune
response as compared to microbial enzymes, and to date we have not observed any patients in our clinical trials who
have experienced an immune response to, or an adverse event that suggested an immune response to, AEB1102. We
believe our technology should provide greater flexibility with respect to the target amino acids that can be addressed.
By depriving cancer cells of what we believe are key amino acids via our engineered human enzyme product
candidates, we provide a novel approach that, when used alone or in combination with existing or emerging standards of
care, has the potential to be a new and effective treatment paradigm for cancer patients. Published literature suggests
that a variety of cancers could potentially respond to amino acid deprivation resulting from enzyme therapies, which offers
us many potential targets for cancer treatment opportunities.
Our Development Programs
The following table summarizes our development programs:
Product
Candidate
Indication
Target Amino
Acid
Research
Pre-IND
Phase 1
Phase 1/2
Status
AEB1102
(Pegzilarginase)
Arginase I deficiency
Arginine
Advanced Solid Tumors
Arginine
Hematological
Malignancies
Arginine
Solid Tumor Expansion
Arms
Arginine
AEB3103
Cancer
AEB2109
Cancer
Cysteine /
Cystine
Methionine
AEB4104
Homocystinuria
Homocystine
AEB1102 (pegzilarginase)
Phase 1/2
Phase 1
Phase 1
Expect to initiate clinical
trials Q4 2017 or Q1 2018
Continue nonclinical
development
Continue nonclinical
development
Continue nonclinical
development
AEB1102 is human Arginase I, engineered to reduce arginine levels to treat patients with Arginase I deficiency, and
arginine-dependent solid tumors and the hematological malignancies AML and MDS. Following completion of dosing for
the first two adult patients in our Phase 1 clinical trial for the treatment of patients with Arginase I deficiency, we submitted
a protocol amendment in November 2016 to broaden the scope of our Phase 1 trial into a Phase 1/2 trial. The amended
7
protocol includes dosing of pediatric patients (two and older) and weekly repeat dosing, with the intent to assess the
safety, tolerability, pharmacokinetics, pharmacodynamics, and clinical response of AEB1102 in patients with this IEM. In
the first quarter of 2017, we received IRB approval for the Phase 1/2 protocol for the treatment of patients with Arginase I
deficiency at two clinical trial sites. In March 2017, we received an information request from the FDA which included
comments and recommendations on the protocol amendment and a request for supporting documents based on their
review of our completed toxicology studies, our dose escalation plan and our information to support the inclusion of
pediatric patients. As recommended by the FDA, we replied with supporting information and requested a follow-up
meeting. At this time, we believe our Phase 1/2 protocol provides an appropriate path to evaluate the safety and
tolerability of AEB1102 in pediatric patients, and pending FDA feedback, we plan to initiate dosing in pediatric patients in
the middle of 2017. In March 2017, we announced results from the first two adult patients in our Phase 1 clinical trial for
the treatment of Arginase I deficiency at the ACMG Annual Meeting. We intend to continue enrollment of adult patients
and plan to dose additional adult patients in the middle of 2017. Topline data from this trial is expected in the first half of
2018.
We are currently conducting two Phase 1 clinical trials. In October 2015, we initiated our Phase 1 dose escalation
trial in patients with advanced solid tumors. We expect to announce results of this Phase 1 dose escalation in patients
with advanced solid tumors and anticipate initiating expansion arms in specific solid tumor types, potentially in
combination with existing or emerging standards of care, in the fourth quarter of 2017 or the first quarter of 2018. We are
also conducting a Phase 1 dose escalation trial in patients with the hematological malignancies AML and MDS and expect
to announce results for this trial in the fourth quarter of 2017 or the first quarter of 2018. After the completion of these
dose escalation trials, we plan to initiate expansion arms in both specific solid tumors and AML and MDS. If we see
compelling evidence of anti-tumor activity in the expansion phase, we plan to meet with regulatory authorities to discuss
expedited regulatory strategies. Additionally, we plan to initiate a Phase 1b/2 trial, potentially in combination with existing
or emerging standards of care in one or more solid tumor types and hematological malignancies.
AEB1102 background, preliminary clinical data in oncology
AEB1102 is being evaluated in two ongoing Phase 1 clinical trials in oncology indications. The Phase 1 clinical trial
in patients with advanced solid tumors is an ongoing, open-label, multiple dose, dose-escalation trial to evaluate the
safety, tolerability, pharmacokinetics and pharmacodynamics of AEB1102. The primary objectives of the dose escalation
stage are to determine the maximum tolerated dose, as well as to determine the safety, tolerability, and pharmacokinetic
profile of AEB1102. The inclusion criteria include patients with locally advanced or metastatic solid tumors. These include
adult patients whose tumors have failed to or progressed under standard treatment, cannot tolerate standard therapies or
for which no standard therapy exists. We expect that up to 48 patients will be enrolled in the dose-escalation portion of the
trial, depending on the number of dose levels studied and the adverse effects observed.
This Phase 1 trial was initiated in October 2015. To date, we have treated 8 cohorts consisting of 29 patients in total.
The following charts show a persistence of active AEB1102 in the blood over time and a dose-dependent reduction
in blood arginine in patients with advanced solid tumors:
Pharmacokinetics
Pharmacodynamics
)
L
m
/
g
(cid:80)
(
2
0
1
1
B
E
A
8
7
6
5
4
3
2
1
0
7 0
6 0
5 0
4 0
3 0
2 0
1 0
0
)
M
(cid:80)
(
e
n
i
n
i
g
r
A
0
2 4
4 8
7 2
9 6
1 2 0
1 4 4
1 6 8
0
2 4
4 8
7 2
9 6
1 2 0
1 4 4
1 6 8
T im e ( h r)
T im e ( h r)
0 .1 2 m g /k g
0 .1 8 m g /k g
0 .2 7 m g /k g
0 .0 1 m g /k g
0 .0 2 m g /k g
0 .0 4 m g /k g
0 .0 8 m g /k g
8
The data presented are preliminary and are subject to change. While these data provide proof-of-mechanism for
AEB1102 in humans, these data may not necessarily be predictive of the final results of all patients intended to be
enrolled in this Phase 1 trial or in future trials. While we have seen serious adverse events in this trial, including
hypercalcemia, bacteremia, pericardial effusion, respiratory failure and death due to progressive cancer, to date these
events were considered to be related to the underlying cancer and not considered to be related to AEB1102. The safety
profile observed in the study supports continued dose escalation.
AEB1102 is being evaluated in a second Phase 1 trial for the treatment of the hematological malignancies AML and
MDS. This Phase 1, multicenter, single-arm, open-label, dose escalation trial of AEB1102 for the treatment of
hematological malignancies is designed to assess the safety and tolerability of AEB1102 as a single agent. The trial is
enrolling patients with relapsed or refractory AML or MDS refractory to hypomethylating agents. Key objectives of the trial
include determining the maximum tolerated dose, pharmacokinetics, pharmacodynamics (including reduction of circulating
levels of arginine) and the recommended Phase 2 dose. An expansion cohort will be enrolled at the maximally tolerated or
biologically relevant dose. We expect that up to 48 patients will be enrolled in the dose escalation portion of this trial and
an additional ten patients will be enrolled at the maximum tolerated dose level to further evaluate safety at this dose level.
To date, three cohorts consisting of a total of 11 patients have been treated and a reduction in blood arginine levels
has been observed in all patients. Given the nature of the patient population enrolled in this trial, we expect to and have
observed serious adverse events in some of these patients. These serious adverse events have included a rise in white
blood cell counts, fever, gout, pain, low potassium, pneumonia, worsening of the patients’ underlying cancer progression,
and death due to cancer progression. To date, only one serious adverse event, consisting of nausea and vomiting, has
been considered to be possibly related to AEB1102.
At the end of our Phase 1 dose escalation in solid tumors, we intend to initiate expansion arms in different tumor
types, which we have yet to determine. We anticipate that up to 75 patients may be enrolled in these expansion arms. The
primary objective of the expansion phase is to assess safety and preliminary antitumor efficacy across these tumor types.
These tumor types will be selected based on the biology underlying their development and the preclinical evidence
generated by our research team. We also intend to initiate an additional Phase 1b/2 expansion trial to evaluate AEB1102,
potentially in combination with an existing or emerging standard of care in one or more solid tumor types and
hematological malignancies.
The selection of the solid tumor types for the Phase 1 expansion arms arises from our biomarker strategy, which is
composed of two parts. First, we plan to confirm and extend the published scientific literature on the biomarkers of
arginine dependence in multiple tumor types. Based on those data, we plan to further assess the predictive value of the
biomarkers in patient-derived xenograft models, which are based on testing drug activity in patient tumor fragments. The
results of these experiments, along with the results from our dose-escalation stage, will inform the choice of specific
cancer indications for our expansion arms. If we use a biomarker-based test to identify and only enroll patients in clinical
trials with tumors that express the biomarker, we expect that the FDA will require the development and regulatory
approval of a companion diagnostic assay as a condition to approval of the product candidate for that indication.
Arginase I deficiency background
Arginase I deficiency is a rare genetic disorder caused by mutations in the Arginase I gene, ARG1, leading to the
inability to degrade arginine in the urea cycle. Patients with this disease are predisposed to neurologic symptoms
including cognitive deficits and seizures and frequently suffer from spasticity, loss of ambulation, and severe intellectual
disability.
Arginase I deficiency is a urea cycle disorder, with a reported incidence of 1:350,000 to 1:1,000,000 live births. It is
believed that approximately 500-600 individuals in the United States and Europe suffer from Arginase I deficiency.
Although Arginase I deficiency is a rare genetic disease, we believe our working relationships with the IEM health care
providers, Urea Cycle Disorders Consortium, and the National Urea Cycle Disorders Foundation patient advocacy group
will assist in the identification of candidates for our clinical trials. Through these relationships, we have identified more
than 40 treating physicians with over 50 patients with Arginase I deficiency in the United States and Europe to date.
Because neonatal blood testing for this disorder did not become common in the United States until 2006, we believe that
approximately half of those individuals identified in the United States are younger than 18. However, due to screening
requirements and enrollment restrictions in our amended clinical trial protocol, or any additional restrictions that may be
imposed by the FDA, not all pediatric patients, if any at all, may be eligible for inclusion in our Phase 1/2 trial in the United
States. The onset of symptoms typically occurs between one and three years of age and diagnosis in the United States
most often occurs through newborn blood screening for this disease, which takes place in 32 U.S. states. Because the
symptoms of Arginase I deficiency are similar to a number of other ailments, including cerebral palsy, we believe the
9
incidence and prevalence of Arginase I deficiency are likely underestimated in regions such as Europe that do not
mandate newborn blood screening for this disease.
There is no approved therapeutic agent that addresses the cause of Arginase I deficiency, although the medical
literature suggests that disease progression can be slowed with strict adherence to dietary protein restriction. Dietary
modification, which requires the use of specially formulated supplements, can reduce plasma arginine levels. This therapy
is inadequate for treating the majority of patients with Arginase I deficiency, is difficult to manage, is poorly tolerated and is
expensive. Therapy with the ammonia scavenging drugs RAVICTI (glycerol phenylbutyrate) or BUPHENYL (sodium
phenylacetate) can be used to reduce elevated ammonia levels but does not appear to affect circulating arginine. Liver
transplantation has been reported to be effective in patients to achieve normalization of arginine levels, but despite these
successes, this intervention is available to only a small fraction of patients and carries a significant risk of mortality and
morbidity.
The lack of existing treatment options that directly address the cause of Arginase I deficiency points to the need for a
therapy that will lower arginine levels to within the normal range and promote the lifelong maintenance of normal arginine
levels. The development of such a therapeutic and its initiation early in a patient’s life could potentially minimize the
exposure to the neurotoxic effects of arginine and its metabolites, and offer the potential for normal development in these
patients.
AEB1102 clinical development in Arginase I deficiency
AEB1102 is intended to replace the function of Arginase I in patients, and return their elevated arginine levels to the
normal physiological range. Normalization of arginine levels is anticipated to slow or halt the progression of the disease in
these patients. Our Phase 1/2 clinical trial for the treatment of patients with Arginase I deficiency will assess the safety,
tolerability, pharmacokinetics, pharmacodynamics, and clinical response of AEB1102 in patients with this IEM.
Topline results of our Phase 1 clinical trial have shown AEB1102 to be effective in lowering blood arginine in two
adult patients with Arginase I deficiency. AEB1102 was well tolerated with no adverse events or other clinical changes
reported in this trial. Plasma arginine levels decreased in a dose-proportional manner after AEB1102 infusions. One
patient stopped dose escalation after plasma arginine levels measured below 40 µM after the second dose (0.03 mg/kg),
and the other patient stopped after the third dose (0.06 mg/kg) after plasma arginine levels measured below 40 µM.
The following chart shows the pharmacodynamic effect of AEB1102 administration in our Phase 1 clinical trial in two
adult patients with Arginase I deficiency.
We have obtained orphan drug designation from the FDA and EMA, and Fast Track Designation from the FDA, for
AEB1102 for the treatment of patients with Arginase I deficiency. The FDA may grant orphan drug designation for drugs
10
or biologics designed to treat disorders affecting fewer than 200,000 people in the United States.
Phase 1/2 trial is supportive, we may seek to accelerate our development plan for AEB1102 by requesting to use
established regulatory pathways, such as Breakthrough Therapy Designation. Regardless of whether we receive this
If successful, we
designation, we anticipate initiating a Phase 3 registration directed trial enrolling 15 to 30 patients.
expect that this trial would support a BLA filing with the FDA.
If the data from our
We have met with the FDA on two occasions regarding the pathway for potential approval of AEB1102 for the
treatment of Arginase I deficiency. Although the FDA recommended in our 2014 Pre-IND meeting that we measure age
appropriate neurocognitive outcomes in our trials for marketing approval under the regular approval pathway, the FDA has
agreed that the primary endpoint of our Phase 2 and Phase 3 trials could be the normalization of blood arginine levels;
provided that we can provide adequate justification that normalization of plasma arginine in the target population is
reasonably likely to predict clinical benefit. To do this, we believe the FDA expects some evidence of consistent trends in
the stabilization or improvement of clinical signs and symptoms of Arginase I deficiency to be observed in the Phase 3 trial
to support the primary endpoint. The FDA has suggested that we investigate multiple endpoints that can show a clinically
meaningful benefit, such as neurocognitive outcomes and quality-of-life measurements, and not necessarily focus on
achieving a statistically significant result (usually measured by a statistical value that indicates the likelihood that the result
is not due to chance) on a single clinical endpoint, given the small number of patients expected to be enrolled in this trial.
The FDA stated that the Phase 3 trial length and design will need to be adequate to assess safety in the target population,
stated that it is not clear that the time needed to show an effect on a biomarker will be an adequate duration to
characterize safety and recommended that we reach agreement with the FDA on the duration of such a trial if we decide
to pursue an accelerated approval development plan. Finally, if we obtain expedited approval, we may be required to
conduct a post-approval controlled trial that verifies clinical benefit in neurocognitive outcomes, and the FDA has stated
that it expects the verification study to be underway at the time of accelerated approval. In March 2017, we received an
information request from the FDA which included comments and recommendations on the protocol amendment and a
request for supporting documents based on their review of our completed toxicology studies, our dose escalation plan and
our information to support the inclusion of pediatric patients. As recommended by the FDA, we replied with supporting
information and requested a follow-up meeting. At this time, we believe our Phase 1/2 protocol provides an appropriate
path to evaluate the safety and tolerability of AEB1102 in pediatric patients, and pending FDA feedback, we plan to initiate
dosing in pediatric patients in the middle of 2017. With respect to Arginase I deficiency, we do not expect to need FDA
regulatory approval of any diagnostic test prior to obtaining approval, if any, of AEB1102 for that indication. A widely
adopted neonatal blood test for Arginase I deficiency currently exists, which is a part of mandatory newborn screening in
32 U.S. states and is incorporated into routine care for diagnosis and treatment of patients with Arginase I deficiency.
AEB1102 background in oncology
We are targeting the dependence of some cancers on the amino acid arginine using AEB1102. Arginine is
considered a semi-essential amino acid since in some circumstances cells cannot make sufficient amounts of arginine.
These circumstances include conditions of enhanced proliferation, tissue injury or stress. The role of arginine and its
metabolites in cancer has been studied extensively in preclinical models with demonstrated effects, including
enhancement of tumor growth and cellular proliferation. Conversely, restriction of dietary arginine attenuates tumor growth
and metastasis in experimental tumor models.
Many types of cancers lose the ability to synthesize intracellular arginine, principally due to deficiency in the
expression of any one or more of the following enzymes—ornithine transcarbamoylase, or OTC, argininosuccinate
synthase1, or ASS1 and argininosuccinate lyase, or ASL. As a result, these cancers depend on extracellular arginine
uptake. When deprived of this tumor-essential nutrient, cancer cells die, establishing a correlation between their inability
to synthesize arginine and vulnerability to arginine deprivation. As set forth in the figure below, based on data from our
preclinical studies and the published scientific and medical literature, Arginase I degrades arginine to ornithine and urea.
Ornithine cannot be used to make arginine by any cancer cells that lack expression of OTC, ASS or ASL.
11
Extracellular
O
O
NH3
NH2
N
H
NH2
O
O
NH3
+
NH3
O
H2N
NH2
L-arginine
AEB1102
L-ornithine + urea
Intracellular
O
O
NH3
O
O
NH3
+
H2N
O
O
P
O
O
O
NH3
O
N
H
NH2
ASS1
L-arginine
Failure to express ASS1 in cancer cells:
Potential CDx = ASS1 Low
Tumor growth advantagea
a Rabinovich et al (2015) ”Diversion of aspartate in ASS1-deficient tumors fosters de novo pyrimidine synthesis” Nature
As documented in scientific and medical literature and from our own preclinical research, the lack of expression of
any one or more of the enzymes OTC, ASS1 or ASL in tumor cells has been shown to be a predictive biomarker for
arginine dependent cancer cells. Our preclinical research has focused on the reduced or loss of expression of ASS1 as
the predominate cause of tumor arginine dependence.
b
b BioPortal: Gao et al. (2013) ” Integrative analysis of complex cancer genomics and clinical profiles using the cBioPortal” Sci. Signal. and Cerami
et al. (2012) ”The cBio cancer genomics portal: an open platform for exploring multidimensional cancer genomics data” Cancer Discovery.
Low or no expression of ASS1 in patient derived xenograft models from patients with melanoma or small lung
cancer results in sensitivity to arginine depletion by AEB1102 in preclinical models, as shown below.
12
ME1154 Melanoma PDx Model
BRAF Mutant
ST585 Melanoma PDx Model
BRAF Wild Type
LU5267 Small Cell Lung
Cancer PDx Model
1 0 0 0
)
3
m
m
(
e
m
u
l
o
v
r
o
m
u
T
8 0 0
6 0 0
4 0 0
2 0 0
0
Dosing
* p - v a l u e ( D a y 2 5 ) = 0 . 0 0 3
0
7
1 4
2 1
2 8
4 0 0 0
)
3
m
m
(
e
m
u
l
o
v
r
o
m
u
T
3 0 0 0
2 0 0 0
1 0 0 0
0
Dosing
)
3
m
m
(
e
m
u
l
o
v
r
o
m
u
T
3 0 0 0
2 0 0 0
1 0 0 0
0
* p - v a l u e ( D a y 2 1 ) = 0 . 0 1 7
* p - v a l u e ( D a y 2 3 ) = 0 . 0 0 5
0
7
1 4
2 1
2 8
0
7
1 4
2 1
2 8
Dosing
Days
Days
Days
Vehicle
AEB1102
Emerging cancer therapies such as immune checkpoint inhibitors have demonstrated a significant clinical benefit in
melanoma. When AEB1102 was tested in combination with immune checkpoint inhibitors targeting PD-1, PD-L1, or
CTLA-4 additive or synergistic inhibition of tumor growth was observed in CT-26, MC-38, and Lewis Lung mouse tumor
allograft models. One example of a synergistic response in combination with a PDL-1 inhibitor in our preclinical studies is
shown below.
M u r in e C T 2 6 C o lo n c a r c i n o m a
( M e a n t u m o r v o l u m e (cid:114) S E M )
M u r in e C T 2 6 C o lo n c a r c i n o m a
( S u r v i v a l c u r v e s )
)
3
m
m
(
e
m
u
l
o
v
r
o
m
u
T
3 0 0 0
2 0 0 0
1 0 0 0
0
l
a
v
i
v
r
u
s
t
n
e
c
r
e
P
1 0 0
5 0
0
3
1 0 1 7 2 4 3 1 3 8 4 5 5 2 5 9 6 6 7 3 8 0
3
1 0 1 7 2 4 3 1 3 8 4 5 5 2 5 9 6 6 7 3 8 0
D a y s a fte r in o c u la tio n
D a y s a fte r in o c u la tio n
M u r in e C T 2 6 C o lo n c a r c i n o m a
( M e a n t u m o r v o l u m e (cid:114) S E M )
)
3
m
m
(
e
m
u
l
o
v
r
o
m
u
T
3 0 0 0
2 0 0 0
1 0 0 0
0
G
G1
G2
G3
Group description
Vehicle (n=10)
AEB1102 (n=10)
anti-PD-L1 Ab (n=10)
G4
AEB1102 + anti-PD-L1 Ab (n=16)
Complete
response
0/10
0/10
0/10
6/16
N=6 survivors
re-challenged
0
7
1 4
2 1
2 8
3 5
4 2
D a y s a fte r in o c u la tio n
G
G1
G2
Group description
Naïve mice (n=10)
Complete responders (n=6)
In this preclinical study, when AEB1102 was administered in combination with anti-PD-L1 for at least 8 weeks, a
37% frequency of complete tumor regression was observed. When the tumor-free mice were re-injected with fresh tumor
cells, the tumor failed to establish, suggesting the development of an immune memory response as a result of the
previously administered combination therapy of AEB1102 and anti-PD-L1 monoclonal antibody.
Targeting cysteine/cystine and oxidative stress for oncology
Reactive oxygen species, or ROS, have been widely reported in the scientific and clinical research literature to have
enhanced production in tumors creating oxidative stress, resulting in damage to lipids, membranes, structural and
functional proteins and DNA of the tumor cells. Major sources of oxidative stress in cancer include: metabolic activities
due to aberrant growth-promoting pathways, infiltrating inflammatory cells, as well as standards of care such as
chemotherapy and radiation therapy. The antioxidant glutathione is a key natural protector of ROS-mediated damage and
has an enhanced role in protecting tumor cells from high levels of ROS. To survive in this hostile environment, cancer
cells produce high levels of glutathione which preferentially reacts with and neutralizes the otherwise damaging ROS.
Glutathione cannot be transported into cells from outside the cell, and must be synthesized in each cell. In order to satisfy
the tumor’s demand for glutathione, an adequate supply of cysteine/cystine is required. Reducing available
13
cysteine/cystine from outside the cell decreases the levels of glutathione, increasing ROS-related damage to cancer cells
and triggering cancer cell death.
The production of ROS is both an initiator as well as a promoter of cancer, requiring increased production of
glutathione for the cancer cells to survive. However, many cancer treatments are also cytotoxic through the production of
ROS. This apparent paradox is receiving increased attention as a potential tumor vulnerability, and underlies the
mechanistic rationale for selective tumor killing by using a therapeutic enzyme to reduce available cysteine/cystine in the
blood. While chemotherapy and radiation therapies are often highly efficient at eliminating the bulk of cancer cells,
treatment-resistant cancer stem cells are highly resistant to ROS-mediated damage and survive anti-cancer therapy.
These cancer stem cells are thought to be a cause of patient relapse.
Cancer stem cells are protected from ROS stress through increased glutathione production in both hematological
malignancies and solid tumors. Based on an extensive body of evidence from the scientific and clinical research literature,
we believe targeting the glutathione dependence of cancer will not only have direct anti-tumor activity but may also show
synergy in combination with standards of care, depleting the cancer stem cell populations to provide a prolonged benefit
to patients.
AEB3103
AEB3103, our lead product candidate in this program, is an engineered human enzyme that targets the degradation
of the amino acid cysteine/cystine. To our knowledge, the human genome does not encode a native cysteine- or cysteine-
degrading enzyme. Initial efficacy testing in preclinical models demonstrated significant depletion of glutathione and
significantly increased levels of ROS in HMVP2 prostate cancer cells. As shown below, in vivo AEB3103 demonstrated a
statistically significant depletion of glutathione and significantly increased levels of ROS in HMVP2 prostate cancer cells.
The treatment appeared to be well tolerated as the tested animals showed no change in appetite or weight loss.
As shown in the following chart, AEB3103 also improved survival in a mouse genetic model of chronic lymphocytic
leukemia.
14
100
50
0
Control
Fludarabine
AEB3103
AEB3103 + Fludarabine
AEB3103 + Fludarabine
0
0
2
4
6
Months
8
10
Targeting methionine dependence for oncology
The dependence of tumors on the essential amino acid methionine for survival has been described extensively in
the scientific and medical literature, with the demand of some tumors for methionine far exceeding that of normal tissues.
This dependence has been exploited in the clinic as a diagnostic where an analog of methionine is the preferred contrast
agent for imaging of glioblastomas, astrocytomas and melanoma metastases to the brain. This is because methionine
supports five metabolic pathways which promote tumor growth, protecting tumor cells from a hostile environment, and
ultimately forms the rationale for using methionine starvation to target tumor cells. Over 40 years of research on tumor
methionine dependence has been built on the use of a bacterial methionine-degrading enzyme. This microbial enzyme
never advanced in clinical development, but provided a strong rationale for targeting methionine dependence in tumors.
The finding of tumor methionine dependence led to efforts to attempt dietary manipulation as an anti-cancer therapy.
These efforts provided evidence of limited activity, but did not reduce methionine levels sufficiently. Enzyme-mediated
methionine depletion in animals has resulted in far lower serum levels than nutritional restrictions can achieve, suggesting
that our therapeutic approach with an engineered human methionine-degrading enzyme may achieve meaningfully
improved efficacy in combination with standard of care.
Because there are specific metabolic pathways dependent on methionine metabolism, we believe methionine
depletion used in combination with a variety of chemotherapeutics will be complementary to enzyme-mediated methionine
depletion in blood, and may result in synergistic effects. We anticipate new treatment paradigms utilizing this approach, if
successfully developed and approved, will have a significant impact with both improved patient responses and long term
outcomes.
AEB2109
AEB2109, our lead enzyme in this program, is an engineered human enzyme that targets the degradation of the
amino acid methionine. To our knowledge, the human genome does not encode a native methionine-degrading enzyme.
Earlier work from our enzyme engineering program has been presented in the scientific literature describing activity in an
animal tumor model. We believe AEB2109 provides us with the opportunity to exploit a tumor vulnerability that has been
recognized for over 40 years, but not yet successfully exploited for therapeutic benefit. We plan to continue our preclinical
development efforts for AEB2109 and, if appropriate, proceed to IND-enabling studies with a development candidate from
this program.
AEB4104 and additional pipeline opportunities
Our ongoing research efforts have identified various opportunities to leverage our expertise in the field of enzyme
biochemistry to develop product candidates targeting various IEM and tumor metabolism mechanisms. We are currently in
the early discovery stages for an engineered human enzyme therapy with AEB4104, the most advanced enzyme in that
program, targeting the reduction of elevated levels of the amino acid homocysteine. Elevated blood levels of this amino
acid arise in the IEM called classical homocystinuria. We believe that classical homocystinuria represents a viable market
opportunity and significant unmet medical need, which we plan to address by continuing our development of AEB4104
and related enzymes. Regarding oncology indications, we will continue to explore other amino acids for targeted enzyme
treatments in combination with emerging and current standards of care such as chemotherapy and radiation therapy. We
15
plan to concurrently develop multiple product candidates targeting diseases with clear mechanisms of action and
balancing research and development in rare genetic diseases and oncology to maximize value.
Intellectual Property
Our success depends in part on our ability to obtain and maintain patents and other forms of intellectual property
rights, including in-licenses of intellectual property rights of others, for our product candidates, methods used to
manufacture our product candidates and methods for treating patients using our product candidates, as well as our ability
to preserve our trade secrets, to prevent third parties from infringing upon our proprietary rights and to operate without
infringing upon the proprietary rights of others.
As of December 31, 2016, we are the owner of five U.S. patents, expiring between 2029 and 2031, absent any
extensions, three of which are directed to the compositions methods of preparing, and methods of using AEB1102
(pegzilarginase), and two of which are directed to compositions of AEB4104. As of December 31, 2016, we also owned
two pending U.S. utility patent applications, one of which is related to pharmaceutical compositions of AEB1102, and the
other directed to methods for identifying and selecting primate cystathionine gamma-lyase variants having L-methionine
degrading activity.
As of December 31, 2016, we also controlled two U.S. utility patent applications, exclusively licensed to us by the
Board of Regents of The University of Texas System, or the University, including one related to compositions of AEB2109
and one related to compositions of AEB3103 and their use in cancer treatment. Any patents issuing from the foregoing
owned or licensed U.S. patent applications are expected to expire in 2034, absent any adjustments or extensions.
As of December 31, 2016, we owned a total of five patents and five applications in foreign jurisdictions variously
including: Australia, Canada, China, Europe, Japan, Hong Kong and South Korea. Any issued patents, or those issuing
from these foreign patent applications, are expected to expire between 2029 and 2031, absent any adjustments or
extensions. These foreign patent applications and patents comprise claims that relate to the compositions of AEB1102
and AEB4104 and methods of use of AEB1102 for the treatment of cancer. As of December 31, 2016, we also controlled
14 pending international patent applications in Australia, Canada, China, the European Patent Office, Israel, Japan and
Korea, which are also exclusively licensed to us by the University, with claims directed to compositions and methods of
use of AEB2109 and compositions and methods of use of AEB3103. Any patents issuing from these applications are
expected to expire in 2034, absent any adjustments or extensions.
Patents may 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.
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 product candidates, where available.
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. In addition, we also require confidentiality or service agreements from third parties that receive our
confidential information or materials.
Licensing
On December 24, 2013, two of our wholly-owned subsidiaries, AECase, Inc., or AECase, and AEMase, Inc., or
AEMase, entered into license agreements with the University under which the University has granted to AECase and
AEMase exclusive, worldwide, sublicenseable licenses. The University granted to AECase a license under a patent
application relating to the right to use technology related to our AEB3103 product candidate. The University granted to
AEMase license under a patent relating to the right to use technology related to our AEB2109 product candidate. On
January 31, 2017, we entered into an Amended and Restated Patent License Agreement, or the Restated License, with
the University which consolidated the two license agreements dated December 24, 2013, revised certain obligations, and
licensed additional patent applications and invention disclosures to Aeglea.
16
With respect to each product candidate covered by the Restated License, we could be required to pay the University
up to $6.4 million in milestone payments based on the achievement of certain development milestones, including clinical
trials and regulatory approvals, the majority of which are due upon the achievement of later development milestones,
including a $5.0 million payment due on regulatory approval of a product and a $500,000 payment payable on final
regulatory approval of a product for a second indication. In addition, we are required to pay the University a low single
digit royalty on worldwide-net sales of products covered under the Restated License, together with a revenue share on
non-royalty consideration received from sublicensees. The rate of the revenue share ranges from 6.5% to 25%,
depending on the date the sublicense agreement is signed. The term of the Restated License continues until the
expiration of the last to expire of the patents licensed thereunder. The University may terminate the agreement under
certain circumstances, including for a breach by us that is not cured within 30 or 60 days of notice (depending on the type
of breach), or if we or any of our affiliates or sublicensees participate in any proceeding to challenge the licensed patent
rights (unless, with respect to sublicensees, we terminate the applicable sublicense). As of December 31, 2016, we have
paid $41,000 under these license agreements.
Sponsored Research Agreement
In connection with the above license agreements, we and each of our wholly-owned subsidiaries also entered into a
Sponsored Research Agreement, or SRA, with the University on December 24, 2013, which was subsequently amended
on September 24, 2014, January 15, 2015, August 10, 2015, November 5, 2015, January 7, 2016, and August 3, 2016.
Pursuant to the SRA, we agreed to sponsor research to be conducted at the laboratory of Professor George Georgiou at
the University related to the systemic depletion of amino acids for cancer therapy, and enzyme replacement for the
treatment of patients having inborn metabolic defects. The SRA will expire on August 31, 2017, and we have the option of
extending the research program under mutually agreeable support terms. We can terminate the SRA with 60 days’ notice
to the University. The University can terminate the SRA for our material breach that remains uncured 60 days after notice
from the University. With respect to intellectual property that results from the sponsored research, each party owns any
such intellectual property that it solely creates and we jointly own with the University any such intellectual property that we
jointly create. We have an option to negotiate a license to the University’s interest in any such intellectual property and
any such license agreement is expected to be on terms substantially similar to the existing license agreements described
above. If we fail to enter into such a license agreement within six months of the date we exercise our option (or such
longer period of time as we may mutually agree), the University would be free to grant licenses under the applicable
intellectual property to third parties. The maximum permitted cost of the sponsored research to us is approximately
$2.2 million. This increases if we agree to extend the research program beyond August 31, 2017. As of December 31,
2016, we have paid $1.8 million to the University under the SRA.
Grant Agreement
In June 2015, we entered into a Cancer Research Grant Contract, or the Grant Contract, with the Cancer Prevention
and Research Institute of Texas, or CPRIT, under which CPRIT awarded us a grant not to exceed $19.8 million to be
used to develop novel cancer treatments by exploiting the unique metabolism of cancer cells. As of December 31, 2016,
we have recognized $10.7 million in revenue under the Grant Contract and collected $9.6 million in grant proceeds. The
Grant Contract expires on May 31, 2018.
Pursuant to the Grant Contract, we grant to CPRIT a non-exclusive, irrevocable, royalty-free, perpetual, worldwide
license to any technology and intellectual property resulting from the grant-funded activities and any other intellectual
property that is owned by us and necessary for the exploitation of the technology and intellectual property resulting from
the grant-funded activities, or the Project Results, for and on behalf of CPRIT and other governmental entities and
agencies of the State of Texas and private or independent institutions of higher education located in Texas for education,
research and other non-commercial purposes only. The terms of the Grant Contract require that we pay tiered royalties in
the low- to mid-single digit percentages on revenues from sales and licenses of products or services that are based upon,
utilize, are developed from or materially incorporate Project Results. Such royalties reduce to less than one percent after a
mid-single-digit multiple of the grant funds have been repaid to CPRIT in royalties. Such royalties are payable for so long
as we have marketing exclusivity or patents covering the applicable product or service (or twelve years from first
commercial sale of such product or service in certain countries if there is no such exclusivity or patent protection).
17
If we abandon patent applications or patents covering Project Results in certain major market countries, CPRIT can,
at its own cost, take over the prosecution and maintenance of such patents and is granted a non-exclusive, irrevocable,
royalty-free, perpetual license with right to sublicense in such country to the applicable Project Results. We are required to
use diligent and commercially reasonable efforts to commercialize at least one commercial product or service or otherwise
bring to practical application the Project Results. If CPRIT notifies us of our failure with respect to the foregoing, and such
failure is not owing to material safety concerns, then, at CPRIT’s option, the applicable Project Results would be
transferred to CPRIT and CPRIT would be granted a non-exclusive license to any other intellectual property that is owned
by us and necessary for the exploitation of the Project Results, and CPRIT, at its own cost, can commercialize products or
services that are based upon, utilize, are developed from or materially incorporate Project Results. CPRIT’s option is
subject to our ability to cure any failures identified by CPRIT within 60 days and a requirement to negotiate in good faith
with us with respect to an alternative commercialization strategy for a period of 180 days.
Competition
While we believe that our preclinical development experience and scientific knowledge provide us with competitive
advantages, we face potential competition from many different sources, including major pharmaceutical companies,
specialty pharmaceutical companies, biotechnology companies, and ultimately biosimilar and generic drug companies.
Any product candidates that we successfully develop and commercialize will compete with existing therapies and new
therapies that may become available in the future.
The acquisition or licensing of pharmaceutical products is also very competitive, and a number of more established
companies, which have acknowledged strategies to license or acquire products, may have competitive advantages as
may other emerging companies taking similar or different approaches to product acquisitions. These established
companies may have a competitive advantage over us due to their size, cash flows, and institutional experience.
We compete in the segments of the pharmaceutical, biotechnology and other related markets that address IEM and
cancer metabolism.
Inborn errors of metabolism. With respect to AEB1102 for Arginase I deficiency, there are currently no approved
therapeutics that address the underlying cause of the disease and we are not aware of any other therapeutics that do so
in clinical development. It is possible that competitors may produce, develop, and commercialize therapeutics, or utilize
other approaches to treat Arginase I deficiency. The current method for treating patients with Arginase I deficiency
includes dietary restriction, which appears to slow the disease progression, as well as treatments such as Hyperion
Therapeutics’ RAVICTI (glycerol phenylbutyrate) and BUPHENYL (sodium phenylacetate) which lower blood-ammonia
levels.
Cancer metabolism. With respect to our oncology product candidates, we compete with other companies that
pursue a cancer metabolism approach, as well as companies that employ more common methods of treating patients
such as surgery, radiation and drug therapy. These drug therapies include chemotherapy, hormone therapy and targeted
drugs, including biologic products such as engineered antibodies.
There are a variety of available drug therapies marketed for cancer. In many cases, these drugs are administered in
combination to enhance efficacy. While our product candidates may compete with many existing drug and other therapies,
to the extent they are ultimately used in combination with or as an adjunct to these therapies, our product candidates will
not be competitive with them. Some of the currently approved drug therapies are branded and subject to patent
protection, and others are available on a generic basis. Many of these approved drugs are well-established therapies and
are widely accepted by physicians, patients and third-party payors. In general, although there has been considerable
progress over the past few decades in the treatment of cancer and the currently marketed therapies provide benefits to
many patients, these therapies all are limited to some extent in their efficacy and frequency of adverse events, and none
are successful in treating all patients. As a result, the level of morbidity and mortality from cancer remains high.
In addition to currently marketed therapies, there are also a number of medicines in late-stage clinical development
to treat cancer. While there are currently no approved drugs targeting tumor arginine dependence, we are aware of a
number of compounds that are in clinical development and enrolling patients with solid and hematological malignancies,
including Polaris Group’s microbial ADI-PEG 20 and Biocancer Treatment International’s pegylated native human
Arginase I. Additionally, Calithera Biosciences is targeting a therapy that inhibits Arginase I as an immune modulator.
These medicines in development may provide efficacy, safety, convenience and other benefits that are not provided by
currently marketed therapies. As a result, they may provide significant competition for our product candidate AEB1102.
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Many of our competitors may have significantly greater financial resources and expertise in research and
development, manufacturing, nonclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing
approved medicines 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. 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 necessary for, our
programs. Smaller or early stage companies may also prove to be significant competitors, particularly through
collaborative arrangements with large and established companies.
The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their
efficacy, safety, convenience, price, the effectiveness of assays or tests that are essential to identifying an appropriate
patient population, which we refer to as companion diagnostics, in guiding the use of related therapeutics, the level of
biosimilar competition and the availability of reimbursement from government and other third-party payors.
Manufacturing
We currently contract with third parties for the manufacturing and testing of our product candidates for nonclinical
studies and intend to do so for our future clinical studies as well. We intend to identify and qualify additional manufacturers
to provide potential alternative sources for the active pharmaceutical ingredient and fill-and-finish services for AEB1102 as
the compound progresses through clinical development, prior to seeking marketing approval from FDA. We believe we
have sufficient supplies of AEB1102 for our ongoing and planned Phase 1 clinical trials.
The KBI Agreement
In December 2013, we entered into a Master Services Agreement, or KBI Agreement, with KBI Biopharma, Inc., or
KBI, in which KBI agreed to research, develop and manufacture the active pharmaceutical ingredient for AEB1102 in
exchange for cash and shares of our Series A convertible preferred stock. In June 2015, we amended the KBI Agreement
to also permit us to exchange Series B convertible preferred stock for such research, development and manufacturing
services. The KBI Agreement was further amended in June 2015 to convert the remaining unmet milestone awards from
share-based payments to cash. The KBI Agreement has an initial three-year term and automatically renews for
successive additional one-year terms until the services are completed. The KBI Agreement may be terminated by either
party for a breach that is not remedied within thirty days after notice or in the event of a bankruptcy by either party. We
may terminate the KBI Agreement upon sixty-days written notice. For termination other than a material breach by KBI, we
must pay for all services conducted prior to the termination and to wind down the activities.
The LSNE Agreement
In November 2014, we entered into a Master Services Agreement, or LSNE Agreement, with Lyophilization Services
of New England, Inc., or LSNE, in which LSNE agreed to manufacture the finished product of AEB1102 for clinical testing
in exchange for cash. The LSNE Agreement has a one-year term that we may unilaterally extend for successive one-year
periods upon written notice. The LSNE Agreement may be terminated for either party for a material breach that is not
remedied within thirty-days after notice or in the event of a bankruptcy by either party. We may terminate the contract for
convenience upon written notice, but must pay termination fees.
We do not own or operate manufacturing facilities for the production of clinical quantities of our product candidates.
We currently have no plans to build our own clinical or commercial scale manufacturing capabilities. The use of contracted
manufacturing is relatively cost-efficient and has eliminated the need for our direct investment in manufacturing facilities
and additional staff early in development.
For our biomarker and companion diagnostic strategies, we will rely on third-party vendors for the development and
execution of our tests. If we choose to develop a biomarker-based test, including a companion diagnostic, for any of our
therapeutic enzymes, we may rely on one or more third parties to manufacture and sell a single test.
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Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and in other countries and
jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing,
manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution,
marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products. The processes for
obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent
compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial
time and financial resources.
FDA approval process
In the United States, pharmaceutical products are subject to extensive regulation by the United States Food and
Drug Administration, or the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, and other federal and state
statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage,
recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting,
sampling, and import and export of pharmaceutical products. Biological products used for the prevention, treatment, or
cure of a disease or condition of a human being are subject to regulation under the FDC Act, except the section of the
FDC Act which governs the approval of new drug applications, or NDAs. Biological products are approved for marketing
under provisions of the Public Health Service Act, or PHSA, via a Biologics License Application, or BLA. However, the
application process and requirements for approval of BLAs are very similar to those for NDAs, and biologics are
associated with similar approval risks and costs as drugs. Failure to comply with applicable U.S. requirements may
subject a company to a variety of administrative or judicial sanctions, such as clinical hold, FDA refusal to approve
pending NDAs or BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Biological product development for a new product or certain changes to an approved product in the United States
typically involves preclinical laboratory and animal tests, the submission to the FDA of an investigational new drug
application, or IND, which must become effective before clinical testing may commence, and adequate and well-controlled
clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought.
Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary
substantially based upon the type, complexity, and novelty of the product or disease.
Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials
to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must
comply with federal regulations and requirements, including good laboratory practices. The results of preclinical testing
are submitted to the FDA as part of an IND along with other information, including information about product chemistry,
manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of
reproductive toxicity and carcinogenicity, may continue after the IND is submitted. A 30-day waiting period after the
submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither
commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin. Clinical
trials involve the administration of the investigational biologic to healthy volunteers or patients under the supervision of a
qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with
good clinical practice, or GCP, an international standard meant to protect the rights and health of patients and to define
the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of
the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol
involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other
sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or
presents an unacceptable risk to the clinical trial patients. The trial protocol and informed consent information for patients
in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the
clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or
may impose other conditions.
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Clinical trials to support BLAs for marketing approval are typically conducted in three sequential phases, but the
phases may overlap. In Phase 1, the initial introduction of the biologic into healthy human subjects or patients, the product
is tested to assess safety, metabolism, pharmacokinetics, pharmacological actions, side effects associated with
increasing doses, and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient
population to determine the effectiveness of the drug or biologic for a particular indication, dosage tolerance, and optimal
dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness
and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information
about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to
permit the FDA to evaluate the overall benefit-risk relationship of the drug or biologic and to provide adequate information
for the labeling of the product. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to
demonstrate the efficacy of the biologic. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare
instances where the trial is a large multicenter trial demonstrating internal consistency and a statistically very persuasive
finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially
serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.
Pursuant to the 21st Century Cures Act, which was enacted on December 13, 2016, the manufacturer of an
investigational drug for a serious or life-threatening disease is required to make available, such as by posting on its
website, its policy on evaluating and responding to requests for expanded access to such investigational drug. This
requirement applies on the later of 60 calendar days after the date of enactment of the law or the initiation of a Phase 2 or
Phase 3 trial of the investigational drug.
After completion of the required clinical testing, a BLA is prepared and submitted to the FDA. FDA approval of the
BLA is required before marketing of the product may begin in the United States. The BLA must include the results of all
preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry,
manufacture, and controls. The cost of preparing and submitting a BLA is substantial. The submission of most BLAs is
additionally subject to a substantial application user fee, and the applicant under an approved BLA is also subject to
annual product and establishment user fees. While these fees are typically increased annually, they decreased from
Fiscal Year 2016 to Fiscal Year 2017. The FDA has 60 days from its receipt of a BLA to determine whether the application
will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit
substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed
to certain performance goals in the review of BLAs. Most such applications for standard review biologic products are
reviewed within ten months of the date the FDA files the BLA; most applications for priority review biologics are reviewed
within six months of the date the FDA files the BLA. Priority review can be applied to a biologic that the FDA determines
has the potential to treat a serious or life-threatening condition and, if approved, would be a significant improvement in
safety or effectiveness compared to available therapies. The review process for both standard and priority review may be
extended by the FDA for three additional months to consider certain late-submitted information, or information intended to
clarify information already provided in the submission.
The FDA may also refer applications for novel biologic products, or biologic products that present difficult questions
of safety or efficacy, to an advisory committee—typically a panel that includes clinicians and other experts—for review,
evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the
recommendation of an advisory committee, but it generally follows such recommendations. Before approving a BLA, the
FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the
facility or the facilities at which the biologic product is manufactured. The FDA will not approve the product unless
compliance with current good manufacturing practice, or cGMP, is satisfactory and the BLA contains data that provide
substantial evidence that the biologic is safe, pure, potent and effective in the indication studied.
After the FDA evaluates the BLA and the manufacturing facilities, it issues either an approval letter or a complete
response letter. A complete response letter generally outlines the deficiencies in the submission and may require
substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those
deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval
letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information
included. An approval letter authorizes commercial marketing of the biologic with specific prescribing information for
specific indications. As a condition of BLA approval, the FDA may require a risk evaluation and mitigation strategy, or
REMS, to help ensure that the benefits of the biologic outweigh the potential risks. REMS can include medication guides,
communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but
are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain
circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the
potential market and profitability of the product. Moreover, product approval may require substantial post-approval testing
and surveillance to monitor the product’s safety or efficacy.
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Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or
problems are identified following initial marketing. Changes to some of the conditions established in an approved
application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and
FDA approval of a new BLA or BLA supplement before the change can be implemented. A BLA supplement for a new
indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures
and actions in reviewing BLA supplements as it does in reviewing BLAs.
Fast track designation and accelerated approval
The FDA is required to facilitate the development, and expedite the review, of biologics that are intended for the
treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which
demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of
a new biologic candidate may request that the FDA designate the candidate for a specific indication as a fast track
biologic concurrent with, or after, the filing of the IND for the candidate. The FDA must determine if the biologic candidate
qualifies for fast track designation within 60 days of receipt of the sponsor’s request. Under the fast track program and
FDA’s accelerated approval regulations, the FDA may approve a biologic for a serious or life-threatening illness that
provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible
morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical
benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative
treatments.
In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that
substitutes for a direct measurement of how a patient feels, functions, or survives. Surrogate endpoints can often be
measured more easily or more rapidly than clinical endpoints. A biologic candidate approved on this basis is subject to
rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to
confirm the effect on the clinical endpoint. Failure to conduct required post-approval trials, or confirm a clinical benefit
during post-marketing trials, will allow the FDA to withdraw the biologic from the market on an expedited basis. All
promotional materials for biologic candidates approved under accelerated regulations are subject to prior review by the
FDA.
In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions
with the FDA, the FDA may initiate review of sections of a fast track product’s BLA before the application is complete. This
rolling review is available if the applicant provides, and the FDA approves, a schedule for the submission of the remaining
information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application
does not begin until the last section of the BLA is submitted. Additionally, the fast track designation may be withdrawn by
the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Breakthrough therapy designation
The FDA is also required to expedite the development and review of the application for approval of biological
products that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence
indicates that the biologic may demonstrate substantial improvement over existing therapies on one or more clinically
significant endpoints. Under the breakthrough therapy program, the sponsor of a new biologic candidate may request that
the FDA designate the candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of
the IND for the biologic candidate. The FDA must determine if the biological product qualifies for breakthrough therapy
designation within 60 days of receipt of the sponsor’s request.
Orphan drug designation
Under the Orphan Drug Act, the FDA may grant orphan drug designation to biological products intended to treat a
rare disease or condition—generally a disease or condition that affects fewer than 200,000 individuals in the United
States, or if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost
of developing and making a product available in the United States for such disease or condition will be recovered from
sales of the product.
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Orphan drug designation must be requested before submitting a BLA. After the FDA grants orphan drug designation,
the generic identity of the biological product and its potential orphan use are disclosed publicly by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
The first BLA applicant to receive FDA approval for a particular active moiety to treat a particular disease with FDA orphan
drug designation is entitled to a seven-year exclusive marketing period in the United States for that product for that
indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market a
biological product containing the same principal molecular structural features for the same disease, except in limited
circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. A product is clinically
superior if it is safer, more effective or makes a major contribution to patient care. Orphan drug exclusivity does not
prevent the FDA from approving a different drug or biological product for the same disease or condition, or the same
biological product for a different disease or condition. Among the other benefits of orphan drug designation are tax credits
for certain research and a waiver of the BLA user fee.
Disclosure of clinical trial information
Sponsors of clinical trials of FDA-regulated products, including biological products, are required to register and
disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, trial
sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are
also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be
delayed in certain circumstances for up to two years after the date of completion of the trial. Competitors may use this
publicly available information to gain knowledge regarding the progress of development programs.
Pediatric information
Under the Pediatric Research Equity Act, or PREA, NDAs or BLAs or supplements to NDAs or BLAs must contain
data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric
subpopulations and to support dosing and administration for each pediatric subpopulation for which the biological product
is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise
required by regulation, PREA does not apply to any biological product for an indication for which orphan designation has
been granted.
Additional controls for biologics
To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance
of manufacturing controls for products whose attributes cannot be precisely defined. The PHSA also provides authority to
the FDA to immediately suspend licenses in situations where there exists a danger to public health, to prepare or procure
products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of
regulations to prevent the introduction or spread of communicable diseases in the United States and between states.
After a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of
the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is
released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each
lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and
the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory tests on
lots of some products, such as viral vaccines, before releasing the lots for distribution by the manufacturer. In addition, the
FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of
biological products. As with drugs, after approval of biologics, manufacturers must address any safety issues that arise,
are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.
Patent term restoration
After approval, owners of relevant drug or biologic patents may apply for up to a five year patent extension. The
allowable patent term extension is calculated as half of the drug’s testing phase—the time between IND application and
NDA or BLA submission—and all of the review phase—the time between NDA or BLA submission and approval up to a
maximum of five years. The time can be shortened if FDA determines that the applicant did not pursue approval with due
diligence. The total patent term after the extension may not exceed 14 years.
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For patents that might expire during the application phase, the patent owner may request an interim patent
extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For
each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the
United States Patent and Trademark Office must determine that approval of the drug covered by the patent for which a
patent extension is being sought is likely. Interim patent extensions are not available for a drug or biologic for which an
NDA or BLA has not been submitted.
Biosimilars
The Biologics Price Competition and Innovation Act of 2009, or BPCIA, creates an abbreviated approval pathway for
biological products shown to be highly similar to or interchangeable with an FDA-licensed reference biological product.
Biosimilarity sufficient to reference a prior FDA-approved product requires that there be no differences in conditions of
use, route of administration, dosage form, and strength, and no clinically meaningful differences between the biological
product and the reference product in terms of safety, purity, and potency. Biosimilarity must be shown through analytical
trials, animal trials, and a clinical trial or trials, unless the Secretary of Health and Human Services waives a required
element. A biosimilar product may be deemed interchangeable with a prior approved product if it meets the higher hurdle
of demonstrating that it can be expected to produce the same clinical results as the reference product and, for products
administered multiple times, the biologic and the reference biologic may be switched after one has been previously
administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference
biologic. To date, only a handful of biosimilar products and no interchangeable products have been approved under the
BPCIA. Complexities associated with the larger, and often more complex, structures of biological products, as well as the
process by which such products are manufactured, pose significant hurdles to implementation, which is still being
evaluated by the FDA.
A reference biologic is granted 12 years of exclusivity from the time of first licensure of the reference product, and no
application for a biosimilar can be submitted for four years from the date of licensure of the reference product. The first
biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the
reference product has exclusivity against a finding of interchangeability for other biologics for the same condition of use
for the lesser of (i) one year after first commercial marketing of the first interchangeable biosimilar, (ii) 18 months after the
first interchangeable biosimilar is approved if there is no patent challenge, (iii) eighteen months after resolution of a
lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant, or (iv) 42 months
after the first interchangeable biosimilar’s application has been approved if a patent lawsuit is ongoing within the 42-month
period.
Post-approval requirements
Once a BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA
closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-
to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional
activities involving the internet. Biologics may be marketed only for the approved indications and in accordance with the
provisions of the approved labeling.
Adverse event reporting and submission of periodic reports is required following FDA approval of a BLA. The FDA
also may require post-marketing testing, known as Phase 4 testing, REMS, and surveillance to monitor the effects of an
approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the
product. In addition, quality control, biological product manufacture, packaging, and labeling procedures must continue to
conform to cGMPs after approval. Biologic manufacturers and certain of their subcontractors are required to register their
establishments with the FDA and certain state agencies. Registration with the FDA subjects entities to periodic
unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance
with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and
quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request
product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing,
or if previously unrecognized problems are subsequently discovered.
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FDA regulation of companion diagnostics
If use of an in vitro diagnostic is essential to safe and effective use of a drug or biologic product, then the FDA
generally will require approval or clearance of the diagnostic, known as a companion diagnostic, at the same time that the
FDA approves the therapeutic product. The FDA has generally required in vitro companion diagnostics intended to select
the patients who will respond to cancer treatment to obtain a pre-market approval, or PMA, for that diagnostic
simultaneously with approval of the therapeutic. The review of these in vitro companion diagnostics in conjunction with
the review of a cancer therapeutic involves coordination of review by the FDA’s Center for Biologics Evaluation and
Research and by the FDA’s Center for Devices and Radiological Health.
The PMA process, including the gathering of clinical and preclinical data and the submission to and review by the
FDA, can take several years or longer. It involves a rigorous premarket review during which the applicant must prepare
and provide the FDA with reasonable assurance of the device’s safety and effectiveness and information about the device
and its components regarding, among other things, device design, manufacturing and labeling. PMA applications are
subject to an application fee, which exceeds $230,000 for most PMAs. In addition, PMAs for certain devices must
generally include the results from extensive preclinical and adequate and well-controlled clinical trials to establish the
safety and effectiveness of the device for each indication for which FDA approval is sought. In particular, for a diagnostic,
the applicant must demonstrate that the diagnostic produces reproducible results when the same sample is tested
multiple times by multiple users at multiple laboratories. As part of the PMA review, the FDA will typically inspect the
manufacturer’s facilities for compliance with the Quality System Regulation, or QSR, which imposes elaborate testing,
control, documentation and other quality assurance requirements.
PMA approval is not guaranteed, and the FDA may ultimately respond to a PMA submission with a not approvable
determination based on deficiencies in the application and require additional clinical trial or other data that may be
expensive and time-consuming to generate and that can substantially delay approval. If the FDA’s evaluation of the PMA
application is favorable, the FDA typically issues an approvable letter requiring the applicant’s agreement to specific
conditions, such as changes in labeling, or specific additional information, such as submission of final labeling, in order to
secure final approval of the PMA. If the FDA concludes that the applicable criteria have been met, the FDA will issue a
PMA for the approved indications, which can be more limited than those originally sought by the applicant. The PMA can
include post-approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device,
including, among other things, restrictions on labeling, promotion, sale and distribution.
After a device is placed on the market, it remains subject to significant regulatory requirements. Medical devices
may be marketed only for the uses and indications for which they are cleared or approved. Device manufacturers must
also establish registration and device listings with the FDA. A medical device manufacturer’s manufacturing processes
and those of its suppliers are required to comply with the applicable portions of the QSR, which cover the methods and
documentation of the design, testing, production, processes, controls, quality assurance, labeling, packaging and shipping
of medical devices. Domestic facility records and manufacturing processes are subject to periodic unscheduled
inspections by the FDA. The FDA also may inspect foreign facilities that export products to the United States.
Other U.S. healthcare laws and compliance requirements
In the United States, our activities are potentially subject to regulation by various federal, state and local authorities
in addition to the FDA, including but not limited to, the Centers for Medicare and Medicaid Services, or CMS, other
divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S.
Department of Justice, or DOJ, and individual U.S. Attorney offices within the DOJ, and state and local governments. For
example, sales, marketing and scientific/educational grant programs must comply with the anti-fraud and abuse provisions
of the Social Security Act, the false claims laws, the privacy provisions of the Health Insurance Portability and
Accountability Act, or HIPAA, and similar state laws, each as amended.
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The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully
offering, paying, soliciting or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to
induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any item or service
reimbursable under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been
interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on the other.
There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from
prosecution. The exceptions and safe harbors are drawn narrowly and practices that involve remuneration that may be
alleged to be intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify
for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or
regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of
the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and
circumstances. Our practices may not in all cases meet all of the criteria for protection under a statutory exception or
regulatory safe harbor.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the Affordable Care Act, or ACA,
to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific
intent to violate it in order to have committed a violation. In addition, the ACA codified case law that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for
purposes of the federal False Claims Act (discussed below).
The civil monetary penalties statute imposes penalties against any person or entity who, 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.
The federal False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or
causing to be presented, a false claim for payment to, or approval by, the federal government or knowingly making, using,
or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal
government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes
“any request or demand” for money or property presented to the U.S. government. Recently, several pharmaceutical and
other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers
with the expectation that the customers would bill federal programs for the product. Other companies have been
prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for unapproved,
and thus generally non-reimbursable, uses.
HIPAA created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute,
a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or
property owned by, or under the control or custody of, any healthcare benefit program, including private third-party payors
and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device, a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services.
Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed
under Medicaid and other state programs, or, in several states, apply regardless of the payor. We may be subject to data
privacy and security regulations by both the federal government and the states in which we conduct our business. HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its
implementing regulations, imposes requirements relating to the privacy, security and transmission of individually
identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly
applicable to business associates, independent contractors or agents of covered entities that receive or obtain protected
health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers
of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business
associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts
to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In
addition, state laws govern the privacy and security of health information in specified circumstances, many of which differ
from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
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Additionally, the federal Physician Payments Sunshine Act within the ACA, and its implementing regulations, require
that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under
Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report information related to
certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or
individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually
certain ownership and investment interests held by physicians and their immediate family members.
In order to distribute products commercially, we must comply with state laws that require the registration of
manufacturers and wholesale distributors of drug and biological products in a state, including, in certain states,
manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place
of business within the state. Some states also impose requirements on manufacturers and distributors to establish the
pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new
technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted
legislation requiring pharmaceutical and biotechnology companies to establish marketing compliance programs, file
periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other
activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from
providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and
marketing, and to prohibit certain other sales and marketing practices. All of our activities are potentially subject to federal
and state consumer protection and unfair competition laws.
If our operations are found to be in violation of any of the federal and state healthcare laws described above or any
other governmental regulations that apply to us, we may be subject to penalties, including without limitation, civil, criminal
and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government programs, such
as Medicare and Medicaid, injunctions, private “qui tam” actions brought by individual whistleblowers in the name of the
government, or refusal to allow us to enter into government contracts, contractual damages, reputational harm,
administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any
of which could adversely affect our ability to operate our business and our results of operations.
Coverage, pricing and reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we
obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we receive
regulatory approval for commercial sale will depend, in part, on the extent to which third-party payors provide coverage,
and establish adequate reimbursement levels for such products. In the United States, third-party payors include federal
and state healthcare programs, private managed care providers, health insurers and other organizations. The process for
determining whether a third-party payor will provide coverage for a product may be separate from the process for setting
the price of a product or for establishing the reimbursement rate that such a payor will pay for the product. Third-party
payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all
of the FDA-approved products for a particular indication. Third-party payors are increasingly challenging the price,
examining the medical necessity and reviewing the cost-effectiveness of medical products, therapies and services, in
addition to questioning their safety and efficacy. We may need to conduct expensive pharmaco-economic studies in order
to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the
FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision
to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one
payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for
the product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize an appropriate return on our investment in product development.
Different pricing and reimbursement schemes exist in other countries. In the EU, governments influence the price of
pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that
fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems
under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or
pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness
of a particular product candidate to currently available therapies. Other member states allow companies to fix their own
prices for medicines, but monitor and control company profits. The downward pressure on health care costs has become
very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some
countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.
The marketability of any product candidates for which we receive regulatory approval for commercial sale may suffer
if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on
managed care in the United States has increased and we expect will continue to increase the pressure on healthcare
pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and
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reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable
coverage policies and reimbursement rates may be implemented in the future.
Healthcare reform
In March 2010, President Obama enacted the ACA, which has the potential to substantially change healthcare
financing and delivery by both governmental and private insurers, and significantly impact the pharmaceutical and
biotechnology industry. The ACA will impact existing government healthcare programs and will result in the development
of new programs.
Among the ACA provisions of importance to the pharmaceutical and biotechnology industries, in addition to those
otherwise described above, are the following:
an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription
drugs and biologic agents apportioned among these entities according to their market share in some
government healthcare programs, that began in 2011;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate
Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for most
branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of
the Average Manufacturer Price, or AMP;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-
of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage
gap period, as a condition for the manufacturers’ 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 beginning in 2014 and by adding new mandatory eligibility categories for
individuals with income at or below 133% of the federal poverty level, thereby potentially increasing
manufacturers’ Medicaid rebate liability;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
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.
We anticipate that the ACA will result in additional downward pressure on coverage and the price that we receive for
any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare and 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 products. In addition, it is possible that there will be further legislation or regulation that
could harm our business, financial condition and results of operations.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual or business from paying, offering, or
authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate
for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in
obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to
comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect
all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of
internal accounting controls for international operations.
Additional regulation
In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances,
including the Occupational Safety and Health Act, the Resource Conservancy and Recovery Act and the Toxic
Substances Control Act, affect our business. These and other laws govern our use, handling and disposal of various
biological, chemical and radioactive substances used in, and wastes generated by, our operations. If our operations result
in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and
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governmental fines. We believe that we are in material compliance with applicable environmental laws and that continued
compliance therewith will not have a material adverse effect on our business. We cannot predict, however, how changes
in these laws may affect our future operations.
Europe / rest of world government regulation
In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions
governing, among other things, clinical trials and any commercial sales and distribution of our products. Whether or not
we obtain FDA approval of a product, we must obtain the requisite approvals from regulatory authorities in foreign
countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries
outside of the United States have a similar process that requires the submission of a clinical trial application much like the
IND prior to the commencement of human clinical trials. In the EU, for example, a clinical trial application must be
submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB,
respectively. Once the clinical trial application is approved in accordance with a country’s requirements, clinical trial
development may proceed. Because biologically sourced raw materials are subject to unique contamination risks, their
use may be restricted in some countries.
The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement
vary from country to country. In all cases, the clinical trials are conducted in accordance with GCP and the applicable
regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
To obtain regulatory approval of an investigational drug or biological product under EU regulatory systems, we must
submit a marketing authorization application. The application used to file the BLA in the United States is similar to that
required in the EU, with the exception of, among other things, country-specific document requirements.
For other countries outside of the EU, such as countries in Eastern Europe, Latin America or Asia, the requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all
cases, again, the clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the
ethical principles that have their origin in the Declaration of Helsinki.
If we or our potential collaborators fail to comply with applicable foreign regulatory requirements, we may be subject
to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
Corporate Information
We were formed as a limited liability company under the laws of the State of Delaware in December 2013 and
converted to a Delaware corporation in March 2015. Our principal executive offices are located at 901 S. MoPac
Expressway, Barton Oaks Plaza One, Suite 250, Austin, Texas 78746, and our telephone number is (512) 942-2935. Our
website address is www.aegleabio.com. The information contained on, or that can be accessed through, our website is
not part of this Annual Report, and you should not consider information on our website to be part of this Annual Report.
Employees
As of December 31, 2016, we had a total of 30 full-time employees, all located in the United States. None of our
employees is represented by a labor union or covered by a collective bargaining agreement. We have not experienced
any work stoppages, and we consider our relations with our employees to be good.
Financial Information
We manage our operations and allocate resources as a single reporting segment. Financial information regarding
our operations, assets and liabilities, including our net loss for the years ended December 31, 2016, 2015 and 2014 and
our total assets as of December 31, 2016 and 2015, is included in our Consolidated Financial Statements in Item 8 of this
Annual Report.
Available Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other
information with the Securities and Exchange Commission (SEC). Our filings with the SEC are available free of charge on
the SEC’s website at www.sec.gov and on our website under the “Investors” tab as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC. You may also read and copy, at SEC prescribed rates,
any document we file with the SEC at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C.
20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
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ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and
uncertainties described below, together with all of the other information in this annual report on Form 10-K, including our
consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” before investing in our common stock. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not
material, may also become important factors that affect us. If any of the following risks occur, our business, operating
results and prospects could be materially harmed. In that event, the price of our common stock could decline, and you
could lose part or all of your investment.
Risks Related to Our Business and Industry
Our limited operating history may make it difficult for you to evaluate the success of our business to date and to
assess our future viability.
We are an early-stage biotechnology company. We began operations as a limited liability company in December
2013 and converted to a Delaware corporation in March 2015. Our operations to date have been limited to organizing and
staffing our company, business planning, raising capital, acquiring and developing our technology, identifying potential
product candidates, undertaking nonclinical studies, and preparing for, commencing and conducting initial clinical trials of
our most advanced product candidate, AEB1102.
We have not yet demonstrated our ability to successfully complete any clinical trials, including large-scale, pivotal
clinical trials, obtain marketing approvals, manufacture a commercial scale product or arrange for a third party to do so on
our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Products, on
average, take ten to 15 years to be developed from the time they are discovered to the time they are approved and
available for treating patients. Although we have recruited a team that has experience with clinical trials, as a company we
have little experience in conducting clinical trials. In part because of this lack of experience, we cannot be certain that
planned or ongoing clinical trials will begin or be completed on time, if at all. Consequently, any predictions you make
about our future success or viability based on our short operating history to date may not be as accurate as they could be
if we had a longer operating history or an established track record in commercializing products or conducting clinical trials.
In addition, as a new business, we may encounter unforeseen expenses, difficulties, complications, delays and other
known and unknown factors. We will need to transition from a company with a research focus to a company capable of
supporting commercial activities. We may not be successful in such a transition.
We have no source of product revenue and we have incurred significant losses since inception. We expect to
incur losses for the foreseeable future and may never achieve or maintain profitability.
We have a limited operating history. We have no approved products and have only recently begun clinical
development of AEB1102. Our ability to generate revenue and become profitable depends upon our ability to successfully
complete the development of any of our product candidates, including AEB1102, for any of our target indications and to
obtain necessary regulatory approvals. To date, we have recognized revenue solely from a government grant and have
not generated any product revenue. Even if we receive regulatory approval for any of our product candidates, we do not
know when these product candidates will generate revenue for us, if at all.
In addition, since inception, we have incurred significant operating losses. For the years ended December 31, 2016,
2015, and 2014, we reported a net loss of $21.7 million, $11.3 million, and $10.3 million, respectively. As of December 31,
2016, we had an accumulated deficit of $45.3 million. We have financed our operations primarily through private
placements of our preferred stock, the initial public offering, or IPO, of our common stock, which closed on April 12, 2016,
and collection of a research grant. We have devoted substantially all of our efforts to research and development. We have
only recently initiated clinical development for AEB1102 for the treatment of advanced solid tumors, Arginase I deficiency
and the hematological malignancies AML and MDS. We have not initiated clinical development of our other product
candidates and expect that it will be many years, if ever, before we have a product candidate ready for commercialization.
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future, and the
net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase
substantially if and as we:
continue our research, nonclinical and clinical development of our product candidates;
seek to identify additional product candidates;
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conduct additional nonclinical studies and initiate clinical trials for our product candidates;
seek marketing approvals for any of our product candidates that successfully complete clinical trials, including
pivotal trials;
ultimately establish a sales, marketing and distribution infrastructure to commercialize any product candidates
for which we may obtain marketing approval;
maintain, expand and protect our intellectual property portfolio;
hire additional executive, clinical, quality control and scientific personnel;
add operational, financial and management information systems and personnel, including personnel to support
our product development; and
acquire or in-license other product candidates and technologies.
We are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or
maintain profitability because of the numerous risks and uncertainties associated with product development. In addition,
our expenses could increase significantly beyond expectations if we are required by the FDA, EMA, MHRA or other
relevant regulatory authorities to modify protocols of our clinical trials or perform studies in addition to those that we
currently anticipate. Even if AEB1102, or any of our other product candidates, is approved for commercial sale, we
anticipate incurring significant costs associated with the commercial launch of any product candidate.
To become and remain profitable, we must develop and eventually commercialize a product candidate or product
candidates with significant market potential. This will require us to be successful in a range of challenging activities,
including completing nonclinical testing, initiating and completing clinical trials of one or more of our product candidates,
obtaining marketing approval for these product candidates, manufacturing, marketing and selling those product
candidates for which we obtain marketing approval and satisfying any post-marketing requirements. We may never
succeed in these activities and, even if we do, we may never generate revenues that are significant or large enough to
achieve profitability. We are currently only in the nonclinical development stages for most of our product candidates, and
have only recently initiated clinical development for AEB1102 for the treatment of advanced solid tumors, Arginase I
deficiency and the hematological malignancies AML and MDS. If we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would
decrease the value of the company and could impair our ability to raise capital, maintain or expand our research and
development efforts, expand our business or continue our operations. A decline in the value of our company would also
cause you to lose part or even all of your investment.
We may not be successful in advancing the clinical development of our product candidates, including AEB1102.
In order to execute on our strategy of advancing the clinical development of our product candidates, we are
conducting three clinical trials for AEB1102, consisting of one Phase 1/2 clinical trial for the treatment of Arginase I
deficiency and two Phase 1 clinical trials for the treatment of patients with advanced solid tumors and the hematological
malignancies AML and MDS. We have designed the planned expansion portion of our Phase 1 trial of AEB1102 for the
treatment of advanced solid tumors, predicted to be dependent on arginine, based on our biomarker studies in archival
tumor samples and in patient-derived xenograft efficacy studies, or studies involving the growth of tissue or cells from one
species in a different species. If our product candidate fails to work as we expect, our ability to assess the therapeutic
effect, seek regulatory approval or otherwise begin or further clinical development, could be compromised. This may result
in longer development times, larger trials and a greater likelihood of terminating the trial or not obtaining regulatory
approval.
In addition, as we pursue oncology-related applications of our product candidates, because the natural history of
different tumor types is variable, we will need to study our product candidates, including AEB1102, in clinical trials specific
for a given tumor type and this may result in increased time and cost. Even if our product candidate demonstrates efficacy
in a particular tumor type, we cannot guarantee that any product candidate, including AEB1102, will behave similarly in all
tumor types, and we will be required to obtain separate regulatory approvals for each tumor type we intend a product
candidate to treat. If any of our ongoing or planned clinical trials are unsuccessful, our business will suffer.
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We or third parties may not be successful in developing companion diagnostic assays for our product
candidates.
In developing a product candidate, we expect that if we use a biomarker-based test to identify and only enroll
patients in clinical trials with tumors that express the biomarker, the FDA will require the development and regulatory
approval of a companion diagnostic assay as a condition to approval of the product candidate. We do not have
experience or capabilities in developing or commercializing these companion diagnostics and plan to rely in large part on
third parties to perform these functions. Companion diagnostic assays are subject to regulation by the FDA as medical
devices and require separate regulatory approval prior to the use of such diagnostic assays with a therapeutic product
candidate. If we, or any third parties that we engage to assist us, are unable to successfully develop companion
diagnostic assays for use with our product candidates, or experience delays in development, we may be unable to identify
patients with the specific profile targeted by our product candidates for enrollment in our clinical trials. Accordingly, further
investment may be required to further develop or obtain the required regulatory approval for the relevant companion
diagnostic assay, which would delay or substantially impact our ability to conduct further clinical trials or obtain regulatory
approval. In addition, if a companion diagnostic is necessary for any of our product candidates, the delay or failure to
obtain regulatory approval of the companion diagnostic would delay or prevent the approval of the therapeutic product
candidate. EMA, MHRA or comparable foreign regulatory authorities may also require the development and regulatory
approval of a companion diagnostic assay as a condition to approval of the product candidate.
We will need substantial additional funding. If we are unable to raise capital when needed, we would be
compelled to delay, reduce or eliminate our product development programs or commercialization efforts.
We expect our expenses to increase in parallel with our ongoing activities, particularly as we continue our discovery
and nonclinical development to identify new clinical candidates and initiate and continue clinical trials of, and seek
marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product
candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing
and distribution. Furthermore, we expect to continue to incur additional costs associated with operating as a public
company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If
we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce or eliminate our
discovery and nonclinical development programs or any future clinical development or commercialization efforts.
Based upon our planned use of the net proceeds from our IPO, we estimate such funds will be sufficient for us to
fund our Phase 1/2 clinical trial for the treatment of patients with Arginase I deficiency and our two ongoing Phase 1
clinical trials for the treatment of patients with advanced solid tumors and the hematological malignancies AML and MDS.
Our future capital requirements will depend on many factors, including:
the costs associated with the scope, progress and results of compound discovery, nonclinical development,
laboratory testing and clinical trials for our product candidates;
the costs related to the extent to which we enter into partnerships or other arrangements with third parties in
order to further develop our product candidates;
the costs and fees associated with the discovery, acquisition or in-license of product candidates or
technologies;
our ability to establish collaborations on favorable terms, if at all;
the costs of future commercialization activities, if any, including product sales, marketing, manufacturing and
distribution, for any of our product candidates for which we receive marketing approval;
revenue, if any, received from commercial sales of our product candidates, should any of our product
candidates receive marketing approval; and
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual
property rights and defending intellectual property-related claims.
Our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be
derived from sales of product candidates that we do not expect to be commercially available for many years, if at all.
Accordingly, we will continue to rely on additional financing to achieve our business objectives, which may not be
available to us on acceptable terms, or at all.
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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to
relinquish rights to our technologies or product candidates.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs
through a combination of equity or equity-linked offerings, debt financings, grants from research organizations and license
and collaboration agreements. We do not have any committed external source of funds other than our grant agreement
with the Cancer Prevention and Research Institute of Texas. 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 rank
senior to our common stock and include liquidation or other preferences, covenants or other terms that adversely affect
your rights as a common stockholder. Further, any future sales of our common stock by us or resale of our common stock
by our existing stockholders could cause the market price of our common stock to decline. 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 have to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or grant licenses on terms that may not be favorable to us and/or that may
reduce the value of our common stock.
We depend heavily on the success of our most advanced product candidate, AEB1102. All of our product
candidates, other than AEB1102, are still in nonclinical development or nonclinical testing, and for AEB1102, the
early stages of clinical development. Existing and future clinical trials of our product candidates, including
AEB1102, may not be successful. If we are unable to commercialize our product candidates or experience
significant delays in doing so, our business will be materially harmed.
We have invested a significant portion of our efforts and financial resources in the nonclinical and clinical
development and testing of our most advanced product candidate, AEB1102, for the treatment of patients with Arginase I
deficiency and patients with advanced solid tumors and the hematological malignancies AML and MDS. Our ability to
generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the
successful development and eventual commercialization of AEB1102. The success of AEB1102 and our other product
candidates will depend on many factors, including the following:
successful enrollment of patients in, and the completion of, our ongoing and planned clinical trials;
receiving required regulatory approvals for the development and commercialization of our product candidates;
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and non-patent exclusivity for our product
candidates and their components;
enforcing and defending intellectual property rights and claims;
achieving desirable therapeutic properties for our product candidates’ intended indications;
launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration
with third parties;
acceptance of our product candidates, if and when approved, by patients, the medical community and third-
party payors;
effectively competing with other therapies; and
maintaining an acceptable safety profile of our product candidates through clinical trials and following
regulatory 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 product candidates, which would materially harm our business.
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Clinical drug development involves a lengthy and expensive process with an uncertain outcome. We may
experience delays in completing, or ultimately be unable to complete, the development and commercialization of
any of our product candidates.
We have only recently initiated clinical trials of our lead product candidate AEB1102, and the risk of failure for all of
our product candidates is high. Before obtaining marketing approval from regulatory authorities for the sale of any product
candidate, we must complete nonclinical development and then conduct extensive clinical trials to demonstrate the safety
and efficacy of our product candidates in humans for the respective target indications. Clinical testing is expensive,
difficult to design and implement and can take many years to complete, and its outcome is inherently uncertain. Failure
can occur at any time during the clinical trial process, and we only recently commenced clinical trials for AEB1102 for the
treatment of patients with advanced solid tumors, Arginase I deficiency and the hematological malignancies AML and
MDS. Further, the results of nonclinical studies and early clinical trials of our product candidates may not be predictive of
the results of later-stage clinical trials that will likely differ in design and size from early-stage clinical trials, and interim
results of a clinical trial do not necessarily predict final results. For example, while we have observed a reduction in blood
arginine for AEB1102 for the treatment of patients with Arginase I deficiency, advanced solid tumors, and the
hematological malignancies AML and MDS, this data may not necessarily be predictive of the final results of all patients
intended to be enrolled in these Phase 1 clinical trials or in future trials. Furthermore, our ongoing Phase 1 clinical trials for
the treatment of advanced solid tumors and the hematological malignancies AML and MDS, will evaluate the safety of our
product candidates, and we will not be evaluating the efficacy of our product candidates in these early trials. Moreover,
nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have
believed their product candidates performed satisfactorily in nonclinical studies and clinical trials have nonetheless failed
to obtain marketing approval of their products. It is impossible to predict when or if any of our product candidates will
prove effective or safe in humans or will receive regulatory approval.
We may experience delays in our ongoing and planned clinical trials and we do not know whether planned clinical
trials will begin or enroll subjects on time, whether they will need to be redesigned or whether they will be able to be
completed on schedule, if at all. There can be no assurance that the FDA, EMA, MHRA or any similar foreign regulatory
agency will allow us to begin clinical trials or that they will not put any of the trials for any of our product candidates that
enter or have entered clinical development on clinical hold in the future. 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 product candidates. Clinical trials may be delayed, suspended or prematurely terminated because
costs are greater than we anticipate or for a variety of reasons, such as:
delay or failure in reaching agreement with the FDA, EMA, MHRA or a comparable foreign regulatory authority
on a trial design that we are able to execute;
delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by
a regulatory authority regarding the scope or design of a clinical trial;
delays in reaching, or failure to reach, agreement on acceptable clinical trial contracts or clinical trial protocols
with planned trial sites;
modifications to our ongoing and planned clinical trial protocols due to regulatory requirements or decisions
made by regulatory authorities;
reports of safety issues, side effects or dose-limiting toxicities, or any additional or more severe safety issues in
addition to those observed to date;
inability, delay, or failure in identifying and maintaining a sufficient number of trial sites, many of which may
already be engaged in other clinical programs;
delay or failure in recruiting and enrolling suitable subjects to participate in one or more clinical trials;
delay or failure in having subjects complete a trial or return for post-treatment follow-up;
clinical sites and investigators deviating from the trial protocol, failing to conduct the trial in accordance with
regulatory requirements, or dropping out of a trial;
a clinical hold for any of our ongoing or planned clinical trials, including for AEB1102, where a clinical hold in a
trial in one indication could result in a clinical hold for clinical trials in other indications;
clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or
regulators may require us, to conduct more clinical trials than we anticipate or abandon product development
programs;
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the number of patients required for clinical trials of our product candidates may be larger than we anticipate,
enrollment in these clinical trials may be slower than we anticipate or insufficient or participants may drop out
of these clinical trials at a higher rate than we anticipate;
we may experience delays or difficulties in the enrollment of patients with Arginase I deficiency or patients with
tumors or hematological malignancies, including the identification of patients with Arginase I deficiency or
development or identification of a test, if needed, to screen for those cancer patients;
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;
we may have difficulty partnering with experienced CROs that can screen for patients with tumors or
hematological malignancies dependent on arginine that AEB1102 is designed to target and with CROs that can
run our clinical trials effectively;
regulators may require that we or our investigators suspend or terminate clinical research for various reasons,
including noncompliance with regulatory requirements or a finding that the participants are being exposed to
unacceptable health risks;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our
product candidates may be insufficient or inadequate; or
there may be changes in governmental regulations or administrative actions.
If we are required to modify our ongoing clinical trial protocols, conduct additional clinical trials or other testing of our
product candidates beyond those that we currently contemplate, if we are unable to successfully initiate or complete
clinical trials of our product candidates or other testing, if the results of these trials or tests do not demonstrate sufficient
clinical benefit or if our product candidates do not have an acceptable safety profile, we may:
be delayed in obtaining marketing approval for our product candidates;
not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or safety warnings that
would reduce the potential market for our product candidates or inhibit our ability to successfully commercialize
our product candidates;
be subject to additional post-marketing restrictions and/or testing requirements; or
have the product removed from the market after obtaining marketing approval.
We do not know whether any of our planned or current nonclinical studies, or ongoing or planned clinical trials, will
need to be restructured or will be completed on schedule, or at all. For example, we withdrew our initial IND for the
treatment of Arginase I deficiency in July 2015 in order to comply with new draft guidance issued by the FDA that required
additional toxicology studies. In addition, we originally proposed including subjects younger than age 18 in our initial
Phase 1 trial in patients with Arginase I deficiency; however, the FDA stated that enrollment in this Phase 1 trial must
currently be limited to adult patients 18 years and older. In November 2016, we submitted a protocol amendment to
broaden the scope of our Phase 1 clinical trial for the treatment of Arginase I deficiency into a Phase 1/2 trial. The
amended protocol includes dosing of pediatric patients (two and older) and weekly repeat dosing. In March 2017, we
received an information request from the FDA which included comments and recommendations on the protocol
amendment and a request for supporting documents based on their review of our completed toxicology studies, our dose
escalation plan and our information to support the inclusion of pediatric patients. While we have replied with supporting
information and believe that our Phase 1/2 protocol provides an appropriate path to evaluate the safety and tolerability of
AEB1102 in pediatric patients, the FDA may disagree with us, require additional information or studies to be conducted, or
impose conditions that could delay or restrict our planned clinical activities. Significant nonclinical or clinical trial delays
also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or
allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our
product candidates and may materially harm our business and results of operations.
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We may not be able to submit INDs, or foreign equivalents outside of the United States, to commence clinical
trials for product candidates on the timeframes we expect, and even if we are able to, the FDA, EMA, MHRA or
comparable foreign regulatory authorities may not permit us to proceed with planned clinical trials.
We are currently conducting nonclinical development of our product candidates other than our clinical trials for
AEB1102 for the treatment of patients with advanced solid tumors, Arginase I deficiency and the hematological
malignancies AML and MDS. Progression of any candidate into clinical trials is inherently risky and dependent on the
results obtained in nonclinical programs, and other potential results such as the results of other clinical programs and
results of third-party programs. If results are not available when expected or problems are identified during therapy
development, we may experience significant delays in clinical development. This may also impact our ability to achieve
certain financial milestones and the expected timeframes to market any of our product candidates. Failure to submit or
have effective INDs, CTAs or other comparable foreign equivalents and commence clinical programs will significantly limit
our opportunity to generate revenue.
Our engineered human enzyme product candidates for our oncology indications represent a novel approach to
cancer treatment, which could result in heightened regulatory scrutiny, delays in clinical development, or delays
in our ability to achieve regulatory approval or commercialization of our product candidates.
Engineered human enzyme products are a new category of therapeutics. Because this is a relatively new and
expanding area of novel therapeutic interventions, there can be no assurance as to the length of the trial period, the
number of patients the FDA, EMA, MHRA or another applicable regulatory authority will require to be enrolled in the trials
in order to establish the safety, efficacy, purity and potency of engineered human enzyme products, or that the data
generated in these trials will be acceptable to the FDA or another applicable regulatory authority to support marketing
approval.
We have only recently initiated our Phase 1 clinical trials for AEB1102 for the treatment of patients with advanced
solid tumors, Arginase I deficiency and the hematological malignancies AML and MDS. We have not dosed any of
our other product candidates in humans. Our existing and future planned clinical trials may reveal significant
adverse events, toxicities or other side effects not seen in our nonclinical studies and may result in a safety
profile that could inhibit regulatory approval or market acceptance of any of our product candidates.
In order to obtain marketing approval for any of our product candidates, we must demonstrate the safety and
efficacy of the product candidate for the relevant clinical indication or indications through nonclinical studies and clinical
trials as well as additional supporting data. If our product candidates are associated with undesirable side effects in
nonclinical studies or clinical trials or have characteristics that are unexpected, we may need to interrupt, delay or
abandon their development or limit development to more narrow uses or subpopulations in which the undesirable side
effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective.
We have only recently initiated our clinical trials for AEB1102 for the treatment of patients with advanced solid
tumors, Arginase I deficiency and the hematological malignancies AML and MDS. Given the nature of the patient
population enrolled in these trials, we have observed and expect to continue to observe serious adverse events which
could be related or unrelated to AEB1102. For example, in each of our Phase 1 trials for AEB1102 for the treatment of
patients with advanced solid tumors and the hematological malignancies AML and MDS, we have observed serious
adverse events in some patients, including death. To date, only one serious adverse event, consisting of nausea and
vomiting, has been considered to be possibly related to the administration of AEB1102. Subjects in our ongoing and
planned clinical trials may suffer significant serious adverse events, including those that are drug-related, or other side
effects not observed in our nonclinical studies, including, but not limited to, immune responses, organ toxicities such as
liver, heart or kidney or other tolerability issues. We have not dosed any of our other product candidates in humans.
Testing in animals, such as our primate studies for AEB1102, may not uncover all side effects in humans or any
observed side effects in animals may be more severe in humans. For example, it is possible that patients’ immune
systems may recognize our engineered human enzymes as foreign and trigger an immune response. This risk is
heightened in patients who lack the target enzyme, as is the case with patients with Arginase I deficiency that we are
treating in our recently initiated Phase 1/2 trial and our future trials for this IEM. In addition, our product candidates such
as AEB1102 break down target amino acids such as arginine, thereby releasing metabolites such as ornithine into the
bloodstream. Some patients may be sensitive to these metabolites, increasing the risk of an adverse reaction due to
treatment, which risk may not be able to be mitigated through dosing. Finally, although our engineered human enzyme
product candidates such as AEB1102 are engineered from the human genome, AEB1102 is produced in E. coli. This
manufacturing process could lead AEB1102 to be more likely to trigger an immune response than we expect.
To the extent significant adverse events or other side effects are observed in any of our clinical trials, we may have
difficulty recruiting patients to the clinical trial, patients may drop out of our trial, or we may be required to abandon the trial
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or our development efforts of that product candidate altogether. Some potential therapeutics developed in the
biotechnology industry that initially showed therapeutic promise in early-stage studies have later been found to cause side
effects that prevented their further development. Even if the side effects do not preclude the drug from obtaining or
maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its
tolerability versus other therapies. Any of these developments could materially harm our business, financial condition and
prospects.
Further, toxicities associated with our product candidates may also develop after regulatory approval and lead to the
withdrawal of the product from the market. We cannot predict whether our product candidates will cause organ or other
injury in humans that would preclude or lead to the revocation of regulatory approval based on nonclinical studies or early
stage clinical testing.
If we experience delays or difficulties in the enrollment of patients in our ongoing or planned clinical trials, our
receipt of necessary regulatory approvals could be delayed or prevented.
We may not be able to initiate or continue our ongoing or planned clinical trials if we are unable to locate and enroll a
sufficient number of eligible patients to participate in these trials as required by the FDA, EMA, MHRA or comparable
regulatory authorities outside the United States. More specifically, many of our product candidates, including AEB1102,
initially target indications that may be characterized as orphan markets, which can prolong the clinical trial timeline for the
regulatory process if sufficient patients cannot be enrolled in a timely manner. Arginase I deficiency, for example, is the
least common of the urea cycle disorders, with a reported incidence of 1:350,000 to 1:1,000,000 live births. Urea cycle
disorders are the IEM resulting from defects in the enzymes of the urea cycle, the process by which the human body
detoxifies ammonia, a natural byproduct of protein metabolism. While there is currently a neonatal blood test to screen for
Arginase I deficiency, it has only been in broad use in the United States since 2006 and is not commonly used in Europe.
To date, the urea cycle disorder consortium and one national urea cycle disorder patient group have together identified
approximately 40 treating physicians with over 50 patients with Arginase I deficiency in the United States and Europe.
Because neonatal blood testing for this disorder did not become common in the United States until 2006, we believe that
approximately half of those individuals identified in the United States are younger than 18. However, due to screening
requirements and enrollment restrictions in our amended clinical trial protocol, or any additional restrictions that may be
imposed by the FDA, not all pediatric patients, if any at all, may be eligible for inclusion in our Phase 1/2 trial in the United
States.
Delays in patient enrollment could result in increased costs, delays in advancing our product development, delays in
testing the effectiveness of our technology or termination of the clinical trials altogether.
Patient enrollment is affected by factors including:
the severity of the disease under investigation;
the design of the clinical trial protocol;
the novelty of the product candidate and acceptance by physicians;
the patient eligibility criteria for the study in question;
the size of the total patient population;
the design of the clinical trials;
the perceived risks and benefits of the product candidate under study;
the availability and efficacy of competing therapies and clinical trials;
our payments for conducting clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment with the product candidate; and
the proximity and availability of clinical trial sites for prospective patients.
In addition, some patients with Arginase I deficiency suffer from heightened levels of ammonia, or
hyperammonemia. Hyperion Therapeutics, Inc., which has been acquired by Horizon Pharma plc, has gained approval for
its product RAVICTI (glycerol phenylbutyrate) to treat patients with urea cycle disorders suffering from hyperammonemia.
Some patients who may be eligible for our ongoing or planned clinical trials may instead pursue treatment for this effect of
their condition by taking RAVICTI (glycerol phenylbutyrate) or through dietary protein restriction. Our inability to enroll a
sufficient number of patients for any of our clinical trials could result in significant delays and could require us to abandon
37
one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for
our product candidates and in delays to commercially launching our product candidates, if approved, which would cause
the value of our company to decline and limit our ability to obtain additional financing.
Even though we have obtained orphan drug designation for AEB1102 in the United States and Europe for the
treatment of hyperargininemia, we may not obtain or maintain orphan drug exclusivity for AEB1102 and we may
not obtain orphan drug designation or exclusivity for any of our other product candidates or indications.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs or
biologics for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a
product as an orphan drug if it is a drug or biologic intended to treat a rare disease or condition, which is generally defined
as a patient population of fewer than 200,000 individuals in the United States. Similarly, the European Commission may
designate a product as an orphan drug under certain circumstances.
Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the
indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes
the FDA or the EMA from approving another marketing application for the same drug for that time period. The applicable
period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six
years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that
market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the
request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to
meet the needs of patients with the rare disease or condition.
On March 16, 2015, we obtained orphan drug designation in the United States for AEB1102 for the treatment of
patients with hyperargininemia, also known as Arginase I deficiency. On July 14, 2016, we also received orphan drug
designation in Europe for AEB1102 for the treatment of patients with Arginase I deficiency. A company that first obtains
FDA or EMA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug
marketing exclusivity for that drug for a period of seven years in the United States or ten years in the European Union,
respectively. This orphan drug exclusivity prevents the FDA or EMA from approving another application, including a
Biologics License Application, or BLA, in the United States or a MAA in the European Union, to market a drug containing
the same principal molecular structural features for the same orphan indication, except in very limited circumstances,
including when the FDA or the EMA concludes that the later drug is safer, more effective or makes a major contribution to
patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that
is broader than the indication for which it received orphan designation.
Even though we have received orphan drug designation for AEB1102 for the treatment of Arginase I deficiency, we
may not be the first to obtain marketing approval for the orphan-designated indication due to the uncertainties associated
with developing pharmaceutical product candidates. Further, even if we obtain orphan drug exclusivity for a product, that
exclusivity may not effectively protect the product from competition because different drugs with different active moieties
can be approved for the same condition or a drug with the same principal molecular structural features can be approved
for a different indication. Orphan drug designation neither shortens the development time or regulatory review time of a
drug nor gives the drug any advantage in the regulatory review or approval process. In addition, even if we intend to seek
orphan drug designation for other product candidates or indications, we may never receive such designations or obtain
orphan drug exclusivity.
If the market opportunities for our product candidates are smaller than we believe they are, our future product
revenues may be adversely affected and our business may suffer.
Our understanding of both the number of people who suffer from conditions such as Arginase I deficiency or who
have advanced tumors or hematological malignancies dependent on arginine, as well as the potential subset of those who
have the potential to benefit from treatment with our product candidates such as AEB1102, are based on estimates.
These estimates may prove to be incorrect and new studies may reduce the estimated incidence or prevalence of these
diseases. The number of patients in the United States, Europe or elsewhere may turn out to be lower than expected, may
not be otherwise amenable to treatment with our product candidates or patients may become increasingly difficult to
identify and access, all of which would adversely affect our business, financial condition, results of operations and
prospects.
Further, there are several factors that could contribute to making the actual number of patients who receive our
potential product candidates less than the potentially addressable market. These include the lack of widespread
availability of, and limited reimbursement for, new therapies in many underdeveloped markets.
38
Even if any of our product candidates receives marketing approval, it 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.
Even if any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market
acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial
success. For example, current cancer treatments like chemotherapy and radiation therapy are well established in the
medical community, and physicians may continue to rely on these treatments instead of adopting the use of AEB1102 for
the treatment of patients with arginine dependent cancers. In addition, many new drugs have been recently approved and
many more are in the pipeline to treat patients with cancer. Additionally, current treatments for Arginase I deficiency
include dietary protein restriction and, in some instances, ammonia-scavenging drugs such as RAVICTI (glycerol
phenylbutyrate). If our product candidates do not achieve an adequate level of acceptance, we may never generate
significant product revenues and we may not become profitable. The degree of market acceptance of our product
candidates, if approved for commercial sale, will depend on a number of factors, including:
their efficacy, safety and other potential advantages compared to alternative treatments;
our ability to offer them for sale at competitive prices;
their convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these
therapies;
the strength of marketing and distribution support;
the availability of third-party coverage and adequate reimbursement for our product candidates;
the prevalence and severity of their side effects;
any restrictions on the use of our product candidates together with other medications;
interactions of our product candidates with other products patients are taking; and
inability of patients with certain medical histories to take our product candidates.
We expect to expand our development and regulatory capabilities and potentially implement sales, marketing
and distribution capabilities, and, as a result, we may encounter difficulties in managing our growth, which could
disrupt our operations.
We expect to experience significant growth in the number of our employees and the scope of our operations,
particularly in the areas of product candidate development, regulatory affairs and, if any of our product candidates
receives marketing approval, sales, marketing and distribution.
We currently do not have a marketing or sales team for the marketing, sales and distribution of any of our product
candidates that are potentially able to obtain regulatory approval. In order to commercialize any product candidates, we
must build on a territory-by-territory basis marketing, sales, distribution, managerial and other non-technical capabilities or
make arrangements with third parties to perform these services, and we may not be successful in doing so. If our product
candidates receive regulatory approval, we intend to establish an internal sales or marketing team with technical expertise
and supporting distribution capabilities to commercialize our product candidates, which will be expensive and time
consuming and will require significant attention of our executive officers to manage. Any failure or delay in the
development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of
any of our product candidates that we obtain approval to market. With respect to the commercialization of all or certain of
our product candidates, we may choose to collaborate, either globally or on a territory-by-territory basis, with third parties
that have direct sales forces and established distribution systems, either to augment our own sales force and distribution
systems or in lieu of our own sales force and distribution systems. If we are unable to enter into such arrangements when
needed on acceptable terms, or at all, we may not be able to successfully commercialize any of our product candidates
that receive regulatory approval or any such commercialization may experience delays or limitations. If we are not
successful in commercializing our product candidates, either on our own or through collaborations with one or more third
parties, our future product revenue will suffer and we may incur significant additional losses.
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 public 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
39
management and business development resources. Any inability to manage growth could delay the execution of our
business plans or disrupt our operations.
We face significant competition from other biotechnology and pharmaceutical companies and our operating
results will suffer if we fail to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive. We have competitors both in the United
States and internationally, including major multinational pharmaceutical companies, biotechnology companies, universities
and other research institutions. Many of our competitors have substantially greater financial, technical and other
resources, such as larger research and development staff and experienced marketing and manufacturing organizations
and well-established sales forces. Competition may increase further as a result of advances in the commercial
applicability of technologies and greater availability of capital for investment in these industries. Our competitors may
succeed in developing, acquiring or licensing, on an exclusive basis, product candidates that are more effective or less
costly than any product candidate that we are currently developing or that we may develop.
We face intense competition from companies developing products to address urea cycle disorders. For example,
Horizon Pharma plc has gained approval for its drug RAVICTI (glycerol phenylbutyrate), which is used to treat patients
with urea cycle disorders suffering from hyperammonemia, which may sometimes include patients suffering from Arginase
I deficiency. Patients with Arginase I deficiency may also benefit from taking RAVICTI (glycerol phenylbutyrate). We also
face intense competition from companies developing products and therapies to treat cancer. For example, Polaris
Pharmaceuticals is conducting numerous clinical trials of ADI-PEG 20, an enzyme derived from mycoplasma, which
degrades arginine in the blood.
Our ability to compete successfully will depend largely on our ability to leverage our experience in product candidate
discovery and development to:
discover and develop product candidates that are superior to other products in the market;
attract qualified scientific, product development and commercial personnel;
obtain and maintain patent and/or other proprietary protection for our product candidates and technologies;
obtain required regulatory approvals; and
successfully collaborate with research institutions or pharmaceutical companies in the discovery, development
and commercialization of new product candidates.
The availability and price of our competitors’ products could limit the demand, and the price we are able to charge,
for any of our product candidates, if approved. We will not achieve our business plan if acceptance is inhibited by price
competition or the reluctance of physicians to switch from existing drug products or other therapies to our product
candidates, or if physicians switch to other new drug products or choose to reserve our product candidates for use in
limited circumstances.
Established biotechnology companies may invest heavily to accelerate discovery and development of products that
could make our product candidates less competitive. In addition, any new product that competes with an approved
product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome
price competition and to be commercially successful. Accordingly, our competitors may succeed in obtaining patent
protection, receiving FDA or non-U.S. regulatory approval or discovering, developing and commercializing product
candidates before we do, which would have a material adverse impact on our business. Many of our competitors have
greater resources than we do and have established sales and marketing capabilities, whether internally or through third
parties. We will not be able to successfully commercialize our product candidates without establishing sales and
marketing capabilities internally or through strategic partners.
The insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or
maintain adequate coverage and reimbursement for new or current product candidates could limit our ability to
market those product candidates and decrease our ability to generate revenue.
The availability and extent of reimbursement by governmental and private payors is essential for most patients to be
able to afford expensive treatments. Sales of any of our product candidates that receive marketing approval will depend
substantially, both in the United States and internationally, on the extent to which the costs of our product candidates will
be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or
reimbursed by government health administration authorities, private health coverage insurers and other third-party payors.
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If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize
our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to
allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In
the United States, the principal decisions about reimbursement for new products are typically made by the Centers for
Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services since CMS
decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tend to
follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel
products such as ours since there is no body of established practices and precedents for these new products.
Reimbursement agencies in Europe may be more conservative than CMS. For example, a number of cancer drugs have
been approved for reimbursement in the United States and have not been approved for reimbursement in certain
European countries.
Outside the United States, international operations are generally subject to extensive governmental price controls
and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada
and other countries has and will continue to put pressure on the pricing and usage of therapeutics such as our product
candidates. In many countries, particularly the countries of the European Union, the prices of medical products are subject
to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with
governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available therapies. In general, the prices of products under such
systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for
products, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation
could restrict the amount that we are able to charge for our product candidates. Accordingly, in markets outside the United
States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to
generate commercially reasonable revenues and profits.
Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap
or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new
products approved and, as a result, they may not cover or provide adequate payment for our product candidates. The
U.S. Congress and the new Trump administration have similarly expressed concerns over the pricing of pharmaceutical
products and there can be no assurance as to how this scrutiny will impact future pricing of pharmaceutical products
generally. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to
the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional
legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical
procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the
entry of new products into the healthcare market.
In addition to CMS and private payors, professional organizations such as the National Comprehensive Cancer
Network and the American Society of Clinical Oncology can influence decisions about reimbursement for new products by
determining standards for care. In addition, many private payors contract with commercial vendors who sell software that
provide guidelines that attempt to limit utilization of, and therefore reimbursement for, certain products deemed to provide
limited benefit to existing alternatives. Such organizations may set guidelines that limit reimbursement or utilization of our
product candidates.
Furthermore, some of our target indications, including for Arginase I deficiency for AEB1102, are orphan indications
where patient populations are small. In order for therapeutics that are designed to treat smaller patient populations to be
commercially viable, the reimbursement for such therapeutics must be higher, on a relative basis, to account for the lack
of volume. Accordingly, we will need to implement a coverage and reimbursement strategy for any approved product
candidate that accounts for the smaller potential market size. If we are unable to establish or sustain coverage and
adequate reimbursement for any future product candidates from third-party payors, the adoption of those products and
sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product
candidates, if approved, and ultimately our financial results.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified
personnel.
We are an early-stage clinical development company with a limited operating history, and, as of December 31, 2016,
had only 30 employees, including five executive officers. We are highly dependent on the research and development,
clinical and business development expertise of our executive officers, as well as the other principal members of our
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management, scientific and clinical team. Any of our management team members may terminate their employment with
us at any time. We do not maintain “key person” insurance for any of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, 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 research, 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, facilitate regulatory approval of and commercialize product candidates.
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. For instance, we are currently in the process of searching for a new Chief Medical Officer. There is no
assurance that a qualified individual will be found timely or engaged on acceptable terms. 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 such as our scientific
advisory board, to assist us in formulating our discovery and nonclinical development and commercialization strategy. Our
consultants and advisors, including members of our scientific advisory board, 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.
Our product candidates for which we intend to seek approval as biologic products may face competition sooner
than anticipated.
With the enactment of the Biologics Price Competition and Innovation Act of 2009, or BPCIA, an abbreviated
pathway for the approval of biosimilar and interchangeable biological products was created. The abbreviated regulatory
pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible
designation of a biosimilar as interchangeable based on its similarity to an existing reference product. Under the BPCIA,
an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product is
approved under a BLA. On March 6, 2015, the FDA approved the first biosimilar product under the BPCIA. However, the
law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation,
and meaning are subject to uncertainty. While it is uncertain when the processes intended to implement BPCIA may be
fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects
for our biological products.
We believe that if any of our product candidates are approved as a biological product under a BLA, it should qualify
for the 12-year period of exclusivity. However, there is a risk that the FDA will not consider any of our product candidates
to be reference products for competing products, potentially creating the opportunity for biosimilar competition sooner than
anticipated. Additionally, this period of regulatory exclusivity does not apply to companies pursuing regulatory approval via
their own traditional BLA, rather than via the abbreviated pathway. Moreover, the extent to which a biosimilar, once
approved, will be substituted for any one of our reference products that may be approved in a way that is similar to
traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace
and regulatory factors that are still developing.
Our business and operations would suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems and those of our strategic partners
and third-parties on whom we rely are vulnerable to damage from computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. Furthermore, we have little or no control over the
security measures and computer systems of third parties including the University of Texas at Austin and any CROs we
may work with in the future. While we and, to our knowledge, our third-party strategic partners have not experienced any
such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our
operations, the operations of our strategic partner the University of Texas at Austin, our other third-party strategic
partners, or our manufacturers or suppliers, it could result in a material disruption of our product candidate development
programs. For example, the loss of research data by University of Texas at Austin could delay development of our product
candidates and the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in
our regulatory approval efforts, and we may incur substantial costs to attempt to recover or reproduce the data. If any
disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of
42
confidential or proprietary information, we could incur liability or the further development of our product candidates could
be delayed.
Risks Related to Our Reliance on Third Parties
We will rely on third parties to conduct our ongoing and future planned clinical trials, and those third parties may
not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We currently rely and will continue to rely on third parties to provide manufacturing, discovery and clinical
development capabilities. For example, we rely on the University of Texas at Austin to provide research under our
sponsored research agreement, and we rely on a contract manufacturing organization, KBI BioPharma, Inc., or KBI, to
manufacture and supply nonclinical and clinical trial quantities of the biological substance of our lead product candidate,
AEB1102 and pipeline product candidates. We also expect to rely on KBI to manufacture and supply commercial
quantities of AEB1102. Until we develop our own drug discovery capabilities, we will continue to depend on third parties
such as the University of Texas at Austin for the identification of future targets for our product candidates.
We will rely on third-party CROs to conduct our ongoing and future planned clinical trials of AEB1102. We do not
plan to independently conduct clinical trials of our other product candidates. These agreements might terminate for a
variety of reasons, including a failure to perform by the third parties. If we need to enter into alternative arrangements, that
would delay our product development 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 ongoing and future planned clinical trials is conducted in accordance with the general investigational plan and
protocols for the trial. Moreover, the FDA requires us to comply with regulatory standards, commonly referred to as good
clinical practices 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. Other
countries’ regulatory agencies also have requirements for clinical trials with which we must comply. We also will be
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.
Furthermore, these third parties may also have relationships with other entities, some of which may be our
competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or
conduct our ongoing and future planned clinical trials in accordance with regulatory requirements or our stated protocols,
we will not be able to complete our clinical trials, obtain, or may be delayed in obtaining, marketing approvals for our
product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product
candidates.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any
performance failure on the part of our distributors could delay clinical development or marketing approval of our product
candidates or commercialization of our product candidates, producing additional losses and depriving us of potential
product revenue.
We contract with third parties for the manufacture of our product candidates for nonclinical studies and our
ongoing and future planned clinical testing and expect to continue to do so for commercialization. This reliance
on third parties increases the risk that we will not have sufficient quantities of our product candidates at an
acceptable cost and quality, which could delay, prevent or impair our development or commercialization efforts.
We do not own or operate facilities for the manufacture of our product candidates, and we do not have any
manufacturing personnel. We currently have no plans to build our own clinical or commercial scale manufacturing
capabilities. We rely, and expect to continue to rely, on third parties, including KBI and Lyophilization Services of New
England, Inc., for the manufacture of our product candidates for nonclinical studies and for our existing and future planned
clinical trials. We also expect to rely on third parties, including KBI, for commercial manufacture if any of our product
candidates receive marketing approval. This reliance on third parties increases the risk that we will not have sufficient
quantities of our product candidates or such quantities at an acceptable cost or quality, which could delay, prevent or
impair our development or commercialization efforts.
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 source for bulk drug
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substance. Currently, KBI is supplying, and is expected to continue to supply, the drug substance requirements for our
ongoing and planned clinical trials with AEB1102. If KBI cannot supply us with sufficient amounts, pursuant to product
requirements as agreed, we may be required to identify alternative manufacturers, which would lead us to incur added
costs and delays in identifying and qualifying any replacement.
The formulation used in early studies is not a final formulation for commercialization. If we are unable to demonstrate
that our commercial scale product is comparable to the product used in clinical trials, we may not receive regulatory
approval for that product without additional clinical trials. We have contracted with KBI for certain studies related to
potential commercial scale manufacturing of AEB1102 at a separate KBI facility, but there is no guarantee that such
studies, the transfer of technology to or any potential manufacturing at such facility, will be completed successfully, on
time, or at all. We also cannot guarantee that we will be able to make any required modifications within currently
anticipated timeframes or that such modifications, if and when made, will obtain regulatory approval or that the new
processes or modified processes will be successfully implemented by or transferred to any third-party contract suppliers
within currently anticipated timeframes. These may require additional studies, and may delay our clinical trials and/or
commercialization.
We expect to rely on third-party manufacturers, including KBI, or third-party strategic partners for the manufacture of
commercial supply of any product candidates for which our strategic partners or we obtain marketing approval. We may
be unable to establish any additional agreements with third-party manufacturers, including KBI, or to do so on acceptable
terms. Even if we are able to establish agreements with third-party manufacturers on acceptable terms, such third-party
manufacturers may have limited experience manufacturing pharmaceutical drugs for commercialization, and reliance on
third-party manufacturers for the commercial supply of our products may expose us to various risks, including:
possible noncompliance by the third party with regulatory requirements 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; 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 current good manufacturing practices, or cGMP or similar
regulatory requirements outside the United States. Although we do not have day-to-day control over third-party
manufacturers’ compliance with these regulations and standards, we are responsible for ensuring compliance with such
regulations and standards. 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 product candidates, operating restrictions
and criminal prosecutions, any of which would significantly and adversely affect supplies of our product candidates and
our business.
In addition, the process of manufacturing and administering our product candidates is complex and highly regulated.
As a result of the complexities, our manufacturing and supply costs are likely to be higher than those at more traditional
manufacturing processes and the manufacturing process is less reliable and more difficult to reproduce.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any
performance failure on the part of our distributors could delay clinical development or marketing approval of our product
candidates or commercialization of our product candidates, producing additional losses and depriving us of potential
product revenue.
Our product candidates and any products that we may develop may compete with other product candidates and
products 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.
Our current and anticipated future dependence upon others for the manufacture of our product candidates may
adversely affect our future profit margins and our ability to commercialize any product candidates that receive marketing
approval on a timely and competitive basis.
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Failure of any future third-party collaborators to successfully commercialize companion diagnostics developed
for use with our therapeutic product candidates for oncology indications could harm our ability to commercialize
these product candidates.
We do not plan to develop companion diagnostics internally and, as a result, we are dependent on the efforts of our
third-party strategic partners to successfully commercialize any needed companion diagnostics. Our strategic partners:
may not perform their obligations as expected;
may encounter production difficulties that could constrain the supply of the companion diagnostics;
may have difficulties gaining acceptance of the use of the companion diagnostics in the clinical community;
may not pursue commercialization of any companion diagnostics;
may elect not to continue or renew commercialization programs based on changes in the strategic partners’
strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create
competing priorities;
may not commit sufficient resources to the marketing and distribution of such companion diagnostic product
candidates; and
may terminate their relationship with us.
If companion diagnostics needed for use with our therapeutic product candidates in oncology fail to gain market
acceptance, our ability to derive revenues from sales of these therapeutic product candidates could be harmed. If our
strategic partners fail to commercialize these companion diagnostics, it could adversely affect and delay the development
or commercialization of our therapeutic product candidates.
We may not be successful in finding strategic partners for continuing development of certain of our product
candidates or successfully commercializing or competing in the market for certain indications.
We may seek to develop strategic partnerships for developing certain of our product candidates, due to capital costs
required to develop the product candidates or manufacturing constraints. We may not be successful in our efforts to
establish such a strategic partnership or other alternative arrangements for our product candidates because our research
and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of
development for collaborative effort or third parties may not view our product candidates as having the requisite potential
to demonstrate safety and efficacy. In addition, we may be restricted under existing collaboration agreements from
entering into future agreements with potential strategic partners. We cannot be certain that, following a strategic
transaction or license, we will achieve an economic benefit that justifies such transaction.
If we are unable to reach agreements with suitable strategic partners on a timely basis, on acceptable terms or at all,
we may have to curtail the development of a product candidate, reduce or delay its development program, delay its
potential commercialization, 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 fund development or
commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not
be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or
expertise to undertake the necessary development and commercialization activities, we may not be able to further
develop our product candidates and our business, financial condition, results of operations and prospects may be
materially and adversely affected.
Our employees may engage in misconduct or other improper activities, including non-compliance with regulatory
standards and requirements, which could cause significant liability for us and harm our reputation.
We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with FDA
regulations or similar regulations of comparable non-U.S. regulatory authorities, provide accurate information to the FDA
or comparable non-U.S. regulatory authorities, comply with manufacturing standards we have established, comply with
the Foreign Corrupt Practices Act and federal and state healthcare fraud and abuse laws and regulations and similar laws
and regulations established and enforced by comparable non-U.S. regulatory authorities, report financial information or
data accurately or disclose unauthorized activities to us. Employee misconduct could also involve the improper use of
information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and
prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws,
45
standards or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business and results of operations, including the
imposition of significant fines or other sanctions.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their
intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical
companies, including our competitors or potential competitors. Although we try to ensure that our employees do not use
the proprietary information or know-how of others in their work for us, we may be subject to claims that these employees
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.
If we 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 are successful in prosecuting or defending against such
claims, litigation could result in substantial costs and be a distraction to management.
We and our strategic partners that we rely on may be adversely affected by natural disasters, and our business
continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations or the operations of KBI’s manufacturing facilities and have a
material adverse effect on our business, financial condition, results of operations and prospects. If a natural disaster,
power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that
damaged critical infrastructure, such as KBI’s manufacturing facilities, or that otherwise disrupted operations, it may be
difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster
recovery and business continuity plans we have in place currently are limited and may not prove adequate in the event of
a serious disaster or similar event. Substantially all of our current supply of product candidates are located at KBI’s
manufacturing facilities, and we do not have any existing back-up facilities in place or plans for such back-up facilities. We
may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans,
which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Government Regulation
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals in the United States
or in foreign jurisdictions, we will not be able to commercialize our product candidates, and our ability to
generate revenue will be materially impaired.
Our product candidates must be approved by the FDA pursuant to a BLA in the United States, and by the EMA
pursuant to a MAA, and by other comparable regulatory authorities outside the United States prior to commercialization.
The process of obtaining marketing approvals, both in the United States and internationally, is expensive and takes many
years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type,
complexity and novelty of the product candidates involved. The approval procedure varies among countries and can
involve additional testing. The time required to obtain approval in Europe or another non-U.S. jurisdiction 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 product be approved for reimbursement before the product can be approved for sale
in that country. We or our third-party strategic partners 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. We may not be able to file for marketing approvals
and may not receive necessary approvals to commercialize our product candidates in any market.
Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product
candidate. We have not received approval to market any of our product candidates from regulatory authorities in any
jurisdiction. We have no experience in filing and supporting the applications necessary to gain marketing approvals and
expect to rely on third-party CROs to assist us in this process. Securing marketing approval requires the submission of
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extensive nonclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication
to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of
information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory
authorities. Our product 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. Regulatory authorities have substantial discretion in the approval process
and may refuse to accept any application or may decide that our data are insufficient for approval and require additional
nonclinical, clinical or other studies. In addition, varying interpretations of the data obtained from nonclinical and clinical
testing could delay, limit or prevent marketing approval of a product candidate. 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 product application, may also cause delays in or prevent the approval of an application.
Approval of our product candidates may be delayed or refused for many reasons, including the following:
the FDA, EMA, MHRA or other comparable foreign regulatory authorities may disagree with the design or
implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA, EMA, MHRA or other comparable foreign
regulatory authorities that our product candidates are safe and effective for any of their proposed indications;
the results of clinical trials may not meet the level of statistical significance required by the FDA, EMA, MHRA
or other comparable foreign regulatory authorities for approval;
we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety
risks;
the FDA, EMA, MHRA or other comparable foreign regulatory authorities may disagree with our interpretation
of data from preclinical programs or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the
FDA, EMA, MHRA or other comparable foreign regulatory authorities to support the submission of a BLA, MAA
or other comparable submission in other jurisdictions or to obtain regulatory approval in the United States or
elsewhere;
the facilities of the third-party manufacturers with which we partner may not be adequate to support approval of
our product candidates; and
the approval policies or regulations of the FDA, EMA or other comparable foreign regulatory authorities may
significantly change in a manner rendering our clinical data insufficient for approval.
New products for the treatment of cancer frequently are initially indicated only for patient populations that have not
responded to an existing therapy or have relapsed. If any of our product candidates receives marketing approval, the
approved labeling may limit the use of our product candidates in this way, which could limit sales of the product.
Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments
that render the approved product not commercially viable. If we experience delays in obtaining approval or if we fail to
obtain approval of our product candidates, the commercial prospects for our product candidates may be harmed and our
ability to generate revenues will be materially impaired.
Any Fast Track Designation by the FDA, even if granted for any of our product candidates, may not lead to a
faster development or regulatory review or approval process, and does not increase the likelihood that our
product candidates will receive marketing approval.
We have received Fast Track Designation from the FDA for our lead product candidate AEB1102 for the treatment
of hyperargininemia secondary to Arginase I deficiency, and may seek such designation for some or all of our product
candidates. If a drug or biologic is intended for the treatment of a serious or life-threatening condition and the drug or
biologic demonstrates the potential to address unmet medical needs for this condition, the drug or biologic sponsor may
apply for FDA Fast Track Designation. The FDA has broad discretion whether or not to grant this designation. Even if we
believe a particular product candidate is eligible for this designation, we cannot assure you that the FDA would decide to
grant it. Even though we have received Fast Track Designation for AEB1102 for the treatment of hyperargininemia
secondary to Arginase I deficiency, and even if we receive Fast Track Designation for other product candidates or
indications in the future, we may not experience a faster development process, review or approval compared to
conventional FDA procedures. The FDA may withdraw Fast Track Designation if it believes that the designation is no
longer supported by data from our clinical development program. Many drugs or biologics that have received Fast Track
Designation have failed to obtain approval.
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We may also seek accelerated approval for products that have obtained fast track designation. Under the FDA’s
accelerated approval program, the FDA may approve a drug or biologic for a serious or life-threatening illness that
provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible
morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical
benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative
treatments. For drugs or biologics granted accelerated approval, post-marketing confirmatory trials are required to
describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. These confirmatory trials must
be completed with due diligence and, in some cases, the FDA may require that the trial be designed and/or initiated prior
to approval. Moreover, the FDA may withdraw approval of our product candidate or indication approved under the
accelerated approval pathway if, for example:
the trial or trials required to verify the predicted clinical benefit of our product candidate fail to verify such
benefit or do not demonstrate sufficient clinical benefit to justify the risks associated with the drug;
other evidence demonstrates that our product candidate is not shown to be safe or effective under the
conditions of use;
we fail to conduct any required post-approval trial of our product candidate with due diligence; or
we disseminate false or misleading promotional materials relating to the relevant product candidate.
A Breakthrough Therapy Designation by the FDA, even if granted for any of our product candidates, may not lead
to a faster development or regulatory review or approval process, and does not increase the likelihood that our
product candidates will receive marketing approval.
We do not currently have Breakthrough Therapy Designation for any of our product candidates, but may seek such
designation. A Breakthrough Therapy is defined as a drug or biologic that is intended, alone or in combination with one or
more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that
the drug or biologic may demonstrate substantial improvement over existing therapies with respect to one or more
clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs or
biologics that have been designated as Breakthrough Therapies, interaction and communication between the FDA and
the sponsor can help to identify the most efficient path for development.
Designation as a Breakthrough Therapy is within the discretion of the FDA. Accordingly, even if we believe, after
completing early clinical trials, that one of our product candidates meets the criteria for designation as a Breakthrough
Therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a
Breakthrough Therapy designation for a product candidate may not result in a faster development process, review or
approval compared to drugs or biologics considered for approval under conventional FDA procedures and does not
assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as Breakthrough
Therapies, the FDA may later decide that such product candidates no longer meet the conditions for qualification.
Any product candidate for which we obtain marketing approval will be subject to extensive post-marketing
regulatory requirements and could be subject to post-marketing restrictions 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 product candidates, when and if any of them are approved.
Our product candidates and the activities associated with their development and commercialization, including their
testing, manufacture, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject
to comprehensive regulation 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,
including periodic inspections by the FDA and other regulatory authorities, requirements regarding the distribution of
samples to physicians and recordkeeping.
The FDA may also impose requirements for costly post-marketing studies or clinical trials and surveillance to
monitor the safety or efficacy of any approved product. The FDA closely regulates the post-approval marketing and
promotion of drugs and biologics to ensure drugs and biologics 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 use of their products and if we promote our product candidates beyond their approved
indications, we may be subject to enforcement action for off-label promotion. 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 product candidates,
manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results,
including:
restrictions on such product candidates, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on product distribution or use;
requirements to conduct post-marketing studies or clinical trials;
warning or untitled letters;
withdrawal of any approved product from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of product candidates;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our product candidates;
product seizure; or
injunctions or the imposition of civil or criminal penalties.
Non-compliance with European requirements regarding safety monitoring or pharmacovigilance, and with
requirements related to the development of products for the pediatric population, can also result in significant financial
penalties. Similarly, failure to comply with Europe’s requirements regarding the protection of personal information can also
lead to significant penalties and sanctions.
Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and
abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties,
contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and
prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party
payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations
that may constrain the business or financial arrangements and relationships through which we market, sell and distribute
any product candidates for which we obtain marketing approval. Restrictions under applicable U.S. federal and state
healthcare laws and regulations include the following:
the federal Anti-Kickback Statute prohibits, among other things, persons 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 a federal healthcare program such as Medicare and Medicaid;
the federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui
tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal
government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or
conceal an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil
liability for executing a scheme to defraud any healthcare benefit program or making false statements relating
to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its
implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to
safeguarding the privacy, security and transmission of individually identifiable health information;
federal law requires applicable manufacturers of covered drugs to report payments and other transfers of value
to physicians and teaching hospitals, which includes annual data collection and reporting obligations. The
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information was made publicly available on a searchable website in September 2014 and will be disclosed on
an annual basis; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply
to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-
governmental third-party payors, including private insurers.
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require
drug manufacturers to report information related to payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of health
information in some 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 will involve substantial costs. It is possible that governmental authorities will conclude that our business
practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or
other healthcare laws and regulations. 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, damages, fines, imprisonment, exclusion of product candidates from government funded healthcare programs,
such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other
healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws,
they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare
programs.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval
of and commercialize our product 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 product
candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any product candidates for
which we obtain marketing approval.
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA,
changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage
for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for
physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be
covered in any therapeutic class. Cost reduction initiatives and other provisions of this legislation could decrease the
coverage and price that we receive for any approved product candidates. While the MMA only applies to drug benefits for
Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own
reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar
reduction in payments from private payors.
More recently, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, or collectively the ACA, 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 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 ACA of importance to our potential product candidates are the following:
an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs
and biologic agents;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate
Program;
expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute,
new government investigative powers, and enhanced penalties for noncompliance;
a Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-
sale discounts off negotiated prices;
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extension of manufacturers’ Medicaid rebate liability to manage care initiation;
expansion of eligibility criteria for Medicaid programs;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
requirements to report financial arrangements with physicians and teaching hospitals;
a requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative
clinical effectiveness research, along with funding for such research.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes
included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, starting in 2013. In January
2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, 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. More recently, President Trump has suggested that he plans to seek
repeal of all or portions of the ACA, and he has indicated that he wants Congress to replace the ACA with new legislation.
We cannot predict whether these challenges will continue or other proposals will be made or adopted, or what impact
these efforts may have on us.
We expect that the ACA, 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
product. 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 product candidates.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and
promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be
enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on
the marketing approvals of our product 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
product labeling and post-marketing testing and other requirements.
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 that we believe is consistent with industry norms to cover us
for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, we
cannot assure you that it will be sufficient to cover our liability in such cases. 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 discovery, nonclinical development or
production efforts. Our failure to comply with these laws and regulations also may result in substantial fines, penalties or
other sanctions.
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Risks Related to Our Intellectual Property
If we are unable to obtain and maintain intellectual property protection for our technology and product
candidates, or if the scope of the intellectual property protection obtained is not sufficiently broad, our
competitors could develop and commercialize technology and product candidates similar or identical to ours,
and our ability to successfully commercialize our technology and product candidates may be impaired.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the
intellectual property related to our technology and product candidates.
In particular, our success depends in large part on our ability, and our licensors’ ability, to obtain and maintain patent
protection in the United States and other countries with respect to our proprietary technology and product candidates,
including any companion diagnostic developed by us or a third-party strategic partner. We seek to protect our proprietary
position by filing patent applications in the United States and abroad related to our novel technologies and product
candidates, and rely on our licensors to obtain patent protection for our licensed intellectual property. Our patent portfolio
includes patents and patent applications own or we exclusively license from the University of Texas at Austin. This patent
portfolio includes issued patents and pending patent applications covering compositions of matter and methods of use.
The patent prosecution process is expensive and time-consuming, and we may not be able to file, prosecute,
maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner, or in
all jurisdictions. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent
protection in certain jurisdictions, and under the laws of certain jurisdictions, patents or other intellectual property rights
may be unavailable or limited in scope. It is also possible that we will fail to identify patentable aspects of our discovery
and nonclinical development output before it is too late to obtain patent protection. Moreover, the risks pertaining to our
patents and intellectual property rights also apply to the intellectual property rights that we license from third parties.
In
some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or
to maintain the patents, covering technology that we license from third parties. We may also require the cooperation of our
licensors in order to enforce the licensed patent rights, and such cooperation may not be provided. Therefore, these
patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our
business and the rights we have licensed may be reduced or eliminated.
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. The U.S. Patent and Trademark
Office, or U.S. PTO, has not established a consistent policy regarding the breadth of claims that it will allow in
biotechnology patents. In addition, the laws of foreign jurisdictions may not protect our rights to the same extent as the
laws of the United States. For example, India and China do not allow patents for methods of treating the human body.
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 were the first to make the inventions claimed in our owned or
licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions, nor
can we know whether those from whom we license patents were the first to make the inventions claimed or were the first
to file. 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
product candidates, in whole or in part, or which effectively prevent others from commercializing competitive technologies
and product candidates. 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. In addition, during
prosecution of any patent application, the issuance of any patents based on the application may depend upon our ability
to generate additional preclinical or clinical data that supports the patentability of our proposed claims. We may not be
able to generate such data on a timely basis, to the satisfaction of the U.S. PTO, or at all.
Moreover, we may be subject to a third-party preissuance submission of prior art to the U.S. PTO or patent offices in
foreign jurisdictions, 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 product candidates and compete directly with us, without payment to us, or result in our
inability to manufacture or commercialize product candidates without infringing third-party patent rights. In addition, if the
breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade
companies from collaborating with us to license, develop or commercialize current or future product candidates.
Even if our owned and licensed patent applications 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 owned or licensed patents by developing similar
or alternative technologies or product candidates in a non-infringing manner.
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The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and
licensed 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 product candidates, or limit the duration of the patent protection of our technology and product candidates. In
addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after
the first non-provisional filing in the patent family. Given the amount of time required for the development, testing and
regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such
candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient
rights to exclude others from commercializing product candidates similar or identical to ours.
Any inability on our part to adequately protect our intellectual property may have a material adverse effect on our
business, operating results and financial position.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document
submission, fee payment and other requirements imposed by governmental patent agencies, and our patent
protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or
applications will be due to be paid to the U.S. PTO and various governmental patent agencies outside the United States in
several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these
fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies.
The U.S. PTO and various non-U.S. governmental patent agencies require compliance with a number of procedural,
documentary, fee payment and other similar provisions during the patent application process. We employ reputable law
firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a
late fee or by other means in accordance with the applicable rules. However, in some cases we rely on licensors to effect
such payments with respect to the patents and patent applications that we in-license. Moreover, there are situations in
which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the
market and this circumstance would have a material adverse effect on our business.
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, and the ability of our collaborators, to develop, manufacture,
market and sell our product 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 product candidates and technology, including interference or derivation proceedings before the U.S.
PTO and similar bodies in other jurisdictions. Third parties may assert infringement claims against us based on existing
patents or patents that may be granted in the future.
It is also possible that we have failed to identify relevant third-party patents or applications. For example,
applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the
United States remain confidential until patents issue. Moreover, it is difficult for industry participants, including us, to
identify all third-party patent rights that may be relevant to our product candidates and technologies because patent
searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in
assessing the meaning of patent claims. We may fail to identify relevant patents or patent applications or may identify
pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may
issue with claims of relevance to our technology. In addition, we may be unaware of one or more issued patents that
would be infringed by the manufacture, sale or use of a current or future product candidate, or we may incorrectly
conclude that a third-party patent is invalid, unenforceable or not infringed by our activities. Additionally, pending patent
applications that have been published can, subject to certain limitations, be later amended in a manner that could cover
our technologies, our products or the use of our products.
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 product candidates 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 product. In addition, we could be
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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 product candidates or force us to
cease some of our business operations, which could materially harm our business. 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 that our employees, consultants or independent contractors have wrongfully used
or disclosed confidential information or trade secrets of third parties or that our employees, consultants or
independent contractors have wrongfully used or disclosed alleged trade secrets of former or other employers.
Many of our employees, independent contractors and consultants, including our senior management, have been
previously employed or retained by universities or other biotechnology or pharmaceutical companies, including our
competitors or potential competitors. Further, many of our consultants are currently retained by other biotechnology or
pharmaceutical companies and may be subject to conflicting obligations to these third parties. Although we try to ensure
that our employees, consultants and independent contractors do not use the proprietary information or know-how of third
parties in their work for us, and do not perform work for us that is in conflict with their obligations to another employer or
any other entity, we may be subject to claims that we or our employees, consultants or independent contractors have
inadvertently or otherwise improperly used or disclosed confidential information, including trade secrets or other
proprietary information, of a former employer or other third parties. We may also be subject to claims that an employee,
advisor, consultant, or independent contractor performed work for us that conflicts with that person's obligations to a third
party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out
of work performed for us. We are not aware of any threatened or pending claims related to these matters, but in the future
litigation may be necessary to defend against such claims.
In addition, while it is our policy to require our employees, independent contractors and consultants who may be
involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we
may be unsuccessful in timely obtaining such an agreement with each party who in fact develops intellectual property that
we regard as our own. Even if timely obtained, such agreements 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.
If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable personnel or
intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. As a result, we
may also elect to enter into license agreements in order to settle patent infringement claims or to resolve disputes prior to
litigation, and any such license agreements may require us to pay royalties and other fees that could be significant. Such
an outcome could have a material adverse effect on our business. Even if we are successful in defending against such
claims, litigation could result in substantial costs and be a distraction to management.
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Any lawsuits relating to infringement of intellectual property rights necessary to defend ourselves or enforce our
rights will be costly and time consuming, and could be unsuccessful.
Because competition in our industry is intense, competitors may infringe or otherwise violate our issued patents,
patents of our licensors or other intellectual property. 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, among other claims, that we infringe their
patents. In addition, in a patent infringement proceeding there are many grounds upon which a party may assert invalidity
or unenforceability of a patent, and a court 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 in question. Litigation is uncertain and we cannot predict whether we would
be successful in any such litigation. 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, managerial or other resources to adequately conduct such litigation or proceedings. 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, managerial and other resources. Uncertainties resulting from the initiation and continuation of
patent litigation or other proceedings could have a material adverse effect on our business. Furthermore, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our
confidential information could be compromised by disclosure.
Intellectual property disputes 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/or 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 market price of our common stock. In some cases, we may choose not to pursue
litigation against those that have infringed on our patents, or used them without authorization, due to the associated
expenses and time commitment of monitoring these activities.
rights successfully, our competitive position could suffer, which could harm our results of operations
If we fail to protect or to enforce our intellectual property
We may not be successful in obtaining or maintaining necessary rights for our development pipeline through
acquisitions and in-licenses.
Presently we have rights to intellectual property to develop our product candidates, including patents and patent
applications we own or exclusively license from the University of Texas at Austin. Because our programs may involve
additional product candidates that may require the use of proprietary rights held by third parties, the growth of our
business may depend in part on our ability to acquire, in-license or use these proprietary rights. We may be unable to
acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from
third parties that we identify as necessary for our product candidates. The licensing and acquisition of third-party
intellectual property rights is a competitive area, and a number of more established companies are also pursuing
strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established
companies may have a competitive advantage over us due to their size, cash resources and greater clinical development
and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign
or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that
would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to required
third-party intellectual property rights, our business, financial condition and prospects for growth could suffer.
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If we are not able to prevent disclosure of our trade secrets and other proprietary information, the value of our
technology and product candidates could be significantly diminished.
We rely on trade secret protection to protect our interests in proprietary know-how and in processes that are
unpatentable or for which patents are difficult to obtain or enforce. We may not be able to protect our trade secrets
adequately. We have a policy of requiring our consultants, advisors and strategic partners to enter into confidentiality
agreements and our employees to enter into invention, non-disclosure and non-compete agreements. However, no
assurance can be given that we have entered into appropriate agreements with all parties that have had access to our
trade secrets, know-how or other proprietary information, or that such agreements will provide for a meaningful protection
of our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of
information. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and
time-consuming, and the outcome is unpredictable. Even if we are successful in prosecuting such claims, any remedy
awarded may be insufficient to fully compensate us for the improper disclosure or misappropriation. Furthermore,
although we seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining
physical security of our premises and physical and electronic security of our information technology systems, it is also
possible that our trade secrets, know-how or other proprietary information could be obtained by third parties as a result of
breaches of such systems.
Any disclosure of confidential information into the public domain or to third parties could allow our competitors to
learn our trade secrets and use the information in competition against us. In addition, others may independently discover
or develop our trade secrets and proprietary information or substantially equivalent techniques. Any action to enforce our
rights is likely to be time consuming and expensive, and may ultimately be unsuccessful, or may result in a remedy that is
not commercially valuable. These risks are accentuated in foreign countries where laws or law enforcement practices may
not protect proprietary rights as fully as in the United States or Europe. Any unauthorized disclosure of our trade secrets
or confidential information could harm our competitive position.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our product candidates throughout the world would be
prohibitively expensive, and our patent rights in some countries outside the United States can be less extensive than
those in the United States. The requirements for patentability may differ in certain countries, particularly developing
countries. For example, unlike other countries, China has a heightened requirement for patentability and specifically
requires a detailed description of medical uses of a claimed therapeutic. 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 inventions in all countries outside the United States, or from
selling or importing products made using our inventions in and into the United States or other jurisdictions.
As part of ordinary course prosecution and maintenance activities, we determine whether to seek patent protection
outside the United States and in which countries. This also applies to patents we have acquired or in-licensed from third
parties. In some cases, this means that we, or our predecessors in interest or licensors of patents within our portfolio,
have sought patent protection in a limited number of countries for patents covering our product candidates. Competitors
may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own
products and, further, may export otherwise infringing products to territories where we have patent protection but where
enforcement is not as strong as in the United States. These products may compete with our products in jurisdictions
where we do not have any issued patents and, even in jurisdictions where we have or are able to obtain issued patents,
our patent claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign
jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the
enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which
could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our
proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost
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. In addition, certain countries in Europe and certain developing countries, including India
and China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third
parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a
license to our patents to a third party, which could materially diminish the value of those patents. In addition, there may be
patent law reforms in foreign jurisdictions that could increase the uncertainties and costs surrounding the prosecution of
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our patent applications and the enforcement or defense of our issued patents in those foreign jurisdictions. This could
limit our potential revenue opportunities.
Accordingly, our efforts to obtain, register, and enforce our intellectual property rights around the world may be
inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Moreover,
patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming
process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we
will not have the benefit of patent protection in such countries.
If we breach any of the agreements under which we license patent rights to use, develop and commercialize our
product candidates or our technologies from third parties or, in certain cases, we fail to meet certain
development deadlines, we could lose license rights that are important to our business.
We are a party to a number of license agreements under which we are granted rights to intellectual property that are
important to our business and we expect that we may need to enter into additional license agreements in the future.
particular, we partner with the University of Texas at Austin, which is a U.S. academic institution, in order to accelerate our
discovery and nonclinical development work under a Sponsored Research Agreement. Under the Sponsored Research
Agreement, we made payments of $832,000, $563,000, and $386,000 for the years ended December 31, 2016, 2015,
and 2014, respectively, to sponsor research in the laboratory of our director, Dr. George Georgiou, at the University of
Texas at Austin on the engineering, optimization and initial animal validation of human enzymes to determine the systemic
depletion of amino acids for cancer therapy and to analyze enzyme replacement for the treatment of patients having
inborn metabolic defects.
In
The University of Texas at Austin has provided us with an option to negotiate a royalty-bearing, exclusive license to
any invention or discovery that is conceived or reduced to practice during the term of the Sponsored Research
Agreement. Regardless of such right of first negotiation for intellectual property, we may be unable to negotiate a license
within the specified time frame or under terms that are acceptable to us. If we are unable to do so, the institution may offer
the intellectual property rights to other parties, potentially blocking our ability to pursue a program based on that
technology.
In December 2013, our wholly-owned subsidiaries AECase, Inc. and AEMase, Inc. each entered into an exclusive,
worldwide license agreement, including the right to grant sublicenses, with the University of Texas at Austin for certain
intellectual property owned by the University of Texas at Austin related to our product candidates AEB3103 and AEB2109.
On January 31, 2017, we and the University of Texas at Austin entered into an Amended and Restated Patent License
Agreement which consolidated the two license agreements, revised certain obligations, and licensed additional patent
applications and invention disclosures to us, or the Restated License. The intellectual property licensed under the
Restated License includes an invention that was made with U.S. government support. The U.S. government therefore has
certain rights in such inventions under the applicable funding agreements and under applicable law. In addition, we are
subject to a requirement that the products covered by the applicable patents that are sold or used in the United States
must be manufactured substantially in the United States unless a written waiver is obtained in advance from the U.S
government. The Restated License obligates us to make certain payments at the achievement of certain milestones and
at regular intervals throughout the life of the license. The University of Texas at Austin may terminate the Restated
License under certain circumstances, including for a breach by us that is not cured within 30 or 60 days of notice
(depending on the type of breach), or if we or any of our affiliates or sublicensees participate in any proceeding to
challenge the licensed patent rights (unless, with respect to sublicensees, we terminate the applicable sublicense).
Licensing of intellectual property is of critical importance to our business and involves complex legal, business and
scientific issues. Any other licenses or other intellectual property agreements we may enter into may impose various
diligence, milestone payment, royalty and other obligations on us. If disputes arise between us and our licensor or if we
fail to comply with our obligations under current or future intellectual property agreements, potentially giving our
counterparties the right to terminate these agreements, we might not be able to develop, manufacture or market any
product that is covered by the agreement or face other penalties under the agreement. Such an occurrence could
materially adversely affect the value of the product candidate being developed under any such agreement. Termination of
these agreements or reduction or elimination of our rights under these agreements may result in our having to negotiate
new or reinstated agreements with less favorable terms, or cause us to lose our rights under these agreements, including
our rights to important intellectual property or technology.
The loss of any one of our current licenses, or any other license we may acquire in the future, could prevent or
impair our ability to successfully develop and commercialize the affected product candidates and thus materially harm our
business, prospects, financial condition and results of operations.
57
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, provide a barrier to entry against our competitors or
potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual
property rights that cover the practice of our technology or product candidates, we may not be able to fully exercise or
extract value from our intellectual property rights. The following examples are illustrative:
others may be able to make compounds that are similar to our product candidates but that are not
covered by the claims of the patents that we own or license;
we or our licensors or collaborators might not have been the first to make the inventions covered by an
issued patent or pending patent application that we own or license;
we or our licensors or collaborators might not have been the first to file patent applications covering an
invention;
others may independently develop similar or alternative technologies or duplicate any of our technologies
without infringing or misappropriating our intellectual property rights;
pending patent applications that we own or license may not lead to issued patents;
issued patents that we own or license may not provide us with any competitive advantages, or may be
narrowly construed or held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have
patent rights and then use the information learned from such activities to develop competitive products for
sale in our major commercial markets;
we may not develop or in-license additional proprietary technologies that are patentable; and
the patents of others may have an adverse effect on our business.
Any of these events could significantly harm our business, results of operations and prospects.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect
our products, and 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.
As is the case with other biotechnology companies, our success is heavily dependent on patents. Obtaining and
enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly,
time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently
implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of
patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In
addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has
created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress,
the federal courts, and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that
would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the
future.
For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater
level of uncertainty in the patent law. 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, which affect
both the way patent applications will be prosecuted and potentially patent litigation. The U.S. PTO has promulgated
regulations and developed procedures to govern administration of the Leahy-Smith Act, and many of the substantive
changes to patent law associated with the Leahy-Smith Act (in particular, the first to file provisions) did not come into
effect until March 16, 2013. Accordingly, it is not yet 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.
An important change introduced by the Leahy-Smith Act is that, as of March 16, 2013, the United States transitioned
to a "first-to-file" system for deciding which party should be granted a patent when two or more patent applications are
filed by different parties claiming the same invention. A third party that files a patent application in the U.S. PTO after that
58
date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention
before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing
of a patent application. Furthermore, our ability to obtain and maintain valid and enforceable patents depends on whether
the differences between our technology and the prior art allow our technology to be patentable over the prior art. Since
patent applications in the United States and most other countries are confidential for a period of time after filing, we
cannot be certain that we were the first to either (i) file any patent application related to our product candidates or
(ii) invent any of the inventions claimed in our patents or patent applications.
Among some of the other changes introduced by the Leahy-Smith Act are changes that limit where a patentee may
file a patent infringement suit and that allow third parties to challenge any issued patent, whether issued before or after
March 16, 2013, in the U.S. PTO. Because of a lower evidentiary standard in U.S. PTO proceedings compared to the
evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially
provide evidence in a U.S. PTO proceeding sufficient for the U.S. PTO to hold a claim invalid even though the same
evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party
may attempt to use the U.S. PTO procedures to invalidate our patent claims that would not have been invalidated if first
challenged by the third party as a defendant in a district court action.
If we do not obtain patent term extensions in the United States under the Hatch-Waxman Act and in foreign
countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for our
product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one
of the U.S. patents covering each of such approved product(s) or the use thereof may be eligible for up to five years of
patent term restoration under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be
extended per FDA-approved product. Patent term extension also may be available in certain foreign countries upon
regulatory approval of our product candidates. Nevertheless, we may not be granted patent term extension either in the
United States or in any foreign country 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 term of
extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority
could be less than we request. In addition, if a patent we wish to extend is owned by another party and licensed to us, we
may need to obtain approval and cooperation from our licensor to request the extension.
If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we
request, the period during which we will have the right to exclusively market our product will be shortened and our
competitors may obtain approval of competing products following our patent expiration, and our revenue could be
reduced, possibly materially.
Risks Related to Our Common Stock
Our executive officers, directors and principal stockholders, if they choose to act together, will continue to have
the ability to control all matters submitted to stockholders for approval.
Our executive officers and directors, combined with our stockholders who each owned more than 5% of our
outstanding common stock, including shares sold in our IPO, in the aggregate, beneficially own shares representing a
majority of our capital stock as of December 31, 2016. As a result, if these stockholders were to choose to act together,
they would be able to control all matters submitted to our stockholders for approval, as well as our management and
affairs. For example, these persons, if they choose to act together, would control the election of directors and approval of
any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership control may:
delay, defer or prevent a change in control;
entrench our management and the board of directors; or
impede a merger, consolidation, takeover or other business combination involving us that other stockholders
may desire or may result in you obtaining a premium for your shares.
59
Our internal control over financial reporting does not currently meet the standards required by Section 404 of the
Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and
stock price.
We are not currently required to comply with the rules of the Securities and Exchange Commission that implement
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, and are therefore not required to make a formal
assessment of the effectiveness of our internal control over financial reporting for that purpose until our annual report for
the year ended December 31, 2017. Pursuant to Section 404, we will be required to furnish a report by our management
on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be
required to include an attestation report on internal control over financial reporting issued by our independent registered
public accounting firm. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally
accepted accounting principles in the United States. We are not currently in compliance with, and we cannot be certain
when we will be able to implement the requirements of Section 404(a). We may encounter problems or delays in
implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. If
we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent
registered public accounting firm is unable to provide an unqualified attestation report on our internal controls when
required, investors could lose confidence in our financial information and the price of our common stock could decline.
Additionally, the existence of any material weakness or significant deficiency would require management to devote
significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and
management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.
The existence of any material weakness in our internal control over financial reporting could also result in errors in our
financial statements that could require us to restate our financial statements causing us to fail to meet our reporting
obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially
and adversely affect us.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of our
company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition
or other change in control of our company that stockholders may consider favorable, including transactions in which you
might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In
addition, because our board of directors is responsible for appointing the members of our management team, these
provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of directors. Among other things, these
provisions:
establish a classified board of directors such that only one of three classes of directors is elected each year;
allow the authorized number of our directors to be changed only by resolution of our board of directors;
limit the manner in which stockholders can remove directors from our board of directors;
establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings
and nominations to our board of directors;
require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by
our stockholders by written consent;
limit who may call stockholder meetings;
authorize our board of directors to issue preferred stock without stockholder approval, which could be used to
institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board of directors; and
require the approval of the holders of at least two-thirds of the votes that all our stockholders would be entitled
to cast to amend or repeal specified provisions of our certificate of incorporation or bylaws.
Moreover, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which
prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a
60
period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner.
Any of these provisions of our charter documents or Delaware law could, under certain circumstances, depress the
market price of our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware
as the sole and exclusive forum for certain types of actions and proceedings 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, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to an alternative
forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or
proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors,
officers, employees or agents to us or our stockholders, any action asserting a claim arising pursuant to any provision of
the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or any action
asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having
personal jurisdiction over the indispensable parties named as defendants therein and the claim not being one which is
vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery or for which the Court of Chancery
does not have subject matter jurisdiction. Any person purchasing or otherwise acquiring any interest in any shares of our
capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated
certificate of incorporation. This choice of forum provision may limit our stockholders’ ability to bring a claim in a judicial
forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage
such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might
benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs
in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery may also reach
different judgments or results than would other courts, including courts where a stockholder considering an action may be
located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to
our stockholders. Alternatively, if a court were to find this provision of our amended and restated certificate of
incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings,
we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material
adverse effect on our business, financial condition or results of operations.
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial
losses for purchasers of our common stock.
Our stock price is volatile. The stock market in general and the market for smaller biotechnology companies in
particular have experienced extreme volatility that has often been unrelated to the operating performance of particular
companies. The market price for our common stock may be influenced by many factors, including:
the success or failure of competitive products or technologies;
results of ongoing or planned clinical trials of our product candidates or those of our competitors;
regulatory or legal developments in the United States and other countries;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
the level of expenses related to any of our product candidates or clinical development programs;
the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations
by securities analysts;
operating results that fail to meet expectations of securities analysts that cover our company;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems;
market conditions in the pharmaceutical and biotechnology sectors;
61
general economic and market conditions; and
the other factors described in this “Risk Factors” section.
We may be subject to securities litigation, which is expensive and could divert management attention.
Our stock price is volatile, and in the past companies that have experienced volatility in the market price of their
stock have been subject to an increased incidence of securities class action litigation. We may be the target of this type of
litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s
attention from other business concerns, which could seriously harm our business.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports
about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry
analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance
that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our
stock or change their opinion of our stock, our stock price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which
could cause our stock price or trading volume to decline.
We have broad discretion in the use of the net proceeds from our IPO and may not use them effectively.
Our management has broad discretion in the application of the net proceeds from the IPO, and you will not have the
opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Our
management could spend the net proceeds from the IPO in ways that do not improve our results of operations or enhance
the value of our common stock. The failure by our management to apply these funds effectively could result in financial
losses that could have a material adverse effect on our business, cause the price of our common stock to decline and
delay the development of our product candidates. Pending their use, we may invest the net proceeds from our IPO in a
manner that does not produce income or that loses value.
Future sales of our common stock in the public 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, or the perception in the market
that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock and
make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
Certain holders of our common stock have rights, subject to conditions, to require us to file registration statements
covering their shares or to include their shares in Securities Act registration statements that we may file for ourselves or
other stockholders. Once we register these shares, they can be freely sold in the public market. Moreover, we have also
registered under the Securities Act shares of common stock that we may issue under our equity compensation plans.
In addition, in the future, we may issue additional shares of common stock or other equity or debt securities
convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangements or
otherwise. Any such issuance could result in substantial dilution to our existing stockholders and could cause our stock
price to decline.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth
companies may make our common stock 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 may remain an emerging growth company for up to five years. For so long as we remain an emerging growth
company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to
other public companies that are not emerging growth companies. These exemptions include:
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;
62
not being required to comply with the auditor attestation requirements in the assessment of our internal control
over financial reporting of Section 404(b) of the Sarbanes-Oxley Act;
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; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved.
The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for
complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of
these accounting standards until they would otherwise apply to private companies. We have irrevocably elected not to
avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as
other public companies that are not emerging growth companies.
We will continue to incur increased costs as a result of operating as a public company, and our management will
be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant
legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the
Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The NASDAQ Global Market
and other applicable securities rules and regulations impose various requirements on public companies, including
establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our
management and other personnel will need to devote a substantial amount of time to these compliance initiatives.
Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it
more difficult and more expensive for us to obtain and maintain director and officer liability insurance, which in turn could
make it more difficult for us to attract and retain qualified members of our board of directors.
We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we
may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many
cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404, we will first be required to furnish a report by our management on our internal control over
financial reporting for the year ending December 31, 2017. As discussed above, if we cease to be an emerging growth
company, we will be required to include an attestation report on internal control over financial reporting issued by our
independent registered public accounting firm as required by Section 404(b). To achieve compliance with Section 404
within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial
reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources,
potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal
control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that
controls are functioning as documented and implement a continuous reporting and improvement process for internal
control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the
prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we
identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of
confidence in the reliability of our consolidated financial statements.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership
change,” 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, or NOLs, and other pre-change tax attributes
(such as research tax credits) to offset its post-change income or taxes may be limited. It is possible that we may have
triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of
subsequent shifts in our stock ownership (some of which are outside of our control). As a result, if we earn net taxable
income, our ability to use our pre-change NOLs and other pre-change tax attributes to offset U.S. federal taxable income
63
or taxes may be subject to limitations, which could potentially result in increased future tax liability to us. Our NOLs and
other tax attributes arising before our conversion from a Delaware limited liability company to a Delaware corporation in
2015 also may be limited by the Separate Return Limitation Year rule, which could increase our U.S. federal tax liability. In
addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which
could accelerate or permanently increase state taxes owed.
Since we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, stock price
appreciation, if any, will be your sole source of gain.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future
earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result, appreciation, if any, in the market price of our common
stock will be your sole source of gain for the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters occupy approximately 10,100 square feet of leased office space in Austin, Texas
pursuant to a lease that expires in 2020. In February 2017, we entered into a separate lease agreement for approximately
3,250 square feet of laboratory space in Austin, Texas, which will expire in December 2017. We intend to add additional
space if we add employees and expand geographically. We believe that our facilities are adequate to meet our needs for
the immediate future, and that, should it be needed suitable additional space will be available on commercially reasonable
terms to accommodate any such expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business.
Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of
management resources, negative publicity and reputational harm, and other factors.
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 and Holders
Our common stock is traded on the NASDAQ Global Market under the symbol “AGLE.” Prior to April 6, 2016, there
was no public market for our common stock. The table below summarizes the high and low sales prices of our common
stock as reported on the Nasdaq Global Market.
Year ended December 31, 2016
Second Fiscal Quarter (1)
Third Fiscal Quarter
Fourth Fiscal Quarter
High
Low
$
$
$
11.99 $
8.11 $
6.99 $
4.36
3.96
4.35
(1)
The period reported for the second fiscal quarter is from April 6, 2016 through June 30, 2016.
As of March 16, 2017, there were 51 registered holders of record of our common stock, based on information
provided by our transfer agent. The actual number of stockholders is greater than this number of registered record
holders, and includes stockholders who are beneficial owners, but whose shares are held in “street name” by
brokers and other nominees.
65
Stock Price Performance Graph
This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into
any of our filings under the Securities Act whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
The following stock performance graph compares our total stock return with the total return for (i) the NASDAQ
Composite Index and the (ii) the NASDAQ Biotechnology Index for the period from April 7, 2016 (the date our common
stock commenced trading on the NASDAQ Global Market) through December 31, 2016. The figures represented below
assume an investment of $100 in our common stock at the closing price of $9.77 on April 7, 2016 and in the NASDAQ
Composite Index and the NASDAQ Biotechnology Index on April 7, 2016 and the reinvestment of dividends into shares of
common stock. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of
possible future performance of our common stock.
Comparison of Cumulative Return
$140
$120
$100
$80
$60
$40
$40
$20
$20
$0
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
AGLE
IXIC
NBI
$100 investment in stock or index
Aeglea Biotherapeutics, Inc.
NASDAQ Composite Index
NASDAQ Biotechnology Index
Ticker
AGLE
IXIC
NBI
April 6, 2016
$
$
$
100.00
100.00
100.00
December 31, 2016
44.52
111.03
94.56
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available
funds and any future earnings to support our operations and finance the growth and development of our business. We do
not intend to pay cash dividends on our common stock for the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item will be included in an amendment to this Annual Report on Form 10-K or
incorporated by reference from our definitive proxy statement to be filed pursuant to Regulation 14A.
Recent Sales of Unregistered Securities
None.
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Use of Proceeds from Registered Securities
On April 6, 2016, our Registration Statement on Form S-1 (File No. 333-200501) relating to the IPO of our common
stock was declared effective by the SEC. Pursuant to the IPO, we sold an aggregate of 5,481,940 shares of our common
stock, including 481,940 shares of common stock sold pursuant to the underwriters’ partial exercise of their option to
purchase additional shares for aggregate gross proceeds of $54.8 million. UBS Securities LLC, BMO Capital Markets
Corp. and Wells Fargo Securities, LLC acted as joint-book-running managers of the offering and as representatives of the
underwriters. Needham & Company, LLC acted as co-manager for the offering. The offering did not terminate before all of
the securities registered in the registration statement were sold. On April 12, 2016, we closed the sale of such shares,
resulting in net proceeds to us of $47.3 million after deducting underwriting discounts and commissions of $3.8 million and
offering costs of $3.7 million. No payments were made by us to directors, officers or persons owning ten percent or more
of our common stock or to their associates, or to our affiliates.
There has been no material change in our planned use of the net proceeds from the IPO, as described in our final
prospectus filed with the SEC on April 7, 2016.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014, and the
balance sheet data as of December 31, 2016 and 2015 are derived from our audited financial statements included
elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data for the period
from December 16, 2013 (inception) through December 31, 2013 and the balance sheet data as of December 31, 2014
and 2013 is derived from our audited financial statements which are not included in this Annual Report on Form 10-K.
67
Our historical results are not necessarily indicative of the results to be expected in the future. You should read the
selected financial data below in conjunction with the section of this report entitled “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included in
this Annual Report on Form 10-K.
Consolidated Statements of Operations Data:
Revenues:
Grant
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Change in fair value of forward sale contract
Other expense, net
Total other income (expense)
Net loss
Deemed dividend to convertible preferred stockholders
Net loss attributable to common shareholders and
stockholders
Common Stock:
Basic and diluted net loss per share
Net loss attributable to common stockholders
Basic and diluted weighted-average shares outstanding
Class A-1 common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
Class A common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
Class B common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
Consolidated Balance Sheet Data:
Cash, cash equivalents, and marketable securities
Working capital
Total assets
Total liabilities
Convertible preferred shares
Accumulated deficit
Total members’/stockholders’ equity (deficit)
Year Ended
December 31,
2016
2015
2014
Period from
December 16,
2013
(Inception)
through
December 31,
2013
(in thousands, except share and per share amounts)
$
$
4,628
18,143
8,391
26,534
(21,906)
244
—
(36)
208
(21,698) $
—
$
$
6,085
11,453
5,947
17,400
(11,315)
22
—
(2)
20
(11,295) $
(228)
— $
—
$
6,830
2,074
8,904
(8,904)
1
(1,444)
—
(1,443)
(10,347) $
—
1,150
735
1,885
(1,885)
-
(52)
—
(52)
(1,937)
—
(21,698) $
(11,523) $
(10,347) $
(1,937)
(2.22) $
(21,698) $
9,791,728
(19.21) $
(11,523) $
599,788
— $
— $
—
—
—
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
(20.13) $
(3,321) $
165,000
(15.48)
(1,277)
82,500
(17.06) $
(5,706) $
334,522
(3.94)
(660)
167,261
(40.17) $
(1,320) $
32,861
—
—
—
2016
As of December 31,
2015
2014
(in thousands)
2013
$
63,502
62,459
67,063
4,097
—
(45,277)
62,966
$
33,062
35,763
38,654
2,550
58,311
(23,579)
(22,207)
$
2,616
1,672
2,930
1,058
13,345
(12,284)
(11,473)
4,597
3,185
4,597
1,412
4,458
(1,937)
(1,273)
$
$
$
$
$
$
$
$
$
$
$
$
$
68
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 together
with our financial statements and related notes appearing in this Annual Report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and
strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.
As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report, our actual
results could differ materially from the results described in or implied by the forward-looking statements contained in the
following discussion and analysis. As used in this report, unless the context suggests otherwise, “we,” “us,” “our,” “the
Company” or “Aeglea” refer to Aeglea BioTherapeutics, Inc.
Overview
We are a biotechnology company committed to developing enzyme-based therapeutics in the field of amino acid
metabolism to treat rare genetic diseases and cancer. Our engineered human enzymes are designed to degrade specific
amino acids in the blood to target these diseases. In inborn errors of metabolism, or IEM, we are seeking to reduce the
toxic levels of amino acids in patients to the normal range. In oncology, we are seeking to reduce amino acid blood levels
below the normal range where we believe we will be able to exploit the dependence of certain cancers on specific amino
acids.
Our lead product candidate, AEB1102, is engineered to degrade the amino acid arginine and is being developed to
treat two extremes of arginine metabolism, including arginine excess in patients with Arginase I deficiency, an IEM, as
well as some cancers which have shown to have a metabolic dependence on arginine. AEB1102 has demonstrated
clinical proof-of-mechanism in both scenarios. In a Phase 1 clinical trial for the treatment of patients with Arginase I
deficiency, a dose-proportional reduction in plasma arginine levels was observed in two patients. A reduction in blood
arginine levels was also observed in Phase 1 clinical trials for the treatment of patients with advanced solid tumors and
the hematological malignancies relapsed refractory acute myeloid leukemia, or AML, and myelodysplastic syndrome, or
MDS. These preliminary results support its potential use as a therapeutic of both Arginase I deficiency and certain
cancers associated with abnormal amino acid metabolism.
We are conducting three clinical trials for AEB1102, consisting of one Phase 1/2 clinical trial for the treatment of
Arginase I deficiency and two Phase 1 clinical trials for the treatment of certain cancers.
Arginase I deficiency. Following completion of dosing for the first two adult patients in our Phase 1 clinical
trial for the treatment of patients with Arginase I deficiency, we submitted a protocol amendment in
November 2016 to broaden the scope of our Phase 1 trial into a Phase 1/2 trial. The amended protocol
includes dosing of pediatric patients (two and older) and weekly repeat dosing, with the intent to assess the
safety, tolerability, pharmacokinetics, pharmacodynamics, and clinical response of AEB1102 in patients with
this IEM. In the first quarter of 2017, we received IRB approval for the Phase 1/2 protocol for the treatment
of patients with Arginase I deficiency at multiple clinical trial sites. In March 2017, we received an
information request from the FDA which included comments and recommendations on the protocol
amendment and a request for supporting documents based on their review of our completed toxicology
studies, our dose escalation plan and our information to support the inclusion of pediatric patients. As
recommended by the FDA, we replied with supporting information and requested a follow-up meeting. At
this time, we believe our Phase 1/2 protocol provides an appropriate path to evaluate the safety and
tolerability of AEB1102 in pediatric patients, and pending FDA feedback, we plan to initiate dosing in
pediatric patients in the middle of 2017. In March 2017, we announced results from the first two adult
patients in our Phase 1 clinical trial for the treatment of Arginase I deficiency at the 2017 American College
of Medical Genetics and Genomics Annual Clinical Genetics Meeting, or ACMG Annual Meeting. We intend
to continue enrollment of adult patients and plan to dose additional adult patients in the middle of 2017.
Topline data from this trial is expected in the first half of 2018.
Advanced Solid Tumors. In October 2015, we initiated enrollment for a Phase 1 dose escalation trial for
cancer patients with advanced solid tumors. In this ongoing trial, AEB1102 was well-tolerated and patients
have demonstrated a reduction in blood arginine levels, providing proof-of-mechanism. We expect to
announce results of this Phase 1 dose escalation in patients with advanced solid tumors and anticipate
initiating expansion arms in specific solid tumor types, potentially in combination with existing or emerging
standards of care, in the fourth quarter of 2017 or the first quarter of 2018.
69
Hematological Malignancies. In July 2016, we initiated a Phase 1 clinical trial in patients the hematological
malignancies AML and MDS in the United States and Canada. As demonstrated in the trial for patients with
advanced solid tumors, the first three cohorts of this trial have demonstrated proof-of-mechanism. We
expect to announce results of the Phase 1 dose escalation trial in patients with AML and MDS in the fourth
quarter of 2017 or the first quarter of 2018.
We are also building a pipeline of additional product candidates targeting key amino acids and other metabolites,
including homocystine, a target for another IEM as well as cysteine, and its oxidized form cystine, and methionine, for
oncology indications.
Since inception, we have devoted substantially all of our efforts and resources to identifying and developing product
candidates, conducting nonclinical studies, initiating and conducting clinical trials, recruiting personnel and raising capital.
To date, we have financed our operations primarily through private placements of our preferred stock, the initial public
offering, or IPO, of our common stock, completed on April 12, 2016, and collection of a research grant.
We have not recorded revenue from product sales and all of our revenue to date has been grant revenue. Since our
inception, and through December 31, 2016, we have raised an aggregate of $109.5 million to fund our operations through
sale and issuance of convertible preferred and common equity securities and collected $9.6 million in grant proceeds. As
of December 31, 2016, we had cash, cash equivalents, and marketable securities of $63.5 million.
We have incurred net losses in each year since inception. Our net losses were $21.7 million, $11.3 million, and
$10.3 million for the years ended December 31, 2016, 2015, and 2014, respectively, and have resulted from costs
incurred in connection with our research and development programs and from general and administrative expenses
associated with our operations. As of December 31, 2016, we had an accumulated deficit of $45.3 million. 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 from year to year. We anticipate that our expenses will increase significantly as
we continue our clinical and diagnostic development activities for our lead product candidate, AEB1102; concurrently
develop our pipeline product candidates; expand and protect our intellectual property portfolio; and hire additional
personnel. In addition, we have incurred and expect to continue to incur additional costs associated with operating as a
public company.
Components of Operating Results
Revenue
To date, we have recognized revenue solely from a research grant from the Cancer Prevention and Research
Institute of Texas, or CPRIT, and have not generated any revenue from the sale of any of our product candidates. Our
ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on
the successful development, regulatory approval and eventual commercialization of our product candidates.
In June 2015, we entered into a grant agreement with CPRIT, or the Grant Contract, for $19.8 million for use in
developing cancer treatments by exploiting the metabolism of cancer cells. The Grant Contract covers a four year period
from June 1, 2014 through May 31, 2018. The grant allows us to receive funds in advance of costs and allowable
expenses being incurred. We record the revenue as qualifying costs are incurred and there is reasonable assurance that
the conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the
conditions of the award being met are recognized as deferred revenue until the services are performed and the conditions
of the award are met.
On a quarterly basis, we are required to submit a financial reporting package outlining the nature and extent of
reimbursable costs paid and requesting reimbursement under the grant. At the end of each period, qualifying costs paid
prior to reimbursement result in the recognition of a grant receivable.
70
Research and development expenses
Research and development expenses consist primarily of costs incurred for the discovery and development of our
product candidates, most notably, our lead product candidate AEB1102. Since we currently do not have manufacturing
capabilities and did not have an internal laboratory in 2016, we contracted with external providers for nonclinical studies,
clinical trials and manufacturing services. Our research and development expenses include:
costs from acquiring clinical trial materials and services performed for contracted services with a contract
manufacturing organization;
fees paid to clinical trial sites, clinical research organizations, contract research organizations, contract
manufacturing organizations, nonclinical research companies, and academic institutions;
employee and consultant-related expenses incurred, which include salaries, benefits, travel and share-based
compensation; and
expenses incurred under license agreements with third parties.
Research and development costs are expensed as incurred. Advance payments for goods or services to be
rendered in the future for use in research and development activities are deferred and capitalized. The capitalized
amounts are expensed as the related goods are delivered or the services are performed.
Research and development expenses have historically represented the largest component of our total operating
expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the
development of our product candidates.
Our expenditures on current and future nonclinical and clinical development programs are subject to numerous
uncertainties in timing and cost to completion. The duration, costs, and timing of clinical trials and development of our
product candidates will depend on a variety of factors, including:
the scope, rate of progress, and expenses of our ongoing research activities as well as any additional clinical
trials and other research and development activities;
future clinical trial results;
uncertainties in clinical trial enrollment rates or drop-out or discontinuation rates of patients;
potential safety monitoring or other studies requested by regulatory agencies;
significant and changing government regulation; and
the timing and receipt of regulatory approvals, if any.
The process of conducting the necessary clinical research to obtain FDA and other regulatory approval is costly and
time consuming and the successful development of our product candidates is highly uncertain. The risks and uncertainties
associated with our research and development projects are discussed more fully in Part I, Item 1A of this Annual Report
titled “Risk Factors.” As a result of these risks and uncertainties, we are unable to determine with any degree of certainty
the duration and completion costs of our research and development projects, or if, when, or to what extent we will
generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval.
We may never succeed in achieving regulatory approval for any of our product candidates.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based
compensation, for personnel in executive, finance, accounting, and human resources functions. Other significant costs
include legal fees relating to corporate matters and fees for insurance, accounting, consulting, and recruiting services.
We expect that our general and administrative expenses will increase in the future to support our continued research
and development activities, potential commercialization of our product candidates and the increased costs of operating as
a public company. These increases will likely include incremental costs related to the hiring of additional personnel and
fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we have incurred and expect
to continue to incur increased costs associated with being a public company, including expenses related to services
associated with maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor
relations costs.
71
Interest income
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.
Loss on forward contract
The financing arrangement in connection with the sale and issuance of our Series A convertible preferred shares in
December 2013 included a second closing in July 2014, which, for financial reporting purposes, resulted in a contract for
the forward sale of an additional 837,594 Series A convertible preferred shares at a price of $5.25 per share, contingent
upon certain milestones being met. This freestanding financial instrument was classified as a liability because the
underlying preferred shares are contingently redeemable. The forward sale contract was carried at fair value on the
balance sheet, with changes in fair value recorded in earnings. The changes in fair value of the derivative liability from our
inception through settlement in July 2014 were recorded as other income (expense) in the consolidated statements of
operations.
Income taxes
Since inception in December 2013, through March 10, 2015, we were a Delaware LLC and elected to file as a
partnership for federal and state income tax purposes through the year ended December 31, 2014. On March 10, 2015,
we converted from a Delaware LLC to a Delaware corporation, and have subsequently filed a corporate income tax return
for the year ended December 31, 2015. For tax purposes, we elected to be treated as a corporation under Subchapter C
of Chapter 1 of the United States Internal Revenue Code, effective January 1, 2015. We therefore, were subject to federal
and state tax expense beginning January 1, 2015.
We serve as a holding company for our seven wholly-owned subsidiary corporations and file consolidated corporate
federal income tax returns. We use the asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the financial statements and the tax bases of assets and liabilities. A valuation allowance is established against
the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. The deferred
tax assets and liabilities are classified as noncurrent along with the related valuation allowance. Due to our lack of
earnings history, the net deferred tax assets have been fully offset by a valuation allowance.
We recognize benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon
examination based solely on the technical merits, as the largest amount of benefits that is more likely than not to be
realized upon the ultimate settlement. Our policy is to recognize interest and penalties related to the unrecognized tax
benefits as a component of income tax expense.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our
financial statements, which have been prepared in accordance with generally accepted accounting principles in the United
States, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of
the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with
GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable
under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and
judgments under different assumptions or conditions. We periodically review our estimates in light of changes in
circumstances, facts and experience. The effects of material revisions in estimates are reflected in our consolidated
financial statements prospectively from the date of the change in estimate.
We define our critical accounting policies as those accounting principles generally accepted in the United States that
require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material
impact on our financial condition and results of operations, as well as the specific manner in which we apply those
principles. Our significant accounting policies are more fully described in Note 2 to our audited consolidated financial
statements appearing elsewhere in this annual report.
Accrued research and development costs
We record the costs associated with research nonclinical studies, clinical trials, and manufacturing development as
incurred. These costs are a significant component of our research and development expenses, with a substantial portion
72
of our on-going research and development activities conducted by third-party service providers, including contract
research organizations, or CROs, and contract manufacturing organizations, or CMOs.
We accrue for expenses resulting from obligations under agreements with CROs, CMOs, and other outside service
providers for which payment flows do not match the periods over which materials or services are provided to us. We
record accruals based on estimates of services received and efforts expended pursuant to agreements established with
CROs, CMOs, and other outside service providers. These estimates are typically based on contracted amounts applied to
the proportion of work performed and determined through analysis with internal personnel and external service providers
as to the progress or stage of completion of the services. We make significant judgments and estimates in determining the
accrual balance in each reporting period. In the event advance payments are made to a CRO, CMO, or outside service
provider, the payments will be recorded as a prepaid asset which will be amortized as the contracted services are
performed. As actual costs become known, we adjust our accruals. Inputs, such as the services performed, the number of
patients enrolled, or the study duration, may vary from our estimates, resulting in adjustments to research and
development expense in future periods. Changes in these estimates that result in material changes to our accruals could
materially affect our results of operations.
Forward sale contract for Series A convertible preferred shares
In connection with the issuance of Series A convertible preferred shares on December 24, 2013, we entered into a
contract for the forward sale of an additional 837,594 Series A convertible preferred shares at a price of $5.25 per share,
contingent upon certain milestones being met. This freestanding financial instrument was classified as a liability because
the underlying preferred shares are contingently redeemable. The forward sale contract is carried at fair value on the
balance sheet, with changes in fair value recorded in earnings. The liability was settled with the issuance of additional
Series A convertible preferred shares on July 15, 2014.
We estimated the fair value of the forward sale contract for our Series A convertible preferred shares using a
probability-weighted discount approach. The significant inputs used to estimate the fair value of the forward sale contract
include the estimated present and future fair values of the Series A convertible preferred shares, the estimated probability
of the milestone being achieved (initially 90%), the discount rate (20%) and an estimated time to the milestone event
(initially estimated to be ten months).
Share/Stock-based compensation
We recognize the cost of share/stock-based awards granted to employees based on the estimated grant-date fair
values of the awards. The value of the portion of the award that is ultimately expected to vest is recognized as expense
ratably over the requisite service period. We recognize the compensation costs for awards that vest over several years on
a straight-line basis over the vesting period. We recognize the cost of share/stock-based awards granted to
nonemployees at their then-current fair values as services are performed, and are remeasured at each reporting date
through the counterparty performance date.
Prior to March 2015, we operated as a Limited Liability Company, or LLC, and issued Common B incentive equity
awards to employees, consultants and non-employee directors of the Company. In March 2015, upon conversion from a
Delaware LLC to a Delaware corporation, the outstanding Common B share awards were converted into restricted
common stock and options to purchase common stock, or collectively, the Replacement Awards.
We assessed the conversion of the Common B share awards as a modification under GAAP. Because there was no
change in vesting timing or conditions and there was no incremental increase in the conversion date fair value as a result
of the conversion, we allocated the original Common B share values to the restricted common stock and stock options
proportionate to their conversion date fair values.
We estimate the grant date fair value of the non-Replacement Award stock options granted using the Black-Scholes
option-pricing model, which requires the use of highly subjective assumptions to determine the fair value of the awards.
These assumptions include:
Expected term – The expected term represents the period that the stock-based awards are expected to be
outstanding and is determined using the simplified method (based on the mid-point between the vesting date and
the end of the contractual term).
73
Expected volatility – Since we have only been publicly traded for a short period and do not have adequate trading
history for our common stock, the expected volatility is estimated based on the average volatility for comparable
publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.
Subsequent to the IPO, we began to consider our own historic volatility. For purposes of identifying comparable
companies, we selected companies with comparable characteristics to us, including enterprise value, risk
profiles, position within the industry, and with historical share price information sufficient to meet the expected life
of the stock-based awards. The historical volatility data was computed using the daily closing prices for the
selected companies’ shares during the equivalent period of the calculated expected term of the stock-based
awards. We will continue to apply this process until a sufficient amount of historical information regarding the
volatility of our own stock price becomes available, or until circumstances change, such that the identified entities
are no longer comparable companies. In the latter case, other suitable, similar entities whose share prices are
publicly available would be utilized in the calculation.
Risk-free interest rate – The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at
the time of grant for periods corresponding with the expected term of option.
Expected dividend – We have never paid dividends on our common stock and have no plans to pay dividends on
our common stock. Therefore, we used an expected dividend yield of zero.
In the year ended December 31, 2016, we elected to early adopt ASU No. 2016-09, Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, and began to account for
forfeitures in compensation expense as they occur by reversing the previous compensation expense recognized.
Previously, we estimated our forfeiture rate based on an analysis of our actual forfeitures and evaluated the adequacy of
the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The
cumulative impact from any forfeiture rate adjustment would be recognized in the period of adjustment. We also
considered the other areas of simplification included in this update, including income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows, and determined that they did not
have an impact on the consolidated financial statements.
Prior to our IPO in April 2016, the fair value of the shares of common stock underlying our share-based awards were
estimated on each grant date by our Board of Directors. In order to determine the fair value of our Common B awards and
the common stock underlying option grants, our Board of Directors considered, among other things, timely valuations of
our common shares and common stock prepared by an unrelated third-party valuation firm in accordance with the
guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-
Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our capital stock,
our Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to
determine the best estimate of the fair value of our Common B shares and common stock, including our stage of
development; progress of our research and development efforts; the rights, preferences and privileges of our convertible
preferred shares and preferred stock relative to those of our common shares and common stock; equity market conditions
affecting comparable public companies and the lack of marketability of our common shares and common stock. Following
our IPO, we established a policy of using the closing sale price per share of our common stock as quoted on the NASDAQ
Global Market on the date of grant for purposes of determining the exercise price per share of our share-based awards to
purchase common stock.
74
Results of Operations
Comparison of the Years Ended December 31, 2016 and 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015,
together with the changes in those items in dollars and as a percentage:
Revenues:
Grant
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Other expense, net
Net loss
*
Percentage not meaningful
Year Ended
December 31,
2016
2015
(dollars in thousands)
Dollar
Change
% Change
$
4,628 $
6,085 $
(1,457)
-24%
$
18,143 $
11,453 $
6,690
2,444
9,134
(10,591)
222
(34)
$ (21,698) $ (11,295) $ (10,403)
5,947
17,400
(11,315)
22
(2)
8,391
26,534
(21,906)
244
(36)
58%
41%
52%
94%
*
*
92%
Grant Revenues. Grant revenues decreased by $1.5 million, or 24%, to $4.6 million for the year ended December
31, 2016 from $6.1 million for the year ended December 31, 2015. The decrease was due to $2.0 million in revenue for
qualifying 2014 expenditures recognized in connection with the execution of the Grant Contract in June 2015. Upon
execution of the Grant Contract, all accumulated qualified expenditures paid and incurred during the period from June 1,
2014 through June 30, 2015 were recognized as grant revenues in the year ended December 31, 2015. The decrease
was offset by an increase in research and development costs associated with the clinical trials for AEB1102 in patients
with advanced solid tumors and the hematological malignancies AML and MDS, for which we received grant revenue
pursuant to the Grant Contract.
Research and Development Expenses. Research and development expenses increased by $6.7 million, or 58%, to
$18.1 million for the year ended December 31, 2016 from $11.5 million for the year ended December 31, 2015. Research
and development expenses costs directly associated with our lead product candidate, AEB1102, increased to $10.9
million for the year ended December 31, 2016 from $7.0 million for the year ended December 31, 2015. The increase in
research and development expenses was primarily due to:
Higher nonclinical expenses, which increased by $0.9 million as a result of additional toxicology studies and
analysis costs in preparation for multi-dose clinical trials related to AEB1102 and additional research with the
University of Texas at Austin, or the University;
Higher personnel-related expenses, which increased by $2.8 million as a result of additional employee
headcount to expand our internal regulatory and clinical development capabilities in support of the three
separate clinical trials for AEB1102 in patients with advanced solid tumors, Arginase I deficiency, and the
hematological malignancies AML and MDS; and
Higher clinical development expenses, which increased by $3.0 million primarily as a result of initiating our
Phase 1 dose escalation trials for AEB1102 in patients with advanced solid tumors in October 2015, Arginase I
deficiency in June 2016, and the hematological malignancies AML and MDS in July 2016.
General and Administrative Expenses. General and administrative expenses increased by $2.4 million, or 41%, to
$8.4 million for the year ended December 31, 2016 from $5.9 million for the year ended December 31, 2015. The increase
in general and administrative expenses was primarily due to an increase of $0.8 million in employee compensation,
recruiting, and travel expenses, $0.8 million in professional services, audit and legal fees, and $0.8 million in insurance
and other administrative costs associated with being a public company.
Interest Income.
Interest income consists of interest earned on our cash, cash equivalents, and marketable
securities. The increase in interest income to $244,000 for the year ended December 31, 2016 from $22,000 for the year
ended December 31, 2015 was primarily due to purchased cash equivalents and marketable securities in September
2015 and investment of funds received from our IPO in April 2016.
75
Comparison of the Years Ended December 31, 2015 and 2014
The following table summarizes our results of operations for the years ended December 31, 2015 and 2014,
together with the changes in those items in dollars and as a percentage:
Revenues:
Grant
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Change in fair value of forward sale contract
Other expense, net
Net loss
*
Percentage not meaningful
$
$
Year Ended
December 31,
2015
2014
(dollars in thousands)
Dollar
Change
% Change
6,085 $
— $
6,085
*
11,453 $
5,947
17,400
(11,315)
22
—
(2)
6,830 $
2,074
8,904
(8,904)
1
(1,444)
—
$ (11,295) $ (10,347) $
4,623
3,873
8,496
(2,411)
21
1,444
(2)
(948)
68%
187%
95%
27%
*
*
*
9%
Grant Revenues. We recorded grant revenues of $6.1 million for the year ended December 31, 2015, including $2.0
million in revenue for qualifying 2014 expenditures. Upon execution of the Grant Contract, all accumulated qualified
expenditures paid and incurred during the period from June 1, 2014 through June 30, 2015 were recognized as grant
revenues in the year ended December 31, 2015.
Research and Development Expenses. Research and development expenses increased by $4.6 million, or 68%, to
$11.5 million for the year ended December 31, 2015 from $6.8 million for the year ended December 31, 2014. Research
and development expenses directly associated with our lead product candidate, AEB1102, increased to $7.0 million for
the year ended December 31, 2015 from $3.7 million for the year ended December 31, 2014. The increase in research
and development expenses was primarily due to:
Higher nonclinical expenses, which increased by $1.8 million as a result of additional biomarker-related costs
in preparation for clinical trials related to AEB1102 and additional research with the University;
Higher personnel-related expenses, which increased by $1.3 million as a result of additional employee
headcount in preparation for the initiation of clinical trials for AEB1102;
Higher clinical development expenses, which increased by $0.8 million primarily as a result of initiating our
Phase 1 dose escalation trial for AEB1102 in patients with advanced solid tumors in October 2015;
Higher consulting expenses, which increased by $0.4 million as a result of our additional nonclinical and
clinical development efforts in 2015; and
Higher clinical regulatory-related expenses, which increased by $0.3 million as a result of expenses incurred in
2015 for the preparation and submission of two investigational new drug applications with the FDA for
AEB1102 for the treatment of advanced solid tumors and Arginase I deficiency.
General and Administrative Expenses. General and administrative expenses increased by $3.9 million, or 187%,
to $5.9 million for the year ended December 31, 2015 from $2.1 million for the year ended December 31, 2014. The
increase in general and administrative expenses was primarily due to an increase of $1.9 million in employee
compensation, recruiting, and travel expenses and $1.6 million in professional services, audit and legal fees associated
with preparing to be a public company and the development of administrative functions. In addition, facility-related costs
increased by $0.3 million due to moving to a larger office in January 2015.
Interest Income.
Interest income consists of interest earned on our cash, cash equivalents, and marketable
securities. The increase in interest income to $22,000 for the year ended December 31, 2015 from $1,000 for the year
ended December 31, 2014 was primarily due to funds invested from closing the Series B convertible preferred stock
financing in March 2015.
76
Liquidity and Capital Resources
Sources of liquidity
We are an early stage biotechnology company with a limited operating history, and due to our significant research
and development expenditures, we have generated operating losses since our inception and have not generated any
revenue from the sale of any products. Since our inception and through December 31, 2016, we have funded our
operations by raising an aggregate of $109.5 million of gross proceeds from the sale and issuance of convertible preferred
and common equity securities and collecting $9.6 million in grant proceeds. Additionally, we entered into an agreement
with a contract manufacturing organization, or CMO, in 2013 whereby we issued convertible preferred shares to the CMO
in exchange for services performed, with the obligation fully satisfied in June 2015.
In April 2016, we completed our IPO and sold 5,481,940 shares of common stock for aggregate proceeds of $47.3
million net of underwriting discounts and commissions and offering expenses.
In June 2015, we entered into the Grant Contract with CPRIT, under which we expect to generate up to $19.8 million
in grant funding to fund our development of AEB1102. Through December 31, 2016, we have collected $9.6 million in
grant proceeds with $10.2 million available for future collection under the grant contract. As of December 31, 2016, we
have a grant receivable outstanding of $1.2 million. For a detailed discussion of this grant, see “Business—Grant
Agreement.”
Our primary use of cash is to fund the development of our lead product candidate, AEB1102. This includes both the
research and development costs and the general and administrative expenses required to support those operations.
Since we are an early stage company, we have incurred significant operating losses since our inception and we anticipate
such losses, in absolute dollar terms, to increase as we continue our clinical trials in AEB1102 and expand our
development efforts in our pipeline of nonclinical candidates.
As of December 31, 2016, we had available cash, cash equivalents, and marketable securities of $63.5 million.
Under our current operating plan, we believe that we have sufficient resources to fund our operations through March 31,
2019 with our existing cash, cash equivalents, and marketable securities.
Cash flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Year Ended
December 31,
2015
2014
2016
$
$
(18,840) $
(12,076)
49,370
18,454 $
(10,982) $
(4,014)
41,674
26,678 $
(7,335)
(221)
5,575
(1,981)
Cash used in operating activities
Cash used in operating activities for the year ended December 31, 2016 was $18.8 million and reflected a net loss of
$21.7 million. The cash impact of our net loss was offset in part by non-cash expenses of $1.2 million for stock-based
compensation and $0.2 million for depreciation and amortization. The change in operating assets and liabilities of $1.5
million was primarily due to an increase in accrued and other liabilities driven by accrued research and development
costs.
Cash used in operating activities for the year ended December 31, 2015 was $11.0 million and reflected a net loss of
$11.3 million, offset in part by non-cash expenses of $0.8 million for stock-based compensation and $0.8 million for
convertible preferred shares issued to a contract manufacturing organization in exchange for services performed. Cash
used in operating activities also reflected an increase of $1.7 million in grant accounts receivable from executing the Grant
Contract in 2015 and $0.6 million in prepaid expenses and other assets driven by prepaid research and development
costs. The asset increases were offset, with cash provided by operating activities, by a $1.1 million increase in accrued
and other liabilities driven by additional accrued research and development costs, consulting, and legal accruals.
77
Cash used in operating activities for the year ended December 31, 2014 was $7.3 million and reflected a net loss of
$10.3 million, offset in part by non-cash expenses of $1.4 million for the change in fair value of the forward contracts
associated with the second closing of the Series A financing, $0.8 million for convertible preferred shares issued to a
contract manufacturing organization in exchange for services performed, $0.5 million for the discount on the sale of
convertible preferred shares and $0.1 million of share-based compensation.
Cash used in investing activities
Cash used in investing activities for the year ended December 31, 2016 was $12.1 million and primarily consisted of
$20.4 million in purchases of marketable securities and $0.2 million in purchases of property and equipment offset by $8.4
million in maturities of marketable securities.
Cash used in investing activities for the year ended December 31, 2015 was $4.0 million and primarily consisted of
$0.2 million in purchases of property and equipment and $3.8 million in purchases of marketable securities.
Cash used in investing activities for the year ended December 31, 2014 was $0.2 million and consisted primarily of
capital purchases of computer and laboratory equipment.
Cash provided by financing activities
Cash provided by financing activities for the year ended December 31, 2016 was $49.4 million, which consisted of
$54.8 million from the IPO in April 2016, offset by $3.8 million in underwriting discounts and commissions and $1.7 million
in offering costs, and $0.1 million in sale of common stock under our 2016 Employee Stock Purchase Plan.
Cash provided by financing activities for the year ended December 31, 2015 was $41.7 million resulting from $44.0
million from the closing of the Series B financing in March 2015, offset by $0.3 million in Series B issuance costs and $2.0
million in offering costs related to our IPO.
Cash provided by financing activities for the year ended December 31, 2014 was $5.6 million, resulting from the
second closing of the Series A financing in July 2014.
Future funding requirements and operational plan
Our operational plan for the near future is to continue clinical trials for our lead product candidate AEB1102 in three
separate indications, Arginase I deficiency, advanced solid tumors, and the hematological malignancies AML and MDS,
and to expand development for at least one additional product candidate. As such, we plan to increase our research and
development expenditures for the foreseeable future with nonclinical studies, clinical trials, manufacturing and an
integrated biomarker strategy. We expect our principal expenditures during this time period to include expenses for the
following:
funding the continuing development of AEB1102;
funding the advancement of additional product candidates; and
funding working capital, including general operating expenses.
We anticipate that we will continue to generate losses into the foreseeable future as we develop our lead product
candidates, seek regulatory approval of those candidates and begin to commercialize any approved products. Until such
time as we can generate substantial product revenue, we expect to finance our cash needs through a combination of
equity or debt financings, research grants, collaborations, or other sources. We currently have no debt or debt facility or
additional committed capital. To the extent that we raise additional equity, the ownership interest of our shareholders will
be diluted.
Due to our significant research and development expenditures, we have generated substantial losses in each period
since inception. We have an accumulated deficit of $45.3 million as of December 31, 2016. We expect to incur substantial
losses in the future as we expand our research and development capabilities. Based on those plans, we expect our
existing cash, cash equivalent, and marketable securities will enable us to fund our operating expenses and capital
expenditure requirements at least through March 31, 2019. We have based this estimate on assumptions that may prove
to be incorrect, however, and we could deplete our capital resources sooner than we expect.
78
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
Operating leases
Sponsored research agreement
Total contractual obligations
Payments Due by Period
Less than
1 year
1 to 3
years
4 to 5
years
More than
5 years
$
$
262 $
375
637 $
574 $
—
574 $
300 $
—
300 $
—
—
—
In September 2016, we amended our operating lease agreement for office space in Austin, Texas. The amended
lease increased the office space and extended the lease term through December 31, 2020. The total estimated rent
payments over the remaining term of the lease is approximately $1.1 million as of December 31, 2016.
In February 2017, we entered into a separate lease agreement for laboratory space in Austin, Texas, which will
expire on December 31, 2017. The total estimated rent payments over the full term of the lease is approximately $78,000.
In August 2016, we amended our sponsored research agreement with the University. The scope and term under the
agreement were extended through August 31, 2017 with a $750,000 increase in the maximum expenditure limitation. As
of December 31, 2016, the research agreement, as amended, expires on August 31, 2017 with no remaining payment
obligations after such date.
Contingent contractual obligations
The terms of the Grant Contract require that we pay CPRIT tiered royalties in the low- to mid-single digit
percentages on revenues from sales and license or products or services that are based upon, utilize, are developed from
or materially incorporate the intellectual property resulting from the grant-funded activities for AEB1102. Such royalties
reduce to less than one percent after a mid-single digit multiple of the grant funds have been repaid to CPRIT in royalties.
Such royalties are payable for so long as we have marketing exclusivity or patents covering the applicable product or
service (or twelve years from commercial sale of product or service in certain countries if there is no such exclusivity or
patent protection).
On December 24, 2013, two of our wholly owned subsidiaries, AECase, Inc., or AECase, and AEMase, Inc., or
AEMase, entered into license agreements with the University under which the University granted to AECase and AEMase
exclusive, worldwide, sublicenseable licenses. The University granted to AECase a license under a patent application
relating to the right to use technology related to our AEB3103 product candidate. The University granted to AEMase a
license under a patent relating to the right to use technology related to our AEB2109 product candidate. On January 31,
2017, we entered into an Amended and Restated Patent License Agreement, or the Restated License, with the University
which consolidated the two license agreements dated December 24, 2013, revised certain obligations, and licensed
additional patent applications and invention disclosures to Aeglea.
With respect to each product candidate covered by the Restated License, we could be required to pay the University
up to $6.4 million in milestone payments based on the achievement of certain development milestones, including clinical
trials and regulatory approvals, the majority of which are due upon the achievement of later development milestones,
including a $5.0 million payment due on regulatory approval of a product and a $500,000 payment payable on final
regulatory approval of a product for a second indication. In addition, we are required to pay the University a low single
digit royalty on worldwide-net sales of products covered under the Restated License, together with a revenue share on
non-royalty consideration received from sublicensees. The rate of the revenue share ranges from 6.5% to 25% depending
on the date the sublicense agreement is signed. The University may terminate the agreement under certain
circumstances, including for a breach by us that is not cured within 30 or 60 days of notice (depending on the type of
breach), or if we or any of our affiliates or sublicensees participate in any proceeding to challenge the licensed patent
rights (unless, with respect to sublicensees, we terminate the applicable sublicense).
Off Balance Sheet Arrangements
Through December 31, 2016, we do not have any off balance sheet arrangements, as defined by applicable SEC
regulations.
79
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth
companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act
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, are subject to the same new or revised accounting
standards as other public companies that are not emerging growth companies.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new
lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease
classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as
a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified
retrospective application. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU
2016-02 will have on our consolidated financial statements, but expect the impact to be limited to the operating lease
agreement for office space in Austin, TX.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of
accounting for share-based compensation arrangements, including the income tax impact, classification of awards as
either equity or liabilities, classification on the statement of cash flows and forfeitures. The standard is effective for fiscal
years and interim periods beginning after December 15, 2016. Early adoption is permitted.
We elected to early adopt ASU 2016-09 for the three months ended December 31, 2016 using a modified
retrospective approach, effective as if adopted the first day of the fiscal year January 1, 2016. We elected to account for
forfeitures in compensation cost as they occur. The cumulative impact for the change in election was not material and was
recognized in the year ended December 31, 2016. Additionally, we determined that none of the other provisions of ASU
2016-09 has a significant impact on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate
sensitivities.
As of December 31, 2016, we held $63.5 million in cash, cash equivalents, and marketable securities, all of which
was denominated in U.S. dollar assets, and consisting primarily of investments in reverse repurchase agreements and
U.S government and agency securities.
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of
U.S. interest rates, particularly because our investments are in short-term marketable securities. Our marketable
securities are subject to interest rate risk and could fall in value if market interest rates increase. Due to the short-term
duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates
would not 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.
80
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AEGLEA BIOTHERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm........................................................................................
Consolidated Balance Sheets.....................................................................................................................................
Consolidated Statements of Operations .....................................................................................................................
Consolidated Statements of Comprehensive Loss.....................................................................................................
Consolidated Statements of Changes in Convertible Preferred Shares/Stock and
Members’/Stockholders’ Equity (Deficit).................................................................................................................
Consolidated Statements of Cash Flows....................................................................................................................
Notes to Consolidated Financial Statements..............................................................................................................
Page
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84
85
86
87
89
90
81
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Aeglea BioTherapeutics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
comprehensive loss, changes in convertible preferred shares/stock and members’/stockholders’ equity (deficit) and cash
flows present fairly, in all material respects, the financial position of Aeglea BioTherapeutics, Inc. and its subsidiaries at
December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
March 23, 2017
82
Aeglea BioTherapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
ASSETS
December 31,
2016
2015
CURRENT ASSETS
Cash and cash equivalents
Marketable securities
Restricted cash
Accounts receivable - grant
Deferred offering costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other non-current assets
TOTAL ASSETS
$
$
47,748
15,754
—
1,215
—
1,707
66,424
599
40
67,063
$
$
LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable
Deferred revenue
Accrued and other current liabilities
Total current liabilities
Other non-current liabilities
TOTAL LIABILITIES
Commitments and Contingencies (Note 14 and 16)
Series A convertible preferred stock, $0.0001 par value; no shares and 2,172,524
shares authorized as of December 31, 2016 and 2015, respectively; no shares
and 2,172,520 shares issued and outstanding as of December 31, 2016 and
2015, respectively
Series B convertible preferred stock, $0.0001 par value; no shares and 5,008,210
shares authorized as of December 31, 2016 and 2015, respectively; no shares
and 4,999,976 shares issued and outstanding as of December 31, 2016 and
2015, respectively
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred stock, $0.0001 par value; 10,000,000 shares and no shares
authorized as of December 31, 2016 and 2015, respectively;
no shares issued and outstanding as of December 31, 2016 and 2015,
respectively
Common stock, $0.0001 par value; 500,000,000 shares and 25,000,000
shares authorized as of December 31, 2016 and 2015, respectively;
13,430,833 shares and 757,336 shares issued and outstanding
as of December 31, 2016 and 2015, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND
STOCKHOLDERS’ EQUITY (DEFICIT)
$
$
168
71
3,726
3,965
132
4,097
—
—
—
1
108,246
(4)
(45,277)
62,966
29,294
3,768
80
1,697
2,535
912
38,286
348
20
38,654
176
—
2,347
2,523
27
2,550
13,573
44,738
—
—
1,373
(1)
(23,579)
(22,207)
$
67,063
$
38,654
The accompanying notes are an integral part of these consolidated financial statements.
83
Aeglea BioTherapeutics, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Revenues:
Grant
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Change in fair value of forward sale contract
Other expense, net
Total other income (expense)
Net loss
Deemed dividend to convertible preferred stockholders
Net loss attributable to common shareholders and stockholders
Common Stock:
Basic and diluted net loss per share
Net loss attributable to common stockholders
Basic and diluted weighted-average shares outstanding
Class A-1 common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
Class A common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
Class B common:
Basic and diluted net loss per share
Net loss attributable to class
Basic and diluted weighted-average shares outstanding
2016
Year Ended
December 31,
2015
2014
$
4,628
$
6,085
$
—
18,143
8,391
26,534
(21,906)
244
—
(36)
208
(21,698) $
—
(21,698) $
11,453
5,947
17,400
(11,315)
22
—
(2)
20
(11,295) $
(228)
(11,523) $
(2.22) $
(21,698) $
9,791,728
(19.21) $
(11,523) $
599,788
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
$
$
$
$
$
$
$
$
$
$
6,830
2,074
8,904
(8,904)
1
(1,444)
—
(1,443)
(10,347)
—
(10,347)
—
—
—
(20.13)
(3,321)
165,000
(17.06)
(5,706)
334,522
(40.17)
(1,320)
32,861
The accompanying notes are an integral part of these consolidated financial statements.
84
Aeglea BioTherapeutics, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive loss:
Unrealized loss on marketable securities
Total comprehensive loss
2016
Year Ended
December 31,
2015
2014
(21,698) $
(11,295) $
(10,347)
(3)
(1)
(21,701) $
(11,296) $
—
(10,347)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
85
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87
Aeglea BioTherapeutics, 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
Purchase premium on marketable securities
Amortization of premium on marketable securities
Deferred rent
Amortization of lease allowance liability
Share/stock-based compensation
Change in fair value of forward sale contract
Discount on Series A convertible preferred shares
Research and development services settled with convertible preferred
stock
Changes in operating assets and liabilities:
Accounts receivable - grant
Prepaid expenses and other assets
Accounts payable
Deferred revenue
Accrued and other liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Purchases of marketable securities
Proceeds from maturities of marketable securities
Decrease (increase) in restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred stock, net of offering
costs
Proceeds from initial public offering, net of (payments of) offering costs
Proceeds from employee stock plan purchases and issuance of common
stock
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS
Beginning of period
End of period
Supplemental Disclosure of Non-Cash Investing and Financing
Information:
Unpaid amounts related to purchase of property and equipment
Deemed dividend to Series A convertible preferred stockholders upon
conversion from an LLC to corporation
Convertible preferred stock issued for research and development
services to be performed
Conversion of Series A convertible preferred stock to common stock
upon initial public offering
Conversion of Series B convertible preferred stock to common stock
upon initial public offering
Settlement of the forward sale contract for Series A convertible preferred
shares
$
$
$
$
$
$
$
2016
Year Ended
December 31,
2015
2014
$
(21,698) $
(11,295) $
(10,347)
132
(146)
101
12
(22)
1,221
—
—
110
482
(924)
(8)
71
1,829
(18,840)
(212)
(20,390)
8,446
80
(12,076)
—
49,294
76
49,370
18,454
89
(5)
2
4
(23)
767
—
—
812
(1,697)
(586)
(169)
—
1,119
(10,982)
(208)
(3,766)
—
(40)
(4,014)
43,679
(2,028)
23
41,674
26,678
29,294
47,748
$
2,616
29,294
$
172
$
— $
— $
— $
13,573
44,738
$
$
228
232
$
$
— $
— $
19
—
—
—
—
147
1,444
531
845
—
(112)
(165)
—
303
(7,335)
(181)
—
—
(40)
(221)
5,575
—
—
5,575
(1,981)
4,597
2,616
—
—
—
—
—
— $
— $
1,936
The accompanying notes are an integral part of these consolidated financial statements.
88
Aeglea BioTherapeutics, Inc.
Notes to Consolidated Financial Statements
1. The Company and Basis of Presentation
Aeglea BioTherapeutics, Inc. (“Aeglea” or the “Company”) is a clinical-stage biotechnology company committed to
developing enzyme-based therapeutics in the field of amino acid metabolism to treat rare genetic diseases and cancer.
The Company was formed as a Limited Liability Company (LLC) in Delaware on December 16, 2013 under the name
Aeglea BioTherapeutics Holdings, LLC (“Aeglea LLC”) and was converted from a Delaware LLC to a Delaware
corporation (the “LLC Conversion”) on March 10, 2015. The LLC Conversion was effective January 1, 2015 for tax
purposes and as such, the Company filed a consolidated tax return for the full year ended December 31, 2015. The
Company operates in one segment and has its principal offices in Austin, Texas.
Initial Public Offering
On April 6, 2016, the Company’s Registration Statement on Form S-1 (File No. 333-205001) relating to the initial
public offering (“IPO”) of its common stock was declared effective by the Securities and Exchange Commission (“SEC”).
The IPO closed on April 12, 2016, and 5,481,940 shares of common stock were sold at a public offering price of $10.00
per share, including 481,940 shares of common stock issued upon the partial exercise by the underwriters of their option
to purchase additional shares. The Company received $47.3 million in aggregate cash proceeds, net of underwriting
discounts and commissions of $3.8 million and offering costs of $3.7 million incurred by the Company.
Immediately prior to the closing of the IPO, all shares of outstanding convertible preferred stock were automatically
converted, at a ratio of one share of common stock for each share of convertible preferred stock, into 7,172,496 shares of
common stock with the related carrying value of $58.3 million reclassified to common stock and additional paid-in capital.
In connection with the IPO, the Company amended its Restated Certificate of Incorporation (the “Public Certificate”)
to change the authorized capital stock to 510,000,000 shares of which 500,000,000 shares are designated as common
stock and 10,000,000 shares are designated as preferred stock, all with a par value of $0.0001 per share. There are no
shares of preferred stock outstanding as of December 31, 2016.
Reverse Stock Split
The Company’s Board of Directors and stockholders approved a 1-for-10.5 reverse stock split of the Company’s
common stock and preferred stock. The reverse stock split became effective on March 28, 2016 upon filing an amended
Restated Certificate of Incorporation (the “Split Certificate”). The Split Certificate remained in effect until closing of the
IPO, at which time the company amended the Restated Certificate of Incorporation and filed the Public Certificate.
All share and per share amounts in the consolidated financial statements and notes thereto have been retroactively
adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the
reduction in par value of common stock to additional paid-in capital.
Liquidity
As of December 31, 2016, the Company had working capital of $62.5 million, an accumulated deficit of $45.3 million,
and cash, cash equivalents, and marketable securities of $63.5 million. The Company has not generated any product
revenues and has not achieved profitable operations. There is no assurance that profitable operations will ever be
achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and
nonclinical research, and commercialization of the Company’s products will require significant additional financing.
The Company is subject to a number of risks similar to other life science companies, including, but not limited to,
risks related to the successful discovery and development of product candidates, raising additional capital, development
of competing drugs and therapies, protection of proprietary technology and market acceptance of the Company’s
products. As a result of these and other factors and the related uncertainties, there can be no assurance of the
Company’s future success.
89
Based upon the Company’s current operating plan, the Company believes that it has sufficient resources to fund
operations through March 31, 2019 with its existing cash, cash equivalents, and marketable securities. The Company will
need to secure additional funding in the future, in order to carry out all of its planned research and development activities.
If the Company is unable to obtain additional financing or generate license or product revenue, the lack of liquidity could
have a material adverse effect on the Company’s future prospects.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with generally accepted accounting
principles in the United States (“U.S. GAAP”) as defined by the Financial Accounting Standards Board (“FASB”) and
include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such
management estimates include those related to accruals of research and development related costs, fair values of
preferred and common shares and preferred and common stock, a forward sale contract, share/stock-based
compensation, and certain company income tax related items. Management bases its estimates on historical experience
and on various other market-specific and relevant assumptions that management believes to be reasonable under the
circumstances. Actual results could differ significantly from those estimates.
Prior to becoming a public company, the Company utilized significant estimates and assumptions in determining the
fair value of its common shares, common stock, and the forward sale contract for Series A convertible preferred shares.
The board of directors determined the estimated fair value of common shares and common stock based on a number of
objective and subjective factors, including external market conditions affecting the biotechnology industry sector, the price
at which the Company sold shares of convertible preferred shares, the superior rights and preferences of securities senior
to the Company’s common shares and common stock, and the marketability at the time. The Company utilized valuation
methodologies in accordance with the American Institute of Certified Public Accountants Practice Guide, Audit and
Accounting Practice Aid Series: Valuation of Privately-Held-Company Securities Issued as Compensation, to estimate the
fair value of common shares, common stock, and the forward sale contract for Series A convertible preferred shares (see
Notes 6, 9, and 11).
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of
purchase to be cash equivalents. Cash equivalents consist of money market funds and debt securities and are stated at
fair value.
Marketable Securities
All investments have been classified as available-for-sale and are carried at estimated fair value as determined
based upon quoted market prices or pricing models for similar securities. Management determines the appropriate
classification of its investments in debt securities at the time of purchase. Unrealized gains and losses are excluded from
earnings and are reported as a component of accumulated other comprehensive loss. Realized gains and losses and
declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in other
income (expense). The cost of securities sold is based on the specific-identification method. There were no realized gains
or losses on marketable securities for the years ended December 31, 2016, 2015, and 2014. Interest on marketable
securities is included in interest income.
Restricted Cash
Restricted cash consisted of a money market account held by a financial institution as collateral for the Company’s
obligations under a corporate credit card agreement. In September 2016, the collateral requirement was terminated and
the restricted cash balance was recorded as cash and cash equivalents.
90
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash
equivalents, and marketable securities. The Company’s investment policy limits investments to high credit quality
securities issued by the U.S. government, U.S. government-sponsored agencies and FDIC insured bank obligations,
subject to certain concentration limits and restrictions on maturities. The Company’s cash, cash equivalents, and
marketable securities are held by financial institutions in the United States that management believes are of high credit
quality. Amounts on deposit may at times exceed federally insured limits. The Company has not experienced any losses
on its deposits of cash and cash equivalents and its accounts are monitored by management to mitigate risk. The
Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents
and bond issuers.
Deferred Offering Costs
Deferred offering costs, which primarily consists of direct incremental legal, printing, and accounting fees relating to
the Company’s IPO of its common stock, are capitalized. At the closing of the IPO, the deferred offering costs were offset
against the proceeds from the IPO and recorded to additional paid-in capital.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated useful lives of the assets. Repairs and
maintenance that do not extend the life or improve an asset are expensed as incurred. Upon retirement or sale, the cost
of disposed assets and their related accumulated depreciation and amortization are removed from the balance sheet. Any
gain or loss is credited or charged to operations.
The useful lives of the property and equipment are as follows:
Laboratory equipment
Furniture and office equipment
Computer equipment
Software
Leasehold improvements
5 years
5 years
3 years
3 years
Shorter of remaining lease term or estimated useful life
Impairment of Long-Lived Assets
Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the
carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to
the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows
arising from these assets. There were no impairments of long-lived assets for the years ended December 31, 2016, 2015,
and 2014.
Accrued Research and Development Costs
The Company records the costs associated with research nonclinical studies, clinical trials, and manufacturing
development as incurred. These costs are a significant component of the Company’s research and development
expenses, with a substantial portion of the Company’s on-going research and development activities conducted by third-
party service providers, including contract research and manufacturing organizations.
The Company accrues for expenses resulting from obligations under agreements with contract research
organizations (“CROs”), contract manufacturing organizations (“CMOs”), and other outside service providers for which
payment flows do not match the periods over which materials or services are provided to the Company. Accruals are
recorded based on estimates of services received and efforts expended pursuant to agreements established with CROs,
CMOs, and other outside service providers. These estimates are typically based on contracted amounts applied to the
proportion of work performed and determined through analysis with internal personnel and external service providers as to
the progress or stage of completion of the services. The Company makes significant judgments and estimates in
determining the accrual balance in each reporting period. In the event advance payments are made to a CRO, CMO, or
outside service provider, the payments will be recorded as a prepaid asset which will be amortized as the contracted
services are performed. As actual costs become known, the Company adjusts its accruals. Inputs, such as the services
91
performed, the number of patients enrolled, or the study duration, may vary from the Company’s estimates, resulting in
adjustments to research and development expense in future periods. Changes in these estimates that result in material
changes to the Company’s accruals could materially affect the Company’s results of operations. The Company has not
experienced any material deviations between accrued and actual research and development expenses.
Leases
The Company entered into a lease agreement for its office facilities. The lease is classified as an operating lease.
The Company records rent expense on a straight-line basis over the term of the lease and, accordingly, records the
difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Incentives granted
under the Company’s facilities leases, including allowances to fund leasehold improvements, are deferred and are
recognized as adjustments to rental expense on a straight-line basis over the term of the lease.
Fair Value of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain financial and non-financial
assets and liabilities and to determine fair value disclosures. The accounting standards define fair value, establish a
framework for measuring fair value, and require disclosures about fair value measurements. Fair value is defined as the
price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required to
be recorded at fair value, the principal or most advantageous market in which the Company would transact are considered
along with assumptions that market participants would use when pricing the asset or liability, such as inherent risk,
transfer restrictions, and risk of nonperformance.
The accounting standard for fair value establishes a fair value hierarchy based on three levels of inputs, the first two
of which are considered observable and the last unobservable, that requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of inputs that may be used to measure fair value are as follows:
Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other
inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3:
Valuations based on unobservable inputs to the valuation methodology and including data about
assumptions market participants would use in pricing the asset or liability based on the best information
available under the circumstances.
Financial instruments carried at fair value include cash, cash equivalents, and marketable securities. The carrying
amount of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short
maturities.
Convertible Preferred Stock
The Company recorded the issuance of all convertible preferred stock net of offering costs on the dates of issuance,
which represented the carrying value. The conversion feature of the convertible preferred stock was subject to certain
anti-dilution provisions, which if triggered, would have required the Company to seek shareholder approval to increase the
number of shares of common stock authorized. In the event that the Company could not deliver the conversion shares
because it did not have an adequate number of common stock authorized, the convertible preferred stock would have
been redeemable. Accordingly, the Company classified the convertible preferred stock in temporary equity. The Company
did not adjust the carrying value of the convertible preferred stock to their redemption values, since it was uncertain
whether or when a redemption event would occur. The convertible preferred stock outstanding was automatically
converted into shares of common stock immediately prior to the completion of the IPO in April 2016 (see Note 1).
92
Forward Sale Contract for Series A Convertible Preferred Shares
In connection with the issuance of Series A convertible preferred shares on December 24, 2013, the Company
entered into a contract for the forward sale of an additional 837,594 Series A convertible preferred shares at a price of
$5.25 per share, contingent upon certain milestones being met. This freestanding financial instrument was classified as a
liability because the underlying preferred shares were contingently redeemable. The forward sale contract was carried at
fair value on the balance sheet, with changes in fair value recorded in earnings. The liability was settled with the issuance
of additional Series A convertible preferred shares on July 15, 2014 (see Note 6).
Revenue Recognition
The Company’s sole source of revenue is grant revenue related to a $19.8 million research grant received from the
Cancer Prevention and Research Institute of Texas (“CPRIT”), covering a four-year period from June 1, 2014 through
May 31, 2018. Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that the
conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the conditions
of the award being met are recognized as deferred revenue until the services are performed and the conditions of the
award are met (see Note 8).
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs include, but are not
limited to, salaries, benefits, travel, share/stock-based compensation, consulting costs, contract research service costs,
laboratory supplies, contract manufacturing costs, and costs paid to other third parties that conduct research and
development activities on the Company’s behalf. Amounts incurred in connection with license agreements are also
included in research and development expense.
Certain research and development costs incurred were settled contractually by the Company issuing a variable
number of the Company’s shares determined by dividing the fixed monetary amount of costs incurred by the issuance-
date fair value of the issuable shares. The Company recorded research and development expense for these costs and
accrued for the fixed monetary amount as an accrued liability as the services were rendered until the amount was settled.
In June 2015, the remaining Company obligation to settle these costs with Company shares was converted to a cash-
based payment through a contract amendment with the service provider.
Advance payments for goods or services to be rendered in the future for use in research and development activities
are recorded as a prepaid asset and expensed as the related goods are delivered or the services are performed.
Share/Stock-Based Compensation
The Company recognizes the cost of share/stock-based awards granted to employees based on the estimated
grant-date fair values of the awards. The value of the portion of the award that is ultimately expected to vest is recognized
as expense ratably over the requisite service period. The Company recognizes the compensation costs for awards that
vest over several years on a straight-line basis over the vesting period. The Company recognizes the cost of share/stock-
based awards granted to nonemployees at their then-current fair values as services are performed, and are remeasured
at each reporting date through the counterparty performance date.
Income Taxes
Effective January 1, 2015, the Company, for tax purposes, converted from a partnership to a corporation and
continues to serve as a holding company for seven wholly-owned subsidiary corporations. Beginning with the year ended
December 31, 2015, the Company filed a consolidated corporate federal income tax return. The Company and its
subsidiaries use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary differences between the financial
statements and the tax bases of assets and liabilities. A valuation allowance is established against the deferred tax assets
to reduce their carrying value to an amount that is more likely than not to be realized. The deferred tax assets and
liabilities are classified as noncurrent along with the related valuation allowance. Due to a lack of earnings history, the net
deferred tax assets have been fully offset by a valuation allowance.
93
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be
sustained upon examination based solely on the technical merits, as the largest amount of benefits that is more likely than
not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the
unrecognized tax benefits as a component of income tax expense.
Comprehensive Loss
Comprehensive loss is the change in stockholders’ equity (deficit) from transactions and other events and
circumstances other than those resulting from investments by stockholders and distributions to stockholders. The
Company’s other comprehensive loss is currently comprised of changes in unrealized gains and losses on available-for-
sale securities.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new
lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease
classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as
a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified
retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of
ASU 2016-02 will have on its consolidated financial statements, but expect the impact to be limited to the operating lease
agreement for office space in Austin, TX.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of
accounting for share-based compensation arrangements, including the income tax impact, classification of awards as
either equity or liabilities, classification on the statement of cash flows and forfeitures. The standard is effective for fiscal
years and interim periods beginning after December 15, 2016. Early adoption is permitted.
The Company elected to early adopt ASU 2016-09 for the three months ended December 31, 2016 using a modified
retrospective approach, effective as if adopted the first day of the fiscal year January 1, 2016. The Company elected to
account for forfeitures in compensation cost as they occur. The cumulative impact for the change in election was not
material and was recognized in the year ended December 31, 2016. Additionally, the Company determined that none of
the other provisions of ASU 2016-09 has a significant impact on its consolidated financial statements.
3. Cash Equivalents and Marketable Securities
The following tables summarize the estimated fair value of our cash equivalents and marketable securities and the
gross unrealized gains and losses (in thousands):
Cash equivalents:
Money market funds
Reverse repurchase agreements
Total cash equivalents
Marketable securities:
US government and agency securities
Total marketable securities
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
4,584 $
39,250
43,834
15,758
15,758 $
$
— $
—
—
—
— $
— $
—
—
4,584
39,250
43,834
(4)
(4) $
15,754
15,754
94
Cash equivalents:
Money market funds
Reverse repurchase agreements
Total cash equivalents
Marketable securities:
US government and agency securities
Total marketable securities
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
3,988 $
16,250
20,238
3,769
3,769 $
$
— $
—
—
—
— $
— $
—
—
(1)
(1) $
3,988
16,250
20,238
3,768
3,768
The reverse repurchase agreements are settled in cash nightly, and as such are classified as cash equivalents. All
of the cash equivalents and marketable securities held as of December 31, 2016 and 2015 had maturities of less than one
year.
As of December 31, 2016 and 2015, the Company held nine and five debt securities, respectively, that were in an
unrealized loss position for less than one year. The aggregate fair value of debt securities in an unrealized loss position as
of December 31, 2016 and 2015 were $15.8 million and $2.5 million, respectively, with no individual securities in a
significant unrealized loss position. The Company evaluated its securities for other-than-temporary impairment and
considered the decline in market value for the securities to be primarily attributable to current economic and market
conditions and would not be required to sell the securities before recovery of the amortized cost basis. Based on this
analysis, these marketable securities were not considered to be other-than-temporarily impaired as of December 31, 2016
and 2015.
4. Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
Laboratory equipment
Furniture and office equipment
Computer equipment
Software
Leasehold improvements
Property and equipment, gross
Less: Accumulated depreciation and amortization
Property and equipment, net
December 31,
2016
2015
$
$
221 $
202
102
44
270
839
(240)
599 $
138
118
79
44
77
456
(108)
348
Depreciation and amortization expense for the years ended December 31, 2016, 2015, and 2014 was $132,000,
$89,000, and $19,000, respectively. All of the Company’s long-lived assets are located in the United States.
5. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following (in thousands):
Accrued compensation
Accrued contracted research and development costs
Accrued professional and consulting fees
Accrued and other current liabilities
Total accrued and other current liabilities
December 31,
2016
2015
1,270 $
1,749
480
227
3,726 $
571
863
863
50
2,347
$
$
95
6. Convertible Preferred Stock
On December 24, 2013, the Company raised $5.1 million through the issuance of 971,928 Series A convertible
preferred shares at $5.25 per share. The financing arrangement included a contract for the forward sale of an additional
837,594 Series A convertible preferred shares at a price of $5.25 per share, contingent upon certain milestones being
met. This freestanding financial instrument was classified as a liability because the underlying preferred share were
contingently redeemable. The fair value of the forward sale contract at issuance was $440,000. The fair value of the
forward sale contract at settlement on July 15, 2014 was $1.9 million.
The change in fair value of the derivative liability was recorded as Other Income (Expense) in the consolidated
statements of operations. For the year ended December 31, 2014, the Company recognized $1.4 million in expense due
to changes in fair value of the derivative liability. The forward sale contract was settled on July 15, 2014 when the
Company issued and received payment for additional Series A convertible preferred shares, and the fair value of the
financial instrument on that date was reclassified to Series A convertible preferred shares.
On July 15, 2014, the Company raised $5.6 million through the issuance of 1,067,592 Series A convertible preferred
shares at $5.25 per share (including 837,594 convertible preferred shares related to the forward sale contract). The Series
A convertible preferred shares issued on July 15, 2014 were recorded at their fair value of $7.56 per share (see Note 11).
The Company recognized $531,000 in expense for the 229,998 Series A convertible preferred shares that were not
covered by the forward sale contract and were issued to an investor providing sponsored research and employees of the
company at a discount. The expense was primarily recorded as research and development expense because the
counterparties were engaged in such activities on behalf of the Company (see Note 14).
On March 10, 2015, the Company converted from a Delaware limited liability company into a Delaware corporation
and changed the Company’s name from Aeglea BioTherapeutics Holdings, LLC to Aeglea BioTherapeutics, Inc. In
connection with the LLC Conversion, all of the Company’s outstanding common shares and convertible preferred shares
were converted into shares of common stock and convertible preferred stock. Further, the outstanding Common B share
awards were converted into a combination of vested and unvested restricted common stock and vested and unvested
stock options with no changes to the vesting provisions (see Note 9). Upon the LLC Conversion, each then-outstanding
Series A convertible preferred share was converted into one share of Series A convertible preferred stock, par value
$0.0001 per share. The Company determined that the LLC Conversion resulted in a deemed dividend from stockholders
of common stock to stockholders of Series A convertible preferred stock of $0.11 per share of Series A convertible
preferred stock. The Company recorded $228,000 as an increase in the carrying amount of the Series A convertible
preferred stock and as a reduction of additional paid-in capital. Such dividend was determined by comparing the fair value
of the Series A convertible preferred shares immediately prior to the conversion to the fair value of the Series A
convertible preferred stock issued in the conversion.
Also on March 10, 2015, the Company issued 4,929,948 shares of Series B convertible preferred stock, par value
$0.0001 per share, at an issuance price equal to $8.93 per share and received gross proceeds of $44.0 million. In
connection with the financing, the Company incurred total offering costs of $321,000.
On April 12, 2016, immediately prior to the closing of the IPO, all of the Company’s outstanding convertible preferred
stock was automatically converted into an aggregate total of 7,172,496 shares of common stock (see Note 1). As of
December 31, 2016, there were no shares of preferred stock outstanding.
Convertible preferred stock consisted of the following as of December 31, 2015 (in thousands, except share
amounts):
December 31, 2015
Preferred
Stock
Issued and
Outstanding
2,172,520 $
4,999,976 $
Liquidation
Preference
11,406 $
44,625 $
Common
Stock
Issuable
Upon
Conversion
2,172,520
4,999,976
Carrying
Value
13,573
44,738
Series A convertible preferred stock
Series B convertible preferred stock
Preferred
Stock
Authorized
2,172,524
5,008,210
96
Prior to the closing of the IPO, the holders of convertible preferred stock had various rights, privileges, and
preferences as follows:
Conversion
Each share of convertible preferred stock was convertible at any time and at the option of the holder into that
number of fully-paid and non-assessable common stock determined by dividing the original issue price of the convertible
preferred stock by the conversion price in effect on the date of conversion (a 1:1 ratio at the time of the conversion).
The convertible preferred stock was automatically convertible into shares of common stock at the then-current
conversion rate upon (i) a vote of 62% of the outstanding Series B convertible preferred stock, or (ii) the closing of a firm
commitment underwritten public offering that met aggregate gross proceed and pricing terms.
The respective applicable conversion price was subject to adjustment upon any future stock splits or stock
combinations, reclassifications or exchanges of similar stock, upon a reorganization, merger or consolidation of the
Company, upon the issuance or sale by the Company of common stock for consideration less than the applicable
conversion price, or upon the issuance of any share purchase rights that are exercisable at a strike price less than the
applicable conversion price.
Dividends
Each share of convertible preferred stock was entitled to non-cumulative dividends of 8% of the original issue price
per share, per annum, if, as and when declared by the Board of Directors. Dividends to Series A and Series B
stockholders were to be paid in advance of any distributions to common stockholders. No dividends were declared prior to
the conversion of the shares into common stock upon the closing of the IPO.
Voting
Each share of convertible preferred stock had voting rights equal to an equivalent number of shares of common
stock into which it was convertible and voted together as one class along with the common stock. The holders of
convertible preferred stock had the right to vote on all significant matters as to which holders of common stock had the
right to vote.
For as long as at least 342,857 shares of any series of convertible preferred stock (subject to adjustment in the
event of a recapitalization affecting the convertible preferred stock) remained outstanding, the Company had to obtain the
affirmative vote or written consent by at least 62% of the then-outstanding Series B convertible preferred stock along with
Board consent to consummate significant transactions including, but not limited to, the authorization and issuance of
additional shares or share classes, amending the certificate of incorporation, and the approval of a deemed liquidation
event.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders
of the Series A and Series B convertible preferred stock were entitled to be paid out of the assets of the Company an
amount per share equal to $5.25 and $8.93 respectively, prior to and in preference to any distribution to the holders of
common stock.
If assets were insufficient to make payments in full to all holders of Series A and Series B convertible preferred
stock, then the assets or consideration would be distributed ratably among the convertible preferred stockholders. Prior to
the LLC Conversion, distributions were determined based upon the distribution preferences in the LLC agreement
discussed further below. Subsequent to the LLC Conversion, remaining assets would be distributed among the holders of
convertible preferred stock and holders of common stock on pro rata basis based on the number of shares held, treating
all shares of preferred stock as if they had been converted to common stock pursuant to the then-applicable conversion
terms.
LLC Distributions
Prior to the LLC Conversion, the holders of the Series A convertible preferred shares were entitled to receive
distributions out of any assets legally available, prior and in preference to any distributions to Common A-1, Common A,
and Common B shares, up to the preference amount that equals the original issue price of $5.25 per share adjusted for
share splits, share distributions, combinations and reclassifications.
97
After the payment of the preference amount to holders of Series A convertible preferred shares, any remaining
amount would be paid to the holders of the Series A convertible preferred shares and Common A-1 shares on a pro rata
basis; until the Company had distributed an aggregate of $1.0 million to the Common A-1 shares. Any remaining amount
would be paid to the holders of Series A convertible preferred shares and Common A shares on a pro rata basis; until the
Company had distributed to Common A shares an aggregate amount equal to the amount Common A-1 shares received.
Thereafter, if assets remained in the Company, they would be paid to the holders of the Series A convertible
preferred shares, Common A-1 shares, Common A shares and Common B shares on a per share pro rata basis; provided
that with respect to all Common B shares having a threshold amount, no distribution would be paid with respect to such
Common shares until the aggregate amount of all distributions exceeded the threshold amount. All Common B Shares
were issued with an applicable Threshold Amount set by the Board of Directors to qualify the shares as “profits interest”
within the meaning of Revenue Procedure 93-27 as clarified by Revenue Procedure 2001-43.
To the extent that the amounts available for distribution were insufficient to pay the full amounts to which holders of
the shares would otherwise be entitled, the holders of such shares entitled to receive distributions should share ratably in
any such distribution in proportion to the respective amounts that would otherwise be payable.
No distributions were declared or paid by the Company prior to the LLC Conversion.
Redemption
The Series A and Series B convertible preferred stock were not mandatorily redeemable as they did not have a set
redemption date or date after which the stock could be redeemed by the holders. However, the stock was contingently
redeemable upon a deemed liquidation event and the trigger of certain anti-dilution provisions upon conversion to
common stock without an adequate number of authorized common stock.
7. Common Stock
Each holder of common stock is entitled to one vote for each share of common stock held. The Company’s common
stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions. Subject
to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of common stock are
entitled to receive dividends out of funds legally available if the board of directors, in its discretion, determines to issue
dividends and then only at the times and in the amounts that the board of directors may determine.
As of December 31, 2016, no common stock dividends had been declared by the board of directors.
The Company’s former LLC Agreement authorized Aeglea LLC to issue three classes of common shares, each with
no par value: Common A-1 shares, Common A shares, and Common B shares. Upon the LLC Conversion, each
outstanding Common A-1 and Common A share was automatically converted into one share of common stock, par value
$0.0001 per share. See Note 9 regarding the conversion of outstanding Common B shares.
8. Grant Revenues
In June 2015, the Company entered into a Cancer Research Grant Contract (“Grant Contract”) with CPRIT, under
which CPRIT awarded a grant not to exceed $19.8 million for use in developing cancer treatments by exploiting the
metabolism of cancer cells. The Grant Contract covers a four year period from June 1, 2014 through May 31, 2018.
Upon commercialization of the product, the terms of the Grant Contract require the Company to pay tiered royalties
in the low to mid-single digit percentages. Such royalties reduce to less than one percent after a mid-single-digit multiple
of the grant funds have been paid to CPRIT in royalties.
The agreement includes reimbursement for qualified expenditures incurred and recognized in 2014. Upon execution
of the Grant Contract, grant revenue was recognized for the accumulated qualified expenditures paid and recognized in
the period from June 1, 2014 through June 30, 2015. For the years ended December 31, 2016, 2015, and 2014 the
Company recognized $4.6 million, $6.1 million, and $0, respectively, in grant revenues for qualified expenditures under
the grant. As of December 31, 2016 and 2015, the Company had an outstanding grant receivable of $1.2 million and
$1.7 million, respectively, for the grant expenditures that were paid but had not been reimbursed and deferred revenue of
$71,000 and $0, respectively, for proceeds received but the costs had not been incurred or the conditions of the award
had not been met.
98
9. Share/Stock-Based Compensation
2013 Equity Incentive Plan
In 2013, the Company adopted the 2013 Equity Incentive Plan (“2013 Plan”). The 2013 Plan provides incentives to
employees, consultants and non-employee directors of the Company by providing incentive awards of Common B shares
or any other class of equity authorized by the Company and designated by the Board of Directors as incentive equity. The
Company classified the incentive awards as equity-classified grants of unvested stock within the scope of ASC 718.
The Common B shares were issued upon grant date and held in escrow in the grantee’s name, subject to vesting
requirements. Unvested shares could participate in any distributions allocated to the Common B shares and would remain
in the custody of the Company until vesting occurred, at which time the funds would be released and voting rights
commenced.
Prior to the LLC Conversion and for the year ended December 31, 2014, the Company granted 355,156 Common B
shares with a weighted average grant date fair value of $1.66 per share.
Upon the LLC Conversion, the Company terminated the 2013 Plan and adopted the 2015 Equity Incentive Plan
(“2015 Plan”). All Common B shares issued under the 2013 Plan were replaced with stock options and restricted stock
issued under the 2015 Plan.
Modification of Common B Share Awards
As discussed in Note 6, in connection with the LLC Conversion on March 10, 2015, the 355,156 Common B share
awards granted, less forfeitures of 1,474 shares, were converted into a combination of 253,232 vested and unvested
shares of restricted common stock and 100,446 vested and unvested options to purchase common stock (collectively the
“Replacement Awards”) with no changes to the vesting provisions. The conversion ratio for each award was dependent
upon the issuance date of the relevant shares with the modification affecting seven employees.
In accordance with ASC 718, the Company determined the fair value of the Common B share awards held by
employees and nonemployees immediately before the Replacement Awards were issued and compared that amount to
the then fair value of the Replacement Awards. Given there was no incremental fair value in connection with the issuance
of the Replacement Awards, the Company continues to recognize the compensation expense originally estimated for the
Common B shares at the date of grant. The original Common B share values were allocated to stock options and
restricted stock awards based on proportionate conversion date fair values.
2015 Equity Incentive Plan
The 2015 Plan, administered by the Board of Directors, provides for the Company to sell or issue common stock or
restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common
stock, to employees, members of the Board of Directors and consultants of the Company. Under the terms of the 2015
Plan, the exercise prices, vesting and other restrictions may be determined at the discretion of the Board of Directors, or
their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of
the fair market value of the share of common stock on the date of grant, the term of stock options may not be greater than
ten years for all grants, and for grantees holding more than 10% of the total combined voting power of all classes of stock,
the term may not be greater than five years.
The Company granted options under the 2015 Plan until April 2016 when it was terminated as to future awards,
although it continues to govern the terms of options that remain outstanding under the 2015 Plan.
As of December 31, 2016, a total of 699,573 shares of common stock are subject to options outstanding under the
2015 Plan and 75,932 shares of unvested restricted stock are outstanding under the 2015 Plan. The shares will become
available under the 2016 Equity Incentive Plan (“2016 Plan”) to the extent the options are forfeited or lapse unexercised or
the restricted stock is forfeited prior to vesting.
2016 Equity Incentive Plan
On April 5, 2016, the day preceding the effectiveness of the Registration Statement, the 2016 Plan became effective
and serves as the successor to the 2015 Plan. Under the 2016 Plan, the Company may grant stock options, stock
appreciation rights, restricted stock awards, restricted stock units, performance awards, and stock bonuses. The 2016
Plan provides for an initial reserve of 1,100,000 shares of common stock, plus 509,869 shares of common stock
99
remaining under the 2015 Plan, and any share awards that subsequently are forfeited or lapse unexercised under the
2015 Plan. The shares reserved exclude shares of common stock reserved for issuance under the 2015 Plan.
As of December 31, 2016, the total number of shares reserved for issuance under the 2016 Plan was 1,624,561, of
which 447,362 shares were subject to outstanding option awards.
The 2016 Plan allows the Company’s board of directors to approve an annual increase in the number of shares
available for issuance thereunder, to be added on the first day of each fiscal year, beginning on January 1, 2017 and
continuing through 2023, up to 4% of the outstanding number of shares of the Company’s common stock on the
December 31 immediately prior to the date of increase. As a result of the operation of this provision, on January 1, 2017,
an additional 537,233 shares became available for issuance under the 2016 Plan.
The Company generally grants stock-based awards with service conditions only (“service-based” awards). Awards
granted under the 2016 Plan and 2015 Plan generally vest over four or five years and expire after ten years, although
awards have been granted with vesting terms less than four years.
2016 Employee Stock Purchase Plan
On April 6, 2016, upon the effectiveness of the Registration Statement, the 2016 Employee Stock Purchase Plan
(“2016 ESPP”) became effective. A total of 165,000 shares of common stock were reserved for issuance under the 2016
ESPP. Eligible employees may purchase shares of common stock under the 2016 ESPP at 85% of the lower of the fair
market value of the Company’s common stock as of the first or the last day of each offering period. Employees are limited
to contributing 15% of the employee’s eligible compensation, and may not purchase more than $25,000 of stock during
any calendar year or more than 2,000 shares during any one purchase period or a lesser amount determined by the board
of directors. The 2016 ESPP will terminate ten years from the first purchase date under the plan, unless terminated earlier
by the board of directors. For the year ended December 31, 2016, the Company issued and sold 19,061 shares under the
2016 ESPP. The remaining 145,939 shares are available for issuance as of December 31, 2016.
Modification of Stock Options
In May 2016, the Company’s board of directors approved the modification of 542,392 outstanding stock options for
21 employees to align the vesting schedule of existing awards with the Company’s planned vesting schedule for future
awards. The result was an acceleration of vesting for the modified awards. Stock options with a five year vesting schedule
and 25% vesting after year two and 6.25% quarterly thereafter were modified to a four year vesting schedule with 25%
vesting after year one and 2.08% monthly thereafter. Stock options with a four year vesting schedule and 25% vesting
after year one and 6.25% quarterly thereafter were modified to a similar four year vesting schedule with 25% vesting after
year one and 2.08% monthly thereafter. The modified awards have service conditions only.
In accordance with ASC 718, the Company determined the fair value of the awards immediately before the
modification and compared that amount to the then-fair value of the modified awards. Given there was no incremental fair
value in connection with the modification of the awards, the Company will continue to recognize the compensation
expense originally estimated for the stock options at the date of grant over the modified service period. The Company
recognized $89,000 in cumulative expense as of the modification date related to changes in the service period for the
modified awards.
100
The following table summarizes employee and nonemployee stock option activity for the year ended December 31,
2016:
Outstanding as of December 31, 2015
Granted
Exercised
Forfeited
Outstanding as of December 31, 2016
Options vested and expected to vest
as of December 31, 2016
Options exercisable as of December 31, 2016
Shares
Issuable
Under
Options
Weighted
Average
Exercise
Price
629,848 $
731,779
—
(214,692)
1,146,935 $
1,137,407 $
390,033 $
4.55
7.04
—
7.19
5.64
5.66
5.07
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
2,833
9.29 $
8.64 $
8.64 $
8.35 $
440
431
213
For the years ended December 31, 2016 and 2015, the weighted-average grant date fair value of non-replacement
award options granted was $7.04 and $3.48, respectively. There were no option exercises during the year ended
December 31, 2016. The total intrinsic value of options exercised during the year ended December 31, 2015 was
$25,000.
There were no stock options issued to or vested for non-employees during the year ended December 31, 2016. For
the year ended December 31, 2015, the Company issued 25,387 stock options to non-employees with 11,279 options
vesting in the period.
Restricted Common Stock
As part of the LLC Conversion, the Company granted restricted common stock with time-based and performance-
based vesting conditions. Unvested shares of restricted common stock may not be sold or transferred by the holder.
These restrictions lapse according to the time-based vesting conditions of each award.
The Company issued 253,232 restricted stock awards (“RSAs”) during the year ended December 31, 2015 and all
are Replacement Awards from the conversion of the Common B share awards as discussed above. The Company
allocated the fair value from the Common B shares to the restricted stock at the then-applicable conversion date fair
value.
The following table summarizes employee and nonemployee restricted stock activity for the year ended December
31, 2016:
Unvested restricted common stock as of December 31, 2015
Granted
Vested
Forfeited
Unvested restricted common stock as of December 31, 2016
Weighted
Average
Grant
Date Fair
Value
1.85
—
1.86
—
1.96
Shares
118,554
—
(42,622)
—
75,932
$
$
The fair value of RSAs that vested during the years ended December 31, 2016 and 2015 was $258,000 and
$933,000, respectively.
There were no RSAs granted to non-employees during the year ended December 31, 2016. The Company issued
61,096 RSAs to non-employees during the year ended December 31, 2015 (and as part of the LLC Conversion) with
32,588 RSAs vesting in the period.
101
Share/Stock-Based Compensation Expense
Total share/stock-based compensation expense recognized from the Company’s equity incentive plans and the
2016 ESPP for the years ended December 31, 2016, 2015, and 2014 was as follows (in thousands):
2016
Year Ended
December 31,
2015
2014
Research and development
General and administrative
Total share/stock-based
compensation expense
Employees
389
$
832
Non-
Employees
$
Employees
101
326
— $
—
Non-
Employees
340
$
—
Employees
7
$
107
Non-
Employees
$
$
1,221
$
— $
427
$
340
$
114
$
30
3
33
No related tax benefits were recognized for the years ended December 31, 2016, 2015, and 2014.
The non-employee awards contain both performance and service-based vesting conditions. No expense was
recognized for the unvested non-employee awards with only a performance condition for the years ended December 31,
2016, 2015, and 2014. The performance-based vesting conditions represent counterparty performance conditions.
Share/stock-based compensation expense is recognized if the performance condition is considered probable of
achievement using management’s best estimates. The lowest potential aggregate fair values of the unvested awards
were $0 as of and for the years ended December 31, 2016, 2015, and 2014.
As of December 31, 2016, the Company had an aggregate of $3.1 million and $89,000 of unrecognized stock-based
compensation expense for options and RSAs outstanding, respectively, which is expected to be recognized over a
weighted average period of 2.6 years and 1.1 years, respectively.
In determining the fair value of the non-Replacement Award stock-based awards, the Company uses the Black-
Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires
significant judgment to determine.
Expected Term
The Company’s expected term represents the period that the Company’s stock-based awards are expected to be
outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end
of the contractual term). The Company utilizes this method due to lack of historical exercise data and the plain-vanilla
nature of the Company’s stock-based awards.
Expected Volatility
Since the Company was privately held through April 2016, it alone does not have the relevant company-specific
historical data to support its expected volatility. As such, the Company has used an average of expected volatilities based
on the volatilities of a representative group of publicly traded biopharmaceutical companies over a period equal to the
expected term of the stock option grants. Subsequent to the IPO, the Company began to consider the Company’s own
historic volatility. For purposes of identifying comparable companies, the Company selected companies with comparable
characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price
information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed
using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected
term of the stock-based awards. The Company intends to consistently apply this process using the same similar entities
until a sufficient amount of historical information regarding the volatility of the Company’s own share price becomes
available or until circumstances change, such that the identified entities are no longer comparable companies. In the latter
case, other suitable, similar entities whose share prices are publicly available would be utilized in the calculation.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods
corresponding with the expected term of option.
102
Expected Dividend
The Company has never paid dividends on its common stock and has no plans to pay dividends on its common
stock. Therefore, the Company used an expected dividend yield of zero.
The fair value of the non-Replacement Award stock options granted under the 2016 Plan and 2015 Plan and the
shares available for purchase under the 2016 ESPP were determined using the Black-Scholes option-pricing model. The
following table summarizes the weighted-average assumptions used in calculating the fair value of the awards:
2016 Plan and 2015 Plan
Expected term
Expected volatility
Risk-free interest
Dividend yield
2016 ESPP
Expected term
Expected volatility
Risk-free interest
Dividend yield
10. Defined Contribution Plan
Year Ended
December 31,
2016
2015
5.99
87%
1.28%
0%
0.45
82%
0.50%
0%
6.29
87%
1.37%
0%
—
—
—
—
In September 2016, the Company began to sponsor a 401(k) retirement plan in which substantially all of its full-time
employees are eligible to participate. Participants may contribute a percentage of their annual compensation to this plan,
subject to statutory limitations. During the year ended December 31, 2016, the Company provided $51,000 in
contributions to the plan. The Company did not provide any contributions during the years ended December 31, 2015 or
2014.
11. Fair Value Measurements
The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring
basis. The following tables sets forth the fair value of the Company’s financial assets and liabilities at fair value on a
recurring basis based on the three-tier fair value hierarchy (in thousands):
Financial Assets
Money market funds
Reverse repurchase agreements
US government and agency securities
Total financial assets
Financial Assets
Money market funds
Reverse repurchase agreements
US government and agency securities
Total financial assets
Level 1
Level 2
Level 3
Total
December 31, 2016
4,584 $
—
—
4,584 $
— $
39,250
15,754
55,004 $
— $
—
—
— $
4,584
39,250
15,754
59,588
Level 1
Level 2
Level 3
Total
December 31, 2015
3,988 $
—
—
3,988 $
— $
16,250
3,768
20,018 $
— $
—
—
— $
3,988
16,250
3,768
24,006
$
$
$
$
The Company measures the fair value of money market funds on quoted prices in active markets for identical asset
or liabilities. The Level 2 assets include reverse repurchase agreements and U.S. government and agency securities and
are valued based on quoted prices for similar assets in active markets and inputs other than quoted prices that are
derived from observable market data.
103
The Company evaluates transfers between levels at the end of each reporting period. There were no transfers
between Level 1 and Level 2 during the periods presented.
The liability for the forward sale contract is considered a Level 3 instrument. The forward sale contract was settled
on July 15, 2014 when the Company issued and received payment for additional Series A convertible preferred shares,
and the fair value of the financial instrument of $1.9 million was reclassified to Series A convertible preferred shares.
Valuation Approach for the Company’s Shares and Related Instruments
Prior to the IPO, the Company valued its common stock and common shares by taking into consideration, among
other things, its most recent valuation of common stock and common shares prepared by an unrelated third-party
valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice
Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public
trading market for the Company’s capital stock, the Company exercised reasonable judgment and considered a number of
objective and subjective factors, including changes since the date of the most recent contemporaneous valuation through
the date of grant. The Company estimated the fair value of each class of common shares, preferred shares, and common
stock by utilizing either a hybrid of the Probability-Weighted Expected Return Method (“PWERM”) and the Option Pricing
Method (“OPM”) or the OPM, both valuation methodologies are based on the Backsolve Method, a form of the market
approach. The hybrid valuation methodology applied the PWERM utilizing the probability of going public scenarios and a
liquidation scenario. The OPM valuation methodology included estimates and assumptions that require the Company’s
judgment. Inputs used to determine estimated fair value of the shares include the equity value of the Company,
probabilities of going public by term (from 12.5% to 80% with terms from 0.55 to 0.13 years), risk-adjusted discount rate
(30%), discount for lack of marketability (from 30% to 7.5%), expected timing of the liquidity event (from 2.8 to 3.0 years),
a risk-free interest rate (from 0.8% to 1.1%) and the expected volatility (70%). Generally, increases or decreases in these
unobservable inputs would result in a directionally similar impact to the fair value measurement of the Company’s shares.
Following the IPO, the Company utilizes the closing sale price per share of its common stock as quoted on the NASDAQ
Global Market on the date of grant for purposes of determining the fair value of its common stock.
The fair value of the forward sale contract for Series A convertible preferred shares was measured using a
probability-weighted discount approach. Inputs used to determine estimated fair value of the forward sale contract include
the estimated present and future fair values of the Series A convertible preferred shares, the estimated probability of the
milestone being achieved (initially 90%), the discount rate (20%), and an estimated time to the milestone event (initially
estimated to be ten months). Increases or decreases in the discount rate generally would result in a directionally opposite
impact to the fair value measurement of this forward sale contract. Changes in the estimated fair value of the Series A
convertible preferred shares generally would result in a directionally similar impact on the fair value measurement of the
forward sale contract.
12.
Income Taxes
For the years ended December 31, 2016, 2015, and 2014, the Company recognized no provision or benefit from
income taxes. The difference between the Company’s provision for income taxes and the amounts computed by applying
the statutory federal income tax rate to income before income taxes is as follows (in thousands):
Tax provision derived by applying the federal statutory
rate to income before income taxes
Permanent differences and other
Federal tax credits
State tax credits
Losses of LLC entity attributable to the members
Conversion of LLC from partnership to corporation
Change in the valuation allowance
Income tax expense /(benefit)
Year Ended
December 31,
2015
2014
2016
$
$
(7,377) $
333
(1,921)
(404)
—
—
9,369
— $
(3,841) $
307
(321)
—
—
(21)
3,876
— $
(3,518)
54
(289)
—
730
—
3,023
—
104
The components of the deferred tax assets and liabilities consist of the following (in thousands):
Deferred tax assets
Net operating loss carryforward
Intangible assets
Accrued expense
Stock-based compensation
Federal tax credits
State tax credits
Other
Total deferred tax assets
Deferred tax liabilities
Depreciable assets
Total deferred tax liabilities
Less: Valuation allowance
Deferred tax assets, net
December 31,
2016
2015
12,286 $
38
335
283
3,291
404
76
16,713
6,336
41
184
112
624
36
7,333
(60) $
(60)
(16,653)
— $
(49)
(49)
(7,284)
—
$
$
$
The Company has established a valuation allowance equal to the net deferred tax asset due to uncertainties
regarding the realization of the deferred tax asset based on the Company’s lack of earnings history. The valuation
allowance increased by approximately $9.4 million, $3.9 million, and $3.0 million during the years ended December 31,
2016, 2015, and 2014, respectively, primarily due to continuing loss from operations.
As of December 31, 2016 and 2015, the Company had U.S. net operating loss carryforwards (“NOL”) of
approximately $36.1 million and $18.6 million, respectively. As of December 31, 2016 and 2015, the Company had U.S.
tax credit carryforwards of approximately $3.3 million and $624,000, respectively, and state tax credit carryforwards of
approximately $612,000 and $0, respectively. The net operating loss and tax credit carryforwards will begin to expire in
2033, if not utilized. The net operating loss carryforwards are subject to Internal Revenue Service adjustments until the
statute closes on the year the net operating loss is utilized.
The Company has not completed a study to assess whether an ownership change has occurred or whether there
have been multiple ownership changes since the Company’s formation due to the complexity and cost associated with
such a study, and the fact that there may be additional such ownership changes in the future. If the Company has
experienced an ownership change at any time since its formation, utilization of the NOL or R&D credit carryforwards
would be subject to an annual limitation under Section 382 or 383 of the Internal Revenue Code, which is determined by
first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-
exempt rate, and then could be subject to additional adjustments, as required. Additionally, the separate return limitation
year (“SRLY”) rules may apply to losses of the Company’s seven wholly-owned subsidiary corporations. The SRLY rules
limit the consolidated group’s use of a subsidiary corporation’s net operating losses to the amount of income generated by
the subsidiary corporation after it becomes a member of the group. Any limitation may result in expiration of a portion of
the NOL or R&D credit carryforwards before utilization. Further, until a study is completed and any limitation known, no
amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Additionally, the
Company does not expect any unrecognized tax benefits to change significantly over the next twelve months. Due to the
existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact its
effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from
deferred tax assets with a corresponding reduction of the valuation allowance.
The Company files income tax returns in the U.S. and state jurisdictions. The Company is subject to examination by
taxing authorities in its significant jurisdictions for the 2013 and subsequent years.
13. Net Loss Per Share Attributable to Common Shareholders and Stockholders
The Company computed net loss attributable per common shareholder and stockholder using the two-class method
required for participating securities through the date of the IPO. Immediately prior to the closing of the IPO, all outstanding
convertible preferred stock was converted into common stock (see Note 6). The Company considered convertible
preferred shares/stock to be participating securities. In the event that the Company had paid out distributions, holders of
convertible preferred shares/stock would have participated in the distribution.
105
The two-class method is an earnings (loss) allocation method under which earnings (loss) per share is calculated for
each class of common share, common stock, and participating security considering a participating security’s rights to
undistributed earnings (loss) as if all such earnings (loss) had been distributed during the period. The convertible
preferred shares/stock did not have an obligation to fund losses and are therefore excluded from the calculation of basic
net loss per share. Starting in the first quarter of 2015 in connection with the LLC Conversion, the Company’s Series A
and B convertible preferred stock were entitled to receive noncumulative dividends and in preference to any dividends on
shares of the Company’s common stock.
Basic and diluted net loss per share attributable to common shareholders and stockholders is computed by dividing
net loss attributable to the applicable class of common share and common stock by the weighted-average number of that
class of common share and common stock outstanding during the period. For net loss per share attributable to common
stockholders for the year ended December 31, 2015, the effect of the LLC Conversion is presented prospectively from
January 1, 2015 as none of the losses for the year ended December 31, 2015 were allocated to the members of Aeglea
LLC. For periods in which the Company generated a net loss, the Company does not include the potential impact of
dilutive securities in diluted net loss per share, as the impact of these items is anti-dilutive. Additionally, the convertible
preferred stock dividend is included in the loss attributable to common stockholders.
The following weighted-average equity instruments were excluded from the calculation of diluted net loss per share
because their effect would have been anti-dilutive for the periods presented:
Series A convertible preferred shares/stock
Series B convertible preferred stock
Unvested restricted common stock
Options to purchase common stock
Forward sale contract for Series A convertible preferred shares
Unvested Class B common shares
2016
611,392
1,407,097
100,634
1,063,778
—
—
Year Ended
December 31,
2015
2,172,520
4,047,734
153,355
450,458
—
—
2014
1,557,870
—
—
—
447,482
151,936
14. Research and License Agreements
Contract Research Agreement
In December 2013, the Company entered into a contract research agreement with a contract manufacturing
organization (“CMO”) under which the CMO provides research and development services to the Company in exchange for
cash and convertible preferred shares.
For the year ended December 31, 2016, no shares were issued to the CMO. For the years ended December 31,
2015 and 2014, the Company issued 70,028 Series B convertible preferred shares and 133,000 Series A convertible
preferred shares to the CMO, respectively, with fair values of $1.1 million and $845,000, respectively. The number of
convertible preferred shares contractually issuable to the counterparty was determined by dividing a fixed monetary
amount by the issuance-date fair value of the issued shares. These services are expensed as research and development
costs in accordance with the fair value of the consideration paid and as the services are rendered.
The Company was obligated to issue a variable number of shares of convertible preferred stock upon the completion
of certain milestones related to the research and development of the Company’s products. In June 2015, the contract
research agreement was amended to convert the remaining unmet milestone awards from share-based payments to
cash. As of December 31, 2016 and 2015, all related obligations payable in convertible preferred stock under the
agreement have been satisfied.
University Research Agreement
In December 2013, the Company entered into a research agreement with the University of Texas at Austin (the
“University”). Under the terms of this research agreement, the Company engaged the University to perform certain
nonclinical research activities related to the systemic depletion of amino acids for cancer and rare genetic disease
therapies.
Under the research agreement, the Company was required to pay the University an annual amount not to exceed
$386,000 during the one-year term of the agreement from the effective date. Pursuant to subsequent amendments to the
106
research agreement, the term and maximum expenditure limitation were extended and increased through August 31,
2017 for a combined $1.8 million, including an amendment in August 2016 which increased the maximum expenditure
limitation by $750,000 for additional research to be performed by the University. For the years ended December 31, 2016,
2015, and 2014, the Company paid $832,000, $563,000, and $386,000, respectively, to the University under the research
agreement.
License Agreements
In December 2013, two of the Company’s wholly owned subsidiaries, AECase, Inc. (“AECase”) and AEMase, Inc.
(“AEMase”), entered into license agreements with the University under which the University granted to AECase and
AEMase exclusive, worldwide, sublicenseable licenses. The University granted the AECase license under a patent
application relating to the right to use technology related to the Company’s AEB3103 product candidate. The University
granted the AEMase license under a patent relating to the right to use technology related to the Company’s AEB2109
product candidate.
For the year ended December 31, 2016, the Company paid $5,000 in annual license fees for each license
agreement. For the years ended December 31, 2015 and 2014, there were no license fees due or paid. In January, 2017,
the Company entered into an Amended and Restated Patent License Agreement (the “Restated License”) with the
University which consolidated the two license agreements, revised certain obligations, and licensed additional patent
applications and invention disclosures to the Company. See Note 17 regarding the terms of the Restated License.
15. Related Party Transactions
The spouse of the Company’s Chief Executive Officer provided consulting services to the Company. For the years
ended December 31, 2016, 2015, and 2014, the Company paid $399,000, $433,000, and $146,000, respectively, to the
spouse in consulting fees, which were recorded in Research and Development expenses. As of December 31, 2016, the
Company had no outstanding liability to the related party. As of December 31, 2015, the Company had an outstanding
liability of $129,000.
One of the founders, a non-employee member of the Company’s Board of Directors, entered into a consulting
agreement with the Company in 2014 under which the founder would receive $50,000 per year for a fixed number of
hours of consulting and advisory services and receive 57,142 Common B shares (converted into 43,290 restricted stock
awards and 13,852 stock options upon the LLC Conversion) with the vesting contingent on time and performance
milestones being achieved. For the years ended December 31, 2016, 2015, and 2014, the Company paid $50,000 in each
year, respectively, to the Founder under the consulting agreement. As of December 31, 2016 and 2015, the Company had
no outstanding liability to the related party.
16. Commitments and Contingencies
The Company leases office space in Austin, TX under an operating lease that commenced in January 2015. The
lease was amended in September 2016 to increase office space and extend the term to December 31, 2020. In addition,
the amended lease provides for tenant improvement allowances on both the original space and expansion space totaling
$200,000. As provided in the lease amendment, monthly lease payments are subject to annual increases through the
lease term. The Company recognizes rent expense on a straight-line basis over the non-cancellable term of the lease.
Under the terms of the amended office lease agreement, the security deposit requirement was set at $39,000 until
the expiration of the lease. The lessor is entitled to retain all or any part of the security deposit for payment in the event of
any uncured default by the Company under the terms of the lease.
Future annual minimum lease payments due under non-cancellable operating leases at December 31 of each year
are as follows (in thousands):
2017
2018
2019
2020
Thereafter
Total minimum lease payments
$
$
262
283
291
300
—
1,136
107
For the years ended December 31, 2016, 2015, and 2014, the Company incurred $151,000, $140,000, and $17,000
in rent expense under non-cancellable operating leases.
In August 2016, the Company amended the research agreement with the University to further extend the period of
performance and increase the limitation of funding to perform additional research. Under the terms of the amendment, the
performance period was extended to August 31, 2017 with a remaining $375,000 expected to be paid in 2017 (see Note
14).
17. Subsequent Events
On January 31, 2017, the Company and the University entered into the Restated License. The Company may be
required to pay the University up to $6.4 million milestone payments based on the achievement of certain development
milestones, including clinical trials and regulatory approvals, the majority of which are due upon the achievement of later
development milestones, including a $5.0 million payment due on regulatory approval of a product and a $500,000
payment payable on final regulatory approval of a product for a second indication. In addition, the Company is required to
pay the University a low single-digit royalty on worldwide-net sales of products covered under the Restated License,
together with a revenue share on non-royalty consideration received from sublicensees. The rate of the revenue share
ranges from 6.5% to 25% depending on the date the sublicense agreement is signed.
18. Selected Quarterly Financial Data (Unaudited)
Selected quarterly results from operations for the years ended December 31, 2016 and 2015 are as follows (in
thousands, except per share amounts):
2016 Quarter Ended
March 31,
June 30,
859 $
(4,567)
(4,547)
(7.10) $
1,373 $
(5,495)
(5,430)
(0.46) $
September 30, December 31,
1,247
(5,543)
(5,483)
(0.41)
1,149 $
(6,301)
(6,238)
(0.47) $
2015 Quarter Ended
March 31,
June 30,
— $
(2,469)
(2,468)
(4.71) $
3,427 $
(1,432)
(1,427)
(2.44) $
September 30, December 31,
1,585
(3,997)
(3,987)
(6.36)
1,073 $
(3,417)
(3,413)
(5.57) $
Grant revenues
Loss from operations
Net loss
Basic and diluted net loss per common share
Grant revenues
Loss from operations
Net loss
Basic and diluted net loss per common share
$
$
$
$
108
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
Our management, with the participation of our principal executive officer and our principal financial officer,
evaluated, as of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure
controls and procedures. Based on that evaluation of our disclosure controls and procedures as of December 31, 2016,
our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of
such date are effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined 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 ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, 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 our management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control
over financial reporting or an attestation report of our registered public accounting firm due to a transition period
established by the rules of the SEC for newly public companies. Additionally, for as long as we remain an “emerging
growth company” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the
Jumpstart Our Business Startups Act of 2012, we intend to take advantage of the exemption permitting us not to comply
with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness of
our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
109
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this
Annual Report on Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this
Annual Report on Form 10-K.
110
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
PART IV
1.
Financial Statements
See Index to Financial Statements at Item 8 herein.
2.
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial
statements or notes thereto.
3.
Exhibits
See the Exhibit Index immediately following the signature page of this report.
ITEM 16. FORM 10-K SUMMARY
None.
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2017
AEGLEA BIOTHERAPEUTICS, INC.
By:
/s/ David G. Lowe, Ph.D.
David G. Lowe, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints David G. Lowe, Ph.D. and Charles N. York II, jointly and severally, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to
file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
Signature
Title
/s/ David G. Lowe, Ph.D.
David G. Lowe, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Charles N. York II
Charles N. York II
/s/ Russell J. Cox
Russell J. Cox
/s/ George Georgiou, Ph.D.
George Georgiou, Ph.D.
/s/ Sandesh Mahatme, LLM
Sandesh Mahatme, LLM
/s/ Anthony G. Quinn, M.B Ch.B, Ph.D.
Anthony G. Quinn, M.B Ch.B, Ph.D.
/s/ Armen Shanafelt, Ph.D.
Armen Shanafelt, Ph.D.
/s/ Suzanne Bruhn, Ph.D.
Suzanne Bruhn, Ph.D.
Chief Financial Officer and Vice President
(Principal Accounting Officer and
Principal Financial Officer)
Director
Director
Director
Director
Director
Director
112
Exhibit
Number Description of Document
Incorporate by Reference
Form
File No.
Date of
Filing
Exhibit
No.
Filed
Herewith
EXHIBIT INDEX
3.1*
3.4*
4.1*
4.2*
10.1*
10.2*‡
10.3*‡
10.4*‡
10.5*‡
10.6*‡
Restated Certificate of Incorporation
Restated Bylaws
Form of Common Stock Certificate.
Amended and Restated Investors’ Rights
Agreement, dated March 10, 2015, by and among
the Registrant and certain of its stockholders, as
amended.
Form of Indemnification Agreement.
2015 Equity Incentive Plan and forms of award
agreements.
2016 Equity Incentive Plan and forms of award
agreements.
2016 Employee Stock Purchase Plan and forms of
award agreements.
Form of Stock Restriction Agreement.
Executive Employment Agreement, dated July 7,
2015, by and between the Registrant and Dr. David
G. Lowe.
10.7*‡ Offer Letter, dated December 28, 2013, issued by
the Registrant to Dr. Scott W. Rowlinson.
10.8*†
Sponsored Research Agreement No. UTA13-
001113, dated December 24, 2013, between The
University of Texas at Austin (“UT-Austin”) and
Aeglea BioTherapeutics, Inc., Aeglea Development
Company, Inc., AERase, Inc., AEMase, Inc.,
AECase, Inc., AE4ase, Inc., AE5ase, Inc. and
AE6ase., Inc., as amended.
10.9*† Master Services Agreement, dated December 24,
2013, between KBI Biopharma, Inc. Aeglea
Development Company, Inc. and the Registrant and
First Amendment to Master Services Agreement,
dated June 30, 2015, between KBI Biopharma, Inc.,
Aeglea Development Company, Inc. and Registrant.
S-1/A
S-1/A
S-1/A
S-1
S-1/A
S-1
S-1/A
S-1/A
S-1
S-1/A
S-1/A
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
9/14/2015
9/14/2015
9/14/2015
3.2
3.5
4.1
6/16/2015
4.2
9/14/2015
10.1
6/16/2015
10.2
3/28/2016
10.3
3/28/2016
10.3
6/16/2015
10.5
9/14/2015
10.6
9/14/2015
10.7
10-Q
001-
37722
11/9/2016
10.2
S-1/A
333-
205001
9/14/2015
10.10
10.10* Office Lease, dated November 24, 2014, between
Barton Oaks Office Center, LLC and the Registrant.
S-1
333-
205001
6/16/2015
10.11
113
Exhibit
Number Description of Document
10.11*
First Amendment to Office Lease and Assignment
and Assumption of Lease dated September 20, 2016
to Office Lease dated November 24, 2014, between
Barton Oaks Office Center, LLC, Aeglea
Development Company, Inc., and Aeglea
BioTherapeutics, Inc.
Incorporate by Reference
Form
File No.
Date of
Filing
Exhibit
No.
Filed
Herewith
10-Q
001-
37722
11/9/2016
10.1
10.12*‡ Consulting Agreement, dated February 18, 2014, by
and between the Registrant and George Georgiou.
S-1
333-
205001
6/16/2015
10.12
10.13# Amended and Restated Patent License Agreement
No. PM1401501, dated January 31, 2017, between
the Registrant and The University of Texas at Austin
on behalf of the Board of Regents of the University of
Texas system
10.14*† Cancer Research Grant Contract, dated June 15,
2015, between AERase, Inc. and the Cancer
Prevention Research Institute of Texas.
S-1
10.15*‡ CEO Severance Agreement, dated July 7, 2015, by
and between the Registrant and Dr. David G. Lowe.
S-1/A
10.16*‡ Vice President Severance Agreement dated July 10,
2015 by and between Registrant and Dr. Scott W.
Rowlinson.
10.17*‡ Offer Letter, dated May 4, 2015, issued by the
Registrant to Mr. Henry Hebel.
S-1/A
S-1/A
10.18*‡ Vice President Severance Agreement dated January
14, 2016 by and between Registrant and Mr. Henry
Hebel.
S-1/A
10.19‡ Offer Letter, dated June 16, 2014, issued by the
Registrant to Mr. Charles N. York II.
10.20‡ Vice President of Finance Severance Agreement
dated July 7, 2015 by and between Registrant and
Mr. Charles N. York II.
333-
205001
333-
205001
333-
205001
333-
205001
333-
205001
6/16/2015
10.15
9/14/2015
10.16
9/14/2015
10.17
3/14/2016
10.17
3/14/2016
10.18
21.1*
23.1
24.1
31.1
31.2
Subsidiaries of the Registrant.
S-1
333-
205001
6/16/2015
21.1
Consent of independent registered public accounting
firm.
Power of Attorney. Reference is made to the
signature page hereto.
Certification of the Principal Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934.
Certification of the Principal Financial Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934.
114
X
X
X
X
X
X
X
Exhibit
Number
Description of Document
32.1(1) Certification of the Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2(1) Certification of the Principal Financial Officer
pursuant to 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.
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Document.
101.LAB
XBRL Taxonomy Extension Labels Linkbase
Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document
Incorporate by Reference
Form
File No.
Date of
Filing
Exhibit
No.
Filed
Herewith
X
X
X
X
X
X
X
X
*
†
‡
#
(1)
Previously filed.
Confidential treatment has been granted for portions of this exhibit pursuant to Rule 406 of the Securities Act, or
Rule 24b-2 of the Exchange Act. The Registrant has omitted and filed separately with the SEC the confidential
portions of this exhibit.
Indicates management contract or compensatory plan.
Registrant has omitted portions of the referenced exhibit and filed such exhibit separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment under Rule 24b-2 promulgated under the
Exchange Act.
The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or
otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act.
115
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