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, 2018
☐ 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 every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to 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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
☒
Accelerated filer
Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2018 (the last business day of the
Registrant’s second fiscal quarter), based upon the closing price of $10.58 of the Registrant’s common stock as reported on The Nasdaq
Global Market, was approximately $199.1 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 1, 2019
28,819,900 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement (“Proxy Statement”) relating to the 2019 Annual Meeting of Stockholders will be
filed with the Commission within 120 days after the end of the Registrant’s 2018 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
26
66
66
66
66
Securities ..........................................................................................................................................................
67
Item 6. Selected Financial Data ......................................................................................................................................
69
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations...............................
72
Item 7A.Quantitative and Qualitative Disclosures About Market Risk ..............................................................................
82
83
Item 8. Financial Statements and Supplementary Data ..................................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 107
Item 9A.Controls and Procedures..................................................................................................................................... 107
Item 9B.Other Information ................................................................................................................................................ 108
PART III
Item 10. Directors, Executive Officers and Corporate Governance .................................................................................. 109
Item 11. Executive Compensation..................................................................................................................................... 109
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............ 109
Item 13. Certain Relationships and Related Transactions, and Director Independence................................................... 109
Item 14. Principal Accountant Fees and Services............................................................................................................. 109
PART IV
Item 15. Exhibits and Financial Statement Schedules ...................................................................................................... 110
Item 16. Form 10-K Summary ........................................................................................................................................... 112
SIGNATURES................................................................................................................................................................ 113
2
NOTE ABOUT 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 results of operations and financial position, business strategy,
market size, potential growth opportunities, nonclinical and clinical development activities, efficacy and safety profile of our
product candidates, use of net proceeds from our public offerings, our ability to maintain and recognize the benefits of
certain designations received by product candidates, the timing and results of nonclinical studies and clinical trials,
commercial collaboration with third parties, and the receipt and timing of potential regulatory designations, approvals and
commercialization of product candidates, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,”
“estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and
similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words.
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 for any reason after the date of this
report 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,” “the Company,” “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 that designs and develops innovative human enzyme therapeutics for patients
with rare genetic diseases and cancer. We believe our novel approach of utilizing human enzymes offers advantages that
provide a greater likelihood of clinical success and commercial adoption.
Our drug-hunting capabilities in enzyme engineering, preclinical disease modeling, and drug development in both
rare genetic disease and cancer allow us to identify and advance innovative opportunities to address important unmet
medical needs for the benefit of patients. Our programs and the decisions we make to progress assets into clinical studies
are driven by the following considerations:
-
-
-
-
-
-
Potential for enhancement of human enzymatic activity
Ability to create novel human enzymatic activity
Strong preclinical data and rationale
Limited or no competition
Meaningful commercial opportunities
Worldwide commercial rights
We are a patient-focused organization conscious of the fact that people with a rare genetic disease or cancer have
limited treatment options, and we recognize that their lives and well-being are highly dependent upon our efforts to
develop improved therapies. For this reason, we are passionate about designing and developing novel therapeutics to
address significant unmet medical need for rare genetic disease and cancer.
Our Strategy
Our goal is to build a world-class biotechnology company dedicated to the discovery, development, and
commercialization of human enzyme-based therapeutics that transform the lives of patients by addressing unmet medical
needs in both rare genetic disease and cancer. To achieve that goal, we intend to:
•
-
-
Successfully advance our lead product candidate, pegzilarginase, through clinical development.
For Arginase 1 Deficiency, we believe we have the only therapeutic in clinical development that addresses the
underlying drivers of disease progression. Pegzilarginase is currently being evaluated in two ongoing clinical
trials for Arginase 1 Deficiency, consisting of one Phase 1/2 clinical trial for the treatment of Arginase 1
Deficiency and one open label extension study for patients with Arginase 1 Deficiency. In December 2018, we
announced the design of our global pivotal Phase 3 PEACE (Pegzilarginase Effect on Arginase 1 Deficiency
Clinical Endpoints) trial with a primary endpoint of plasma arginine reduction and secondary endpoints which
include assessments of clinical outcomes on mobility and adaptive behavior, safety and pharmacokinetics. We
finalized the design of the PEACE trial to be a single, global pivotal trial based on FDA and EMA feedback. We
expect to dose the first patient in the Phase 3 PEACE trial in the second quarter of 2019 and anticipate that
topline data from the study will be available in the first quarter of 2021. Additional repeat dose data from our
Phase 1/2 clinical trial of pegzilarginase in Arginase 1 Deficiency is expected in the first half of 2019.
For our oncology indications, pegzilarginase is currently being evaluated in two ongoing clinical trials,
consisting of one Phase 1 clinical trial for the treatment of advanced solid tumors, and one Phase 1/2
combination clinical trial of pegzilarginase with Merck’s anti-PD-1 therapy, KEYTRUDA® (pembrolizumab) for
the treatment of patients with small cell lung cancer (SCLC). After determining the maximum tolerated dose in
the Phase 1b combination study, we advanced to Phase 2 in December 2018 and dosed the first patients. We
expect that topline data from open label Phase 2 study will be available in the first half of 2020.
4
•
•
•
•
Target enzyme-based therapeutic opportunities within rare genetic disease and cancer where
regulation of abnormal metabolism provides the potential for important medical benefits.
Our focus is on rare genetic diseases and cancers where there is a plausible link between disease
development, progression, and metabolite levels including amino acids. Advancing to clinical development is
gated by strong biological rationale and preclinical data. We favor diseases where there are meaningful
potential commercial markets with limited or no current competition and where potential therapy can transform
patient outcomes.
Concurrently develop and commercialize multiple product candidates.
We are committed to the discovery and development of multiple product candidates of engineered human
enzymes, as we believe this results in a diversified portfolio, leverages organizational efficiencies, and utilizes
economies of scale. This includes continually investing in our internal research capabilities to expand our
portfolio.
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
patient populations for subjects with the greatest potential to benefit from our metabolism focused approaches.
In rare genetic disease this strategy is focused on identifying mis-diagnosed and undiagnosed patients. In the
United States, we continue to pursue avenues to improve disease state awareness and diagnosis of Arginase
1 Deficiency. In oncology, we are exploring biomarkers to identify patients with tumors sensitive to amino acid
deprivation. We believe that targeting these patients will both enhance our ability to detect evidence of clinical
activity earlier in clinical development and improve the probability of treating their cancers effectively.
Seek global approval and commercialization of our product candidates.
We retain worldwide intellectual property rights to all of our product candidates. We intend to pursue clinical
and regulatory programs for approval in the United States and internationally. Ultimately, our plan is to
establish a multi-country commercial organization in rare genetic disease and seek commercial partnerships in
select regional markets. In cancer, we plan to build a focused commercial organization in the United States
and strategically evaluate partnership opportunities globally.
Our Focus—Enzyme-based Therapeutic Opportunities in Metabolism
Our company was initially founded to develop therapeutics for diseases characterized by abnormal amino acid
metabolism. We have broadened the scope of our metabolic focus, which we believe allows us to better leverage our
enzyme engineering capabilities. 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 these abnormal
metabolic pathways 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 Rare Genetic Disease and Arginase 1 Deficiency
The incidence of a single metabolic abnormality typically occurs in fewer than one per 100,000 live births. While
rare, most of these diseases have severe or life-threatening characteristics and many metabolic abnormalities are likely to
be under-diagnosed. Current treatment options for these disorders are limited. While diet modification or nutrient
5
supplementation can provide some benefit to patients, several metabolic abnormalities have been treated successfully
with enzyme therapy.
We are targeting Arginase 1 Deficiency, a urea cycle disorder, with our lead product candidate, pegzilarginase.
Arginase 1 Deficiency is a serious progressive disease with significant morbidity and early mortality. This disease is
caused by deficiency of a key arginine metabolizing enzyme. This leads to two important harmful metabolic effects: (1) the
accumulation of high levels of arginine and other arginine derived metabolites, and (2) an impairment of the urea cycle
which leads to elevation of ammonia levels, especially at times of stress. The high plasma arginine level is believed to be
the key driver of the spasticity, developmental delays, and seizures that develop in early childhood and progress over
time. The impairment of the urea cycle also means that these patients are at risk of episodic and sometimes persistent
hyperammonemia, which causes irritability, nausea, and vomiting with potential to progress to brain swelling,
encephalopathy, and death.
There is currently no approved therapeutic agent specifically indicated for Arginase 1 Deficiency or effective
treatment options for these patients. Current disease management practice includes a medical diet with protein restriction
and ammonia scavengers. Medical literature suggests that disease progression can be slowed with strict adherence to
dietary protein restriction, which often includes the use of specially formulated supplements. Such dietary modification has
been shown to partially reduce plasma arginine levels, but generally does not reach the range stipulated by medical
guidelines. Therefore, this disease management approach is difficult to manage, unpalatable, and generally inadequate to
treat the majority of patients. Ammonia-scavenging drugs such as RAVICTI (glycerol phenylbutyrate) and BUPHENYL
(sodium phenylbutyrate) are used to manage elevated ammonia levels. Liver transplantation has been reported to achieve
normalization of arginine levels; however, this intervention is available only to a small fraction of patients and carries
significant procedural risk.
The lack of a treatment option that directly address the cause of Arginase 1 Deficiency supports the need for a
therapy that manages the harmful metabolic effects caused by accumulation of high levels of arginine and other arginine-
derived metabolites (also referred to as guanidino compounds), as well as the accumulation of ammonia caused by the
disease related slowing of the urea cycle. The development of an arginine reducing therapeutic introduced early in a
patient’s life could potentially minimize the exposure to the neurotoxic effects of arginine, its metabolites, and ammonia,
as well as potentially enabling improved protein intake. Reduction of plasma arginine levels to below the recommended
guidelines for an extended period during the pegzilarginase dosing schedule has the potential to slow or halt the
progression of the disease, thereby offering the potential for more normal growth and development in these patients.
Arginase 1 Deficiency is a rare disorder, and disease prevalence has not been established in the medical literature.
Newborn screening data for two reliably detected urea cycle disorders allowed disease experts to estimate the incidence
of Arginase 1 Deficiency at 1:950,000 births. Assuming a less than normal life span, we believe that at least 600
individuals in global addressable markets have Arginase 1 Deficiency. Presently, only 34 U.S. states and jurisdictions
screen for Arginase 1 Deficiency, and screening in Europe is not universal. Because the symptoms of Arginase 1
Deficiency may overlap with other disorders such as cerebral palsy or epilepsy, the prevalence of Arginase 1 Deficiency
may be underestimated in regions that do not mandate newborn screening for this disease. To date we have identified
more than 170 patients in the major addressable markets, primarily in the U.S. and Europe.
Background on Cancer
Cancer is the second-leading cause of death in the United States. The National Cancer Institute estimates that in
2018 there were approximately 1.7 million new cases and approximately 610,000 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.
We believe that the altered metabolism of cancer cells—the atypical uptake and breakdown of nutrients— provides
an opportunity to develop important new cancer treatments. Cancer cells rapidly change how they take up and utilize
nutrients. However, while cancer cell metabolic abnormalities fuel tumor growth and alter tumor immune response, 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 a single agent and in combination with existing or emerging standards of care.
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 Oncaspar (pegaspargase), an E. coli-derived L-asparaginase enzyme, in combination with
chemotherapy generates much improved remission rates as compared with chemotherapy alone. Aeglea and other
companies have also reported clinical responses with arginine degrading enzyme treatment in some cancers known to be
6
arginine dependent. However, the clinical impact reported by other third parties appear limited as the microbial-derived
arginine-degrading enzyme elicited an immune response that appears to neutralize the activity of the drug and therefore
may result in limited clinical utility.
The use of microbial enzymes as human therapeutics is often limited by an immune response to a foreign protein.
We expect our enzyme product candidates, which are engineered from human proteins, may have more favorable drug-
like properties and be less likely to elicit an immune response compared with microbial enzymes. This is supported by our
experience with pegzilarginase to date in our clinical programs compared to clinical trials reported in the medical literature
with a bacterial-derived arginine depleting enzyme. We believe our approach may provide greater flexibility with respect to
the target amino acids that can be addressed.
Using pegzilarginase to enzymatically deplete extracellular arginine needed by some cancer cells provides an
approach that, when used alone or in combination with existing or emerging standards of care, has the potential to be an
effective treatment paradigm for cancer patients. Published literature suggests that a variety of cancers could potentially
respond to amino acid deprivation, which offers us several potential targets for cancer treatment opportunities.
Our Development Programs
Pegzilarginase Overview
Our lead product candidate, pegzilarginase, is an enhanced human arginase that enzymatically degrades the amino
acid arginine. Pegzilarginase is a recombinant, human Arginase 1 enzyme with modifications that enhance the stability
and arginine-degrading activity of the enzyme in human plasma, and we believe it may have a lower likelihood of
immunogenicity in patients than bacterial arginine-degrading enzymes. Our lead program, pegzilarginase, is in early
clinical development for two indications.
1.
2.
Arginase 1 Deficiency, which is a rare progressive autosomal recessive metabolic disease caused by a marked
decrease in the activity of the native arginase 1 enzyme, which appears to play a key role in the degradation of
arginine as part of the urea cycle.
Arginine dependent cancers, which demonstrate a potential vulnerability that leads to an increased
dependency on extracellular arginine
Pegzilarginase in Rare Genetic Disease
PEACE Global Pivotal Phase 3 Study of Pegzilarginase in Patients with Arginase 1 Deficiency: In December 2018,
we announced the design of our single, global pivotal Phase 3 PEACE trial to evaluate the safety and efficacy of
pegzilarginase. The trial is believed to be the first-ever investigative therapy that addresses the high arginine levels that
are the key drivers of this devastating disease for patients with Arginase 1 Deficiency. We designed the PEACE trial
based on input from the FDA and EMA. We expect to dose the first patient in the PEACE trial in the second quarter of
2019 and anticipate that topline data from the Phase 3 PEACE study will be available in the first quarter of 2021. PEACE
is a global, randomized, double-blind, placebo-controlled trial designed to assess the effects of treatment with
pegzilarginase versus placebo over 24 weeks with a primary endpoint of plasma arginine reduction from baseline. The
primary endpoint is intended to assess the effectiveness of pegzilarginase in lowering plasma arginine levels given the
evidence that improved plasma arginine control has the potential to improve the clinical status and slow disease
progression in patients with Arginase 1 Deficiency. Secondary endpoints will include mobility and adaptive behavior as
assessments of clinically meaningful effects, in addition to safety and pharmacokinetics. The FDA and EMA indicated that
data from this Phase 3 PEACE trial showing plasma arginine reduction in conjunction with improvements in clinically
meaningful aspects of the disease may be sufficient to support a marketing application for pegzilarginase in Arginase 1
Deficiency.
We plan to enroll 30 (pediatric and adult) patients with Arginase 1 Deficiency. Patients enrolled in the trial are
randomized on a two-to-one basis to receive weekly infusions of pegzilarginase (0.1 mg/kg), or placebo for the double-
blind treatment period of 24 weeks. Dose adjustments during this period can be made to optimize plasma arginine control
for levels outside the range of 50 to 150 µM.
Patients will be considered eligible for the PEACE trial during screening if they exhibit average plasma arginine of
greater than 250 µM, are greater than two years of age and have a deficit in at least one dimension of mobility or adaptive
behavior. All assessments and dose adjustments will be conducted in a blinded fashion at pre-specified intervals. Patients
will remain on current disease management for the duration of the Phase 3 PEACE trial.
In addition to the primary endpoint of plasma arginine reduction, secondary endpoints in the Phase 3 PEACE trial
will evaluate pegzilarginase relative to placebo through a multi-dimensional assessment of clinical response. A clinical
7
responder is defined as a patient exhibiting improvement from baseline in mobility (2 Minute Walk Test or Functional
Mobility Assessment) or adaptive behavior (Vineland Adaptive Behavior Scale). Additional secondary endpoints include a
response rate for each individual assessment, the total number of mobility and adaptive behavior responses per patient
and the proportion of patients with plasma arginine below medical guidance of 200 µM. Additional interim clinical data
from our Phase 1/2 clinical trial reporting repeat dose administration of pegzilarginase is expected in the first half of 2019.
Phase 1/2 Open Label Study of Pegzilarginase in Patients with Arginase 1 Deficiency: We are conducting a Phase
1/2 clinical trial for the treatment of patients with Arginase 1 Deficiency to assess the safety and clinical activity of
pegzilarginase. The Phase 1/2, multi-center, single-arm, open label trial of pegzilarginase enrolled 16 adult and pediatric
patients with Arginase 1 Deficiency in the United States, Canada, and Europe, exceeding the initial target of 10 patients.
The Phase 1/2 dosing was completed in February 2019, with 14 patients completing 8 weeks of repeat dosing. The trial is
investigating both single ascending doses (Part 1) and repeated dosing (Part 2). The primary endpoint of the trial is safety
and tolerability of intravenous administration of pegzilarginase in patients with Arginase 1 Deficiency. The trial also will
evaluate the pharmacokinetic and pharmacodynamic effects of repeated doses of pegzilarginase on plasma arginine
levels. Additionally, patients who complete the repeat dose part of the Phase 1/2 trial are eligible to enroll in a long-term
open label extension study.
In October 2018, we announced new positive interim clinical data at the 2018 American Society of Human Genetics
(ASHG) Conference from our ongoing Phase 1/2 trial of pegzilarginase in patients with Arginase 1 Deficiency. We
reported clinical improvements with repeat dose administration of pegzilarginase after only eight weeks, including
consistent reduction of arginine and improvement in mobility or adaptive behavior. Pegzilarginase was generally well
tolerated; most treatment-related adverse events were mild, and while investigators considered some of the
hypersensitivity events as serious adverse events, they were generally manageable with standard measures and all
patients continued study treatment. Additionally, we completed and exceeded our enrollment target with 16 patients in the
Phase 1/2 clinical trial.
If the data from our Phase 1/2 and open label extension trials are supportive, we may seek to accelerate our
development plan for pegzilarginase by requesting to use established regulatory pathways, such as Breakthrough
Therapy Designation. Regardless of whether we receive this designation, we anticipate initiating a pivotal trial in the
second quarter of 2019 and, if successful, we expect that this trial would support registration filing in the US and Europe.
Phase 1/2 Open Label Extension Study to Evaluate the Long-Term Safety, Tolerability and Effects of Pegzilarginase
in Patients with Arginase 1 Deficiency Who Received Treatment in a Previous Study: After completing the repeat dose
portion of the Phase 1/2 study and at least four weeks of post-treatment observation, patients are allowed to continue
treatment with pegzilarginase by enrolling in a long-term open label extension study. This study is expected to provide
important insights into the longer term clinical effects of reducing plasma arginine. In December 2017, we announced the
initiation of this study with the recruitment of two patients who had previously completed the repeat dose phase (Part 2) of
the previous study. Currently, 10 patients have enrolled in the long-term open label extension study, and we expect to
enroll 13 patients by the second quarter of 2019.
Regulatory Designations: We have obtained orphan drug designation from the FDA and EMA, as well as Fast Track
Designation from the FDA, for pegzilarginase for the treatment of patients with Arginase 1 Deficiency. In addition, we
announced in October 2018 that the FDA granted a rare pediatric disease designation for pegzilarginase for the treatment
of Arginase 1 Deficiency. This designation by the FDA confirms our eligibility to receive a rare pediatric disease priority
review voucher upon approval of a qualifying biologics license application for pegzilarginase if completed before October
1, 2022.
Pegzilarginase in Cancer
Background Biology: We are developing pegzilarginase to target arginine-dependent cancers. Arginine is considered
a semi-essential amino acid because, under conditions such as enhanced proliferation, tissue injury, or stress, cells are
unable to make enough arginine and are therefore dependent on an extracellular source. 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
in experimental tumor models.
Many types of cancers lack the ability to synthesize intracellular arginine due to lack of expression of
argininosuccinate synthase1 (ASS1), argininosuccinate lyase (ASL), or ornithine transcarbamoylase (OTC), which are
enzymes in the urea cycle. As a result, these cancers depend on extracellular arginine without which they may exhibit
8
reduced protein synthesis and proliferation, and undergo autophagy and/or apoptosis, establishing a correlation between
their inability to synthesize arginine and vulnerability to arginine deprivation. Based on data from our preclinical studies
and the published scientific and medical literature, arginase 1 degrades arginine to ornithine and urea. Ornithine cannot
be used to make arginine by cancer cells that lack expression of OTC, ASS or ASL. Pezilarginase is intended to target
cancer cells that depend on extracellular arginine by depriving the cells of the amino acid that is essential for cell survival
and tumor growth. We believe pegzilarginase has the potential to provide an effective treatment option in combination with
existing or emerging standards of care for patients with some cancers.
Diagnostic Potential: 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 associated
with cancer cell sensitivity to arginine depletion. Our preclinical research has focused on the reduction or loss of
expression of ASS1 as the predominant cause of tumor arginine dependence. We found that low or no expression of
ASS1 in nonclinical patient derived xenograft models of melanoma or SCLC can result in sensitivity to arginine depletion
by pegzilarginase.
Phase 1/2 Combination Trial in Patients with SCLC: In the first quarter of 2018, we initiated an open label Phase 1b
clinical collaboration with Merck to evaluate the combination of pegzilarginase with Merck’s anti-PD1 therapy,
pembrolizumab, for the treatment of patients with SCLC that relapsed or progressed after platinum-based chemotherapy.
The primary objectives in Phase 1b were to determine the safety and recommended dose of pegzilarginase to be used in
combination with pembrolizumab in Phase 2. In March 2019, we announced the Phase 1b topline data from 16 patients
enrolled across three cohorts. The recommended Phase 2 dose was established at 0.27 mg/kg/week of pegzilarginase in
combination with pembrolizumab. Of nine patients in Phase 1b treated at the recommended Phase 2 dose, three patients
had stable disease at 9 weeks, one partial response was observed, and three patients remained on treatment as of the
data cutoff. The safety profile was consistent with pegzilarginase monotherapy observations.
We initiated enrollment in open label Phase 2 in December 2018 with topline data expected in the first half of 2020.
The Phase 2 primary objective is objective response rate (ORR), and secondary objectives include safety, clinical benefit
rate, time to response, duration of response, progression free survival (PFS), and overall survival.
Phase 1 Dose Escalation Trial of Pegzilarginase in Patients with Advanced Solid Tumors: In October 2015, we
initiated the Phase 1 open label, multiple dose, dose escalation clinical trial in patients with advanced solid tumors. The
primary objective of dose-escalation is to determine the maximum tolerated dose, and secondary objectives are to
evaluate the safety, tolerability, and pharmacokinetic profile of pegzilarginase. The inclusion criteria include patients with
locally advanced or metastatic solid tumors that failed to respond to or progressed under standard treatment, could not
tolerate standard therapies, or for which no standard therapy exists.
In December 2017, we reported topline results of the dose escalation trial in which 40 patients were enrolled. The
maximum tolerated dose was established at 0.33 mg/kg weekly by intravenous infusion, based on observations of
reversible rash and reversible tremor at 0.40 mg/kg/week. Two dose-limiting toxicities (DLT) were observed: failure to
thrive and maculopapular rash. Other treatment-related serious or Grade 3/4 adverse events (AEs) that were not DLTs
per protocol, including those that occurred after the DLT window, were hypophosphatemia, anemia (developed from a
Grade 1 baseline), neutropenia (developed from a Grade 1 baseline), tremor, weakness, and transient hypertension.
Treatment-related AEs in 10% or more of patients included nausea, stomatitis/mouth sores, fatigue, vomiting, rash,
decreased appetite, and diarrhea, which were primarily Grades 1 or 2. Other serious adverse events, including death,
occurred on study but were not considered related to pegzilarginase treatment. Most patients discontinued due to disease
progression, and only one patient discontinued due to an adverse event that was considered related to pegzilarginase
(tremor). Clinical proof of mechanism was demonstrated, with a rapid and sustained reduction of plasma arginine to levels
substantially less than the normal range in cancer patients. Additionally, preliminary evidence suggesting clinical activity
was observed in two patients with forms of melanoma who had stable disease longer than 12 weeks while receiving
pegzilarginase.
Upon completion of the dose escalation in patients with advanced solid tumors, we initiated three separate cohort
expansions of patients with SCLC, uveal melanoma, and cutaneous melanoma. These cancer types were selected
because nonclinical studies and the medical literature suggested that a significant fraction of patients are expected to
have cancers that are dependent on extracellular arginine. The primary endpoint of each cohort expansion is to assess
the safety of pegzilarginase in patients with each tumor type. Secondary endpoints include the assessment of
pharmacokinetics, pharmacodynamics and clinical response. We plan to also use the data to inform the viability of
companion diagnostic development, which has the potential to enrich patient populations with the greatest likelihood of
clinical success.
9
In March 2019, we announced the completion of enrollment to three separate cohort expansions of patients with
heavily pre-treated SCLC, uveal melanoma, and cutaneous melanoma, with clinical data expected to be submitted for
publication later in 2019. We previously presented interim clinical data at the European Society for Medical Oncology
(ESMO) 2018 Congress in October 2018, demonstrating that pegzilarginase monotherapy resulted in anti-tumor activity in
heavily pre-treated patients with advanced uveal and cutaneous melanoma. Across the two advanced melanoma cohorts,
28 patients were enrolled with one confirmed partial response observed and eight patients with stable disease at 8 weeks.
Three patients experienced treatment-related, Grade 3 serious adverse events, including asthenia and failure to thrive,
vomiting and dehydration. For the SCLC cohort, no objective responses and no new safety findings were observed in the
13 heavily-pretreated patients in the single agent expansion arm, which completed enrollment in December 2018. Anti-
tumor activity appeared greater in melanomas lacking argininosuccinate synthetase 1 (ASS1) expression, which is
consistent with preclinical studies that suggest tumors lacking ASS1 expression are dependent on extracellular arginine
for survival. Additionally, pegzilarginase was shown to rapidly and sustainably deplete plasma arginine. The results,
combined with preclinical evidence of synergy with immune checkpoint inhibitors, support further clinical evaluation of
pegzilarginase in immunotherapy combinations.
Preclinical Pipeline
AEB4104 in Patients with Homocystinuria
AEB4104 is a novel recombinant human enzyme that degrades the amino acid homocysteine and its oxidized form
homocystine. Aeglea is developing AEB4104 for the treatment of patients with cystathionine beta synthase (CBS)
deficiency, also known as Classical Homocystinuria.
Homocystinuria is an inherited disorder of methionine metabolism caused by mutations in CBS and other genes
leading to elevated levels of plasma and tissue homocysteine and homocystine, which affect multiple organ systems and
cause early mortality. Current disease management, which includes dietary protein (methionine) restriction, vitamins, and
betaine supplementation, is insufficient to effectively control the more severe forms of the disease.
In October 2018, we announced preclinical efficacy data on our AEB4104 homocystinuria program at the 2018
American Society of Human Genetics (ASHG) Conference, demonstrating that AEB4104 improved survival and correction
of disease-related abnormalities in a preclinical model of homocystinuria. AEB4104 decreased homocysteine and
homocystine levels in the plasma, including the cystathionine beta synthase (CBS) deficient model (CBS-/-) and the high
methionine diet-induced model of homocystinuria. Treatment with AEB4104 prevented early mortality, stopped disease
progression, and reversed liver pathology in the cystathionine beta synthase (CBS) deficient model (CBS-/-).
We believe homocystinuria represents a viable market opportunity with significant unmet medical need, which we
plan to address by continuing our preclinical development of AEB4104. Given the severity of the disease, the limitations of
current disease management approaches, and the data demonstrating improved survival in a preclinical model of the
disease, Aeglea initiated IND-enabling activities and is progressing manufacturing, pharmacology and other activities to
support preclinical toxicology studies and advancement towards clinical trials. We anticipate filing an IND or CTA in the
first quarter of 2020.
AEB5100 in Patients with Cystinuria
AEB5100 is a novel recombinant human enzyme that degrades plasma cystine and cysteine. Aeglea is developing
AEB5100 for the treatment of patients with cystinuria, a rare genetic disease characterized by frequent and recurrent
kidney stone formation requiring multiple procedural interventions, and by an increased risk of chronic kidney disease.
Cystinuria occurs due to genetic mutations in amino acid transporters that lead to increased amounts of cystine in the
urine. This results in high cystine concentrations in the urine and formation of kidney stones.
In October 2018, we announced preclinical efficacy data on our AEB5100 cystinuria therapeutic program at the 2018
American Society of Nephrology (ASN) Conference, demonstrating that AEB5100 lowered blood levels of cystine,
decreased the amount of cystine in the urine and reduced both cystine crystal and kidney stone formation in a preclinical
model of cystinuria. Given the compelling preclinical data and the limitations of current disease management approaches,
Aeglea initiated IND-enabling activities and is progressing manufacturing, pharmacology and other activities to support
preclinical toxicology studies and advancement towards clinical trials. We anticipate filing an IND or CTA in the second
half of 2020.
10
AEB3103
AEB3103 is an engineered human enzyme that targets the degradation of the amino acid cysteine/cystine. Initial
efficacy testing in preclinical models demonstrated significant depletion of glutathione and significantly increased levels of
ROS in HMVP2 prostate cancer cells.
AEB2109
AEB2109 is an engineered human enzyme that targets the degradation of the amino acid methionine. 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 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.
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, 2018, we are the owner of seven U.S. patents, expiring between 2029 and 2032, absent any
extensions; three patents of which are directed to the compositions or methods of preparing pegzilarginase, and three
patents of which are directed to compositions of methionine-gamma lyase enzymes, methods of treatment using the
enzymes, nucleic acids encoding the enzymes, or methods of identifying the enzymes. One U.S. patent is to arginase
variants other than pegzilarginase. As of December 31, 2018, we are the owner of three U.S. patent applications that
include methods of treatment that can use pegzilarginase. As of December 31, 2018, we are the owner of one U.S. patent
application that includes methionine-gamma-lyase enzymes that can include AEB2109 having L-methionine degrading
activity. As of December 31, 2018, we are also the owner of three pending U.S. patent provisional applications that
include methods of treatment that can use pegzilarginase.
As of December 31, 2018, we also controlled two U.S. patents and five U.S. patent applications, exclusively licensed
to us by the Board of Regents of The University of Texas System, or the University. The two U.S. patents include
compositions, methods of treatment, or nucleic acids encoding the compositions that include AEB2109. One U.S. patent
application is directed to cystathionine-gamma-lyase variants other than AEB2109. One U.S. patent application is directed
to a method of treatment that include using AEB2109. Three of the U.S. patent applications include compositions or
methods of treatment that include AEB3103. One U.S. application includes enzyme variants and methods of treatment
using the enzyme variants that can include AEB4104. As of December 31, 2018, we also controlled one U.S. provisional
patent application that includes compositions that include AEB5100. Any patents and patents issuing from the foregoing
licensed U.S. patent applications are expected to expire between 2034 to 2038, absent any adjustments or extensions.
As of December 31, 2018, we owned a total of eight patents and five patent applications in foreign jurisdictions
variously including: Australia, Canada, China, Europe, Japan, Hong Kong, Taiwan, and South Korea. As of December 31,
2018, we are the owner of two PCT applications. Any issued foreign patents or patents issuing from these foreign patent
applications, are expected to expire between 2029 and 2038, absent any adjustments or extensions. These owned foreign
patent applications and patents include compositions of pegzilarginase or methods of using pegzilarginase to treat cancer
or arginine 1 deficiency, or compositions and methods of using methionine-gamma-lyase enzyme variants. As of
December 31, 2018, we also controlled one Europe patent, three PCT applications, and thirteen pending foreign patent
applications in Australia, Canada, China, Europe, Israel, Japan and South Korea, which are also exclusively licensed to
us by the University. The controlled foreign Europe patent includes cystathionine-gamma-lyase variants, their formulations
and use in treatment in cancer and includes AEB2109. The controlled foreign patent applications include compositions
and their use in treatment that can include AEB2109 or AEB3103. One PCT application includes compositions that can
include AEB4104. Any foreign patent and foreign patents issuing from these controlled foreign applications are expected
to expire between 2034 and 2038, 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
11
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, develop, manufacture, and market 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. In January 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 to Aeglea. We have also entered into amendments
to the Restated License in August 2017, December 2017, and December 2018 to license additional patent applications.
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 $0.5 million 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, 2018, we have
paid $0.1 million under these license agreements.
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.
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 expired on August 31, 2018. For the year ended
December 31, 2018, we paid $0.2 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. The contract ended in May
2018 with the full $19.8 million in grant proceeds collected and recognized as revenue under the Grant Contract.
Pursuant to the Grant Contract, we granted 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 reduced to less than one percent after
12
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).
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.
Recent advances in gene-based medicine, such as gene therapy have resulted in market approvals of DNA and RNA-
based therapeutics in certain rare genetic diseases. However, no gene therapy drugs have yet to demonstrate clinical
success in the type of complex diseases targeted by our research approach with novel enzyme therapeutics. 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 rare
genetic disease and cancer.
Rare genetic disease. With respect to pegzilarginase for Arginase 1 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 1 Deficiency. The current medical management of patients with Arginase 1 Deficiency
includes dietary protein restriction, essential amino acid supplementation, and ammonia scavengers, which appears to
slow the disease progression in some cases. Ammonia scavengers such as Horizon Pharma’s RAVICTI (glycerol
phenylbutyrate) and BUPHENYL (sodium phenylbutyrate) are used for the management of elevated blood ammonia in
urea cycle disorders in combination with dietary approaches. Erytech Pharma announced a potential collaboration to
explore preclinical development of an Arginase 1 Deficiency candidate.
Cancer. 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. Our product candidates may compete with many such therapies whether used in
combination with or as an adjunct to other cancer therapies. 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, most of these therapies 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
13
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 Athenex’s pegylated native human arginase 1. Additionally, Calithera
Biosciences is targeting a therapy that inhibits arginase 1 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 pegzilarginase.
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
and clinical studies and intend to do so for future studies as well. We may qualify additional manufacturers to provide
potential alternative sources for the active pharmaceutical ingredient and fill-and-finish services for pegzilarginase as the
compound progresses through clinical development, prior to seeking marketing approval from FDA. We believe we have
sufficient supplies of pegzilarginase for our ongoing and currently expected Phase 1/2 clinical trial to evaluate the
combination of pegzilarginase with pembrolizumab for the treatment of patients with small cell lung cancer and the Phase
3 pivotal trial in conjunction with the open label extension study for the treatment of patients with Arginase 1 Deficiency.
The Diosynth Agreement
In November 2018, we entered into a master services agreement (Diosynth Agreement) with Fujifilm Diosynth
Biotechnologies UK Limited, Fujifilm Diosynth Biotechnologies Texas, LLC, and Fujifilm Diosynth Biotechnologies U.S.A.,
Inc. (collectively, Fujifilm). Under the Diosynth Agreement, Fujifilm provides research, development, testing and
manufacturing services of certain of our products, which are or will be designated as programs pursuant to scope of work
agreements. The fees for such services are or will be set out in each scope of work agreement. We may pay additional
fees in consideration of certain research and development and technical consultancy services in relation to the
procurement, testing and management of consumables, subcontracted work (including delivery of material to and from
such subcontractors), process-specific equipment (including installation and qualification thereof), modifications and
special waste. Either party may terminate the Diosynth Agreement by giving six months written notice to the other party,
provided there are no uncompleted programs existing at the date such notice is given, or upon material breach. We may
also be required to pay Fujifilm cancellation fees in the event that we decide to terminate any scope of work prior to its
completion, calculated as a percentage of the fees payable under the applicable scope of work agreement. Additionally,
upon providing written notice, we may cancel certain stages or programs for convenience, and Fujifilm may terminate for
certain unforeseen technical errors.
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.
14
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 some 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.
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.
15
In addition, the manufacturer of an investigational drug in a Phase 2 or Phase 3 clinical trial 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.
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 an
annual program fee for each prescription product. Beginning in fiscal year 2018, this annual program fee replaces the
annual product and established fees. These fees are typically increased annually. 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 intended indication.
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.
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.
16
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.
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.
17
Rare pediatric disease priority review voucher program
Under the Rare Pediatric Disease Priority Review Voucher program, FDA may award a priority review voucher to the
sponsor of an approved marketing application for a product that treats or prevents a rare pediatric disease. The voucher
entitles the sponsor to priority review of one subsequent marketing application.
A voucher may be awarded only for an approved rare pediatric disease product application. A rare pediatric disease
product application is an NDA or BLA for a product that treats or prevents a serious or life-threatening disease in which
the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years; in general, the
disease must affect fewer than 200,000 such individuals in the U.S.; the NDA or BLA must be deemed eligible for priority
review; the NDA or BLA must not seek approval for a different adult indication (i.e., for a different disease/condition); the
product must not contain an active ingredient that has been previously approved by FDA; and the NDA or BLA must rely
on clinical data derived from studies examining a pediatric population such that the approved product can be adequately
labeled for the pediatric population. Before NDA or BLA approval, FDA may designate a product in development as a
product for a rare pediatric disease, but such designation is not required to receive a voucher.
To receive a rare pediatric disease priority review voucher, a sponsor must notify FDA, upon submission of the NDA
or BLA, of its intent to request a voucher. If FDA determines that the NDA or BLA is a rare pediatric disease product
application, and if the NDA or BLA is approved, FDA will award the sponsor of the NDA or BLA a voucher upon approval
of the NDA or BLA. FDA may revoke a rare pediatric disease priority review voucher if the product for which it was
awarded is not marketed in the U.S. within 365 days of the product’s approval.
The voucher, which is transferable to another sponsor, may be submitted with a subsequent NDA or BLA and
entitles the holder to priority review of the accompanying NDA or BLA. The sponsor submitting the priority review voucher
must notify FDA of its intent to submit the voucher with the NDA or BLA at least 90 days prior to submission of the NDA or
BLA and must pay a priority review user fee in addition to any other required user fee. FDA must take action on an NDA
or BLA under priority review within six months of receipt of the NDA or BLA.
The Rare Pediatric Disease Priority Review Voucher program was reauthorized in the 21st Century Cures Act,
allowing a product that is designated as a product for a rare pediatric disease prior to October 1, 2020 to be eligible to
receive a rare pediatric disease priority review voucher upon approval of a qualifying NDA or BLA prior to October 1,
2022.
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 and related process impurities, 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.
18
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.
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 U.S.
PTO 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. The first biosimilar was approved by FDA in 2015, 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.
19
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.
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 Drug Evaluation and Research and
by the FDA’s Center for Devices and Radiological Health. Approval and clearance of a companion diagnostic also
requires a high level of coordination between the drug or biologic manufacturer and device manufacturer, if different
companies.
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 a substantial application fee, which is typically increased annually. In addition, PMAs 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 has adequate sensitivity and specificity, has adequate specimen and reagent stability,
and 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 register their establishment(s), including payment of an annual establishment registration fee, and list their device(s)
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.
20
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.
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
21
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.
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. The reported data
are posted in searchable form on a public website on an annual basis. Failure to submit required information may result in
civil monetary penalties. Effective January 1, 2022, we will also be required to report on transfers of value to physician
assistants, nurse practitioners or clinical nurse specialists, certified registered nurse anesthetists, and certified nurse-
midwives.
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
22
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
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
The ACA 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 Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-
sale discounts (increased to 70% beginning in 2019) 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.
On January 20, 2017, federal agencies with authorities and responsibilities under the ACA were directed to waive,
defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal burden
on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or
manufacturers of pharmaceuticals or medical devices. More recently, the Tax Cuts and Jobs Act was signed into law in
December 2017, which eliminated certain requirements of the ACA, including the individual mandate, and plans to repeal
all or portions of the ACA have also been suggested. We cannot predict whether these challenges will continue or
whether other proposals will be made or adopted, or what impact these efforts may have on us.
23
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
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.
24
Employees
As of December 31, 2018, we had a total of 61 full-time employees. 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, 2018, 2017 and 2016 and
our total assets as of December 31, 2018 and 2017, 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.
25
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 a 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 clinical trials of our most
advanced product candidate, pegzilarginase.
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 begun clinical development of
pegzilarginase. Our ability to generate revenue and become profitable depends upon our ability to successfully complete
the development of any of our product candidates, including pegzilarginase, for any of our target indications and to obtain
necessary regulatory approvals. To date, we have recognized revenue solely from a fully utilized 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, 2018,
2017, and 2016, we reported a net loss of $44.3 million, $27.2 million and $21.7 million, respectively. As of December 31,
2018, we had an accumulated deficit of $116.9 million. We have financed our operations primarily through private
placements of our preferred stock, the initial public offering, or IPO, of our common stock, follow-on public offerings of our
common stock, and collection of a research grant. We have devoted substantially all of our efforts to research and
development. Currently, we are only conducting clinical development for pegzilarginase for the treatment of Arginase 1
Deficiency and advanced solid tumors, including a combination clinical trial of pegzilarginase with pembrolizumab. 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;
conduct additional nonclinical studies and initiate clinical trials for our product candidates;
26
•
•
•
•
•
•
seek marketing approvals for any of our product candidates that successfully complete clinical trials, including
pivotal trials;
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, or the Health Authorities, to modify protocols of our clinical trials or perform studies in
addition to those that we currently anticipate. Even if pegzilarginase, 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 conducting clinical development for pegzilarginase for the treatment of
Arginase 1 Deficiency and advanced solid tumors, as well as a combination clinical trial of pegzilarginase with
pembrolizumab and are only in the nonclinical development stages for our remaining product candidates. 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
pegzilarginase.
In order to execute on our strategy of advancing the clinical development of our product candidates, we are currently
conducting multiple clinical trials for pegzilarginase, consisting of one Phase 1/2 clinical trial for the treatment of Arginase
1 Deficiency, one Phase 1 clinical trial for the treatment of patients with advanced solid tumors with multiple cohort
expansions, and one Phase 1/2 clinical trial to evaluate the combination of pegzilarginase with pembrolizumab for the
treatment of patients with small cell lung cancer. We have initiated the planned expansion cohorts of our Phase 1 trial of
pegzilarginase for the treatment of advanced solid tumors to study small cell lung cancer, uveal melanoma, and
cutaneous melanoma, and each of these histologies has been shown in published literature and preclinical studies to
demonstrate a dependence on arginine in a substantial proportion of tumors. If our product candidate fails to work as we
expect, or if we need to conduct additional studies to better understand the relationship between our product candidate
and clinical activity, our ability to assess the therapeutic effect, seek regulatory approval or otherwise begin or further
clinical development, could be compromised. For instance, we discontinued clinical development of pegzilarginase for the
treatment of the hematological malignancies acute myeloid leukemia (AML) and myelodysplastic syndrome (MDS) in
December 2017 due to lack of evidence of clinical benefit. Also, while there is an established link between seizures and
elevated levels of certain arginine metabolites, we may not be able to determine the relationship between clinical activity
and arginine and its metabolites, if any, for the treatment of Arginase 1 Deficiency. Any such events 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 pegzilarginase, in clinical trials
specific for a given tumor type and this will 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 pegzilarginase, 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.
27
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 in cancer trials 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. Additionally, clinical trials
that utilize a biomarker-based test to select patients are likely to take longer and require additional funding.
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 for any reason, including but not limited to a federal government shutdown, or
on acceptable terms, we would be forced to delay, reduce or eliminate our discovery and nonclinical development
programs, our ongoing clinical development, or any future clinical development or commercialization efforts.
Based upon our planned use of our cash, cash equivalents, and marketable securities as of December 31, 2018, in
conjunction with the net proceeds received from our public offering in February 2019, we estimate such funds will be
sufficient for us to fund completion of our global pivotal Phase 3 PEACE clinical trial and ongoing Phase 1/2 trial for the
treatment of patients with Arginase 1 Deficiency, our ongoing Phase 1 clinical trial for the treatment of patients with
advanced solid tumors, as well as our ongoing Phase 1/2 combination clinical trial of pegzilarginase with pembrolizumab
for the treatment of patients with small cell lung cancer. 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.
28
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, or CPRIT, which ended on May 31, 2018. As of
December 31, 2018, the full $19.8 million of grant proceeds had been collected. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, or if existing holders of warrants exercise their rights to
purchase common stock, 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, pegzilarginase. All of our product
candidates, other than pegzilarginase, are still in nonclinical development or nonclinical testing, and for
pegzilarginase, the early stages of clinical development. Existing and future clinical trials of our product
candidates, including pegzilarginase, 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, pegzilarginase, for the treatment of patients with
Arginase 1 Deficiency and advanced solid tumors, including a combination clinical trial of pegzilarginase with
prembrolizumab in patients with small cell lung cancer. 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
pegzilarginase. The success of pegzilarginase 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
as monotherapy or in combination with other products;
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.
29
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 initiated clinical trials with our lead product candidate, pegzilarginase. 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, can take many years to complete, and its outcome is inherently uncertain. Failure can
occur at any time during the clinical trial process.
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
and arginine metabolite levels due to administration of pegzilarginase in patients with Arginase 1 Deficiency, and a
reduction in blood arginine levels due to pegzilarginase in patients with advanced solid tumors, this data may not
necessarily be predictive of the final results of all patients intended to be enrolled in these ongoing clinical trials or in
future trials, and may also not be predictive of pegzilarginase’s ability to reduce arginine or arginine metabolite levels for
these patients over a longer term nor predictive of positive clinical outcomes. In addition, while we have announced
interim data from our ongoing clinical trials of pegzilarginase for the treatment of Arginase 1 Deficiency and advanced
solid tumors, such reports were based on unaudited data provided by our clinical trial investigators. An audit or
subsequent review of this data may change the conclusions drawn from this unaudited data provided by our clinical trial
investigators indicating less promising results than we anticipate. In addition, our observations of clinical improvements,
through clinician and assessor feedback or assessment tools in the Phase 1/2 open label study of pegzilarginase in
patients with Arginase 1 Deficiency after eight and twenty weeks of dosing may not be representative of our observations
with subsequently dosed patients out to eight weeks or longer. We have announced the design of our single, global
pivotal Phase 3 PEACE (Pegzilarginase Effect on Arginase 1 Deficiency Clinical Endpoints) trial to evaluate the safety
and efficacy of pegzilarginase. We expect to dose the first patient in the PEACE trial in the second quarter of 2019 and
anticipate that data from the Phase 3 PEACE study will be available in the first quarter of 2021. Furthermore, our ongoing
Phase 1/2 clinical trial for the treatment of patients with Arginase 1 Deficiency and our Phase 1 clinical trials for the
treatment of advanced solid tumors will primarily evaluate the safety of our product candidates. 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 enrolled subjects will complete trials on time or at all, 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 Health Authorities 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 Health Authorities 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;
geographic complexities of managing the design and completion of clinical trials across different Health
Authorities in the United States, Canada, Europe, etc.;
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;
30
•
•
•
•
•
•
•
•
•
•
•
•
•
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. For instance, in March
2018, a pediatric patient previously dosed in Part 1 of our Phase 1/2 clinical trial of pegzilarginase for the
treatment of Arginase 1 Deficiency withdrew from the trial due to personal reasons;
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 pegzilarginase, 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;
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 1 Deficiency or patients
with tumors, including the identification of patients with Arginase 1 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 dependent
on arginine that pegzilarginase 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 or privacy concerns;
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;
cease development of our product candidates;
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.
31
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, in June 2017, we delayed enrollment of
pediatric patients in our Phase 1/2 trial of pegzilarginase for the treatment of Arginase 1 Deficiency due to a difference in
opinion with the FDA on data required to support inclusion of pediatric patients. Although we reached an agreement with
the FDA in November 2017 and began dosing pediatric patients, the FDA may require additional information or studies to
be conducted, or impose conditions that could further delay or restrict our other planned clinical activities in the future. We
announced the design of our global pivotal Phase 3 PEACE trial in which we intend to study plasma arginine reduction
from baseline as our primary endpoint. However, evidence of stabilization or improvement of clinical signs and symptoms
of Arginase 1 Deficiency, such as our secondary endpoints with the assessment of clinical outcomes on mobility and
adaptive behavior, as well as clinician and caregiver global impressions of effectiveness, may be required in addition to
the primary endpoint to support approval. We may face difficulties or delays in enrolling our Phase 3 trial in Arginase 1
Deficiency because we are restricting enrollment to patients with baseline clinical abnormalities at a level that provides an
opportunity to demonstrate neuromotor and/or neurocognitive outcomes. If we are unable to demonstrate sufficient
improvement on such clinical endpoints, the FDA may determine that there is inadequate justification to support that the
endpoints we have chosen are reasonably likely to predict clinical benefit, which would potentially prohibit approval under
various approval pathways. For example, the FDA indicated that longer duration dosing may increase the likelihood of
seeing changes in clinical outcomes. 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.
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 Health 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
pegzilarginase for the treatment of patients with Arginase 1 Deficiency and advanced solid tumors, including a
combination clinical trial of pegzilarginase with pembrolizumab. 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
manufacturing and quality control standards required to be met by regulators, the number of patients the Health
Authorities 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 initiated early-stage clinical trials for pegzilarginase for the treatment of certain conditions. 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, in monotherapy or combination therapy, 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.
32
We are currently conducting clinical trials for pegzilarginase for the treatment of patients with Arginase 1 Deficiency
and advanced solid tumors, as well as a combination clinical trial of pegzilarginase with pembrolizumab in patients with
previously-treated small cell lung cancer. Given the nature of the patient populations enrolled in these trials, we have
observed and expect to continue to observe serious adverse events that could be related or unrelated to pegzilarginase.
In a Phase 1 trial of pegzilarginase for the treatment of patients with advanced solid tumors and a previously concluded
trial of pegzilarginase for the treatment of the patients with hematological malignancies AML and MDS, we have observed
serious adverse events in some patients, including death. In 2018, we reported results from these trials in which we
observed serious adverse events that were considered possibly or probably related to the administration of pegzilarginase
including asthenia, fatigue, failure to thrive, hypertension, diarrhea, nausea, vomiting, dehydration, dizziness, intracranial
hemorrhage, and encephalopathy manifested as acute agitation. In October 2018, we announced updated interim clinical
data from our ongoing Phase 1/2 trial of pegzilarginase for the treatment of patients with Arginase 1 Deficiency, in which
we observed 4 hypersensitivity events of at least moderate severity that were considered related to the administration of
pegzilarginase in 3 patients. Three of these hypersensitivity events were considered by investigators as serious adverse
events. These hypersensitivity events were due to the development of anti-drug antibodies to pegzilarginase.
Hypersensitivity reactions and immunogenicity manifest as anti-drug antibodies could impact the safety and efficacy of
pegzilarginase. Subjects in our ongoing and planned clinical trials with pegzilarginase may suffer minor, significant,
serious, or even life-threatening adverse events, including those that are drug-related. Subjects in our ongoing and
planned clinical trials may also suffer side effects not yet observed in any of our prior and ongoing clinical or nonclinical
studies, including, but not limited to, toxicities to the nervous system, liver, heart, lung, kidney, blood, pulmonary or
immune system. We have not dosed any of our other product candidates in humans.
Testing in animals, such as our primate studies for pegzilarginase, 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 some patients who lack the target enzyme, as is the case with patients with Arginase 1 Deficiency that we
are treating in our Phase 1/2 trial, open label extension study, and our future trials for this rare genetic disease. In
addition, our product candidates such as pegzilarginase 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 pegzilarginase are engineered from the
human genome, pegzilarginase is produced in E. coli. This manufacturing process could lead pegzilarginase 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
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 Health Authorities. More specifically,
many of our product candidates, including pegzilarginase, initially target indications that may be characterized as
orphan markets, which can prolong the clinical trial timeline if sufficient patients cannot be enrolled in a timely manner.
Arginase 1 Deficiency is a rare disorder, and there are no published reports of disease prevalence. Newborn screening
data for two reliably detected urea cycle disorders allowed disease experts to estimate the incidence of Arginase 1
Deficiency at 1:950,000 births. Assuming a less than normal life span, we believe that at least 600 individuals in global
addressable markets have Arginase 1 Deficiency. Presently, only 34 U.S. states and jurisdictions screen for Arginase 1
Deficiency, and screening in Europe is not universal. Due to screening requirements and enrollment restrictions in our
clinical trial protocol, or any additional restrictions that may be imposed by regulatory agencies, not all pediatric patients
may be eligible for inclusion in our planned global pivotal Phase 3 trial. To date, we have identified more than 170 patients
in the global addressable markets, primarily in the U.S. and Europe.
33
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 1 Deficiency suffer from heightened levels of ammonia, or
hyperammonemia. Horizon Pharma plc has gained approval for its products RAVICTI (glycerol phenylbutyrate) and
BUPHENYL (sodium 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
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.
The safety or efficacy profile of pegzilarginase may differ in combination therapy with other existing or future
drugs, and therefore may preclude its further development or approval, which would materially harm our
business.
From time to time, our commercialization strategy may include the combination of our product candidates with third-
parties’ products or product candidates. For example, we are currently conducting a combination trial with Merck to
evaluate the combination of pegzilarginase with Merck’s anti-PD-1 therapy, KEYTRUDA® (pembrolizumab), for the
treatment of patients with small cell lung cancer. These combination studies involve additional risks due to their reliance
on circumstances outside our control, such as those relating to the availability and marketability of the third-party product
involved in the study. Although Merck has agreed to provide pembrolizumab in connection with our ongoing combination
trial, we may be unable to secure and maintain a sufficient supply of such third-party products when needed on
commercially reasonably terms. Any such shortages could cause us to delay or terminate our combination trials.
It is also difficult to predict the way in which pegzilarginase will interact with third-party products used in combination
clinical trials. As a result, such combination trials may demonstrate reduced efficacy, increase or exacerbate side effects
that have been seen with pegzilarginase alone, or result in new side effects that have not previously been identified with
pegzilarginase alone. In addition, data obtained from any combination trials may be subject to a variety of interpretations.
For instance, positive data may not guarantee the ability to move forward due to changes in the landscape for the
treatment of targeted indications, and failure to achieve our primary endpoints may not necessarily preclude a viable
commercial path. Any undesirable side effects, lack of efficacy seen in combination trials, changing regulatory and
commercial requirements for approval, differing interpretation of clinical data or other unforeseen circumstances may
affect our ability to continue with and obtain regulatory approval for the combination therapy, as well as our ability to
continue with and obtain regulatory approval for pegzilarginase monotherapy.
34
Further, evaluating pegzilarginase in combination with other products in clinical development may require us to
establish collaborations, licensing arrangements or alliances with third parties. There is no assurance that we will be able
to enter into such arrangements on favorable terms, or at all.
Even though we have obtained orphan drug designation for pegzilarginase in the United States and Europe for
the treatment of hyperargininemia, we may not obtain or maintain orphan drug exclusivity for pegzilarginase 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 the same disease for that time
period. The applicable period is seven years in the United States and ten years in the European Union. 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.
In March 2015, we obtained orphan drug designation in the United States for pegzilarginase for the treatment of
patients with Arginase 1 Deficiency. In July 2016, we also received orphan drug designation in Europe for pegzilarginase
for the treatment of patients with Arginase 1 Deficiency. A company that first obtains FDA or EMA approval for a
designated orphan drug for the designated rare disease or condition receives orphan drug marketing exclusivity for that
drug for the designated disease 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 pegzilarginase for the treatment of Arginase 1
Deficiency in the United States and Europe, we may not be the first to obtain marketing approval for the orphan-
designated indication in these jurisdictions due to the uncertainties associated with developing pharmaceutical product
candidates. We may also seek to obtain orphan drug designations in other international jurisdictions. However, there is no
guarantee that we would be able to do so on a timely basis, or at all. 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.
A Rare Pediatric Disease designation by the FDA does not guarantee that the NDA or BLA for the product will
qualify for a priority review voucher upon approval, and it does not lead to a faster development or regulatory
review process, or increase the likelihood that any of our product candidates will receive marketing approval.
Under the Rare Pediatric Disease Priority Review Voucher program, upon the approval of a qualifying BLA or NDA
for the treatment of a rare pediatric disease, the sponsor of such an application would be awarded a rare pediatric disease
priority review voucher that can be used to obtain priority review for a subsequent BLA or NDA. In September 2018, the
FDA notified us that we obtained Rare Pediatric Disease designation for pegzilarginase for the treatment of patients with
Arginase 1 Deficiency. If a product candidate is designated before October 1, 2020, as is the case with pegzilarginase, the
sponsor of a qualifying NDA or BLA for such a product is eligible to receive a voucher if the NDA or BLA is approved
before October 1, 2022. However, there is no guarantee that any of our product candidates will be approved by that date,
or at all, and, therefore, we may not be in a position to obtain a priority review voucher prior to expiration of the program,
unless Congress further reauthorizes the program. Additionally, designation of a drug for a rare pediatric disease does not
guarantee that a BLA will meet the other eligibility criteria for a rare pediatric disease priority review voucher at the time
35
the application is approved. Finally, a Rare Pediatric Disease designation does not lead to faster development or
regulatory review of the product, or increase the likelihood that it will receive marketing approval.
Failure to obtain marketing approval in international jurisdictions would prevent our product candidates from
being marketed abroad.
In order to market and sell our products in the European Union and many other jurisdictions, we or our third-party
collaborators must obtain separate marketing approvals and comply with numerous and varying regulatory requirements.
The approval procedure varies among countries and can involve additional testing and different criteria for approval. The
time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory
approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In
addition, in many countries outside the United States, it is required that the product be approved for reimbursement before
the product can be approved for sale in that country. We, or our third-party collaborators, may not obtain approvals from
regulatory authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval
by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United
States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. However,
failure to obtain approval in some countries or jurisdictions may compromise our ability to obtain approval elsewhere. We
may not be able to file for marketing approvals and may not receive necessary approvals to commercialize our products in
any market.
The market opportunities for our product candidates may be limited to those patients who are ineligible for or
have failed prior treatments.
Cancer therapies are sometimes characterized as first-line, second-line or third-line based on the order they should
be used in relation to other products, and the FDA often approves new therapies initially only for third-line use. Initial
approvals for new cancer therapies are often restricted to later lines of therapy for patients with advanced or metastatic
disease, limiting the number of patients who may be eligible for such new therapies, which may include our product
candidates.
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 1 Deficiency or who
have advanced solid tumors 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 pegzilarginase, are based on estimates. We expect our
product candidates targeting rare diseases to target the smaller patient populations that suffer from the respective
diseases we seek to treat. 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. Additionally, our
assumptions regarding the addressable market may be incorrect and the addressable market may change over time,
including from the announcement date of a product candidate to the approval by Health Authorities and
commercialization. Even if we obtain significant market share for our product candidates, because certain of the potential
target populations are small, we may never achieve profitability without obtaining regulatory approval for additional
indications.
36
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
pegzilarginase 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 1 Deficiency include dietary protein restriction and, in some instances, nitrogen-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. We will also have to compete with
other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. 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. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from
product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in
our search for third parties to assist us with the sales and marketing efforts of our product candidates. 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.
37
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
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 include patients suffering from Arginase 1
Deficiency. Patients with Arginase 1 Deficiency may also benefit from taking RAVICTI (glycerol phenylbutyrate). Erytech
Pharma announced a potential collaboration to explore preclinical development of an Arginase 1 Deficiency candidate.
We also face intense competition from companies developing products and therapies to treat cancer. For example,
Polaris Group 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 management, 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. In addition, approved products
may be used outside of the approved patient population, particularly in cancer, where approved drugs often receive
preferential commercial and regulatory treatment on new indications and alternative lines of therapy. 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.
38
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.
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. government has 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.
39
Furthermore, some of our target indications, including for Arginase 1 Deficiency for pegzilarginase, 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 a clinical-stage biotechnology company with a limited operating history, and, as of December 31, 2018, had
only 61 employees, including four 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 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. 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 and clinical 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.
40
We may not be successful in our efforts to identify additional product candidates. Due to our limited resources
and access to capital, we must prioritize development of certain product candidates, which may prove to be
wrong and may adversely affect our business.
Although we intend to explore other therapeutic opportunities, in addition to the product candidates that we are
currently developing, we may fail to identify viable new product candidates for clinical development for a number of
reasons. If we fail to identify additional potential product candidates, our business could be materially harmed.
Research programs to pursue the development of our existing and planned product candidates for additional
indications and to identify new product candidates and disease targets require substantial technical, financial and human
resources whether or not they are ultimately successful. Our research programs may initially show promise in identifying
potential indications and/or product candidates, yet fail to yield results for clinical development for a number of reasons,
including:
•
•
•
•
the research methodology used may not be successful in identifying potential indications and/or product
candidates;
potential product candidates may, after further study, be shown to have harmful adverse effects or other
characteristics that indicate they are unlikely to be effective drugs;
it may take greater human and financial resources than we will possess to identify additional therapeutic
opportunities for our product candidates or to develop suitable potential product candidates through internal
research programs, thereby limiting our ability to develop, diversify and expand our product portfolio; or
alternative research or therapeutic methodologies may be more efficient than the research approaches
provided by Aeglea.
Because we have limited financial and human resources, we intend to initially focus on research programs and
product candidates for a limited set of indications. As a result, we may forego or delay pursuit of opportunities with other
product candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of
success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable
market opportunities.
Accordingly, there can be no assurance that we will ever be able to identify additional therapeutic opportunities for
our product candidates or to develop suitable potential product candidates through internal research programs, which
could materially adversely affect our future growth and prospects. We may focus our efforts and resources on potential
product candidates or other potential programs that ultimately prove to be unsuccessful.
If we fail to develop additional product candidates, our commercial opportunity will be limited.
Developing and obtaining regulatory approval for and commercializing any additional product candidates we identify
will require substantial additional funding and is prone to the risks of failure inherent in medical product development. We
cannot provide you any assurance that we will be able to successfully advance additional product candidates, if any,
through the development process.
Even if we receive FDA approval to market additional product candidates for the treatment of the diseases we target,
we cannot assure you that any such product candidates will be successfully commercialized, widely accepted in the
marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and
commercialize additional product candidates, our commercial opportunity will be limited. Moreover, a failure in obtaining
regulatory approval of additional product candidates may have a negative effect on the approval process of other product
candidates of ours or result in losing approval of any approved product candidate.
41
Our information technology systems, or those used by our CROs, contractors or consultants, may fail or suffer
security breaches, which could harm our business and operations.
Cyberattacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to
detect. Despite the implementation of security measures, our information technology systems and those of our strategic
partners and third-parties on whom we rely are vulnerable to cyberattacks, 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 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, it could result in material negative consequences for
us including interruptions in our operations, the operations of our strategic partners, or our manufacturers or suppliers,
misappropriation of confidential business information and trade secrets, disclosure of corporate strategic plans, and result
in material disruptions of our product candidate development programs. For example, 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 confidential or proprietary information, we could incur
liability or the further development of our product candidates could be delayed.
We depend on our information technology and infrastructure.
We rely on the efficient and uninterrupted operation of information technology systems to manage our operations, to
process, transmit, and store electronic and financial information, and to comply with regulatory, legal and tax
requirements. We also depend on our information technology infrastructure for communications among our personnel,
contractors, consultants and suppliers. System failures or outages could materially compromise our ability to perform
these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. In
addition, we depend on third parties to operate and support our information technology systems. Failure by these
providers to adequately deliver the contracted services could have an adverse effect on our business, which in turn may
materially adversely affect our operating results and financial condition.
Risks Related to Our Reliance on Third Parties
We currently rely and 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 and clinical development
capabilities. For example, we currently rely on third party contract manufacturing organizations, to manufacture and
supply nonclinical and clinical trial quantities of the biological substance of our lead product candidate, pegzilarginase and
pipeline product candidates. We also expect to continue to rely on such third parties to manufacture and supply
commercial quantities of pegzilarginase. In addition, we rely on Merck to provide pembrolizumab for the conduct of our
combination trials.
We rely on third-party CROs to conduct our ongoing and future planned clinical trials of pegzilarginase. 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.
42
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. 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, 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, 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
substance. Currently, third party manufacturers are supplying, and are expected to continue to supply, the drug substance
requirements for our ongoing and planned clinical trials with pegzilarginase. If such third party manufacturers 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 third party manufacturers for certain
studies related to potential commercial scale manufacturing of pegzilarginase, 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, 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, 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.
43
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. If a third-party manufacturer’s facilities do not pass a pre-approval inspection or do not have a cGMP
compliance status acceptable to the FDA or a comparable foreign regulatory agency, our product candidate will not be
approved.
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.
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.
44
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 (i) comply with
FDA regulations or similar regulations of comparable non-U.S. regulatory authorities, (ii) provide accurate information to
the FDA or comparable non-U.S. regulatory authorities, (iii) comply with manufacturing standards we have established,
(iv) 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, or (v) 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, 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.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to
limit commercialization of our product candidates.
We face an inherent risk of product liability as a result of testing our product candidates in clinical trials and will face
an even greater risk if we commercialize any products. For example, we may be sued if our product candidates cause or
are perceived to cause injury or are found to be otherwise unsuitable during clinical trials, manufacturing, marketing or
sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to
warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted
under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may
incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense
would require significant financial and management resources. Regardless of the merits or eventual outcome, liability
claims may result in:
•
•
•
•
•
inability to bring a product candidate to the market;
decreased demand for our products;
injury to our reputation;
withdrawal of clinical trial participants and inability to continue clinical trials;
initiation of investigations by regulators;
45
•
•
•
•
•
•
•
•
costs to defend the related litigation;
diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any product candidate; and
decline in our share price.
Our product liability insurance policies may also have various exclusions, and we may be subject to a product
liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a
settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able
to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us
to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
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 our third party manufacturers’ 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 our third party manufacturers’ 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 a single third party manufacturer’s 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.
46
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
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 Health Authorities may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the Health 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 Health Authorities
for approval;
we may be unable to demonstrate that our product candidates’ clinical and other benefits outweigh their safety
risks;
the Health Authorities may disagree with our interpretation of data from nonclinical programs or clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the
Health 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 Health Authorities may significantly change in a manner rendering
our clinical data insufficient for approval.
47
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 pegzilarginase for the
treatment of hyperargininemia secondary to Arginase 1 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 pegzilarginase for the treatment of hyperargininemia
secondary to Arginase 1 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.
We may also seek accelerated approval for products. 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.
48
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.
We may seek priority review designation for one or more of our other product candidates, but we might not
receive such designation, and even if we do, such designation may not lead to a faster regulatory review or
approval process.
If the FDA determines that a product candidate offers a treatment for a serious condition and, if approved, the
product would provide a significant improvement in safety or effectiveness, the FDA may designate the application for
such product candidate for priority review. A priority review designation means that the goal for the FDA to review an
application is six months, rather than the standard review period of ten months. We may request priority review for
applications for our product candidates. The FDA has broad discretion with respect to whether or not to grant priority
review designation to an application, so even if we believe an application for a particular product candidate is eligible for
such designation, the FDA may decide not to grant it. Moreover, a priority review designation does not necessarily result
in an expedited regulatory review or approval process or confer any advantage with respect to approval compared to
conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month
review cycle or at all.
Any product candidate for which we obtain marketing approval will be subject to extensive post-approval
marketing regulatory requirements and could be subject to post-approval 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 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.
The FDA may also impose requirements for costly post-approval marketing studies or clinical trials and surveillance
to monitor the safety or efficacy of any approved product. In particular, certain of our products are expected to be dosed
chronically, and therefore could require follow-up studies and close monitoring of our patients after regulatory approval
has been granted, to establish broader, longer-term understanding of potential for adverse effects than is plausible for
clinical research. These studies may be expensive and time-consuming to conduct and may reveal side effects or other
harmful effects in patients that use our therapeutic products after they are on the market, which may result in the limitation
or withdrawal of our drugs from the market. Alternatively, we may not be able to conduct such additional clinical trials,
which might force us to abandon our efforts to develop or commercialize certain product candidates. Even if post-approval
studies are not requested or required, after our products are approved and on the market, there might be safety issues
that emerge over time that require a change in product labeling or that require withdrawal of the product from the market,
which would cause our revenue to decline. If we fail to comply with any such post-approval regulatory requirements,
approval for our products may be withdrawn, and product sales may be suspended. We may not be able to regain
compliance, or we may only be able to regain compliance after a lengthy delay, significant expense, lost revenues and
damage to our reputation.
49
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
information was made publicly available on a searchable website in September 2014 and is disclosed on an
annual basis; and
50
•
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.
We are subject to a variety of privacy and data security laws, and our failure to comply with them could harm our
business.
We maintain a large quantity of sensitive information, including confidential business and patient health information
in connection with our clinical trials, and are subject to laws and regulations governing the privacy and security of such
information. In the United States, there are numerous federal and state privacy and data security laws and regulations
governing the collection, use, disclosure and protection of personal information, including federal and state health
information privacy laws, federal and state security breach notification laws, and federal and state consumer protection
laws. Each of these laws is subject to varying interpretations and constantly evolving. In May 2018, a new privacy regime,
the General Data Protection Regulation (GDPR) took effect in the European Economic Area (EEA). The GDPR increases
our obligation with respect to clinical trials conducted in the EEA by expanding the definition of personal data and
requiring changes to informed consent practices, as well as more detailed notices for clinical trial subjects and
investigators. In addition, the GDPR increases the scrutiny of transfers of personal data from clinical trial sites located in
the EEA to the United States, and imposes substantial fines for breaches and violations. Compliance with these privacy
and data security laws and regulations is a rigorous and time-intensive process and if we fail to comply with any such laws
or regulations, we may face significant fines and penalties that could adversely affect our business, final condition and
results of operations.
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.
51
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act,
or collectively the ACA, is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth
of healthcare spending, enhance remedies against fraud and abuse, add 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 70% point-of-
sale discounts off negotiated prices;
extension of manufacturers’ Medicaid rebate liability to managed care utilization;
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, the American Taxpayer Relief Act of 2012 was signed into law, 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. On January 20, 2017, federal agencies with authorities and responsibilities under the
ACA were directed to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that
would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare
providers, health insurers, or manufacturers of pharmaceuticals or medical devices. More recently, the Tax Cuts and Jobs
Act was signed into law, which eliminated certain requirements of the ACA, including the individual mandate, and plans to
repeal all or portions of the ACA have also been suggested. We cannot predict whether these challenges will continue or
whether 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.
Comprehensive tax reform bills could increase the tax burden on our orphan drug programs and adversely affect
our business and financial condition.
The U.S. government has recently enacted comprehensive tax legislation that includes significant changes to the
taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax
52
rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational
corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of
the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with
the latter taxed at a lower rate.
Further, the newly enacted comprehensive tax legislation, among other things, reduces the orphan drug credit from
50% to 25% of qualifying expenditures. When and if we become profitable, this reduction in tax credits may result in an
increased federal income tax burden on our orphan drug programs as it may cause us to pay federal income taxes earlier
under the revised tax law than under the prior law and, despite being partially off-set by a reduction in the corporate tax
rate from a top marginal rate of 35% to a flat rate of 21%, may increase our total federal tax liability attributable to such
programs.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and
our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various
states will conform to the newly enacted federal tax law.
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 and clinical
development or production efforts. Our failure to comply with these laws and regulations also may result in substantial
fines, penalties or other sanctions.
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 we 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
53
and nonclinical and clinical 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 does not allow patents for methods of treating the human body or medical
use claims as in other jurisdictions. 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 an
application may depend upon our ability to generate additional nonclinical 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.
The issuance of a patent, while given the presumption of validity under the law, 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.
54
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
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.
55
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.
The illegal distribution and sale by third parties of counterfeit versions of our products or stolen products could
have a negative impact on our reputation and business.
Third parties might illegally distribute and sell counterfeit or unfit versions of our products, which do not meet our
rigorous manufacturing and testing standards. A patient who receives a counterfeit or unfit drug may be at risk for a
number of dangerous health consequences. Our reputation and business could suffer harm as a result of counterfeit or
unfit drugs sold under our brand name. In addition, thefts of inventory at warehouses, plants or while in-transit, which are
not properly stored and which are sold through unauthorized channels, could adversely impact patient safety, our
reputation and our business.
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.
56
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. If we fail to protect or to enforce our intellectual property
rights successfully, our competitive position could suffer, which could harm our results of operations.
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.
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.
57
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
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. In
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.
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.
58
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.
In January and December 2017, we and the University of Texas at Austin entered into and subsequently amended 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.
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;
59
•
•
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
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.
60
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.
We have a concentrated stockholder base and our executive officers and directors, combined with our stockholders
who, to our knowledge, each owned more than 5% of our outstanding common stock, in the aggregate, beneficially own
shares representing a majority of our capital stock as of December 31, 2018. 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.
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.
Pursuant to Section 404, we have been required to furnish a report by our management on our internal control over
financial reporting beginning with the year ended December 31, 2017. 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 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.
61
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
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,
62
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;
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 public offerings and may not use them
effectively.
Our management has broad discretion in the application of the net proceeds from our public offerings, 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 our public offerings 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 public offerings in a manner that does not produce income or that loses value.
63
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, on February 13, 2019, our shelf registration statement on Form S-3 for the potential offering, issuance
and sale by us of up to $200.0 million of our common stock, preferred stock, debt securities, warrants to purchase our
common stock, preferred stock and debt securities, subscription rights to purchase our common stock, preferred stock
and debt securities, and units consisting of all or some of these securities was declared effective by the SEC. In
connection with this shelf registration statement, we have entered into an “at-the-market” offering of our common stock
pursuant to a sales agreement between us and Jefferies LLC, or Jefferies. Subject to certain limitations in the sales
agreement and compliance with applicable law, we have the discretion to deliver a placement notice to Jefferies at any
time throughout the term of the sales agreement, which has a term equal to the term of the registration statement on Form
S-3 unless otherwise terminated earlier by us or Jefferies pursuant to the terms of the sales agreement. The number of
shares that are sold by Jefferies after delivering a placement notice will fluctuate based on the market price of our
common stock during the sales period and limits we set with Jefferies. Because the price per share of each share sold will
fluctuate based on the market price of our common stock during the sales period, it is not possible at this stage to predict
the number of shares that will be ultimately issued. Issuances of any shares sold pursuant to the sales agreement will
have a dilutive effect on our existing stockholders. Further, if we sell common stock, preferred stock, convertible securities
and other equity securities in other transactions pursuant to our shelf registration statement on Form S-3, existing
investors may be materially diluted by such subsequent sales and new investors could gain rights superior to our existing
stockholders.
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,
including upon exercise of our pre-funded warrants. Any such issuance could result in substantial dilution to our existing
stockholders and could cause our stock price to decline.
There is no public market for our pre-funded warrants.
There is no public trading market for our pre-funded warrants issued in the February 2019 public offering, and we do
not expect a market to develop. In addition, we do not intend to apply to list the pre-funded warrants on any securities
exchange or nationally recognized trading system, including the Nasdaq Global Market. Without an active market, the
liquidity of the pre-funded warrants will be limited and their value may be adversely impacted.
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 through December 31, 2020. 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;
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;
64
•
•
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 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 have been required to furnish a report by our management on our internal control over
financial reporting beginning with 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
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.
65
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 October 2018, we amended and extended a separate lease agreement for
approximately 4,560 square feet of laboratory space in Austin, Texas, which will expire in September 2021. We intend to
lease 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.
66
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.”
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.
67
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, 2018. 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.
$100 investment in stock or index
Aeglea Biotherapeutics, Inc
Nasdaq Composite Index
Nasdaq Biotechnology Index
Dividends
Ticker
April 7, 2016
AGLE
IXIC
NBI
$
$
$
December 31, 2016 December 31, 2017 December 31, 2018
76.66
121.42
107.34
44.52 $
102.12 $
98.88 $
55.37 $
126.43 $
118.33 $
100.00 $
100.00 $
100.00 $
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.
68
Recent Sales of Unregistered Securities
None.
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.
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, 2018, 2017, and 2016, and the
balance sheet data as of December 31, 2018 and 2017 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 year
ended December 31, 2015 and 2014 and the balance sheet data as of December 31, 2016, 2015, and 2014 is derived
from our audited financial statements which are not included in this Annual Report on Form 10-K.
69
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:
Net loss per share, basic and diluted
Net loss attributable to common stockholders
Weighted-average common shares outstanding,
basic and diluted
Class A-1 common:
Net loss per share, basic and diluted
Net loss attributable to class
Weighted-average common shares outstanding,
basic and diluted
Class A common:
Net loss per share, basic and diluted
Net loss attributable to class
Weighted-average common shares outstanding,
basic and diluted
Class B common:
Net loss per share, basic and diluted
Net loss attributable to class
Weighted-average common shares outstanding,
basic and diluted
Year Ended
December 31,
2018
2017
2016
2015
2014
(in thousands, except share and per share amounts)
$
3,888 $
5,205 $
4,628 $
6,085 $
—
36,719
12,632
49,351
(45,463)
1,172
—
(57)
1,115
(44,348)
22,815
10,066
32,881
(27,676)
482
—
(42)
440
(27,236)
18,143
8,391
26,534
(21,906)
11,453
5,947
17,400
(11,315)
6,830
2,074
8,904
(8,904)
244
—
(36)
208
(21,698)
22
-
(2)
20
(11,295)
1
(1,444)
—
(1,443)
(10,347)
—
—
—
(228)
—
$
(44,348) $
(27,236) $
(21,698) $ (11,523) $ (10,347)
$
$
(2.13) $
(44,348) $
(1.80) $
(27,236) $
(2.22) $
(19.21) $
(21,698) $ (11,523) $
20,822,560 15,128,192 9,791,728 599,788
—
—
—
$
$
$
$
$
$
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
— $
— $
(20.13)
(3,321)
—
— 165,000
— $
— $
— $
— $
(17.06)
(5,706)
—
— 334,522
— $
— $
— $
— $
(40.17)
(1,320)
—
—
32,861
70
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)
2018
2017
As of December 31,
2016
(in thousands)
2015
2014
$
74,513 $
66,432
77,739
10,311
—
(116,861)
67,428
50,299 $
49,362
56,077
5,740
—
(72,513)
50,337
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)
71
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 that designs and develops innovative human enzyme therapeutics for patients
with rare genetic diseases and cancer. We believe our novel approach of utilizing human enzymes offers advantages that
provide a greater likelihood of clinical success and commercial adoption.
Our drug-hunting capabilities in enzyme engineering, preclinical disease modeling, and drug development in both
rare genetic disease and cancer allow us to identify and advance innovative opportunities to address important unmet
medical needs for the benefit of patients. Our programs and the decisions we make to progress assets into clinical studies
are driven by the following considerations:
-
-
-
-
-
-
Potential for enhancement of human enzymatic activity
Ability to create novel human enzymatic activity
Strong preclinical data and rationale
Limited or no competition
Meaningful commercial opportunities
Worldwide commercial rights
We are a patient-focused organization conscious of the fact that people with a rare genetic disease or cancer have
limited treatment options, and we recognize that their lives and well-being are highly dependent upon our efforts to
develop improved therapies. For this reason, we are passionate about designing and developing novel therapeutics to
address significant unmet medical need for rare genetic disease and cancer.
Our lead product candidate, 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 1 Deficiency,
a rare genetic disease, as well as some cancers which have been shown to have a metabolic dependence on arginine.
Pegzilarginase is being evaluated in multiple ongoing clinical trials and we expect to start a single, global pivotal Phase 3
trial in patients with Arginase 1 Deficiency in the second quarter of 2019. Currently our development consists of a Phase
1/2 clinical trial for the treatment of Arginase 1 Deficiency, an open label extension study for patients with Arginase 1
Deficiency, a Phase 1 clinical trial for the treatment of advanced solid tumors, and a Phase 1/2 combination clinical trial of
pegzilarginase with pembrolizumab for the treatment of patients with small cell lung cancer (SCLC). We are also building
a pipeline of additional product candidates targeting key amino acids and other metabolites, including AEB4104 for the
treatment of homocystinuria, AEB5100 for the treatment of cystinuria, and AEB3103 and AEB2109 for the treatment of
cancer.
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, follow-on public offerings of our common stock, and collection of a research grant.
72
We have incurred net losses in each year since inception. Our net losses were $44.3 million, $27.2 million, and
$21.7 million for the years ended December 31, 2018, 2017, and 2016, 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, 2018, we had an accumulated deficit of $116.9 million. We expect to
continue to incur 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, pegzilarginase; concurrently develop our pipeline
product candidates; expand and protect our intellectual property portfolio; hire additional personnel; and continue to
operate as a public company.
Components of Operating Results
Revenue
To date, we 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 covered a four-year period
from June 1, 2014 through May 31, 2018. The grant allowed us to receive funds in advance of costs and allowable
expenses being incurred. We recorded the revenue as qualifying costs were incurred and there was reasonable
assurance that the conditions of the award had been met for collection. Proceeds received prior to the costs being
incurred or the conditions of the award being met were recognized as deferred revenue until the services were performed
and the conditions of the award were met.
On a quarterly basis, we were 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 resulted in the recognition of a grant receivable. As of December 31, 2018, we collected the full
$19.8 million grant proceeds and will not be recognizing grant revenue under the contract in future periods.
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 pegzilarginase. Although we opened an internal research
laboratory in February 2017, we continue to contract with external providers for nonclinical studies and clinical trials. Our
research and development expenses include:
•
•
•
costs from acquiring clinical trial materials and services performed for contracted services with contract
manufacturing organizations;
fees paid to clinical trial sites, clinical research organizations, contract research organizations, contract
manufacturing organizations, nonclinical research companies, and academic institutions; and
employee and consultant-related expenses incurred, which include salaries, benefits, travel and stock-based
compensation.
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.
73
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;
changes in the competitive drug development environment;
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, operations, 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, and the potential commercialization of our product candidates. These increases will likely
include higher 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.
Interest income
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.
Income taxes
We serve as a holding company for our seven wholly-owned subsidiary corporations and file a consolidated
corporate federal income tax return. 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.
74
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in
the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related
disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities,
which are not readily apparent from other sources. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates
and assumptions. Our actual results may differ materially from these estimates under different assumptions or conditions.
Our critical accounting policies are those policies which require the most significant judgments and estimates in the
preparation of our consolidated financial statements. We believe that the assumptions and estimates associated with our
most critical accounting policies are those relating to accrued research and development costs and stock-based
compensation.
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
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.
Stock-based compensation
We recognize the cost of stock-based awards granted to employees based on the estimated grant-date fair values of
the awards. The value of the award is recognized as compensation expense on a straight-line basis over the requisite
service period. Forfeitures are recognized when they occur, which may result in the reversal of compensation costs in
subsequent periods as the forfeitures arise. We elected to early adopt ASU 2018-07, Compensation – Stock Compensation
(Topic 718) effective January 1, 2018. All non-employee share-based payment awards granted prior to adoption were
remeasured at fair value as of the adoption date. There was no material impact on our consolidated financial statements from
the adoption. All non-employee share-based payment awards granted after adoption are measured at grant-date fair value.
Compensation expense for employee and non-employee share-based payment awards with performance conditions is
recognized when the performance condition is deemed probable.
75
We estimate the grant date fair value of 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).
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 using the same or similar comparable
entities until a sufficient amount of historical information regarding the volatility of our own stock price becomes
available.
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.
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 stock
underlying option grants, our board of directors considered, among other things, timely valuations of our 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 stock, including our stage of development; progress of our research and development efforts;
the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; equity
market conditions affecting comparable public companies and the lack of marketability of our 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.
Results of Operations
Comparison of the Years Ended December 31, 2018 and 2017
The following table summarizes our results of operations for the years ended December 31, 2018 and 2017,
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 loss
Year Ended
December 31,
2018
2017
(dollars in thousands)
Dollar
Change
% Change
$
3,888 $
5,205 $
(1,317)
-25%
$
36,719 $
12,632
49,351
(45,463)
1,172
(57)
13,904
2,566
16,470
(17,787)
690
(15)
$ (44,348) $ (27,236) $ (17,112)
22,815 $
10,066
32,881
(27,676)
482
(42)
61%
25%
50%
64%
143%
36%
63%
76
Grant Revenues. Grant revenues decreased by $1.3 million, or 25%, to $3.9 million for the year ended December
31, 2018 from $5.2 million for the year ended December 31, 2017. The decrease was due to the grant contract ending in
May 2018 with the full $19.8 million grant recognized as revenue over the life of the award.
Research and Development Expenses. Research and development expenses increased by $13.9 million, or 61%,
to $36.7 million for the year ended December 31, 2018 from $22.8 million for the year ended December 31, 2017. The
change in research and development expenses was primarily due to:
•
•
•
•
Higher personnel-related expenses, which increased by $2.8 million as a result of additional employee
headcount to expand our clinical development capabilities and internal research laboratory team;
Higher clinical development expenses, which increased by $9.5 million as a result of advancing and exceeding
enrollment of our Phase 1/2 clinical trial for pegzilarginase in patients with Arginase 1 Deficiency, initiating and
completing enrollment of three single agent cohort expansions for the Phase 1 trial in patients with advanced
solid tumors, and advancing and completing enrollment of our Phase 1 combination trial in patients with small
cell lung cancer;
Higher nonclinical expenses, which increased by $0.4 million as a result of advancing our toxicology studies to
support continued clinical development of pegzilarginase; and
Higher manufacturing expenses, which increased by $1.0 million primarily as a result of a ramp-up in
manufacturing activities for pegzilarginase.
General and Administrative Expenses. General and administrative expenses increased by $2.6 million, or 25%, to
$12.6 million for the year ended December 31, 2018 from $10.1 million for the year ended December 31, 2017. The
increase in general and administrative expenses was primarily due to additional employee headcount and compensation
to support company growth. Non-cash stock compensation expense accounted for $1.1 million of the increase.
Interest Income. The increase in interest income to $1.2 million for the year ended December 31, 2018 from $0.5
million for the year ended December 31, 2017 was primarily due to increasing yield rates, purchasing investments with
greater maturity terms, and the investment of additional funds received as a result of our public offerings in April 2018 and
October 2018.
Comparison of the Years Ended December 31, 2017 and 2016
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016,
together with the changes in those items in dollars and as a percentage:
Year Ended
December 31,
2017
2016
(dollars in thousands)
Dollar
Change
% Change
Revenues:
Grant
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Other expense
Net loss
$
5,205 $
4,628 $
577
$
22,815 $
10,066
32,881
(27,676)
482
(42)
18,143 $
8,391
26,534
(21,906)
244
(36)
$ (27,236) $ (21,698) $
4,672
1,675
6,347
(5,770)
238
(6)
(5,538)
12%
26%
20%
24%
26%
98%
17%
26%
Grant Revenues. Grant revenues increased by $0.6 million, or 12%, to $5.2 million for the year ended
December 31, 2017 from $4.6 million for the year ended December 31, 2016. The increase was primarily due to additional
research and development costs associated with the clinical trials for pegzilarginase in cancer patients, for which we
recognized grant revenue pursuant to the Grant Contract.
77
Research and Development Expenses. Research and development expenses increased by $4.7 million, or 26%, to
$22.8 million for the year ended December 31, 2017 from $18.1 million for the year ended December 31, 2016. The
change in research and development expenses was due to:
•
•
•
•
Higher personnel-related expenses, which increased by $3.2 million as a result of additional employee
headcount to strengthen our management team and expand our internal regulatory, research laboratory, and
clinical development capabilities;
Higher manufacturing expenses, which increased by $2.2 million as a result of process scale-up for
pegzilarginase and additional manufacturing activities for pipeline development;
Higher clinical development expenses, which increased by $1.6 million as a result of advancing our Phase 1/2
clinical trial for pegzilarginase in patients with Arginase 1 Deficiency, completing our Phase 1 dose escalation
trial in patients with advanced solid tumors, preparing for three solid tumor single agent cohort expansions, and
preparing for our Phase 1/2 combination trial in patients with small cell lung cancer; and
Lower nonclinical expenses, which decreased by $2.3 million as a result of completing toxicology studies in
2016, which supported the multi-dose clinical trials related to pegzilarginase for patients with Arginase 1
Deficiency.
General and Administrative Expenses. General and administrative expenses increased by $1.7 million, or 20%, to
$10.1 million for the year ended December 31, 2017 from $8.4 million for the year ended December 31, 2016. The
increase in general and administrative expenses was primarily due to an increase in employee compensation, consulting,
and facility costs.
Interest Income. Interest income consists of interest earned on our cash, cash equivalents, and marketable
securities. The increase in interest income to $0.5 million for the year ended December 31, 2017 from $0.2 million for the
year ended December 31, 2016 was primarily due to increasing yield rates and purchasing investments with greater
terms.
Liquidity and Capital Resources
Sources of liquidity
We are a 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, 2018, we have funded our operations
primarily by raising an aggregate of $182.5 million of gross proceeds from the sale and issuance of convertible preferred
and common equity securities and collecting $19.8 million in grant proceeds.
In February 2019, we sold an aggregate of 4,625,000 shares of common stock at a public offering price of $8.00 per
share and pre-funded warrants to purchase up to 4,000,000 shares of common stock at a public offering price of $7.9999
per warrant. This includes the full exercise by the underwriters of their option to purchase up to 1,125,000 additional
shares of common stock. The gross proceeds from this public offering were approximately $69.0 million, resulting in net
proceeds of $64.5 million after deducting underwriting discounts and commissions and estimated offering costs.
Additionally, a new shelf registration statement on Form S-3 was declared effective in February 2019 by the SEC for the
offering, issuance and sale by us of up to $200.0 million (2019 Registration Statement) of our common stock, preferred
stock, debt securities, warrants to purchase common stock, preferred stock and debt securities, subscription rights to
purchase common stock and units consisting of all or some of these securities.
In December 2018, we entered into a sales agreement with Jefferies LLC, as sales agent and underwriter, to issue
and sell shares of our common stock for an aggregate offering price of $60.0 million under an at-the-market (2018 ATM)
offering program. After the 2019 Registration Statement was declared effective by the SEC in February 2019, $60.0
million of our common stock remain available for sale pursuant to the 2018 ATM program.
The 2019 Registration Statement and 2018 ATM program replaced the 2017 shelf registration statement on Form S-
3 (2017 Registration Statement) and sales agreement with JonesTrading Institutional Services LLC (2017 ATM), as sales
agent and underwriter, we filed with the SEC in May 2017.
78
During the year ended December 31, 2018, we sold an aggregate of:
•
•
5,046,510 shares of common stock in an underwritten public offering pursuant to the 2017 Registration
Statement for gross proceeds of $40.4 million, resulting in net proceeds of $37.7 million after deducting
underwriting discounts and commissions and offering expenses and
1,845,820 shares of common stock in a single transaction pursuant to the 2017 ATM for net proceeds of $16.4
million.
During the year ended December 31, 2017, we sold an aggregate of 3,000,000 shares of common stock in an
underwritten public offering pursuant to the 2017 Registration Statement for gross proceeds of $12.3 million, resulting in
net proceeds of $11.4 million after deducting underwriting discounts and commissions and offering expenses.
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 CPRIT agreed to provide up to $19.8
million in grant funding to fund our development of pegzilarginase. Through December 31, 2018, we have collected the full
$19.8 million in grant proceeds under the grant contract. 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, pegzilarginase. This includes both
the research and development costs and the general and administrative expenses required to support those operations.
Since we are a clinical-stage biotechnology 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 pegzilarginase and
expand our development efforts in our pipeline of nonclinical candidates.
Future funding requirements and operational plan
Our operational plan for the near future is to continue clinical trials for our lead product candidate pegzilarginase in
Arginase 1 Deficiency and oncology indications, and to expand development for AEB4104 in patients with Homocystinuria
and AEB5100 in patients with Cystinuria. 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 pegzilarginase;
funding the advancement of additional product candidates; and
funding working capital, including general operating expenses.
Due to our significant research and development expenditures, we have generated substantial losses in each period
since inception. We have an accumulated deficit of $116.9 million as of December 31, 2018. We anticipate that we will
continue to generate losses into the foreseeable future as we develop our 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, credit facility or additional committed capital. To the
extent that we raise additional equity, the ownership interest of our stockholders will be diluted.
Based on available cash, cash equivalents, and marketable securities of $74.5 million as of December 31, 2018, in
conjunction with the net proceeds received from our public offering in February 2019, we believe that we have sufficient
resources to fund our operations through the first quarter of 2021. 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.
79
Cash flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash and cash equivalents (used in) provided by:
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash
equivalents
Year Ended
December 31,
2017
2016
2018
$
(32,193) $
(15,231)
57,068
(24,615) $
(22,529)
12,213
(18,840)
(12,076)
49,370
$
9,644 $
(34,931) $
18,454
Cash used in operating activities
Cash used in operating activities for the year ended December 31, 2018 was $32.2 million and reflected a net loss of
$44.3 million. The cash impact of our net loss was offset by non-cash expenses of $4.3 million for stock-based
compensation, $0.3 million for net discount purchases and accretion on marketable securities, and $0.3 million for
depreciation and amortization. The change in operating assets and liabilities of $7.2 million was primarily related to a $4.2
million increase in accrued and other liabilities due to additional research and development costs associated with the
clinical trials for pegzilarginase in patients with Arginase 1 Deficiency and cancer, as well as a $3.1 million decrease in
grants accounts receivable due to concluding the grant contract and collecting the remaining proceeds.
Cash used in operating activities for the year ended December 31, 2017 was $24.6 million and reflected a net loss of
$27.2 million. The cash impact of our net loss was offset by non-cash expenses of $2.5 million for stock-based
compensation and $0.3 million for depreciation and amortization. The change in operating assets and liabilities of $0.2
million was primarily due to an increase in accrued and other liabilities driven by additional research and development
activities, offset by an increase in grant accounts receivable due to the timing of payments and additional qualifying costs
paid prior to reimbursement.
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 investing activities
Cash used in investing activities for the year ended December 31, 2018 was $15.2 million and consisted of $62.2
million in purchases of marketable securities and $0.4 million in purchases of property and equipment offset by $47.4
million in maturities of marketable securities.
Cash used in investing activities for the year ended December 31, 2017 was $22.5 million and consisted of $64.1
million in purchases of marketable securities and $0.6 million in purchases of property and equipment primarily to develop
an internal research laboratory, offset by $42.2 million in maturities of marketable securities.
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 provided by financing activities
Cash provided by financing activities for the year ended December 31, 2018 was $57.1 million, which consisted of
$57.4 million from the public offerings of our common stock, offset by $2.9 million in underwriting discounts and
commissions and $0.4 million in offering costs, and $3.0 million in proceeds received from stock option exercises and sale
of common stock under our 2016 Employee Stock Purchase Plan.
80
Cash provided by financing activities for the year ended December 31, 2017 was $12.2 million, which consisted of
$12.3 million from a follow-on public offering of our common stock, offset by $0.6 million in underwriting discounts and
commissions and $0.3 million in offering costs, and $0.8 million in proceeds received from stock option exercises and sale
of common stock under our 2016 Employee Stock Purchase Plan.
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.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):
Operating leases
Payments Due by Period
Less than
1 year
1 to 3
years
4 to 5
years
More than
5 years
$
397 $
492 $
— $
—
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 as of December 31, 2018 is approximately $0.6 million.
In October 2018, we amended and extended our separate lease agreement for laboratory space in Austin, Texas,
which will expire in September 2021. The total estimated rent payments over the remaining term of the lease as of
December 31, 2018 is approximately $0.3 million.
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 of products or services that are based upon, utilize, are developed from
or materially incorporate the intellectual property resulting from the grant-funded activities for pegzilarginase. 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. In December 2017, the Restated License was further
amended to revise certain diligence milestones.
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 $0.5 million 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).
81
Off Balance Sheet Arrangements
Through December 31, 2018, we do not have any off-balance sheet arrangements, as defined by applicable SEC
regulations.
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 (ROU) asset. The new standard is effective for fiscal years and interim
periods beginning after December 15, 2018, with early adoption permitted.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides
entities with an additional transition method. Under ASU 2018-11, entities have the option of initially applying Topic 842 at
the adoption date, rather than at the beginning of the earliest comparative period presented, and recognizing the
cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption
while continuing to present all prior periods under previous lease accounting guidance. We elected this transition method
with an adoption date of January 1, 2019. The new standard provides a number of optional practical expedients in
transition. We plan to elect all of the available practical expedients.
We expect the most significant effects of adopting this standard will primarily relate to (a) the recognition of ROU
assets and lease liabilities on the balance sheet in relation to its existing operating lease agreements for the office and
laboratory spaces in Austin, Texas; and (b) providing significant new disclosures about leasing activities. The adoption of
this standard is not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal Use Software
(Subtopic 350-40), to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal-use software license). The amendments in the update require
an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which
implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2019 and can be applied either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted.
We are currently evaluating the impact that the adoption of ASU 2018-15 will have on our 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. 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 marketable securities. Our marketable securities are subject to interest rate risk and could fall in value
if market interest rates increase. However, we believe that our exposure to interest rate risk is not significant as the
majority of our investments are short-term in duration and due to the low risk profile of our investments, a 10% change in
interest rates would not have a material effect on the total 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.
As of December 31, 2018, we held $74.5 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,
commercial paper, and U.S. government securities.
82
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 Stock and
Stockholders’ Equity (Deficit) .................................................................................................................................
Consolidated Statements of Cash Flows....................................................................................................................
Notes to Consolidated Financial Statements..............................................................................................................
84
85
86
87
88
89
90
Page
83
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Aeglea BioTherapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aeglea BioTherapeutics, Inc. and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive
loss, changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in
the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
March 7, 2019
We have served as the Company’s auditor since 2014.
84
Aeglea BioTherapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
CURRENT ASSETS
Cash and cash equivalents
Marketable securities
Accounts receivable - grant
Prepaid expenses and other current assets
ASSETS
$
Total current assets
Property and equipment, net
Other non-current assets
TOTAL ASSETS
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Deferred revenue
Accrued and other current liabilities
Total current liabilities
Other non-current liabilities
TOTAL LIABILITIES
Commitments and Contingencies (Note 13 and 15)
STOCKHOLDERS’ EQUITY
$
December 31,
2018
2017
22,461 $
52,052
—
2,158
76,671
1,018
50
77,739 $
663 $
—
9,576
10,239
72
10,311
12,817
37,482
3,078
1,614
54,991
854
232
56,077
389
20
5,220
5,629
111
5,740
Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of
December 31, 2018 and 2017; no shares issued and outstanding as of
December 31, 2018 and 2017
Common stock, $0.0001 par value; 500,000,000 shares authorized as of
December 31, 2018 and 2017, 24,140,097 shares and 16,670,188 shares
issued and outstanding as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
—
—
2
184,314
(27)
(116,861)
67,428
77,739 $
2
122,950
(102)
(72,513)
50,337
56,077
The accompanying notes are an integral part of these consolidated financial statements.
85
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
Other expense
Total other income
Net loss
2018
Year Ended
December 31,
2017
2016
$
3,888 $
5,205 $
4,628
36,719
12,632
49,351
(45,463)
22,815
10,066
32,881
(27,676)
1,172
(57)
1,115
(44,348) $
482
(42)
440
(27,236) $
$
18,143
8,391
26,534
(21,906)
244
(36)
208
(21,698)
Net loss per share, basic and diluted
Weighted-average common shares outstanding, basic and diluted
(1.80) $
$
20,822,560 15,128,192
(2.13) $
(2.22)
9,791,728
The accompanying notes are an integral part of these consolidated financial statements.
86
Aeglea BioTherapeutics, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities
Total comprehensive loss
2018
Year Ended
December 31,
2017
2016
$
(44,348) $
(27,236) $
(21,698)
75
(44,273) $
(98)
(27,334) $
(3)
(21,701)
$
The accompanying notes are an integral part of these consolidated financial statements.
87
Aeglea BioTherapeutics, Inc.
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands)
Series A
Convertible
Preferred
Stock
Series B
Convertible
Preferred
Stock
Shares Amount Shares Amount Shares Amount
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
(Deficit)
8
8
Balances—December 31, 2015
Conversion of preferred stock to common stock upon
initial public offering
Issuance of common stock in connection with initial
public offering, net of offering costs
Issuance of common stock in connection with employee
stock purchase plan
Stock-based compensation expense
Unrealized loss on marketable securities
Net loss
Balances—December 31, 2016
Issuance of common stock in connection with employee
stock purchase plan
Issuance of common stock in connection with exercise
of stock options
Issuance of common stock in connection with follow-on
offering, net of offering costs
Stock-based compensation expense
Unrealized loss on marketable securities
Net loss
Balances—December 31, 2017
Issuance of common stock in connection with employee
stock purchase plan
Issuance of common stock in connection with exercise
of stock options
Issuance of common stock in connection with public
and at-the-market offerings, net of offering costs
Stock-based compensation expense
Unrealized gain on marketable securities
Net loss
Balances—December 31, 2018
2,173 $ 13,573
5,000 $ 44,738
757 $
— $
1,373 $
(23,579) $
(1) $
(22,207)
(2,173)
(13,573)
(5,000)
(44,738)
7,173
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,482
19
—
—
—
13,431 $
39
200
3,000
—
—
—
16,670 $
56
521
6,893
—
—
—
24,140 $
1
—
—
—
—
—
1 $
—
—
1
—
—
—
2 $
—
—
—
—
—
—
2 $
58,310
47,266
76
1,221
—
—
108,246 $
131
702
11,379
2,492
—
—
122,950 $
207
2,829
54,048
4,280
—
—
184,314 $
—
—
—
—
—
(21,698)
(45,277) $
—
—
—
—
—
(27,236)
(72,513) $
—
—
—
—
—
(44,348)
(116,861) $
—
—
—
—
(3)
—
(4) $
—
—
—
—
(98)
—
(102) $
—
—
—
—
75
—
(27) $
58,311
47,266
76
1,221
(3)
(21,698)
62,966
131
702
11,380
2,492
(98)
(27,236)
50,337
207
2,829
54,048
4,280
75
(44,348)
67,428
The accompanying notes are an integral part of these consolidated financial statements.
Aeglea BioTherapeutics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
2018
Year Ended
December 31,
2017
2016
$
(44,348) $
(27,236) $
(21,698)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Purchase net discount (premium) on marketable securities
Net (accretion of discount) amortization of premium on marketable
securities
Stock-based compensation
Research and development services settled with stock
Other, net
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 in restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock in public and at-the-market
offerings, net of offering costs
Proceeds from employee stock plan purchases and stock option
exercises
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
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
$
$
$
$
293
907
(593)
4,280
107
(40)
3,078
(261)
239
(20)
4,165
(32,193)
(422)
(62,179)
47,370
—
(15,231)
249
9
75
2,492
15
(21)
(1,863)
(114)
164
(51)
1,666
(24,615)
(619)
(64,115)
42,205
—
(22,529)
132
(146)
101
1,221
110
(10)
482
(924)
(8)
71
1,829
(18,840)
(212)
(20,390)
8,446
80
(12,076)
54,048
11,380
49,294
3,020
57,068
9,644
833
12,213
(34,931)
12,817
22,461 $
47,748
12,817 $
76
49,370
18,454
29,294
47,748
92 $
— $
— $
57 $
172
— $
13,573
— $
44,738
The accompanying notes are an integral part of these consolidated financial statements.
89
Aeglea BioTherapeutics, Inc.
Notes to Consolidated Financial Statements
1. The Company and Basis of Presentation
Aeglea BioTherapeutics, Inc. (“Aeglea” or the “Company”) is a biotechnology company that designs and develops
innovative human enzyme therapeutics for patients with 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 and was converted from a Delaware LLC to a Delaware corporation (the “LLC Conversion”) on March 10, 2015. The
Company operates in one segment and has its principal offices in Austin, Texas.
Liquidity
As of December 31, 2018, the Company had working capital of $66.4 million, an accumulated deficit of
$116.9 million, and cash, cash equivalents, and marketable securities of $74.5 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 testing, 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.
Based upon the Company’s current operating plans, the Company believes that it has sufficient resources to fund
operations through the first quarter of 2021 with its existing cash, cash equivalents, and marketable securities, in
conjunction with the net proceeds received from a public offering in February 2019 (see Note 16). 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 stock, 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 stock. The board of directors determined the estimated fair value of 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 stock, the superior rights and preferences of
securities senior to the Company’s 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
90
Accounting Practice Aid Series: Valuation of Privately-Held-Company Securities Issued as Compensation, to estimate the
fair value of common stock (see Notes 3, 7, and 9).
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. The Company may or may not hold securities
with stated maturities greater than one year until maturity. All available-for-sale securities are considered available to
support current operations and are classified as current assets.
Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated
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,
2018, 2017, and 2016. Interest on marketable securities is included in interest income.
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 highly rated banks, 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.
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, 2018, 2017,
and 2016.
91
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
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 lease agreements for its office and laboratory facilities. The leases are classified as
operating leases. The Company records rent expense on a straight-line basis over the term of the leases 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 that market participants would use in pricing the asset or liability based on the best information
available under the circumstances.
92
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.
Revenue Recognition
The Company’s sole source of revenue was 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 was recognized when qualifying costs were incurred and there was reasonable assurance
that the conditions of the award had been met for collection. Proceeds received prior to the costs being incurred or the
conditions of the award being met were recognized as deferred revenue until the services were performed and the
conditions of the award were 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, stock-based compensation, consulting costs, contract research service costs,
laboratory supplies and facilities, 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.
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.
Stock-Based Compensation
The Company recognizes the cost of stock-based awards granted to employees based on the estimated grant-date
fair values of the awards. The value of the award is recognized as compensation expense on a straight-line basis over the
requisite service period. Forfeitures are recognized when they occur, which may result in the reversal of compensation
costs in subsequent periods as the forfeitures arise. The Company elected to early adopt ASU 2018-07, Compensation –
Stock Compensation (Topic 718) effective January 1, 2018. All non-employee share-based payment awards granted prior to
adoption were remeasured at fair value as of the adoption date. There was no material impact on the Company’s consolidated
financial statements from the adoption. All non-employee share-based payment awards granted after adoption are measured
at grant-date fair value. Compensation expense for employee and non-employee share-based payment awards with
performance conditions is recognized when the performance condition is deemed probable.
Income Taxes
The Company and its seven wholly-owned subsidiary corporations 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.
Additionally, any changes in income tax laws are immediately recognized in the year of enactment.
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.
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.
93
Comprehensive Loss
Comprehensive loss is the change in stockholders’ equity from transactions and other events and circumstances
other than those resulting from investments by stockholders and distributions to stockholders. The Company’s other
comprehensive income (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 (ROU) asset. The new standard is effective for fiscal years and interim
periods beginning after December 15, 2018, with early adoption permitted.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides
entities with an additional transition method. Under ASU 2018-11, entities have the option of initially applying Topic 842 at
the adoption date, rather than at the beginning of the earliest comparative period presented, and recognizing the
cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption
while continuing to present all prior periods under previous lease accounting guidance. The Company elected this
transition method with an adoption date of January 1, 2019. The new standard provides a number of optional practical
expedients in transition. The Company plans to elect all of the available practical expedients.
The Company expects that the most significant effects of adopting this standard will primarily relate to (a) the
recognition of ROU assets and lease liabilities on the balance sheet in relation to its existing operating lease agreements
for the office and laboratory spaces in Austin, Texas; and (b) providing significant new disclosures about leasing activities.
The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial
statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal Use Software
(Subtopic 350-40), to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal-use software license). The amendments in the update require
an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which
implementation costs to capitalize as an asset related to the service contract and which costs to expense. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2019 and can be applied either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted.
The Company is currently evaluating the impact that the adoption of ASU 2018-15 will have on its consolidated financial
statements.
3. 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
Commercial paper
U.S. government securities
Total financial assets
Level 1
Level 2
Level 3
Total
December 31, 2018
$
$
7,180 $
—
—
—
$
7,180
— $
6,250
53,916
4,112
64,278 $
— $
—
—
—
—
$
7,180
6,250
53,916
4,112
71,458
94
Financial Assets
Money market funds
Reverse repurchase agreements
U.S. treasury securities
U.S. government securities
Total financial assets
Level 1
Level 2
Level 3
Total
December 31, 2017
$
$
1,674 $
—
1,501
—
3,175 $
— $
7,250
—
35,981
43,231 $
— $
—
—
—
— $
1,674
7,250
1,501
35,981
46,406
The Company measures the fair value of money market funds and U.S. treasury securities on quoted prices in
active markets for identical asset or liabilities. The Level 2 assets include reverse repurchase agreements, commercial
paper, and U.S. government 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.
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.
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.
4. Cash Equivalents and Marketable Securities
The following tables summarize the estimated fair value of the Company’s cash equivalents and marketable
securities and the gross unrealized gains and losses (in thousands):
Cash equivalents:
Money market funds
Reverse repurchase agreements
Commercial paper
Total cash equivalents
Marketable securities:
Commercial paper
U.S. government securities
Total marketable securities
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
7,180 $
6,250
5,977
19,407
47,964
4,114
52,078 $
— $
—
—
—
—
—
— $
— $
—
(1)
(1)
7,180
6,250
5,976
19,406
(24)
(2)
(26) $
47,940
4,112
52,052
$
$
95
Cash equivalents:
Money market funds
Reverse repurchase agreements
Total cash equivalents
Marketable securities:
U.S. treasury securities
U.S. government securities
Total marketable securities
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
1,674 $
7,250
8,924
1,502
36,082
37,584 $
— $
—
—
—
—
— $
— $
—
—
1,674
7,250
8,924
(1)
(101)
(102) $
1,501
35,981
37,482
The reverse repurchase agreements are settled in cash nightly, and as such are classified as cash equivalents.
As of December 31, 2018 and 2017, all debt securities with an unrealized loss position have been in a loss position
for less than one year. The aggregate fair value of debt securities in an unrealized loss position as of December 31, 2018
and 2017 were $45.6 million and $37.5 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, 2018 and 2017.
The following table summarizes the contractual maturities of the Company's marketable securities at estimated fair
value (in thousands):
Due in one year or less
Due in 1 - 2 years
Total marketable securities
December 31,
2018
2017
$
$
52,052 $
—
52,052 $
34,498
2,984
37,482
The Company may sell investments at any time for use in current operations even if they have not yet reached
maturity. As a result, the Company classifies marketable securities, including securities with maturities beyond twelve
months as current assets.
5. 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,
2018
2017
$
$
981 $
227
89
99
374
1,770
(752)
1,018 $
651
209
111
99
271
1,341
(487)
854
Depreciation and amortization expense for the years ended December 31, 2018, 2017, and 2016 was $0.3 million,
$0.2 million, and $0.1 million, respectively. All of the Company’s long-lived assets are located in the United States.
96
6. 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,
2018
2017
2,643 $
5,993
807
133
9,576 $
1,837
2,552
672
159
5,220
7. Convertible Preferred Stock and Stockholders’ Equity
As of December 31, 2015, the Company had 2,172,520 shares of Series A convertible preferred stock outstanding
and 4,999,976 shares of Series B convertible preferred stock outstanding with a related carrying value of $13.6 million
and $44.7 million, respectively. Immediately prior to the closing of the Company’s initial public offering (“IPO”) in April
2016, all of the outstanding convertible preferred stock was automatically converted into 7,172,496 shares of common
stock on a one-to-one basis, with the aggregate total carrying value of $58.3 million reclassified to common stock and
additional paid-in capital. As of December 31, 2018 and 2017, there were no shares of preferred stock outstanding.
On April 12, 2016, the Company closed an IPO of its common stock, which resulted in the sale of 5,481,940 shares
of its common stock 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.
In connection with the IPO, the Company amended its Restated Certificate of Incorporation 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. 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, 2018, no common stock dividends
have been declared by the board of directors.
Follow-on Public Offerings
In June 2017, the Company issued and sold 3,000,000 shares of common stock in an underwritten public offering
pursuant to a shelf registration statement on Form S-3 at a public offering price of $4.10 per share. The net proceeds to
the Company from this public offering was $11.4 million, after deducting underwriting discounts and commissions of $0.6
million and offering costs of $0.3 million.
In April 2018, the Company issued and sold 5,046,510 shares of common stock in an underwritten public offering
pursuant to a shelf registration statement on Form S-3 at a public offering price of $8.00 per share, including 546,510
shares of common stock issued upon the partial exercise by the underwriters of their option to purchase additional shares.
The net proceeds to the Company from this public offering was $37.7 million, after deducting underwriting discounts and
commissions of $2.4 million and offering costs of $0.3 million.
At-The-Market Offering
In May 2017, the Company entered into a sales agreement with JonesTrading Institutional Services LLC, as sales
agent and underwriter, pursuant to which the Company may issue and sell shares of its common stock for an aggregate
offering price of $20.0 million under an at-the-market (“ATM’) offering program. In October 2018, the Company sold
1,845,820 shares of common stock in a single transaction pursuant to the ATM at an offering price of $9.21 per share for
gross proceeds of $17.0 million, resulting in net proceeds of $16.4 million after deducting underwriting fees and offering
expenses.
97
The Company subsequently terminated the ATM sales agreement with JonesTrading in December 2018 and
entered into a sales agreement with Jeffries LLC, as sales agent and underwriter, to issue and sell shares of the
Company’s common stock for an aggregate offering price of $60.0 million under an ATM offering program.
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 covered 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 as royalties.
The contract ended in May 2018 with the full $19.8 million grant recognized as revenue over the life of the award.
For the years ended December 31, 2018, 2017, and 2016 the Company recognized $3.9 million, $5.2 million, and $4.6
million, respectively, in grant revenues for qualified expenditures under the grant. As of December 31, 2018, all grant
proceeds had been collected. As of December 31, 2017, the Company had an outstanding grant receivable of $3.1 million
for the grant expenditures that were paid but had not been reimbursed and deferred revenue of $20,000 for proceeds
received but for which the costs had not been incurred or the conditions of the award had not been met.
9. Stock-Based Compensation
2015 Equity Incentive Plan
In March 2015, the Company adopted the 2015 Equity Incentive Plan (“2015 Plan”), administered by the board of
directors, and 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, 2018, a total of 268,716 shares of common stock are subject to options outstanding under the
2015 Plan and will become available under the 2016 Equity Incentive Plan (“2016 Plan”) to the extent the options are
forfeited or lapse unexercised.
2016 Equity Incentive Plan
The 2016 Plan became effective in April 2016 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 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.
In October 2018, the 2016 plan was amended to increase the number of shares of common stock reserved for
issuance thereunder by 1,759,602 shares, extend the term of the 2016 Plan through August 7, 2028, and provide for an
automatic increase in the number of shares reserved for issuance thereunder on January 1 of each year for the remaining
term of the plan equal to (a) 4.0% of the number of issued and outstanding shares of common stock on December 31 of
the immediately preceding year, or (b) a lesser amount as approved by the board each year. The superseded 2016 Plan
provision to provide an annual increase in the number of shares available for issuance required the Company’s board of
directors to approve the increase, up to 4%, prior to January 1 of each relevant year. As a result of the operation of each
98
of these provisions, on January 1, 2019, 2018, and 2017, an additional 965,603, 666,807, and 537,233 shares,
respectively, became available for issuance under the 2016 Plan.
As of December 31, 2018, the total number of shares reserved for issuance under the 2016 Plan was 4,750,902, of
which 2,760,071 shares were subject to outstanding option awards.
2018 Equity Inducement Plan
In February 2018, the board of directors approved and adopted the 2018 Equity Inducement Plan (“2018 Plan”),
which became effective on the same date. The board of directors approved an initial reserve of 1,100,000 shares of
common stock to be used exclusively for individuals who were not previously employees or directors, or following a bona
fide period of non-employment, as an inducement material to the individual entering into employment with the Company.
Nonqualified stock options or restricted stock units may be granted under the 2018 Plan at the discretion of the
Compensation Committee or the board of directors. The Company did not seek stockholder approval of the 2018 Plan
pursuant to Nasdaq Rule 5635(c)(4).
As of December 31, 2018, the total number of shares reserved for issuance under the 2018 Plan was 1,100,000, of
which 113,900 shares were subject to outstanding option awards.
Under the 2016 Plan and 2018 Plan, the Company may grant stock-based awards with service conditions (“service-
based” awards), performance conditions (“performance-based” awards), and market conditions (“market-based” awards).
Service-based awards granted under the 2018 Plan, 2016 Plan, and 2015 Plan generally vest over four years and expire
after ten years, although awards have been granted with vesting terms less than four years.
2016 Employee Stock Purchase Plan
The 2016 Employee Stock Purchase Plan (“2016 ESPP”) became effective in April 2016. 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.
As of December 31, 2018, the reserve remaining and available for future issuance under the 2016 ESPP was
50,851 shares.
In June 2018, the 2016 ESPP was amended to provide for an automatic annual increase in the number of shares
reserved for issuance thereunder on January 1 of each year for the remaining term of the year equal to (a) 1.0% of the
number of issued and outstanding shares of common stock on December 31 of the immediately preceding year, or (b) a
lesser amount as approved by the board of directors each year. As a result of the operation of this provision, on January
1, 2019, an additional 241,400 shares became available for issuance under the 2016 ESPP.
The following table summarizes employee and non-employee stock option activity for the year ended December 31,
2018:
99
Outstanding as of December 31, 2017
Granted
Exercised
Forfeited
Outstanding as of December 31, 2018
Options vested and expected to vest
as of December 31, 2018
Options exercisable as of December 31, 2018
Shares
Issuable
Under
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
2,361,360 $
1,668,800
(521,665)
(365,808)
3,142,687 $
5.21
8.03
5.42
5.20
6.67
(in years) (in thousands)
2,482
8.72 $
8.52 $
4,798
2,939,785 $
1,160,819 $
6.49
5.85
8.45 $
7.68 $
4,786
2,470
The aggregate intrinsic value of options outstanding, exercisable, vested and expected to vest were calculated as
the difference between the exercise price of the options and the fair value of the Company’s common stock as of the
reporting date.
For the years ended December 31, 2018, 2017, and 2016, the weighted-average grant date fair value of options
granted was $8.03, $5.22, and $7.04, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2018 and 2017 was $1.9 million and $0.3 million, respectively. There were no option exercises during the
year ended December 31, 2016.
There were no stock options issued to non-employees during the years ended December 31, 2018, 2017, and 2016.
For the year ended December 31, 2018, 6,626 non-employee stock options vested in the period. For the years ended
December 31, 2017 and 2016, no non-employee stock options vested in the period.
Restricted Common Stock
The Company issued 253,232 restricted stock awards (“RSAs”) during the year ended December 31, 2015 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 following table summarizes employee and non-employee restricted stock activity for the year ended
December 31, 2018:
Unvested restricted common stock as of
December 31, 2017
Granted
Vested
Forfeited
Unvested restricted common stock as of
December 31, 2018
Weighted
Average
Grant
Date Fair
Value
1.84
—
1.87
—
1.73
Shares
33,307 $
—
(26,444)
—
6,863 $
The fair value of RSAs that vested during the years ended December 31, 2018, 2017, and 2016 was $0.2 million,
$0.2 million, and $0.3 million, respectively. There were no RSAs granted to non-employees during the years ended
December 31, 2018, 2017, and 2016. For the year ended December 31, 2018, 21,645 non-employee RSAs vested in the
period. For the years ended December 31, 2017 and 2016, no non-employee RSAs vested in the period.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized from the Company’s equity incentive plans, 2018 Plan, and
the 2016 ESPP for the years ended December 31, 2018, 2017, and 2016 was as follows (in thousands):
100
Research and development
General and administrative
Total stock-based
compensation expense
2018
Non-
Year Ended
December 31,
2017
Non-
2016
Non-
Employees Employees
Employees Employees
234 $
—
961 $
1,531
— $
—
389 $
832
Employees
—
—
Employees
$
1,440 $
2,606
$
4,046 $
234 $
2,492 $
— $
1,221 $
—
No related tax benefits were recognized for the years ended December 31, 2018, 2017, and 2016 (see Note 11).
The employee and non-employee awards contain both performance and service-based vesting conditions. No
expense was recognized for the unvested employee and non-employee awards with only a performance condition for the
years ended December 31, 2018, 2017, and 2016. The performance-based vesting conditions represent specific
performance targets. Compensation expense for employee and non-employee share-based payment awards with
performance conditions is recognized when the performance condition is deemed probable.
In November 2018, the Company’s board of directors approved the acceleration of vesting and an extension in the
exercise period for all outstanding equity awards held by one director upon his resignation (see Note 14). The result was a
modification of 86,252 outstanding stock options and 43,290 restricted stock awards. The incremental fair value of $0.3
million, in connection with the modification of the awards, was recognized as stock compensation expense upon
resignation with no future service or performance conditions required.
As of December 31, 2018, the Company had an aggregate of $8.6 million of unrecognized stock-based
compensation expense for options outstanding, which is expected to be recognized over a weighted average period of 2.7
years. There was no unrecognized stock-based compensation expense for RSAs outstanding as of December 31, 2018.
In determining the fair value of the 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. However, due to its limited history as a public company, the Company still uses peer company data to
assist in this analysis. 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 or
similar comparable entities until a sufficient amount of historical information regarding the volatility of the Company’s own
share price becomes available.
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.
101
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 stock options granted under the 2018 Plan, 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:
2018 Plan, 2016 Plan, and 2015 Plan
Expected term (in years)
Expected volatility
Risk-free interest
Dividend yield
2016 ESPP
Expected term (in years)
Expected volatility
Risk-free interest
Dividend yield
10. Defined Contribution Plan
Year Ended
December 31,
2017
2016
2018
5.20
74%
2.42%
0%
0.50
66%
2.20%
0%
5.88
86%
2.00%
0%
0.50
78%
1.06%
0%
5.99
87%
1.28%
0%
0.45
82%
0.50%
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 years ended December 31, 2018, 2017, 2016, the Company provided $0.2
million, $0.1 million, and $0.1 million, respectively, in contributions to the plan.
11. Income Taxes
For the years ended December 31, 2018, 2017, and 2016, 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
Change in tax rate
Change in the valuation allowance
Income tax expense /(benefit)
Year Ended
December 31,
2017
2016
2018
$
$
(9,313) $
264
(1,211)
464
—
9,796
— $
(9,260) $
296
(1,294)
(284)
7,869
2,673
— $
(7,377)
333
(1,921)
(404)
—
9,369
—
102
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,
2018
2017
20,276 $
38
508
682
7,260
359
73
29,196
12,170
29
333
386
5,572
824
75
19,389
$
$
(74) $
(74)
(29,122)
— $
(63)
(63)
(19,326)
—
On December 22, 2017, the 2017 Tax Act was signed into law making significant changes to the Internal Revenue
Code. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates from
a maximum of 35% to a flat 21% rate and reducing the orphan drug credit from 50% to 25% of qualifying expenditures,
effective for tax years beginning after December 31, 2017. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
As a result of the reduction in the U.S. corporate income tax rate under the 2017 Tax Act, the Company revalued its
deferred tax assets and liabilities as of December 31, 2017 resulting in a $7.9 million decrease in net deferred assets, with
a corresponding reduction in the valuation allowance. The accounting for the income tax effects of the 2017 Tax Act and
related adjustments were completed and included in the financial statements as of and for the year ended December 31,
2017. There were no income tax effects from the 2017 Tax Act for the year ended December 31, 2018.
The Company has established a valuation allowance equal to the net deferred tax assets 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 $9.8 million, $2.7 million, and $9.4 million during the years ended December 31, 2018, 2017, and
2016, respectively, primarily due to continuing loss from operations.
As of December 31, 2018 and 2017, the Company had U.S. net operating loss carryforwards (“NOL”) of $96.6
million and $58.0 million, respectively. As of December 31, 2018 and 2017, the Company had U.S. tax credit
carryforwards of $7.3 million and $5.6 million, respectively, and state tax credit carryforwards of $0.4 million and $1.0
million, respectively. The net operating loss and tax credit carryforwards will begin to expire in 2033, if not utilized. The net
operating loss and credit carryforwards are subject to Internal Revenue Service adjustments until the statute closes on the
year the net operating loss or tax credits are utilized.
As part of the PATH Act of 2015, certain eligible companies have the ability to convert a portion of their research tax
credits to offset payroll tax liabilities. During the year ended December 31, 2017, the Company converted $0.5 million of
its research tax credit to offset payroll tax liabilities. The Company did not convert any research tax credits to offset payroll
tax liabilities during the years ended December 31, 2018 and 2016. As of December 31, 2018 and 2017, the Company
held a payroll tax credit receivable of $0.3 million and $0.4 million, respectively, in prepaid expenses and other current
assets and $0.0 million and $0.1 million, respectively, in other non-current assets.
103
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 2015 and subsequent years. However, due to NOL and tax attribute
carryovers, the taxing authorities have the ability to adjust the NOLs and other tax attributes related to closed years. As of
December 31, 2018 and 2017, there were no amounts recorded for uncertain tax positions.
12. Net Loss Per Share
The Company computed net loss attributable per common 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 7). The Company considered convertible preferred stock to
be participating securities. In the event that the Company had paid out distributions, holders of convertible preferred stock
would have participated in the distribution.
The two-class method is an earnings (loss) allocation method under which earnings (loss) per share is calculated for
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 stock did not have an obligation
to fund losses and are therefore excluded from the calculation of basic net loss per share.
Basic and diluted net loss per share is computed by dividing net loss by the weighted-average number of that class
of common stock outstanding during the period. 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.
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:
Year Ended
December 31,
2017
2018
2016
611,392
—
— 1,407,097
100,634
3,014,984 2,043,420 1,063,778
—
—
26,841
57,629
Series A convertible preferred stock
Series B convertible preferred stock
Unvested restricted common stock
Options to purchase common stock
104
13. Research and License Agreements
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 of Texas at Austin (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.
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. Pursuant to the terms of the Restated License,
the Company may 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 $0.5 million 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
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.
For the years ended December 31, 2018, 2017 and 2016, the Company paid $50,000, $30,000 and $10,000,
respectively, in annual license fees.
In connection with the above license agreements, the Company also entered into a Sponsored Research Agreement
(the “SRA”) with the University in December 2013, which was subsequently amended. 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 therapy. The SRA expired on August 31, 2018. For the years
ended December 31, 2018, 2017, and 2016, the Company paid $0.2 million, $0.6 million, and $0.8 million, respectively, to
the University under the SRA.
14. Related Party Transactions
One of the founders (“Founder”), 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 equity incentive shares, which 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.
Effective November 7, 2018, the Founder resigned from his position as a member of the Company’s board of
directors and is no longer deemed a related party. Upon resigning, the board of directors approved the immediate vesting
of all unvested stock options and restricted stock. Additionally, the exercise period was extended from 90 days to 180
days. The acceleration of vesting and extension of the exercise period resulted in additional stock-based compensation
expense (see Note 9).
For the year ended December 31, 2018, there were no payments made to the Founder under the consulting
agreement. In each of the years ended December 31, 2017 and 2016, the Company paid $50,000 to the Founder under
the consulting agreement. As of December 31, 2018 and 2017, the Company had no outstanding liability to the related
party.
15. Commitments and Contingencies
The Company leases office and laboratory space in Austin, Texas under operating leases that commenced in
January 2015 and February 2017, respectively. The office lease was amended in September 2016 to increase office
space and extend the term to December 31, 2020. In addition, the amended office lease provides for tenant improvement
allowances on both the original space and expansion space totaling $0.2 million.
105
The Company signed a new laboratory lease agreement in October 2017 for the original laboratory space, which
commenced on January 1, 2018. The laboratory lease was subsequently amended in October 2018 to increase the space
and extend the lease term to September 30, 2021.
As provided in the office and laboratory leases, 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 each lease.
The Company is subject to security deposit requirements under the terms of the amended office lease and
laboratory lease agreements, totaling $48,000, 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):
2019
2020
2021
Thereafter
Total minimum lease payments
$
$
397
409
83
—
889
For the years ended December 31, 2018, 2017, and 2016, the Company incurred $0.4 million, $0.4 million, and $0.2
million in rent expense under non-cancellable operating leases.
16. Subsequent Events
In February 2019, the Company issued and sold 4,625,000 shares of common stock at a public offering price of
$8.00 per share and pre-funded warrants to purchase 4,000,000 shares of common stock at a public offering price of
$7.9999 per warrant in an underwritten public offering pursuant to a shelf registration statement on Form S-3. This
includes the full exercise by the underwriters of their option to purchase up to 1,125,000 additional shares of common
stock. The net proceeds to the Company from this public offering were approximately $64.5 million, after deducting
underwriting discounts and commissions of $4.1 million and estimated offering costs of $0.4 million.
17. Selected Quarterly Financial Data (Unaudited)
Selected quarterly results from operations for the years ended December 31, 2018 and 2017 are as follows (in
thousands, except per share amounts):
2018 Quarter Ended
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
June 30,
September 30, December 31,
—
— $
(15,305)
(12,243)
(14,898)
(11,917)
(0.62)
(0.54) $
2,378 $
(9,670)
(9,414)
(0.46) $
2017 Quarter Ended
June 30,
September 30, December 31,
1,483
(6,627)
(6,483)
(0.39)
1,261 $
(7,998)
(7,874)
(0.48) $
1,479 $
(6,720)
(6,632)
(0.47) $
March 31,
$
1,510 $
(8,245)
(8,119)
(0.49) $
$
March 31,
$
982 $
(6,331)
(6,247)
(0.47) $
$
106
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, 2018,
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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act
as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected
by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our
internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our management, with the participation of our principal executive officer and principal financial officer, assessed the
effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in its 2013 Internal Control – Integrated Framework. Based on our assessment, our management has concluded
that, as of December 31, 2018, our internal control over financial reporting is effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. 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
107
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, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
108
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our
2019 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
2019 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
2019 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
2019 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
2019 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.
109
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
Exhibit
Number
Description of Document
Incorporate by Reference
Date of
Filing
File No.
Form
Exhibit
No.
Filed
Herewith
3.1*
Restated Certificate of Incorporation
S-1/A 333-205001 9/14/2015
3.2
3.4*
Restated Bylaws
S-1/A 333-205001 9/14/2015
3.4
4.1*
Form of Common Stock Certificate.
S-1/A 333-205001 9/14/2015
4.1
4.2*
4.3
Amended and Restated Investors’ Rights Agreement,
dated March 10, 2015, by and among the Registrant
and certain of its stockholders, as amended.
Amendment #1, dated December 4, 2018, to
Amendment and Restated Investors' Rights
Agreement, as amended
S-1 333-205001 6/16/2015
4.2
4.4
Form of Pre-Funded Warrants
8-K
001-37722
2/7/2019
4.1
10.1*
Form of Amended and Restated Indemnification
Agreement.
10.2*‡
2015 Equity Incentive Plan and forms of award
agreements.
10.3‡
2016 Equity Incentive Plan and forms of award
agreements, as amended.
10.4*‡
2016 Employee Stock Purchase Plan and forms of
award agreements, as amended.
10Q
001-37722
8/9/2018
10.1
S-1 333-205001 6/16/2015
10.2
10Q
001-37722 11/8/2018
10.2
10.5*‡ 2018 Equity Inducement Plan
S-8 333-223614 3/13/2018
99.2
10.6*‡ Form of Stock Restriction Agreement.
S-1 333-205001 6/16/2015
10.5
10.7*‡ Form of Severance Agreement
8-K
001-37722 4/16/2018
10.1
X
X
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.
110
10-Q
001-37722 11/7/2017
10.3
Exhibit
Number
Description of Document
Incorporate by Reference
Date of
Filing
File No.
Form
Exhibit
No.
Filed
Herewith
10.9*
Office Lease, dated November 24, 2014, between
Barton Oaks Office Center, LLC and the Registrant.
S-1 333-205001 6/16/2015 10.11
10.10*
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.
10-Q
001-37722 11/9/2016
10.1
10.11*‡
Consulting Agreement, dated February 18, 2014, by
and between the Registrant and George Georgiou.
S-1 333-205001 6/16/2015 10.12
10.12#
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
10.13*†
Cancer Research Grant Contract, dated June 15,
2015, between AERase, Inc. and the Cancer
Prevention Research Institute of Texas.
10.14‡
Offer Letter, dated June 16, 2014, issued by the
Registrant to Mr. Charles N. York II.
10.15‡
Offer Letter, dated June 20, 2017, issued by the
Registrant to Dr. James Wooldridge.
S-1 333-205001 6/16/2015 10.15
10-K
001-37722 3/23/2017 10.19
10-K
001-37722 3/13/2018 10.17
10.16
Offer Letter, dated July 18, 2018, by and between the
Registrant and Anthony G. Quinn
8-K
001-37722 7/23/2018
10.1
10.17
Severance Agreement, dated July 18, 2018, by and
between the Registrant and Anthony G. Quinn
8-K
001-37722 7/23/2018
10.2
10.18#
Master Services Agreement, dated November 26,
2018, between the Registrant, Fujifilm Diosynth
Biotechnologies UK Limited, Fujifilm Diosynth
Biotechnologies Texas, LLC, and Fujifilm Diosynth
Biotechnologies U.S.A, Inc.
21.1* Subsidiaries of the Registrant.
S-1 333-205001 6/16/2015
21.1
23.1
24.1
31.1
31.2
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.
111
X
X
X
X
X
X
Description of Document
Incorporate by Reference
Date of
Filing
File No.
Exhibit Filed
No.
Herewith
Form
Exhibit
Number
32.1(1)
32.2(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.
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
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.
ITEM 16. FORM 10-K SUMMARY
None.
112
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 7, 2019
AEGLEA BIOTHERAPEUTICS, INC.
By:
/s/ Anthony G. Quinn, M.B Ch.B, Ph.D.
Anthony G. Quinn, M.B Ch.B, 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 Anthony G. Quinn, M.B. Ch.B, 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.
Signature
Title
/s/ Anthony G. Quinn, M.B Ch.B, Ph.D.
Anthony G. Quinn, M.B. Ch.B, 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/ Sandesh Mahatme, LLM
Sandesh Mahatme, LLM
/s/ Armen Shanafelt, Ph.D.
Armen Shanafelt, Ph.D.
/s/ Suzanne Bruhn, Ph.D.
Suzanne Bruhn, Ph.D.
/s/ Ivana Magovcevic-Liebisch, Ph.D.
Ivana Magovcevic-Liebisch, Ph.D.
/s/ Bryan Lawlis, Ph.D.
Bryan Lawlis, Ph.D.
Chief Financial Officer and Vice President
(Principal Accounting Officer and
Principal Financial Officer)
Director
Director
Director
Director
Director
Director
113
Date
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019
March 7, 2019