UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO
Commission File Number 001-38792
Alector, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of incorporation)
001-38792
(Commission File Number)
82-2933343
(IRS Employer
Identification No.)
131 Oyster Point Blvd, Suite 600
South San Francisco, California 94080
(Address of principal executive offices, including zip code)
(415) 231-5660
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol
Common Stock
ALEC
Name of each exchange on which
registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Select Market)
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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
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Non-accelerated filer
Emerging growth company
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Smaller reporting company
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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
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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 common stock held by non-affiliates of the registrant as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was
approximately $1,375.6 million, based on the closing price of the registrant’s common stock, as reported by the Nasdaq Global Select Market on June 30, 2020 of $24.44 per share.
The number of shares of the registrant’s Common Stock outstanding as of February 15, 2021 was 79,584,442.
Portions of the registrant’s Definitive Proxy Statement relating to the registrant’s Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K
where indicated. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s 2020 fiscal year ended December
31, 2020.
TABLE OF CONTENTS
Alector, Inc.
Annual Report on Form 10-K
Business
Risk Factors
PART I
Item 1.
Item 1A.
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Item 5.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Controls and Procedures
Item 9A.
Item 9B. Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in this
report, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical
studies and clinical trials, results of clinical trials, research and development costs, regulatory approvals, timing and likelihood of success, as well as plans
and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties,
and other important factors that are in some cases beyond our control and may cause our actual results, performance, or achievements to be materially
different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,”
“could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other
similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements about:
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our plans relating to the development and manufacturing of our product candidates and research programs;
the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;
the timing and focus of our future clinical trials, and the reporting of data from those trials;
the impact of the coronavirus (COVID-19) pandemic on our business;
our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;
the expected potential benefits of strategic collaborations with third parties and our ability to attract collaborators with development,
regulatory and commercialization expertise;
our estimates of the number of patients in the United States who suffer from the diseases we are targeting and the number of patients that
will enroll in our clinical trials;
the size of the market opportunity for our product candidates in each of the diseases we are targeting;
our ability to expand our product candidates into additional indications and patient populations;
the success of competing therapies that are or may become available;
the beneficial characteristics, safety, efficacy, and therapeutic effects of our product candidates;
the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug
designation, for our product candidates for various diseases;
our ability to obtain and maintain regulatory approval of our product candidates;
our plans relating to the further development and manufacturing of our product candidates, including additional indications that we may
pursue;
existing regulations and regulatory developments in the United States and other jurisdictions;
our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product
candidates for preclinical studies and clinical trials;
our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available and the
outcome of our ongoing arbitration proceedings;
the need to hire additional personnel and our ability to attract and retain such personnel;
the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing;
our financial performance; and
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the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements.
We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we
operate and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking
statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are
subject to a number of risks, uncertainties, and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-
looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-
looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur
and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to
publicly update or revise any forward-looking statements contained herein until after we distribute this Annual Report on Form 10-K, whether as a result of
any new information, future events, or otherwise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based
upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such
information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review
of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.
Investors and others should note that we may announce material business and financial information to our investors using our investor relations
website (https://investors.alector.com), Securities and Exchange Commission (SEC) filings, webcasts, press releases, and conference calls. We use these
mediums, including our website, to communicate with our stockholders and public about our company, our products, and other issues. It is possible that the
information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to
review the information that we make available on our website.
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Item 1. Business.
Overview
PART I
Our mission is to develop therapies that empower the immune system to cure neurodegeneration and other diseases.
We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of
neurodegeneration. Immuno-neurology targets immune dysfunction as a root cause of multiple pathologies that are drivers of degenerative brain disorders.
We are developing therapies designed to simultaneously counteract these pathologies by restoring healthy immune function to the brain. Supporting our
scientific approach, our Discovery Platform enables us to advance a broad portfolio of product candidates, validated by human genetics, which we believe
will improve the probability of technical success over shorter development timelines. As a result, we have identified over 100 system targets, have
advanced four product candidates, AL001, AL002, AL003, and AL101, into clinical development, and continue to develop our research pipeline.
AL001, our first product candidate, modulates progranulin (PGRN), a key regulator of immune activity in the brain with genetic links to multiple
neurodegenerative disorders, including frontotemporal dementia (FTD), Alzheimer’s disease, Parkinson’s disease, and amyotrophic lateral sclerosis (ALS).
AL001 is initially designed to treat FTD, a severe, rapidly progressing neurodegenerative disorder that affects 50,000 to 60,000 people in the United States
and roughly 110,000 people in the European Union, with potentially higher prevalence in Asia and Latin America.
AL001 is initially aimed at treating people with FTD who have a known genetic mutation that causes a deficiency in PGRN, which is called FTD-
GRN. Our AL001 program has successfully demonstrated safety, target engagement, and proof-of-mechanism with a well-tolerated safety profile in the
central nervous systems of healthy volunteers and FTD patients in our Phase 1a, Phase 1b, and Phase 2 clinical trials. In July 2020, we advanced AL001
into a global pivotal Phase 3 trial, named INFRONT-3, in both pre-symptomatic and symptomatic participants with FTD-GRN. We own worldwide rights
to AL001.
AL101, our second product candidate in our PGRN portfolio, is designed to treat people suffering from more prevalent neurodegenerative diseases
including Alzheimer’s disease and Parkinson’s disease, in addition to FTD. In line with our therapeutic hypothesis for FTD, mutations that moderately
reduce the expression levels of PGRN have been shown to increase the risk of developing Alzheimer’s disease and Parkinson’s disease, and increased
PGRN levels have been demonstrated to be protective for these diseases in animal models. We initiated our AL101 clinical study in January 2020, and we
expect to start receiving Phase 1a data in 2021. We also own worldwide rights for AL101.
Our AL002 product candidate is aimed at treating patients with Alzheimer’s disease and is being developed in collaboration with AbbVie.
Alzheimer’s disease is a chronic neurodegenerative disease that is the most common cause of dementia, affecting nearly six million people in 2020 and that
number is projected to rise to nearly 14 million by 2050. Alzheimer’s disease is the sixth leading cause of death in the United States. AL002 is focused on
modulating check-point receptors on the brain’s immune cells, targeting Triggering Receptor Expressed on Myeloid cells 2 (TREM2). AL002 has
demonstrated a safety and tolerability profile that supports further development, target engagement, and proof-of-mechanism in the central nervous systems
of healthy volunteers in a Phase 1 trial. We initiated a Phase 2 trial evaluating AL002 in patients with early Alzheimer’s disease in January 2021.
AL003 is another product candidate designed to treat patients with Alzheimer’s disease and is also being developed in collaboration with AbbVie.
AL003 focuses on modulating check-point receptors on the brain’s immune cells, targeting sialic acid binding Ig-like lectin 3 (SIGLEC 3). AL003 has
demonstrated a safety and tolerability profile that supports further development and peripheral target engagement in healthy volunteers in a Phase 1a study.
AL003 has also completed enrollment of Alzheimer’s disease patients in a Phase1b study that continues to progress.
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Our newest development program, AL044, is developing our latest prioritized product candidate that targets MS4A4A, a major risk gene for
Alzheimer’s disease that encodes a transmembrane receptor protein that is expressed selectively in microglia in the brain and is associated with control of
microglia functionality and potential viability. We own worldwide rights for our AL044 development program.
We are also expanding our discovery platform to other indications, such as the field of immuno-oncology. We believe that products focused on
innate immune biology will complement and expand the efficacy of current immuno-oncology drugs that target the adaptive immune system.
The Immune System is Central to Neurodegeneration
The loss of healthy immune function in the brain, due to cellular aging or mutations of genes that regulate key immune cells, underlies the onset
and progression of multiple neurodegenerative disorders. Genomic analyses have shown that there is a strong correlation between genetic mutations that
predispose individuals to neurodegeneration and dysfunction in the immune system. As a result of these genetic mutations, the brain’s immune function
deteriorates and subsequently would fail to carry out critical activities, which include:
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clearing or counteracting pathological neurodegenerative proteins such as amyloid-beta, TAU, alpha-synuclein, and TDP-43;
providing metabolic and functional support to nerve cells;
regulating synaptic connections;
protecting nerve cells by stimulating the regeneration of myelin sheaths around nerve fibers; and
controlling the neurotoxic activities of activated astrocytes and rogue microglia.
We believe that restoring the immune system’s ability to perform all of these vital functions in the brain is crucial to addressing neurodegeneration
given that past approaches focusing on single degenerative pathologies have proved inadequate to date.
Since the early 20th century, the root cause of neurodegeneration has been thought to be misfolded and aggregated pathological proteins. Other
observable pathologies, including destruction of synapses, accelerated nerve cell death, and dysfunction of the brain support cells, were all thought to be
consequences of these pathological misfolded proteins. As a result, attempts to develop therapies for neurodegeneration have been centered on blocking the
synthesis of, and removing or dis-aggregating misfolded proteins. These attempts have been largely unsuccessful, as the disease continues to progress
despite significant clearance of the misfolded protein. We believe that the multiple pathologies found in degenerative brain disorders become independent
of the misfolded proteins, and each other, at early disease stages and are driven primarily by dysfunction of the brain’s immune system.
Specifically, the brain’s immune system undergoes gradual deterioration of functional characteristics as part of normal biological aging or due to
harmful genetic mutations that are linked to neurodegeneration and are associated with accelerated senescence of the brain immune cells. These cells are no
longer capable of executing their beneficial and protective roles and instead often become harmful and destructive to the brain. Based on our understanding
of the role of genetic mutations in neurodegeneration, we have designed our product candidates to target the mutated genes linked to neurodegeneration,
with the goal of slowing or reversing the deterioration of the brain’s immune cells to achieve therapeutic benefit. By restoring healthy immune function in
the brain, we believe we can simultaneously counteract the multiple independent pathologies responsible for neurodegeneration.
Our Strategy
Our goal is to develop therapies that empower the immune system to cure neurodegeneration and other diseases. The key tenets of our business
strategy to achieve this goal include:
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Building the leading, fully-integrated company focused on delivering innovative immuno-therapies, validated by human genetics, for
the treatment of neurodegeneration. We believe that building a fully integrated company will allow us to more rapidly and efficiently
develop therapies for patients as
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well as create value for our stakeholders. We are focused on building an independent research, development, clinical, and ultimately
commercial organization in order to prosecute the full potential of our immuno-neurology approach and Discovery Platform.
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Applying our proprietary development capabilities to rapidly advance our product candidates through clinical proof-of-concept
studies and beyond. We are focused on maximizing the probability of success of our product candidates by leveraging immunology,
neurobiology, and human genetics, as well as our state-of-the-art bioinformatics, to enable better and earlier target selection. In addition,
we are also focused on a biomarker-driven approach, including proprietary tools and assays, to confirm target engagement, inform patient
selection, and follow clinical outcomes.
Maximizing the therapeutic potential of our existing targets and product candidates. Given the central physiological roles played by
the distinct targets of our product candidates, we believe that there is significant potential for us to address multiple indications with
single targets. Our goal is to expand the therapeutic and commercial potential of our existing targets and product candidates to additional
indications, such as immuno-oncology. However, we will remain disciplined about advancing this strategy, leveraging our Discovery
Platform capabilities to inform expansion areas of maximum value and highest probability of success.
Continuing to focus on discovering new targets and product candidates, validated by human genetics, to prosecute the full power of
our insights and platform. Our Discovery Platform is central to our efforts to rapidly identify new product candidates with compelling
clinical promise. We will continue to invest in our Discovery Platform, including evolving our proprietary analytical tools and assays, to
further investigate several of our identified immune system targets as well as generate additional targets and product candidates.
Our Approach
The Role of the Innate Immune System and Microglia in Neurodegeneration
Significant evidence in the last decade has shown that neurodegenerative diseases, such as Alzheimer’s disease, Parkinson’s disease, FTD, and
ALS, are linked to a dysfunctional brain immune system. In contrast to the dual adaptive and innate components that characterize the broader human
immune system, the brain’s immune system consists primarily of innate immune cells, known as microglia. These brain resident macrophages account for
10% to 15% of all cells found within the brain and are responsible for many aspects of brain health and maintenance. As the key innate immune cells in the
brain, microglia respond to infection and damage, clear cell debris and pathological proteins, nurture neurons and the brain support cells, and control the
number and functionality of inter-neuronal connections. Microglia have been our initial focus and new scientific advances have made it possible to
understand how these key innate immune cells in the brain represent a crucial focal point for intervening, treating, or preventing neurodegenerative diseases
(Figure 1).
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Figure 1. Our antibody product candidates target microglia to harness their many potential beneficial roles in treating neurodegenerative diseases.
Significant Scientific Data Support Our Hypothesis
Understanding how the brain’s immune cells affect its structure and function, in both normal and diseased states, is in our view, the key to
understanding many neurological diseases. Human genetic evidence has supported the importance of the interactions between the brain and the innate
immune system. For example, 22 of the top 29 risk genes for Alzheimer’s disease, identified using genetic linkage studies, candidate gene analysis,
genome-wide association (GWAS) studies, and whole-genome or whole-exome sequencing, regulate immune function in the brain. Many of these risk
genes have been shown to express predominantly in microglia and to control the function of these cells (Figure 2).
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Figure 2. Expression of genes linked to Alzheimer’s disease is highly enriched in microglia.1
Microglia have been shown to be key cells in overall brain maintenance, health, and function and are the brain’s first line of immune defense.
These innate immune cells are tooled with “microglial sensomes” which enable them to constantly survey brain cells to identify and respond to subtle signs
of pathology or dysfunction. Microglia scavenge the brain for toxic misfolded proteins, cell debris, damaged or unnecessary nerve cells, dysfunctional or
aged synapses, and infectious agents. In addition, microglia support the generation of new neurons and synapses and remodel neuronal circuits. Microglia
also control the survival and function of astrocytes and oligodendrocytes, the main brain support cells which control brain metabolism and blood supply
and replenish aged or damaged nerve fibers after injury. Further, microglia have been shown to modulate the permeability of the blood brain barrier
allowing access to peripheral immune cells, to assist against infection or injury. Microglia can also change their morphology, functionality, and number in
response to changing brain environment.
Analysis of gene transcription at the single-cell level in microglia from normal and diseased brains revealed that multiple microglia subtypes exist
which may respond to specific disease pathologies in the brain. Our product candidates are designed to recruit microglia subtypes by targeting microglia
check-point proteins that control their survival, proliferation, migration, and function. This allows us to differentially modulate microglia activity as needed
to counteract a given degenerative brain disorder.
Findings in the fields of human genetics, immunology, and neuroscience have indicated that as a result of normal aging or genetic mutations, the
beneficial functions of the microglia deteriorate leading to massive death of neurons and consequently to neurodegeneration.
1 Hansen, D., Hanson, J., Sheng, M. “Microglia in Alzheimer’s disease.” Journal of Cell Biology. Volume 217, Number 2, February 2018
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The following table outlines the key impact of functional and dysfunctional microglia:
Functional Microglia
Dysfunctional Microglia
•Clear/counteract and form a barrier around pathological proteins
such as amyloid-beta
•Provide metabolic and functional support to nerve cells
•Regulate healthy synaptic connections
•Control the function of astrocytes, the brain’s star shaped support
cells that help maintain the blood-brain barrier, provide
nutrients to neurons, repair the nerve tissue following injury,
and facilitate neurotransmission
•Reduced ability to remove, or to limit the damage
caused by pathological proteins leading to
dysfunction of neuronal connections and
ultimately leading to neuronal cell death
•Reduced ability to provide nourishing factors to
neurons leading to neuronal cell death
•Indiscriminate destruction of synapses leading to
reduced number of synapses and dysfunctional
neuronal connections
•Inducement and conversion of beneficial astrocytes
to toxic astrocytes leading to neuronal cell death
•Control the survival and function of oligodendrocytes that provide
•Failure to support oligodendrocytes, leading to
protective myelin sheaths around nerve fibers
neuronal dysfunction
Our Discovery Platform
Our Discovery Platform leverages human genetic datasets, advanced tools in bioinformatics and imaging, and insights in neurodegeneration and
immunology to: (1) identify immune system targets that play a critical role in the development of multiple neurodegenerative diseases, and rapidly develop
antibody therapeutics to these targets, (2) interrogate and prioritize those targets for activity using biomarkers and related proprietary assays and preclinical
models, and (3) clinically test product candidates in genetically defined patient populations that are most likely to respond to treatment. We believe that
these platform capabilities provide us with the tools to solve the conceptual and technical challenges associated with development of drug candidates for
neurodegeneration.
We rely on proprietary immuno-neurology bioinformatics algorithms and methodologies to analyze large genetic datasets from diseased and
healthy individuals, brain-based gene expression profiling, brain-based proteomics, and human pathology. These proprietary capabilities allow us to rapidly
identify tractable targets, pharmacodynamic biomarkers, and patient populations associated with aberrant immune function which lead to
neurodegeneration. Specifically, the three priorities of our platform efforts are:
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Target Selection. Our target selection capabilities address a wide array of factors that we believe inform efficient, optimized therapeutic
outcomes, including genetic and mechanistic rationale. We leverage our state-of-the-art bioinformatics to identify genetic mutations in
the brain immune system that we believe are the root cause of neurodegeneration. We employ a suite of genetic tools to elucidate the
immune dysfunction caused by these mutations. We then seek to engineer immune modulating antibody product candidates to
functionally counteract the harmful consequence of these genetic mutations. We leverage in vitro and in vivo functional tools to validate
the activity of our product candidates and their ability to cross the blood brain barrier at sufficient quantities to be therapeutically
effective.
Biomarker Selection. We are able to identify and employ molecular biomarkers, assays, and imaging techniques that are tailored to our
product candidates to confirm target engagement and quantify their therapeutic impact, allowing us to potentially obtain clinical data
earlier than would be expected using traditional clinical measures.
Patient Selection. We utilize genetic screening and biomarkers to better align a patient’s specific diagnosis with the targeted intervention
in our clinical studies.
We employ gene expression profiling, proteomics, brain imaging, and data on disease pathology as well as our own preclinical and clinical data to
continually refine our proprietary immuno-neurology algorithms and
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methodologies. Using our Discovery Platform to identify targets that are validated by human genetics, disease biomarkers, and responsive patient
populations, we believe that we are positioned for greater probability of technical success on more efficient timelines relative to historical drug
development in neurodegeneration.
Our Pipeline Programs
Figure 3. The following table highlights our clinical programs.
In addition to our pre-clinical and clinical programs described above, we continue to expand the number of research programs in our pipeline
focused on targeting Alzheimer’s disease, Parkinson’s disease, ALS, progressive multiple sclerosis, and oncology.
Our Progranulin Program
Our first development program is focused on modulating levels of PGRN, a key regulator of microglia function in the brain with strong genetic
links to FTD and other neurodegenerative disorders. Healthy individuals carry two copies of PGRN that function together to produce healthy levels of
PGRN throughout the body. Mutations in both copies of the PGRN gene lead to a neurodegenerative disease called neuronal ceroid lipofuscinosis, which is
typified by childhood dementia, vision loss, and epilepsy. Mutations in a single copy of PGRN lead to a drop of between 50% and 70% in the level of
PGRN and consequently lead to development of FTD with about 90% penetrance by 75 years of age2 with greater than 90% probability. Moreover, large
scale human genetic studies have shown that mutations in the gene for PGRN, which leads to a more modest decrease in the level of PGRN, increases the
risk for Alzheimer’s disease and Parkinson’s disease, making PGRN a significant risk gene for these disorders as well.
Healthy levels of PGRN are associated with many cellular processes that include, but are not limited to, normal microglial activities, neuronal
survival, and lysosome function. As shown in the figure below (Figure 4), PGRN deficiency disrupts microglia-neuronal homeostasis in the brain and
promotes neurodegeneration through the release of cytotoxic cytokines and complement factors by dysfunctional microglia. Moreover, these microglia
activate astrocytes, which in turn, damage neurons. Thus, lack of PGRN leads to disrupted health and function of both neurons and microglia and if not
corrected, rapid neurodegeneration.
2 Cruts et al. Nature. 2006;442:920–4. [PubMed]
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Figure 4. PGRN deficiency disrupts homeostasis between microglia and neurons, and promotes neurodegeneration during aging. 3
SORT1 Controls PGRN Levels in the Body
Human and mouse genetic studies have identified the neurotrophic factor PGRN degrading receptor Sortilin (SORT1) as a major negative regulator
of PGRN levels in plasma and the brain. SORT1 is a sorting receptor on the cell surface and on the endoplasmic reticulum-Golgi apparatus within the cell.
SORT1 binds to extracellular PGRN in the plasma and brain and transports it into the cells for degradation by the lysosome resulting in decreasing levels of
extracellular PGRN. SORT1 deficiency increases PGRN plasma and brain levels by two to three-fold in mouse models, while variants that modestly reduce
expression of SORT1 increase the level of PGRN in humans.
Moreover, genetic loss of SORT1 in mice does not lead to the adverse effects associated with genetic loss of PGRN, and PGRN continue to
function as expected in the absence of SORT1. These studies and others have indicated to us that blocking SORT1 with a pharmacological agent would be a
safe and effective approach in increasing the level of functional PGRN in the brain.
We have developed two distinct product candidates that target SORT1, AL001 and AL101, designed to increase PGRN levels in the brain of
patients to counteract the damage sustained due to low PGRN levels in neurodegenerative disorders. Our first product candidate, AL001, is initially
intended to target orphan disorders, including genetic forms of FTD such as in patients that are missing a functional copy of the PGRN gene (FTD-GRN).
Our second PGRN product candidate, AL101, is intended to target widely prevalent neurodegenerative disorders such as Alzheimer’s disease and
Parkinson’s disease, in addition to FTD. We have worldwide development and commercial rights to our PGRN product candidates.
AL001 for the Treatment of FTD
Our first product candidate, AL001, is a humanized recombinant monoclonal antibody that is intended to be delivered by intravenous, peripheral
infusion to the blood stream to increase the levels of PGRN in the brains of FTD-GRN patients. AL001 functions by shutting down the SORT1
degradation mechanism for PGRN and increasing the circulating half-life of the functional PGRN in the brain. AL001 received orphan drug designation
from the FDA for the treatment of FTD in 2018 as well as Fast Track designation for the treatment of patients with
3 Kao, A., McKay, A., Singh, P., Brunet, A., Huang, E. “Progranulin, lysosomal regulation and neurodegenerative disease.” Nature Reviews Neuroscience.
Volume 18, Number 6, June 2017.
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FTD-GRN. Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has
such designation, the product is entitled to a period of market exclusivity. This exclusivity precludes the FDA from approving another marketing
application for the same indication for that time period, unless the later product is clinically superior. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory review and approval process. Fast Track designation is designed to facilitate the development and
expedite the review of therapies which treat serious conditions and fill an unmet medical need. Programs with Fast Track designation may benefit from
early and frequent communications with the FDA, potential priority review, and additionally, a rolling submission of the marketing application.
Overview of FTD
FTD is a rapidly progressing and severe degenerative brain disease with no approved treatment. FTD is a form of dementia found most frequently
in individuals less than 65 years old at time of diagnosis. Patients with FTD exhibit a range of symptoms including personality changes including
compulsive behavior, lack of restraint, apathy, and anxiety as well as language and behavioral problems. Average life expectancy in FTD patients is seven
to 10 years after the start of symptoms. FTD symptoms have an insidious onset with clinical symptoms usually appearing between 45 to 65 years of age at
an average age of 58. Hence, FTD is considered an early-onset dementia as compared to late-onset Alzheimer’s disease, and is more common than
Alzheimer’s disease in early-onset dementia under the age of 60 years.
Figure 5. MRI of frontal and temporal atrophy in FTD.
Although FTD was poorly understood and thought to be rare, over the past decade the scientific community has gained a knowledge about the
biology of FTD as well as an awareness of disease prevalence. FTD affects roughly 50,000 to 60,000 people in the United States and roughly 110,000 in
the European Union. There are multiple heritable forms of FTD, and FTD-GRN, and FTD-GRN patients represent 5% to 10% of all people with FTD There
are currently no approved treatments options available for FTD. Healthy individuals carry two copies of PGRN that function together to produce sufficient
levels of PGRN throughout the body. Mutations in a single copy of PGRN lead to a drop of between 50% and 70% in the level of PGRN and consequently
lead to development of FTD with about 90% penetrance by 75 years of age4 with greater than 90% probability. Researchers have identified over 70
inherited loss of function mutations in PGRN that lead to FTD to date.
4 Cruts et al. Nature. 2006;442:920–4. [PubMed]
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Figure 6. Mutations in a single copy of PGRN lead to a 50% or greater decrease in the level of PGRN and lead to development of FTD with
a greater than 90% probability.
The rate of disease progression in FTD is faster than in Alzheimer’s disease, suggesting that clinical trials with disease-modifying agents have the
potential to obtain clinical data more quickly and with fewer subjects in FTD than in Alzheimer’s disease. For example, the median survival from symptom
onset in FTD is shorter than in Alzheimer’s disease.
We believe that we can establish rapid clinical proof-of-concept in FTD-GRN patients given its genetically-defined patient population, fast rate of
disease progression, and our ability to leverage fluid and imaging biomarkers. In FTD-GRN patients, inhibition of SORT1 through AL001 represents a
potential mechanism to compensate for the over 50% reduction of PGRN. AL001 is intended to reduce the ability of SORT1 to bind to and degrade PGRN,
leading to increases in the levels of PGRN through increasing its circulating half-life (Figure 7). We have tested our PGRN program antibodies in various
animal models, healthy volunteers, and FTD-GRN patients and have achieved significantly elevated, long-lasting levels of PGRN in the brain after
intravenous administration.
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Figure 7. Mechanism of action for our PGRN programs. AL001 binds to SORT1 and prevents degradation of PGRN, increasing its circulating
half-life significantly. A similar mechanism of action is also applicable for AL101.
AL101 for the Treatment of Alzheimer’s Disease and Parkinson’s Disease
We are developing a second product candidate in our PGRN program, AL101, that targets SORT1 for large patient populations such as Alzheimer’s
disease and Parkinson’s disease. The FDA has granted orphan drug designation for the treatment of FTD to AL101, as well as Fast Track designation for
the treatment of patients with FTD-GRN.
Mutations that moderately reduce the amount of PGRN in the brain increase the risk for Alzheimer’s disease and Parkinson’s disease. Moreover,
some Parkinson’s disease patients have been shown to have reduced levels of PGRN. In line with our therapeutic hypothesis, we plan to target PGRN as a
potential disease modifying therapeutic for patients suffering from Alzheimer’s disease and/or Parkinson’s disease.
Overview of Alzheimer’s Disease
Alzheimer’s disease is a chronic neurodegenerative disease that usually starts slowly in people over 65 years of age and worsens over time. It is the
most common cause of dementia, accounting for 60% to 70% of all cases. The most common early symptom of Alzheimer’s disease is difficulty in
remembering recent events. As the disease advances, symptoms can include problems with language, disorientation, mood swings, loss of motivation,
failure to manage self-care, and behavioral issues. As a person’s condition declines, they often withdraw from family and society. Gradually, bodily
functions are lost, leading to death. Although the speed of progression can vary, the typical life expectancy following diagnosis is eight to ten years.
While estimates of the prevalence of Alzheimer’s disease vary, the Alzheimer’s Association estimates that in 2020, there were more than five
million Americans age 65+ suffering from Alzheimer’s disease and that number is projected to nearly triple by 2050. Alzheimer’s disease is the sixth
leading cause of death in the United States and the fifth-leading cause of death for those ages 65 and older.
In addition to its debilitating effect on patients’ cognition and day-to-day functioning, Alzheimer’s disease places a significant burden on the
healthcare system. According to the Alzheimer’s Association, the aggregate cost of care in 2020 for patients with Alzheimer’s disease and other types of
dementia in the United States was estimated to be $305 billion, with nearly two-thirds over half of which is borne by the Medicare system. Total payments
for health care, long-term care and hospice care for people with Alzheimer’s and other dementias are projected to increase to more than $1.1 trillion in
2050.
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Overview of Parkinson’s Disease
Parkinson’s disease is a long-term degenerative disorder of the central nervous system that mainly affects the motor system. Early in the disease,
the most obvious symptoms are shaking, rigidity, slowness of movement, and difficulty with walking. Cognitive and behavioral problems may also occur.
Dementia becomes common in the advanced stages of the disease. Depression and anxiety are also common, occurring in more than a third of people with
Parkinson’s disease. Other symptoms include sensory, sleep, and emotional problems. Parkinson’s disease typically occurs in people over the age of 60.
The average life expectancy following diagnosis is between three to 10 years after the onset of symptoms.
There is no disease modifying treatment for Parkinson’s disease, and the options for patients are limited to treatments that improve symptoms.
Initial treatment is typically with the anti-Parkinson’s drug medication levodopa, with dopamine agonists being used once levodopa becomes less effective.
As the disease progresses and neurons continue to be lost, these medications become less effective while at the same time they produce a complication
marked by involuntary writhing movements.
According to the Parkinson’s Foundation, more than 10 million people worldwide are living with Parkinson’s disease. Approximately 60,000
Americans are diagnosed with Parkinson’s disease each year and an estimated one million Americans will be living with Parkinson’s disease by the year
2040. According to the Parkinson’s Foundation, the combined direct and indirect cost of Parkinson’s, including treatment, social security payments and lost
income, is estimated to be nearly $52 billion per year in the United States alone. It is estimated that by 2040, over 12 million people globally will have
Parkinson’s disease.
Our PGRN Product Candidates Development Plan
We initiated our AL001 Phase 1a clinical study in September 2018. Our AL001 product candidate has demonstrated target engagement and
increases in the disease associated pharmacodynamic marker PGRN in the brains of primates, healthy volunteers, and FTD-GRN patients. We initiated our
AL101 Phase 1a clinical study in January 2020, and we expect to start receiving Phase 1a data in 2021. AL001 successfully demonstrated proof-of-
mechanism in a Phase 1a study (n=50) in healthy volunteers and in the Phase 1b portion of the study (n=14) in FTD-GRN patients by showing a
statistically significant increase in PGRN levels relative to baseline when compared to pooled placebo in plasma and in CSF at the pre-specified follow-up
time point. The primary endpoints of the study are safety and tolerability. The secondary endpoints include pharmacokinetic and pharmacodynamic
measurements, including changes of PGRN in serum and the CSF. Pharmacodynamic characteristics include the biochemical and physiological effects of a
product candidate, and pharmacokinetic characteristics describe the time course, for example, product candidate absorption, distribution, metabolism, and
excretion.
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Figure 8. AL001 restores PGRN levels back to normal range in healthy volunteers and symptomatic and asymptomatic FTD-GRN patients.
Results showed that AL001 was generally safe and well-tolerated, with no drug-related serious adverse events or dose-limiting adverse events
reported in the study, achieving the primary objective of the study. There were no drug-related serious adverse events or dose limiting adverse events
reported in the study, achieving the primary endpoint. Moreover, in our Phase 1a and 1b studies, statistically significant increases in plasma and CSF PGRN
levels relative to baseline were also observed, and the magnitude and duration of the effect in plasma and CSF PGRN levels appeared to be dose dependent.
In the third quarter of 2019, we advanced AL001 into a Phase 2 study. Our preliminary Phase 2 preliminary results similarly showed that there
were no drug-related serious adverse events or dose limiting adverse events reported in the study and significant increases in plasma PGRN levels relative
to baseline back to the normal range were also observed, and the magnitude and duration of the effect in plasma PGRN levels appeared to be dose
dependent. The Phase 2 study also includes an additional genetic subset of FTD patients (FTD-C9orf72). We plan to continue this 96-week open-label
Phase 2 study and present additional data from the study participants in 2021.
Figure 9. Phase 2 data shows plasma PGRN restored to normal in FTD-GRN participants.
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We review and monitor biomarker data from these studies to confirm target engagement and quantify their therapeutic impact. In addition to
reviewing PGRN levels in plasma and CSF, we evaluate disease-associated proteins, including inflammatory (i.e. SPP1, CHIT1) and lysosomal (i.e. CTSB)
biomarkers and neurofilament light chain (NfL). NfL has been associated with disease progression in FTD patients and identified as a marker of treatment
effect in neurodegenerative diseases such as amyotrophic lateral sclerosis, spinal muscular atrophy, and multiple sclerosis in peer-reviewed journals. We
have previously reported results from our AL001 Phase 1b study and preliminary data from our AL002 study which showed normalization in a number of
disease-associated proteins, further validating our decision to progress AL001 into a Phase 3 study.
In July 2020, we advanced AL001 into a global pivotal Phase 3 trial in both pre-symptomatic and symptomatic participants with FTD-GRN, named
INFRONT-3. The randomized, double-blind, placebo-controlled trial will enroll up to 180 FTD-GRN mutation carriers across approximately 50 sites in the
United States, Europe and Australia. Symptomatic and pre-symptomatic participants will be randomized to receive AL001 or placebo intravenously every
four weeks. Participants will also be given the option to continue receiving treatment in an open-label extension study. The primary endpoint of the pivotal
Phase 3 trial is to measure the effect of AL001 on clinical decline by utilizing the CDR® plus NACC FTLD-SB assessment, which evaluates clinical
impairments in behavior, language, memory, judgment, and functional activities in trial participants. In addition, the trial will assess secondary clinical
endpoints, multiple biomarkers and safety.
Figure 10. Clinical plan for AL001 in FTD-GRN. (Figure not to scale.)
Potential Additional Applications for Our PGRN Program
Our initial PGRN program is currently targeted only at patients with FTD-GRN, which is a subset of the total FTD patient population. Beyond
FTD-GRN, we believe AL001 has the potential to treat other rare diseases
that share pathological mechanisms with FTD-GRN. In order to treat any other rare diseases and the broader FTD patient population, we will be required to
conduct additional clinical studies in order to obtain the applicable approvals for that specific patient population. We are enrolling an additional genetic
subset of FTD patients (FTD-C9orf72) in our Phase 2 clinical trial of AL001 and may expand to additional FTD subpopulations in the future, and we will
evaluate AL001 in patients with ALS caused by C9orf72 repeats, which share TDP-43 pathology with FTD-GRN.
In addition, polymorphic mutations that moderately reduce the expression levels of PGRN have also been shown to increase the risk of developing
Alzheimer’s disease and Parkinson’s disease, and increased PGRN levels have been demonstrated to be protective for these diseases in animal models. We
are developing AL101 ultimately to target these large chronic neurodegenerative diseases (Figure 11). The study is a randomized, double-blind, placebo-
controlled Phase 1 trial expected to enroll up to 42 healthy volunteers at a single clinical study site in the United States. The study is designed to assess the
safety, tolerability, pharmacokinetics, pharmacodynamics, and bioavailability profile of intravenously and subcutaneously administered doses of AL101.
For our other programs, we anticipate following a similar development approach to expand into additional patient populations as appropriate.
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Figure 11 Our PGRN programs have broad therapeutic potential, including FTD and other more prevalent neurodegenerative diseases. (Figure
not to scale.)
Our TREM2 Program
TREM2 is a transmembrane receptor protein that is expressed on a subset of innate immune cells and selectively on microglia in the brain. TREM2
on microglia cells is thought to promote improved cell migration to the site of injury, improved cell survival, increased phagocytosis, and increased cell
proliferation. Rare individuals with homozygous TREM2 mutations, or mutations on both chromosomal copies, may develop neurodegeneration by the age
of 40 with an average lifespan of 10 years following diagnosis. A gene variant in one of the two copies of TREM2 is found to increase the risk of
Alzheimer’s disease by threefold. Not only do mutations in a single copy of TREM2 increase the risk of Alzheimer’s disease significantly, but Alzheimer’s
disease patients with TREM2 mutations exhibit an earlier onset of symptoms by three years and an increased rate of brain volume loss compared to
individuals without such mutation. Evidence also suggests that gain of function mutation leading to increased extension of TREM2 confer a protective
phenotype against Alzheimer’s disease.
The discovery of strong genetic linkage of TREM2 to Alzheimer’s disease in 2013 was one of the first examples in which large scale genomic
analyses were used to identify a rare gene variation and link it to an increase in the risk of late-onset Alzheimer’s disease.
TREM2 binds to membrane lipids and lipoproteins such as Apolipoprotein E (ApoE) which are normally found in the brain. Mutations in the gene
for ApoE are also known to significantly increase the risk of development of Alzheimer’s disease and is the single highest risk factor for Alzheimer’s
disease.
AL002 for the Treatment of Alzheimer’s Disease
Our product candidate, AL002, is a humanized, TREM2 activating, monoclonal antibody that is intended to be delivered by intravenous, peripheral
infusion into the blood stream (Figure 12). AL002 is a microglia cell regulator that modulates the TREM2 receptor and is being developed for the treatment
of Alzheimer’s disease in collaboration with AbbVie.
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Figure 12. Mechanism of action of our TREM2 activating product candidate AL002.
There are currently no cures or approved disease-modifying therapies for Alzheimer’s disease, and there are only two classes of approved therapies
for symptomatic treatment: acetylcholinesterase inhibitors and glutamatergic modulators. These drugs are designed to help preserve neuronal
communication, but only provide temporary benefit and do not slow or halt neuronal death. In addition, antidepressants and antipsychotics are often
prescribed off-label to treat the symptoms of severe Alzheimer’s disease in patients suffering from agitation, aggressive behaviors, psychosis, and
depression.
Recent drug candidates under development for Alzheimer’s disease include those focused on blocking synthesis, enhancing clearance or
disaggregating misfolded amyloid-beta or TAU proteins in the brain, reversing chronic inflammation, and repairing vascular dysfunction, metabolic
dysregulation, as well as neurotoxicity. Almost all of these candidates were designed to target just one of the multiple Alzheimer’s disease pathologies, and
most of these drug candidates have so far failed to demonstrate any significant benefit.
Although amyloid-beta plaques and TAU protein in the brain represent physical pathologies of the disease and are believed to cause a loss of
neuronal connectivity in the brain and neuronal death, recent scientific data paints a more complex picture. Therapeutic approaches that address only one of
the multiple pathologies observed in Alzheimer’s disease, for example, pathology-directed therapies that clear amyloid-beta or TAU proteins, have had
limited efficacy. More efficacious therapies will require addressing additional pathologies which we believe are associated with microglial failure.
Our TREM2 Preclinical Data
AL002 binds to TREM2 on the surface of microglia and is designed to optimize microglial activity through the phosphorylation of Spleen
Associated Tyrosine Kinase (Syk). With prominent academic collaborators, we have demonstrated that AL002s, an antibody that is functionally similar to
AL002 but cross-reacts to the mouse TREM2, can normalize gene expression signature associated with Alzheimer’s disease and reduce pathology in a
mouse model of Alzheimer’s disease. Furthermore, AL002 was shown to induce microglial proliferation, increase microglial survival and decrease
dystrophic neurites associated with damaged neurons in an aggressive mouse model of Alzheimer’s disease that expresses either the normal or genetic risk
variant of the human TREM2.
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Figure 13. AL002s statistically significantly increases the number of microglia around amyloid-beta plaques (left) and reduces the area occupied
by amyloid-beta plaques5 (right) in a mouse model of Alzheimer’s disease (**** indicates p<0.001 by T-test).
Figure 14. AL002s statistically significantly improves cognitive deficit in a mouse model of Alzheimer’s disease (**** indicates p<0.0001 by T-test).
AL002 Development Plan
In the third quarter of 2019, we completed the Phase 1a portion (n=56) of a clinical trial in healthy volunteers with AL002. AL002 was generally
safe and well-tolerated in the single ascending dose part of the Phase 1 study. In addition, a dose dependent and statistically significant change in both
soluble TREM2 (sTREM2) and downstream biomarkers for microglia functionality in cerebrospinal fluid were observed upon treatment, indicating both
target engagement and proof-of-mechanism in healthy volunteers.
5 Data generated by D. Wilcox, University of Kentucky.
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Figure 15. In healthy volunteers, a dose dependent decrease in sTREM2 and an increase in an immune activity biomarker was observed in the
AL002 Phase 1a clinical study. CSF samples were taken from the five highest dose cohorts. The data shown are derived from analysis of CSF
samples from 34 healthy volunteers (* denotes p<0.05 by T-test, *** denotes p<0.001 by T-test).
In the second quarter of 2019, based on the safety and tolerability observed in the Phase 1a healthy volunteer study, as well as encouraging
biomarker data, we initiated the Phase 1b portion of the trial with AL002 in people with Alzheimer’s disease. Based on the data collected to date in
preclinical studies as well as in healthy volunteers, and in alignment with our partner AbbVie, we have decided to close enrollment in the Phase 1b study,
which was impacted by the COVID-19 pandemic.
In January 2021, initiated our Phase 2 trial in Alzheimer’s disease patients in early stages of the disease. The randomized, double-blind, placebo-
controlled, dose-ranging, multi-center Phase 2 study will enroll approximately 265 participants with early AD at up to 90 sites globally. The primary
endpoint of the Phase 2 study will measure disease progression utilizing the Clinical Dementia Rating Sum of Boxes (CDR-SB). The study will also
measure multiple fluid and imaging biomarkers, and assess several secondary clinical, pharmacokinetic and pharmacodynamic endpoints, as well as safety
to generate data enabling pivotal Phase 3 studies.
Figure 16. Clinical development plan for AL002 in Alzheimer’s disease. (Figure not to scale.)
These clinical trials have been designed in close collaboration with AbbVie. Our desired outcome is to achieve informative endpoints to enable
efficient Phase 3 clinical trial design and a rapid advancement towards marketing approval. For more information on our collaboration with AbbVie see the
section titled “Business—Strategic Alliance with AbbVie.”
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Our SIGLEC 3 Program
Large scale genomic profiling of datasets from Alzheimer’s disease patients has been used to identify the association between certain variants of
SIGLEC 3, also known as CD33, and increased risk to develop Alzheimer’s disease. SIGLEC 3 is an inhibitory receptor expressed on microglia and acts as
the brakes of the immune system in the brain, slowing down microglial activity. Excessive inhibition of the microglia by the disease risk variant of
SIGLEC 3, which increases expression of the inhibitory SIGLEC 3 receptor on microglia, leads to reduced functionality of the myeloid cells, and
consequently, increased deposition of amyloid-beta plaques and accelerated loss of tissue in the brain of Alzheimer’s disease patients that carry this risk
variant.
Our analysis further showed that the natural inhibitory ligands for SIGLEC 3, which are required for activation of SIGLEC 3, are upregulated in
the brain of Alzheimer’s disease patients, further reducing the functionality of the microglia.
Consistent with the genetic findings in humans, Alzheimer’s disease mouse models, in which the gene for SIGLEC 3 was genetically ablated, have
microglia with improved phagocytosis of beta amyloid and displayed fewer amyloid-beta plaques compared to the same Alzheimer’s disease model that
expressed the mouse SIGLEC 3 gene. In line with the findings that the presence of SIGLEC 3 increased the severity of Alzheimer’s disease, a reduced
number of certain disease associated microglia that are thought to counteract the progression of Alzheimer’s disease was observed when the human
SIGLEC 3 in Alzheimer’s disease mouse models was over-expressed.
Taken together, this data supports the hypothesis that blocking the function of SIGLEC 3 would increase the number of beneficial microglia and
elicit a therapeutic benefit in Alzheimer’s disease.
AL003 for Treatment of Alzheimer’s Disease
Our product candidate, AL003, is a SIGLEC 3 blocking, monoclonal antibody (Figure 17) that is intended to be delivered by intravenous,
peripheral infusion into the blood stream. The function of SIGLEC 3 on microglia is similar to the inhibitory function of PD-1 on T-cells. AL003 acts
similarly to PD-1 inhibitors that have been employed successfully in immunotherapy of cancer. Both approaches aim to remove the “brakes” on the
immune system to allow the system to work at its full capacity.
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Figure 17. Mechanism of action of our SIGLEC 3 blocking product candidate AL003.
Our SIGLEC 3 Preclinical Data
The activity of AL003 in mice was assessed in immunodeficient mice containing human immune cells to recapitulate the human immune system as
closely as possible. AL003 injected into the bloodstream of these mice blocks SIGLEC 3 on immune cells. In addition, a single intraperitoneal injection of
AL003 into mice that express the human SIGLEC 3 in microglia leads to a long-lasting, statistically significant blockade of SIGLEC 3 on the cell surface
of microglia in the brain, indicating that AL003 is potentially able to cross the blood brain barrier and exert its desired activity (Figure 18).
Figure 18. AL003 blocks SIGLEC 3 on microglia in mouse brain following injection to the blood stream (**** indicates p<0.0001 by T-test).
AL003 Development Plan
In the fourth quarter of 2019, we completed the Phase 1a portion of our trial (n=38) in healthy volunteers with AL003 for the treatment of
Alzheimer’s disease patients, and reported that the primary safety endpoint of the study
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had been achieved. Additionally, secondary PK and PD endpoints were also met. In the study, 38 healthy volunteers were dosed over eight dose cohorts in
the SAD portion of the AL003 Phase 1a study. A dose dependent and long-lasting change in SIGLEC 3 indicating target engagement was observed upon a
single dose treatment in these healthy volunteers.
Based on the safety and tolerability observed in the Phase 1a study, we commenced dosing in January 2020 in Alzheimer’s disease patients in a
Phase 1b study with AL003. We have completed enrollment of Alzheimer’s disease patients in this study which continues to progress with clinical data
expected to be presented in 2021.
Figure 19. Clinical development plan for AL003 in Alzheimer’s disease. (Figure not to scale.)
These clinical trials have been designed in close collaboration with AbbVie. Our desired outcome is to achieve informative endpoints to enable
efficient Phase 3 clinical trial design and a rapid advancement towards marketing approval. For more information on our collaboration with AbbVie see the
section titled “Business—Strategic Alliance with AbbVie.”
Our MS4A4A Program
MS4A4A is among the most prominent genetic risk clusters for late-onset Alzheimer’s disease. Risk variants of MS4A4A are associated with an
increase in the prevalence of Alzheimer’s disease and a decrease in the age of onset. MS4A4A is a transmembrane receptor protein that is expressed in a
subset of innate immune cells, and selectively, in microglia in the brain. MS4A4A is thought to control microglia functionality and/or viability. Our AL044
product candidate was designed to counteract the risk variants of MS4A4A and to functionally convert the risk variants of MS4A4A to the protective variant.
We expect that AL044 will mimic and exceed the beneficial activity of the protective MS4A4A variant, which we believe may potentially decrease the
progression of Alzheimer’s disease.
Figure 20. AL044 is designed to mimic and exceed the beneficial activity of the protective MS4A4A variant, which we believe may stop or slow the
progression of Alzheimer’s disease.
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AL044 for the Treatment of Alzheimer’s Disease
AL044 is a humanized, MS4A4A function modulating monoclonal antibody that is intended to be delivered by intravenous, peripheral infusion into
the bloodstream. AL044 was designed to mimic and exceed the beneficial activities of the protective MS4A4A gene variant in Alzheimer’s disease, as
determined by AL044’s ability to partially phenocopy the gene expression signature of the protective MS4A4A gene variant and to increase sTREM2 levels
in the CSF of non-human primates in a dose-dependent manner.
Expansion of Our Discovery Platform to Other Indications
Immuno-oncology
We are also expanding our discovery platform to other indications, such as the field of immuno-oncology. We believe that products focused on
innate immune biology will complement and expand the efficacy of current immuno-oncology drugs that target the adaptive immune system. Microglia
display similar gene expression signature and function to the innate cells of the peripheral immune system. These peripheral innate cells such as
macrophages, NK cells, and others, likely play a significant role in multiple chronic diseases including cancer, inflammation, and autoimmune disorders.
We are leveraging our expertise in the innate immune system to develop additional innate immune check-point focused programs, including programs
targeting the Siglec protein family and the SIRP protein family, for peripheral disorders, particularly cancer.
We have entered into a licensing agreement with Innovent to develop and commercialize AL008, our novel antibody that non-competitively
antagonizes combines inhibition of the CD47-SIRP-alpha (SIRPα) pathway by inducing the internalization and degradation of the inhibitory receptor on
macrophages to relieve immune suppression (a “don’t eat me signal”) while also engaging FcyR2A, an activating IgG Fc receptor to promote immune-
stimulatory pathways that drive anti-tumor immunity. We believe that products focused on innate, a potent immune biology will complement and expand
the efficacy of current immuno-oncology drugs that target the adaptive checkpoint pathway co-opted by tumors to evade the immune system. AL008 is a
potential best-in-class SIRP-alpha inhibitor with a unique dual mechanism of action that non-competitively antagonizes the CD47-SIRP-alpha pathway by
inducing the internalization and degradation of the inhibitory receptor on macrophages to relieve immune suppression (a "don't eat me signal") while also
engaging Fc gamma receptors to promote immuno-stimulatory pathways that drive anti-tumor immunity.
AL009, our latest prioritized investigational product candidate, is a first-in-class multi Siglec inhibitor that works to enhance both the innate and
adaptive immune system response to tumors by blocking a critical glycan checkpoint pathway that drives immune inhibition. This product candidate is
being developed in oncology and we believe it could also have potential therapeutic application to neurodegenerative disorders.
Combination Therapies
Our therapies are also likely to act in conjunction with each other or with other experimental drugs that are designed to remove pathological
proteins. Therapies such as antibodies against amyloid-beta, the TAU filaments or misfolded alpha-synuclein protein are designed to tag the pathological
proteins and recruit microglia to dispose of the drug pathological protein complex. Aging microglia are less likely to perform this function effectively, and
our immuno-neurology therapies could ameliorate this deficiency. We are continuing to explore various combination strategies in preclinical models and
will, in the future, consider moving this strategy into the clinic based upon results from preclinical models.
Strategic Alliance with AbbVie
Overview
In October 2017, we entered into the Co-Development and Option Agreement with AbbVie (AbbVie Agreement). The primary goal of our global
strategic collaboration with AbbVie is to co-develop and commercialize therapeutics to treat Alzheimer’s and other neurodegenerative diseases.
Under the AbbVie Agreement, we granted AbbVie an exclusive option to global development and commercialization for our TREM2 and
SIGLEC 3 programs. The terms of the AbbVie Agreement included initial
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upfront payments of $205.0 million and $20.0 million from the sale of shares of our stock, and if AbbVie exercises its option for both programs, we are
eligible for up to an additional $985.6 million in option exercise and milestone payments. Following AbbVie’s exercise of its option, Alector and AbbVie
will share the development costs and will split global profits after marketing approval. However, following AbbVie’s option exercise for a program, we
may opt out of sharing in development costs and profits or losses from that program and instead receive a tiered royalty on sales of products from that
program. We are responsible for the design and execution of Phase 1 and Phase 2 studies, taking advantage of our significant in-house expertise in running
clinical trials in Alzheimer’s disease. Following its exercise of an option for a program, AbbVie will be responsible for certain development activities and
global commercialization, taking advantage of its global clinical trial expertise and commercialization networks. Through this partnership, we aim to
leverage the strengths of both organizations efficiently to best achieve the desired outcome.
Exercise of options. AbbVie may exercise its option for a program at any time until the expiration of an option term for that program. For each
program, the option term ends following a fixed period after AbbVie’s receipt of the data package after completion of Phase 2 clinical trials that includes
certain information relating to the applicable program’s research and development activities. If AbbVie fails to exercise its option during the option term for
a product candidate, we will retain all rights to that program. If AbbVie exercises its option for a program, then AbbVie will lead development and
commercialization activities worldwide. Once AbbVie opts in with respect to a given product candidate, AbbVie must use commercially reasonable efforts
to develop and commercialize the corresponding product globally.
Governance. The collaboration is governed by a joint steering committee (JSC). The JSC may establish additional subcommittees to oversee
particular projects or activities. Subject to limitations specified in the AbbVie Agreement, if the applicable governance committee is unable to make a
decision by consensus and the parties are unable to resolve the issue through escalation to specified senior executive officers of the parties, then the issue is
escalated to an alternative dispute resolution subject to final decision-making rights retained by each party.
Exclusivity. During the term of the AbbVie Agreement, each of Alector and AbbVie are subject to exclusivity requirements prohibiting certain
activities outside of the AbbVie Agreement directed to targets under the AbbVie Agreement.
Intellectual Property. Ownership of intellectual property created in connection with the AbbVie Agreement is generally determined on the basis of
inventorship. Generally, each party has the first right to prosecute and maintain its own patents. We generally have the first right to prosecute and maintain
joint patents prior to AbbVie’s exercise of its option for the program relating to such patent, and AbbVie has the right following its exercise of such option.
AbbVie has the first right to prosecute any infringement of jointly held patents developed under the AbbVie Agreement and our patents that are licensed
under the AbbVie Agreement. Additionally, AbbVie has the sole right to prosecute its own patents. AbbVie has the first right to defend against claims that a
product developed under either of the programs that are the subject of the AbbVie Agreement infringe third-party intellectual property rights.
Term and Termination. At any point during the term of the AbbVie Agreement, including during the research, development, and clinical trial
process, AbbVie can terminate the AbbVie Agreement in its entirety, or with respect to either program under the AbbVie Agreement, for convenience. In
that event, all rights related to the applicable program revert to us. Additionally, AbbVie or we and can terminate the AbbVie Agreement in connection with
a material breach of the AbbVie Agreement by the other party that remains uncured for a specified period of time.
Adimab Collaboration Agreements
Overview
In 2014, we entered into the 2014 Adimab Collaboration Agreement. Under the 2014 Adimab Agreement, we are required to fund, and we and
Adimab LLC (Adimab) are required to use commercially reasonable efforts to conduct, certain research to discover and optimize antibodies directed
against targets selected by us. We are developing antibodies discovered by Adimab in our AL001 and AL101 product candidates, and we are developing
antibodies optimized by Adimab in our AL002 and AL003 product candidates.
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Governance. Our collaboration with Adimab is governed by a research committee consisting of at least two representatives from each party. The
research committee prioritizes among research programs and prepares and finalizes new proposed research plans, among other activities. If the research
committee is unable to make a decision by consensus and the parties are unable to resolve the issue through escalation to specified senior executive officers
of the parties, then either party may seek arbitration of the matter.
Exclusivity. Pursuant to the 2014 Adimab Agreement, each party is subject to limitations on its ability to use information or material provided by
the other outside the scope of the collaboration.
Intellectual Property. Ownership of intellectual property arising from the research is generally owned by the party that invents or creates the
applicable intellectual property, although certain categories of intellectual property are specifically assigned to one party or the other. For example, patent
rights relating to improvements to Adimab’s background platform technology that are invented in the course of the research are assigned to Adimab. Prior
to our exercise of the option described below, we and Adimab each grant the other a non-exclusive license to the relevant intellectual property we own to
allow each party to carry out its rights and obligations in connection with the research; and except for Adimab’s retained rights to continue using and
licensing its own libraries, each party agrees not to practice or license the patents arising out of the research that it owns for any purpose other than to carry
out its rights and obligations in connection with the research. Generally, each party has the obligation to prosecute, maintain, defend, and enforce its own
patents, but we are subject to certain contractual restrictions on our ability to prosecute, practice, and license certain of our patents that arose out of the
research. These restrictions are lifted once we exercise the option described below as to such patents.
Exercise of Options. The 2014 Adimab Agreement granted us an exclusive option to obtain certain rights relating to a specified number of
antibodies discovered or optimized by Adimab directed against the targets we selected. The option extended to ownership of patent rights specifically
covering the sequences of such antibodies, and the right to obtain worldwide, royalty-bearing, sublicensable licenses under certain technology owned or
developed by Adimab to research, develop, make, have made, use, sell, offer to sell, import and export such antibodies and products based on such
antibodies for all human therapeutic, prophylactic and diagnostic uses. These licenses are exclusive, except as to Adimab background and platform
technology and Adimab’s retained rights to continue using and licensing its own libraries, as to which the licenses are non-exclusive. We have confirmed
with Adimab in writing that key patents we have filed relating to the programs partnered with AbbVie claim inventions owned solely by us, and do not
include any such background or platform technology of Adimab. All of our options under the 2014 Adimab Agreement have either expired, are in the
process of being exercised, or, with respect to multiple targets and hundreds of antibodies (including the target programs partnered with AbbVie), have
already been exercised. Upon our exercise of the option with respect to a target, we are subject to an obligation to devote commercially reasonable efforts
to commercialize products using the optioned rights to such target. The assigned and licensed patent rights we obtained from these option exercises are
described in more detail above under the section titled “Business—Intellectual Property.”
Financial terms. We fund Adimab’s research in connection with our collaboration, in accordance with the terms and limitations described in the
2014 Adimab Agreement. We also have potential milestone payments per program for use of antibodies and low- to mid-single digit royalty payments for
commercial sales of products incorporating such antibodies. However, if we enter into any transaction granting rights to the inventions or sell products
created as a result of a collaboration with a third party, we have a choice to pay a share of the resulting revenue instead of royalties from such sales.
Term and Termination. We are able to terminate the 2014 Adimab Agreement, in its entirety or with respect to a products or antibodies directed to
particular targets, on three months prior written notice to Adimab. In addition, either party can terminate the 2014 Adimab Agreement in its entirety, or,
subject to certain limitations, with respect to specific optioned rights, for material breaches that remain uncured after 90 days’ notice to the breaching party.
In the case of a termination before expiration of the 2014 Adimab Agreement, we would have certain continuing payment obligations to Adimab, or would
be required to adhere to certain restrictions as to the fruits of the collaboration. The 2014 Adimab Agreement expires on the twelfth anniversary of the first
commercial sale of the products created under the collaboration, on a product-by-product and country-by-country basis. The licenses we and Adimab
granted to each other do not survive, subject to certain limitations.
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Overview—2019 Adimab Collaboration Agreement (2019 Adimab Agreement)
In 2019, we entered into another Adimab collaboration agreement. Under the 2019 Adimab Agreement, we are required to fund, and we and
Adimab are required to use commercially reasonable efforts to conduct, certain research to discover and optimize antibodies directed against targets
selected by us. We have not yet identified any research programs under the 2019 Adimab Agreement.
Governance. Our collaboration with Adimab is governed by a research committee consisting of at least two representatives from each party. The
research committee facilitates communication regarding research under the 2019 Adimab Agreement and has the limited authority to amend a research plan
in a manner not substantially affecting the resources required from a party. If the research committee is unable to make a decision by consensus, no decision
will be taken.
Exclusivity. Pursuant to the 2019 Adimab Agreement, each party is subject to limitations on its ability to use information or material provided by
the other outside the scope of the collaboration.
Intellectual Property. Ownership of intellectual property arising from the research is generally owned by the party that invents or creates the
applicable intellectual property, although certain categories of intellectual property are specifically assigned to one party or the other. Certain intellectual
property relating to Adimab’s background platform technology including any improvements thereto that are invented in the course of the research are
assigned to Adimab. Patents covering antibodies that are the subject of the collaboration are owned by us; however, prior to our exercise of the option
described below, we are prohibited from practicing such patents for any purpose other than to perform our research obligations under the 2019 Adimab
Agreement. Upon the expiration of the option term described below, in the event we elect not to exercise our option right with respect to an antibody,
ownership of such patents is transferred to Adimab. Prior to our exercise of the option described below, we and Adimab each grant the other a non-
exclusive license to the relevant intellectual property we own to allow each party to carry out its rights and obligations in connection with the research.
Generally, each party has the obligation to prosecute, maintain, defend, and enforce its own patents, but we are subject to certain contractual restrictions on
our ability to prosecute, practice, and license certain of our patents that arose out of the research. These restrictions are lifted once we exercise the option
described below as to such patents.
Exercise of Options. The 2019 Adimab Agreement granted us an exclusive option to obtain certain rights relating to a specified number of
antibodies discovered or optimized by Adimab directed against the targets we selected. The option extends to ownership of the applicable optioned
antibody, and the right to obtain worldwide, royalty-bearing, sublicensable non-exclusive licenses under certain technology owned or developed by Adimab
to research, develop, make, have made, use, sell, offer to sell, import and export such antibodies and products based on such antibodies for all human
therapeutic, prophylactic and diagnostic uses. Upon our exercise of the option with respect to a target, we are subject to an obligation to devote
commercially reasonable efforts to commercialize products using the optioned rights to such target.
Financial terms. We fund Adimab’s research in connection with our collaboration, in accordance with the terms and limitations described in the
2019 Adimab Agreement. We are also responsible for certain development fees and, in the event we exercise the option right, we are obligated to pay an
option fee. We also have potential milestone payments per product for use of antibodies, subject to certain limitations on total payments owed on any given
target, and low-single digit royalty payments for commercial sales of products incorporating such antibodies.
Term and Termination. We are able to terminate the 2019 Adimab Agreement, in its entirety or with respect to a products or antibodies directed to
particular targets, on 60 days’ prior written notice to Adimab. In addition, either party can terminate the 2019 Adimab Agreement in its entirety for material
breaches that remain uncured after 90 days’ notice to the breaching party. In the case of a termination before expiration of the 2019 Adimab Agreement, we
would be prohibited from using the fruits of the collaboration. The 2019 Adimab Agreement expires, on a product-by-product and country-by-country
basis, on the later of the twelfth anniversary of the first commercial sale of such product in such country and expiration of the last patent covering such
product in such country, or, in the event no product is optioned under the 2019 Adimab Agreement, upon the last to expire option period. Upon expiration,
the licenses Adimab granted to us with respect to products for which we have exercised our option will continue on a non-exclusive, royalty-free basis.
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Manufacturing
We must manufacture our product candidates for clinical trial use in compliance with cGMP regulations. The cGMP regulations include
requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures,
production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or
salvaged products. The manufacturing facilities for our product candidates must meet cGMP requirements and FDA or comparable foreign regulatory
authority’s satisfaction before any product is approved for human clinical trial use. Our third-party manufacturers will also be subject to periodic
inspections of their respective facilities for general cGMP compliance by the FDA and other foreign authorities. These inspections may include review of
procedures and operations used in the testing and manufacture of our products to assess compliance with applicable regulations.
We do not currently have the infrastructure or internal capability to manufacture our product candidates for use in clinical trials and
commercialization. We rely, and expect to continue to rely, on third-party cGMP manufacturers for the production of our products for human clinical trials
in compliance with FDA and other foreign authority regulations for such products. We rely on CDMOs to manufacture and supply our preclinical and
clinical materials to be used during the preclinical and clinical development of our product candidates. As part of our broad manufacturing strategy to
expedite the manufacturing of our product candidates and minimize manufacturing risk, we currently have established relationships with several CDMOs
for the manufacturing of our drug substance or product candidates.
We do not have long-term supply agreements and we purchase our required drug product on a development manufacturing services agreement or
purchase order basis. We expect to continue to rely on third-party manufacturers for the commercial supply of any of our product candidates for which we
obtain marketing approval. We have personnel with significant technical, manufacturing, analytical, quality, regulatory, including cGMP, and project
management experience to oversee our third-party manufacturers and to manage manufacturing and quality data and information for regulatory compliance
purposes.
Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including warning
letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil
and criminal penalties. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as
shortages of qualified personnel. Any of these actions or events could have a material impact on the availability of our products.
Commercialization Plan
We do not currently have any approved drugs and we do not expect to have any approved drugs in the near term. Therefore, we have no sales,
marketing or commercial product distribution capabilities and have no experience as a company in marketing drugs. When, and if any of our product
candidates are approved for commercialization, we intend to develop a commercialization infrastructure for those products in the United States, Europe,
Asia, and potentially in certain other key markets. We may also rely on partnerships, such as our AbbVie collaboration, to provide commercialization
infrastructure, including sales and marketing and commercial distribution.
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to
operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our strategy is to seek to protect our
proprietary position by, among other methods, pursuing and obtaining patent protection in the United States and in jurisdictions outside of the United States
related to our proprietary technology, inventions, improvements and product candidates that are important to the development and implementation of our
business. Our patent portfolio is intended to cover our product candidates and related components, their methods of use and processes for their
manufacture, our proprietary reagents and assays and any other inventions that are commercially important to our business. We also rely on trademarks as
well as trade secret protection of our confidential information and know-how relating to our
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proprietary technology, platforms and product candidates. We believe that we have substantial know-how and trade secrets relating to our technology and
product candidates.
Our patent portfolio contains over 40 families, and as of December 31, 2020, our patent portfolio includes 11 issued patents and over 300 pending
patent applications, directed to over 20 different targets and/or technologies, that are solely owned or we have rights to exclusive licenses by us. For our
product candidates, we generally pursue multilayered patent protection covering the composition of matter based on binding epitopes of the product
candidates on the target protein, functional characteristics of the product candidates, degenerative sequence of the product candidates, and/or specific
sequence of the product candidates. In addition to composition of matter coverage, we also generally pursue claims directed to methods of making, nucleic
acids, formulations, and methods of use of the product candidates. The method of use claims further include claims directed to patient selection criteria,
biomarkers, disease subgroups, pharmacodynamic and clinical end-points, and dosage regimes. As further described below, we intend to strengthen the
patent protection of our product candidates and technologies through additional patent application filings.
PGRN Programs
We own five patent families directed to our PGRN programs, AL001 and AL101, which include three issued U.S. patents, covering the
compositions and uses of our PGRN program product candidates. The first two patent families are expected to expire in 2036, the third patent family is
expected to expire in 2039, the fourth patent family is expected to expire in 2040, and the fifth patent family, assuming that the necessary non-provisional
patent applications are timely filed and all other applicable requirements are satisfied for the U.S. provisional patent application, is expected to expire in
2041, in all cases excluding any patent term adjustments and any patent term extensions.
TREM2 Program
We own six patent families directed to the TREM2 program covering the compositions and uses of our TREM2 program product candidates. Four
patent families are expected to expire in 2035, 2036, 2038, 2040, respectively, and two patent families, assuming that the necessary non-provisional patent
applications are timely filed and all other applicable requirements are satisfied for the U.S. provisional patent application, are expected to expire in 2041, in
all cases excluding any patent term adjustments and any patent term extensions.
SIGLEC 3 Program
We own five patent families directed to the SIGLEC 3 program covering the compositions and uses of our SIGLEC 3 program product candidates.
Two patent families are expected to expire in 2036, the third patent family in 2038, the fourth patent family in 2039, and the fifth patent family in 2040, in
all cases excluding any patent term adjustments and any patent term extensions.
MS4A4A Program
We own two patent families directed to the MS4A4A program covering the compositions and uses of our MS4A4A program product candidates. The
first patent family is expected to expire in 2039 and the second patent family in 2040.
The term of individual patents depends upon the legal term for patents in the countries in which they are granted. In most countries, including the
United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. In
the United States, a patent’s term may, in certain cases, be lengthened by patent term adjustment, which compensates a patentee for administrative delays
by the U.S. Patent and Trademark Office in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over a commonly
owned patent or a patent naming a common inventor and having an earlier expiration date. The Drug Price Competition and Patent Term Restoration Act of
1984 (Hatch-Waxman Act) permits a patent term extension of up to five years beyond the expiration date of a U.S. patent as partial compensation for the
length of time the drug is under regulatory review while the patent is in force. A patent
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term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent applicable to
each regulatory review period may be extended and only those claims covering the approved drug, a method for using it or a method for manufacturing it,
may be extended.
Similar provisions are available in the European Union and certain other foreign jurisdictions to extend the term of a patent that covers an approved
drug. In the future, if and when our product candidates receive approval by the FDA or foreign regulatory authorities, we expect to apply for patent term
extensions on issued patents covering those products, depending upon the length of the clinical trials for each drug and other factors. Expiration dates
referred to above are without regard to potential patent term extension or other market exclusivity that may be available to us.
We also rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to
protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and
contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and
physical and electronic security of our information technology systems.
Competition
The biotechnology and pharmaceutical industries, including in the neurodegenerative disease field, are characterized by rapidly advancing
technologies, strong competition and an emphasis on intellectual property. We face substantial competition from many different sources, including large
and specialty pharmaceutical and biotechnology companies, academic research institutions, governmental agencies and public and private research
institutions. Some of the pharmaceutical and biotechnology companies that are currently pursuing the development of products for the treatment of the
neurodegenerative disease indications for which we have research programs, including FTD, Alzheimer’s disease, Parkinson’s disease, and ALS, include
large companies with significant financial resources, such as Biogen, Eli Lilly, GlaxoSmithKline, Merck and Roche Holding AG. We believe that the key
competitive factors affecting the success of any of our product candidates will include efficacy, safety profile, method of administration, cost, level of
promotional activity and intellectual property protection.
Our product candidates will compete with current therapies approved for the treatment of neurodegenerative diseases, which to date have been
primarily targeted at treating the symptoms of such diseases rather than halting or slowing the progression of the disease. However, in addition to such
currently approved therapies, we believe that our product candidates, if approved, may also compete with other potential therapies intended to halt or slow
the progression of neurodegenerative disease that are being developed by a number of companies and institutions.
Government Regulation
Government authorities in the United States at the federal, state and local level and in other countries regulate, among other things, the research,
development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-
approval monitoring and reporting, marketing and export and import of drug and biological products. Generally, before a new drug or biologic can be
marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific for each regulatory authority,
submitted for review and approved by the regulatory authority.
U.S. Drug Development
In the United States, the FDA regulates drugs under the Food, Drug, and Cosmetic Act (FDCA) and biologics under the FDCA and the Public
Health Service Act (PHSA). Both drugs and biologics also are subject to other federal, state and local statutes and regulations. The process of obtaining
regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of
substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process,
approval process or post-market may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the
FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, untitled or warning letters, product recalls or market
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withdrawals, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution,
disgorgement and civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.
Any future product candidates must be approved by the FDA through either a biologics license application (BLA) or new drug application (NDA)
process before they may be legally marketed in the United States. The process generally involves the following:
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Completion of extensive preclinical studies in accordance with applicable regulations, including studies conducted in accordance with
GLP;
Submission to the FDA of an investigational new drug application (IND), which must become effective before human clinical trials may
begin;
Approval by an independent Institutional Review Board (IRB), or ethics committee at each clinical trial site before each trial may be
initiated;
Performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations, good clinical practice
(GCP), requirements and other clinical trial-related regulations to establish the safety and efficacy of the investigational product for each
proposed indication;
Submission to the FDA of a NDA or BLA;
A determination by the FDA within 60 days of its receipt of an NDA or Biologics License Application (BLA) to accept the filing for
review;
Satisfactory completion of a FDA pre-approval inspection of the manufacturing facility or facilities where the drug or biologic will be
produced to assess compliance with cGMP, requirements to assure that the facilities, methods and controls are adequate to preserve the
drug or biologic’s identity, strength, quality, and purity;
Potential FDA audit of the preclinical study and/or clinical trial sites that generated the data in support of the NDA or BLA;
FDA review and approval of the NDA or BLA, including consideration of the views of any FDA advisory committee, prior to any
commercial marketing or sale of the drug or biologic in the United States; and
Compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation
Strategy (REMS), and the potential requirement to conduct post-approval studies.
The data required to support an NDA or BLA are generated in two distinct developmental stages: preclinical and clinical. The preclinical and
clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for any future
product candidates will be granted on a timely basis, or at all.
The preclinical developmental stage generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as studies to
evaluate toxicity in animals, which support subsequent clinical testing. The sponsor must submit the results of the preclinical studies, together with
manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. An IND
is a request for authorization from the FDA to administer an investigational product to humans, and must become effective before human clinical trials may
begin.
Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the potential
for adverse events and in some cases to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and
requirements, including GLP regulations for safety/toxicology studies. An IND sponsor must submit the results of the preclinical tests, together with
manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things, to the FDA as part of
an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is
submitted. An IND automatically
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becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or more proposed clinical
trials and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can
begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical Trials
The clinical stage of development involves the administration of the investigational product to healthy volunteers or patients under the supervision
of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCP requirements, which include
the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to
be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part
of the IND. Furthermore, each clinical trial must be reviewed and approved by an IRB for each institution at which the clinical trial will be conducted to
ensure that the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also
approves the informed consent form that must be provided to each clinical trial subject or his or her legal representative, and must monitor the clinical trial
until completed. There also are requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.
A sponsor who wishes to conduct a clinical trial outside of the United States may, but need not, obtain FDA authorization to conduct the clinical
trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an
NDA or BLA. The FDA will accept a well-designed and well-conducted foreign clinical trial not conducted under an IND if the trial was conducted in
accordance with GCP requirements and the FDA is able to validate the data through an onsite inspection if deemed necessary.
Clinical trials in the United States generally are conducted in three sequential phases, known as Phase 1, Phase 2, and Phase 3, and may overlap.
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Phase 1 clinical trials generally involve a small number of healthy volunteers or disease-affected patients who are initially exposed to a
single dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism,
pharmacologic action, tolerability and safety of the drug.
Phase 2 clinical trials involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the
same time, safety and further pharmacokinetic and pharmacodynamic information is collected, possible adverse effects and safety risks
are identified, and a preliminary evaluation of efficacy is conducted.
Phase 3 clinical trials generally involve a large number of patients at multiple sites and are designed to provide the data necessary to
demonstrate the effectiveness of the product for its intended use, its safety in use and to establish the overall benefit/risk relationship of
the product and provide an adequate basis for product approval. These trials may include comparisons with placebo and/or other
comparator treatments. The duration of treatment is often extended to mimic the actual use of a product during marketing.
Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gain
additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance of
Phase 4 clinical trials as a condition of approval of an NDA or BLA.
Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA and written
IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies
suggesting a significant risk to humans exposed to the drug or biologic, findings from animal or in vitro testing that suggest a significant risk for human
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volunteers and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure.
Phase 1, Phase 2, and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may
suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in
accordance with the IRB’s requirements or if the drug or biologic has been associated with unexpected serious harm to patients. Additionally, some clinical
trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or
committee. This group provides authorization for whether a trial may move forward at designated check-points based on access to certain data from the
trial. Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the
chemistry and physical characteristics of the drug or biologic as well as finalize a process for manufacturing the product in commercial quantities in
accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product and, among
other things, companies must develop methods for testing the identity, strength, quality, and purity of the final product. Additionally, appropriate packaging
must be selected and tested, and stability studies must be conducted to demonstrate that our product candidates do not undergo unacceptable deterioration
over their shelf life.
As a result of the consequences of the COVID-19 pandemic, the FDA has issued various COVID-19 related guidance documents applicable to
biopharmaceutical manufacturers and clinical trial sponsors. For example, in March 2020, the FDA issued a guidance, which the FDA subsequently
updated, on conducting clinical trials during the pandemic, which describes a number of considerations for sponsors of clinical trials impacted by the
pandemic, including the requirement to include in the clinical trial report contingency measures implemented to manage the clinical trial, and any
disruption of the clinical trial as a result of the COVID-19 pandemic; a list of all subjects affected by the COVID-19-pandemic related study disruption by
unique subject identifier and by investigational site and a description of how the individual’s participation was altered; and analyses and corresponding
discussions that address the impact of implemented contingency measures (e.g., participant discontinuation from investigational product and/or study,
alternative procedures used to collect critical safety and/or efficacy data) on the safety and efficacy results reported for the clinical trial. The FDA also
issued a guidance on good manufacturing practice considerations for responding to COVID-19 infection in employees in drug products manufacturing,
including recommendations for manufacturing controls to prevent contamination of drugs; guidance on recommendations for reducing the risk of human
immunodeficiency virus transmission by blood and blood products; a guidance on drug and biologics manufacturing operations during the COVID-19
public health emergency; and a guidance on review timelines for applicant responses to Complete Response Letters when a facility assessment is needed
during the COVID-19 public health emergency. These and future guidance documents and regulatory requirements, including future legislation, may
require us to develop and implement new policies and procedures, make significant adjustments to our clinical trials, or increase the amount time and
resources needed for regulatory compliance, which may impact our clinical development plans and timelines. The extent to which the COVID-19 public
health emergency impacts our business, including non-clinical studies and clinical trials, will depend on future developments, which are highly uncertain
and cannot be predicted with confidence.
NDA/BLA Review Process
Following completion of the clinical trials, data is analyzed to assess whether the investigational product is safe and effective for the proposed
indicated use or uses. The results of preclinical studies and clinical trials are then submitted to the FDA as part of an NDA or BLA, along with proposed
labeling, chemistry and manufacturing information to ensure product quality and other relevant data. In short, the NDA or BLA is a request for approval to
market the drug or biologic for one or more specified indications and must contain proof of safety and efficacy for a drug or safety, purity, and potency for
a biologic. The application may include both negative and ambiguous results of preclinical studies and clinical trials, as well as positive findings. Data may
come from company-sponsored clinical trials intended to test the safety and efficacy of a product’s use or from a number of alternative sources, including
studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and
efficacy of the investigational product to the satisfaction of FDA. FDA approval of an NDA or BLA must be obtained before a drug or biologic may be
marketed in the United States.
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Under the Prescription Drug User Fee Act (PDUFA), as amended, each NDA or BLA must be accompanied by a user fee. FDA adjusts the PDUFA
user fees on an annual basis. According to the FDA’s 2021 fee schedule for prescription drug user fees, which became effective on October 1, 2020, and
will remain in effect through September 30, 2021, the user fee for an application requiring clinical data, such as an NDA or BLA, is approximately
$2.9 million. PDUFA also imposes an annual program fee for each marketed human drug or biologic ($336,432 in 2021) and an annual establishment fee
on facilities used to manufacture prescription drugs and biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of
the application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs or BLAs for products designated as
orphan drugs, unless the product also includes a non-orphan indication.
The FDA reviews all submitted NDAs and BLAs before it accepts them for filing, and may request additional information rather than accepting the
NDA or BLA for filing. The FDA must make a decision on accepting an NDA or BLA for filing within 60 days of receipt. Once the submission is accepted
for filing, the FDA begins an in-depth review of the NDA or BLA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10
months, from the filing date, in which to complete its initial review of a new molecular-entity NDA or original BLA and respond to the applicant, and six
months from the filing date of a new molecular-entity NDA or original BLA designated for priority review. The FDA does not always meet its PDUFA
goal dates for standard and priority NDAs or BLAs, and the review process is often extended by FDA requests for additional information or clarification.
Before approving an NDA or BLA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to
determine whether they comply with cGMP requirements. The FDA will not approve the product unless it determines that the manufacturing processes and
facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The FDA
also may audit data from clinical trials to ensure compliance with GCP requirements. Additionally, the FDA may refer applications for novel drug products
or drug products which 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 and under what conditions, if any. The FDA is not
bound by recommendations of an advisory committee, but it considers such recommendations when making decisions on approval. The FDA likely will
reanalyze the clinical trial data, which could result in extensive discussions between the FDA and the applicant during the review process. After the FDA
evaluates an NDA or BLA, it will issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the drug
with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete
and the application will not be approved in its present form. A Complete Response Letter usually describes all of the specific deficiencies in the NDA or
BLA identified by the FDA. The Complete Response Letter may require additional clinical data, additional pivotal Phase 3 clinical trial(s) and/or other
significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a Complete Response Letter is issued, the
applicant may either resubmit the NDA or BLA, addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and
information are submitted, the FDA may decide that the NDA or BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not
always conclusive and the FDA may interpret data differently than we interpret the same data.
Orphan Drugs
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition,
which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United
States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of
disease or condition will be recovered from sales of the product.
Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the identity of the
therapeutic agent 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.
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If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation,
the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same
indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with
orphan exclusivity by means of greater effectiveness, greater safety or providing a major contribution to patient care or in instances of drug supply issues.
However, competitors may receive approval of either a different product for the same indication or the same product for a different indication but that could
be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven years if a competitor
obtains approval before we do for the same product, as defined by the FDA, for the same indication we are seeking approval, or if a product candidate is
determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of our products designated as an orphan
drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity. Orphan drug
status in the European Union has similar, but not identical, requirements and benefits.
Expedited Development and Review Programs
The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs and biologics that meet certain
criteria. Specifically, new drugs and biologics are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and
preclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product
and the specific indication for which it is being studied. The sponsor can request the FDA to designate the product for fast track status any time before
receiving NDA or BLA approval, but ideally no later than the pre-NDA or pre-BLA meeting.
Any product submitted to the FDA for marketing, including under a fast track program, may be eligible for other types of FDA programs intended
to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it treats a serious or
life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies.
A product may also be eligible for accelerated approval, if it treats a serious or life-threatening condition and generally provides a meaningful
advantage over available therapies. In addition, it must demonstrate an effect on 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 (IMM), which is reasonably likely to predict an effect on IMM
or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug or biologic receiving accelerated approval perform
adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug or biologic shown to be effective can be safely used only if
distribution or use is restricted, it may require such post-marketing restrictions as it deems necessary to assure safe use of the product.
Additionally, a drug or biologic may be eligible for designation as a breakthrough therapy if the product is intended, alone or in combination with
one or more other drugs or biologics, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the product may
demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints. The benefits of breakthrough
therapy designation include the same benefits as fast track designation, plus intensive guidance from the FDA to ensure an efficient drug development
program. Fast track designation, priority review, accelerated approval and breakthrough therapy designation do not change the standards for approval, but
may expedite the development or approval process.
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Abbreviated Licensure Pathway of Biological Products as Biosimilar or Interchangeable
The Patient Protection and Affordable Care Act, or ACA, signed into law in 2010, includes the BPCIA, which created an abbreviated approval
pathway for biological products shown to be highly similar to an FDA-licensed reference biological product. The BPCIA attempts to minimize duplicative
testing, and thereby lower development costs and increase patient access to affordable treatments. An application for licensure of a biosimilar product must
include information demonstrating biosimilarity based upon the following, unless the FDA determines otherwise:
•
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•
analytical studies demonstrating that the proposed biosimilar product is highly similar to the approved product notwithstanding minor
differences in clinically inactive components;
animal studies (including the assessment of toxicity); and
a clinical trial or trials (including the assessment of immunogenicity and pharmacokinetic or pharmacodynamic) sufficient to demonstrate
safety, purity, and potency in one or more conditions for which the reference product is licensed and intended to be used.
In addition, an application must include information demonstrating that:
•
•
•
•
the proposed biosimilar product and reference product utilize the same mechanism of action for the condition(s) of use prescribed,
recommended or suggested in the proposed labeling, but only to the extent the mechanism(s) of action are known for the reference
product;
the condition or conditions of use prescribed, recommended or suggested in the labeling for the proposed biosimilar product have been
previously approved for the reference product;
the route of administration, the dosage form and the strength of the proposed biosimilar product are the same as those for the reference
product; and
the facility in which the biological product is manufactured, processed, packed or held meets standards designed to assure that the
biological product continues to be safe, pure, and potent.
Biosimilarity means that the biological product is highly similar to the reference product notwithstanding minor differences in clinically inactive
components; and that there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity,
and potency of the product. In addition, the law provides for a designation of “interchangeability” between the reference and biosimilar products, whereby
the biosimilar may be substituted for the reference product without the intervention of the healthcare provider who prescribed the reference product. The
higher standard of interchangeability must be demonstrated by information sufficient to show that:
•
•
•
the proposed product is biosimilar to the reference product;
the proposed product is expected to produce the same clinical result as the reference product in any given patient; and
for a product that is administered more than once to an individual, the risk to the patient in terms of safety or diminished efficacy of
alternating or switching between the biosimilar and the reference product is no greater than the risk of using the reference product
without such alternation or switch.
FDA approval is required before a biosimilar may be marketed in the United States. However, complexities associated with the large and intricate
structures of biological products and the process by which such products are manufactured pose significant hurdles to the FDA’s implementation of the law
that are still being worked out by the FDA. For example, the FDA has discretion over the kind and amount of scientific evidence—laboratory, preclinical
and/or clinical—required to demonstrate biosimilarity to a licensed biological product.
The FDA intends to consider the totality of the evidence provided by a sponsor to support a demonstration of biosimilarity, and recommends that
sponsors use a stepwise approach in the development of their biosimilar products. Biosimilar product applications thus may not be required to duplicate the
entirety of preclinical and clinical testing used to establish the underlying safety and effectiveness of the reference product. However, the FDA may refuse
to approve a biosimilar application if there is insufficient information to show that the active ingredients are the same or to demonstrate that any impurities
or differences in active ingredients do not affect the safety, purity,
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or potency of the biosimilar product. In addition, as with BLAs, biosimilar product applications will not be approved unless the product is manufactured in
facilities designed to assure and preserve the biological product’s safety, purity, and potency.
The submission of a biosimilar application does not guarantee that the FDA will accept the application for filing and review, as the FDA may
refuse to accept applications that it finds are insufficiently complete. The FDA will treat a biosimilar application or supplement as incomplete if, among
other reasons, any applicable user fees assessed under the Biosimilar User Fee Act of 2012 have not been paid. In addition, the FDA may accept an
application for filing but deny approval on the basis that the sponsor has not demonstrated biosimilarity, in which case the sponsor may choose to conduct
further analytical, preclinical or clinical studies and submit a BLA for licensure as a new biological product.
The timing of final FDA approval of a biosimilar for commercial distribution depends on a variety of factors, including whether the manufacturer
of the branded product is entitled to one or more statutory exclusivity periods, during which time the FDA is prohibited from approving any products that
are biosimilar to the branded product. The FDA cannot approve a biosimilar application for 12 years from the date of first licensure of the reference
product. Additionally, a biosimilar product sponsor may not submit an application for four years from the date of first licensure of the reference product. A
reference product may also be entitled to exclusivity under other statutory provisions. For example, a reference product designated for a rare disease or
condition (an orphan drug) may be entitled to seven years of exclusivity, in which case no product that is biosimilar to the reference product may be
approved until either the end of the twelve-year period provided under the biosimilarity statute or the end of the seven-year orphan drug exclusivity period,
whichever occurs later. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block biosimilarity
applications from being approved on or after the patent expiration date. In addition, the FDA may under certain circumstances extend the exclusivity period
for the reference product by an additional six months if the FDA requests, and the manufacturer undertakes, studies on the effect of its product in children,
a so-called pediatric extension.
The first biological product determined to be interchangeable with a branded product for any condition of use is also entitled to a period of
exclusivity, during which time the FDA may not determine that another product is interchangeable with the reference product for any condition of use. This
exclusivity period extends until the earlier of: one year after the first commercial marketing of the first interchangeable product; 18 months after resolution
of a patent infringement against the applicant that submitted the application for the first interchangeable product, based on a final court decision regarding
all of the patents in the litigation or dismissal of the litigation with or without prejudice; 42 months after approval of the first interchangeable product, if a
patent infringement suit against the applicant that submitted the application for the first interchangeable product is still ongoing; or 18 months after
approval of the first interchangeable product if the applicant that submitted the application for the first interchangeable product has not been sued.
Post-Approval Requirements
Following approval of a new product, the manufacturer and the approved product are subject to continuing regulation by the FDA, including,
among other things, monitoring and record-keeping requirements, requirements to report adverse experiences and comply with promotion and advertising
requirements, which include restrictions on promoting drugs for unapproved uses or patient populations, known as “off-label use”, and limitations on
industry-sponsored scientific and educational activities. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may
not market or promote such uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Further, if there
are any modifications to the drug or biologic, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be
required to submit and obtain FDA approval of a new NDA/BLA or NDA/BLA supplement, which may require the development of additional data or
preclinical studies and clinical trials.
The FDA may also place other conditions on approvals including the requirement for REMS, to assure the safe use of the product. A REMS could
include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and
other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or
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dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following initial
marketing.
The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the
product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or
frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new
safety information; imposition of post-market studies or clinical studies to assess new safety risks or imposition of distribution restrictions or other
restrictions under a REMS program. Other potential consequences include, among other things:
•
•
•
•
•
•
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market, or product recalls;
fines, warning letters, or holds on post-approval clinical studies;
refusal of the FDA to approve pending applications or supplements to approved applications;
applications, or suspension or revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs and biologics may be
promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the
laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to
significant liability.
Other U.S. Regulatory Matters
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in
the United States in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human
Services, the Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the
Occupational Safety & Health Administration, the Environmental Protection Agency, and state and local governments.
For example, in the United States, sales, marketing and scientific and educational programs also must comply with state and federal fraud and
abuse laws. These laws include the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a
party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce or reward referrals, including
the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as
Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties and exclusion
from participation in federal healthcare programs. Moreover, the ACA provides that the government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and
more recent requirements in the ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and state consumer protection and
unfair competition laws.
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The distribution of biologic and pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping,
licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with any of these laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the
circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, requests for recall,
seizure of products, total or partial suspension of production, denial or withdrawal of product approvals or refusal to allow a firm to enter into supply
contracts, including government contracts. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to
incur significant legal expenses and divert our management’s attention from the operation of our business. Prohibitions or restrictions on sales or
withdrawal of future products marketed by us could materially affect our business in an adverse way.
Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example:
changes to our manufacturing arrangements; additions or modifications to product labeling; the recall or discontinuation of our products; or additional
record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
U.S. Patent-Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of FDA approval of any future product candidates, some of our U.S. patents may be eligible for
limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits restoration of the patent term of up to five years as
compensation for patent term lost during product development and FDA regulatory review process. Patent-term restoration, however, cannot extend the
remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent-term restoration period is generally one-half the time
between the effective date of an IND and the submission date of an NDA or BLA plus the time between the submission date of an NDA or BLA and the
approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one
patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the
patent. The United States Patent and Trademark Office (USPTO), in consultation with the FDA, reviews and approves the application for any patent term
extension or restoration. In the future, we may apply for restoration of patent term for our currently owned or licensed patents to add patent life beyond its
current expiration date, depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA or BLA.
Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-
year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of a NDA for a new chemical entity. A drug
is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion
responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application
(ANDA), or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of
reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or
non-infringement. The FDCA also provides three years of marketing exclusivity for a NDA, 505(b)(2) NDA or supplement to an existing NDA if new
clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the
approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of
use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent.
Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be
required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate
safety and effectiveness.
A reference biological product is granted 12 years of data exclusivity from the time of first licensure of the product, and the FDA will not accept an
application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the
reference product. “First
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licensure” typically means the initial date the particular product at issue was licensed in the United States. Date of first licensure does not include the date
of licensure of (and a new period of exclusivity is not available for) a biological product if the licensure is for a supplement for the biological product or for
a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest or other related entity) for a
change (not including a modification to the structure of the biological product) that results in a new indication, route of administration, dosing schedule,
dosage form, delivery system, delivery device or strength or for a modification to the structure of the biological product that does not result in a change in
safety, purity, or potency. Therefore, one must determine whether a new product includes a modification to the structure of a previously licensed product
that results in a change in safety, purity, or potency to assess whether the licensure of the new product is a first licensure that triggers its own period of
exclusivity. Whether a subsequent application, if approved, warrants exclusivity as the “first licensure” of a biological product is determined on a case-by-
case basis with data submitted by the sponsor.
European Union Drug Development
Similar to the United States, the various phases of preclinical and clinical research in the European Union are subject to significant regulatory
controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out common
rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the Directive
differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated it must be
approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority (NCA), and one or more
Ethics Committees (ECs). Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the
clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.
The EU clinical trials legislation currently is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial
authorization, simplifying adverse-event reporting procedures, improving the supervision of clinical trials and increasing their transparency. Recently
enacted Clinical Trials Regulation EU No 536/2014 ensures that the rules for conducting clinical trials in the EU will be identical. In the meantime, Clinical
Trials Directive 2001/20/EC continues to govern all clinical trials performed in the EU.
European Union Drug Review and Approval
In the European Economic Area (EEA), which is comprised of the 27 Member States of the European Union (including Norway and excluding
Croatia), Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization (MA). There are two types
of marketing authorizations.
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•
The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee
for Medicinal Products for Human Use (CHMP), of the European Medicines Agency (EMA), and is valid throughout the entire territory
of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan
medicinal products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines and
medicinal products containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders,
diabetes, auto-immune and other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products containing
a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical
innovation or which are in the interest of public health in the EU.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory,
are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been
authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the
Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be
approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical
dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the
applicant as the Reference Member State (RMS). The competent authority of the RMS prepares a draft
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assessment report, a draft summary of the product characteristics (SPC), and a draft of the labeling and package leaflet, which are sent to
the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no
objections, based on a potential serious risk to public health, to the assessment, SPC, labeling or packaging proposed by the RMS, the
product is subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned).
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an
assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
Coverage and Reimbursement
Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health
programs, commercial insurance, and managed healthcare organizations. In the United States, no uniform policy of coverage and reimbursement for drug
or biological products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products
will be made on a payor-by-payor basis. As a result, the coverage determination process is often a time-consuming and costly process that will require us to
provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement
will be obtained.
The United States government, state legislatures, and foreign governments have shown significant interest in implementing cost containment
programs to limit the growth of government-paid healthcare costs, including price-controls, restrictions on reimbursement, and requirements for
substitution of generic products for branded prescription drugs. For example, the ACA contains provisions that may reduce the profitability of drug
products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory
discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs.
Adoption of general controls and measures, coupled with the tightening of restrictive policies in jurisdictions with existing controls and measures, could
limit payments for pharmaceutical drugs.
The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the
Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient
drugs furnished to Medicaid
patients. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by
raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price (AMP), to 23.1% of AMP and
adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded
products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of
Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by
enlarging the population potentially eligible for Medicaid drug benefits. The Centers for Medicare & Medicaid Services (CMS), have proposed to expand
Medicaid rebate liability to the territories of the United States as well.
The Trump administration announced several executive orders designed to reduce prescription drug pricing. The FDA also released a final rule in
September 2020 providing guidance for states to build and submit importation plans for drugs from Canada. In November 2020, HHS finalized a regulation
removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy
benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as
well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturer. In December 2020, the CMS issued a final
rule implementing significant manufacturer price reporting changes under the Medicaid Drug Rebate Program, including regulations that affect
manufacturer-sponsored patient assistance programs subject to pharmacy benefit manager accumulator programs and Best Price reporting related to certain
value-based purchasing arrangements. It is unclear to what extent the new administration and these new regulations will impact our business.
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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), established the Medicare Part D program to provide a
voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private
entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. While all Medicare drug
plans must give at least a standard level of coverage set by Medicare, Part D prescription drug plan sponsors are not required to pay for all covered Part D
drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D
prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in
each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.
Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However,
any negotiated prices for our products covered by a Part D prescription drug plan likely will be lower than the prices we might otherwise obtain. Moreover,
while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in
setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-
governmental payors.
For a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government
agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a
given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer.
As noted above, the marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and
third-party payors fail to provide adequate coverage and reimbursement. An increasing emphasis on cost containment measures in the United States has
increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may
change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval,
less favorable coverage policies and reimbursement rates may be implemented in the future.
In addition, in most foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its member states
to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect
controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls
or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.
Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly
lower.
Scientific Advisory Board
We have assembled a highly qualified scientific advisory board comprised of advisors who have, collectively, deep expertise in neurodegenerative
diseases, genomics, protein engineering, drug development, and drug discovery as well as translational medicine. Our scientists work in collaboration with
these advisors to identify new disease targets, develop a biomarker strategy, and accelerate discovery and development.
Name
Adam Boxer, M.D., Ph.D.
Stephen Hauser, M.D.
Michael Heneka, M.D.
Lewis Lanier, Ph.D.
Affiliated Entity
Director of UCSF Neurosciences Clinical Research Unit
Chair of the Department of Neurology at UCSF
Director of the Department of Neurodegenerative Diseases and
Gerontopsychiatry at the University of Bonn
Chair of the Department of Microbiology and Immunology at UCSF
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Name
Liqun Luo, Ph.D.
Richard Scheller, Ph.D.
Thomas Christian Südhof, M.D., Ph.D.
Robert Vassar, Ph.D.
Berislav Zlokovic, M.D., Ph.D.
Employees and Human Capital
Affiliated Entity
Member of National Academy of Sciences, Stanford University
Member of National Academy of Sciences
Nobel Laureate, Stanford University
Northwestern University Feinberg School of Medicine
Chair of the Department of Physiology & Neuroscience at USC Keck
School of Medicine
As of December 31, 2020, we had 171 full-time employees, over 75% of whom were engaged in research and development activities. None of our
employees are represented by a labor union or covered under a collective bargaining agreement.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing, and integrating our existing and new
employees, advisors, and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the
granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such
individuals to perform to the best of their abilities and achieve our objectives.
In response to the COVID-19 pandemic, we focused our health and safety efforts on protecting our employees and their families. We swiftly
implemented changes that we determined were in the best interest of our employees and the communities in which we operate, and which are aligned with
guidance from the Centers for Disease Control and Prevention and in compliance with state and local regulations. This includes having some of our
employees work from home, while implementing additional safety measures for employees continuing critical on-site work.
Corporate Information
We were initially formed as a limited liability company in Delaware in May 2013 under the name Alector LLC and completed our restructuring to
a Delaware corporation in October 2017 under the name Alector, Inc. Our principal executive offices are located at 131 Oyster Point Boulevard, Suite 600,
South San Francisco, California 94080. Our telephone number is 415-231-5660. Our website address is www.alector.com. Information contained on, or that
can be accessed through, our website is not incorporated by reference in this Annual Report on Form 10-K or in any other filings we make with the SEC.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance
with the Securities Exchange Act of 1934, as amended (Exchange Act). These include our annual reports on Form 10-K, our quarterly reports on Form 10-
Q, and our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We
make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with,
or furnish it to, the SEC.
We use Alector, the Alector logo, and other marks as trademarks in the United States and other countries. This report contains references to our
trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report,
including logos, artwork, and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way
that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and trade names. We
do not intend our use or display of other entities’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of
us by, any other entity.
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Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other
information in this Annual Report on Form 10-K, including our financial statements and the related notes and the section titled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could harm our
business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common stock could decline, and you
may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair
our business operations and the market price of our common stock.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties that you should consider before investing in our company, as fully described below. The
principal factors and uncertainties that make investing in our company risky include, among others:
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We are in the early stages of clinical drug development and have a limited operating history and no products approved for commercial sale,
which may make it difficult to evaluate our current business and predict our future success and viability.
We have incurred significant net losses in each period since our inception and anticipate that we will continue to incur net losses for the
foreseeable future.
The market price of our common stock may continue to be volatile, which could result in substantial losses for investors.
Drug development is a highly uncertain undertaking and involves a substantial degree of risk.
We will need to obtain substantial additional financing to complete the development and any commercialization of our product candidates, and
a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our
commercialization efforts, product development, or other operations.
Due to the significant resources required for the development of our programs, and depending on our ability to access capital, we must
prioritize development of certain product candidates. Moreover, we may expend our limited resources on programs that do not yield a
successful product candidate or fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater
likelihood of success.
Research and development of biopharmaceutical products is inherently risky, and our business is heavily dependent on the successful
development of our product candidates, which are in the early stages of preclinical and clinical development, so we cannot give any assurance
that any of our product candidates will receive regulatory, including marketing, approval, which is necessary before they can be
commercialized.
We may not be successful in our efforts to continue to create a pipeline of product candidates from our Discovery Platform or to develop
commercially successful products. If we fail to successfully identify and develop additional product candidates from our Discovery Platform,
our commercial opportunity may be limited.
We may not be successful in our efforts to expand indications for approved product candidates.
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We have concentrated a substantial portion of our research and development efforts on the treatment of neurodegenerative diseases, a field that
has seen limited success in drug development. Further, our product candidates are based on new approaches and novel technology, and we must
be able to identify and develop new biomarkers that are signs of a disease or condition and that can measure impact on disease progression of
our product candidates, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining
regulatory approval.
We may encounter substantial delays in our clinical trials, or may not be able to conduct or complete our clinical trials on the timelines we
expect, if at all.
Our clinical trials may reveal significant adverse events, toxicities, or other side effects and may fail to demonstrate substantial evidence of the
safety and efficacy of our product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization.
We are highly dependent on our key personnel, and if we are not successful in attracting, motivating, and retaining highly qualified personnel,
we may not be able to successfully implement our business strategy.
Our operations and financial results could be adversely impacted by the COVID-19 pandemic in the United States and the rest of the world.
Risks Related to Our Business, Financial Condition, and Capital Requirements
We are in the early stages of clinical drug development and have a limited operating history and no products approved for commercial sale, which may
make it difficult to evaluate our current business and predict our future success and viability.
We are a clinical stage biopharmaceutical company with a limited operating history, focused initially on developing therapeutics for
neurodegenerative diseases, including FTD, Alzheimer’s disease, Parkinson’s disease, and ALS. We commenced operations in May 2013. To date, we have
only generated revenue from our collaboration arrangements and a government grant. We have no products approved for commercial sale and have not
generated any revenue from product sales. Drug development is a highly uncertain undertaking and involves a substantial degree of risk. We are in Phase 2
and Phase 3 clinical trials for one product candidate, AL001, are in Phase 2 clinical trials for one product candidate, AL002, and are in Phase 1 clinical
trials for two product candidates, AL003 and AL101. To date, we have not completed a pivotal clinical trial, obtained marketing approval for any product
candidates, manufactured a commercial scale product or arranged for a third party to do so on our behalf, or conducted sales and marketing activities
necessary for successful product commercialization. Our short operating history as a company makes any assessment of our future success and viability
subject to significant uncertainty.
We will encounter risks and difficulties frequently experienced by clinical-stage biopharmaceutical companies in rapidly evolving fields, and we
have not yet demonstrated an ability to successfully overcome such risks and difficulties. If we do not address these risks and difficulties successfully, our
business will suffer.
We have incurred significant net losses in each period since our inception and anticipate that we will continue to incur net losses for the foreseeable
future.
We have incurred net losses in each reporting period since our inception, including net losses of $190.2 million, $105.4 million, and $52.2 million
for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, we had an accumulated deficit of $410.0 million.
We have invested significant financial resources in research and development activities, including for our preclinical and clinical product
candidates. We do not expect to generate revenue from product sales for several years, if at all. The revenue we currently generate from our collaboration
arrangement with AbbVie is variable and limited in amount. For our collaboration with AbbVie, we recognize collaboration revenue by measuring the
progress towards complete satisfaction of the performance of obligation measured as the program costs are incurred. The amount of our future net losses
will depend, in part, on the level of our future expenditures and revenue.
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Moreover, our net losses may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of
operations may not be a good indication of our future performance.
We expect to continue to incur significant expenses and increasingly higher operating losses for the foreseeable future. We anticipate that our
expenses will increase substantially if and as we:
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continue our research and discovery activities;
advance our Discovery Platform, including our target, patient, and biomarker selections;
progress our current and any future product candidates through preclinical and clinical development;
initiate and conduct additional preclinical, clinical, or other studies for our product candidates;
work with our contract development and manufacturing organizations (CDMOs) to scale up the manufacturing processes for our product
candidates or, in the future, establish and operate a manufacturing facility;
change or add additional contract manufacturers or suppliers;
seek regulatory approvals and marketing authorizations for our product candidates;
establish sales, marketing, and distribution infrastructure to commercialize any products for which we obtain approval;
make milestone, royalty, or other payments due under any license or collaboration agreements;
take steps to seek protection of our intellectual property and defend our intellectual property against challenges from third parties;
obtain, maintain, protect, and enforce our intellectual property portfolio, including intellectual property obtained through license
agreements, including as a result of the arbitration proceeding that we have initiated against our former consulting co-founder;
attract, hire, and retain qualified personnel;
provide additional internal infrastructure to support our continued research and development operations and any planned
commercialization efforts in the future;
experience any delays or encounter other issues related to our operations;
implement additional internal systems and infrastructure related to cybersecurity;
meet the requirements and demands of being a public company; and
defend against any product liability claims or other lawsuits related to our products.
Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital. In
any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock
price to decline.
Drug development is a highly uncertain undertaking and involves a substantial degree of risk.
We have no products approved for commercial sale. To obtain revenues from the sales of our product candidates that are significant or large enough
to achieve profitability, we must succeed, either alone or with third parties, in developing, obtaining regulatory approval for, manufacturing, and marketing
therapies with significant commercial success. Our ability to generate revenue and achieve profitability depends on many factors, including:
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completing research and preclinical and clinical development of our product candidates;
addressing any delays in our clinical trials or other impacts resulting from factors related to the COVID-19 pandemic;
obtaining regulatory approvals and marketing authorizations for product candidates for which we successfully complete clinical
development and clinical trials;
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developing a sustainable and scalable manufacturing process for our product candidates, as well as establishing and maintaining
commercially viable supply relationships with third parties that can provide adequate products and services to support clinical activities
and commercial demand of our product candidates;
identifying, assessing, acquiring, and/or developing new product candidates;
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter;
launching and successfully commercializing product candidates for which we obtain regulatory and marketing approval, either by
collaborating with a partner or, if launched independently, by establishing a sales, marketing, and distribution infrastructure;
obtaining and maintaining an adequate price for our product candidates, both in the United States and in foreign countries where our
products are commercialized;
obtaining adequate reimbursement for our product candidates from payors;
obtaining market acceptance of our product candidates as viable treatment options;
addressing any competing technological and market developments;
receiving milestones and other payments under our current and any future collaboration arrangements;
maintaining, protecting, expanding, and enforcing our portfolio of intellectual property rights, including patents, trade secrets, and know-
how; and
attracting, hiring, and retaining qualified personnel.
Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of our expenses,
or when we will be able to generate any meaningful revenue or achieve or maintain profitability, if ever. In addition, our expenses could increase beyond
our current expectations if we are required by the FDA or foreign regulatory agencies, to perform studies in addition to those that we currently anticipate,
or if there are any delays in any of our or our future collaborators’ clinical trials or the development of any of our product candidates. Even if one or more
of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with launching and commercializing any
approved product candidate and ongoing compliance efforts.
We will need to obtain substantial additional financing to complete the development and any commercialization of our product candidates, and a
failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce, or terminate our
commercialization efforts, product development, or other operations.
Our operations have required substantial amounts of cash since inception, and we expect our expenses to increase significantly in the foreseeable
future. To date, we have financed our operations primarily through the sale of equity securities and upfront payments received in connection with our
collaboration arrangement with AbbVie. Developing our product candidates and conducting clinical trials for the treatment of neurodegenerative diseases,
including FTD, Alzheimer’s disease, and Parkinson’s disease, will require substantial amounts of capital. We will also require a significant amount of
capital to commercialize any approved products.
As of December 31, 2020, we had cash, cash equivalents, and marketable securities of $413.3 million. In February 2019, we received
$168.2 million of net proceeds from the issuance of common stock upon the completion of our initial public offering (IPO), net of underwriting discounts
and commissions and offering expenses. In January 2020, we received $224.5 million of net proceeds from the issuance of common stock upon the
completion of a follow-on offering, net of underwriting discounts and commissions and offering expenses. In May 2020, we established an “at-the-market”
facility for the sale of up to $150 million worth of shares of common stock from time to time by entering into an equity distribution agreement with Morgan
Stanley & Co. LLC and Goldman Sachs & Co. LLC, as sales agents. We have not issued any shares pursuant to any at-the-market offerings but may at a
future date.
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Based on our current operating plan, we believe that our existing cash, cash equivalents, and marketable securities will be sufficient to fund our
projected operations through at least the next 12 months, subsequent to the filing date of this Annual Report on Form 10-K. Our estimate as to how long we
expect our existing cash, cash equivalents, and marketable securities to be available to fund our operations is based on assumptions that may be proved
inaccurate, and we could use our available capital resources sooner than we currently expect. In addition, changing circumstances may cause us to increase
our spending significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances
beyond our control. We may need to raise additional funds sooner than we anticipate if we choose to expand more rapidly than we presently anticipate.
We will require additional capital for the further development and, if approved, commercialization of our product candidates. In recent months,
global markets have experienced volatility in connection with continued concerns over the global impact of a novel strain of coronavirus, COVID-19. Our
ability to raise money in the public markets may be severely impacted for the foreseeable future due to the impact of COVID-19. Additional capital may
not be available when we need it, on terms acceptable to us or at all. We have no committed source of additional capital. If adequate capital is not available
to us on a timely basis, we may be required to significantly delay, scale back, or discontinue our research and development programs or the
commercialization of any product candidates, if approved, or be unable to continue or expand our operations, or otherwise capitalize on our business
opportunities, as desired, which could materially affect our business, financial condition, results of operations, and growth prospects and cause the price of
our common stock to decline.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will
be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt
financing, 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 licensing arrangements
with pharmaceutical partners, 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.
Due to the significant resources required for the development of our programs, and depending on our ability to access capital, we must prioritize
development of certain product candidates. Moreover, we may expend our limited resources on programs that do not yield a successful product
candidate or fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
As a result, we have identified over 100 immune system targets, have advanced four product candidates, AL001, AL002, AL003, and AL101 into
clinical development, and continue to develop our research pipeline. We currently have four product candidates in clinical trials. Together, the development
of these programs and product candidates require significant capital investment. Due to the significant resources required for the development of our
programs and product candidates, we must focus our programs and product candidates on specific diseases and disease pathways and decide which product
candidates to pursue and advance and the amount of resources to allocate to each. Our drug development strategy is to clinically test and seek regulatory
approval for our product candidates in indications in which we believe there is the most evidence that we will be able to quickly generate proof-of-concept
data. We then intend to expand to clinical testing and seek regulatory approvals in other neurodegenerative indications based on genetic and mechanistic
overlap with the primary indication. However, even if our product candidates are able to gain regulatory approval in one indication, there is no guarantee
that we will be able to expand to other indications, and we may expend significant resources in seeking such approvals. In addition, we may focus resources
on pursuing indications outside of neurodegeneration based on the same genetic and mechanistic rationale we utilize in determining on which of our
discovery programs to focus. Our decisions concerning the allocation of research, development, collaboration, management, and financial resources toward
particular product candidates or therapeutic areas may not lead to the development of any viable commercial product and may divert resources away from
better opportunities. Similarly, our potential decisions to delay, terminate, or collaborate with third parties in respect of certain programs may subsequently
also prove to be suboptimal and could cause us to miss valuable opportunities. If we make incorrect determinations regarding the viability or market
potential of any of our programs or product candidates or misread trends in the biopharmaceutical industry, in particular for neurodegenerative diseases, our
business, financial condition, and results of operations could be
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materially adversely affected. As a result, we may fail to capitalize on viable commercial products or profitable market opportunities, be required to forego
or delay pursuit of opportunities with other product candidates or other diseases and disease pathways that may later prove to have greater commercial
potential than those we choose to pursue, or relinquish valuable rights to such product candidates through collaboration, licensing, or other royalty
arrangements in cases in which it would have been advantageous for us to invest additional resources to retain sole development and commercialization
rights.
Risks Related to the Discovery, Development, and Commercialization of Our Product Candidates
Research and development of biopharmaceutical products is inherently risky. Our business is heavily dependent on the successful development of our
product candidates, which are in various stages of preclinical and clinical development. We cannot give any assurance that any of our product
candidates will receive regulatory, including marketing, approval, which is necessary before they can be commercialized.
We are at the early stages of development of many of the product candidates currently in our programs. To date, we have invested substantially in
our efforts and financial resources to identify, procure intellectual property for, and develop our programs, including conducting preclinical studies and
clinical trials in our programs for our product candidates, AL001, AL002, AL003, AL101, and AL044, and providing general and administrative support
for these operations. Our future success is dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully
commercialize our product candidates, and we may fail to do so for many reasons, including the following:
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our product candidates may not successfully complete preclinical studies or clinical trials;
a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to be
effective or otherwise does not meet applicable regulatory criteria;
our competitors may develop therapeutics that render our product candidates obsolete or less attractive;
the product candidates that we develop may not be sufficiently covered by intellectual property for which we hold exclusive rights;
the product candidates that we develop may be covered by third parties’ patents or other intellectual property or exclusive rights;
the market for a product candidate may change so that the continued development of that product candidate is no longer reasonable or
commercially attractive;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;
if a product candidate obtains regulatory approval, we may be unable to establish sales and marketing capabilities, or successfully market
such approved product candidate, to gain market acceptance; and
a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors, if applicable.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material
adverse effect on our business and could potentially cause us to cease operations.
We may not be successful in our efforts to further develop our current product candidates. We are not permitted to market or promote any of our
product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such
regulatory approval for any of our product candidates. Most of our product candidates are in the early stages of development and will require significant
additional clinical development, management of preclinical, clinical, and manufacturing activities, regulatory approval, adequate manufacturing supply, a
commercial organization, and significant marketing efforts before we generate any revenue from product sales, if at all.
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We have never completed a clinical development program. We currently have one product candidate, AL001, in a pivotal Phase 3 clinical trial, one
product candidate, AL002 in a Phase 2 clinical trial, and two product candidates, AL003 and AL101, in Phase 1 clinical trials. Further, we cannot be certain
that any of our product candidates will be successful in clinical trials. We may in the future advance product candidates into clinical trials and terminate
such trials prior to their completion.
If any of our product candidates successfully complete clinical trials, we generally plan to seek regulatory approval to market our product
candidates in the United States, the European Union, and in additional foreign countries where we believe there is a viable commercial opportunity. We
have never commenced, compiled or submitted an application seeking regulatory approval to market any product candidate. We may never receive
regulatory approval to market any product candidates even if such product candidates successfully complete clinical trials, which would adversely affect
our viability. To obtain regulatory approval in countries outside the United States, we must comply with numerous and varying regulatory requirements of
such other countries regarding safety, efficacy, manufacturing and controls, clinical trials, commercial sales, pricing, and distribution of our product
candidates. We may also rely on our collaborators or partners to conduct the required activities to support an application for regulatory approval, and to
seek approval, for one or more of our product candidates. For example, for our AL002 and AL003 product candidates, our collaboration arrangement with
AbbVie provides that we are responsible for the execution of the Phase 1 and Phase 2 studies. We cannot be sure that our collaborators or partners will
conduct these activities or do so within the timeframe we desire. Even if we (or our collaborators or partners) are successful in obtaining approval in one
jurisdiction, we cannot ensure that we will obtain approval in any other jurisdictions. If we are unable to obtain approval for our product candidates in
multiple jurisdictions, our business, financial condition, results of operations, and our growth prospects could be negatively affected.
Even if we receive regulatory approval to market any of our product candidates, whether for the treatment of neurodegenerative diseases or other
diseases, we cannot assure you that any such product candidate will be successfully commercialized, widely accepted in the marketplace or more effective
than other commercially available alternatives.
Investment in biopharmaceutical product development involves significant risk that any product candidate will fail to demonstrate adequate
efficacy or an acceptable safety profile, gain regulatory approval, and become commercially viable. We cannot provide any assurance that we will be able
to successfully advance any of our product candidates through the development process or, if approved, successfully commercialize any of our product
candidates.
We may not be successful in our efforts to continue to create a pipeline of product candidates from our Discovery Platform or to develop commercially
successful products. If we fail to successfully identify and develop additional product candidates from our Discovery Platform, our commercial
opportunity may be limited.
One of our strategies is to identify and pursue clinical development of additional product candidates. Identifying, developing, obtaining regulatory
approval, and commercializing additional product candidates for the treatment of neurodegenerative diseases will require substantial additional funding and
is prone to the risks of failure inherent in drug development. We cannot provide you any assurance that we will be able to successfully identify or acquire
additional product candidates, advance any of these additional product candidates through the development process, successfully commercialize any such
additional product candidates, if approved, or assemble sufficient resources to identify, acquire, develop, or, if approved, commercialize additional product
candidates. If we are unable to successfully identify, acquire, develop, and commercialize additional product candidates, our commercial opportunity may
be limited.
We may not be successful in our efforts to expand indications for approved product candidates.
Our drug development strategy is to clinically test and seek regulatory approval for our product candidates in indications in which we believe there
is the most evidence that we will be able to quickly generate proof-of-concept data. We then intend to expand to clinical testing and seek regulatory
approvals in other neurodegenerative indications based on genetic and mechanistic overlap with the primary indication. Conducting clinical trials for
additional indications for our product candidates requires substantial technical, financial, and human resources and is prone to the risks of failure inherent
in drug development. We cannot provide you any assurance that we will be
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successful in our effort to obtain regulatory approval for our product candidates for additional indications even if we obtain approval for an initial
indication.
For example, our product candidate AL001 is initially targeting FTD-GRN patients. In the third quarter of 2019, we advanced AL001 into a
Phase 2, which also includes an additional genetic subset of FTD patients (FTD-C9orf72) and we will evaluate AL001 in patients with amyotrophic lateral
sclerosis (ALS) caused by C9orf72 repeats, which share TDP-43 pathology with FTD-GRN. If we are unable to expand indications for our product
candidates, our commercial opportunity may be limited.
We have concentrated a substantial portion of our research and development efforts on the treatment of neurodegenerative diseases, a field that has
seen limited success in drug development. Further, our product candidates are based on new approaches and novel technology, and we must be able to
identify and develop new biomarkers that are signs of a disease or condition and that can measure impact on disease progression of our product
candidates, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.
We have focused a substantial portion of our research and development efforts on addressing neurodegenerative diseases. Collectively, efforts by
biopharmaceutical companies in the field of neurodegenerative diseases have seen limited success in drug development. There are few effective therapeutic
options available for patients with FTD, Alzheimer’s disease, Parkinson’s disease, and other neurodegenerative diseases. Our future success is highly
dependent on the successful development of our product candidates for treating neurodegenerative diseases. Developing and, if approved, commercializing
our product candidates for treatment of neurodegenerative diseases subjects us to a number of challenges, including obtaining disease modifying activity
and efficacious dose in target tissue and obtaining regulatory approval from the FDA and other regulatory authorities who have only a limited set of
precedents to rely on.
Our approach to the treatment of neurodegenerative diseases aims to identify and select targets enriched in microglia and other myeloid immune
cells which are genetically associated with neurodegenerative diseases. We identify and develop product candidates that are designed to cross the blood
brain barrier in sufficient quantity and potency to enable efficacious dosing in the brain and engage the intended target, and we must be able to identify and
develop biomarkers and biomarker assays that can accurately identify signs of a disease or condition, assist us in selecting the right patient population, and
demonstrate target engagement, pathway engagement, and measure the impact on disease progression of our product candidates. This strategy may not
prove to be successful. We cannot be sure that our approach will yield satisfactory therapeutic products that are safe and effective, scalable, or profitable.
We may encounter substantial delays in our clinical trials, or may not be able to conduct or complete our clinical trials on the timelines we expect, if at
all.
Clinical testing is expensive, time consuming, and subject to uncertainty. We cannot guarantee that any clinical trials will be conducted as planned
or completed on schedule, if at all. We cannot be sure that submission of an IND or a clinical trial application (CTA) will result in the FDA or EMA, as
applicable, allowing clinical trials to begin in a timely manner, if at all. Moreover, even if these trials begin, issues may arise that could suspend or
terminate such clinical trials. A failure of one or more clinical trials can occur at any stage of testing, and our future clinical trials may not be successful.
Events that may prevent successful or timely initiation or completion of clinical trials include:
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inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical
trials;
delays in confirming target engagement, patient selection, or other relevant biomarkers to be utilized in preclinical and clinical product
candidate development;
delays in reaching a consensus with regulatory agencies on study design;
delays in reaching agreement on acceptable terms with prospective contract research organizations (CROs) and clinical trial sites, the
terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;
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delays in identifying, recruiting, and training suitable clinical investigators;
delays in obtaining required IRB approval at each clinical trial site;
imposition of delays to clinical trials, including as a result of temporary or permanent clinical hold by regulatory agencies for a number
of reasons, including:
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after review of an IND or amendment, CTA or amendment, or equivalent application or amendment;
as a result of a new safety finding that presents unreasonable risk to clinical trial participants;
as a result of modifications to clinical trial protocols or related documentation;
a negative finding from an inspection of our clinical trial operations or study sites; or
the finding that the investigational protocol or plan is clearly deficient to meet its stated objectives;
delays in identifying, recruiting, and enrolling suitable patients to participate in our clinical trials, and delays caused by patients
withdrawing from clinical trials, or failing to return for post-treatment follow-up;
difficulty collaborating with patient groups and investigators;
failure by our CROs, other third parties, or us to adhere to clinical trial requirements;
failure to perform in accordance with the FDA’s or any other regulatory authority’s current good clinical practices (cGCPs) requirements,
or applicable EMA or other regulatory guidelines in other countries;
occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;
changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;
the cost of clinical trials of our product candidates being greater than we anticipate;
clinical trials of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators
requiring us, to conduct additional clinical trials or abandon product development programs; and
delays in manufacturing, testing, releasing, validating, or importing/exporting sufficient stable quantities of our product candidates for
use in clinical trials or the inability to do any of the foregoing.
Any and all of the events described above may be caused or exacerbated by factors related to the ongoing COVID-19 pandemic.
Any inability to successfully initiate or complete clinical trials could result in additional costs to us or impair our ability to generate revenue. In
addition, if we make manufacturing or formulation changes to our product candidates, we may be required to or we may elect to conduct additional studies
to bridge our modified product candidates to earlier versions. Clinical trial delays could also shorten any periods during which our products have patent
protection and may allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our
product candidates and may harm our business and results of operations.
We could also encounter delays if a clinical trial is suspended or terminated by us, by the data safety monitoring board for such trial or by the FDA,
EMA, or any other regulatory authority, or if the IRBs of the institutions in which such trials are being conducted suspend or terminate the participation of
their clinical investigators and sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including
failure to conduct the clinical trial in accordance with regulatory requirements or our
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clinical protocols, inspection of the clinical trial operations or trial site by the FDA, EMA, or other regulatory authorities resulting in the imposition of a
clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental
regulations or administrative actions, or lack of adequate funding to continue the clinical trial.
We may in the future advance product candidates into clinical trials and terminate such trials prior to their completion, which could adversely affect
our business.
Delays in the completion of any clinical trial of our product candidates will increase our costs, slow down our product candidate development and
approval process and delay, or potentially jeopardize our ability to commence product sales and generate revenue. In addition, many of the factors that
cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product
candidates.
We may encounter difficulties enrolling patients in our clinical trials, and our clinical development activities could thereby be delayed or otherwise
adversely affected.
The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number
of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons,
including:
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the size and nature of the patient population;
the patient eligibility criteria defined in the protocol, including biomarker-driven identification and/or certain highly-specific criteria
related to stage of disease progression, which may limit the patient populations eligible for our clinical trials to a greater extent than
competing clinical trials for the same indication that do not have biomarker-driven patient eligibility criteria;
the size of the study population required for analysis of the trial’s primary endpoints;
the proximity of patients to a trial site;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
competing clinical trials for similar therapies or targeting patient populations meeting our patient eligibility criteria;
clinicians’ and patients’ perceptions as to the potential advantages and side effects of the product candidate being studied in relation to
other available therapies and product candidates;
our ability to obtain and maintain patient consents; and
the risk that patients enrolled in clinical trials will not complete such trials, for any reason.
Enrollment of patients in our clinical trials and maintaining patients in our ongoing clinical trials have been, and may continue to be, delayed or
limited as certain of our clinical trial sites limit their onsite staff or temporarily close as a result of the COVID-19 pandemic. In addition, patients may not
be able or willing to visit clinical trial sites for dosing or data collection purposes due to limitations on travel and physical distancing imposed or
recommended by federal or state governments or patients’ reluctance to visit the clinical trial sites during the pandemic. These factors resulting from the
COVID-19 pandemic could delay or prevent the anticipated readouts from our clinical trials.
Our clinical trials may reveal significant adverse events, toxicities, or other side effects and may fail to demonstrate substantial evidence of the safety
and efficacy of our product candidates, which would prevent, delay, or limit the scope of regulatory approval and commercialization.
Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through lengthy, complex,
and expensive preclinical studies and clinical trials that our product
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candidates are both safe and effective for use in each target indication. For those product candidates that are subject to regulation as biological drug
products, we will need to demonstrate that they are safe, pure, and potent for use in their target indications. Each product candidate must demonstrate an
adequate risk versus benefit profile in its intended patient population and for its intended use.
Clinical testing is expensive and 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 preclinical studies of our product candidates may not be predictive of the results of early-stage or later-stage clinical
trials, and results of early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. The results of clinical
trials in one set of patients or disease indications may not be predictive of those obtained in another. In some instances, there can be significant variability
in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set
forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen, and other clinical trial
protocols and the rate of dropout among clinical trial participants. Open-label extension studies may also extend the timing and cost of a clinical test
substantially. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through
preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced
clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. This is particularly true in
neurodegenerative diseases, where failure rates historically have been higher than in many other disease areas. Most product candidates that begin clinical
trials are never approved by regulatory authorities for commercialization.
We have limited experience in designing clinical trials and may be unable to design and execute a clinical trial to support marketing approval. We
cannot be certain that our current clinical trials or any other future clinical trials will be successful. Additionally, any safety concerns observed in any one
of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in those and other indications,
which could have a material adverse effect on our business, financial condition, and results of operations.
In addition, even if such clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret
the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are
not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, we may be required to expend
significant resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates. Even if
regulatory approval is secured for any of our product candidates, the terms of such approval may limit the scope and use of our product candidates, which
may also limit its commercial potential.
Our operations and financial results could be adversely impacted by the COVID-19 pandemic in the United States and the rest of the world.
In January 2020, the World Health Organization declared the outbreak of COVID-19 as a “Public Health Emergency of International Concern,”
which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and
volatility in financial markets. The COVID-19 pandemic and government responses are creating disruption in global supply chains and adversely impacting
many industries. The pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global
economic slowdown. We continue to monitor the impact of the COVID-19 pandemic closely. The extent to which the COVID-19 pandemic will impact its
operations or financial results is uncertain.
The pandemic and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and
commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain
goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. In response to
the spread of COVID-19 and in compliance with local shelter-in-place regulations, we reduced the number of employees operating at our headquarters,
which has altered our operations and processes. While the extent of the impact of the COVID-19 pandemic on our business and financial results is
uncertain, a continued and prolonged public health crisis such as the COVID-19 pandemic could have a material adverse effect on our business, financial
condition and results of operations. As the COVID-19 pandemic continues to spread around the globe, we may experience disruptions that could severely
impact our business and clinical trials, including:
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the size and nature of the patient population;
delays or difficulties in recruiting, enrolling, and maintaining patients in our clinical trials;
delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial
sites and hospital staff supporting the conduct of clinical trials;
interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by
federal or state governments, employers and others;
limitations in resources that would otherwise be focused on the conduct of our business or our clinical trials, including because of
sickness or the desire to avoid contact with large groups of people or as a result of government-imposed “shelter in place” or similar
working restrictions;
delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;
delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials;
interruption in global shipping that may affect the transport of clinical trial materials, such as investigational drug product used in our
clinical trials;
changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical
trials are conducted, or to discontinue the clinical trials altogether, or which may result in unexpected costs;
delays in necessary interactions with regulators, ethics committees and other important agencies and contractors due to limitations in
employee resources or forced furlough of government or contractor personnel; and
refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.
We may be required to develop and implement additional clinical trial policies and procedures designed to help protect subjects from
the COVID-19 virus, which may delay our anticipated timelines for clinical studies and regulatory approval and increase our costs for clinical studies. For
example, in March 2020, the FDA issued a guidance, which the FDA subsequently updated, on conducting clinical trials during the pandemic, that
describes a number of considerations for sponsors of clinical trials impacted by the pandemic. In this guidance, pharmaceutical companies would be
required to include in the clinical trial report contingency measures implemented to manage the clinical trial, and any disruption of the clinical trial as a
result of the COVID-19 pandemic; a list of all subjects affected by the COVID-19 pandemic related study disruption (by unique subject identifier and by
investigational site and a description of how the individual’s participation was altered); and analyses and corresponding discussions that address the impact
of implemented contingency measures (e.g., participant discontinuation from investigational product and/or study, alternative procedures used to collect
critical safety and/or efficacy data) on the safety and efficacy results reported for the clinical trial. In June 2020, the FDA also issued a guidance on good
manufacturing practice considerations for responding to COVID-19 infection in employees in drug and biological products manufacturing, including
recommendations for manufacturing controls to prevent contamination of drugs and a guidance on resuming normal drug and biologics manufacturing
operations during the COVID-19 public health emergency. To the extent our clinical studies are delayed or data from our clinical studies become
compromised due to COVID-19 related factors, we may be required to expend additional resources to conduct additional studies and/or enroll more
participants, which could adversely affect our business operations and delay regulatory approval.
The COVID-19 pandemic continues to evolve rapidly, with the status of operations and government restrictions evolving weekly. The extent to
which the outbreak impacts our business, preclinical studies, and clinical trials will depend on future developments, which are highly uncertain and cannot
be predicted with confidence, such as the duration of the pandemic, travel restrictions, and social distancing in the United States and other countries,
business closures or business disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
Additionally, certain third parties with whom we engage, including our collaborators, contract organizations, third party manufacturers,
suppliers, clinical trial sites, regulators and other third parties with whom
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we conduct business are similarly adjusting their operations and assessing their capacity in light of the COVID-19 pandemic. If these third parties
experience shutdowns or continued business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be
materially and negatively impacted.
For example, certain of our clinical trial sites have experienced clinical trial visit delays, and we are aware that for a period of time, some
participants in each of our ongoing trials did not received scheduled doses on time. These events could negatively impact the integrity, reliability, or
robustness of the data from our clinical trials. We and our CROs have also made certain adjustments to the operation of such trials in an effort to ensure the
monitoring and safety of patients and minimize risks to trial integrity during the pandemic in accordance with the guidance issued by the FDA, and we may
be required to make further adjustments in the future. Many of these adjustments are new and untested, may not be effective, and may have unforeseen
effects on the enrollment, progress and completion of these trials and the findings from these trials. In addition, notwithstanding any adjustments, some trial
participants may decline to visit clinical trial sites for dosing or data collection purposes due to limitations on travel and physical distancing imposed or
recommended by federal or state governments or patients’ reluctance to visit the clinical trial sites during the pandemic. We may not be successful in
adding clinical trial sites, may experience delays in patient enrollment or in the progression of our clinical trials and collection and analysis of patient data,
may need to suspend or abandon our clinical trials, and may encounter other negative impacts to our trials, due to the effects of the COVID-19 pandemic.
The global outbreak of COVID-19 continues to rapidly evolve, with particularly significant case increases in the United States. While the
extent of the impact of the current COVID-19 pandemic on our business and financial results is uncertain, a continued and prolonged public health crisis
such as the COVID-19 pandemic could have a material negative impact on our business, financial condition and operating results. To the extent the
COVID-19 pandemic adversely affects our operations and financial results, it may also have the effect of heightening many of the other risks described in
this “Risk Factors” section.
We face significant competition in an environment of rapid technological and scientific change, and there is a possibility that our competitors may
achieve regulatory approval before us or develop therapies that are safer, more advanced, or more effective than ours, which may negatively impact our
ability to successfully market or commercialize any product candidates we may develop and ultimately harm our financial condition.
The development and commercialization of new drug products is highly competitive. Moreover, the neurodegenerative field is characterized by
strong and increasing competition, and a strong emphasis on intellectual property. We may face competition with respect to any of our product candidates
that we seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies, and biotechnology
companies worldwide. Potential competitors also include academic institutions, government agencies, and other public and private research organizations
that conduct research, seek patent protection, and establish collaborative arrangements for research, development, manufacturing, and commercialization.
There are a number of large pharmaceutical and biotechnology companies that are currently pursuing the development of products for the treatment
of neurodegenerative diseases, including FTD and Alzheimer’s disease. Many of these current or potential competitors, either alone or with their strategic
partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical
trials, obtaining regulatory approvals, and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology
industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early-stage companies may also
prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete
with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical
trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunity could be reduced or eliminated if
our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less
expensive than any products that we may develop. Furthermore, currently approved products could be discovered to have application for treatment of
neurodegenerative disease indications, which could give such products significant regulatory and market timing advantages over any of our product
candidates. Our competitors also may obtain FDA, EMA, or other regulatory approval for their products more rapidly than we may obtain approval for ours
and may obtain orphan drug exclusivity from the FDA for indications our product candidates are targeting, which could result in our competitors
establishing a strong market position
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before we are able to enter the market. Additionally, products or technologies developed by our competitors may render our potential product candidates
uneconomical or obsolete, and we may not be successful in marketing any product candidates we may develop against competitors.
In addition, we could face litigation or other proceedings with respect to the scope, ownership, validity, and/or enforceability of our patents relating
to our competitors’ products and our competitors may allege that our products infringe, misappropriate, or otherwise violate their intellectual property. The
availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and
commercialize.
The manufacture of our product candidates is complex, and we may encounter difficulties in production. If we or any of our third-party manufacturers
encounter such difficulties, or fail to meet rigorously enforced regulatory standards, our ability to provide supply of our product candidates for clinical
trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
The processes involved in manufacturing our drug and biological product candidates are complex, expensive, highly-regulated, and subject to
multiple risks. Further, as product candidates are developed through preclinical studies to late-stage clinical trials towards approval and commercialization,
it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes
and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our product candidates to
perform differently and affect the results of planned clinical trials or other future clinical trials.
In order to conduct clinical trials of our product candidates, or supply commercial products, if approved, we will need to manufacture them in large
quantities. Our CDMOs may be unable to successfully increase the manufacturing capacity for any of our product candidates in a timely or cost-effective
manner, or at all. In addition, quality issues may arise during scale-up activities. If our CDMOs are unable to successfully scale up the manufacture of our
product candidates in sufficient quality and quantity, the development, testing, and clinical trials of that product candidate may be delayed or become
infeasible, and regulatory approval or commercial launch of any resulting product may be delayed or not obtained, which could significantly harm our
business. The same risk would apply to our internal manufacturing facilities, should we in the future decide to build internal manufacturing capacity. In
addition, building internal manufacturing capacity would carry significant risks in terms of being able to plan, design, and execute on a complex project to
build manufacturing facilities in a timely and cost-efficient manner.
In addition, the manufacturing process for any products that we may develop is subject to FDA, EMA, and foreign regulatory authority approval
processes, and continuous oversight, and we will need to contract with manufacturers who can meet all applicable FDA, EMA, and foreign regulatory
authority requirements, including complying with current good manufacturing practices (cGMPs) on an ongoing basis. If we or our third-party
manufacturers are unable to reliably produce products to specifications acceptable to the FDA, EMA, or other regulatory authorities, including recent FDA
guidance on good manufacturing practice considerations for responding to COVID-19 infection in employees in drug and biological products
manufacturing, as well as any future guidance and regulations, we may not obtain or maintain the approvals we need to commercialize such products. Even
if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CDMOs will be able to manufacture the
approved product to specifications acceptable to the FDA, EMA, or other regulatory authorities, to produce it in sufficient quantities to meet the
requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials,
require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidate, impair
commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations, and growth
prospects.
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If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any product
candidates we may develop, we may not be successful in commercializing those product candidates if and when they are approved.
We do not have a sales or marketing infrastructure and have no experience in the sale, marketing, or distribution of pharmaceutical products. To
achieve commercial success for any approved product for which we retain sales and marketing responsibilities, we must either develop a sales and
marketing organization or outsource these functions to third parties. In the future, we may choose to build a focused sales, marketing, and commercial
support infrastructure to sell, or participate in sales activities with our collaborators for, some of our product candidates if and when they are approved.
There are risks involved with both establishing our own commercial capabilities and entering into arrangements with third parties to perform these
services. For example, recruiting and training a sales force or reimbursement specialists is expensive and time consuming and could delay any product
launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing and other commercialization capabilities
is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly,
and our investment would be lost if we cannot retain or reposition our commercialization personnel.
Factors that may inhibit our efforts to commercialize any approved product on our own include:
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our inability to recruit and retain adequate numbers of effective sales, marketing, reimbursement, customer service, medical affairs, and
other support personnel;
the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future
approved products;
the inability of reimbursement professionals to negotiate arrangements for formulary access, reimbursement, and other acceptance by
payors;
the inability to price our products at a sufficient price point to ensure an adequate and attractive level of profitability;
restricted or closed distribution channels that make it difficult to distribute our products to segments of the patient population;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to
companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent commercialization organization.
If we enter into arrangements with third parties to perform sales, marketing, commercial support, and distribution services, our product revenue or
the profitability of product revenue may be lower than if we were to market and sell any products we may develop ourselves. In addition, we may not be
successful in entering into arrangements with third parties to commercialize our product candidates or may be unable to do so on terms that are favorable to
us. We may have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our
products effectively. If we do not establish commercialization capabilities successfully, either on our own or in collaboration with third parties, we will not
be successful in commercializing our product candidates if approved.
Even if any product candidates we develop receive marketing approval, they may fail to achieve the degree of market acceptance by physicians,
patients, healthcare payors, and others in the medical community necessary for commercial success.
The commercial success of any of our product candidates will depend upon its degree of market acceptance by physicians, patients, third-party
payors, and others in the medical community. Even if any product candidates we may develop receive marketing approval, they may nonetheless fail to
gain sufficient market acceptance by physicians, patients, healthcare payors, and others in the medical community. The degree of market acceptance of
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any product candidates we may develop, if approved for commercial sale, will depend on a number of factors, including:
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the efficacy and safety of such product candidates as demonstrated in clinical trials and published in peer-reviewed journals;
the potential and perceived advantages compared to alternative treatments;
the ability to offer our products for sale at competitive prices;
sufficient third-party coverage or reimbursement;
the ability to offer appropriate patient access programs, such as co-pay assistance;
the extent to which physicians recommend our products to their patients;
convenience and ease of dosing and administration compared to alternative treatments;
the clinical indications for which the product candidate is approved by FDA, EMA, or other regulatory agencies;
product labeling or product insert requirements of the FDA, EMA, or other comparable foreign regulatory authorities, including any
limitations, contraindications, or warnings contained in a product’s approved labeling;
restrictions on how the product is distributed;
the timing of market introduction of competitive products;
publicity concerning our products or competing products and treatments;
the strength of marketing and distribution support; and
the prevalence and severity of any side effects.
If any product candidates we develop do not achieve an adequate level of acceptance, we may not generate significant product revenue, and we
may not become profitable.
Any products we commercialize may become subject to unfavorable pricing regulations, third-party reimbursement practices, or healthcare reform
initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing, and reimbursement for new drugs vary widely from country to country. In the United
States, recently enacted or potential future legislation may significantly change the approval requirements in ways that could involve additional costs and
cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing
review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject
to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular
country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact
the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment
in one or more product candidates, even if any product candidates we may develop obtain marketing approval.
Our ability to successfully commercialize any products that we may develop also will depend in part on the extent to which reimbursement for
these products and related treatments will be available from government health administration authorities, private health insurers, and other organizations.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will
pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and
third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Government
authorities currently impose mandatory discounts for certain patient groups, such as Medicare, Medicaid, and Veterans Affairs hospitals, and may seek to
increase such discounts at any time. Future regulation may negatively impact the price of our products, if approved.
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Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the
prices charged for medical products. We cannot be sure that reimbursement will be available for any product candidate that we commercialize and, if
reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which we
obtain marketing approval. In order to get reimbursement, physicians may need to show that patients have superior treatment outcomes with our products
compared to standard of care drugs, including lower-priced generic versions of standard of care drugs. If reimbursement is not available or is available only
to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval. In the United States, no
uniform policy of coverage and reimbursement for products exists among third-party payors and coverage and reimbursement levels for products can differ
significantly from payor to payor. As a result, the coverage determination process is often a time consuming and costly process that may require us to
provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement
will be applied consistently or obtained in the first instance.
There may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for
which the medicine is approved by the FDA, EMA, or other comparable foreign regulatory authorities. Moreover, eligibility for reimbursement does not
imply that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale, and distribution.
Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement
rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost
drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required
by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where
they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting
their own reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors
for any approved products we may develop could have a material adverse effect on our operating results, our ability to raise capital needed to
commercialize product candidates, and our overall financial condition.
Our product candidates for which we intend to seek approval may face competition sooner than anticipated.
Even if we are successful in achieving regulatory approval to commercialize a product candidate ahead of our competitors, our product candidates
may face competition from biosimilar products. In the United States, our product candidates are regulated by the FDA as biologic products and we intend
to seek approval for these product candidates pursuant to the BLA pathway. The Biologics Price Competition and Innovation Act of 2009 (BPCIA) created
an abbreviated pathway for the approval of biosimilar and interchangeable biologic products. 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 brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the
original branded product was approved under a BLA. 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 such 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 product candidates.
We believe that any of our product candidates approved as a biologic product under a BLA should qualify for the 12-year period of exclusivity.
However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product
candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover,
the extent to which a biosimilar product, once approved, will be substituted for any one of our reference products in a way that is similar to traditional
generic substitution for non-biologic products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
In addition, a competitor could decide to forego the biosimilar approval path and submit a full BLA after completing its own preclinical studies and clinical
trials. In such cases, any exclusivity to which we may be eligible under the BPCIA would not prevent the competitor from marketing its product as soon as
it is approved.
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In Europe, the European Commission has granted marketing authorizations for several biosimilar products pursuant to a set of general and product
class-specific guidelines for biosimilar approvals issued over the past few years. In Europe, a competitor may reference data supporting approval of an
innovative biological product, but will not be able to get it on the market until 10 years after the time of approval of the innovative product. This 10-year
marketing exclusivity period will be extended to 11 years if, during the first eight of those 10 years, the marketing authorization holder obtains an approval
for one or more new therapeutic indications that bring significant clinical benefits compared with existing therapies. In addition, companies may be
developing biosimilar products in other countries that could compete with our products, if approved.
If competitors are able to obtain marketing approval for biosimilars referencing our product candidates, if approved, such products may become
subject to competition from such biosimilars, with the attendant competitive pressure and potential adverse consequences. Such competitive products may
be able to immediately compete with us in each indication for which our product candidates may have received approval.
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 the clinical testing of our product candidates and will face an even greater risk when and
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 testing, 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 testing and 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:
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decreased or interrupted demand for our products;
injury to our reputation;
withdrawal of clinical trial participants and inability to continue clinical trials;
initiation of investigations by regulators;
costs to defend the related litigation;
a 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; and
the inability to commercialize any product candidate.
Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent
or inhibit the commercialization of products we develop, alone or with collaborators. Our insurance policies may 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.
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Risks Related to Regulatory Approval and Other Legal Compliance Matters
The regulatory approval processes of the FDA, EMA, and comparable foreign regulatory authorities are lengthy, time consuming, and inherently
unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, we will be unable to generate product revenue and
our business will be substantially harmed.
The time required to obtain approval by the FDA, EMA, and comparable foreign regulatory authorities is unpredictable, typically takes many years
following the commencement of clinical trials, and depends upon numerous factors, including the type, complexity, and novelty of the product candidates
involved. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a
product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve an
application. 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 preclinical, clinical, or other studies. We have not submitted for, or obtained regulatory approval for any
product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever
obtain regulatory approval.
Further, development of our product candidates and/or regulatory approval may be delayed for reasons beyond our control. For example, the U.S.
federal government has experienced and may in the future experience shutdown or budget sequestration, which could result in significant reductions to the
FDA’s budget, employees, and operations, which may lead to slower response times and longer review periods, potentially affecting our ability to progress
development of our product candidates or obtain regulatory approval for our product candidates. To the extent FDA and other regulatory authorities
experience any delays or limited resources in reviewing our regulatory applications or requests for meetings and/or guidance, and inspection of
manufacturing facilities prior to regulatory approval due to the COVID-19 pandemic or other reasons, we may experience significant delays in our
anticipated timelines for our clinical studies and/or seeking regulatory approvals, which could adversely affect our business.
Applications for our product candidates could fail to receive regulatory approval in an initial or subsequent indication for many reasons, including
but not limited to the following:
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the FDA, EMA, or comparable foreign regulatory authorities may disagree with the design, implementation, or results of our clinical
trials;
the FDA, EMA, or comparable foreign regulatory authorities may determine that our product candidates are not safe and effective, only
moderately effective or have undesirable or unintended side effects, toxicities, or other characteristics that preclude our obtaining
marketing approval or prevent or limit commercial use;
the population studied in the clinical program may not be sufficiently broad or representative to assure efficacy and safety in the full
population for which we seek approval;
we may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’s risk-benefit ratio
when compared to the standard of care is acceptable;
the FDA, EMA, or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or
clinical trials;
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a NDA, BLA, or other
submission or to obtain regulatory approval in the United States or elsewhere;
we may be unable to demonstrate to the FDA, EMA, or comparable foreign regulatory authorities that a product candidate’s risk-benefit
ratio for a proposed indication is acceptable;
the FDA, EMA, or comparable foreign regulatory authorities may fail to approve the manufacturing processes, test procedures, and
specifications, or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA, EMA, or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
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This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in our failing to obtain regulatory approval
to market any of our product candidates, which would significantly harm our business, results of operations, and prospects.
Our product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their regulatory
approval, limit their commercial potential, or result in significant negative consequences.
Adverse events or other undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt
clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, EMA, or other comparable foreign
regulatory authorities.
Drug-related side effects could affect patient recruitment, the ability of enrolled patients to complete the study, and/or result in potential product
liability claims. We are required to maintain product liability insurance pursuant to certain of our development and commercialization agreements. We may
not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. A successful product
liability claim or series of claims brought against us could adversely affect our results of operations, business, and reputation. In addition, regardless of
merit or eventual outcome, product liability claims may result in impairment of our business reputation, withdrawal of clinical trial participants, costs due
to related litigation, distraction of management’s attention from our primary business, initiation of investigations by regulators, substantial monetary awards
to patients or other claimants, the inability to commercialize our product candidates, and decreased demand for our product candidates, if approved for
commercial sale.
Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects or
adverse events caused by such products, a number of potentially significant negative consequences could result, including but not limited to:
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regulatory authorities may withdraw approvals of such product and cause us to recall our products;
regulatory authorities may require additional warnings on the label;
we may be required to change the way the product is administered or conduct additional clinical trials or post-approval studies;
we may be required to create a Risk Evaluation and Mitigation Strategy plan, which could include a medication guide outlining the risks
of such side effects for distribution to patients, a communication plan for healthcare providers, and/or other elements, such as boxed
warning on the packaging, to assure safe use;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could
significantly harm our business, financial condition, results of operations, and growth prospects.
We currently are and may continue in the future to conduct clinical trials for our product candidates outside the United States, and the FDA, EMA,
and applicable foreign regulatory authorities may not accept data from such trials.
We currently are and may continue in the future choose to conduct one or more of our clinical trials outside the United States, including in Europe
or Australia. The acceptance of study data from clinical trials conducted outside the United States or another jurisdiction by the FDA, EMA, or applicable
foreign regulatory authority may be subject to certain conditions. In cases where data from foreign clinical trials are intended to serve as the basis for
marketing approval in the United States, the FDA will generally not approve the application on the basis of foreign data alone unless (i) the data are
applicable to the United States population and United States medical practice; and (ii) the trials were performed by clinical investigators of recognized
competence and pursuant to cGCP regulations.
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Additionally, the FDA’s clinical trial requirements, including sufficient size of patient populations and statistical powering, must be met. Many foreign
regulatory bodies have similar approval requirements. In addition, such foreign trials would be subject to the applicable local laws of the foreign
jurisdictions where the trials are conducted. There can be no assurance that the FDA, EMA, or any applicable foreign regulatory authority will accept data
from trials conducted outside of the United States or the applicable jurisdiction. If the FDA, EMA, or any applicable foreign regulatory authority does not
accept such data, it would result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan, and
which may result in our product candidates not receiving approval or clearance for commercialization in the applicable jurisdiction.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not mean that we will be successful in obtaining
regulatory approval of our product candidates in other jurisdictions.
Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or
maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect
on the regulatory approval process in others. For example, even if the FDA or EMA grants marketing approval of a product candidate, comparable
regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing, and promotion of the product candidate in those countries.
Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States,
including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other
jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in
that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and
costs for us and could delay or prevent the introduction of our products in certain countries. If we or any partner we work with fail to comply with the
regulatory requirements in international markets or fail to receive applicable marketing approvals, our target market will be reduced, and our ability to
realize the full market potential of our product candidates will be harmed.
Even if we obtain regulatory approval for a product candidate, our products will remain subject to extensive regulatory scrutiny.
If any of our product candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging,
storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market
information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.
Manufacturers and manufacturers’ facilities are required to comply with extensive requirements imposed by the FDA, EMA, and comparable
foreign regulatory authorities, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we and our
contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any
NDA, BLA, or marketing authorization application (MAA). Accordingly, we and others with whom we work must continue to expend time, money, and
effort in all areas of regulatory compliance, including manufacturing, production, and quality control.
Any regulatory approvals that we receive for our product candidates will be subject to limitations on the approved indicated uses for which the
product may be marketed and promoted or to the conditions of approval (including the requirement to implement a Risk Evaluation and Mitigation
Strategy), or contain requirements for potentially costly post-marketing testing. We will be required to report certain adverse reactions and production
problems, if any, to the FDA, EMA, and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays
in product development or commercialization, or increased costs to assure compliance. The FDA and other agencies, including the Department of Justice,
closely regulate and monitor the post-approval marketing and promotion of products to ensure that they are manufactured, marketed, and distributed only
for the approved indications and in accordance with the provisions of the approved labeling. We will have to comply with requirements concerning
advertising and promotion for our products. Promotional communications
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with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s
approved label. As such, we may not promote our products for indications or uses for which they do not have approval. The holder of an approved NDA,
BLA, or MAA must submit new or supplemental applications and obtain approval for certain changes to the approved product, product labeling, or
manufacturing process. We could also be asked to conduct post-marketing clinical trials to verify the safety and efficacy of our products in general or in
specific patient subsets. If original marketing approval was obtained via the accelerated approval pathway, we could be required to conduct a successful
post-marketing clinical trial to confirm clinical benefit for our products. An unsuccessful post-marketing study or failure to complete such a study could
result in the withdrawal of marketing approval.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or
problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency
may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable
regulatory requirements, a regulatory agency or enforcement authority may, among other things:
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issue warning letters that would result in adverse publicity;
impose civil or criminal penalties;
suspend or withdraw regulatory approvals;
suspend any of our ongoing clinical trials;
refuse to approve pending applications or supplements to approved applications submitted by us;
impose restrictions on our operations, including closing our contract manufacturers’ facilities;
seize or detain products; or
require a product recall.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate
negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and
generate revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating
results will be adversely affected.
We have received orphan drug designation from the FDA for AL001 and AL101 for treatment of FTD and plan to seek orphan drug designation for
some of our other product candidates, but we may be unable to obtain such designations or to maintain the benefits associated with orphan drug status,
including market exclusivity, which may cause our revenue, if any, to be reduced.
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, defined as a
disease or condition with a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States
when there is no reasonable expectation that the cost of developing and making available the drug or biologic in the United States will be recovered from
sales in the United States for that drug or biologic. Orphan drug designation must be requested before submitting an NDA or BLA. In the United States,
orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages, and user-
fee waivers. After the FDA grants orphan drug designation, the generic identity of the drug 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. While we have obtained
orphan drug designation from the FDA for AL001 and AL101 for treatment of FTD, we may be unable to reap the benefits associated with orphan drug
status. In addition, we plan to seek orphan drug designations for some of our other product candidates in the future but may be unable to obtain an orphan
drug designation for any additional product candidates.
If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for
which it has such designation, the product is entitled to orphan product
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exclusivity, which means that the FDA may not approve any other NDA or BLA applications to market the same drug or biologic for the same indication
for seven years, except in limited circumstances such as a showing of clinical superiority to the product with orphan exclusivity or if FDA finds that the
holder of the orphan exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan product to meet the needs of patients
with the disease or condition for which the drug was designated. As a result, even though the FDA has approved orphan drug status for AL001 and AL101
for treatment of FTD, the FDA can still approve other drugs that have a different active ingredient for use in treating the same indication or disease.
Furthermore, the FDA can waive orphan exclusivity if we are unable to manufacture sufficient supply of our product.
We have received Fast Track designation from the FDA for AL001 and AL101 for the treatment of patients with frontotemporal dementia carrying
specific genetic mutation in the granulin gene, but we may be unable to obtain or maintain the benefits associated with the Fast Track designation.
Fast Track designation is designed to facilitate the development and expedite the review of therapies which treat serious conditions and fill an
unmet medical need. Programs with Fast Track designation may benefit from early and frequent communications with the FDA, potential priority review,
and the ability to submit a rolling application for regulatory review. Fast Track designation applies to both the product and the specific indication for which
it is being studied.
In December 2019, the FDA granted Fast Track designation for AL001 and in January 2020, the FDA granted Fast Track designation for AL101
for the treatment of patients with FTD carrying specific genetic mutations in the granulin gene. If our clinical development program does not continue to
meet the criteria for Fast Track designation, or if our clinical trials are delayed, suspended, or terminated, or put on clinical hold due to unexpected adverse
events or issues with clinical supply, we will not receive the benefits associated with the Fast Track program. Furthermore, Fast Track designation does not
change the standards for approval. Fast Track designation alone does not guarantee qualification for the FDA’s priority review procedures.
Healthcare legislative measures aimed at reducing healthcare costs may have a material adverse effect on our business and results of operations.
Third-party payors, whether domestic or foreign, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare
system that could impact our ability to sell our products profitably. In particular, in 2010, the ACA was enacted, which, among other things, subjected
biologic products to potential competition by lower-cost biosimilars, addressed a new methodology by which rebates owed by manufacturers under the
Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected, increased the minimum Medicaid rebates
owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of prescriptions of
individuals enrolled in Medicaid managed care organizations, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs,
and provided incentives to programs that increase the federal government’s comparative effectiveness research. The ACA has been subject to litigation and
other efforts to repeal and replace the ACA. It is unclear how such efforts, including the Supreme Court’s ruling on the constitutionality of the ACA, and
healthcare measures of the new administration will impact the ACA and our business. Complying with any new legislation or reversing changes
implemented under the Trump administration could be time-intensive and expensive, resulting in a material adverse effect on our business. Until the ACA
is fully implemented or there is more certainty concerning the future of the ACA, it will be difficult to predict its full impact and influence on our business.
There have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more
transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient
programs, and reform government program reimbursement methodologies for drugs. In 2020, the Trump administration announced several executive orders
related to prescription drug pricing. The FDA also released a final rule in September 2020 providing guidance for states to build and submit importation
plans for drugs from Canada. Further, in November 2020, HHS finalized a regulation removing safe harbor protection for price reductions from
pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price
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reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain
fixed fee arrangements between pharmacy benefit managers and manufacturer. It is unclear to what extent these new regulations and those of the new
administration will affect these policies and what the effects will be on our business. In December 2020, the CMS issued a final rule implementing
significant manufacturer price reporting changes under the Medicaid Drug Rebate Program, including regulations that affect manufacturer-sponsored
patient assistance programs subject to pharmacy benefit manager accumulator programs and Best Price reporting related to certain value-based purchasing
arrangements.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal, and state levels directed at containing or
lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance
companies, managed care organizations, and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may
adversely affect:
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the demand for our product candidates, if we obtain regulatory approval;
our ability to receive or set a price that we believe is fair for our products;
our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and
the availability of capital.
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in
Medicare and other healthcare funding, more rigorous coverage criteria, lower reimbursement, and new payment methodologies. Further, the governmental
may take further action to address the COVID-19 pandemic. Any reduction in reimbursement from Medicare or other government programs may result in a
similar reduction in payments from private payors. This could lower the price that we receive for any approved product. The new administration and the
states may pass further legislation and regulations designed to control pharmaceutical and biological product pricing, including price or patient
reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. Any denial in
coverage or reduction in reimbursement from Medicare or other government-funded programs may result in a similar denial or reduction in payments from
private payors, which may prevent us from being able to generate sufficient revenue, attain profitability, or commercialize our product candidates, if
approved. In addition, increased scrutiny by 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.
Our employees, independent contractors, consultants, commercial partners, and vendors may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and requirements.
We are exposed to the risk of fraud, misconduct, or other illegal activity by our employees, independent contractors, consultants, commercial
partners, and vendors. Misconduct by these parties could include intentional, reckless, and negligent conduct that fails to:
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comply with the laws of the FDA, EMA, and other comparable foreign regulatory authorities;
provide true, complete, and accurate information to the FDA, EMA, and other comparable foreign regulatory authorities;
comply with manufacturing standards we have established;
comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws; or
report financial information or data accurately or to disclose unauthorized activities to us.
If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States, our potential exposure
under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. In particular, research,
sales, marketing, education, and other business arrangements in the healthcare industry are subject to extensive laws designed to prevent fraud, kickbacks,
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self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, educating, marketing and
promotion, sales and commission, certain customer incentive programs, and other business arrangements generally. Activities subject to these laws also
involve the improper use of information obtained in the course of patient recruitment for clinical trials, which could result in regulatory sanctions and cause
serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by
employees and third parties, 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. If
any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant
impact on our business, including the imposition of significant fines or other sanctions.
If we fail to comply with healthcare laws, we could face substantial penalties and our business, operations, and financial conditions could be adversely
affected.
If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations will be
subject to various federal and state fraud and abuse laws. The laws that may impact our operations include the following:
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The federal Anti-Kickback Statute, prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering, or
paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to
induce, or in return for, either the referral of an individual, or the purchase, lease, order, or recommendation of any good, facility,
item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and
Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to
have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of
the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
Federal civil and criminal false claims laws and civil monetary penalty laws, including the False Claims Act, impose criminal and civil
penalties, including through civil “qui tam” or “whistleblower” actions, against individuals or entities from knowingly presenting, or
causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are false or fraudulent
or knowingly making a false statement to improperly avoid, decrease, or conceal an obligation to pay money to the federal government.
Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent
to violate them in order to have committed a violation.
The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) created new federal criminal statutes that prohibit
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of
false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of,
any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing, or
covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or
payment for, healthcare benefits, items or services relating to healthcare matters.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) and their
respective implementing regulations, impose requirements on certain covered healthcare providers, health plans, and healthcare
clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of,
individually identifiable health information, relating to the privacy, security, and transmission of individually identifiable health
information without appropriate authorization.
The federal Physician Payment Sunshine Act, created under the ACA, and its implementing regulations, require manufacturers of drugs,
devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance
Program to report
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annually to the U.S. Department of Health and Human Services under the Open Payments Program, information related to payments or
other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and
their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include payments and transfers of
value made during the previous year to certain non-physician providers, such as physician assistants and nurse practitioners.
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Federal consumer protection and unfair competition laws broadly regulate marketplace activities and activities that potentially harm
consumers.
Analogous state and foreign laws and regulations, such as state and foreign anti-kickback, false claims, consumer protection, and unfair
competition laws may apply to pharmaceutical business practices, including but not limited to, research, distribution, sales, and
marketing arrangements, as well as submitting claims involving healthcare items or services reimbursed by any third-party payer,
including commercial insurers.
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 that otherwise restricts payments that may be made to healthcare
providers and other potential referral sources.
State laws also require drug manufacturers to file reports with states regarding pricing and marketing information, such as the tracking
and reporting of gifts, compensations and other remuneration, and items of value provided to healthcare professionals and entities.
State and foreign laws also govern the privacy and security of health information in certain circumstances, many of which differ from
each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our
business activities could, despite our efforts to comply, be subject to challenge under one or more of such laws. Efforts to ensure that our business
arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will
conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other
healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those
actions could have a significant impact on our business, including the imposition of civil, criminal, and administrative penalties, damages, disgorgement,
monetary fines, possible exclusion from participation in Medicare, Medicaid, and other federal healthcare programs, contractual damages, reputational
harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and
our results of operations. In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject
us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
If we or any contract manufacturers and suppliers we engage fail to comply with environmental, health, and safety laws and regulations, we could
become subject to fines or penalties or incur costs that could have a material adverse effect on our business.
We and any contract manufacturers and suppliers we engage are subject to numerous federal, state, and local environmental, health, and safety
laws, regulations, and permitting requirements, including those governing laboratory procedures; the generation, handling, use, storage, treatment, and
disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee
health and safety. Our operations involve the use of hazardous and flammable materials, including chemicals and biological and radioactive materials. Our
operations also produce hazardous waste. 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. Under certain environmental laws, we could be held responsible for costs
relating to any contamination at our
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current or past facilities and at third-party facilities. We also could incur significant costs associated with civil or criminal fines and penalties.
Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may
impair our research, product development, and manufacturing efforts. In addition, we cannot entirely eliminate the risk of accidental injury or
contamination from these materials or wastes. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur
due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential
liabilities. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty, and general liability insurance policies
specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of
contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or
regulatory approvals could be suspended, which could have a material adverse effect on our business, financial condition, results of operations, and
prospects.
Our business is subject to complex and evolving U.S. and foreign laws and regulations relating to security, privacy and data protection. These laws and
regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, or monetary penalties,
and otherwise may harm our business.
A wide variety of state, national, and international laws and regulations apply to security and cybersecurity requirements and the collection, use,
retention, protection, disclosure, transfer, and other processing of personal data. These security and data protection and privacy-related laws and regulations
are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. We are working to
comply with these laws, and we anticipate needing to devote significant additional resources to our compliance efforts. It is possible that the new
legislation may impose new obligations and requirements on similarly situated companies, and these laws may be interpreted and applied in a manner that
is inconsistent from jurisdiction to jurisdiction or inconsistent with our current policies and practices. Our actual or perceived failure to adequately comply
with applicable laws and regulations relating to security, privacy and data protection, or to protect our systems, personal data and other data we process or
maintain, could result in regulatory fines, investigations and enforcement actions, penalties and other liabilities, claims for damages by affected individuals,
and damage to our reputation, any of which could materially affect our business, financial condition, results of operations and prospects.
Inadequate funding for the FDA and other government agencies could hinder our ability to hire and retain key leadership and other personnel, prevent
new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal
business functions on which the operation of our business may rely, which could negatively impact our business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding
levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at
the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies on which our operations may rely,
including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at
the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which
would adversely affect our business. In the past, the U.S. government has experienced budgetary shutdowns and certain regulatory agencies, such as the
FDA, have had to furlough critical FDA and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could
significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our
business. Further, in our operations as a public company, future government shutdowns could impact our ability to access the public markets and obtain
necessary capital in order to properly capitalize and continue our operations.
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Our business activities may be subject to the Foreign Corrupt Practices Act (FCPA) and similar anti-bribery and anti-corruption laws.
Our business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which
we operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value,
either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also
requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and
maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public
officials, including officials of non-U.S. governments. Additionally, in many other countries, the healthcare providers who prescribe pharmaceuticals are
employed by their government, and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and
purchasers are subject to regulation under the FCPA.
Recently the SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical
companies. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates, will comply with all applicable
laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal
sanctions against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation of business
activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could
include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international
expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.
Risks Related to Our Reliance on Third Parties
We expect to depend on collaborations with third parties for the research, development, and commercialization of certain of the product candidates we
may develop. If any such collaborations are not successful, we may not be able to realize the market potential of those product candidates.
We currently use and expect to continue to use third-party collaborators for the research, development, and commercialization of certain of the
product candidates we may develop, including our previously disclosed arrangements with AbbVie and Adimab. We have entered into a licensing
agreement with Innovent Biologics to develop and commercialize our AL008 product, an anti-SIRP-alpha antibody for the treatment of oncology
indications in China. Our likely collaborators for any other collaboration arrangements include large and mid-size pharmaceutical companies, regional and
national pharmaceutical companies, biotechnology companies, and academic institutions. Such arrangements with any third parties, generally provide us
with shared or limited control over the amount and timing of resources that our collaborators dedicate to the development or potential commercialization of
any product candidates we may seek to develop with them. Our ability to generate revenue from these arrangements with commercial entities will depend
on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. We cannot predict the success of any
collaboration that we enter into.
Collaborations involving our research programs, or any product candidates we may develop, pose the following risks to us:
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collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations;
collaborators may not properly obtain, maintain, enforce, or defend intellectual property or proprietary rights relating to our product
candidates or research programs or may use our proprietary information in such a way as to expose us to potential litigation or other
intellectual property related proceedings, including proceedings challenging the scope, ownership, validity, and enforceability of our
intellectual property;
collaborators may own or co-own intellectual property covering our product candidates or research and development programs that
results from our collaboration with them, and in such cases, we may not
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have the exclusive right to commercialize such intellectual property or such product candidates or research programs;
we may need the cooperation of our collaborators to enforce or defend any intellectual property we contribute to or that arises out of our
collaborations, which may not be provided to us;
collaborators may control certain interactions with regulatory authorities, which may impact our ability to obtain and maintain regulatory
approval of our product candidates;
disputes may arise between the collaborators and us that result in the delay or termination of the research, development, or
commercialization of our product candidates or research programs or that result in costly litigation or arbitration that diverts management
attention and resources;
collaborators may decide to not pursue development and commercialization of any product candidates we develop or may elect not to
continue or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic
focus or available funding or external factors such as an acquisition that diverts resources or creates competing priorities or collaborators
may elect to fund or commercialize a competing product;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product
candidate, repeat or conduct new clinical trials, or require a new formulation of a product candidate for clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product
candidates or research programs if the collaborators believe that competitive products are more likely to be successfully developed or can
be commercialized under terms that are more economically attractive than ours;
collaborators may restrict us from researching, developing, or commercializing certain products or technologies without their
involvement;
collaborators with marketing and distribution rights to one or more product candidates may not commit sufficient resources to the
marketing and distribution of such product candidates;
we may lose certain valuable rights under circumstances identified in our collaborations, including if we undergo a change of control;
collaborators may grant sublicenses to our technology or product candidates or undergo a change of control, and the sublicensees or new
owners may decide to take the collaboration in a direction which is not in our best interest;
collaborators may become bankrupt, which may significantly delay our research or development programs, or may cause us to lose
access to valuable technology, know-how, or intellectual property of the collaborator relating to our products, product candidates, or
research programs;
key personnel at our collaborators may leave, which could negatively impact our ability to productively work with our collaborators;
collaborations may require us to incur short and long-term expenditures, issue securities that dilute our stockholders, or disrupt our
management and business;
if our collaborators do not satisfy their obligations under our agreements with them, or if they terminate our collaborations with them, we
may not be able to develop or commercialize product candidates as planned;
collaborations may require us to share in development and commercialization costs pursuant to budgets that we do not fully control, and
our failure to share in such costs could have a detrimental impact on the collaboration or our ability to share in revenue generated under
the collaboration;
collaborations may be terminated in their entirety or with respect to certain product candidates or technologies and, if so terminated, may
result in a need for additional capital to pursue further development or commercialization of the applicable product candidates or
technologies; and
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collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all.
If a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our
development or commercialization program under such collaboration could be delayed, diminished, or terminated.
We may face significant competition in seeking appropriate collaborations. Recent business combinations among biotechnology and
pharmaceutical companies have resulted in a reduced number of potential collaborators. In addition, the negotiation process is time-consuming and
complex, and we may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to
curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our
other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures
and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or
commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do
not have sufficient funds, we may not be able to further develop product candidates or bring them to market and generate product revenue.
We may not realize the benefit of collaborations if we or our collaborator elects not to exercise the rights granted under the agreement or if we or
our collaborator are unable to successfully integrate a product candidate into existing operations and company culture. In addition, if our agreement with
any of our collaborators terminates, our access to technology and intellectual property licensed to us by that collaborator may be restricted or terminate
entirely, which may delay our continued development of our product candidates utilizing the collaborator’s technology or intellectual property or require us
to stop development of those product candidates completely. We may also find it more difficult to find a suitable replacement collaborator or attract new
collaborators, and our development programs may be delayed or the perception of us in the business and financial communities could be adversely affected.
Many of the risks relating to product development, regulatory approval, and commercialization described in this “Risk Factors” section also apply to the
activities of our collaborators and any negative impact on our collaborators may adversely affect us.
We expect to rely on third parties to conduct our clinical trials and some aspects of our research and preclinical testing, and those third parties may not
perform satisfactorily, including failing to meet deadlines for the completion of such trials, research, or testing.
We currently rely and expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions, and
clinical investigators, to conduct some aspects of our research and preclinical testing and our clinical trials. Any of these third parties may terminate their
engagements with us or be unable to fulfill their contractual obligations. If we need to enter into alternative arrangements, it would delay our product
development activities.
Our reliance on these third parties for research and development activities reduces our control over these activities but does not relieve us of our
responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational
plan and protocols for the trial. Moreover, the FDA requires us to comply with cGCPs for conducting, recording, and reporting the results of clinical trials
to assure that data and reported results are credible, reproducible, and accurate and that the rights, integrity, and confidentiality of trial participants are
protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database
within certain timeframes. Failure to do so can result in fines, adverse publicity, and civil and criminal sanctions.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or conduct our clinical trials in accordance with
regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for any product
candidates we may develop and will not be able to, or may be delayed in our efforts to, successfully commercialize our medicines.
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, including with the shipment of any drug supplies, could delay
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clinical development or marketing approval of any product candidates we may develop or commercialization of our medicines, producing additional losses
and depriving us of potential product revenue.
We contract with third parties for the manufacture of materials for our research programs, preclinical studies, clinical trials, and for commercialization
of any product candidates that we may develop. This reliance on third parties carries and may increase the risk that we will not have sufficient
quantities of such materials, product candidates, or any medicines that we may develop and commercialize, or that such supply will not be available to
us at an acceptable cost, which could delay, prevent, or impair our development or commercialization efforts.
We do not have any manufacturing facilities. We currently rely on CDMOs for the manufacture of our materials for preclinical studies and clinical
trials and expect to continue to do so for preclinical studies, clinical trials, and for commercial supply of any product candidates that we may develop. We
currently have established relationships with several CDMOs for the manufacturing of our product candidates. We may be unable to establish any further
agreements with CDMOs or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on CDMOs
entails additional risks, including:
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the possible breach of the manufacturing agreement by the third party;
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us;
reliance on the third party for regulatory compliance, quality assurance, safety, and pharmacovigilance and related reporting; and
the inability to produce required volume in a timely manner and to quality standards.
Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our
failure, or the failure of our CDMOs, to comply with applicable regulations could result in clinical holds on our trials, sanctions being imposed on us,
including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocations, seizures, or recalls of product candidates or
medicines, operating restrictions, and criminal prosecutions, any of which could significantly and adversely affect supplies of our medicines and harm our
business, financial condition, results of operations, and prospects.
Any medicines 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.
Any performance failure on the part of our existing or future third-party manufacturers could delay clinical development or marketing approval. If
any one of our current contract manufacturers cannot perform as agreed, we may be required to replace that manufacturer and may incur added costs and
delays in identifying and qualifying any such replacement. Furthermore, securing and reserving production capacity with contract manufacturers may result
in significant costs.
Our current and anticipated future dependence upon others for the manufacture of any product candidates we may develop or medicines may
adversely affect our future profit margins and our ability to commercialize any medicines that receive marketing approval on a timely and competitive
basis.
We depend on third-party suppliers for key raw materials used in our manufacturing processes, and the loss of these third-party suppliers or their
inability to supply us with adequate raw materials could harm our business.
We rely on third-party suppliers for the supply of the raw materials required for the production of our product candidates, and we expect to
continue to rely on third-party manufacturers for the commercial supply of any of our product candidates for which we obtain marketing approval. Our
dependence on these third-party suppliers and the challenges we may face in obtaining adequate supplies of raw materials involve several risks, including
limited control over pricing, availability, quality, and delivery schedules. As a small company, our negotiation leverage is limited, and we are likely to get
lower priority than our competitors who are larger than we are. We do not have long-term supply agreements, and we purchase our required drug product
on a development manufacturing services
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agreement or purchase order basis. We cannot be certain that our suppliers will continue to provide us with the quantities of these raw materials that we
require or satisfy our anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially
harm our ability to manufacture our product candidates until a new source of supply, if any, could be identified and qualified. We may be unable to find a
sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could
delay the development and potential commercialization of our product candidates, including limiting supplies necessary for clinical trials and regulatory
approvals, which would have a material adverse effect on our business.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain patent protection for any product candidates we develop, our competitors could develop and commercialize
products similar or identical to ours, and our ability to successfully commercialize any product candidates we may develop may be adversely affected.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our
proprietary product candidates and other technologies we may develop. We seek to protect our proprietary position by filing patent applications in the
United States and abroad relating to our core programs and product candidates, as well as other technologies that are important to our business. Given that
the development of many of our product candidates is at an early stage, our intellectual property portfolio with respect to certain aspects of many of our
product candidates is also at an early stage. For example, we have filed or intend to file patent applications on aspects of our technology and core product
candidates; however, there can be no assurance that any such patent applications will issue as granted patents. Furthermore, in some cases, we have only
filed provisional patent applications on certain aspects of our technology and product candidates and each of these provisional patent applications is not
eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the
applicable provisional patent application. Any failure to file a non-provisional patent application within this timeline could cause us to lose the ability to
obtain patent protection for the inventions disclosed in the associated provisional patent applications. Furthermore, in some cases, we may not be able to
obtain issued claims covering compositions relating to our core programs and product candidates, as well as other technologies that are important to our
business, and instead may need to rely on filing patent applications with claims covering a method of use and/or method of manufacture for protection of
such core programs, product candidates, and other technologies. There can be no assurance that any such patent applications will issue as granted patents,
and even if they do issue, such patent claims may be insufficient to prevent third parties, such as our competitors, from utilizing our technology. Any failure
to obtain or maintain patent protection with respect to our core programs and product candidates could have a material adverse effect on our business,
financial condition, results of operations, and prospects.
If any of our patent applications, or those of our collaborators, do not issue as patents in any jurisdiction, we may not be able to compete effectively.
Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions,
obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of
our patents or those of our collaborators with respect to our product candidates. With respect to both our intellectual property and that of our collaborators
related to our product candidates, we cannot predict whether the patent applications we and our collaborators are currently pursuing will issue as patents in
any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.
The patent prosecution process is expensive, time-consuming, and complex, and we or our collaborators 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. It is also possible that we will fail to
identify patentable aspects of our research and development output in time to obtain patent protection. Although we enter into nondisclosure and
confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our
employees, corporate collaborators, outside scientific collaborators, CROs, CDMOs, consultants, advisors, and other third parties, any of these parties may
breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In
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addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow
our inventions to be patentable over the prior art. Furthermore, 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 be certain that we or our collaborators were the first to make the inventions claimed in any of our or our collaborators’ patents or
pending patent applications, or that we or our collaborators were the first to file for patent protection of such inventions.
If the scope of any patent protection we obtain is not sufficiently broad, or if we lose any of our patent protection, our ability to prevent our competitors
from commercializing similar or identical technology and product candidates would be adversely affected.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions,
and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent
rights are highly uncertain. Our or our collaborators’ pending and future patent applications may not result in patents being issued which protect our
product candidates or other technologies or which effectively prevent others from commercializing competitive technologies and product candidates.
Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted
after issuance. Even if patent applications we or our collaborators license or own currently or in the future issue as patents, they may not issue in a form that
will provide us with any meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any
competitive advantage. Any patents to which we or our collaborators have rights may be challenged, narrowed, circumvented, or invalidated by third
parties. Consequently, we do not know whether product candidates or other technologies will be protectable or remain protected by valid and enforceable
patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-
infringing manner which could materially adversely affect our business, financial condition, results of operations and prospects.
The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability, and our patents may be challenged in the courts
or patent offices in the United States and abroad. We or our collaborators may be subject to a third-party preissuance submission of prior art to the USPTO
or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or interference proceedings or other similar
proceedings challenging our or our collaborators’ patent rights. An adverse determination in any such submission, proceeding, or litigation could reduce the
scope of, or invalidate or render unenforceable, such patent rights, allow third parties to commercialize our product candidates or other technologies and
compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent
rights. Moreover, we, or one of our collaborators, may have to participate in interference proceedings declared by the USPTO to determine priority of
invention or in post-grant challenge proceedings, such as oppositions in a foreign patent office, that challenge our or our collaborators’ priority of invention
or other features of patentability with respect to our or our collaborators’ patents and patent applications. Such challenges may result in loss of patent
rights, loss of exclusivity, or in patent claims being narrowed, invalidated, or held unenforceable, which could limit our ability to stop others from using or
commercializing similar or identical technology and products, or limit the duration of the patent protection of our product candidates and other
technologies. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual
outcome is favorable to us. If we or our collaborators are unsuccessful in any such proceeding or other priority or inventorship dispute, we may be required
to obtain and maintain licenses from third parties, including parties involved in any such interference proceedings or other priority or inventorship disputes.
Such licenses may not be available on commercially reasonable terms or at all, or may be non-exclusive. If we are unable to obtain and maintain such
licenses, we may need to cease the development, manufacture, and commercialization of one or more of the product candidates we may develop. The loss
of exclusivity or the narrowing of our owned and licensed patent claims could limit our ability to stop others from using or commercializing similar or
identical technology and products.
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In addition, given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting
such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our intellectual property may not
provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Some of our patents and patent applications may in the future be co-owned with third parties. In addition, collaborators or future licensors may co-
own their patents and patent applications with other third parties with whom we do not have a direct relationship. Our rights to certain of these patents and
patent applications may be dependent, in part, on inter-institutional or other operating agreements between the joint owners of such patents and patent
applications, who are not parties to our license agreements. If our collaborators or future licensors do not have exclusive control of the grant of licenses
under any such third-party co-owners’ interest in such patents or patent applications or we are otherwise unable to secure such exclusive rights, such co-
owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and
technology to the extent such products and technology are not also covered by our intellectual property. In addition, we may need the cooperation of any
such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. Any of the foregoing
could have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.
Our rights to develop and commercialize our product candidates are subject, in part, to the terms and conditions of agreements with others.
We are heavily reliant upon option rights to certain patent rights and proprietary technology from third parties that are important or necessary to the
development of our product candidates and are subject to the terms and conditions of certain collaboration agreements with third parties. For example, in
2014 we entered into the Adimab Collaboration Agreement with Adimab. Under the Adimab Collaboration Agreement, we are developing antibodies
discovered by Adimab in our AL001 and AL101 product candidates, and we are developing antibodies optimized by Adimab in our AL002 and AL003
product candidates. Additionally, in October 2017, we entered into the AbbVie Agreement to co-develop and commercialize medicines with AbbVie to
treat Alzheimer’s disease and other neurodegenerative diseases. In August 2019, we entered into a new Adimab collaboration agreement for development
of antibodies for use in future programs. For additional information on the Adimab Collaboration Agreement and the AbbVie Agreement, see the sections
titled “Business—Adimab Collaboration Agreements” and “Business—Strategic Alliance with AbbVie.”
Our agreements with Adimab and AbbVie and other agreements we enter into in the future may not provide exclusive rights to use certain
intellectual property and technology retained by the collaborator in all relevant fields of use and in all territories in which we may wish to develop or
commercialize our technology and products in the future. As a result, we may not be able to prevent competitors or other third parties from developing and
commercializing competitive products that utilizes technology retained by such collaborators to the extent such products are not also covered by our
intellectual property.
In addition, subject to the terms of any such agreements, we do not have the right to control the preparation, filing, prosecution, and maintenance,
and we may not have the right to control the enforcement and defense of certain patents and patent applications retained by the collaborator and provided to
us under a limited license. For example, under the Adimab Collaboration Agreements, patent rights relating to improvements to Adimab’s background
platform technology that are invented in the course of the research under the Adimab Collaboration Agreements are assigned to Adimab. We also have an
exclusive option under the Adimab Collaboration Agreements to obtain with respect to a specified number of antibodies directed against such target and
discovered or optimized by Adimab, ownership of certain patent rights relating to such antibodies, including certain patent rights. Until we exercise such
option, we and Adimab each grant each other a non-exclusive license to the relevant intellectual property. We cannot be certain that patents and patent
applications that are controlled by our collaborators will be prepared, filed, prosecuted, maintained, enforced, and defended in a manner consistent with the
best interests of our business. If our collaborators fail to prosecute, maintain, enforce, and defend such patents, or lose rights to those patents or patent
applications, the limited rights we have licensed may be reduced or eliminated, our right to develop and commercialize any of our product candidates that
are subject of such licensed rights could be adversely affected, and we may have a reduced ability to prevent competitors from making, using, and selling
competing products. In addition, even where we have the right to control patent prosecution of patents and patent applications we have
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licensed to and from collaborators, we may still be adversely affected or prejudiced by actions or inactions of our collaborators that took place prior to the
date upon which we assumed control over patent prosecution.
Furthermore, our or our collaborators’ patents may be subject to a reservation of rights by one or more third parties. For example, we received an
award from the National Institute of Health in support of our research into the production and characterization of novel therapeutic antibodies against
SORT1. As a result, the U.S. government may have certain rights to resulting intellectual property. When new technologies are developed with U.S.
government funding, the U.S. government generally obtains certain rights in any resulting patents, including a non-exclusive license authorizing the U.S.
government to use the invention or to have others use the invention on its behalf. The U.S. government’s rights may also permit it to disclose the funded
inventions and technology to third parties and to exercise march-in rights to use or allow third parties to use the technology developed using U.S.
government funding. The U.S. government may exercise its march-in rights if it determines that action is necessary because we fail to achieve the practical
application of the government funded technology, or because action is necessary to alleviate health or safety needs, to meet requirements of federal
regulations, or to give preference to U.S. industry. In addition, our rights in such inventions may be subject to certain requirements to manufacture products
embodying such inventions in facilities in the United States in certain circumstances and if this requirement is not waived. Any exercise by the U.S.
government of such rights or by any third party of its reserved rights could have a material adverse effect on our competitive position, business, financial
condition, results of operations, and prospects.
If we fail to comply with our obligations in the agreements under which we option or license intellectual property rights from our collaborators or
future licensors or otherwise experience disruptions to our business relationships with our collaborators or future licensors, we could lose intellectual
property rights that are important to our business.
We have entered into agreements with our collaborators to option or license certain intellectual property and may need to obtain additional
intellectual property rights from others to advance our research or allow commercialization of product candidates we may develop. It is possible that we
may be unable to obtain additional intellectual property rights at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to
expend significant time and resources to redesign our technology, product candidates, or the methods for manufacturing them or to develop or license
replacement technology, all of which may not be feasible on a technical or commercial basis. If we are unable to do so, we may be unable to develop or
commercialize the affected product candidates, which could harm our business, financial condition, results of operations, and prospects significantly. We
cannot provide any assurances that third-party patents do not exist which might be enforced against our current technology, manufacturing methods,
product candidates, or future methods or products resulting in either an injunction prohibiting our manufacture or future sales, or, with respect to our future
sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties, which could be significant.
In addition, each of our agreements with collaborators do, and we expect our future agreements will, impose various economic, development,
diligence, commercialization, and other obligations on us. Certain of our collaboration agreements also require us to meet development timelines, or to
exercise commercially reasonable efforts to develop and commercialize licensed products. In spite of our efforts, our collaborators might conclude that we
have materially breached our obligations under such agreements and might therefore terminate or seek damages under the agreements, thereby removing or
limiting our ability to develop and commercialize products and technology covered by these agreements. If termination of these agreements causes us to
lose the rights to certain patents or other intellectual property, or if the underlying patents fail to provide the intended exclusivity, competitors or other third
parties may have the freedom to seek regulatory approval of, and to market, products similar to or identical to ours and we may be required to cease our
development and commercialization of certain of our product candidates. Any of the foregoing could have a material adverse effect on our competitive
position, business, financial conditions, results of operations, and growth prospects.
Moreover, disputes may arise regarding intellectual property subject to a collaboration agreement, including:
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the scope of the option or license rights granted under the agreement and other interpretation-related issues;
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the extent to which our technology and processes infringe on intellectual property of the collaborator that is not subject to the option or
license rights granted under the agreement;
the sublicensing of patent and other rights under our collaborative development relationships;
our diligence obligations under the agreement and what activities satisfy those diligence obligations;
the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our
collaborators and us and our other partners; and
the priority of invention of patented technology.
In addition, the agreements under which we currently have rights to option or license intellectual property or technology from third parties are
complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation
disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what
we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business,
financial condition, results of operations, and growth prospects. Moreover, if disputes over intellectual property that we have optioned or licensed prevent
or impair our ability to maintain our current arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize
the affected product candidates, which could have a material adverse effect on our business, financial conditions, results of operations, and growth
prospects.
We may not be able to protect our intellectual property and proprietary rights throughout the world.
Filing, prosecuting, and defending patents on our product candidates and other technologies in all countries throughout the world would be
prohibitively expensive, and the laws of foreign countries may not protect our rights to the same extent as the laws of 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. Competitors may use our technologies in jurisdictions
where we have not obtained patent protection to develop their own products, and, further, may export otherwise infringing products to territories where we
have patent protection but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other
intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property
protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of
competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and
proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put
our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to
assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many
countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited
remedies, which could materially diminish the value of such patent. If we, our collaborators or any of our future licensors is forced to grant a license to
third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of
operations, and prospects may be adversely affected.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other
requirements imposed by government 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 government fees on patents and applications will be due to be paid to the
USPTO and various government patent agencies outside of the United States over the lifetime of our owned or licensed patents and applications. In certain
circumstances, we rely on our collaborators or licensing partners to pay these fees due to U.S. and non-U.S. patent agencies. The USPTO and various non-
U.S. government agencies require compliance with several procedural, documentary, fee payment, and other similar provisions during the patent
application process. We also are dependent on our collaborators or licensors to take the necessary action to comply with these requirements with respect to
our licensed intellectual property. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the
applicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in
a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar
or identical products or technology, which could have a material adverse effect on our business, financial condition, results of operations, and growth
prospects.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the
prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to
March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent
application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act (the America Invents Act) enacted in
September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the
first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed
invention. A third party that files a patent application in the USPTO after March 2013, 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 such third party. This will require us to be cognizant going forward of the time
from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time
after filing or until issuance, we cannot be certain that we were the first to either (i) file any patent application related to our product candidates or other
technologies or (ii) invent any of the inventions claimed in our patents or patent applications.
The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may
affect patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional procedures to
attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings.
Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate
a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO 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
USPTO 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. Therefore, the America Invents 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, financial
condition, results of operations, and prospects.
In addition, the patent positions of companies in the development and commercialization of pharmaceuticals are particularly uncertain. 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. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future
actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing
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patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce
our intellectual property in the future.
Issued patents covering our product candidates and other technologies could be found invalid or unenforceable if challenged in court or before
administrative bodies in the United States or abroad.
If we initiated legal proceedings against a third party to enforce a patent covering our product candidates or other technologies, the defendant could
counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or
unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution
of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may raise claims
challenging the validity or enforceability of our patents before administrative bodies in the United States or abroad, even outside the context of litigation.
Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent
proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to our
patents in such a way that they no longer cover our product candidates or other technologies. The outcome following legal assertions of invalidity and
unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we
or our licensing partners and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates or other technologies. Such a loss of patent
protection would have a material adverse impact on our business, financial condition, results of operations, and growth prospects.
If we do not obtain patent term extension and data exclusivity for any product candidates we may develop, our business may be materially harmed.
Depending upon the timing, duration, and specifics of any FDA marketing approval of any product candidates we may develop, one or more of our
U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent term extension of up
to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a
patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a
method for using it, or a method for manufacturing it may be extended. Similar extensions as compensation for patent term lost during regulatory review
processes are also available in certain foreign countries and territories, such as in Europe under a Supplementary Patent Certificate. However, we may not
be granted an extension in the United States and/or foreign countries and territories because of, for example, failing to exercise due diligence during the
testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise
failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If
we are unable to obtain patent term extension or the term of any such extension is shorter than what we request, our competitors may obtain approval of
competing products following our patent expiration, and our business, financial condition, results of operations, and growth prospects could be materially
harmed.
We may be subject to claims challenging the inventorship of our patents and other intellectual property.
We may be subject to claims that former employees, collaborators or other third parties have an interest in our patents, trade secrets, or other
intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of employees,
consultants, or others who are involved in developing our product candidates or other technologies. Litigation may be necessary to defend against these and
other claims challenging inventorship or ownership of our patents, trade secrets, or other intellectual property. If the defense of any such claims fails, in
addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual
property that is important to our product candidates and other technologies. Even if we are successful in defending against such claims, litigation could
result
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in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business,
financial condition, results of operations, and growth prospects.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for our product candidates and other technologies, we also rely on trade secrets and confidentiality agreements to
protect our unpatented know-how, technology, and other proprietary information and to maintain our competitive position. We consider trade secrets and
know-how to be one of our primary sources of intellectual property. Trade secrets and know-how can be difficult to protect. We expect our trade secrets and
know-how to over time be disseminated within the industry through independent development, the publication of journal articles describing the
methodology, and the movement of personnel from academic to industry scientific positions.
We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with
parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, CROs, CDMOs, consultants, advisors,
and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants, train our
employees not to bring or use proprietary information or technology from former employers to us or in their work, and remind former employees when
they leave their employment of their confidentiality obligations. We cannot guarantee that we have entered into such agreements with each party that may
have or have had access to our trade secrets or proprietary technology and processes. Despite our efforts, any of these parties may breach the agreements
and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. For example,
on June 18, 2019, we initiated a confidential arbitration proceeding against Dr. Asa Abeliovich, our former consulting co-founder, related to alleged
breaches of his consulting agreement and the improper use of our confidential information learned during the course of rendering services to us as our
consulting Chief Scientific Officer/Chief Innovation Officer. Although an independent arbitrator issued a confidential decision in favor of the Company and
which found Dr. Abeliovich liable for breach of his confidentiality agreement and for spoliation based on his destruction of documents relevant to the
proceeding, asserting and maintaining such proceeding was difficult, expensive, and time-consuming. In addition, some courts inside and outside the
United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a
competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade
secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and adversely
harmed.
We may not be successful in obtaining, through acquisitions or otherwise, necessary rights to our product candidates or other technologies.
Many pharmaceutical companies, biotechnology companies, and academic institutions are competing with us in the field of neurodegeneration
therapy may have patents and have filed and are likely filing patent applications potentially relevant to our business. In order to avoid infringing these
third-party patents, we may find it necessary or prudent to obtain licenses to such patents from such third-party intellectual property holders. We may also
require licenses from third parties for certain technologies for use with future product candidates. In addition, with respect to any patents we co-own with
third parties, we may wish to obtain licenses to such co-owners’ interest to such patents. However, we may be unable to secure such licenses or otherwise
acquire any compositions, methods of use, processes, or other intellectual property rights from third parties that we identify as necessary for our future
product candidates. The licensing or acquisition of third-party intellectual property rights is a competitive area, and several more established companies
may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. These established companies
may have a competitive advantage over us due to their size, capital 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 or at all. If we are unable to
successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to
abandon
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development of the relevant program or product candidate, which could have a material adverse effect on our business, financial condition, results of
operations, and growth prospects.
We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or
former employers or claims asserting ownership of what we regard as our own intellectual property.
Many of our employees, consultants, and advisors are currently or were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors and potential competitors. Although we try to ensure that our employees, consultants, and advisors
do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or
disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may
be necessary to defend against these claims. If we fail in 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 defending against such claims, litigation could result in substantial costs and be a
distraction to management.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or 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, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the
assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to
determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial
condition, results of operations, and growth prospects.
Third-party claims of intellectual property infringement, misappropriation, or other violation against us or our collaborators may prevent or delay the
development and commercialization of our product candidates and other technologies.
The field of discovering treatments for neurodegenerative diseases is highly competitive and dynamic. Due to the focused research and
development that is taking place by several companies, including us and our competitors, in this field, the intellectual property landscape is in flux, and it
may remain uncertain in the future. Additionally, the technology used in our product candidates is still in its infancy and no products utilizing similar
technology have yet reached the market. As such, there may be significant intellectual property related litigation and proceedings relating to our, and other
third party, intellectual property and proprietary rights in the future.
Our commercial success depends in part on our and our collaborators’ ability to develop, manufacture, market, and sell any product candidates that
we develop and to use our proprietary technologies without infringing, misappropriating, and otherwise violating the patents and other intellectual property
rights of third parties. There is a substantial amount of complex litigation involving patents and other intellectual property rights in the biotechnology and
pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference, derivation, and reexamination proceedings
before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. We may become party to, or threatened with, such actions in
the future, regardless of their merit. As discussed above, recently, due to changes in U.S. law referred to as patent reform, new procedures including inter
partes review and post-grant review have been implemented. As stated above, this reform adds uncertainty to the possibility of challenge to our patents in
the future.
Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing our
product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates
and other technologies may give rise to claims of infringement of the patent rights of others. We cannot assure you that our product candidates and other
technologies that we have developed, are developing, or may develop in the future will not infringe existing or future patents owned by third parties. We
may not be aware of patents that have already been issued and that a third party, for example, a competitor in the fields in which we are developing product
candidates, and other technologies might assert are infringed by our current or future product candidates or other technologies, including claims to
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compositions, formulations, methods of manufacture or methods of use or treatment that cover our product candidates or other technologies. It is also
possible that patents owned by third parties of which we are aware, but which we do not believe are relevant to our product candidates or other
technologies, could be found to be infringed by our product candidates or other technologies. In addition, because patent applications can take many years
to issue, there may be currently pending patent applications that may later result in issued patents that our product candidates or other technologies may
infringe.
Third parties may have patents or obtain patents in the future and claim that the manufacture, use or sale of our product candidates or other
technologies infringes upon these patents. In the event that any third-party claims that we infringe their patents or that we are otherwise employing their
proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, a court of competent
jurisdiction could hold that such patents are valid, enforceable and infringed by our product candidates or other technologies. In this case, the holders of
such patents may be able to block our ability to commercialize the applicable product candidate or technology unless we obtain a license under the
applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Such a license may not be available on
commercially reasonable terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both,
and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. If we are unable
to obtain a necessary license to a third-party patent on commercially reasonable terms, we may be unable to commercialize our product candidates or other
technologies, or such commercialization efforts may be significantly delayed, which could in turn significantly harm our business.
Defense of infringement claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of
management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us,
we may be enjoined from further developing or commercializing our infringing product candidates or other technologies. In addition, we may have to pay
substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties,
and/or redesign our infringing product candidates or technologies, which may be impossible or require substantial time and monetary expenditure. In that
event, we would be unable to further develop and commercialize our product candidates or other technologies, which could harm our business significantly.
Engaging in litigation to defend against third parties alleging that we have infringed, misappropriated, or otherwise violated their patents or other
intellectual property rights is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain
the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources. Patent litigation and other
proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other
proceedings against us could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect
on our business, financial condition, results of operations, and growth prospects.
We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time consuming,
and unsuccessful.
Competitors may infringe our patents or the patents of our licensing partners, or we may be required to defend against claims of infringement. In
addition, our patents or the patents of our licensing partners also may become involved in inventorship, priority, or validity disputes. To counter or defend
against such claims can be expensive and time consuming. In an infringement proceeding, a court may decide that a patent in which we have an interest is
invalid or unenforceable, the other party’s use of our patented technology falls under the safe harbor to patent infringement under 35 U.S.C. §271(e)(1), or
may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse
result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted narrowly. Furthermore, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation.
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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 personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or
other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse
effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available
for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such
litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we
can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation
and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our
business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, or declared generic or determined to be
infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among
potential partners or customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours,
thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks
or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to
compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets,
domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could
adversely affect our business, financial condition, results of operations, and growth prospects.
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and
may not adequately protect our business or permit us to maintain our competitive advantage. For example:
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others may be able to make products that are similar to our product candidates or utilize similar technology but that are not covered by
the claims of the patents that we license or may own;
we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent
or pending patent application that we license or own now or in the future;
we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or
their inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our owned
or licensed intellectual property rights;
it is possible that our current or future pending owned or licensed patent applications will not lead to issued patents;
issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or
other third parties;
our competitors or other third parties might conduct research and development activities in countries where we do not have patent rights
and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
we may not develop additional proprietary technologies that are patentable;
the patents of others may harm our business; and
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we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent
covering such intellectual property.
Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations, and growth
prospects.
Risks Related to Our Operations
We are highly dependent on our key personnel, and if we are not successful in attracting, motivating, and retaining highly qualified personnel, we may
not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract, motivate, and
retain highly qualified managerial, scientific, and medical personnel. We are highly dependent on our management, particularly our Chief Executive
Officer, Dr. Arnon Rosenthal, and our scientific and medical personnel. The loss of the services provided by any of our executive officers, other key
employees, and other scientific and medical advisors, and our inability to find suitable replacements, could result in delays in the development of our
product candidates and harm our business.
We conduct our operations at our facility in South San Francisco, California, in a region that is headquarters to many other biopharmaceutical
companies and many academic and research institutions. Competition for skilled personnel is intense and the turnover rate can be high, which may limit
our ability to hire and retain highly qualified personnel on acceptable terms or at all. We expect that we may need to recruit talent from outside of our
region and doing so may be costly and difficult.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided and will continue to provide
restricted stock, stock option grants, and other equity awards that vest over time. The value to employees of these equity grants that vest over time may be
significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers
from other companies. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment,
which means that any of our employees could leave our employment at any time, with or without notice. If we are unable to attract and incentivize quality
personnel on acceptable terms, or at all, it may cause our business and operating results to suffer.
We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2020, we had 171 full-time employees. As our development plans and strategies develop, and as we continue to implement the
requirements applicable to operating as a public company, we must add a significant number of additional managerial, operational, financial, and other
personnel. Future growth will impose significant added responsibilities on members of management, including:
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identifying, recruiting, integrating, retaining, and motivating additional employees;
managing our internal development efforts effectively, including the clinical and FDA review process for our current and future product
candidates, while complying with our contractual obligations to contractors and other third parties;
expanding our operational, financial and management controls, reporting systems, and procedures; and
managing increasing operational and managerial complexity.
Our future financial performance and our ability to continue to develop and, if approved, commercialize our product candidates will depend, in
part, on our ability to effectively manage any future growth. Our management may also have to divert a disproportionate amount of its attention away from
day-to-day activities in order to manage these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors, and
consultants to provide certain services. There can be no assurance that the
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services of these independent organizations, advisors, and consultants will continue to be available to us on a timely basis when needed, or that we can find
qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by
consultants is compromised for any reason, our clinical trials may be extended, delayed, or terminated, and we may not be able to obtain regulatory
approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or
find other competent outside contractors and consultants on economically reasonable terms, if at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we
may not be able to successfully implement the tasks necessary to further develop our product candidates and, accordingly, may not achieve our research,
development, and commercialization goals.
We have engaged in strategic collaborations and may in the future engage in acquisitions, collaborations, or strategic partnerships, which may increase
our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
We have engaged in strategic collaborations in the past, such as our strategic collaboration with AbbVie, and we may engage in various
acquisitions, collaborations, and strategic partnerships in the future, including licensing or acquiring complementary products, intellectual property rights,
technologies, or businesses. Any acquisition, collaboration, or strategic partnership may entail numerous risks, including:
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increased operating expenses and cash requirements;
volatility with respect to the financial reporting related to such arrangements, such as our expected variability in the recognition of
revenue each quarter from the AbbVie Agreement based on the percentage-of-completion basis under the applicable accounting rules;
assumption of indebtedness or contingent liabilities;
issuance of our equity securities which would result in dilution to our stockholders;
assimilation of operations, intellectual property, products, and product candidates of an acquired company, including difficulties
associated with integrating new personnel;
diversion of our management’s attention from our existing product programs and initiatives in pursuing such an acquisition or strategic
partnership;
retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;
risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing
products or product candidates and regulatory approvals; and
our inability to generate revenue from acquired intellectual property, technology, and/or products sufficient to meet our objectives or even
to offset the associated transaction and maintenance costs.
In addition, if we undertake such a transaction, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses,
and acquire intangible assets that could result in significant future amortization expense.
Our internal computer systems, or those used by our third-party research institution collaborators, CROs or other contractors or consultants, may fail
or suffer other breakdowns, cyberattacks, or information security breaches that could compromise the confidentiality, integrity, and availability of such
systems and data, result in material disruptions of our development programs and business operations, risk disclosure of confidential, financial, or
proprietary information, and affect our reputation.
Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and
consultants may be vulnerable to damage from computer viruses and unauthorized access. As the cyber-threat landscape evolves, these attacks are growing
in frequency, sophistication, and intensity, and are becoming increasingly difficult to detect. Such attacks could include the use of key loggers or other
harmful and
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virulent malware, including ransomware or other denials of service, and can be deployed through malicious websites, the use of social engineering, and/or
other means. If a breakdown, cyberattack, or other information security breach were to occur and cause interruptions in our operations, it could result in a
misappropriation of confidential information, including our intellectual property or financial information, and a material disruption of our development
programs and our business operations. For example, the loss of clinical trial data from completed, ongoing, or future clinical trials could result in delays in
our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on our third-party research
institution collaborators for research and development of our product candidates and other third parties for the manufacture of our product candidates and to
conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any
disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate disclosure of confidential, financial, or
proprietary information, including data related to our personnel, we could incur liability or risk disclosure of confidential, financial, or proprietary
information, and the further development and commercialization of our product candidates could be delayed. There can be no assurance that we and our
business counterparties will be successful in efforts to detect, prevent, or fully recover systems or data from all breakdowns, service interruptions, attacks,
or breaches of systems that could adversely affect our business and operations and/or result in the loss of critical or sensitive data, which could result in
financial, legal, business, or reputational harm to us.
Business disruptions, including as a result of global pandemics, could seriously harm our future revenue and financial condition and increase our
costs and expenses.
Our operations, and those of our third-party research institution collaborators, CROs, CDMOs, suppliers, and other contractors and consultants,
could be subject to pandemic events and the spread of disease, earthquakes, power shortages, telecommunications failures, water shortages, floods,
hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, political unrest, and other natural or man-made disasters or business
interruptions, for which we are partly uninsured. In addition, we rely on our third-party research institution collaborators for conducting research and
development of our product candidates, and they may be affected by government shutdowns or withdrawn funding. The occurrence of any of these business
disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to
produce and process our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these
suppliers are affected by a man-made or natural disaster, global pandemics, or other business interruption.
The majority of our operations including our corporate headquarters are located in a facility in South San Francisco, California. Damage or
extended periods of interruption to our corporate, development, or research facilities due to fire, natural disaster, global pandemics, power loss,
communications failure, unauthorized entry, or other events could cause us to cease or delay development of some or all of our product candidates.
Although we maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses under
such circumstances and our business may be seriously harmed by such delays and interruption.
Our business is subject to economic, political, regulatory, and other risks associated with international operations.
Our business is subject to risks associated with conducting business internationally. Some of our CDMOs are located outside the United States.
Accordingly, our future results could be harmed by a variety of factors, including:
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economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;
differing and changing regulatory requirements in non-U.S. countries;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect
intellectual property rights to the same extent as the United States;
difficulties in compliance with non-U.S. laws and regulations;
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changes in non-U.S. regulations and customs, tariffs, and trade barriers;
changes in non-U.S. currency exchange rates and currency controls;
changes in a specific country’s or region’s political or economic environment;
shipping of biologics/drugs;
trade protection measures, import or export licensing requirements, or other restrictive actions by U.S. or non-U.S. governments;
negative consequences from changes in tax laws;
compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad;
workforce uncertainty in countries where labor unrest is more common than in the United States;
difficulties associated with staffing and managing international operations, including differing labor relations;
potential liability under the FCPA, UK Bribery Act, or comparable foreign laws; and
business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes,
typhoons, floods, and fires.
These and other risks associated with our planned international operations may materially adversely affect our ability to attain profitable
operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2020, we had federal and state net operating loss (NOL) carryforwards of approximately $195.3 million and $191.4 million,
respectively, some of which have an indefinite life. Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company’s net operating
loss and research and development credit carryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within
a three-year period. As a result of our initial public offering in February 2019 and follow-on public offering in January 2020, and other transactions that
have occurred since our incorporation, we may have experienced such an ownership change. We may also experience ownership changes in the future as a
result of subsequent shifts in our stock ownership, some of which are outside our control. As a result, our ability to use our pre-change net operating loss
carryforwards and other pre-change tax attributes to offset post-change taxable income or taxes may be subject to limitation. In addition, the enacted
legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the Tax Act) imposes certain limitations on the deduction of NOLs. The Tax Act, as
amended by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), also provides that NOLs from tax years that began after
December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020. Our NOLs may
also be subject to limitations under state law. For example, California enacted legislation suspending the use of NOLs for taxable years 2020, 2021 and
2022 for many taxpayers.
General Risk Factors
An active trading market for our common stock may not be sustained.
Prior to our initial public offering in February 2019, there was no public trading market for our common stock. Although our common stock is
listed on the NASDAQ Global Select Market, the market for our shares has demonstrated varying levels of trading activity. We cannot predict the prices at
which our common stock will trade. It is possible that in one or more future periods our results of operations and progression of our product pipeline may
not meet the expectations of public market analysts and investors, and, as a result of these and other factors, the price of our common stock may fall.
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The market price of our common stock may continue to be volatile, which could result in substantial losses for investors.
The trading price of our common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to
various factors, some of which are beyond our control. Some of the factors that may cause the market price of our common stock to fluctuate include:
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the success of existing or new competitive products or technologies;
the timing and results of clinical trials for our current product candidates and any future product candidates that we may develop;
commencement or termination of collaborations for our product development and research programs;
failure to achieve development, regulatory, or commercialization milestones under our collaborations;
failure or discontinuation of any of our product development and research programs;
results of preclinical studies, clinical trials, or regulatory approvals of product candidates of our competitors, or announcements about
new research programs or product candidates 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 research programs, clinical development programs, or product candidates that we may develop;
the results of our efforts to develop additional product candidates or products;
actual or anticipated changes in estimates as to financial results, development timelines, or recommendations by securities analysts;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders, or other stockholders, such as if we use our at-the-market facility;
expiration of market standoff or lock-up agreements;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in estimates or recommendations by securities analysts, if any, that cover our stock;
changes in the structure of healthcare payment systems;
market conditions in the pharmaceutical and biotechnology sectors;
general economic, industry, and market conditions; and
the other factors described in this “Risk Factors” section.
In recent years, the stock market in general, and the market for pharmaceutical and biotechnology companies in particular, has experienced
significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies
whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our common
stock, regardless of our actual operating performance. Following periods of such volatility in the market price of a company’s securities, securities class
action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities
litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
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If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock
could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our
business. If one or more of the analysts covering our business cease to cover us or downgrade their evaluations of our stock or if we fail to meet their
operating results estimates for us, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in
the market for our stock, which in turn could cause our stock price to decline.
Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could cause the market price of
our common stock to decline significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market
perceives that our stockholders intend to sell, substantial amount of our common stock in the public market, the market price of our common stock could
decline significantly.
Certain holders of shares 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 registration statements that we may file for ourselves or other stockholders. Registration of these shares under the Securities
Act would result in the shares becoming freely tradeable in the public market, subject to the restrictions of Rule 144 in the case of our affiliates. Any sales
of securities by these stockholders could have a material adverse effect on the market price for our common stock.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies
or product candidates.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances,
and licensing arrangements. We, and indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue
debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing, or nature of any future offerings. To the extent that we raise additional capital through the sale of equity or debt securities, your ownership
interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of
indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur
additional debt, limitations on our ability to acquire, sell, or license intellectual property rights and other operating restrictions that could adversely impact
our ability to conduct our business. On May 13, 2020, we filed a shelf registration statement on Form S-3 with the SEC that automatically became effective
and permits us to use our at-the-market facility for sales of up to $150 million worth of shares of common stock from time to time. Additionally, any future
collaborations we enter into with third parties may provide capital in the near term but limit our potential cash flow and revenue in the future. If we raise
additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our
technologies or product candidates, or grant licenses on terms unfavorable to us.
Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence over matters
subject to stockholder approval.
Our directors, executive officers, holders of more than 5% of our outstanding stock and their respective affiliates beneficially owned 42.1% of our
outstanding common stock as of February 15, 2021. As a result, these stockholders, if they act together, may significantly influence all matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company that our other stockholders may believe is in their best interests. This in turn could have
a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove the board of directors or management.
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We have incurred and will continue to incur significant additional 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, we have incurred and will continue to incur significant legal, accounting, and other expenses that we did not incur as a
private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform, and Consumer Protection Act, the listing requirements of NASDAQ, 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. We have hired, and expect that we will need to continue to hire, additional
accounting, finance, and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company, and
our management and other personnel have devoted and will continue to devote a substantial amount of time towards maintaining compliance with these
requirements. These requirements have increased and 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 the rules and regulations applicable to us as a public company may make it more difficult and
more expensive for us to maintain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members
of our board of directors. We are currently 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.
If we are unable to maintain effective internal controls, our business, financial position, and results of operations could be adversely affected.
As a public company, we are subject to reporting and other obligations under the Exchange Act, including the requirements of Sarbanes-Oxley Act
404(a) of the Sarbanes-Oxley Act, which require annual management assessments of the effectiveness of our internal control over financial reporting.
Section 404(b) of the Sarbanes-Oxley Act also requires our independent auditors to attest to, and report on, this management assessment.
The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require
significant documentation, testing and possible remediation to meet the detailed standards under the rules. During the course of its testing, our management
may identify material weaknesses or deficiencies which may not be remedied in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002.
These reporting and other obligations place significant demands on our management and administrative and operational resources, including accounting
resources. If we are not able to comply with the requirements of Section 404 or if we or our independent registered public accounting firm are unable to
attest to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial
reports, the market price of our stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory
authorities, which would require additional financial and management resources.
We do not expect to pay any dividends for the foreseeable future. Investors may never obtain a return on their investment.
You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any dividends to
holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition,
any future credit facility may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock.
Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on
their investment. As a result, investors seeking cash dividends should not purchase our common stock.
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Delaware law and provisions in our amended and restated certificate of incorporation and bylaws might discourage, delay, or prevent a change in
control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws may discourage, delay, or prevent a merger, acquisition, or other
change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our
common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Therefore, these
provisions could adversely affect the price of our common stock. Among other things, our charter documents:
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establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with each class serving staggered three-
year terms;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a
quorum;
provide that our directors may only be removed for cause;
eliminate cumulative voting in the election of directors;
authorize our board of directors to issue shares of preferred stock and determine the price and other terms of those shares, including
preferences and voting rights, without stockholder approval;
provide our board of directors with the exclusive right to elect a director to fill a vacancy or newly created directorship;
permit stockholders to only take actions at a duly called annual or special meeting and not by written consent;
prohibit stockholders from calling a special meeting of stockholders;
require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;
authorize our board of directors, by a majority vote, to amend the bylaws; and
require the affirmative vote of at least 66 2/3% or more of the outstanding shares of common stock to amend many of the provisions
described above.
In addition, Section 203 of the General Corporation Law of the State of Delaware (DGCL), prohibits a publicly-held Delaware corporation from
engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years
has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of
delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and
could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes
between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers, or employees.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have
jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) is the exclusive forum for the following (except
for any claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party
does not consent to the personal jurisdiction of such court within 10 days following such determination), which is vested in
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the exclusive jurisdiction of a court or forum other than such court, or for which such court does not have subject matter jurisdiction).
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any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of fiduciary duty;
any action asserting a claim against us arising under the DGCL, our amended- and restated certificate of incorporation or our amended
and restated bylaws; and
any action asserting a claim against us that is governed by the internal-affairs doctrine.
This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S.
federal courts have exclusive jurisdiction.
Our amended and restated bylaws further provide that the federal district courts of the United States of America will be the exclusive forum for
resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive-forum provisions may limit a stockholder’s ability to
bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits
against us and our directors, officers and other employees. Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall
be deemed to have notice of and consented to these provisions. There is uncertainty as to whether a court would enforce such provisions, and the
enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. It is possible that a
court could find these types of provisions to be inapplicable or unenforceable, and if a court were to find either exclusive-forum provision in our amended
and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other
jurisdictions, which could seriously harm our business.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are currently located in South San Francisco, California, where we lease approximately 105,000 square feet of office
and laboratory space. The term of the lease agreement expires in May 2029, with an option to extend the term of the lease for an additional 10 years. The
lease agreement also provides us a right of first offer to expand into available office space in the building. We sublease approximately 23,600 square feet of
our corporate headquarters with a lease term that expires in November 2021. We lease approximately 18,700 square feet of additional office and laboratory
space in Newark, California. We believe that these facilities will be adequate for our near-term needs. If required, we believe that suitable additional or
alternative space would be available in the future on commercially reasonable terms.
Item 3. Legal Proceedings.
From time to time, we may become involved in litigation or other legal proceedings. We are not currently a party to any litigation or legal
proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. We have been engaged in an arbitration
against a third party as set forth below. Regardless of outcome, litigation, or other legal proceedings can have an adverse impact on us because of legal fees
and settlement costs, diversion of management resources, and other factors.
On June 18, 2019, we initiated a confidential arbitration proceeding against Dr. Asa Abeliovich, our former consulting co-founder, related to
alleged breaches of his consulting agreement and the improper use of our confidential information that he learned during the course of rendering services to
us as our consulting Chief Scientific Officer/Chief Innovation Officer.
On November 2, 2020, we provided an update on our confidential arbitration proceedings against Dr. Asa Abeliovich, co-founder and CEO of
Prevail Therapeutics. An independent arbitrator issued a confidential decision in
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our favor, finding Dr. Abeliovich liable for breach of his confidentiality agreement and for spoliation based on his destruction of documents relevant to the
proceeding. The arbitrator awarded damages for breach of the agreement and sanctions for the spoliation, as well as violation of orders during the
proceeding, and the amount of such damages will be determined in a pending proceeding.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock is publicly traded on the Nasdaq Global Select Market under the symbol "ALEC."
PART II
Holders of Record
As of February 15, 2021, there were approximately 17 stockholders of record of our common stock. The actual number of stockholders is greater
than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other
nominees.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock since our inception. We intend to retain future earnings, if any, to finance the
operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Payment of future cash dividends, if any,
will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and
anticipated cash needs, the requirements and contractual restrictions of then-existing debt instruments, and other factors that our board of directors deems
relevant.
Stock Performance Graph
This graph is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to
liabilities under that Section, and shall not be deemed incorporated by reference into any filing of Alector, Inc. under the Securities Act of 1933, as
amended (the "Securities Act"), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The following graph compares the cumulative total return to stockholder return on our common stock relative to the cumulative total returns of the
NASDAQ Composite Index and the NASDAQ Biotechnology Index. An investment of $100 is assumed to have been made in our common stock and each
index on February 7, 2019 (the first day of trading of our common stock) and its relative performance is tracked through December 31, 2020. Pursuant to
applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been
declared on our common stock to date. The stockholder returns shown on the graph below are based on historical results and are not necessarily indicative
of future performance, and we do not make or endorse any predictions as to future stockholder returns.
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Use of Proceeds
The Registration Statement on Form S-1 (File No. 333-229152) was declared effective by the SEC for our initial public offering of common stock
on February 6, 2019. We started trading on the Nasdaq Global Select Market on February 7, 2019. In connection with our initial public offering, we sold an
aggregate of 9,739,541 shares of common stock at a public offering price of $19.00 per share, including 489,541 shares sold pursuant to the underwriters’
partial exercise of their option to purchase additional shares. The aggregate offering price for shares sold in the offering was $185.1 million. The
underwriters for our initial public offering were Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Cowen and
Company, LLC. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and estimated
offering expenses, were $168.2 million. No offering expenses were paid or are payable, directly or indirectly, to our directors or officers, to persons owning
10% or more of any class of our equity securities or to any of our affiliates.
We filed the Registration Statement on Form S-1 (File No. 333-236094) for issuing additional shares as part of a secondary public offering. The
Registration Statement was declared effective by the SEC on January 29, 2020. We sold an aggregate of 9,602,500 shares of common stock at a public
offering price of $25.00 per share, including 1,252,500 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares.
The aggregate offering price for shares sold in the offering was $240.1 million. The underwriters for our secondary public offering were Morgan Stanley &
Co. LLC, Goldman Sachs & Co. LLC, BofA Securities, Inc., and Cowen and Company, LLC. The aggregate net proceeds received by the Company from
the offering, net of underwriting discounts and commissions and estimated offering expenses, were $224.5 million. No offering expenses were paid or are
payable, directly or indirectly, to our directors or officers, to persons owning 10% or more of any class of our equity securities or to any of our affiliates.
There has been no material change in the planned use of proceeds from our public offerings as described in our final prospectuses filed with the
SEC on February 7, 2019 and January 30, 2020, respectively, pursuant to Rule 424(b)(4). We invested the funds received in interest-bearing, investment-
grade securities and government securities, corporate bonds, and commercial paper.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the
timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not
limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this report.
Overview
We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of
neurodegeneration. Immuno-neurology targets immune dysfunction as a root cause of multiple pathologies that are drivers of degenerative brain disorders.
We are developing therapies designed to simultaneously counteract these pathologies by restoring healthy immune function to the brain. Supporting our
scientific approach, our Discovery Platform enables us to advance a broad portfolio of product candidates, validated by human genetics, which we believe
will improve the probability of technical success over shorter development timelines. As a result we have identified over 100 immune system targets, have
advanced four product candidates, AL001, AL002, AL003, and AL101 into clinical development, and continue to develop our research pipeline.
Our operations have been financed primarily through the issuance and sale of convertible preferred stock, our collaboration with AbbVie, and
issuance of common stock upon the completion of our IPO. We completed our IPO in February 2019, and received $168.2 million net proceeds, after
deducting underwriting discounts and commissions and offering expenses. We completed a follow-on offering in January 2020 and received $224.5 million
net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses.
To date, we have not had any products approved for sale and have not generated any revenue from product sales nor been profitable. Further, we do
not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing
approval for one of our product candidates. We will continue to require additional capital to develop our product candidates and fund operations for the
foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our ability
to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net
losses were $190.2 million, $105.4 million, and $52.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31,
2020, we had an accumulated deficit of $410.0 million. Substantially all of our net losses have resulted from costs incurred in connection with our research
and development programs and from general and administrative costs associated with our operations. We expect our expenses will increase substantially in
connection with our ongoing activities, as we:
•
•
•
•
•
•
•
advance product candidates through preclinical studies and clinical trials;
pursue regulatory approval of product candidates;
hire additional personnel;
continue to operate as a public company;
acquire, discover, validate, and develop additional product candidates;
require the manufacture of supplies for our preclinical studies and clinical trials; and
obtain, maintain, expand, and protect our intellectual property portfolio.
Components of Results of Operations
Revenue
We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date has been primarily related
to the AbbVie Agreement to co-develop product candidates in two
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programs in clinical development with AbbVie. We recognize revenue related to our research and development grant as the related research services are
performed. We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized
as the program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance
obligation. In addition to receiving the upfront payments, we may also be entitled to development and regulatory milestone payments, opt-in payments for
continued development after proof-of-concept for AL002 and AL003, and other future payments from profit sharing or royalties after commercialization of
product candidates from such programs.
We expect that our revenue for the next several years will be derived primarily from the AbbVie Agreement. The balance of deferred revenue was
$132.3 million as of December 31, 2020. The deferred revenue is expected to be recognized over the research and development period of the programs
through the completion of proof-of-concept for AL002 and AL003.
Research and Development Expenses
Research and development expenses account for a significant portion of our operating expenses. We record research and development expenses as
incurred. Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, which
include:
•
•
•
•
•
•
•
expenses incurred under agreements with third-party contract organizations, preclinical testing organizations, and consultants;
costs related to production of clinical materials, including fees paid to contract manufacturers;
laboratory and vendor expenses related to the execution of preclinical studies and clinical trials;
personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel engaged in research and development
functions;
costs related to the preparation of regulatory submissions;
third-party license fees; and
facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense, and
other supplies.
We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized
based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-
party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development
activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.
Specific program expenses include expenses associated with the development of our most advanced product candidates, AL001 which commenced
dosing of the first patient in a pivotal Phase 3 clinical trial, INFRONT-3, and remains in an ongoing Phase 2 clinical trial, AL002, which commenced
dosing of the first patient in a Phase 2 clinical trial, and AL003 and AL101, which are in Phase 1 clinical trials. We also have expenses related to the
discovery and development of future product candidates and separately tracked expenses related to programs that we expect to move out of preclinical
studies and into Phase 1 clinical trials. We do not track personnel or other operating expenses incurred for our research and development programs on a
program-specific basis. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses, including depreciation, and
lab consumables.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the
development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase
substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our
product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek
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regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to
support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-
consuming, and the successful development of our product candidates is highly uncertain.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for our personnel in
executive, legal, finance and accounting, information technology, human resources, and other administrative functions. General and administrative
expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax
services, insurance costs, and facility costs not otherwise included in research and development expenses.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued
research activities and development of our programs. We also anticipate that we will continue to incur expenses as a result of operating as a public
company, including expenses related to compliance with the rules and regulations of the SEC and those of the NASDAQ Stock Market on which our
securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services. In
connection with our arbitration proceeding against Dr. Asa Abeliovich, our former consulting co-founder, an independent arbitrator issued a confidential
decision in favor of the Company and the amount of damages will be determined in a pending proceeding. We expect these arbitration related expenses to
decrease.
Other Income, Net
Other income, net consists of interest earned on our cash equivalents and marketable securities and foreign currency transaction gains and losses
incurred during the period.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
Collaboration revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Net loss
Year Ended
December 31,
2020
2019
(In thousands)
Dollar
Change
$
21,098 $
21,219 $
(121)
156,869
59,403
216,272
(195,174)
4,946
(190,228) $
100,528
35,095
135,623
(114,404)
9,019
(105,385) $
56,341
24,308
80,649
(80,770)
(4,073)
(84,843)
$
Revenue
Collaboration revenue was $21.1 million for the year ended December 31, 2020, compared to $21.2 million for the year ended December 31, 2019.
We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized as the
program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation.
Changes in estimates for revenue recognized over time are recognized on a cumulative basis. Revenue decreased by $0.1 million, reflecting the level of our
estimated cumulative research activities on the AL002 and AL003 programs under the AbbVie Agreement.
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Research and Development Expenses
Research and development expenses were $156.9 million for the year ended December 31, 2020, compared to $100.5 million for the year ended
December 31, 2019. The increase of $56.3 million was driven by a $23.3 million increase in AL001 related to manufacturing runs and continued
progression through clinical trials. We had a $15.6 million increase in personnel-related expenses, including stock-based compensation, due to an increase
in headcount and issuance of option grants to employees. In addition, expenses increased by $9.9 million for AL044, a recent program to progress to
preclinical trials, and increased by $6.6 million for other early stage programs as we continue to invest in developing our pipeline.
Direct research and development expenses
AL001
AL101
AL002
AL003
AL044
Other early stage programs
Indirect research and development expenses
Personnel related (including stock-based
compensation)
Facilities and other unallocated research and
development expenses
Total research and development expenses
Year Ended
December 31,
2020
2019
(In thousands)
Dollar
Change
$
40,398 $
4,911
19,219
8,748
11,148
19,983
17,067 $
8,203
17,359
8,386
1,246
13,423
23,331
(3,292)
1,860
362
9,902
6,560
40,539
24,902
15,637
11,923
156,869 $
9,942
100,528 $
1,981
56,341
$
General and Administrative Expenses
General and administrative expenses were $59.4 million for the year ended December 31, 2020, compared to $35.1 million for the year ended
December 31, 2019. The increase of $24.3 million was driven by a $12.2 million increase in personnel-related expenses, including stock-based
compensation, due to an increase in headcount and issuance of option grants to employees. In addition, there was an $8.2 million increase in legal expense
due mainly to our arbitration proceeding that we commenced in June 2019 with decision issued in November 2020. We also had a $3.4 million increase in
consulting expense to support the growth of the business related to information technology, accounting, human resources, and other administrative
functions.
Other Income, Net
Other income, net was $4.9 million for the year ended December 31, 2020, compared to $9.0 million for the year ended December 31, 2019. The
decrease of $4.1 million was due to due lower investment yields on our marketable securities.
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Comparison of the Years Ended December 31, 2019 and 2018
Revenue:
Collaboration revenue
Grant revenue
Total revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Net loss
Year Ended
December 31,
2019
2018
(In thousands)
Dollar
Change
$
$
21,219 $
—
21,219
100,528
35,095
135,623
(114,404)
9,019
(105,385) $
27,508 $
169
27,677
73,031
11,934
84,965
(57,288)
5,040
(52,248) $
(6,289)
(169)
(6,458)
27,497
23,161
50,658
(57,116)
3,979
(53,137)
Revenue
Total revenue was $21.2 million for the year ended December 31, 2019, compared to $27.7 million for the year ended December 31, 2018. We
recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized as the program
costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Changes in
estimates for revenue recognized over time are recognized on a cumulative basis. Revenue decreased by $6.5 million, primarily due to an increase in total
expected costs for the AL002 and AL003 programs through the completion of proof-of-concept.
Research and Development Expenses
Research and development expenses were $100.5 million for the year ended December 31, 2019, compared to $73.0 million for the year ended
December 31, 2018. The increase of $27.5 million was driven by an $11.8 million increase in personnel related expenses, including stock-based
compensation, due to an increase in headcount and issuance of option grants to employees. There was a $6.3 million increase in facilities and other
unallocated research and development related to the lease expense for the new headquarters and higher depreciation expense due to purchase of property
and equipment. Expenses for AL101 increased by $5.0 million as we did not incur any expenses for AL101 until the second quarter of 2018 and this year
we began clinical trials in the fourth quarter of 2019. In addition, expenses increased by $3.7 million for other early stage programs, including AL044, as
we continue to invest in developing our pipeline.
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Direct research and development expenses
AL001
AL101
AL002
AL003
AL044
Other early stage programs
Indirect research and development expenses
Personnel related (including stock-based
compensation)
Facilities and other unallocated research and
development expenses
Total research and development expenses
Year Ended
December 31,
2019
2018
(In thousands)
Dollar
Change
$
17,067 $
8,203
17,359
8,386
1,246
13,423
14,531 $
3,159
15,500
12,174
—
10,980
2,536
5,044
1,859
(3,788)
1,246
2,443
24,902
13,066
11,836
9,942
100,528 $
3,621
73,031 $
6,321
27,497
$
General and Administrative Expenses
General and administrative expenses were $35.1 million for the year ended December 31, 2019, compared to $11.9 million for the year ended
December 31, 2018. The increase of $23.2 million was primarily due to an $10.1 million increase in personnel-related expenses, including stock-based
compensation, as a result of an increase in headcount and issuance of option grants to employees. Facilities and general overhead expenses increased by
$6.6 million due to additional lease expense related to the lease for the new headquarters, impairment loss on the right-of-use asset related to the sublease,
higher depreciation expense due to purchase of property and equipment, directors and officers insurance necessary to operate a public company, and other
allocated costs from the increased headcount. The increase is also due to a $4.5 million increase in legal expense due to increased costs of operating as a
public company, increased patent costs, and our arbitration proceeding that we commenced in June 2019.
Other Income, Net
Other income, net was $9.0 million for the year ended December 31, 2019, compared to $5.0 million for the year ended December 31, 2018. The
increase of $4.0 million was due to interest income earned after we invested the proceeds from the issuance of common stock upon completion of the IPO
into marketable securities.
Liquidity and Capital Resources
Since our inception through December 31, 2020, our operations have been financed primarily by net proceeds of $210.5 million from sales of our
convertible preferred stock and through the $205.0 million in upfront payments from the AbbVie Agreement. In addition, on February 7, 2019, we
completed our IPO through issuing and selling 9,739,541 shares of common stock at a public offering price of $19.00 per share, including 489,541 shares
sold pursuant to the underwriters’ partial exercise of their option to purchase additional shares, resulting in aggregate net proceeds from the offering of
$168.2 million, after deducting underwriting discounts and commissions and offering costs. On January 30, 2020, we completed a follow-on offering
through issuing and selling 9,602,500 shares of common stock at a public offering price of $25.00 per share, including 1,252,500 shares sold pursuant to
the underwriters’ full exercise of their option to purchase additional shares, resulting in aggregate net proceeds of $224.5 million, after deducting
underwriting discounts and commissions and estimated offering costs. As of December 31, 2020, we had $413.3 million of cash, cash equivalents, and
marketable securities. As of December 31, 2020, we had an accumulated deficit of $410.0 million.
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Future Funding Requirements
Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs,
and to a lesser extent, general and administrative expenditures. We expect our expenses to continue to increase in connection with our ongoing activities, in
particular as we continue to advance our product candidates and our discovery programs. In addition, we expect to incur additional costs associated with
operating as a public company.
Based on our current operating plan, we believe that our existing cash, cash equivalents, and marketable securities will enable us to fund our
operating expenses and capital expenditure requirements through at least mid-2022. We have based this estimate on assumptions that may prove to be
wrong, and we could utilize our available capital resources sooner than we currently expect. We may also choose to seek additional financing
opportunistically. We expect to need to obtain substantial additional funding in the future for our research and development activities and continuing
operations. If we were unable to raise capital when needed or on favorable terms, we would be forced to delay, reduce, or eliminate our research and
development programs or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
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•
•
•
•
•
•
•
•
•
•
•
the timing and progress of preclinical and clinical development activities;
the number and scope of preclinical and clinical programs we decide to pursue;
successful enrollment in and completion of clinical trials;
our ability to establish agreements with third-party manufacturers for clinical supply for our clinical trials and, if our product candidates are
approved, commercial manufacturing;
our ability to maintain our current research and development programs and establish new research and development programs;
addition and retention of key research and development personnel;
our efforts to enhance operational, financial, and information management systems, and hire additional personnel, including personnel to
support development of our product candidates;
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter and performing our obligations
in such collaborations;
the timing and amount of milestone and other payments we may receive under our collaboration arrangements;
our eventual commercialization plans for our product candidates;
the costs involved in prosecuting, defending, and enforcing patent claims and other intellectual property claims, including related to the
ongoing arbitration proceeding that we commenced in June 2019; and
the costs and timing of regulatory approvals.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly
change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we
may need additional funds to meet operational needs and capital requirements associated with such operating plans.
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Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by financing activities
$
Year Ended December 31,
2019
2020
(166,734) $
(105,051)
232,113
(99,308) $
(48,874)
172,353
2018
127,464
(224,119)
131,146
Operating Activities
For the year ended December 31, 2020, cash used in operating activities was $166.7 million. This was mainly due to the net loss of $190.2 million
and the decrease in deferred revenue of $21.1 million as revenue was recognized related to the AbbVie Agreement. This was partially offset by a non-cash
charges of $30.5 million for stock-based compensation and $5.9 million for depreciation and amortization expense. We also had an increase of $12.2
million in accrued liabilities and accrued clinical supply costs, which offset the cash used in operating activities.
For the year ended December 31, 2019, cash used in operating activities was $99.3 million. This was mainly due to the net loss of $105.4 million
and the decrease in deferred revenue of $21.2 million as revenue was recognized related to the AbbVie Agreement. This was offset by a non-cash charges
of $16.3 million for stock-based compensation and $3.8 million for depreciation and amortization expense. We also had an increase of $9.2 million in
accrued liabilities and accrued clinical supply costs.
For the year ended December 31, 2018, cash provided by operating activities was $127.5 million. The net cash inflow from operations primarily
resulted from the receipt of $200.0 million upfront payment from AbbVie in January 2018, that was reflected as a net increase in deferred revenue of
$172.5 million during the period. This was mainly offset by net loss of $52.2 million. In addition, the company had a non-cash charge of $6.9 million for
stock-based compensation.
Investing Activities
For the year ended December 31, 2020, cash used in investing activities of $105.1 million was primarily related to the purchase of marketable
securities of $506.8 million offset by the proceeds from maturities of marketable securities of $406.8 million. In addition, we used cash for the purchase of
$5.0 million of property and equipment.
For the year ended December 31, 2019, cash used in investing activities of $48.9 million was primarily related to the purchase of marketable
securities of $529.6 million offset by the proceeds from maturities of marketable securities of $496.0 million. In addition, we used cash for the purchase of
$15.3 million of property and equipment.
For the year ended December 31, 2018, cash used in investing activities of $224.1 million was primarily related to the purchase of short-term
marketable securities of $472.2 million offset by the proceeds from maturities of marketable securities of $250.0 million. In addition, we used cash for the
purchase of $1.9 million of property and equipment.
Financing Activities
For the year ended December 31, 2020, cash provided by financing activities of $232.1 million was primarily from net proceeds of the issuance of
9,602,500 shares of our common stock upon the completion of a follow-on public offering. In addition, we received $6.3 million cash from the exercise of
options to purchase common stock.
For the year ended December 31, 2019, cash provided by financing activities of $172.4 million was primarily from net proceeds of the issuance of
9,739,541 shares of our common stock upon the completion of our IPO.
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For the year ended December 31, 2018, cash provided by financing activities of $131.1 million was from net proceeds of the issuance of 9,373,633 shares
of our Series E convertible preferred stock in April 2018, July, and October 2018, offset by payment of $1.9 million of deferred offering costs for our IPO.
Critical Accounting Polices and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are
based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are
critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and
estimates.
Revenue Recognition
We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. We recognize collaboration
revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over
the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the
performance obligation. Revenues are recognized as the program costs are incurred. We re-evaluate the estimate of expected costs to satisfy the
performance obligation each reporting period and make adjustments for any significant changes. Clinical trials are expensive and can take many years to
complete, and the outcome is inherently uncertain. Changes in our forecasted costs are likely to occur over time based upon changes in clinical trial
procedures set forth in protocols, changes in estimates of manufacturing costs, or feedback from regulators on the design or operation of our clinical trials.
We have had changes to the overall expected costs to satisfy the performance obligations from period to period. For the year ended December 31, 2020, we
had a 7% increase in the forecast of the total expected costs. For the year ended December 31, 2020, the increase in the overall expected costs to satisfy the
performance obligation resulted in an approximately $6.7 million reduction in revenue compared to if the expected costs had remained the same, as a result
of the cumulative catch up for the change in estimate. The balance of deferred revenue was $132.3 million as of December 31, 2020. The deferred revenue
is expected to be recognized over the research and development period of the programs through the completion of Phase 2 clinical trials.
Accrued Research and Development Expenses
We record accrued expenses for estimated preclinical study and clinical trial expenses. Estimates are based on the services performed pursuant to
contracts with research institutions, contract research organizations in connection with clinical studies, investigative sites in connection with clinical
studies, vendors in connection with preclinical development activities, and contract manufacturing organizations in connection with the production of
materials for clinical trials. Further, we accrue expenses related to clinical trials based on the level of patient enrollment and activity according to the
related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and make judgments and estimates in
determining the accrued balance in each reporting period. If we underestimate or overestimate the level of services performed or the costs of these services,
our actual expenses could differ from our estimates. To date, we have not experienced significant changes in our estimates of preclinical studies and clinical
trial accruals.
Stock-based Compensation
Stock-based compensation is measured at the date of grant, based on the estimated fair value of the award and recognized as an expense over the
employee’s requisite service period (usually the vesting period) on a straight-line
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basis. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards.
These assumptions include:
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The expected term was derived
by using the simplified method which uses the midpoint between the average vesting term and the contractual expiration period of the stock-based
award.
Expected Volatility—We have limited information on the volatility of our stock as shares of our common stock were not actively traded on any
public markets prior to February 7, 2019. The expected volatility was derived from the historical stock volatilities of comparable peer public
companies within our industry. These companies are considered to be comparable to our business over a period equivalent to the expected term of
the stock-based awards. In 2020, we began giving weight to our own historical volatility in the determination of expected volatility.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the measurement date with maturities
approximately equal to the expected term.
Expected Dividend—The expected dividend rate is zero because we have not historically paid and do not expect for the foreseeable future to pay a
dividend on our common stock.
Recent Accounting Pronouncements
Effective January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This
ASU implements an impairment model, known as the current expected credit loss model that is based on expected losses rather than incurred losses. For
available-for-sale debt securities, entities are required to recognize an allowance for credit losses rather than an other-than-temporary impairment that
reduces the cost basis of the investment. Further, an entity will recognize any changes in estimated credit losses immediately in earnings. There was no
material impact to our consolidated financial statements from the adoption of ASU No. 2016-13.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. This ASU
modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740 related
to the approach for intraperiod tax allocation, and the methodology for calculating income taxes in an interim period. We early adopted this ASU as of
January 1, 2020. There was no material impact to our consolidated financial statements from the adoption of ASU No. 2019-12.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. The primary
objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without
assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality and short-term
duration, invested in compliance with our policy.
We had cash, cash equivalents, and marketable securities of $413.3 million as of December 31, 2020, which consisted primarily of bank deposits,
money market funds, and short-term government marketable securities. Such interest-earning instruments carry a degree of interest rate risk; however,
historical fluctuations in interest income have not been significant for us. Due to the short-term maturities of our cash equivalents and marketable securities,
and the low risk profile of our marketable securities, an immediate 100 basis point increase or decrease in interest rates would cause a change in fair value
of approximately $2.3 million.
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Foreign Currency Risk
Our expenses are generally denominated in U.S. dollars. However, we have entered into a limited number of contracts with vendors for research
and development services with payments denominated in foreign currencies, including the Euro. We are subject to foreign currency transaction gains or
losses on our contracts denominated in foreign currencies. To date, foreign currency transaction gains and losses have not been material to our financial
statements, and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would
not have a material effect on our financial results.
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Item 8. Financial Statements and Supplementary Data.
ALECTOR, INC.
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
109
Page
110
112
113
114
115
116
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alector, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alector, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated
statements of operations and comprehensive loss, convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 2020, and 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 at December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021, expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the 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 in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
Description of the Matter
The Company recorded collaboration revenue of $21.1 million for the year ended December 31, 2020. As described in
Note 2, collaboration revenue is recognized by measuring the progress toward complete satisfaction of the performance
obligations using an input measure. In order to recognize collaboration revenue over the research and development
period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the
performance obligations. Revenues are recognized as the program costs are incurred.
Auditing collaboration revenue was challenging as it involves assessing highly judgmental estimates with respect to the
Company’s determination of the total expected costs to satisfy the performance obligations.
110
How We Addressed the Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that
address the identified risks related to the Company's process used to determine total expected costs to satisfy the
performance obligations, including management’s controls over updates to the budget for the relevant research and
development programs.
To test collaboration revenue, our audit procedures included, among others, obtaining an understanding of the
Company’s estimated costs to satisfy the performance obligations, as well as assessing management’s updates to the
budget for the relevant research and development programs. We also tested a sample of expenses recorded to the
development program, evaluated the historical accuracy of management’s budget estimates for the relevant research
and development programs, and inquired of Company personnel directly involved with supervising the development
programs.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017.
San Jose, California
February 25, 2021
111
ALECTOR, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Restricted cash
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued clinical supply costs
Accrued liabilities
Deferred revenue, current portion
Operating lease liabilities, current portion
Total current liabilities
Deferred revenue, long-term portion
Operating lease liabilities, long-term portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $0.0001 par value; 200,000,000 shares authorized; 79,316,261 and 69,052,873 shares
issued and outstanding as of December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2020
2019
$
$
$
$
49,969 $
363,339
8,203
421,511
30,181
32,470
1,472
2,617
488,251 $
3,004 $
11,148
22,538
23,886
7,512
68,088
108,417
43,744
472
220,721
8
676,956
614
(410,048)
267,530
488,251 $
89,641
263,432
4,364
357,437
33,852
28,476
1,472
676
421,913
278
6,706
18,256
30,165
6,565
61,970
123,236
41,471
493
227,170
7
414,414
142
(219,820)
194,743
421,913
The accompanying notes are an integral part of these consolidated financial statements.
112
ALECTOR, INC.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
Revenue:
Collaboration revenue
Grant revenue
Total revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income, net
Net loss
Unrealized gain (loss) on marketable securities
Comprehensive loss
Net loss per share, basic and diluted
2020
Year Ended December 31,
2019
2018
$
$
$
21,098 $
—
21,098
156,869
59,403
216,272
(195,174)
4,946
(190,228)
472
(189,756) $
(2.45) $
21,219 $
—
21,219
100,528
35,095
135,623
(114,404)
9,019
(105,385)
184
(105,201) $
(1.71) $
27,508
169
27,677
73,031
11,934
84,965
(57,288)
5,040
(52,248)
(42)
(52,290)
(4.62)
Shares used in computing net loss per share, basic and diluted
77,758,806
61,734,492
11,302,788
The accompanying notes are an integral part of these consolidated financial statements.
113
Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except member unit and share data)
ALECTOR, INC.
Balance — December 31, 2017
Issuance of Series E convertible
preferred stock, net of issuance
costs of $214
Cancellation of restricted common
stock
Stock-based compensation
Unrealized loss on marketable securities
Net loss
Balance — December 31, 2018
Conversion of convertible preferred
stock into common stock
Issuance of common stock upon
initial public offering, net of
issuance costs of $3,874
Exercise of stock options
Purchase of common stock under
employee stock purchase plan
Forfeiture of restricted common stock
Stock-based compensation
Unrealized gain on marketable securities
Net loss
Balance — December 31, 2019
Issuance of common stock upon
follow-on public offering, net of
issuance costs of $1,148
Exercise of stock options
Purchase of common stock under
employee stock purchase plan
Forfeiture of restricted common stock
Stock-based compensation
Unrealized gain on marketable securities
Net loss
Balance — December 31, 2020
Convertible
Preferred Stock
Common Stock
Shares
36,001,203
Amount
$
77,485
Shares
13,776,153
Amount
$
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
1
$
10,153
$
—
$
(62,187) $
(52,033)
9,373,633
133,035
—
—
—
—
—
45,374,836
—
—
—
—
210,520
(11,324)
—
—
—
13,764,829
(45,374,836)
(210,520)
45,374,836
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
9,739,541
180,287
50,353
(56,973)
—
—
—
69,052,873
—
—
9,602,500
655,772
86,870
(81,754)
—
—
—
79,316,261
$
—
—
—
—
—
—
—
—
—
—
1
5
1
—
—
—
—
—
—
7
1
—
—
—
—
—
8
$
—
—
6,925
—
—
17,078
210,516
168,222
1,519
798
—
16,281
—
—
414,414
224,510
6,331
1,179
—
30,522
—
—
676,956
$
—
—
—
—
—
(42)
—
(42)
—
—
—
—
—
—
184
—
142
—
—
—
—
472
—
614
—
—
—
(52,248)
(114,435)
—
—
—
—
—
—
—
(105,385)
(219,820)
—
—
—
—
—
(190,228)
(410,048) $
$
—
6,925
(42)
(52,248)
(97,398)
210,521
168,223
1,519
798
—
16,281
184
(105,385)
194,743
224,511
6,331
1,179
—
30,522
472
(190,228)
267,530
The accompanying notes are an integral part of these consolidated financial statements.
114
ALECTOR, INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization
Stock-based compensation
Amortization of premiums and accretion of discounts on marketable securities
Amortization of right-of-use assets
Impairment loss on right-of-use assets
Loss from disposal of property and equipment, net
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities and accrued clinical supply costs
Deferred revenue
Lease liabilities
Other long-term liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of marketable securities
Maturities of marketable securities
Net cash used in investing activities
Cash flows from financing activities:
2020
Year Ended December 31,
2019
2018
$
(190,228) $
(105,385) $
(52,248)
5,870
30,522
584
1,395
238
107
(3,839)
(2,498)
2,409
12,232
(21,098)
(2,407)
(21)
(166,734)
(5,032)
(506,809)
406,790
(105,051)
3,775
16,281
(4,701)
1,799
1,158
39
(1,596)
(42)
152
9,210
(21,219)
868
353
(99,308)
(15,265)
(529,609)
496,000
(48,874)
1,019
6,925
(2,745)
—
—
151
(2,245)
106
(809)
4,743
172,492
—
75
127,464
(1,884)
(472,235)
250,000
(224,119)
Proceeds from issuance of common stock upon initial public offering, net
of issuance costs
Proceeds from issuance of common stock upon follow-on public offering, net of
issuance cost
Proceeds from issuance of convertible preferred stock, net of
issuance costs
Proceeds from the exercise of options to purchase common stock
Proceeds from issuance of stock from employee stock purchase plan
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Non-cash investing and financing activities:
Property and equipment purchases included in accounts
payable and accrued liabilities
Deferred offering costs in accrued liabilities
Tenant improvements paid by landlord
—
170,128
(1,904)
224,603
(92)
—
—
6,331
1,179
232,113
(39,672)
91,113
51,441 $
—
1,519
798
172,353
24,171
66,942
91,113 $
428 $
— $
— $
3,471 $
465 $
8,286 $
133,050
—
—
131,146
34,491
32,451
66,942
293
792
7,449
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
115
1.
The Company and Liquidity
Alector, Inc. (Alector or the Company) is a Delaware corporation headquartered in South San Francisco, California. Alector is a clinical stage
biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration.
Initial Public and Follow-on Offerings
On February 7, 2019, the Company completed an initial public offering (IPO) through issuing and selling 9,739,541 shares of common stock at a
public offering price of $19.00 per share, including 489,541 shares sold pursuant to the underwriters’ partial exercise of their option to purchase
additional shares, resulting in aggregate net proceeds of $168.2 million, after deducting underwriting discounts and commissions and offering
costs. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 45,374,836 shares of
common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.
On January 30, 2020, the Company completed a follow-on offering through issuing and selling 9,602,500 shares of common stock at a public
offering price of $25.00 per share, including 1,252,500 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional
shares, resulting in aggregate net proceeds of $224.5 million, after deducting underwriting discounts and commissions and estimated offering costs.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (GAAP)
as defined by the Financial Accounting Standards Board (FASB). The consolidated financial statements include the accounts of Alector, Inc. and its
wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expense during the reporting period. The Company evaluates its estimates, including those related to
revenue recognition, manufacturing accruals, clinical accruals, fair value of assets and liabilities, income taxes uncertainties, stock-based
compensation, and related assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and
assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents,
and short-term marketable securities. Cash and cash equivalents are deposited in checking and sweep accounts at a financial institution. Such
deposits may, at times, exceed federally insured limits.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash
equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value.
Restricted cash as of December 31, 2020 relates to a letter of credit established for a lease entered into in June 2018.
116
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum
to the total of the same amounts shown in the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
Marketable Securities
2020
Year Ended December 31,
2019
(In thousands)
2018
$
$
49,969 $
1,472
51,441 $
89,641 $
1,472
91,113 $
65,470
1,472
66,942
All marketable securities have been classified as “available-for-sale” and are carried at fair value, based upon quoted market prices. The Company
considers its available-for-sale portfolio as available for use in current operations. Accordingly, the Company may classify certain investments as
short-term marketable securities, even though the stated maturity date may be one year or more beyond the current balance sheet date. For
available-for-sale debt securities, unrealized gains, net of any related tax effects, are excluded from earnings and are included in other
comprehensive income and reported as a separate component of stockholders’ equity (deficit) until realized. The Company assesses available-for-
sale debt securities on a quarterly basis to see if any unrealized loss is due to credit-related factors. Factors considered in determining whether an
impairment is credit-related include the extent to which the investment’s fair value is less than its cost basis, declines in published credit ratings,
changes in interest rates, and any other adverse factors related to the security. If it is determined that a credit-related impairment exists, the
Company will measure the credit loss based on a discounted cash flows model. Credit-related impairments on available-for-sale debt securities are
recognized as an allowance for credit losses with a corresponding adjustment to other income, net in the Company’s consolidated statement of
operations. The unrealized loss position that is not credit-related is recorded, net of any related tax effects, in other comprehensive income until
realized. There were no credit-related losses recognized for the periods presented.
The cost of securities sold is based on the specific-identification method. The amortized cost of securities is adjusted for amortization of premiums
and accretion of discounts to maturity. In accordance with our investment policy, management invests in money market funds, U.S. treasury
securities, corporate bonds, commercial paper, and overnight repurchase agreements collateralized by U.S. treasury securities. The Company has
not experienced any losses on its deposits of cash, cash equivalents, and marketable securities.
Fair Value of Financial Instruments
The Company’s believes the carrying value of financial instruments, including cash and cash equivalents, receivables, accounts payable, and
accrued liabilities, approximate fair value due to their short-term nature.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an
asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the
following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for
identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little
or no market data.
117
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized
over the lesser of their useful lives or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation and amortization are removed from the consolidated balance sheet and the resulting gain or loss is reflected in the
consolidated statements of operations in the period realized. Maintenance and repairs are charged to the consolidated statements of operations as
incurred.
Leases
The Company adopted Accounting Standards Update No. 2016-02, Leases on January 1, 2019. There was no material effect on the statement of
operations upon adoption.
The Company determines whether an arrangement is or contains a lease at the inception of the lease. Leases are recognized on the balance sheet as
right-of-use assets and lease liabilities. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease
payments over the expected lease term. The Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a
collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-
of-use asset may be required for items such as initial direct costs paid or incentives received and any prepaid or accrued rent. Rent expense for the
operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations and
comprehensive loss. Variable lease payments include lease operating expenses.
The Company excludes balance sheet recognition of operating leases having a term of 12 months or less (short-term leases) and does not separate
lease components and non-lease components for its long-term leases.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets
are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, an impairment loss is
recognized for the amount by which the carrying amount of the assets exceeds is fair value. For the year ended December 31, 2020, the Company
recognized a $0.2 million impairment loss on its right-of-use asset related to decision to no longer utilize certain property through the end of the
lease term. For the year ended December 31, 2019, the Company recognized a $1.2 million impairment loss on its right of use assets related to the
portion of its headquarters being subleased.
Revenue Recognition
The Company recognizes revenue when control of promised goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services. In determining the appropriate amount of revenue to be recognized as the
Company fulfills its obligations under arrangements, the Company performs the following steps: (i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance
obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation.
Collaboration Revenue
The Company signed an agreement in October 2017 with AbbVie Biotechnology, Ltd. (AbbVie) to co-develop antibodies to two program targets in
preclinical development (AbbVie Agreement). Under the terms of the AbbVie Agreement, AbbVie made $205.0 million in upfront payments, of
which $5.0 million and $200.0 million was received by the Company in October 2017 and January 2018, respectively. The Company will perform
research and development services for the antibodies to the two programs through the end of Phase 2 clinical trials which the Company expects to
conduct through 2023. AbbVie will then have the exclusive right to exercise an option to enter into a license and collaboration agreement with the
Company for
118
one or both of the programs for $250.0 million each. If AbbVie exercises its option for the programs, AbbVie will take over the development of the
product candidates for such program and costs will be split between the parties. The Company will also share in profits and losses upon
commercialization of any products from such program. However, following AbbVie’s exercise of its option for a program, the Company may opt
out of sharing in development costs and profits or losses for that program and instead receive tiered royalties. Additionally, under the terms of the
AbbVie Agreement, the Company will be eligible to earn up to an additional $242.8 million in milestone payments per program related to the
initiation of certain clinical studies and regulatory approval for up to three indications per program. The Company assessed its collaboration
agreement with AbbVie in the context of the delivery of the research and development services.
The Company has determined that there are two research and development performance obligations as part of the agreement with AbbVie, one
research and development performance obligation for each of the two research and development programs. The non-refundable upfront cash
payments of $5.0 million and $200.0 million received in October 2017 and January 2018, respectively, were included in the transaction price. None
of the remaining development and regulatory milestone and program opt-in payment amounts have been included in the transaction price, as all
these amounts were fully constrained as of December 31, 2020 and 2019. As part of the Company’s evaluation of the constraint, the Company
considered numerous factors, including that receipt of the milestone amounts is outside the control of the Company and contingent upon success in
future clinical trials. Any consideration related to royalties on net product sales will be recognized when the related sales occur and therefore have
also been excluded from the transaction price. The Company will re-evaluate the transaction price in each reporting period and as uncertain events
are resolved or other changes in circumstances occur.
The Company recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an
input measure. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date
compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. The
Company will re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any
significant changes. Clinical trials are expensive and can take many years to complete, and the outcome is inherently uncertain. Changes in the
Company’s forecasted costs are likely to occur over time based upon changes in clinical trial procedures set forth in protocols, changes in estimates
of manufacturing costs, or feedback from regulators on the design or operation of clinical trials. The Company has had changes to the overall
expected costs to satisfy the performance obligations from period to period. For the year ended December 31, 2020, the Company had a 7%
increase in the forecast of total expected costs due to changes to the clinical trial plans. For the year ended December 31, 2020, the increase in the
overall expected costs to satisfy the performance obligation resulted in an approximately $6.7 million reduction in revenue compared to if the
expected costs had remained the same, as a result of the cumulative catch up for the change in estimate. Collaboration revenue under the
Company’s collaboration agreement with AbbVie during 2020, 2019, and 2018 was $21.1 million, $21.2 million, and $27.5 million, respectively.
Collaboration revenue recognized during the year ended December 31, 2020, was included in deferred revenue at the beginning of the period. The
balance of deferred revenue was $132.3 million as of December 31, 2020. The deferred revenue is expected to be recognized over the research and
development period of the programs through the completion of Phase 2 clinical trials.
The Company entered into an agreement in March 2020 with Innovent Biologics (Innovent) to license, develop, and commercialize AL008 in
China (Innovent Agreement). AL008 is the Company’s novel antibody targeting the CD47-SIRP-alpha pathway, a potent survival pathway co-
opted by tumors to evade the innate immune system. Under the terms of the Innovent Agreement, Innovent may pay the Company up to $11.5
million in development milestones, $112.5 million in sales milestones, and future royalties for any sales. The Company retains the rights to develop
and commercialize AL008 outside of China. The Company has determined there is one performance obligation for the delivery of the license and
will recognize revenue when it is probable that there will not be significant reversal of cumulative revenue. Development and sales milestones
under the Innovent Agreement have not been included in the transaction price, as all these amounts were fully constrained as of December 31,
2020. As of December 31, 2020, no revenue has been recognized or payments received under the Innovent Agreement.
119
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of new product development. Research and development costs
include salaries and benefits, consultants’ fees, process development costs, stock-based compensation, and laboratory supplies, as well as fees paid
to third parties that conduct certain research and development activities on the Company’s behalf. In addition, research and development costs
include the reimbursable costs incurred for the grant agreements, which includes payroll costs for time incurred on projects, laboratory supplies,
and third-party research and development activities.
A substantial portion of the Company’s ongoing research and development activities are conducted by third-party service providers. The Company
records accrued expenses for estimated preclinical study and clinical trial expenses. Estimates are based on the services performed pursuant to
contracts with research institutions, contract research organizations in connection with clinical studies, investigative sites in connection with
clinical studies, vendors in connection with preclinical development activities, and contract manufacturing organizations in connection with the
production of materials for clinical trials. Further, the Company accrues expenses related to clinical trials based on the level of patient enrollment
and activity according to the related agreement. The Company monitors patient enrollment levels and related activity to the extent reasonably
possible and make judgments and estimates in determining the accrued balance in each reporting period. If the Company underestimates or
overestimates the level of services performed or the costs of these services, actual expenses could differ from estimates. To date, the Company has
not experienced significant changes in its estimates of preclinical studies and clinical trial accruals.
Stock-based Compensation
Stock-based compensation for employee awards is measured on the grant date based on the fair value of the award and recognized on a straight-
line basis over the requisite service period. The fair value of options to purchase common stock are measured using the Black-Scholes option-
pricing model. The Company accounts for forfeitures as they occur.
Comprehensive Loss
Comprehensive loss includes net loss and certain changes in stockholders’ equity that are the result of transactions and economic events other than
those with stockholders. The Company’s only element of other comprehensive loss was net unrealized gain (loss) on marketable securities.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities and are measured using
enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the enactment date.
The deferred tax assets are recognized to the extent the Company believes that these assets are more likely than not to be realized. A valuation
allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s
historical operating performance and the recorded cumulative net losses in prior periods, the net deferred tax assets have been fully offset by a
valuation allowance.
The Company records uncertain tax positions using a two-step process. First, the Company determines whether it is more likely than not that the
tax positions will be sustained on the basis of the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not
recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate
settlement with the related tax authority.
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The Company recognizes interest and penalties related to unrecognized tax benefits on the interest expense line and other expense line,
respectively, in the accompanying statements of operations. To date, there have been no interest or penalties charged in relation to the unrecognized
tax benefits.
Employee 401(k) Plan
The Company has a qualified contributory savings plan under Section 401(k) of the Internal Revenue Code (the “Code”) covering substantially all
U.S. employees of Alector. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of
Section 401(k) of the Code. Eligible employees may defer up to 100% of their eligible compensation up to the annual maximum as determined by
the Internal Revenue Service. The Company’s contributions to the plan are discretionary. For the year ended December 31, 2020, the Company
made matching contributions of $0.7 million. The Company did not make any matching contributions for the years ended December 31, 2019 or
2018.
Segments
The Company operates in one segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s
operations on a consolidated basis for purposes of allocating resources.
Recent Accounting Pronouncements
Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic
326). This ASU implements an impairment model, known as the current expected credit loss model that is based on expected losses rather than
incurred losses. For available-for-sale debt securities, entities are required to recognize an allowance for credit losses rather than an other-than-
temporary impairment that reduces the cost basis of the investment. Further, an entity will recognize any changes in estimated credit losses
immediately in earnings. There was no material impact to the Company’s consolidated financial statements from the adoption of ASU No. 2016-
13.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. This ASU
modifies ASC 740 to simplify several aspects of accounting for income taxes, including eliminating certain exceptions to the guidance in ASC 740
related to the approach for intraperiod tax allocation, and the methodology for calculating income taxes in an interim period. The Company has
early adopted this ASU as of January 1, 2020. There was no material impact to the Company’s consolidated financial statements. There was no
material impact to the Company’s consolidated financial statements from the adoption of ASU No. 2019-12.
3.
Fair Value Measurements
The following tables summarize the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:
Money market funds
U.S. government treasury securities
Corporate bonds
Total cash equivalents and marketable
securities
Fair Value
Hierarchy
Amortized
Cost
December 31, 2020
Unrealized
Gains
(In thousands)
Unrealized
Losses
Fair Market
Value
$
Level 1
Level 1
Level 2
37,951 $
357,725
5,000
— $
620
—
— $
(6)
—
37,951
358,339
5,000
$
400,676 $
620 $
(6) $
401,290
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Money market funds
U.S. government treasury securities
Commercial paper
Corporate bonds
Total cash equivalents and marketable
securities
Fair Value
Hierarchy
Amortized
Cost
December 31, 2019
Unrealized
Gains
(In thousands)
Unrealized
Losses
Fair Market
Value
$
Level 1
Level 1
Level 2
Level 2
61,104 $
227,446
43,735
10,103
— $
149
—
3
— $
(8)
—
(2)
61,104
227,587
43,735
10,104
$
342,388 $
152 $
(10) $
342,530
The Company’s Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models for
which all significant inputs are observable. There were no transfers between levels of the fair value hierarchy during the year ended December 31,
2020. The Company classifies marketable securities available to fund current operations as current assets. As of December 31, 2020, the remaining
contractual maturities of $336.9 million investments were less than one year and $64.4 million investments were after one year through two years.
The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis, which
may be maturity.
4.
Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consists of the following:
Leasehold improvements
Lab equipment
Furniture and fixtures
Computer equipment
Property and equipment, gross
Less accumulated depreciation and amortization
Total property and equipment, net
Accrued Liabilities
Accrued liabilities consist of the following:
Accrued research and development costs
Accrued employee compensation
Accrued professional services
Accrued property and equipment
Other
Total accrued liabilities
December 31,
2020
2019
(In thousands)
25,542 $
11,610
2,222
1,764
41,138
(10,957)
30,181 $
25,222
10,458
2,031
1,554
39,265
(5,413)
33,852
December 31,
2020
2019
(In thousands)
13,375 $
7,288
1,094
428
353
22,538 $
6,400
5,730
2,040
3,471
615
18,256
$
$
$
$
5.
Commitments and Contingencies
On June 18, 2019, the Company initiated a confidential arbitration proceeding against Dr. Asa Abeliovich, the Company’s former consulting co-
founder, related to alleged breaches of his consulting agreement and the improper use of Alector’s confidential information that he learned during
the course of rendering services to the Company as consulting Chief Scientific Officer/Chief Innovation Officer. An independent arbitrator issued
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a confidential decision in favor of Alector, finding Dr. Abeliovich liable for breach of his confidentiality agreement and for spoliation based on his
destruction of documents relevant to the proceeding. The arbitrator awarded damages for breach of the agreement and sanctions for the spoliation,
as well as violation of orders during the proceeding, and the amount of such monetary damages will be determined in a pending further proceeding.
6.
Leases
In June 2018, the Company signed a lease agreement to lease approximately 105,000 square feet in office and laboratory space in South San
Francisco which serves as the Company’s headquarters (the “Headquarters”). The lease expires in 2029 with an option to renew for a period of ten
years. The landlord paid for $15.7 million of tenant improvements. In connection with the lease, the Company entered into a letter of credit
arrangement in the amount of $1.5 million as collateral for the lease, which is classified as restricted cash on the consolidated balance sheets. In
October 2020, the Company signed a lease agreement to lease approximately 18,700 square feet of office and laboratory space in Newark,
California. The lease term ends on February 6, 2028 with an option to extend for an additional five years. The landlord is obligated to pay for up to
$0.4 million of tenant improvements. The measurement of the lease liabilities for the leases excludes the options to extend the term of the lease as
such extensions are not reasonably certain to occur. Variable lease costs for all of the Company’s leases consist of operating expenses for the
spaces.
In May 2019, the Company entered into an agreement to sublease approximately 25,000 square feet of the Headquarters (the “Sublease”), which
was amended to approximately 23,600 square feet in December 2020. The Sublease expires in November 2021. The sublessor has the option to
extend the Sublease for one additional year subject to the consent of the Company. The sublessee is required to pay its proportionate share of
operating expenses for the space.
In June 2019, in connection with the Sublease, the Company evaluated the related right-of-use asset for impairment. The lease costs plus
amortization expense of the leasehold improvements in the subleased space exceeded the sublease income over the remaining sublease term. As
such, the Company recorded an impairment charge of $1.2 million in general and administrative expenses to write-down the right-of-use asset such
that no loss is expected to be recognized over the sublease period.
The components of lease expense were as follows:
Operating lease cost
Variable lease cost
Short-term lease cost
Sublease income and reimbursement of variable lease cost
Total
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December 31,
2020
2019
(In thousands)
5,589 $
2,255
—
(2,288)
5,556 $
5,875
1,328
68
(1,263)
6,008
$
$
Rent expense under legacy guidance for the year ended December 31, 2018 was $1.1 million.
As of December 31, 2020, the weighted-average remaining lease term for operating leases was 8.2 years and the weighted-average discount rate
was 8.5%. Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2020 and 2019 was $6.9 million
and $3.2 million, respectively, was included in net cash used in operating activities in our consolidated statements of cash flows.
The following are the lease payments owed under the Company’s operating leases as of December 31, 2020:
2021
2022
2023
2024
2025
Thereafter
Total undiscounted lease payments
Less: Present value adjustment
Total lease liability
(In thousands)
7,872
8,171
8,436
8,732
9,037
30,130
72,378
(21,122)
51,256
$
$
$
7.
Stock-based Compensation
The Company recognized stock-based compensation as follows:
Research and development
General and administrative
Total stock-based compensation
Determination of Fair Value
2020
Year Ended December 31,
2019
(In thousands)
2018
$
$
14,980 $
15,542
30,522 $
8,031 $
8,250
16,281 $
4,195
2,730
6,925
The estimated grant-date fair value of all the Company’s options to purchase common stock was calculated using the Black-Scholes option pricing
model, based on the following assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
2020
5.3-6.1
74%-78%
0.3% - 1.8%
Year Ended December 31,
2019
5.3 – 6.1
76% – 82%
1.4% – 2.6%
0%
0%
2018
5.1 – 6.1
73% – 81%
2.5% – 3.1%
0%
The fair value of each stock option was determined by the Company using the methods and assumptions discussed below. Each of these inputs is
subjective and generally requires significant judgment and estimation by management.
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The expected term was
derived by using the simplified method which uses the midpoint between the average vesting term and the contractual expiration period of
the stock-based award.
Expected Volatility—The Company has limited information on the volatility of stock options as the shares were not actively traded on any
public markets prior to February 7, 2019. The expected volatility was derived from the historical stock volatilities of comparable peer
public companies within its industry. These companies are considered to be comparable to the Company’s business over a period
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equivalent to the expected term of the stock-based awards. In 2020, the Company began giving weight to in its own historical volatility in
the determination of expected volatility.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon
U.S. Treasury notes with maturities approximately equal to the expected term.
Expected Dividend Rate—The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its
common stock underlying its stock options in the foreseeable future.
Restricted Common Stock
The restricted common stock generally vests over a four-year period with straight-line vesting with a 25% one-year cliff.
Activity for the restricted common stock is shown below:
Unvested restricted common stock as of
December 31, 2018
Vested
Forfeited
Unvested restricted common stock as of
December 31, 2019
Vested
Forfeited
Unvested restricted common stock as of
December 31, 2020
Weighted
Average
Grant
Date Fair
Value per
Share
6.95
6.95
6.95
6.95
6.95
6.95
6.95
Number of
Shares
1,917,848 $
(866,037)
(56,973)
994,838
(726,659)
(81,754)
186,425
As of December 31, 2020, total unrecognized stock-based compensation related to unvested restricted common stock issued to employees was
$0.9 million, which the Company expects to recognize over a remaining weighted-average period of 0.8 years.
2019 Equity Incentive Plan
On February 6, 2019, the Company adopted the 2019 Equity Incentive Plan (2019 Plan) under which the Board may issue incentive stock options,
nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, and performance shares to the
Company’s employees, directors, and consultants. The Company’s 2017 Stock Option and Grant Plan (2017 Plan) was terminated; however, shares
subject to awards granted under it will continue to be governed by the 2017 Plan. Shares reserved for issuance but not issued pursuant to, or not
subject to, awards granted under the 2017 Plan were added to the available shares in the 2019 Plan. Shares subject to awards granted under the
2017 Plan that are repurchased by, or forfeited to, the Company will also be reserved for issuance under the 2019 Plan. The board of directors, or a
committee appointed by the board of directors, has the authority to determine to whom options or shares will be granted, the number of shares, the
term, and the exercise price. If an individual owns stock representing 10% or more of the outstanding shares, the exercise price of each share shall
be at least 110% of the fair market value and the term of the award shall not exceed five years. All other options granted under the 2019 Plan must
have an exercise price at least equal to the fair market value on the date of grant and have a term not to exceed ten years. The shares generally vest
over a four-year period with straight-line vesting with a 25% one-year cliff. As of December 31, 2020, the Company had reserved 15,628,217
shares of common stock for issuance under the 2019 Plan, of which 2,973,219 shares were available for issuance.
125
Activity for the options to purchase common stock shown below:
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited
Outstanding as of December 31, 2020
Exercisable as of December 31, 2020
Vested and expected to vest as of December 31,
2020
Number of
Options
5,063,688 $
3,738,071
(180,287)
(178,648)
8,442,824
5,597,148
(655,772)
(729,202)
12,654,998 $
3,588,568 $
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
8.94
17.74
8.43
11.52
12.79
15.35
9.65
14.96
13.96
12.74
8.7 $
8.1 $
39,633
13,393
12,654,998 $
13.96
8.7 $
39,633
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the
Company’s common stock for stock options that were in-the-money. The aggregate intrinsic value of options exercised was $11.1 million and $1.8
million for the years ended December 31, 2020 and 2019. There were no options exercised in 2018. The weighted-average grant-date fair value per
share of options granted was $10.14, $12.06, and $6.27, for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31,
2020, total unrecognized stock-based compensation related to unvested stock options was $82.9 million, which the Company expects to recognize
over a remaining weighted-average period of 2.6 years.
2019 Employee Stock Purchase Plan
On February 6, 2019, the Company adopted the 2019 Employee Stock Option Plan (2019 ESPP). The 2019 ESPP will enable eligible employees of
the Company to purchase shares of common stock at a discount. Each offering period will be approximately six months long beginning on the first
trading day on or after December 1 and June 1 each year. ESPP participants purchase shares of common stock at a price per share equal to 85% of
the lesser of (1) the fair market value per share of the common stock on the first trading day of the offering period or (2) the fair market value of the
common stock on the purchase date. As of December 31, 2020, there was $0.4 million in unrecognized compensation expense related to the 2019
ESPP to be recognized over five months.
8.
Income Taxes
The Company incurred net operating losses for the years ended December 31, 2020, 2019, and 2018. The Company has not reflected a benefit of
such net operating loss carryforwards in the accompanying financial statements. The Company has established a full valuation allowance against its
net deferred tax assets due to the uncertainty surrounding realization of such assets.
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A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows for the years ended December 31, 2020, 2019, and
2018 (in thousands):
Tax benefit at federal statutory rate
State income taxes
Tax credits
Uncertain tax positions
Stock-based compensation
Nondeductible expense
Tax benefit recognized on utilization of attributes previous
reserved
Deferred adjustment from amended tax return
Change in valuation allowance
Others
Income tax provision
$
$
Year Ended December 31,
2020
(39,948) $
(16,570)
(8,010)
2,003
353
51
—
—
62,280
(159)
— $
2019
(22,081) $
(4,694)
(6,530)
2,044
1,493
124
(13,582)
(1,073)
44,748
(449)
— $
2018
(10,972)
—
(2,387)
708
1,251
58
—
—
11,346
(4)
—
The tax effects of temporary differences that give rise to significant components of the Company’s deferred tax assets consist of (in thousands):
Deferred tax assets:
Net operating loss
Accrued bonus
Tax credits
Stock-based compensation
Deferred revenue
Lease liability
Others
Gross deferred tax assets
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Right-of-use assets
Others
Gross deferred tax liabilities
Deferred tax assets, net
December 31,
2020
2019
$
$
$
$
54,382 $
1,201
13,000
6,493
32,129
12,457
463
120,125
(105,226)
14,899 $
(6,815) $
(7,934)
(150)
(14,899)
— $
2,223
370
7,319
2,015
37,621
11,781
209
61,538
(47,053)
14,485
(7,495)
(6,990)
—
(14,485)
—
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred
assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Evaluating the need for a valuation allowance for deferred tax assets often
requires judgment and analysis of all the positive and negative evidence available, including cumulative losses in recent years and projected future
taxable income, to determine whether all or some portion of the deferred tax assets will not be realized. As of December 31, 2020, the Company
has utilized a full valuation allowance to offset the net deferred tax assets as the Company believes it is not more likely than not that the net
deferred tax assets will be fully realizable. The valuation allowance for deferred tax assets increased by $58.2 million during the year ended
December 31, 2020.
As of December 31, 2020, the Company had federal and state net operating loss (NOL) carryforwards of approximately $195.3 million and
$191.4 million, respectively. Federal NOL carryforwards have an indefinite life and deductions cannot exceed 80% of taxable income. State NOL
carryforwards will begin to expire as early as 2030, if not utilized, or have an indefinite life. As of December 31, 2020, the Company also had
127
federal and California tax credit carryforward of approximately $14.4 million and $3.8 million, respectively. The federal tax credits will begin to
expire in 2036 while the California tax credits have no expiration date.
Generally, utilization of the NOL carryforwards and credits may be subject to an annual limitation due to the ownership change limitations
provided by Section 382, which provides for limitations on NOL carryforwards and certain built-in losses following ownership changes, and
Section 383, which provides for special limitations on certain excess credits, etc., of the Code, and similar state provisions. Accordingly, the
Company’s ability to utilize NOL carryforwards may be limited as the result of such an “ownership change.” The carryforwards could be subject to
an annual limitation, resulting in a reduction in the gross deferred tax assets before considering the valuation allowance. Further, a portion of the
carryforwards may expire before being applied to reduce future earnings. The Company is not aware of any changes in ownership that would result
in material limitations under Section 382 at this time.
The following table summarizes the activity related to the Company’s unrecognized tax benefits for the years ended December 31, 2020 and 2019
(in thousands):
Balance as of December 31, 2018
$
1,507
Decreases related to tax positions taken during the
prior year
Increases related to tax positions taken during the
current year
Balance as of December 31, 2019
Decreases related to tax positions taken during the
prior year
Increases related to tax positions taken during the
current year
Balance as of December 31, 2020
$
(80)
1,608
3,035
(446)
2,003
4,592
If the unrecognized tax benefits for uncertain tax positions as of December 31, 2020, is recognized, there will be no impact to the effective tax rate
as the tax benefit would increase the net deferred tax assets, which is currently offset with a full valuation allowance. The Company’s policy is to
include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the consolidated statements of
operations. The Company did not accrue any interest or penalties and does not have any tax positions for interest or penalties for the year ended
December 31, 2020. The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized
tax benefits will significantly change within 12 months of December 31, 2020.
The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon
examination by the taxing authority, based on the technical merits. During the year ended December 31, 2020, the Company recorded a tax reserve
of $2.0 million as a reduction of the tax credit carryover. The Company’s income tax returns generally remain subject to examination by federal
and most state tax authorities. The Company is currently not subject to any income tax audits by federal or state taxing authorities. The statute of
limitations for tax liabilities for all years remains open.
9.
Related Party Transactions
The Company has a collaboration agreement with Adimab, LLC (Adimab) under which the Company is developing antibodies discovered by
Adimab in its AL001 and AL101 product candidates, and the Company is developing antibodies optimized by Adimab in its AL002 and AL003
product candidates (2014 Adimab Agreement). In August 2019, the Company signed a new collaboration agreement with Adimab for research and
development of additional antibodies (2019 Adimab Agreement). The Chief Executive Officer of Adimab is a Co-founder and Chairperson of the
board of directors of Alector. For the years ended December 31, 2020, 2019, and 2018, Alector incurred expenses of zero, $2.8 million, and
$2.3 million for services provided by Adimab, respectively. The Company had no accrued liabilities due to Adimab as of December 31, 2020 and
2019. Under the 2014 Adimab Agreement, the Company will owe up to $3.5 million in milestone payments per program to Adimab for its product
candidates. The Company will also owe low- to mid- single-digit royalty payments for commercial sales of such product candidates. Under the
2019 Adimab Agreement, the
128
Company will owe certain milestone payments per program for its product candidates and low single-digit royalty payments for commercial sales
of such product candidates.
On January 30, 2020, in connection with the Company’s follow-on offering, a member of the Company’s board of directors purchased 20,000
shares of the Company’s common stock at the public offering price of $25.00 per share.
10.
Net Loss Per Share
The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented
due to their anti-dilutive effect:
Convertible preferred stock
Restricted stock subject to future vesting
Options to purchase common stock
Shares committed under ESPP
Total
2020
Year Ended December 31,
2019
—
186,425
12,654,998
86,677
12,928,100
—
994,838
8,442,824
44,464
9,482,126
2018
45,374,836
1,917,848
5,063,688
—
52,356,372
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2020, management, with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer,
performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-
15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial and
Accounting Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based on this evaluation, our Principal Executive Officer and Principal Financial and Accounting
Officer concluded that, as of December 31, 2020, the design and operation of our disclosure controls and procedures were effective at a reasonable
assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2020, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles. Under the supervision of and with the participation of our
principal executive officer and principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2020 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—
Integrated Framework” (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of
December 31, 2020.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Alector, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Alector, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control
—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In
our opinion, Alector, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2020 and 2019, the
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related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for
each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 25, 2021 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s 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 for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ Ernst & Young LLP
San Jose, California
February 25, 2021
Item 9B. Other Information.
None
131
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item will be contained in our definitive proxy statement to be filed with the SEC on Schedule 14A in connection with
the Proxy Statement to be filed within 120 days after December 31, 2020, and is incorporated herein by reference.
Item 11. Executive Compensation.
Information required by this item will be contained in the Proxy Statement to be filed within 120 days of December 31, 2020, and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item will be contained in the Proxy Statement to be filed within 120 days of December 31, 2020, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item will be contained in the Proxy Statement to be filed within 120 days of December 31, 2020, and is incorporated
herein by reference.
Item 14. Principal Accounting Fees and Services.
Information required by this item will be contained in the Proxy Statement to be filed within 120 days of December 31, 2020, and is incorporated
herein by reference.
132
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this report:
(1)
Financial Statements
The consolidated financial statements of Alector, Inc. are filed as part of this report on Form 10-K under Item 8. Financial Statements and
Supplementary Data.
(2)
Financial Statement Schedules
All other schedules have been omitted because they are not required, not inapplicable, or the required information is included in the
consolidated financial statements or notes thereto.
(3)
Exhibits
The documents listed in the Exhibit Index are incorporated by reference or are filed with this report, in each case as indicated herein
(numbered in accordance with Item 601 of Regulation S-K).
Item 16. Form 10-K Summary
None.
133
Exhibit Index
Number
Exhibit Title
Amended and Restated Certificate of Incorporation of the
Registrant.
Amended and Restated Bylaws of the Registrant.
Amended and Restated Registration Rights Agreement among
the Registrant and certain of its stockholders, dated April 26,
2018.
Incorporated by Reference
File No.
Exhibit
Filing
Date
Filed
Herewith
001-38792
001-38792
3.1
3.1
2/11/2019
10/6/2020
Form
8-K
8-K
S-1
333-229152
4.1
1/7/2019
Specimen common stock certificate of the Registrant.
S-1
333-229152
4.2
1/7/2019
Description of securities of the Registrant.
Form of Indemnification Agreement between the Registrant
and each of its directors and executive officers.
S-1
333-229152
10.1
1/7/2019
X
2017 Stock Option and Grant Plan, as amended, and forms of
agreement thereunder.
S-1
333-229152
10.2
1/7/2019
2019 Equity Incentive Plan and forms of agreements
thereunder.
S-1
333-229152
10.3
1/7/2019
2019 Employee Stock Purchase Plan
S-1
333-229152
10.4
1/7/2019
Confirmatory Offer Letter between the Registrant and Arnon
Rosenthal, Ph.D.
S-1/A 333-229152
10.5
1/29/2019
Confirmatory Offer Letter between the Registrant and Robert
Paul, M.D., Ph.D.
S-1/A 333-229152
10.6
1/29/2019
Confirmatory Offer Letter between the Registrant and Robert
King, Ph.D.
S-1/A 333-229152
10.7
1/29/2019
Confirmatory Offer Letter between the Registrant and Sabah
Oney, Ph.D.
S-1/A 333-229152
10.8
1/29/2019
Confirmatory Offer Letter between the Registrant and Calvin
Yu.
Executive Incentive Compensation Plan.
Outside Director Compensation Policy.
Form of Change in Control and Severance Agreement between
the Registrant and certain of its executive officers.
S-1/A 333-229152
10.9
1/29/2019
S-1
333-229152
10.10
1/7/2019
10-K
001-38792
10.11
3/24/2020
S-1
333-229152
10.12
1/7/2019
Lease between the Registrant and HCP Oyster Point III, LLC,
dated June 27, 2018.
S-1
333-229152
10.14
1/7/2019
Third Amended and Restated Collaboration Agreement
between the Registrant and Adimab, dated September 19, 2016,
as amended.
Co-Development and Option Agreement between the
Registrant and AbbVie Biotechnology, Ltd., dated October 16,
2017.
S-1
333-229152
10.15
1/7/2019
S-1
333-229152
10.16
1/7/2019
2019 Collaboration Agreement between the Registrant and
Adimab, LLC, dated August 16, 2019.
10-Q
001-38792
10.17
11/12/2019
Offer Letter between the Registrant and Shehnaaz Suliman,
M.D.
8-K
001-38792
99.1
12/11/2019
3.1
3.2
4.1
4.2
4.3
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13
10.14#
10.15#
10.16#
10.17+
21.1
23.1
24.1
List of subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the signature page to this
Annual Report on Form 10-K).
134
X
X
X
31.1
31.2
32.1*
32.2*
Certification of Principal Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of 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 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 Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
X
X
X
X
X
X
X
X
X
X
+
#
*
Indicated management contract or compensatory plan.
Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment and this exhibit has been filed
separately with the SEC.
The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and
Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any
general incorporation language contained in such filing.
135
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 25, 2021
ALECTOR, INC.
By: /s/ Arnon Rosenthal
Arnon Rosenthal, Ph.D.
Co-founder and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Arnon Rosenthal,
Ph.D., Shehnaaz Suliman, M.D., and Calvin Yu as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and substitution,
for him or her and in his or her name, place, and stead, in any and all capacities (including his capacity as a director and/or officer of Alector, Inc.) to sign
any or all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they, he or she
might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or any of them, or their, his, or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature
/s/ Arnon Rosenthal
Arnon Rosenthal, Ph.D.
/s/ Calvin Yu
Calvin Yu
/s/ Tillman Gerngross
Tillman Gerngross, Ph.D.
/s/ Paula Hammond
Paula Hammond, Ph.D.
/s/ Louis J. Lavigne, Jr.
Louis J. Lavigne, Jr.
/s/ Terry McGuire
Terry McGuire
/s/ Richard Scheller
Richard Scheller, Ph.D.
/s/ David Wehner
David Wehner
Title
Co-founder, Chief Executive Officer, and
Director
(Principal Executive Officer)
Date
February 25, 2021
Vice President, Finance
(Principal Financial and Accounting Officer)
February 25, 2021
Chairperson of the Board
February 25, 2021
Director
Director
Director
Director
Director
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
136
Signature
Title
/s/ Kristine Yaffe
Kristine Yaffe, M.D.
Director
Date
February 25, 2021
137
DESCRIPTION OF CAPITAL STOCK
Exhibit 4.3
The following description summarizes certain important terms of the capital stock of Alector, Inc. (the “company,” “we,” “us” and “our”), as
well as certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws. This summary does not
purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended
and restated bylaws, copies of which have been filed as exhibits to this Annual Report on Form 10-K, as well as by the applicable provisions
of the Delaware General Corporation Law.
Authorized Capital Stock
Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.0001 per share, and 20,000,000 shares of
convertible preferred stock, par value $0.0001 per share. All of our outstanding shares of common stock are fully paid and non-assessable.
Common Stock
Our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “ALEC.” The transfer agent and registrar for
our common stock is American Stock Transfer & Trust Company, LLC. The transfer agent and registrar’s address is 6201 15th Avenue,
Brooklyn, New York 11219.
Voting Rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the
election of directors. Our certificate of incorporation and bylaws do not provide for cumulative voting rights. Because of this, the holders of a
plurality of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they
should so choose. With respect to matters other than the election of directors, at any meeting of the stockholders at which a quorum is present
or represented, the affirmative vote of a majority of the voting power of the shares present in person or represented by proxy at such meeting
and entitled to vote on the subject matter shall be the act of the stockholders, except as otherwise required by law. The holders of a majority
of the stock issued and outstanding and entitled to vote, present in person, or represented by proxy, shall constitute a quorum for the
transaction of business at all meetings of the stockholders.
Dividends
Subject to preferences that may be applicable to any then-outstanding convertible preferred stock, holders of our common stock are entitled
to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution, or winding up, holders of our common stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any
liquidation preference granted to the holders of any then-outstanding shares of convertible preferred stock.
Rights and Preferences
Holders of our common stock have no preemptive, conversion, subscription, or other rights, and there are no redemption or sinking fund
provisions applicable to our common stock. The rights, preferences, and privileges of the holders of our common stock are subject to and
may be adversely affected by the rights of the holders of shares of any series of our convertible preferred stock that we may designate in the
future.
Preferred Stock
Our board of directors has the authority, without further action by the stockholders, to issue up to 20,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges, and restrictions thereof. These rights, preferences, and privileges could include
dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, sinking fund terms, and the number of shares
constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. The issuance of
preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring, or
preventing change in our control or other corporate action.
Registration Rights of Certain Stockholders
Under our registration rights agreement, as amended, certain holders of shares of common stock or their transferees have the right to require
us to register the offer and sale of their shares, or to include their shares in any registration statement we file, in each case as described below.
Demand Registration Rights
Certain holders of shares of our common stock are entitled to certain demand registration rights. The holders of at least 25% of the shares (or
a lesser percent for which the anticipated aggregate offering price would be at least $15 million) having registration rights then outstanding
can request that we file a registration statement to register the offer and sale of their shares. We are only obligated to effect up to two such
registrations. Each such request for registration must cover securities the anticipated aggregate public offering price of which, before
deducting underwriting discounts and commissions, is at least $15 million. These demand registration rights are subject to specified
conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain
circumstances. If we determine that it would be seriously detrimental to us and our stockholders to effect such a demand registration, we have
the right to defer such registration, not more than once in any twelve month period, for a period of up to 60 days.
Form S-3 Registration Rights
Certain holders of shares of our common stock are entitled to certain Form S-3 registration rights. At any time when we are eligible to file a
registration statement on Form S-3, the holders of the shares having these rights then outstanding can request that we register the offer and
sale of their shares of our common stock on a registration statement on Form S-3 so long as the request covers securities the anticipated
aggregate public offering price of which is at least $3 million. These stockholders may make an unlimited number of requests for registration
on a registration statement on Form S-3. However, we will not be required to effect a registration
-2-
on Form S-3 if we have effected two such registrations within the twelve month period preceding the date of the request. Additionally, if we
determine that it would be seriously detrimental to us and our stockholders to effect such a demand registration, we have the right to defer
such registration, not more than once in any twelve month period, for a period of up to 60 days.
Piggyback Registration Rights
Certain holders of shares of our common stock are entitled to certain “piggyback” registration rights. If we propose to register the offer and
sale of shares of our common stock under the Securities Act, all holders of these shares then outstanding can request that we include their
shares in such registration, subject to certain marketing and other limitations, including the right of the underwriters to limit the number of
shares included in any such registration statement under certain circumstances. As a result, whenever we propose to file a registration
statement under the Securities Act, other than with respect to (1) a registration related to any employee benefit plan or a corporate
reorganization or other transaction covered by Rule 145 promulgated under the Securities Act, (2) a registration in which the only stock being
registered is common stock issuable upon conversion of debt securities also being registered, or (3) a registration on any form that does not
include substantially the same information as would be required to be included in a registration statement covering the sale of our common
stock, the holders of these shares are entitled to notice of the registration and have the right, subject to certain limitations, to include their
shares in the registration.
Expenses of Registration
We will pay all expenses relating to any demand registrations, Form S-3 registrations, and piggyback registrations, subject to specified
exceptions.
Termination
The registration rights terminate upon the earliest of (1) the date that is five years after the closing of our initial public offering and (2) a
deemed liquidation event (as defined in our amended and restated certificate of incorporation, in effect prior to the completion of our initial
public offering).
Anti-Takeover Effects of Certain Provisions of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our
Amended and Restated Bylaws
Certain provisions of Delaware law and certain provisions that are included in our amended and restated certificate of incorporation and
amended and restated bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter, or prevent a tender
offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being
paid over the market price for the shares held by stockholders.
Preferred Stock
Our amended and restated certificate of incorporation contains provisions that permit our board of directors to issue, without any further vote
or action by the stockholders, shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares
constituting the series and the designation of the series, the voting rights (if any) of the shares of the series and the powers, preferences, or
relative, participation, optional, and other special rights, if any, and any qualifications, limitations, or restrictions, of the shares of such series.
-3-
Classified Board of Directors
Our amended and restated certificate of incorporation provides that our board of directors is divided into three classes, designated Class I,
Class II, and Class III. Each class is an equal number of directors, as nearly as possible, consisting of one-third of the total number of
directors constituting the entire board of directors. The term of initial Class I directors shall terminate on the date of the 2022 annual meeting,
the term of the initial Class II directors shall terminate on the date of the 2020 annual meeting, and the term of the initial Class III directors
shall terminate on the date of the 2021 annual meeting. At each annual meeting of stockholders, successors to the class of directors whose
term expires at that annual meeting will be elected for a three-year term.
Removal of Directors
Our amended and restated certificate of incorporation provides that stockholders may only remove a director for cause by a vote of no less
than a majority of the shares present in person or by proxy at the meeting and entitled to vote.
Director Vacancies
Our amended and restated certificate of incorporation authorizes only our board of directors to fill vacant directorships.
No Cumulative Voting
Our amended and restated certificate of incorporation provides that stockholders do not have the right to cumulate votes in the election of
directors.
Special Meetings of Stockholders
Our amended and restated certificate of incorporation and amended and restated bylaws provides that, except as otherwise required by law,
special meetings of the stockholders may be called only by the Chairperson of our board of directors, the Chief Executive Officer, the
President, or our board of directors acting pursuant to a resolution adopted by a majority of the board of directors.
Advance Notice Procedures for Director Nominations
Our bylaws provide that stockholders seeking to nominate candidates for election as directors at an annual or special meeting of stockholders
must provide timely notice thereof in writing. To be timely, a stockholder’s notice generally will have to be delivered to and received at our
principal executive offices before notice of the meeting is issued by the secretary of the company, with such notice being served not less than
90 nor more than 120 days before the meeting. Although the amended and restated bylaws do not give the board of directors the power to
approve or disapprove stockholder nominations of candidates to be elected at an annual meeting, the amended and restated bylaws may have
the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the
company.
-4-
Action by Written Consent
Our amended and restated certificate of incorporation and amended and restated bylaws provide that any action to be taken by the
stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent.
Amending our Certificate of Incorporation and Bylaws
Our amended and restated certificate of incorporation may be amended or altered in any manner provided by the Delaware General
Corporation Law (“DGCL”). Our amended and restated bylaws may be adopted, amended, altered, or repealed by stockholders only upon
approval of at least majority of the voting power of all the then outstanding shares of the common stock, except for any amendment of certain
provisions set forth in the bylaws, which would require the approval of a two-thirds majority of our then outstanding common stock.
Additionally, our amended and restated certificate of incorporation provides that our bylaws may be amended, altered, or repealed by the
board of directors.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock are available for future issuances without stockholder approval,
except as required by the listing standards of Nasdaq, and could be utilized for a variety of corporate purposes, including future offerings to
raise additional capital, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and
preferred stock could render more difficult or discourage an attempt to obtain control of the company by means of a proxy contest, tender
offer, merger, or otherwise.
Exclusive Jurisdiction
Our amended and restated bylaws provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State
of Delaware, or if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware, is the exclusive
forum for (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed
by any director, officer, or other employee to the us or our stockholders, (iii) any action arising pursuant to any provision of the DGCL or our
certificate of incorporation or bylaws (as either may be amended from time to time), or (iv) any action asserting a claim governed by the
internal affairs doctrine, except, in each case, (A) any claim as to which such court determines that there is an indispensable party not subject
to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within 10 days
following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than such court, or (C) for which
such court does not have subject matter jurisdiction. Although our amended and restated bylaws contain the exclusive of forum provisions
described above, it is possible that a court could find that such provision is inapplicable for a particular claim or action or that such provision
is unenforceable, and our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and
regulations thereunder.
Business Combinations with Interested Stockholders
We are governed by Section 203 of the DGCL. Subject to certain exceptions, Section 203 of the DGCL prohibits a public Delaware
corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any
person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for
a period of three
-5-
years following the time that such stockholder became an interested stockholder, unless (i) prior to such time the board of directors of such
corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the
voting stock of such corporation outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned
(A) by persons who are directors and also officers of such corporation and (B) by employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) at
or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of
stockholders (and not by written consent) by the affirmative vote of at least 66 2/3% of the outstanding voting stock of such corporation not
owned by the interested stockholder.
Our amended and restated certificate of incorporation and our amended and restated bylaws provide that we must indemnify our directors and
officers to the fullest extent authorized by the DGCL. We are expressly authorized to, and do, carry directors’ and officers’ insurance
providing coverage for our directors, officers and certain employees for some liabilities. We believe that these indemnification provisions and
insurance are useful to attract and retain qualified directors and executive directors.
The limitation on liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders.
In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and
officers pursuant to these indemnification provisions.
-6-
Alector LLC
SUBSIDIARIES OF REGISTRANT
Exhibit 21.1
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1)
(2)
Registration Statement (Form S-3 No. 333-238230) of Alector, Inc., and
Registration Statement (Form S-8 No. 333-237369) pertaining to the 2019 Equity Incentive Plan and 2019 Employee
Stock Purchase Plan of Alector, Inc.,
of our reports dated February 25, 2021, with respect to the consolidated financial statements of Alector, Inc. and the
effectiveness of internal control over financial reporting of Alector, Inc. included in this Annual Report (Form 10-K) of Alector, Inc.
for the year ended December 31, 2020.
Exhibit 23.1
/s/ Ernst & Young LLP
San Jose, California
February 25, 2021
A member firm of Ernst & Young Global Limited
A member firm of Ernst & Young Global Limited
Exhibit 31.1
I, Arnon Rosenthal, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Alector, Inc;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
(d)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 25, 2021
/s/ Arnon Rosenthal
Arnon Rosenthal, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Calvin Yu, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Alector, Inc;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
(d)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 25, 2021
/s/ Calvin Yu
Calvin Yu
Vice President, Finance
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Alector, Inc. (the “Company”) for the period ended December 31,2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: February 25, 2021
/s/ Arnon Rosenthal
Arnon Rosenthal, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Alector, Inc. (the “Company”) for the period ended December 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: February 25, 2021
/s/ Calvin Yu
Calvin Yu
Vice President, Finance
(Principal Financial and Accounting Officer)