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, 2019
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 001-38582
Allakos Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
975 Island Drive, Suite 201
Redwood City, California
(Address of principal executive offices)
45-4798831
(I.R.S. Employer
Identification No.)
94065
(Zip Code)
Registrant’s telephone number, including area code: (650) 597-5002
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.001
Trading Symbol(s)
ALLK
Name of Each Exchange on Which Registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the 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
Non-accelerated filer
Emerging growth company
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Accelerated filer
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 standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the common stock held by non-affiliates of the Registrant based on the closing price of the Registrant’s Common Stock on the Nasdaq Global Select Market as of June
28, 2019 was $959.2 million.
The number of shares of Registrant’s Common Stock outstanding as of February 20, 2020 was 48,708,305.
Portions of the Registrant’s Definitive Proxy Statement relating to the registrant’s 2020 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 2019 fiscal year ended December 31,
2019.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
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i
Item 1. Business.
Overview
PART I
We are a clinical stage biotechnology company developing antolimab (AK002), our wholly owned monoclonal antibody, for the treatment of various
mast cell and eosinophil related diseases. Antolimab (AK002) selectively targets both mast cells and eosinophils, two types of white blood cells that are
widely distributed in the body and play a central role in the inflammatory response. Inappropriately activated mast cells and eosinophils have been identified
as key drivers in a number of severe diseases affecting the gastrointestinal tract, eyes, skin, lungs and other organs. As such, antolimab (AK002) has the
potential to treat a large number of severe diseases. Antolimab (AK002) completed a randomized, double-blind, placebo-controlled Phase 2 study in patients
with eosinophilic gastritis (“EG”) and/or eosinophilic gastroenteritis (“EGE”; the “ENIGMA study”). The ENIGMA study met all prespecified primary and
secondary endpoints when compared to placebo. Additionally, patients in the ENIGMA study with co-morbid eosinophilic esophagitis (“EoE”) treated with
antolimab (AK002) showed histological and symptomatic improvement when compared to placebo. Based on these results from the ENIGMA study, we plan
to initiate a Phase 3 study in patients with EG and/or EGE and a Phase 2/3 study in patients with EoE.
Antolimab (AK002) also showed promising activity in clinical studies in chronic urticaria (“CU”), indolent systemic mastocytosis (“ISM”), and
severe allergic conjunctivitis (“SAC”). In addition, improvements also were observed in atopic comorbidities such as asthma, atopic dermatitis, and allergic
rhinitis. The activity observed in these studies suggests that antolimab (AK002) could provide significant benefit to patients suffering from these diseases and
highlights the potential of antolimab (AK002) to broadly inhibit mast cells and deplete eosinophils in different disease settings.
Figure 1. Select Mast Cell and Eosinophil Related Diseases
Figure 1: We have completed studies in the indications shown in bold
1
Despite the knowledge that mast cells and eosinophils drive many pathological conditions, there are no approved therapies that selectively target both
mast cells and eosinophils. Antolimab (AK002) binds to Siglec-8, an inhibitory receptor found on mast cells and eosinophils, which represents a novel way to
selectively deplete or inhibit these important immune cells and thereby potentially resolve inflammation. We believe antolimab (AK002) is the only Siglec-8
targeting antibody currently in clinical development and may have advantages over current treatment options available to patients for the diseases we are
pursuing.
Antolimab (AK002) has received orphan drug designation for EG and EGE from the U.S. Food and Drug Administration (“FDA”). EG and EGE are
a group of orphan gastrointestinal diseases characterized by severe abdominal pain, nausea, diarrhea, bloating, cramping, early satiety, loss of appetite, and
vomiting resulting from inflammation caused by mast cells and eosinophils. There are no approved therapies for EG and EGE and their estimated prevalence
in the United States is approximately 50,000 patients. However, based on our conversations with gastroenterologists and our own work, we believe these
diseases may be significantly under-diagnosed or mis-diagnosed as other gastrointestinal diseases and are conducting a non-interventional study to further
understand the prevalence of EG and EGE. In the ENGIMA study, tissue eosinophils were reduced by 95% in patients treated with antolimab (AK002) versus
a 10% increase in tissue eosinophils for patients receiving placebo over the same treatment period. Symptoms were reduced by 53% for patients receiving
antolimab (AK002) versus a decrease in symptoms of 24% for patients receiving placebo. Furthermore, 69% of patients receiving antolimab (AK002) met the
predefined response criteria versus 5% of patients receiving placebo. All antolimab (AK002) results were statistically significant relative to placebo. Patients
completing the ENIGMA study, including those included in the placebo arm, were offered the opportunity to enter a long-term extension for which they will
receive antolimab (AK002). Of the total patients eligible to participate, 92% elected to enter the long-term extension study. We expect to report efficacy and
safety results from the long-term extension study in the first half of 2020. Based on the results of the ENIGMA study, we are planning to initiate a Phase 3
study in patients with EG and/or EGE in the first quarter of 2020.
In addition, in the ENIGMA study approximately 40% of the patients had comorbid EoE, a severe orphan gastrointestinal disease characterized by
dysphagia, or difficulty swallowing, nausea, and vomiting resulting from inflammation caused by mast cells and eosinophils. Antolimab (AK002) has
received orphan drug designation for EoE from the FDA. The estimated prevalence of EoE in the United States is approximately 200,000 patients and there
are no treatments currently approved specifically for this disease. In the ENIGMA study, patients with co-morbid EoE receiving antolimab (AK002) had
tissue eosinophil reductions and improvements in dysphagia. Specifically, 93% of patients receiving antolimab (AK002) showed a tissue response ≤6
eosinophils per high powered field (“HPF”) versus 11% of patients receiving placebo. Additionally, dysphagia improved by 53% in patients receiving
antolimab (AK002) versus 17% for patients receiving placebo. Based on these observations, we are planning to initiate a double-blind, randomized, placebo-
controlled Phase 2/3 study in patients with EoE in the first quarter of 2020.
During the enrollment phase of the ENIGMA study, we identified a group of patients that had elevated stomach and/or duodenal mast cell counts in
the absence of elevated eosinophils but had similar symptoms and symptom burden as EG and/or EGE patients. Because of the elevated mast cell counts and
lack of other elevated cell types, these patients appear to suffer from mast cell driven gastrointestinal symptoms. We have labelled these conditions Mast Cell
Gastrointestinal Disease (“MGID”). We are currently conducting a six-month open-label Phase 1 study in patients with MGID using antolimab (AK002) and
expect to report safety and efficacy results from this study in the first quarter of 2020. We are also working to further characterize the MGID patient
population and are conducting a non-interventional prevalence study to further understand the prevalence of MGID in the US.
Antolimab (AK002) has also demonstrated activity in three forms of CU, ISM, and SAC. CU is a group of inflammatory skin diseases characterized
by hives and severe itching resulting from the inappropriate activation of mast cells in the skin. In a Phase 2 open-label six-month multiple dose study of
antolimab (AK002) in 45 antihistamine refractory patients with chronic spontaneous urticaria, cholinergic urticaria or dermatographic urticaria, patients
reported high levels of disease control and some patients experienced complete resolution of symptoms. Importantly, antolimab (AK002) also produced high
levels of response in patients that were refractory to omalizumab (“Xolair”), the only biologic treatment option currently approved for use in patients with
CU. This suggests that antolimab (AK002), if approved, could become the treatment of choice for antihistamine refractory CU patients. ISM is a disorder
caused by the release of mast cell derived inflammatory mediators throughout the body
2
resulting in severe symptoms in the skin, gastrointestinal tract, central nervous system, joints, and muscles. There are treatments currently approved for ISM.
In a Phase 1 open-label six-month multiple dose study of antolimab (AK002) in 11 patients with ISM, patients reported substantial improvements in
symptoms and improved quality of life measures. SAC is a group of severe ocular disorders resulting from allergic inflammation of the conjunctiva, and
symptoms include persistent severe ocular pain, itching, sensitivity to light (“photophobia”), foreign body sensation, watering eyes, redness, swelling and the
formation of papillae. In a Phase 1 open-label six-month multiple dose study of antolimab (AK002) in 29 patients with SAC, patients administered antolimab
(AK002) reported a 78% median improvement in ocular symptoms by Allergic Conjunctivitis Symptom (“ACS”) Score and a 71% median improvement in
physician assessed signs and symptoms using the Ocular Symptom Score (“OSS”). In addition, patients suffering from comorbid atopic dermatitis, asthma
and allergic rhinitis, despite treatment with currently available therapies, reported improvements in their symptoms while receiving antolimab (AK002). The
activity observed in CU, ISM, and SAC suggest that antolimab (AK002) could provide meaningful benefit to patients suffering from these diseases and
highlight the potential of antolimab (AK002) in multiple disease settings.
Antolimab (AK002) has generally been well tolerated in each of our clinical trials. The most common adverse event has been the occurrence of mild
to moderate infusion related reactions (“IRRs”), consisting of flushing, feeling of warmth, headache, nausea or dizziness, which occurred mostly during the
first infusion and diminished or did not occur on subsequent infusions. To date, antolimab (AK002) has been administered intravenously in our completed and
ongoing clinical studies. We also have developed a high concentration formulation of antolimab (AK002) for subcutaneous administration. We expect to
complete a Phase 1 study in healthy volunteers evaluating the safety, tolerability and pharmacokinetics of a subcutaneous formulation of antolimab (AK002)
in the second half of 2020.
Ongoing or planned studies are listed in Figure 2. See “Antolimab (AK002) Clinical Development” for further detail on these studies.
Figure 2. Antolimab (AK002) Ongoing and Planned Studies
Study
Phase 3 Eosinophilic Gastritis and/or Gastroenteritis
Phase 2/3 Eosinophilic Esophagitis
Phase 1 Mast Cell Gastrointestinal Disease
Phase 2 Eosinophilic Gastritis and/or Gastroenteritis Extension
Phase 1 Bioavailability Study (Intravenous and Subcutaneous Administration)
Non-Interventional EG, EGE, and MGID Prevalence
Understanding the Foundation of Our Approach
Background on Mast Cells, Eosinophils and Siglec-8
Milestone
Initiation Q1 2020
Initiation Q1 2020
Data Q1 2020
Data H1 2020
Data H2 2020
Data H2 2020
Mast cells and eosinophils and are involved in many inflammatory conditions and therefore represent attractive drug targets. Mast cells and
eosinophils can respond to signals from allergens, tissues, bacteria, viruses and also cells of the innate and adaptive immune system. In response, they release
a large variety of mediators which can result in tissue damage, fibrosis and the recruitment and activation of other innate and adaptive immune cells. The
ability to respond to signals from multiple cell types and the diverse array of mediators that they produce place mast cells and eosinophils in the center of
multiple aspects of the inflammatory response.
Eosinophils are normally present in the blood and tissues, especially in the mucosal linings of the respiratory and gastrointestinal tract. However, they
can be recruited to any site of the body in the setting of inflammation. Mast cells reside within tissues and all vascularized organs, often located in close
proximity to blood vessels, nerves and lymphatics. Sites include the dermis, gut mucosa and submucosa, conjunctiva and pulmonary alveoli and airways. As a
result of their widespread location and potent inflammatory activity, mast cells and eosinophils have been identified as key drivers in a number of severe
diseases of the gastrointestinal tract, eyes, skin and lungs as well as diseases which affect multiple organ systems.
3
Siglec-8 is an inhibitory receptor selectively expressed on eosinophils, mast cells and, to a lesser extent, on basophils. Because Siglec-8 is expressed
in high abundance only on mast cells and eosinophils, it presents a novel way to selectively target these important immune cells. As an inhibitory receptor, the
natural function of Siglec-8 is to counteract activating signals within mast cells and eosinophils that lead to an inflammatory response. By binding to Siglec-8,
antolimab (AK002) is able to selectively target mast cells and eosinophils to resolve inflammation.
Mast cells and Eosinophils are Effector Cells That are Central to Initiating and Maintaining Inflammatory Responses
Mast cells and/or eosinophils respond to a variety of activating signals including those from cell-cell contact, allergens bound to IgE, neuropeptides,
cytokines including IL-33, thymic stromal lymphopoietin (“TSLP”), IL-5, IL-4 and IL-13 and viruses through Toll-Like Receptor-3. In response to these and
other activating signals, mast cells and eosinophils produce a broad range of inflammatory mediators that cause tissue damage and contribute to acute and
chronic inflammation. These mediators include vasoactive amines, bioactive lipids, proteases, chemokines and cytokines. The mediators, their functions and
their contribution to disease pathogenesis are described in more detail below.
•
•
•
Mast cells play an important role in inflammation as the main producer of histamine. Histamine causes vasodilation and produces intense
itching. It is believed to contribute to increased gastrointestinal peristalsis (diarrhea), the skin symptoms of urticaria and ISM, the diffuse
vasodilation of anaphylaxis and bronchospasm in asthma.
Proteases secreted from mast cells and eosinophils are the key cause of tissue damage and contribute to tissue fibrosis. Eosinophil and mast
cell secretions are toxic to surrounding cells and break down tissues, resulting in fibrosis and tissue remodeling.
Mast cells and eosinophils drive inflammation by signaling to other cells of the immune system. Mast cells and eosinophils release lipid
mediators and a large variety of cytokines including TNFa, IL-1, IL-3, IL-4, IL-5, IL-6, IL-8, IL-9, IL-13, MCP-1, CCL2, CCL3, CCL5,
CCL17, TGFa, TGFb and granulocyte-macrophage colony stimulating factor, that attract and activate cells of the innate and adaptive
immune system, such as neutrophils, monocytes, macrophages, basophils, B-cells, T-cells and dendritic cells, as well as other mast cells and
eosinophils.
Figure 3. Mast Cell and Eosinophil Functions
Due to their ability to respond to signals from multiple cell types and elicit responses from others, mast cells and eosinophils mediate the immediate
hypersensitivity and late phase responses responsible for allergies and many innate and adaptive immune responses.
4
Siglec-8 is an Attractive Target for Mast Cell and Eosinophil Driven Diseases
Siglec-8 (sialic acid immunoglobulin-like lectin 8) is a constitutively expressed inhibitory receptor that is restricted to eosinophils, mast cells and to a
lesser extent, basophils (approximately 1/100 the level on mast cells and eosinophils). The physiological function of Siglec-8 is to provide an inhibitory signal
to mast cells and eosinophils. Siglec-8 exerts these effects through an intracellular immunoreceptor, tyrosine-based inhibitory motif (“ITIM”) and ITIM-like
motif. In contrast to approaches which block a single activating cytokine or receptor, targeting the ITIM signaling cascade (via Siglec-8) has the potential to
counteract a broad array of activating signals, which could allow for the treatment of multiple diseases. Antibodies to Siglec-8 have been shown to trigger
antibody-dependent cellular cytotoxicity (“ADCC”) of blood eosinophils and apoptosis of tissue eosinophils and to inhibit the release of inflammatory
mediators from mast cells. In the human clinical studies, antolimab (AK002) has depleted eosinophils and demonstrated mast cell inhibitory activity in
multiple disease settings including EG, EGE, EoE, CU, SAC, and ISM. In summary, the expression pattern and broad inhibitory function make Siglec-8 an
attractive target for treatment of mast cell and eosinophil driven diseases.
Figure 4. Siglec-8 Triggers Apoptosis of Eosinophils and Inhibition of Mast Cells
Our Strategy
Antolimab (AK002) has shown activity in humans as well as activity in a broad array of animal disease models of mast cell and eosinophil driven
diseases. We have prioritized our antolimab (AK002) development efforts based on our assessment of the probability of clinical and regulatory success,
unmet medical need and potential market opportunity. We have assembled a team with a proven track record and deep experience in antibody discovery and
in clinical development, commercialization, operations and finance from companies such as Genentech, Gilead, Intermune, Novo Nordisk, Pfizer, ZS Pharma
and others.
The key elements of our strategy are to:
•
Rapidly advance antolimab (AK002) through clinical development in EG, EGE and EoE. Antolimab (AK002) has secured orphan drug
designation for the treatment of EG, EGE from the FDA. We believe the positive results from our ENIGMA study in patients with EG and/or
EGE, in conjunction with our planned Phase 3 study, will serve as the basis for demonstrating safety and efficacy in our biologics license
application (“BLA”) and market authorization application submissions.
Antolimab (AK002) has secured orphan drug designation for the treatment of EoE from the FDA. We plan to initiate a Phase 2/3 study in
patients with EoE following observed improvements in the pathology and symptoms of patients with EoE as part of the ENIGMA study.
5
•
•
•
Evaluate additional eosinophilic and mast cell driven conditions. We are currently conducting a study in MGID, and have completed trials
for CU, ISM, and SAC. We will continue to evaluate development opportunities in these, as well as other indications.
Build commercial capability and retain rights in key markets. We intend to retain the rights to antolimab (AK002) in key markets for the
time being, and plan to commercialize antolimab (AK002) in the U.S through a specialty sales force.
Coordinate clinical and manufacturing process development. Antolimab (AK002) has been produced under current good manufacturing
practices (“cGMP”) at commercial scale utilizing the commercial process at Lonza Sales AG (“Lonza”), a Contract Development
Manufacturing Organization (“CDMO”).
Antolimab (AK002) Clinical Development
Antolimab (AK002) was designed to take advantage of the selective expression pattern and inhibitory function of Siglec-8, an inhibitory receptor
found on eosinophils, mast cells, and to a lesser extent, on basophils. Antolimab (AK002) is a humanized antibody that binds to Siglec-8 with high affinity
(bivalent binding avidity (KD) = 17 pM, determined by surface plasmon resonance analysis). Binding of antolimab (AK002) to Siglec-8 on mast cells and
eosinophils triggers apoptosis of eosinophils and inhibition of mast cells. Antolimab (AK002) is a non-fucosylated IgG1 antibody engineered to have potent
ADCC. ADCC is a mechanism whereby the binding of an antibody like antolimab (AK002) to a target cell in the blood, such as an eosinophil, triggers a
natural killer (“NK”) cell, to bind to the Fc portion of the antibody bound to the target cell, thereby destroying the antibody-bound cell. This provides
antolimab (AK002) with an additional mechanism to deplete eosinophils present in blood. As a result of these dual modes of action, antolimab (AK002) has
been shown to deplete eosinophils in blood and tissue, and to inhibit the release of inflammatory mediators from mast cells.
Antolimab (AK002) has demonstrated activity in a broad array of animal disease models of eosinophilic and mast cell-driven diseases. Consistent
with these experiments, human trials have shown that antolimab (AK002) depletes blood eosinophils and inhibits mast cells in multiple different diseases
including EG, EGE, EoE, CU, ISM, and SAC. Based on the promising results in the ENIGMA study, we are initiating a Phase 3 study in EG and/or EGE and
a Phase 2/3 study in EoE. Antolimab (AK002) has generally been well tolerated in our clinical studies. The most common adverse event has been the
occurrence of mild to moderate IRRs, such as flushing, feeling of warmth, headache, nausea or dizziness, which occurred mostly during the first infusion and
diminished or did not occur on subsequent infusions.
Eosinophilic Gastrointestinal Diseases (“EGIDs”)
EGIDs are a collection of chronic inflammatory disorders that share a similar eosinophilic driven inflammation that occurs along different segments
of the gastrointestinal (“GI”) tract. Based on the site of eosinophilic infiltration, EGIDs are categorized into EoE (esophagus), EG (stomach), EGE (duodenum
and small intestine) and Eosinophilic Colitis (colon). While EGIDs are estimated to affect up to 300,000 patients in the United States in total, individually
they each are considered orphan diseases. To date, antolimab (AK002) has secured orphan drug designation for EG, EGE, and EoE from the FDA.
It is believed that EGIDs arise in some patients from food allergies or other allergens that cause a hypersensitivity reaction that leads to recruitment of
eosinophils to the GI tract. Mast cells are also elevated and believed to play a significant role. The gastrointestinal symptoms are believed to be due to the
release of inflammatory mediators from activated eosinophils and mast cells. Elevated serum immunoglobulin E (“IgE”) levels and food-specific IgE are
correlated with EG in some patients and provide evidence for the allergy hypothesis and mast cell involvement. We have recently demonstrated that in
biopsies of patients with symptomatic EG, mast cells are present in elevated numbers compared to normal controls and that the mast cells are also in an
increased activation state, providing additional evidence for a pathogenic role of mast cells in EGIDs.
6
Figure 5. Mast Cells and Eosinophils are Elevated in EGIDs
Because antolimab (AK002) directly depletes eosinophils and broadly inhibits mast cells, we believe it has the potential to be a superior treatment in
comparison to agents acting only on one cell type or pathway.
Eosinophilic Gastritis and Eosinophilic Gastroenteritis
EG and EGE are orphan diseases characterized by chronic inflammation due to infiltration of eosinophils and mast cells into layers of the stomach.
Symptoms commonly include abdominal pain, nausea, vomiting, diarrhea, early satiety, loss of appetite, abdominal cramping, bloating, malnutrition and
weight loss. EG can occur with eosinophilia isolated to the stomach, or often in combination with eosinophilia of the small intestine. Diagnosis is established
based on clinical presentation (gastrointestinal symptoms) combined with increased tissue eosinophils in biopsy specimens from the stomach and/or
duodenum without any other cause for the eosinophilia. The presence of greater than or equal to 30 eosinophils per HPF in 5 HPFs indicates the presence of
EG and the presence of greater than or equal to 30 eosinophils per HPF in 3 HPFs indicates the presence of EGE. Based on ICD-9 codes, the estimated
prevalence of EG and EGE in the United States is approximately 50,000 patients. Based on our conversations with gastroenterologists and our own work, we
believe these diseases may be significantly under-diagnosed or mis-diagnosed as other gastrointestinal diseases, such as irritable bowel syndrome or
functional dyspepsia. We are conducting a non-interventional study to further understand the prevalence of EG and EGE in the United States.
Eosinophilic Esophagitis
EoE is an orphan disease characterized by eosinophil and mast cell driven inflammation of the esophagus. Common symptoms of EoE include
dysphagia (difficulty swallowing), food impaction, nausea and vomiting. Diagnosis is established based on clinical presentation (dysphagia) combined with
increased tissue eosinophils in biopsy specimens from the esophagus without any other cause for the eosinophilia. The presence of greater than 15 eosinophils
per HPF in an esophagus biopsy identifies the presence of EoE. The estimated prevalence of EoE in the United States is approximately 200,000 patients.
Current Therapies and Limitations
There are no FDA-approved treatments for EG, EGE or EoE. Current therapies and disease management strategies include restricted/elemental diets
and systemic or topical corticosteroids. Restricted/elemental diets are designed to avoid foods which trigger symptoms. Unfortunately for most patients the
restricted/elemental diets are only partially effective and mainly used as a strategy to provide nutrition despite continuing symptoms. Corticosteroids,
systemic or topical, can provide symptom relief, but are not appropriate for long-term treatment due to their numerous side effects.
7
Phase 2 Study in Patients with EG and/or EGE
Study Design
The ENIGMA study, a randomized, double-blind, placebo-controlled Phase 2 study of antolimab (AK002) enrolled patients with active, biopsy-
confirmed EG and/or EGE. Patients were required to be moderately to severely symptomatic based on a patient reported symptom questionnaire and to
subsequently have biopsy confirmed eosinophilia of the stomach (≥ 30 eosinophils/HPF in 5 HPFs) and/or duodenum (≥ 30 eosinophils/HPF in 3 HPFs).
Qualifying patients were randomized 1:1:1 to receive: (a) 0.3 mg/kg of antolimab (AK002) for the first month followed by three doses of 1.0 mg/kg given
monthly, (b) 0.3 mg/kg of antolimab (AK002) for the first month followed by 1.0 mg/kg, 3.0 mg/kg and 3.0 mg/kg given monthly, or (c) a monthly placebo.
Disease symptoms were measured daily using a patient reported symptom questionnaire that scored 8 symptoms on a scale from 0 to 10 (abdominal pain,
nausea, vomiting, early satiety, loss of appetite, abdominal cramping, bloating, and diarrhea). Endpoints were assessed per protocol in a prespecified
hierarchical order using biopsies collected at the end of study and symptom questionnaires collected over the last two weeks of study prior to biopsy. The
primary endpoint was the percent change from baseline in the number of tissue eosinophils obtained from gastric or duodenal biopsies. The secondary
endpoints were (1) proportion of patients with a greater than 75% reduction in tissue eosinophil counts from biopsies and a greater than 30% reduction in
Total Symptom Score (“TSS”) from the patient reported questionnaire and (2) the percent change from baseline in the TSS.
Study Results
Antolimab (AK002) showed a statistically significant benefit when compared to placebo on all primary and secondary endpoints for each of the high
dose, the low dose, and the combined high/low dose antolimab (AK002) groups. The data demonstrate that antolimab (AK002) produced histological
resolution of gastrointestinal tissue eosinophilia and improved disease symptoms, and that these benefits occurred in the same individuals.
Figure 6: Topline results from the ENIGMA study
Primary and Secondary Endpoints
1° Endpoint: change in gastric or duodenal eosinophil counts
p–value
2° Endpoint: treatment responders 1
p–value
2° Endpoint: change in TSS 2
p–value
Placebo
(n=20)
+10%
—
5%
—
-24%
—
High Dose
antolimab (AK002)
(n=20)
-97%
<0.0001
70%
0.0009
-58%
0.0012
Low Dose
antolimab (AK002)
(n=19)
-92%
<0.0001
68%
0.0019
-49%
0.0150
Combined
antolimab (AK002)
(n=39)
-95%
<0.0001
69%
0.0008
-53%
0.0012
1
2
Treatment responders defined as patients with greater than a 75% reduction in biopsy eosinophil counts and a greater than 30% reduction in TSS.
TSS is the sum of all 8 patient reported symptoms each measured on a scale from 0 to 10 (abdominal pain, nausea, vomiting, early satiety, loss of
appetite, abdominal cramping, bloating, and diarrhea).
8
Safety
Antolimab (AK002) was generally well tolerated. The only treatment emergent adverse event occurring more frequently on antolimab (AK002) than
on placebo was mild to moderate IRRs, such as flushing, feeling of warmth, headache, nausea, and/or dizziness, which occurred in 60% of patients receiving
antolimab (AK002) versus 23% of patients receiving placebo. There was 1 drug-related serious adverse event (“SAE”) in the study, consisting of an IRR that
resolved within 24 hours. Treatment emergent SAEs occurred in 9% of patients receiving antolimab (AK002) versus 14% of patients receiving placebo.
Results in Patients with EoE
Esophageal eosinophil counts and dysphagia improved in patients with comorbid eosinophilic esophagitis.
Figure 7: EoE endpoints from the ENIGMA study
Exploratory Endpoints
EoE: proportion of patients with esophageal eosinophil counts <5/HPF
EoE: change in patient reported dysphagia questionnaire
Steroid Use
Placebo
1/9 (11%)
-17%
Combined
antolimab (AK002)
13/14 (93%)
-53%
All allowed baseline medications remained constant throughout the baseline period and study. Acute steroids could be used at the physician’s
discretion to prevent or treat IRRs. Acute steroid use was balanced between antolimab (AK002) and placebo groups with 28% and 35% of patients in the
antolimab (AK002) and placebo group receiving acute steroids. Statistically significant results were also observed on all primary and secondary endpoints in
the subgroup of patients who did not receive acute steroids.
Long-Term Extension Study
Ninety-two percent of eligible patients from the ENIGMA study elected to enter the long-term extension study. We expect to report efficacy and
safety results from the long-term extension study in the first half of 2020.
In the long-term extension study, we evaluated the effect of pre-treating patients with oral prednisone one day prior to receiving a 1.0 mg/kg first dose
of antolimab (AK002). This evaluation included antolimab (AK002) naïve patients receiving 1.0 mg/kg of antolimab (AK002). No IRRs were observed in
patients pre-treated with prednisone the day prior to receiving antolimab (AK002) despite using a higher initial dose than the 0.3 mg/kg dose used in the
ENIGMA study. These results suggest prednisone may be a useful pre-treatment to reduce or eliminate IRRs in future studies of antolimab (AK002).
Future Studies
Antolimab (AK002) has secured orphan drug designation for EG, EGE, and EoE from the FDA. Based on the promising results from the ENIGMA
study, we plan to initiate a Phase 3 study in patients with EG and/or EGE during the first quarter of 2020. Based on communications with the FDA, we
believe the results of the ENGIMA study, in conjunction with the results from a Phase 3 study, if successful, will be sufficient for regulatory approval. We
also plan to initiate a Phase 2/3 study in patients EoE during the first quarter of 2020.
Mast Cell Gastrointestinal Disease
During the enrollment phase of the ENIGMA study, we identified a group of patients who were symptomatic but upon biopsy had elevated stomach
and/or duodenal mast cell counts in the absence of elevated eosinophils (Figure 8). Because of the elevated mast cell counts and lack of elevated eosinophils
and other elevated cell types, these patients appear to suffer from mast cell driven gastrointestinal symptoms. We have labelled these conditions Mast Cell
Gastrointestinal Disease (“MGID”). We are currently conducting a six-month open-label Phase 1 study in patients with MGID using antolimab (AK002) and
expect to report safety and efficacy results from this study in the first quarter of 2020. We are also working to further characterize the MGID patient
population and are conducting a non-interventional study to further understand the prevalence of MGID in the United States.
9
Figure 8: Symptoms of patients with EG and/or EGE compared to patients with MGID
EG, EGE, and MGID Prevalence Study
During the enrollment phase of the ENIGMA study, our investigational sites screened 51 patients that had not been previously diagnosed with an
EGID. Many of these patients, identified as potential study candidates after presenting with chronic GI symptoms, had received prior diagnoses of irritable
bowel syndrome (“IBS”), functional dyspepsia (“FD”), or nonspecific gastritis. Of the 51 patients with no prior EGID diagnosis, 26 met the symptomatic
threshold and received biopsies. Of the 26 patients biopsied, 15 patients (58%) were found to have EG or EGE and were therefore eligible for enrollment in
the ENGIMA study and 11 (42%) patients were found to have MGID. The high rate of discovery among previously undiagnosed patients suggests that some
patients with chronic GI symptoms (including those with IBS, FD or nonspecific gastritis) may have EG, EGE, or MGID. Based on these observations, we
are conducting a non-interventional study to assess the prevalence of EG, EGE, and MGID in approximately 200 patients with chronic moderate to severe GI
symptoms, including those with IBS, FD, or gastritis, with no prior diagnosis of EG, EGE, or elevated mast cell counts. We expect to report results from this
disease prevalence study in the second half of 2020. Results from the study may point to a larger EG and EGE population than the ICD-9 based prevalence
estimate of 50,000 US patients and establish an estimate of the prevalence of MGID.
Chronic Urticarias
Disease Overview
CU is a group of mast cell driven skin conditions which are characterized by recurrent transient pruritic wheal and flare type skin reactions and, in
roughly 40% of patients, angioedema. Symptoms include hives, itching, redness, raised welts, burning, warmth, tingling and irritation of the skin. Patients
with CU are often severely impaired in their quality of life, with negative effects on sleep, daily activities, school/work life and social interactions. Urticaria
symptoms are caused by degranulation of dermal mast cells, with IgE signaling believed to contribute to mast cell activation in many cases. The most
common forms of CU are chronic spontaneous urticaria (“CSU”), cholinergic urticaria and symptomatic dermatographism.
10
Despite sharing similar inflammatory pathology, urticarias differ in the triggers that cause the inflammatory response. Cholinergic urticaria patients
typically develop symptoms a few minutes after exercise or passive warming in a bath or shower. In some cholinergic patients, emotional stress or hot and
spicy food or beverages can also elicit symptoms. Symptomatic dermatographism is characterized by hiving and itching following a minor stroking pressure,
rubbing or scratching of the skin. In CSU, itchy, wheal-and-flare-type skin reactions spontaneously appear on the skin at any time of the day or night. In most
CSU patients, an underlying cause of CSU cannot be identified making a causal and/or curative treatment difficult. We conservatively estimate that
approximately 200,000-500,000 patients with severe CSU, cholinergic urticaria and symptomatic dermatographism could be candidates for therapy with
antolimab (AK002) in the United States.
Current Therapies and Limitations
The current treatment guidelines for the management of all forms of urticaria recommend the use of non-sedating oral H1-antihistamines as first-line
therapy. For patients that do not respond to standard doses of H1-antihistamines, doses are increased to as high as four times the standard dose. Though this
can increase the response rates, side effects also increase, including sedation and anticholinergic effects, such as dry mouth, blurred vision, urinary retention
and constipation. Patients that do not respond to or are unable to tolerate high dose antihistamines have few options. For cholinergic urticaria and
symptomatic dermatographism patients, it is recommended that they avoid target triggers such as overheated spaces, hot baths/showers, exercise, specific
food allergens and excessive contact. For antihistamine refractory patients with CSU, the only currently approved treatment is Xolair, a monoclonal anti-IgE
antibody. Unfortunately, approximately 60% of CSU patients continue to have symptoms despite treatment with Xolair.
Study Design and Results
We conducted an open-label Phase 2 study with antolimab (AK002) in patients with uncontrolled CU despite treatment with H1 antihistamines at up
to 4x the labeled dose. The study enrolled four cohorts consisting of 13 Xolair naïve patients with CSU, 11 Xolair refractory patients with CSU (average
duration of Xolair treatment 10 months at doses as high as 600mg/month), 11 patients with cholinergic urticaria, and 10 patients with symptomatic
dermographism. Baseline symptom scores, as measured by Urticaria Control Test (“UCT”) and Urticaria Activity Score (“UAS7”) were collected over a 4-
week screening period. Patients with baseline UCT scores of less than 12, indicative of poorly controlled urticaria, were enrolled in the study and treated with
up to 6 doses of antolimab (AK002) given once monthly. Patients received an initial dose of 0.3 mg/kg at baseline, followed by a dose of 1.0 mg/kg on day
28, and then received monthly doses of either 1.0 or 3.0 mg/kg for a total of 6 doses. The primary endpoint of the trial was patient-reported symptoms
measured by the UCT. Secondary endpoints include safety and tolerability, as well as patient-reported symptoms as measured by UAS7 (CSU patients only),
pulse controlled ergometry (cholinergic urticaria patients only), and Fric testing (symptomatic dermographism patients only).
Results for each cohort are shown in Figure 9. Patients in all cohorts reported high levels of disease control and some patients experienced complete
resolution of symptoms while receiving antolimab (AK002). Importantly, antolimab (AK002) also produced high levels of response in patients that were
refractory to Xolair. This suggests that antolimab (AK002), if approved, could become the treatment of choice for antihistamine refractory CU patients.
Additionally, antolimab (AK002) depleted blood eosinophils in subjects throughout the dosing period.
Figure 9. Data from the Phase 2 CU clinical trial
Xolair Naïve CSU Cohort (N=13)
Average UCT Score
UCT Complete Response
UCT Partial Response
UCT No Response
Average UAS7 Score
Proportion with UAS7 ≤ 6
Proportion with UAS7 = 0
Proportion with ISS7 = 0
Proportion with HSS7 = 0
Baseline
3.2
—
—
—
18.5
0%
0%
0%
0%
Week 22
14.2
12/13 (92%)
0/13 (0%)
1/13 (8%)
4.6 (-75%)
8/13 (62%)
7/13 (54%)
7/13 (54%)
10/13 (77%)
11
Xolair Failure CSU Cohort (N=11)
Average UCT Score
UCT Complete Response
UCT Partial Response
UCT No Response
Average UAS7
Proportion with UAS7 ≤ 6
Proportion with UAS7 = 0
Proportion with ISS7 = 0
Proportion with HSS7 = 0
Cholinergic Urticaria Cohort (N=11)
Average UCT Score
UCT Complete Response
UCT Partial Response
UCT No Response
Pulse Control Ergometry Exercise Test Negative
Symptomatic Dermographism Cohort (N=10)
Average UCT Score
UCT Complete Response
UCT Partial Response
UCT No Response
Fric Test Itch Negative
Fric Test Hives Negative (Critical Friction Threshold)
Baseline
3.7
—
—
—
28.7
0%
0%
0%
0%
Baseline
5.4
—
—
—
0%
Baseline
5.7
—
—
—
0%
0%
Week 22
8.5
4/11 (36%)
2/11 (18%)
5/11 (45%)
14.7 (-49%)
2/11 (18%)
1/11 (9%)
1/11 (9%)
1/11 (9%)
Week 22
11.8
9/11 (82%)
0/11 (0%)
2/11 (18%)
7/7 (100%)
Week 22
9.1
4/10 (40%)
3/10 (30%)
3/10 (30%)
5/10 (50%)
4/10 (40%)
Antolimab (AK002) was generally well tolerated in the Phase 2 CU study. The most common adverse event was the occurrence of mild to moderate
IRRs such as flushing, feeling of warmth, headache, nausea or dizziness, which occurred in 34% of first infusions and only 4% of subsequent infusions.
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Severe Allergic Conjunctivitis
Disease Overview
Atopic keratoconjunctivitis (“AKC”), vernal keratoconjunctivitis (“VKC”) and perennial allergic conjunctivitis (“PAC”) are a set of allergic ocular
conjunctival diseases primarily associated with an IgE-mediated hypersensitivity reaction. We are focused on SAC, the severe forms of these collective
diseases. These conditions are often caused by airborne allergens, such as grass and tree pollens, coming into contact with the eyes, which induces IgE
mediated mast cell degranulation and allergic inflammation. The inflammatory mediators released by the mast cell result in inflammation and the infiltration
of eosinophils, neutrophils and other immune cells. Eosinophils and mast cells are believed to be the main effector cells, with protease secretions directly
damaging the conjunctiva, and play a key role in triggering and maintaining the inflammatory response. Symptoms include itching, hyperemia, light
sensitivity (or “photophobia”), pain, eye discharge and the sensation of having a foreign body in the eye. These symptoms can affect quality of life and daily
activities, such as reading, driving and being in bright outdoor environments. In addition, patients with untreated disease, in particular those with VKC and
AKC, can experience remodeling of the ocular surface tissues that can lead to vision loss. In addition to the primary symptoms of allergic conjunctivitis, a
high correlation of allergic rhinitis, allergic asthma and atopic dermatitis comorbidities occur in this patient population. We believe that approximately
50,000-150,000 patients in the United States suffer from SAC and could be candidates for treatment with antolimab (AK002).
Current Therapies and Limitations
PAC is treated with topical antihistamines and mast cell stabilizers. More serious forms are treated with topical and systemic corticosteroids,
cyclosporine and other immunomodulatory drugs. There are no drugs approved for AKC and VKC, and as a result, patients are typically treated similarly to
patients with PAC. Unfortunately, many patients continue to have symptoms despite these topical and/or systemic treatments and many of the drugs are not
suitable for long-term treatment due to undesirable side effects.
Study Design and Results
We conducted an open-label Phase 1 trial with antolimab (AK002) in patients with SAC. The trial was open-label, multi-dose, six-month study and
enrolled 29 total SAC patients. Of the 29 patients, 13 patients had AKC, 15 patients had PAC, and one patient had VKC. Patients received a 0.3 mg/kg dose
of antolimab (AK002) for the first month, followed by a 1 mg/kg dose the next month, then monthly doses of 1 or 3 mg/kg for four additional months. The
primary endpoint of the trial was safety and tolerability. Key secondary endpoints included patient-reported symptom measures of ocular itch, pain,
lacrimation, photophobia and foreign body sensation. Patients administered antolimab (AK002) reported a 78% median improvement in ocular symptoms by
ACS and a 71% median improvement in physician assessed signs and symptoms using the OSS. In addition, a number of patients enrolled in the trial also had
concomitant allergic rhinitis, asthma, and atopic dermatitis. Patients suffering from comorbid atopic dermatitis, asthma and allergic rhinitis, despite treatment
with currently available therapies, reported improvements in their symptoms while receiving antolimab (AK002).
Antolimab (AK002) was generally well tolerated. The most common adverse event was mild to moderate IRRs, such as flushing, feeling of warmth,
headache, nausea, dizziness, which occurred mostly during the first infusion.
13
Figure 10. SAC Phase 1 Trial Results
ACS Symptom (N=29)
Patient Assessed
Median Change from Baseline to Weeks 21 to 22
Itching
Light Sensitivity
Eye Pain
Foreign Body Sensation
Watering Eyes
-75%
-57%
-75%
-80%
-76%
OSS Symptom (N=29)
Investigator Assessed
Median Change from Baseline to Day 140
Itching
Redness
Tearing
Chemosis
Comorbid Condition
Asthma (N = 9)
Atopic Dermatitis (N = 11)
Rhinitis (N = 11)
Indolent Systemic Mastocytosis
Disease Overview
-67%
-67%
-50%
-100%
Patient Assessed
Change in Median Global Severity from
Baseline to Weeks 21 to 22
-72%
-65%
-69%
ISM is a rare disease characterized by the clonal proliferation and accumulation of mast cells in the bone marrow, respiratory and gastrointestinal
tracts, and organs such as the skin, liver, spleen and brain. Common symptoms include pruritus, flushing, headache, cognitive impairment, fatigue, diarrhea,
gastrointestinal cramps, hypotension and skin lesions, as well as an increased risk for osteoporosis and anaphylaxis, which in some cases can be life
threatening. The symptoms of ISM are attributed to mast cell activation and the systemic release of mediators. Approximately 30,000 patients in the United
States suffer from ISM. Antolimab (AK002) has received orphan drug designation from the FDA and the European Medicines Agency (“EMA”) for the
treatment of ISM.
Current Therapies and Limitations
There are currently no drugs approved for the treatment of ISM by the FDA or EMA. ISM is treated with drugs targeting mast cell mediators,
including antihistamines, cromolyn sodium and leukotriene blocking agents. Most patients’ symptoms remain poorly controlled by these treatments.
Glucocorticoids can provide temporary relief in some cases; however long-term treatment with steroids is not appropriate due to their many side effects.
Study Design and Results
Antolimab (AK002) has been evaluated in an open-label, single and multiple ascending dose Phase 1 study in patients with ISM. The single dose
portion of this trial was completed during the second quarter of 2017, with subsequent completion of the six-month multi-dose portion in the first quarter of
2019. The primary endpoints of the trial were safety and tolerability. Key secondary endpoints were the pharmacokinetic and pharmacodynamic profile of
antolimab (AK002), including peripheral counts of eosinophils and patient-reported mastocytosis disease
14
symptoms including itching, hives, skin flushing, diarrhea, abdominal pain, fatigue, headache, difficulty concentrating and muscle and joint pain. In the single
dose portion, 13 patients received single escalating doses of 0.0003 to 1.0 mg/kg, including three patients receiving 0.3 mg/kg and three patients receiving 1.0
mg/kg of antolimab (AK002). Five out of six patients receiving 0.3 or 1.0 mg/kg reported to the study investigators that they had improvements in symptoms,
including diarrhea, abdominal pain, fatigue, pruritus, difficulty concentrating and headaches.
In the multi-dose portion of the trial, 6 patients received six doses of 1.0 mg/kg of antolimab (AK002) given monthly and 5 patients received 1.0
mg/kg for the first month and then monthly doses of 3.0 to 10 mg/kg of antolimab (AK002) for the five months thereafter. Depletion of eosinophils was
observed for all patients throughout the dosing period with antolimab (AK002). ISM symptoms and quality of life were assessed using the Mastocytosis
Questionnaire (“MSQ”), an internally developed Patient Reported Outcome (“PRO”) instrument, the Mastocytosis Questionnaire (“MSQ”), as well as two
published questionnaires, the Mastocytosis Activity and Symptom Severity questionnaire (“MAS”) and the Mastocytosis Quality of Life questionnaire (“MC-
QoL”). The MSQ is a proprietary daily PRO Mastocytosis Questionnaire that we developed based on published guidance from the FDA on the development
of PRO instruments and is expected to be used to help determine safety and efficacy in future clinical trials. The MSQ consists of nine symptom assessments,
with each symptom being scored on a 0-10 scale with higher values representing greater symptom burden. Total score for the MSQ ranges from 0-90 points.
For each PRO, baseline scores were collected over 14 to 28 days and compared to scores at Weeks 21 to 22, two weeks after the final dose of antolimab
(AK002). PRO data obtained from patients in the multidose portion of the trial are presented in Figure 11. Consistent with the improvements reported in the
single ascending dose study, antolimab (AK002) produced clinically meaningful improvement in patient symptoms for multiple symptoms across all three
PROs used in the study.
15
Figure 11. Patient Reported Outcomes from multi-dose portion of ISM trial
MSQ Symptom (N=8) 1
Itching
Hives
Flushing (#)
Abdominal Pain
Diarrhea
Headache
Fatigue
Difficulty Concentrating
Muscle Pain
Joint Pain
1
The MSQ was not available for use in 3 patients.
MAS2 Symptom (N=11)
Itching
Hives
Flushing
Abdominal Pain
Diarrhea
Headache
Fatigue
Difficulty Concentrating
Bone-Joint-Muscle Pain
MC-QoL Domain (N=11)
Symptoms
Social Life / Functioning
Emotions
Skin
Median Change from Baseline
at Weeks 21 to 22
-56%
-38%
-46%
-60%
-49%
-50%
-47%
-59%
-27%
-26%
Median Change from Baseline
at Weeks 21 to 22
-53%
-59%
-57%
-84%
-72%
-57%
-22%
-30%
-22%
Median Change from Baseline
at Day 145
-39%
-42%
-57%
-44%
Antolimab (AK002) was generally well tolerated in the Phase 1 ISM study. The most common adverse event was the occurrence of mild to moderate
IRRs, such as flushing, feeling of warmth, headache, nausea or dizziness, which occurred mostly during the first infusion.
Subcutaneous Formulation
To date, antolimab (AK002) has been administered intravenously in all of our completed and ongoing clinical studies. We have also developed a high
concentration formulation of antolimab (AK002) for subcutaneous administration. We expect to complete a Phase 1 study in healthy volunteers evaluating the
safety, tolerability and pharmacokinetics of a subcutaneous formulation of antolimab (AK002) in the second half of 2020.
Preclinical Results
Antolimab (AK002) Results in Animal Disease Models Suggest Broad Activity
Because Siglec-8 is found only in cells of humans and certain other primates, we have developed a proprietary Siglec-8 transgenic mouse, in which
Siglec-8 is expressed with a similar tissue distribution to humans and is
16
functionally active. The transgenic mouse provides us with a proprietary tool to assess the safety, tolerability and activity of anti-Siglec-8 antibodies.
Antolimab (AK002) has completed short- and long-term toxicity studies in Siglec-8 transgenic mice. Chronic weekly dosing for six months with
antolimab (AK002) in transgenic mice at dose levels of 50 or 100 mg/kg resulted in no adverse drug-related findings in mortality, clinical observations, body
weight, food consumption and anatomic pathology after the end of dosing. Non-adverse findings included decreases in eosinophil counts in both sexes at
50 mg/kg/week, which persisted through the recovery period. These findings reflect the expected pharmacology of antolimab (AK002). The no-observed-
adverse-effect-level of antolimab (AK002) after chronic dosing for six months was 100 mg/kg/week.
We have shown that antolimab (AK002) or antibodies to Siglec-8 have broad activity in animal disease models (eosinophilic gastroenteritis,
anaphylaxis, fibrosis and chronic obstructive pulmonary disease) and in human ex vivo diseased tissue (eosinophilic gastrointestinal disease, mastocytosis,
atomic dermatitis and lung). In these models, anti-Siglec-8 antibodies have significantly reduced eosinophils and inhibited mast cells. The activity in these
models suggests antolimab (AK002) has the potential to treat eosinophil and mast cell inflammation in a number of disease settings and highlights the ability
of antolimab (AK002) to inhibit the inflammatory cascade triggered by different activating signals.
Anti-Siglec-8 Antibody Inhibits IgE Mediated Systemic Anaphylaxis in Mouse Model
The ability of an anti-Siglec-8 antibody to inhibit IgE-mediated mast cell activation was demonstrated in a mouse model of systemic anaphylaxis.
Anaphylaxis occurs due to IgE-mediated release of inflammatory mediators and cytokines from mast cells, which results in vasodilation, a reduction in core
body temperature, itchiness and bronchoconstriction, among other symptoms. In this model, “humanized” mice engrafted with human immune cells were
pretreated with an anti-Siglec-8 antibody or an isotype control antibody, administered an allergen-specific IgE, and 24 hours later, anaphylaxis was triggered
using an allergen. Mice treated with the isotype control antibody plus IgE and allergen displayed symptoms of anaphylaxis and body temperature decreases
that peaked 10 to 40 minutes after inducing anaphylaxis. In contrast, mice treated with the anti-Siglec-8 antibody plus IgE and allergen displayed no
observable symptoms and had no significant changes in core body temperature.
Figure 12. Effects of Anti-Siglec-8 in a Mouse Model of Systemic Anaphylaxis
Anti-Siglec-8 Antibody Decreases Bleomycin Induced Lung Fibrosis in Mouse Model
Lung fibrosis induced by bleomycin is believed to be due to the increased expression of IL-33. IL-33 induces mast cells to release mediators that
activate fibroblasts leading to fibrosis and collagen deposition. In this model, lung fibrosis was induced by administering bleomycin to Siglec-8 transgenic
mice every other day for 30 days. On days 14, 21 and 28, an anti-Siglec-8 or isotype control antibody was administered. Fibrosis was assessed on day 30
17
for anti-Siglec-8 or isotype control antibody treated mice and compared to sham treated mice (mice that did not receive bleomycin). Relative to control
antibody mice, mice treated with an anti-Siglec-8 antibody displayed minimal fibrotic changes. In addition, the bronchoalveolar lavage (“BAL”) of anti-
Siglec-8 treated mice displayed reduced levels of infiltrating leukocytes that were similar to sham treated animals.
Figure 13. Leukocyte Counts and Lung Fibrosis in Bleomycin Lung Fibrosis Model
Anti-Siglec-8 Antibody Inhibits IL-33/TSLP Activation of Mast Cells from Human Skin
IL-33 combined with TSLP is a potent activator of mast cells and results in increased expression of the mast cell activation marker CD63. Mast cells
isolated from skin showed a 20% increase in the expression of CD63 after overnight exposure to IL-33 and TSLP. In contrast, skin mast cells treated with
antolimab (AK002) along with IL-33 and TSLP did not show increased activation, with CD63 levels remaining similar to control levels (no IL-33 and TSLP
exposure). In addition, the levels of chemokines CCL2 and ENA78 did not increase after stimulation with IL-33 and TSLP in the presence of antolimab
(AK002). Chemokines are known to recruit and activate cells of the innate and adaptive immune system. By normalizing chemokine secretions, antolimab
(AK002) may be able to prevent further recruitment of immune cells and thereby interrupt the inflammatory cascade.
18
Figure 14. Ex Vivo Skin Tissue Response to IL33/TSLP
Anti-Siglec-8 Antibody Reduces Eosinophil and Mast Cell Levels in EG/EGE Model
In this model, two groups of Siglec-8 transgenic mice were sensitized with ovalbumin to induce eosinophil and mast cell driven gastrointestinal
inflammation similar to that observed in EG and other EGIDs. A third group of animals was administered phosphate buffered saline to serve as normal
unsensitized sham controls (“sham”). Treatment with a single dose of anti-Siglec-8 antibody led to lower levels of eosinophils in the blood, stomach and
small intestine and reduced numbers of mast cells in the stomach and small intestine compared to mice that received an isotype control antibody (“ISO”).
Figure 15. EG/EGE Model Eosinophil and Mast Cell Counts in Blood, Stomach and Small Intestine
Anti-Siglec-8 treatment also reduced the levels of multiple important chemokines (CCL5/Rantes, CCL2/MCP-1, CCL17) to the levels of sham
control animals. Chemokines are known to recruit and activate cells of the innate and adaptive immune system. By normalizing chemokine secretions,
antolimab (AK002) may be able to reduce further recruitment of immune cells and thereby interrupt the inflammatory cascade.
19
Figure 16. Chemokine Levels in the EG/EGE Mouse Model
Preclinical Programs
We are developing additional antibodies targeting novel immune system receptors. These antibodies are being assessed in a variety of animal models.
Competition
The biotechnology and pharmaceutical industries are characterized by rapid technological advancement, significant competition and an emphasis on
intellectual property. We face potential competition from many different sources, including major and specialty pharmaceutical and biotechnology companies,
academic research institutions, governmental agencies and public and private research institutions. Any product candidates that we successfully develop and
commercialize will compete with current therapies and new therapies that may become available in the future. We believe that the key competitive factors
affecting the success of any of our product candidates will include efficacy, safety profile, convenience, cost, level of promotional activity devoted to them
and intellectual property protection.
We are not aware of any other company or organization that is conducting clinical trials of a product candidate that targets both mast cells and
eosinophils, including any product candidate that specifically targets Siglec-8. The competition we may face with respect to each of the indications we are
targeting with antolimab (AK002) includes:
•
•
•
•
EG, EGE and EoE. Currently, there are no therapies that have been approved by the FDA specifically for EG, EGE or EoE. Several
companies, including but not limited to, Regeneron, AstraZeneca, Celgene, Shire, and Dr. Falk Pharma have or are conducting studies in
these indications.
ISM. We are not aware of any FDA-approved treatments for ISM. Blueprint Medicines initiated a phase 2 trial evaluating avapritinib in
smoldering systemic mastocytosis and ISM in the second half of 2018.
CU. Xolair is an FDA-approved drug approved for the treatment of CSU. We are not aware of any FDA-approved treatment options for
cholinergic urticaria or symptomatic dermatographism. Companies conducting studies in chronic spontaneous urticaria include: Novartis
Pharmaceuticals (ligelizumab), Genentech (fenebrutinib), and Gossamer Bio (GB100).
SAC. The products that are currently available for treatment of SAC only provide temporary relief for most patients and have little effect on
moderate to severe cases. We are not aware of any other company specifically targeting SAC.
Many of the companies against which we may compete 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. 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
20
and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our
programs.
Sales and Marketing
In light of our stage of development, we currently have limited marketing and sales capabilities. We hold worldwide commercialization rights to all of
our product candidates. We intend to retain the rights to our compounds in key markets for the time being, and plan to build our own focused, specialty sales
force to commercialize approved products in the United States.
Manufacturing
We must manufacture drug product 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 and our commercial products can be manufactured. Our third-party manufacturers will also be subject to periodic inspections of
facilities by the FDA and other foreign authorities, including procedures and operations used in the testing and manufacture of our products to assess our
compliance with applicable regulations.
We do not currently have the infrastructure or internal capability to manufacture our product candidates for use in clinical development and
commercialization. We rely, and expect to continue to rely, on third-party manufacturers for the production of our product candidates in compliance with
cGMP requirements clinical trials under our guidance. In the case of antolimab (AK002), we rely on a single third-party manufacturer, Lonza, and we
currently have no alternative manufacturer in place. We do not have long-term supply agreements and we purchase our required drug product on a 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, 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.
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In-Licensing Agreements
We have entered into two in-licensing agreements with third-parties for the development, manufacturing and commercialization of our products
including antolimab (AK002). The specific terms of the individual agreements are discussed in further detail below.
Exclusive License Agreement with The Johns Hopkins University
We have exclusively licensed intellectual property from The Johns Hopkins University (“JHU”) in a license agreement dated December 20, 2013 and
amended and restated September 30, 2016. In December 2013, we entered into an agreement with JHU for an exclusive worldwide license to develop and
commercialize for the treatment and prevention of disease products covered by the JHU licensed patent rights or derived from materials provided by JHU. In
September 2016, we and JHU amended and restated the license agreement to an exclusive worldwide license to develop and commercialize in all fields
products covered by the licensed patent rights, or derived from materials provided by JHU.
Under the license agreement we are obligated to make payments to JHU for therapeutic products aggregating up to $4.0 million based on achieving
specified development and regulatory approval milestones. We will also pay single-digit royalties to JHU based on net sales of each licensed therapeutic
product by us and our affiliates and sublicensees and have up to a low six-digit dollar minimum annual royalty payment. In addition, in the event we
sublicense the JHU intellectual property, we are obligated to pay JHU a specified portion of income we receive from sublicensing.
Our royalty obligation with respect to each licensed product in a country extends until the later of the expiration of the last-to-expire patent licensed
from JHU covering the licensed product in the country or the expiration of a specified number of years after the first commercial sale of any licensed product
in any country. The latest possible expiration date of patents licensed under the agreement is 2021 in all applicable countries, in the absence of any patent
extensions that may be available for such patents.
Non-Exclusive License Agreement with BioWa Inc. and Lonza Sales AG
We have licensed on a non-exclusive basis intellectual property from BioWa Inc. (“BioWa”) and Lonza pursuant to a license agreement dated
October 31, 2013. The agreement grants Allakos a non-exclusive worldwide license to develop and commercialize certain products manufactured in a
particular mammalian host cell line for the prevention, diagnosis or treatment of human disease.
Under the license agreement, we are obligated to pay BioWa an annual commercial license fee of $40,000 until such time as BioWa receives royalty
payments. We may also become obligated to make payments to BioWa aggregating up to $41.0 million based on achieving specified milestones, and to pay
low single-digit royalties to BioWa based on net sales of licensed product by us and our affiliates and sublicensees. Our royalty obligation to BioWa with
respect to each licensed product in a country extends until the later of the expiration of the last-to-expire licensed patent covering the licensed product in the
country or the expiration of either regulatory exclusivity or a specified number of years after the first commercial sale of the licensed product in the country,
whichever is later.
We may also pay low single-digit royalties to Lonza based on net sales of each licensed product by us and our affiliates and sublicensees. We will be
required to pay an annual license fees to Lonza if we (or our strategic partner) manufactures a particular product using the particular cell line, or if we utilize a
third party CMO to manufacture a product using such system. Our royalty obligation to Lonza with respect to each licensed product in a country extends until
the later of the expiration of the last-to-expire licensed patent covering the licensed product in the country or a specified number of years after the first
commercial sale of the licensed product in the country, whichever is later. The latest possible expiration date of patents licensed under the agreement is 2021
or 2023, depending on the country, in the absence of any patent extensions that may be available for such patents.
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Total Royalty Burden
In aggregate, we anticipate our total royalty obligation on antolimab (AK002) from our in-licensing agreements will be a mid-single digit percentage
of net sales by us and our affiliates and sublicensees.
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 Federal Food, Drug, and Cosmetic Act (“FDCA”) and its implementing regulations, and
biologics under the FDCA, the Public Health Service Act (“PHSA”) and their implementing regulations. 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 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 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 good
laboratory practice (“GLP”), requirements;
submission to the FDA of an Investigational New Drug (“IND”) application, 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 an NDA or BLA;
a determination by the FDA within 60 days of its receipt of an NDA or 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 and/or clinical trial sites that generated the data in support of the NDA or BLA;
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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.
Preclinical Studies and IND
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 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.
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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 PK and PD 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 subjects 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.
NDA/BLA Review Process
Following completion of the clinical trials, data are 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
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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.
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 fee schedule, effective through September 30, 2020, the user fee for an application requiring clinical
data, such as an NDA or BLA, is $2.9 million. PDUFA also imposes an annual program fee for human drugs and biologics of $0.3 million. 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 ten
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
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FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
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.
Competitors, however, 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 Affordable Care Act (“ACA”), signed into law in 2010, includes a subtitle called the Biologics
Price Competition and Innovation Act of 2009 (“BPCIA”), 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 PK or PD) 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:
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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 health care provider who prescribed the reference product. The higher
standard of interchangeability must be demonstrated by information sufficient to show that:
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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
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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 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 twelve 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: (1) one year after the first commercial marketing of the first interchangeable product; (2) 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; (3) 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 (4) 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.
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The FDA may also place other conditions on approvals including the requirement for a 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 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:
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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.
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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.
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:
(i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or
(iv) 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 Drug Price Competition and Patent Term Restoration Act of 1984 (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 U.S. PTO, 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.
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A reference biological product is granted twelve 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 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
As in the United States, medicinal products can be marketed only if a marketing authorization from the competent regulatory agencies has been
obtained.
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.
•
•
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 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
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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 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 health care 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 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
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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 of 2010, the ACA expanded the types of entities
eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible
entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, as 340B drug prices are determined based on AMP and Medicaid
rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.
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.
Employees
As of December 31, 2019, we had 90 full-time employees, 61 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, and we consider our relationship with our employees to be good.
Facilities
Our corporate headquarters are currently located in Redwood City, California, where we lease 25,136 square feet of office, research and development
and laboratory space pursuant to a lease agreement that expires on July 31, 2029. The lease agreement includes an option to extend the term for an additional
period of five years, and provides us a right of first offer to expand into available space on the first floor of the building. We are responsible for payment of
our proportionate share of taxes and operating expenses for the building, in addition to monthly base rent in the initial amount of $0.1 million, with 3% annual
increases, which monthly base rent is abated for the first nine months of the lease term. We provided a security deposit under the lease in the form of a letter
of credit in the initial amount of $0.8 million, subject to a reduction to $0.4 million following the 45th month of the term and the satisfaction of certain
conditions. On December 4, 2019, we entered into a lease agreement for approximately 98,000 square feet of office space to be constructed in San Carlos,
California. We expect these premises to be delivered in November 2020, and we expect to move into this new headquarters in mid-2021 after making certain
improvements. The lease term will expire 123 months following the rent commencement date, which is expected to be the earlier of nine months after the
premises are delivered or the date our tenant improvements are substantially completed. Upon commencement of the lease term, we will be responsible for
monthly base rent payments of $5.75
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per rentable square foot. We provided a security deposit in the form of a letter of credit in the amount of $1.5 million. This lease agreement includes an option
to extend the term for an additional period of five years and provides us a right of first refusal for certain additional office space. 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.
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. Regardless of outcome, litigation can have an
adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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 policy 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 components thereof, 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 trade secret protection of our
confidential information and know-how relating to our 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 as of
February 25, 2020 contains six issued and unexpired U.S. patents and seven pending U.S. patent applications that are solely owned or exclusively licensed by
us and numerous foreign counterparts of these patents and patent applications.
We have exclusively licensed from JHU four issued and unexpired U.S. patents and also foreign counterparts, with claims granted in Europe and
Japan. The JHU licensed patent rights include issued U.S. patents with claims that recite anti-Siglec-8 antibodies comprising the CDRs of a particular
antibody and methods of use a class of antibodies that bind to Siglec-8 for treating particular diseases. We own two granted U.S. patents that claim the active
component of antolimab (AK002), an anti-Siglec-8 antibody, pharmaceutical compositions comprising antolimab (AK002), and methods for the treatment of
particular diseases using antibodies to Siglec-8, with a projected expiration date in 2035 in the absence of patent extensions. Similar patent applications are
pending in Europe and Japan. We have eight further pending families of patent applications that include U.S. and foreign applications relating to methods of
treatment for treating particular diseases using antibodies to Siglec-8 and methods of delivering antibodies to Siglec-8. We have also filed patent applications
with claims pending relating to antibodies in preclinical development and methods for treating cancer with these antibodies. We also have a non-exclusive
license to intellectual property from BioWa and Lonza regarding the expression and manufacturing of monoclonal antibodies in particular mammalian host
cell lines.
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 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 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
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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, including antolimab (AK002), 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.
Corporate Information
We were incorporated in Delaware in March 2012. Our website is www.allakos.com. We use our website as a channel of distribution for company
information, and financial and other material information regarding our company is routinely posted and accessible on our website.
On the Investor Relations section of our website, we post or will post, as applicable, the following filings as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”): our Annual Report on Form 10-K (the “Annual Report”),
our Proxy Statement on Schedule 14A, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended.
All of the information on our Investor Relations web page is available to be viewed free of charge. Information contained on our website is not part of
this Annual Report or our other filings with the SEC. We assume no obligation to update or revise any forward-looking statements in this Annual Report
whether as a result of new information, future events or otherwise, unless we are required to do so by law.
The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC.
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Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. The following discussion of risk factors contains forward-looking statements. 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 materially 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, financial condition, results of operations and growth prospects.
Risks Related to Our Financial Position and Need for Additional Capital
We are in the early stages of clinical drug development and have a very limited operating history and no products approved for commercial sale, which
may make it difficult for you to evaluate our current business and predict our future success and viability.
We are an early clinical stage biopharmaceutical company with a limited operating history. We were incorporated and commenced operations in
2012, have no products approved for commercial sale and have not generated any revenue. Our operations to date have been limited to organizing and staffing
our company, business planning, raising capital, identifying and developing potential product candidates, conducting preclinical and clinical studies of our
product candidates, including Phase 1 and Phase 2 clinical trials of antolimab (AK002), our lead compound. All of our product candidates currently under
development, other than antolimab (AK002), are in preclinical development. We have not yet demonstrated our ability to successfully complete any large-
scale, pivotal clinical trials, obtain marketing approvals, manufacture a commercial-scale drug or arrange for a third-party to do so on our behalf or conduct
sales and marketing activities. As a result, it may be more difficult for you to accurately predict our future success or viability than it could be if we had a
longer operating history.
In addition, as a business with a limited operating history, we may encounter unforeseen expenses, difficulties, complications, delays and other
known and unknown factors and risks frequently experienced by early-stage biopharmaceutical companies in rapidly evolving fields. We also may need to
transition from a company with a research focus to a company capable of supporting commercial activities. We have not yet demonstrated an ability to
successfully overcome such risks and difficulties, or to make such a transition. If we do not adequately address these risks and difficulties or successfully
make such a transition, our business will suffer.
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We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.
We have incurred net losses in each reporting period since our inception, have not generated any revenue to date and have financed our operations
principally through the sale and issuance of common stock and preferred stock. Our net losses were $85.4 million, $43.5 million and $23.6 million for the
years ended December 31, 2019, 2018 and 2017. As of December 31, 2019, we had an accumulated deficit of $189.5 million. We have devoted substantially
all of our resources and efforts to research and development. Our lead compound, antolimab (AK002), is in clinical development, and our other product
candidates are in preclinical development. As a result, we expect that it will be several years, if ever, before we generate revenue from product sales. Even if
we succeed in receiving marketing approval for and commercializing one or more of our product candidates, we expect that we will continue to incur
substantial research and development and other expenses in order to develop and market additional potential products.
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate
significantly from quarter-to-quarter such that a period-to-period comparison of our results of operations may not be a good indication of our future
performance. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior
losses and expected future losses have had and will continue to have an adverse effect on our working capital and our ability to achieve and maintain
profitability.
Our ability to generate revenue and achieve profitability depends significantly on our ability to achieve a number of objectives.
Our business depends entirely on the successful development and commercialization of our product candidates. We currently generate no revenues
from sales of any products. We have no products approved for commercial sale and do not anticipate generating any revenue from product sales until
sometime after we have successfully completed clinical development and received marketing approval for the commercial sale of a product candidate, if ever.
Our ability to generate revenue and achieve profitability depends significantly on our ability to achieve a number of objectives, including:
•
•
•
•
•
•
•
•
•
successful and timely completion of preclinical and clinical development of our lead compound, antolimab (AK002), and any other future
product candidates;
timely receipt of marketing approvals for antolimab (AK002) and any future product candidates for which we successfully complete clinical
development and clinical trials from applicable regulatory authorities;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
developing an efficient and scalable manufacturing process for antolimab (AK002) and any future product candidates, including establishing
and maintaining commercially viable supply and manufacturing relationships with third-parties to obtain finished products that are
appropriately packaged for sale;
successful launch of commercial sales following any marketing approval, including the development of a commercial infrastructure, whether
in-house or with one or more collaborators;
a continued acceptable safety profile following any marketing approval;
commercial acceptance of antolimab (AK002) and any future product candidates as viable treatment options by patients, the medical
community and third-party payors;
addressing any competing technological and market developments;
identifying, assessing, acquiring and developing new product candidates;
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•
•
•
•
obtaining and maintaining patent protection, trade secret protection and regulatory exclusivity, both in the United States and internationally;
protection of our rights in our intellectual property portfolio, including our licensed intellectual property;
negotiating favorable terms in any collaboration, licensing or other arrangements that may be necessary to develop, manufacture or
commercialize our product candidates; and
attracting, hiring and retaining qualified personnel.
We may never be successful in achieving our objectives and, even if we do, may never generate revenue that is significant or large enough to achieve
profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and
remain profitable would decrease the value of our company and could impair our ability to maintain or further our research and development efforts, raise
additional necessary capital, grow our business and/or continue our operations.
We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we
may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain
process that takes years to complete. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials
of, and seek marketing approval for, antolimab (AK002) and our other product candidates. In addition, if we obtain marketing approval for any of our product
candidates, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution. We have also incurred
and expect to continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional
funding in order to maintain our continuing operations. If we are unable to raise capital when needed or on acceptable terms, we may be forced to delay,
reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.
As of December 31, 2019, we had $495.9 million in cash, cash equivalents and marketable securities, which includes proceeds from our July 2018
IPO and concurrent private placement that we completed on July 23, 2018 and from our August 2019 Offering. 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 the next 12 months.
Our estimate as to how long we expect our existing cash, cash equivalents and marketable securities to continue to fund our operations is based on
assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of
which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional
funds sooner than planned.
We plan to use our existing cash, cash equivalents and marketable securities to fund our development of antolimab (AK002) and for other research
and development activities, working capital and other general corporate purposes. This may include additional research, hiring additional personnel, capital
expenditures and the costs of operating as a public company. Advancing the development of antolimab (AK002) and any other product candidates will require
a significant amount of capital. Our existing cash, cash equivalents and marketable securities will not be sufficient to fund all of the actions that are necessary
to complete the development of antolimab (AK002) or any of our other product candidates. We will be required to obtain further funding through public or
private equity offerings, debt financings, collaborations and licensing arrangements or other sources, which may dilute our stockholders or restrict our
operating activities. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or
at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
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Risks Related to the Discovery, Development and Commercialization of Our Product Candidates
We are dependent on the success of our lead compound, antolimab (AK002), which is currently in multiple clinical trials. If we are unable to obtain
approval for and commercialize antolimab (AK002) for one or more indications in a timely manner, our business could be materially harmed.
Our future success is dependent on our ability to timely complete clinical trials and obtain marketing approval for, and then successfully
commercialize antolimab (AK002), our lead compound, for one or more indications. Antolimab (AK002) is in the early stages of development and we are
investing the majority of our efforts and financial resources in the research and development of antolimab (AK002) for multiple indications. Antolimab
(AK002) will require additional clinical development, evaluation of clinical, preclinical and manufacturing activities, marketing approval from government
regulators, substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or
promote antolimab (AK002), or any other product candidates, before we receive marketing approval from the U.S. Food and Drug Administration (“FDA”)
and comparable foreign regulatory authorities, and we may never receive such marketing approvals.
The success of antolimab (AK002) will depend on several factors, including the following:
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successful and timely completion of our clinical trials of antolimab (AK002);
initiation and successful patient enrollment and completion of additional clinical trials on a timely basis;
efficacy, safety and tolerability profiles that are satisfactory to the FDA or any comparable foreign regulatory authority for marketing
approval;
timely receipt of marketing approvals for antolimab (AK002) from applicable regulatory authorities;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
the maintenance of existing or the establishment of new supply arrangements with third-party drug product suppliers and manufacturers;
the maintenance of existing or the establishment of new scaled production arrangements with third-party manufacturers to obtain finished
products that are appropriately packaged for sale;
obtaining and maintaining patent protection, trade secret protection and regulatory exclusivity, both in the United States and internationally;
protection of our rights in our intellectual property portfolio, including our licensed intellectual property;
successful launch of commercial sales following any marketing approval;
a continued acceptable safety profile following any marketing approval;
commercial acceptance by patients, the medical community and third-party payors; and
our ability to compete with other therapies.
We do not have complete control over many of these factors, including certain aspects of clinical development and the regulatory submission process,
potential threats to our intellectual property rights and the manufacturing, marketing, distribution and sales efforts of any future collaborator.
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The regulatory approval processes of the FDA, European Medicines Agency (“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 data. Even if we eventually complete clinical testing and receive approval of
any regulatory filing for our product candidates, the FDA, EMA and comparable foreign regulatory authorities may approve our product candidates for a
more limited indication or a narrower patient population than we originally requested. 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.
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;
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 Biologics License
Application (“BLA”) or New Drug Application (“NDA”), 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 its 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.
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.
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If we experience delays or difficulties in the enrollment of patients in clinical trials, our receipt of necessary marketing approvals could be delayed or
prevented.
We may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate and enroll a sufficient number of eligible
patients to participate in these trials as required by the FDA or comparable foreign regulatory authorities. Patient enrollment is a significant factor in the
timing of clinical trials. In particular, our ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate.
Patient enrollment may be affected if our competitors have ongoing clinical trials for product candidates that are under development for the same
indications as our product candidates, and patients who would otherwise be eligible for our clinical trials instead enroll in clinical trials of our competitors’
product candidates. Patient enrollment may also be affected by other factors, including:
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size and nature of the patient population;
severity of the disease under investigation;
availability and efficacy of approved drugs for the disease under investigation;
patient eligibility criteria for the trial in question;
perceived risks and benefits of the product candidate under study;
efforts to facilitate timely enrollment in clinical trials;
patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment;
proximity and availability of clinical trial sites for prospective patients; and
continued enrollment of prospective patients by clinical trial sites.
Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one or
more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for our product candidates and jeopardize our
ability to obtain marketing approval for the sale of our product candidates.
The clinical trials of our product candidates may not demonstrate safety and efficacy to the satisfaction of regulatory authorities or otherwise produce
positive results.
Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must complete preclinical development
and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates. Clinical testing is expensive, difficult to design and
implement, can take many years to complete and its ultimate outcome is uncertain. A failure of one or more clinical trials can occur at any stage of the
process. The outcome of preclinical studies and early-stage clinical trials may not be predictive of the success of later clinical trials. Moreover, preclinical and
clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed
satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their drugs.
We do not know whether our future clinical trials will begin on time or enroll patients on time, or whether our ongoing and/or future clinical trials
will be completed on schedule or at all. Clinical trials can be delayed for a variety of reasons, including delays related to:
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obtaining marketing approval to commence a trial;
reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
obtaining institutional review board approval at each clinical trial site;
recruiting suitable patients to participate in a trial;
patients failing to comply with trial protocol or dropping out of a trial;
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clinical trial sites deviating from trial protocol or dropping out of a trial;
the need to add new clinical trial sites; or
manufacturing sufficient quantities of product candidate for use in clinical trials.
We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent receipt of marketing approval or
our ability to commercialize our product candidates, including:
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receipt of feedback from regulatory authorities that requires us to modify the design of our clinical trials;
negative or inconclusive clinical trial results that may require us to conduct additional clinical trials or abandon certain drug development
programs;
the number of patients required for clinical trials being larger than anticipated, enrollment in these clinical trials being slower than anticipated
or participants dropping out of these clinical trials at a higher rate than anticipated;
third-party contractors failing to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
the suspension or termination of our clinical trials for various reasons, including non-compliance with regulatory requirements, a finding that
our product candidates have undesirable side effects or other unexpected characteristics or risks;
the cost of clinical trials of our product candidates being greater than anticipated;
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates being
insufficient or inadequate; and
regulators revising the requirements for approving our product candidates.
If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are
unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only
modestly positive or if there are safety concerns, we may incur unplanned costs, be delayed in obtaining marketing approval, if at all, receive more limited or
restrictive marketing approval, be subject to additional post-marketing testing requirements or have the drug removed from the market after obtaining
marketing approval.
The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of our clinical trials
may not satisfy the requirements of the FDA or comparable foreign regulatory authorities.
We currently have no drugs approved for sale and we cannot guarantee that we will ever have marketable drugs. Clinical failure can occur at any
stage of clinical development. Clinical trials may produce negative or inconclusive results, and we or any future collaborators may decide, or regulators may
require us, to conduct additional clinical trials or preclinical studies. We will be required to demonstrate with substantial evidence through well-controlled
clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek marketing approvals for their commercial
sale. Success in preclinical studies and early-stage clinical trials does not mean that future larger registration clinical trials will be successful. This is because
product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and non-U.S. regulatory
authorities despite having progressed through preclinical studies and early-stage clinical trials. In particular, no compound with the mechanism of action of
antolimab (AK002) has been commercialized, and the outcome of preclinical studies and early-stage clinical trials may not be predictive of the success of
later-stage clinical trials.
From time to time, we may publish or report interim or preliminary data from our clinical trials. Interim or preliminary data from clinical trials that
we may conduct may not be indicative of the final results of the trial and are subject to the risk that one or more of the clinical outcomes may materially
change as patient enrollment continues
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and more patient data become available. Interim or preliminary data also remain subject to audit and verification procedures that may result in the final data
being materially different from the interim or preliminary data. As a result, interim or preliminary data should be viewed with caution until the final data are
available.
In some instances, there can be significant variability in safety and efficacy results between different clinical trials of the same product candidate due
to numerous factors, including changes in trial protocols, differences in size and type of the patient populations, differences in and adherence to the dosing
regimen and other trial protocols and the rate of dropout among clinical trial participants. In addition, we use patient-reported outcome assessments in our
clinical trials, which involve patients’ subjective assessments of efficacy of the treatments they receive in the trial. Such assessments can vary widely from
day to day for a particular patient, and from patient to patient and site to site within a clinical trial. This subjectivity can increase the uncertainty of, and
adversely impact, our clinical trial outcomes.
We do not know whether any clinical trials we may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain marketing
approval to market our product candidates.
Our product candidates may not achieve adequate market acceptance among physicians, hospitals, patients, healthcare payors and others in the medical
community necessary for commercial success.
Even if our product candidates receive regulatory approval, they may not gain adequate market acceptance among physicians, hospitals, patients,
healthcare payors and others in the medical community. The degree of market acceptance of any of our approved product candidates will depend on a number
of factors, including:
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the efficacy and safety profile as demonstrated in planned clinical trials;
the timing of market introduction of the product candidate as well as competitive products;
the clinical indications for which the product candidate is approved;
restrictions on the use of our products, if approved, such as boxed warnings or contraindications in labeling, or a Risk Evaluation and
Mitigation Strategy (“REMS”), if any, which may not be required of alternative treatments and competitor products;
the potential and perceived advantages of product candidates over alternative treatments;
the cost of treatment in relation to alternative treatments;
the availability of coverage and adequate reimbursement and pricing by third-parties and government authorities;
relative convenience and ease of administration;
the effectiveness of sales and marketing efforts;
unfavorable publicity relating to the product candidate; and
the approval of other new therapies for the same indications.
If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors and patients, we
may not generate or derive sufficient revenue from that product candidate and our financial results could be harmed. Antolimab (AK002) is currently
administered as an intravenous treatment, which is less convenient for patients than some other methods of administration, such as an orally delivered drug.
The sizes of the patient populations suffering from some of the diseases we are targeting are small and based on estimates that may not be accurate.
Our projections of both the number of people who have some of the diseases we are targeting, as well as the subset of people with these diseases who
have the potential to benefit from treatment with antolimab (AK002) and any other future product candidates, are estimates. These estimates have been
derived from a variety of sources, including scientific literature, surveys of clinics, physician interviews, patient foundations and market research, and may
prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these diseases. The number of patients may turn out to be
lower than expected. Additionally, the potentially addressable patient
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population for antolimab (AK002) and any other future product candidates may be limited or may not be amenable to treatment with antolimab (AK002) and
any other products, if and when approved. Even if we obtain significant market share for antolimab (AK002) and any other products (if and when they are
approved), small potential target populations for certain indications means we may never achieve profitability without obtaining market approval for
additional indications.
Our business will be impacted by our ability to advance additional product candidates beyond antolimab (AK002) into clinical development and through
to regulatory approval and commercialization. Our other product candidates are at even earlier stages of development than antolimab (AK002) and may
fail in development or suffer delays that adversely affect their commercial viability.
All of our product candidates are in the early stages of development and may fail in development or suffer delays that adversely affect their
commercial viability. A product candidate can unexpectedly fail at any stage of preclinical and clinical development. The historical failure rate for product
candidates is high due to risks relating to safety, efficacy, clinical execution, changing standards of medical care and other unpredictable variables. The results
from preclinical testing or early clinical trials of a product candidate may not be predictive of the results that will be obtained in later-stage clinical trials of
the product candidate.
Our future operating results are dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize
other product candidates in addition to antolimab (AK002). The success of any product candidates we may develop will depend on many factors, including,
among other things, the following:
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generating sufficient data to support the initiation or continuation of clinical trials;
obtaining regulatory permission to initiate clinical trials;
contracting with the necessary parties to conduct clinical trials;
successful enrollment of patients in, and the completion of, clinical trials;
the timely manufacture of sufficient quantities of the product candidate for use in clinical trials; and
adverse events in the clinical trials.
Even if we successfully advance any other product candidates into clinical development, their success will be subject to all of the clinical, regulatory
and commercial risks described elsewhere in this “Risk Factors” section. Accordingly, we cannot assure you that we will ever be able to develop, obtain
regulatory approval of, commercialize or generate significant revenue from any other product candidates.
Any drugs we develop may become subject to unfavorable third-party reimbursement practices and pricing regulations.
The availability and extent of coverage and adequate reimbursement by governmental and private payors is essential for most patients to be able to
afford expensive treatments. Sales of any of our product candidates that receive marketing approval will depend substantially, both in the United States and
internationally, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit, and similar
healthcare management organizations or reimbursed by government health administration authorities, private health coverage insurers and other third-party
payors. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize our product candidates.
Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize an
adequate return on our investment. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain
marketing approval. If coverage and reimbursement are not available or reimbursement is available only to limited levels, we may not successfully
commercialize any product candidate for which we obtain marketing approval.
There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. In the United States, principal
decisions about reimbursement for new products are typically made by the Centers for Medicare & Medicaid Services (“CMS”), an agency within the U.S.
Department of Health and Human Services. CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare, and
private payors often follow CMS’s decisions regarding coverage and reimbursement to a substantial degree. However, one payor’s determination to provide
coverage for a drug product does not assure that other payors will also provide
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coverage for the drug product. As a result, the coverage determination process is often time-consuming and costly. This process 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
applied consistently or obtained in the first instance.
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. Further, such payors are increasingly challenging the price, examining the medical necessity and reviewing the cost
effectiveness of medical drug products. There may be especially significant delays in obtaining coverage and reimbursement for newly approved drugs.
Third-party payors may limit coverage to specific drug products on an approved list, known as a formulary, which might not include all FDA-approved drugs
for a particular indication. We may need to conduct expensive pharmaco-economic studies to demonstrate the medical necessity and cost effectiveness of our
products. Nonetheless, our product candidates may not be considered medically necessary or cost effective. We cannot be sure that coverage and
reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be.
Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and
we believe the increasing emphasis on cost containment initiatives in Europe, Canada and other countries has and will continue to put pressure on the pricing
and usage of therapeutics such as our product candidates. In many countries, particularly the countries of the European Union, medical product prices are
subject to varying price control mechanisms as part of national health systems. In these countries, pricing negotiations with governmental authorities can take
considerable time after a product receives marketing approval. To obtain reimbursement or pricing approval in some countries, we may be required to conduct
a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. In general, product prices under such systems are
substantially lower than in the United States. Other countries allow companies to fix their own prices for products but monitor and control company profits.
Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates.
Accordingly, in markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be
insufficient to generate commercially reasonable revenue and profits.
If we are unable to establish or sustain coverage and adequate reimbursement for any future product candidates from third-party payors, the adoption
of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product candidates, if
approved. 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.
If our competitors develop and market products that are more effective, safer or less expensive than our product candidates, our commercial opportunities
will be negatively impacted.
The biotechnology industry is highly competitive and subject to rapid and significant technological change. Products we may develop in the future
are likely to face competition from other drugs and therapies, some of which we may not currently be aware. In addition, our products may need to compete
with off-label drugs used by physicians to treat the indications for which we seek approval. This may make it difficult for us to replace existing therapies with
our products.
We are not aware of any other company or organization that is conducting clinical trials of a product candidate that targets both eosinophils and mast
cells, including any product candidate that specifically targets Siglec-8. The competition we may face with respect to the indications we are targeting with
antolimab (AK002) includes, without limitation, Regeneron, AstraZeneca, Celgene, Shire, and Dr. Falk Pharma for EGIDs, Blueprint Medicines for ISM, and
Novartis Pharmaceuticals, Genentech, and Gossamer Bio for CU. In addition, we are currently evaluating a host of other indications, and if we were to initiate
trials in any such indication, we would likely face significant competition from a number of additional competitors. These companies, or other major
multinational pharmaceutical and biotechnology companies, emerging and start-up companies, universities and other research institutions, could focus their
future efforts on developing competing therapies and treatments for any of the indications we are currently targeting or may target in the future. Many of these
current and potential competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources and
commercial expertise than we do. Large pharmaceutical and biotechnology companies, in particular, have
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extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and manufacturing biotechnology products. These companies also
have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of
development, and collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical and
biotechnology companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could
make the product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining approval from the FDA or
foreign regulatory authorities or discovering, developing and commercializing products in our field before we do.
Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These companies compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial
sites and patient registration for planned clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. In addition, the
biotechnology industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change, we may be unable to
compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less
competitive or not economical.
We have limited resources and are currently focusing our efforts on developing antolimab (AK002) for particular indications. As a result, we may fail to
capitalize on other product candidates or indications that may ultimately have proven to be more profitable.
We are currently focusing our efforts on a small number of indications. As a result, we may forego or delay pursuit of opportunities for other
indications or with other product candidates that may have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize
on viable commercial drugs or profitable market opportunities. Our spending on current and future research and development activities for specific
indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target markets for a particular product
candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other strategic arrangements in cases in which it
would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
Our business entails a significant risk of product liability and if we are unable to obtain sufficient insurance coverage such inability could have an
adverse effect on our business and financial condition.
Our business exposes us to significant product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic
treatments. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such claims could
result in an FDA investigation of the safety and effectiveness of our products, our manufacturing processes and facilities or our marketing programs. FDA
investigation could potentially lead to a recall of our products or more serious enforcement action, limitations on the approved indications for which they may
be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our
products, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and our resources and substantial monetary awards
to trial participants or patients. We currently have product liability insurance that we believe is appropriate for our stage of development and may need to
obtain higher levels prior to marketing any of our product candidates, if approved. Any insurance we have or may obtain may not provide sufficient coverage
against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to
obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have an adverse effect on our business
and financial condition.
Risks Related to Regulatory Approval and Other Legal Compliance Matters
We may be unable to obtain U.S. or foreign regulatory approval and, as a result, unable to commercialize our product candidates.
Our product candidates are subject to extensive governmental regulations relating to, among other things, research, testing, development,
manufacturing, safety, efficacy, approval, recordkeeping, reporting, labeling, storage, packaging, advertising and promotion, pricing, marketing and
distribution of drugs and therapeutic biologics. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process must be
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successfully completed in the United States and in many foreign jurisdictions before a new drug or therapeutic biologic can be marketed. Satisfaction of these
and other regulatory requirements is costly, time-consuming, uncertain and subject to unanticipated delays. For example, despite the recent completion of our
Phase 2 clinical trial in patients with EG and/or EGE, significant regulatory hurdles remain, both near term and long term, before antolimab (AK002) can
obtain regulatory approval in the United States. In the near term, we must conduct an end of Phase 2 meeting with the FDA and if we are unable to do so in a
timely manner, our timeline for the commercialization of our product candidate could be extended. In the longer term, we will need to reach agreement with
the FDA on the design for our Phase 3 clinical trial, and of course conduct of such trial. There can be no assurance we will be able to successfully conclude
these undertakings in a timely manner, and it is possible that none of the product candidates we may develop will obtain the regulatory approvals necessary
for us to begin selling them.
Our company has not conducted or managed clinical trials through regulatory approval, including FDA approval. The time required to obtain FDA
and other approvals is unpredictable but typically takes many years following the commencement of clinical trials, depending upon the type, complexity and
novelty of the product candidate. The standards that the FDA and its foreign counterparts use when regulating us require judgment and can change, which
makes it difficult to predict with certainty how they will be applied. Any analysis we perform of data from preclinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays
or increased costs due to new government regulations. Examples of such regulations include future legislation or administrative action, or changes in FDA
policy during the period of product development, clinical trials and FDA regulatory review. It is impossible to predict whether legislative changes will be
enacted, or whether FDA or foreign regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be.
Any delay or failure in obtaining required approvals could have a material and adverse effect on our ability to generate revenue from the particular
product candidate for which we are seeking approval. Furthermore, any regulatory approval to market a product may be subject to limitations on the approved
uses for which we may market the product or the labeling or other restrictions. In addition, the FDA has the authority to require a REMS as part of a BLA or
NDA, or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug or biologic. These requirements
or restrictions might include limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to
patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. These limitations and restrictions may limit the size of the
market for the product and affect reimbursement by third-party payors.
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We are also subject to numerous foreign regulatory requirements governing, among other things, the conduct of clinical trials, manufacturing and
marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process varies among countries and may include all of the
risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Moreover, the
time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory
authorities outside the United States and vice versa.
Our clinical trials may reveal significant adverse events, toxicities or other side effects and may result in a safety profile that could inhibit regulatory
approval or market acceptance of any of our product candidates.
In order to obtain marketing approval for any of our product candidates, we must demonstrate the safety and efficacy of the product candidate for the
relevant clinical indication or indications through preclinical studies and clinical trials as well as additional supporting data. If our product candidates are
associated with undesirable side effects in preclinical studies or clinical trials, or have unexpected characteristics, we may need to interrupt, delay or abandon
their development or limit development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent,
less severe or more acceptable from a risk-benefit perspective.
We have conducted Phase 1 and Phase 2 clinical trials in healthy volunteers, as well as in patients with EG, EGE, CU, ISM and SAC. However, we
do not know the predictive value of these trials for our future clinical trials, and we cannot guarantee that any positive results in preclinical studies or previous
clinical trials will successfully translate to patients in our future clinical trials. It is not uncommon to observe results in clinical trials that are unexpected
based on preclinical testing, and many product candidates fail in clinical trials despite promising preclinical results. Moreover, preclinical and clinical data are
often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical
studies and clinical trials have nonetheless failed to obtain marketing approval for their products. Because Siglec-8 is only naturally expressed in humans and
certain other primates, there is no standard animal toxicology model for anti-Siglec-8 therapies, and the acceptability of our preclinical safety data for
antolimab (AK002) depends on the continued acceptance by the FDA and EMA, and the acceptance by other regulatory authorities, of the use of our
proprietary transgenic mice models for toxicology studies.
Antolimab (AK002) has generally been well tolerated in our clinical trials. The most common adverse event has been the occurrence of mild to
moderate infusion-related reactions (“IRRs”) (consisting of flushing, feeling of warmth, headache, nausea or dizziness) which occurred mostly, but not
exclusively, during the first infusion. Temporal interruption of the antolimab (AK002) infusion and minimal intervention generally resulted in prompt
resolution of symptoms and ability to resume the infusion without further complications, although there have been instances when an IRR has resulted in a
subject being discontinued from a trial. Subjects in our ongoing and planned clinical trials may in the future suffer other significant adverse events or other
side effects not observed in our preclinical studies or previous clinical trials. If clinical trials of our product candidates fail to demonstrate efficacy to the
satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or
ultimately be unable to complete, development and commercialization of our product candidates.
If further significant adverse events or other side effects are observed in any of our current or future clinical trials, we may have difficulty recruiting
patients to the clinical trials, patients may drop out of our trials, or we may be required to abandon the trials or our development efforts of that product
candidate altogether. We, the FDA, the EMA, other applicable regulatory authorities or an institutional review board may suspend clinical trials of a product
candidate at any time for various reasons, including a belief that subjects in such trials are being exposed to unacceptable health risks or adverse side effects.
Some potential therapeutics developed in the biotechnology industry that initially showed therapeutic promise in early-stage studies have later been found to
cause side effects that prevented their further development. Even if the side effects do not preclude the drug from obtaining or maintaining marketing
approval, undesirable side effects may inhibit market acceptance of the approved product due to its tolerability relative to other therapies. Any of these
developments could materially harm our business, financial condition and prospects.
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Further, if any of our product candidates obtains marketing approval, toxicities associated with our product candidates may also develop after such
approval and lead to a requirement to conduct additional clinical safety trials, additional warnings being added to the labeling, significant restrictions on the
use of the product or the withdrawal of the product from the market. We cannot predict whether our product candidates will cause toxicities in humans that
would preclude or lead to the revocation of regulatory approval based on preclinical studies or early-stage clinical testing.
The FDA, EMA and applicable foreign regulatory authorities may not accept data from trials conducted in locations outside of their jurisdiction.
We currently conduct clinical trials both in the United States and in other countries. We may in the future choose to conduct additional clinical trials
in countries outside the United States, including in Europe. The acceptance of study data by the FDA, EMA or applicable foreign regulatory authority from
clinical trials conducted outside of their respective jurisdictions 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 are performed by clinical
investigators of recognized competence and pursuant to current good clinical practices regulations. 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 its 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. 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.
However, a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others.
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.
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Even if our product candidates receive regulatory approval, they will be subject to significant post-marketing regulatory requirements.
Any regulatory approvals that we may receive for our product candidates will require surveillance to monitor the safety and efficacy of the product
candidate, may contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, and may include
burdensome post-approval study or risk management requirements. For example, the FDA may require a REMS in order to approve our product candidates,
which could entail requirements for a medication guide, physician communication plans or additional elements, such as boxed warning on the packaging, to
ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or foreign regulatory
authorities approve our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising,
promotion, import, export and recordkeeping for our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements
include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good
manufacturing practices (“cGMPs”) and good clinical practices (“GCPs”), for any clinical trials that we conduct post-approval. In addition, manufacturers of
drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with
cGMP regulations and standards. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated
severity or frequency, or problems with the facilities where the product is manufactured, a regulatory agency may impose restrictions on that product, the
manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. In addition, failure to
comply with FDA and foreign regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially
imposed sanctions, including:
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restrictions on our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;
restrictions on the products, manufacturers or manufacturing process;
warning or untitled letters;
civil and criminal penalties;
injunctions;
suspension or withdrawal of regulatory approvals;
product seizures, detentions or import bans;
voluntary or mandatory product recalls and publicity requirements;
total or partial suspension of production;
imposition of restrictions on operations, including costly new manufacturing requirements; and
refusal to approve pending BLAs or supplements to approved BLAs.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenue.
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We may not be able to obtain orphan drug designation or obtain or maintain orphan drug exclusivity for our product candidates and, even if we do, that
exclusivity may not prevent the FDA or the EMA from approving competing products.
Regulatory authorities in some jurisdictions, including the U.S. and the European Union, may designate drugs for relatively small patient populations
as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition,
which is generally defined as a patient population of fewer than 200,000 individuals annually in the U.S., or a patient population greater than 200,000 in the
United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. We have
obtained orphan drug designation for EG, EGE and EoE in the U.S. and for ISM in the U.S. and European Union and we may seek orphan drug designations
for other indications or for other of our product candidates. There can be no assurances that we will be able to obtain such designations.
In the U.S., 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. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for
which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity in the U.S. provides that the FDA may not approve
any other applications, including a full BLA or NDA, to market the same drug for the same indication for seven years, except in limited circumstances. The
applicable exclusivity period is ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for
orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified.
Even if we obtain orphan drug designation for a product candidate, we may not be able to obtain or maintain orphan drug exclusivity for that product
candidate. We may not be the first to obtain marketing approval of any product candidate for which we have obtained orphan drug designation for the orphan-
designated indication due to the uncertainties associated with developing pharmaceutical products. In addition, exclusive marketing rights in the U.S. may be
limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for
designation was materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or
condition. Further, even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition because
different drugs with different active moieties may be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently
approve the same drug with the same active moiety for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to
be safer, more effective or makes a major contribution to patient care or the manufacturer of the product with orphan exclusivity is unable to maintain
sufficient product quantity. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any
advantage in the regulatory review or approval process.
Although we may seek a breakthrough therapy designation for antolimab (AK002) or one or more of our other product candidates, we might not receive
such designation, and even if we do, such designation may not lead to a faster development or regulatory review or approval process.
We may seek a breakthrough therapy designation for antolimab (AK002) in one or more indications or for other product candidates. A breakthrough
therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious condition, and preliminary clinical
evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction
and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the
number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA may also be eligible for priority review if
supported by clinical data at the time the NDA is submitted to the FDA.
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Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe that one of our product candidates meets
the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. Even if we receive
breakthrough therapy designation, the receipt of such designation for a product candidate may not result in a faster development or regulatory review or
approval process compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In
addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the product candidates no longer
meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
We may face difficulties from changes to current regulations and future legislation.
Existing regulatory policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval
of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative
action, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if
we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain
profitability.
The Trump Administration and certain members of Congress have made various efforts to repeal all or portions of the Affordable Care Act (“ACA”),
including suspending the penalties for failing to comply with the individual insurance mandate, removing funds designed to drive enrollment in the program,
repealing the “Cadillac tax” on certain high-cost, employee-sponsored health insurance plans and coming within a single vote in the U.S. Senate of repealing
the ACA altogether. There is uncertainty with respect to the impact future actions by the Trump Administration, Congress or the courts may have and any
changes likely will take time to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that
were authorized by the ACA. However, we cannot predict the ultimate content, timing or effect of any further healthcare reform legislation or the impact of
potential legislation on us. In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, effective April 1, 2013, which, due to subsequent legislative
amendments, will stay in effect through 2025 unless additional Congressional action is taken. In January 2013, President Obama signed into law the
American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in Medicare and
other healthcare funding, which could have a material adverse effect on customers for our drugs, if approved, and accordingly, our financial operations.
We expect that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria
and in additional downward pressure on the price that we receive for any approved product. For example, the Trump Administration has contemplated certain
executive actions and campaigned upon policies aiming to lower the cost of prescription drugs in the U.S., including possibly implementing a “most favored
nations” clause where the U.S. would pay no more than the country with the lowest prescription drug prices. Similarly, many of Democratic candidates for the
2020 Presidential election have made drug price reform a focal point of their presidential campaigns. Any reduction in reimbursement from Medicare or other
government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other
healthcare reforms may prevent us from being able to generate sufficient revenue, attain profitability or commercialize our product candidates.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for
biotechnology products. We cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations
will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by
the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product
labeling and post-marketing testing and other requirements.
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If we fail to comply with applicable U.S. and foreign privacy and data protection laws and regulations, we may be subject to liabilities that adversely affect
our business, operations and financial performance.
We are subject to federal and state laws and regulations requiring that we take measures to protect the privacy and security of certain information we
gather and use in our business. For example, federal and state security breach notification laws, state health information privacy laws and federal and state
consumer protection laws impose requirements regarding the collection, use, disclosure and storage of personal information. In addition, in June 2018,
California enacted the California Consumer Privacy Act (the “CCPA”), which took effect on January 1, 2020. The CCPA gives California residents expanded
rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how
their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that may increase
data breach litigation. Although the CCPA includes exemptions for certain clinical trials data, and HIPAA protected health information, the law may increase
our compliance costs and potential liability with respect to other personal information we collect about California residents. The CCPA has prompted a
number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and
adversely affect our business.
We may also be subject to or affected by foreign laws and regulations, including regulatory guidance, governing the collection, use, disclosure,
security, transfer and storage of personal data, such as information that we collect about patients and healthcare providers in connection with clinical trials and
our other operations in the U.S. and abroad. The global legislative and regulatory landscape for privacy and data protection continues to evolve, and
implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. This evolution may create uncertainty in our
business, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to increase
in the future. For example, the EU has adopted the General Data Protection Regulation (the “GDPR”), which introduces strict requirements for processing
personal data. The GDPR increases our compliance burden with respect to data protection, including by mandating potentially burdensome documentation
requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and leverage information about them. The processing of
sensitive personal data, such as information about health conditions, entails heightened compliance burdens under the GDPR and is a topic of active interest
among foreign regulators. In addition, the GDPR provides for breach reporting requirements, more robust regulatory enforcement and fines of up to the
greater of 20 million euros or 4% of annual global revenue. While companies are afforded some flexibility in determining how to comply with the GDPR’s
various requirements, significant effort and expense are required to ensure continuing compliance with the GDPR. Moreover, the requirements under the
GDPR and guidance issued by different EU member states may change periodically or may be modified, and such changes or modifications could have an
adverse effect on our business operations if compliance becomes substantially costlier than under current requirements. It is also possible that each of these
privacy laws may be interpreted and applied in a manner that is inconsistent with our practices. Further, Brexit, which occurred on January 31, 2020, has
created uncertainty with regard to data protection regulation in the UK. In particular, it is unclear whether, post Brexit, the UK will enact data protection
legislation equivalent to the GDPR and how data transfers to and from the United Kingdom will be regulated. Any failure or perceived failure by us to
comply with federal, state, or foreign laws or self-regulatory standards could result in negative publicity, diversion of management time and effort,
proceedings against us by governmental entities or others, and fines. In many jurisdictions, enforcement actions and consequences for noncompliance are
rising. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we
conduct business.
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Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, transparency and other healthcare
laws and regulations, which could expose us to, among other things, criminal sanctions, civil penalties, contractual damages, reputational harm,
administrative burdens and diminished profits and future earnings.
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of any product candidates for which we
obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our
products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:
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the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an
individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under a federal healthcare
program such as Medicare and Medicaid;
the federal false claims and civil monetary penalties laws, including the civil False Claims Act, impose criminal and civil penalties, including
civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be
presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal
an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), imposes criminal and civil liability for, among other
things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to
healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also
imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of
individually identifiable health information;
the federal Physician Payments Sunshine Act requires applicable manufacturers of covered drugs, devices, biologics and medical supplies for
which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to annually
report to CMS information regarding payments and other transfers of value to physicians and teaching hospitals as well as information
regarding ownership and investment interests held by physicians and their immediate family members. The information was made publicly
available on a searchable website in September 2014 and will be disclosed on an annual basis; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private
insurers.
Some state laws require biotechnology companies to comply with the biotechnology industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing expenditures. State and foreign laws also govern the privacy and security of
health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
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Efforts to ensure that our current and future business arrangements with third-parties will comply with applicable healthcare laws and regulations will
involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes,
regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of
these laws or any other governmental regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative
penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and
Medicaid, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or restructuring of our operations. Defending
against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in
defending against any such actions that may be brought against us, our business may be impaired. Further, if any of the physicians or other healthcare
providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from government funded healthcare programs.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include failures to comply with FDA regulations,
provide accurate information to the FDA, comply with federal and state health care fraud and abuse laws and regulations, accurately report financial
information or data or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to
extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may
restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business
arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in
regulatory sanctions and serious harm to our reputation. We have adopted a code of conduct, but it is not always possible to identify and deter employee
misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such
actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our
business, including the imposition of significant fines or other sanctions.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could
have a material adverse effect on our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling,
use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including
chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third-parties for the disposal of these
materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our
use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant
costs associated with civil or criminal fines and penalties.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for
environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of hazardous and flammable materials,
including chemicals and biological materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These
current or future laws and regulations may impair our research, development or commercialization efforts. Failure to comply with these laws and regulations
also may result in substantial fines, penalties or other sanctions.
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Our business activities may be subject to the Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 (“UK Bribery Act”), and other similar
anti-bribery and anti-corruption laws of other countries in which we operate.
We have conducted and have ongoing studies in international locations, and may in the future initiate additional studies in countries other than the
U.S. Our business activities may be subject to the FCPA, the UK Bribery Act and other similar anti-bribery or anti-corruption laws, regulations or rules of
other countries in which we operate. 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 health care 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 or contractors, 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 Employee Matters, Managing Our Growth and Other Risks Related to Our Business
Our success is highly dependent on the services of our Chief Executive Officer, Dr. Robert Alexander, and our President and Chief Operating Officer,
Dr. Adam Tomasi, and our ability to attract and retain highly skilled executive officers and employees.
To succeed, we must recruit, retain, manage and motivate qualified clinical, scientific, technical and management personnel, and we face significant
competition for experienced personnel. We are highly dependent on the principal members of our management and scientific and medical staff, particularly
our Chief Executive Officer, Dr. Robert Alexander, and our President and Chief Operating Officer, Dr. Adam Tomasi. If we do not succeed in attracting and
retaining qualified personnel, particularly at the management level, it could adversely affect our ability to execute our business plan and harm our operating
results. In particular, the loss of one or more of our executive officers, including Dr. Alexander or Dr. Tomasi, could be detrimental to us if we cannot recruit
suitable replacements in a timely manner. The competition for qualified personnel in the biotechnology field is intense and as a result, we may be unable to
continue to attract and retain qualified personnel necessary for the future success of our business. In addition to competition for personnel, the San Francisco
Bay Area in particular is characterized by a high cost of living. We could in the future have difficulty attracting experienced personnel to our company and
may be required to expend significant financial resources in our employee recruitment and retention efforts.
Many of the other biotechnology companies that we compete against for qualified personnel have greater financial and other resources, different risk
profiles and a longer history in the industry than we do. They also may provide more diverse opportunities and better prospects for career advancement. Some
of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-
quality personnel, the rate and success at which we can discover, develop and commercialize our product candidates will be limited and the potential for
successfully growing our business will be harmed.
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If we are unable to establish sales or marketing capabilities or enter into agreements with third-parties to sell or market our product candidates, we may
not be able to successfully sell or market our product candidates that obtain regulatory approval.
We currently have a small commercial team which will need to be expanded substantially to support the marketing, sales and distribution of any of
our product candidates that may be able to obtain regulatory approval. In order to commercialize any product candidates, we must build marketing, sales,
distribution, managerial and other non-technical capabilities or make arrangements with third-parties to perform these services for each of the territories in
which we may have approval to sell or market our product candidates. We may not be successful in accomplishing these required tasks.
Establishing an internal sales or marketing team with technical expertise and supporting distribution capabilities to commercialize our product
candidates will be expensive and time-consuming, and will require significant attention of our executive officers to manage. Any failure or delay in the
development of our internal sales, marketing and distribution capabilities could adversely impact the commercialization of any of our product candidates that
we obtain approval to market, if we do not have arrangements in place with third-parties to provide such services on our behalf. Alternatively, if we choose to
collaborate, either globally or on a territory-by-territory basis, with third-parties that have direct sales forces and established distribution systems, either to
augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems, we will be required to negotiate and enter into
arrangements with such third-parties relating to the proposed collaboration. If we are unable to enter into such arrangements when needed on acceptable
terms, or at all, we may not be able to successfully commercialize any of our product candidates that receive regulatory approval or any such
commercialization may experience delays or limitations. If we are unable to successfully commercialize our approved product candidates, either on our own
or through collaborations with one or more third-parties, our future product revenue will suffer and we may incur significant additional losses.
In order to successfully implement our plans and strategies, we will need to grow the size of our organization, and we may experience difficulties in
managing this growth.
At December 31, 2019, we had 90 full-time employees, including 61 employees engaged in research and development. In order to successfully
implement our development and commercialization plans and strategies, and as we transition into operating as a public company, we expect to need additional
managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of
management, including:
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identifying, recruiting, integrating, maintaining and motivating additional employees;
managing our internal development efforts effectively, including the clinical and FDA review process for antolimab (AK002) and any other
future product candidates, while complying with any contractual obligations to contractors and other third-parties we may have; and
improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to successfully develop and, if approved, commercialize antolimab (AK002) and any other future
product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a
disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing 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, including substantially all aspects of clinical management and manufacturing. We cannot assure you that the services
of 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 third-party
service providers is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain marketing
approval of antolimab (AK002) and any other future product candidates or otherwise advance our business. We cannot assure you that we will be able to
manage our existing third-party service providers or find other competent outside contractors and consultants on economically reasonable terms, or at all.
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If we are not able to effectively expand our organization by hiring new employees and/or engaging additional third-party service providers, we may
not be able to successfully implement the tasks necessary to further develop and commercialize antolimab (AK002) and any other future product candidates
and, accordingly, may not achieve our research, development and commercialization goals.
We may experience disruptions and delays or incur financial damages as a result of system failures or security breaches.
Despite the implementation of security measures, any of the internal computer systems belonging to us or our third-party service providers are
vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failure. Any system
failure, accident or security breach that causes interruptions in our own or in third-party service providers’ operations could result in a material disruption of
our drug discovery and development programs. A system failure or security breach that causes the loss of clinical trial data from completed or future clinical
trials could result in delays in our regulatory approval efforts and significantly increase our costs in order to recover or reproduce the lost data. In addition, to
the extent that any disruption or security breach results in a loss or damage to our data or applications, or inappropriate disclosure of confidential or
proprietary information, we may incur liability as a result, our drug discovery programs and competitive position may be adversely affected, and further
development of our product candidates may be delayed. Any such disruption, failure or security breach could also cause us to incur additional costs to remedy
the damages that arise from such disruption, failure or security breach.
Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption, failure or security breach. In
addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims
made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.
Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our
control, which could harm our business.
Our facility is located in a seismically active region and in a state which also experiences large scale wildfires from time to time. We have not
undertaken a systematic analysis of the potential consequences to our business and financial results from a major earthquake, fire, power loss, terrorist activity
or other disasters and do not have a recovery plan for such disasters. In addition, we do not carry sufficient insurance to compensate us for actual losses from
interruption of our business that may occur, and any losses or damages incurred by us could harm our business. We maintain multiple copies of each of our
antibody sequences and electronic data records, most of which we maintain at our headquarters. If our facility were impacted by a seismic event, we could
lose all our antibody sequences, which would have an adverse effect on our ability to perform our obligations under our collaborations and discover new
targets.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2019, we had gross U.S. federal and state net operating loss carryforwards of $210.2 million and $42.4 million, respectively,
which expire beginning in 2032. As of December 31, 2019, the Company had federal and California research and other tax credit carryforwards of $8.8
million and $4.0 million, respectively. It is possible that we will not generate taxable income in time to use our net operating loss carryforwards before their
expiration or at all. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change”
(generally defined as a greater than 50 percentage points change (by value) in the ownership of its equity over a rolling three-year period), the corporation’s
ability to use its pre-change net operating loss carryforwards and certain other pre-change tax attributes to offset its post-change income and taxes may be
limited. We have not yet undertaken an analysis under Sections 382 and 383 of the Internal Revenue Code to see if any of our net operating loss
carryforwards were limited as a result of our prior stock sales, including those made as part of our initial public offering. As a result, we may have
experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of shifts in our stock ownership, some of
which are outside our control. Accordingly, our ability to utilize our net operating loss carryforwards could be limited by an “ownership change” as described
above, which could result in increased tax liability to our company.
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Risks Related to Intellectual Property
If we are unable to obtain or protect intellectual property rights, we may not be able to compete effectively in our market.
Our success depends in significant part on our and our current or future licensors’ ability to establish, maintain and protect patents and other
intellectual property rights and operate without infringing the intellectual property rights of others. We have filed numerous patent applications both in the
United States and in foreign jurisdictions to obtain patent rights to inventions we have developed. We have also licensed from third-parties rights to patent
portfolios. Some of these licenses give us the right to prepare, file and prosecute patent applications and maintain and enforce patents we have licensed, and
other licenses may not give us such rights.
The patent prosecution process is expensive and time-consuming, and we and our current or future licensors may not be able to prepare, file and
prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our current and future licensors
will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent
protection on them. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to
maintain the patents, covering technology that we license from third-parties and are reliant on our current and future licensors. Therefore, these patents and
applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors fail to
establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our current and future licensors
are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.
The patent position of biotechnology companies generally is highly uncertain, involves complex legal and factual questions and has in recent years
been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our current or future licensors’
patent rights are highly uncertain. Our and our current or future licensors’ pending and future patent applications may not result in patents being issued which
protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. The
patent examination process may require us or our current and future licensors to narrow the scope of the claims of our or our current and future licensors’
pending and future patent applications, which may limit the scope of patent protection that may be obtained.
We cannot assure you that all of the potentially relevant prior art relating to our patents and patent applications has been found. If such prior art exists,
it can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue and even if such patents
cover our product candidates, third-parties may initiate an opposition, interference, re-examination, post-grant review, inter partes review, nullification or
derivation action in court or before patent offices, or similar proceedings challenging the validity, enforceability or scope of such patents, which may result in
the patent claims being narrowed or invalidated. Our and our current or future licensors’ patent applications cannot be enforced against third-parties
practicing the technology claimed in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims
cover the technology.
Because patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until
issued, we cannot be certain that we or our current and future licensors were the first to file any patent application related to a product candidate. Furthermore,
if third-parties have filed such patent applications on or before March 15, 2013, an interference proceeding in the United States can be initiated by such third-
parties to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. If third-parties have filed such
applications after March 15, 2013, a derivation proceeding in the United States can be initiated by such third-parties to determine whether our invention was
derived from theirs. Even where we have a valid and enforceable patent, we may not be able to exclude others from practicing our invention where the other
party can show that they used the invention in commerce before our filing date or the other party benefits from a compulsory license. In addition, patents have
a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S.
filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product
candidates are obtained, once the patent life has expired for a product, we may
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be open to competition from competitive medications, including biosimilar or generic medications. For example, some of the patents that we exclusively
licensed from The Johns Hopkins University will expire in 2021, one of our owned patent families that claims one of the product candidates will expire in
2035 in the United States and similar patent applications are pending in foreign jurisdictions with a projected expiration date in 2034, at which time the
underlying technology covered by such patents can be used by any third-party, including competitors. Although the patent term extensions under the Hatch-
Waxman Act in the United States may be available to extend the patent term, we cannot provide any assurances that any such patent term extension will be
obtained and, if so, for how long.
Due to the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates
might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with
sufficient rights to exclude others from commercializing products similar or identical to ours. We expect to seek extensions of patent terms where these are
available in any countries where we are prosecuting patents. This includes in the United States under the Drug Price Competition and Patent Term Restoration
Act of 1984, which permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the
FDA and the U.S. Patent and Trademark Office (“USPTO”) in the United States, and any equivalent foreign regulatory authority, may not agree with our
assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request.
If this occurs, our competitors may take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and
launch their product earlier than might otherwise be the case.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, enforcing and defending patents on product candidates in all countries throughout the world would be prohibitively expensive,
and our or our current and future licensors’ intellectual property rights may not exist in some countries outside the United States or may be less extensive in
some countries than in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as
federal and state laws in the United States. Consequently, we and our current and future licensors may not be able to prevent third-parties from practicing our
and our current or future licensors’ inventions in all countries outside the United States, or from selling or importing products made using our and our current
or future licensors’ inventions in and into the United States or other jurisdictions. Competitors may use our and our current or future licensors’ 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 and our current and future licensors have patent protection, but enforcement is not as strong as that in the United States. These products may
compete with our product candidates, and our and our current or future licensors’ 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 and other intellectual property protection,
particularly those relating to biotechnology, which could make it difficult for us and our current and future licensors to stop the infringement of our and our
current or future licensors’ patents or marketing of competing products in violation of our and our current or future licensors’ proprietary rights generally.
Proceedings to enforce our and our current or future licensors’ patent rights in foreign jurisdictions could result in substantial costs and divert our and our
current or future licensors’ efforts and attention from other aspects of our business, could put our and our current or future licensors’ patents at risk of being
invalidated or interpreted narrowly and our and our current or future licensors’ patent applications at risk of not issuing and could provoke third-parties to
assert claims against us or our current and future licensors. We or our current and future licensors may not prevail in any lawsuits that we or our current and
future licensors initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful.
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 or our current and future licensors are forced to grant a license to third-
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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.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity and is therefore costly, time-
consuming and inherently uncertain. Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties
and costs. Recent patent reform legislation in the United States and other countries, including the Leahy-Smith America Invents Act (“Leahy-Smith Act”),
signed into law on September 16, 2011, could increase those uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that
affect the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective avenues for competitors to challenge the
validity of patents. 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. After
March 15, 2013, under the Leahy-Smith Act, the United States transitioned to a first inventor to file system in which, assuming that the other statutory
requirements 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. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the
prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business,
financial condition, results of operations and prospects.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain
circumstances or weakening the rights of patent owners in certain situations. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO
and the relevant law-making bodies in other countries, the laws and regulations governing patents could change in unpredictable ways that would weaken our
ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the
lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee
payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or
by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse
of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly
legalize and submit formal documents. If we or our current and future licensors fail to maintain the patents and patent applications covering our product
candidates, our patent protection could be reduced or eliminated and our competitors might be better able to enter the market with competing products.
If our trademark and tradenames are not adequately protected, then we may not be able to build name recognition in our markets and our business may
be adversely affected.
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We cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. In
addition, we do not own any registered trademarks for the mark “ALLAKOS.” We cannot assure you that any future trademark applications that we will file
will be approved. During trademark registration proceedings, we may receive rejections and although we are given an opportunity to respond to those
rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and in proceedings before comparable agencies in
many foreign jurisdictions, third-parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks.
Opposition or cancellation proceeding may be filed against our trademarks and our trademarks may not survive such proceedings, which may force us to
rebrand our name.
If we breach the license agreements related to our product candidates, we could lose the ability to continue the development and commercialization of our
product candidates.
Our commercial success depends upon our ability, and the ability of our current and future licensors, to develop, manufacture, market and sell our
product candidates and use our and our current or future licensors’ wholly-owned technologies without infringing the proprietary rights of third-parties. A
third-party may hold intellectual property, including patent rights that are important or necessary to the development of our products. As a result, we are a
party to a number of technology licenses that are important to our business. For example, we have obtained an exclusive license under certain intellectual
property related to Siglec-8 from The Johns Hopkins University to develop certain products and a non-exclusive license from BioWa and Lonza to develop
and commercialize products manufactured in a particular mammalian host cell line. If we fail to comply with the obligations under these agreements,
including payment and diligence terms, our current and future licensors may have the right to terminate these agreements, in which event we may not be able
to develop, manufacture, market or sell any product that is covered by these agreements or may face other penalties under the agreements. Such an occurrence
could adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or
elimination of our rights under these agreements may result in our having to negotiate new or reinstated agreements, which may not be available to us on
equally favorable terms, or at all, or cause us to lose our rights under these agreements, including our rights to intellectual property or technology important to
our development programs.
Disputes may arise regarding intellectual property subject to a licensing agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing
agreement;
the sublicensing of patent and other rights under any collaboration relationships we might enter into in the future;
our diligence obligations under the license 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 current
and future licensors and us; and
the priority of invention of patented technology.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable
terms, we may be unable to successfully develop and commercialize the affected product candidates.
Third-parties may initiate legal proceedings against us alleging that we infringe their intellectual property rights or we may initiate legal proceedings
against third-parties to challenge the validity or scope of intellectual property rights controlled by third-parties, the outcome of which would be uncertain
and could have an adverse effect on the success of our business.
Third-parties may initiate legal proceedings against us or our current and future licensors alleging that we or our current and future licensors infringe
their intellectual property rights, or we or our current and future licensors
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may initiate legal proceedings against third-parties to challenge the validity or scope of intellectual property rights controlled by third-parties, including in
oppositions, interferences, reexaminations, inter partes reviews or derivation proceedings in the United States or other jurisdictions. These proceedings can be
expensive and time-consuming, and many of our or our current and future licensors’ adversaries in these proceedings may have the ability to dedicate
substantially greater resources to prosecuting these legal actions than we or our current and future licensors.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and
commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and
would be a substantial diversion of management and employee resources from our business. An unfavorable outcome could require us or our current and
future licensors to cease using the related technology or developing or commercializing our product candidates, or to attempt to license rights to it from the
prevailing party. Our business could be harmed if the prevailing party does not offer us or our current and future licensors a license on commercially
reasonable terms or at all. Even if we or our current and future licensors obtain a license, it may be non-exclusive, thereby giving our competitors access to
the same technologies licensed to us or our current and future licensors. In addition, we could be found liable for monetary damages, including treble damages
and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product
candidates or force us to cease some of our business operations, which could harm our business.
We may be subject to claims by third-parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of
what we regard as our own intellectual property.
Many of our employees, including our senior management, were previously employed at other biopharmaceutical companies, including potential
competitors. Some of these employees executed proprietary rights, non-disclosure and/or non-competition agreements in connection with such previous
employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be
subject to claims that we or these employees have used or disclosed confidential information or intellectual property, including trade secrets or other
proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.
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If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or
personnel or sustain damages. Such intellectual property rights could be awarded to a third-party, and we could be required to obtain a license from such
third-party to commercialize our technology or products. Such a license may not be available on commercially reasonable terms or at all. Even if we
successfully prosecute or defend against such claims, litigation could result in substantial costs and distract management.
Our inability to protect our confidential information and trade secrets would harm our business and competitive position.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology
and other proprietary information, to maintain our competitive position. Trade secrets can be difficult to protect. We seek to protect these trade secrets, in part,
by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, contract manufacturers,
consultants, advisors and other third-parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and
consultants. Despite these efforts, any of the 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. Misappropriation or unauthorized disclosure of our trade secrets could significantly affect our
competitive position and may have a material adverse effect on our business. Enforcing a claim that a party illegally disclosed or misappropriated a trade
secret is difficult, expensive and time-consuming, and the outcome is unpredictable. Some courts both within and outside the United States may be less
willing or unwilling to protect trade secrets. Furthermore, trade secret protection does not prevent competitors from independently developing substantially
equivalent information and techniques and we cannot guarantee that our competitors will not independently develop substantially equivalent information and
techniques. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from
using that technology or information to compete with us. Failure on our part to adequately protect our trade secrets and our confidential information would
harm our business and our competitive position.
Risks Related to Our Dependence on Third-Parties
We rely on third-parties to conduct our clinical trials and those third-parties may not perform satisfactorily, including failing to meet deadlines for the
completion of such trials, research and studies.
We do not have the ability to independently conduct our clinical trials. We currently rely on third-parties, such as CROs, clinical data management
organizations, medical institutions and clinical investigators, to conduct our clinical trials of antolimab (AK002) and expect to continue to rely upon third-
parties to conduct additional clinical trials of antolimab (AK002) and our other product candidates. Third-parties have a significant role in the conduct of our
clinical trials and the subsequent collection and analysis of data. These third-parties are not our employees, and except for remedies available to us under our
agreements, we have limited ability to control the amount or timing of resources that any such third-party will devote to our clinical trials. Some of these
third-parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it would delay our drug development
activities.
Our reliance on these third-parties for research and development activities will reduce our control over these activities but will not relieve us of our
regulatory responsibilities. For example, we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general
investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with GCP standards, regulations for conducting, recording and
reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial
participants are protected. The EMA also requires us to comply with similar standards. Regulatory authorities enforce these GCP requirements through
periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP requirements, the
clinical data generated in our clinical trials may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may require us to
perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority,
such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with
product produced under current cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the
marketing approval process. We also are required to register certain ongoing clinical trials and post the results of certain completed clinical trials on a
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government-sponsored database, ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal
sanctions.
The third-parties we rely on for these services may also have relationships with other entities, some of which may be our competitors. If these third-
parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our 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 our product candidates and will not be able to,
or may be delayed in our efforts to, successfully commercialize our product candidates.
We contract with third-parties for the production of our product candidates for preclinical studies and, in the case of antolimab (AK002), our ongoing
clinical trials, and expect to continue to do so for additional clinical trials and ultimately for commercialization. This reliance on third-parties increases
the risk that we will not have sufficient quantities of our product candidates or drugs or such quantities at an acceptable cost, which could delay, prevent
or impair our development or commercialization efforts.
We do not currently have the infrastructure or internal capability to manufacture supplies of our product candidates for use in development and
commercialization. We rely, and expect to continue to rely, on third-party manufacturers for the production of our product candidates for preclinical studies
and clinical trials under the guidance of members of our organization. In the case of antolimab (AK002), we rely on a single third-party manufacturer, Lonza,
and we currently have no alternative manufacturer in place. We do not have long-term supply agreements and we purchase our required drug product on a
purchase order basis. If we were to experience an unexpected loss of supply of antolimab (AK002), or any of our other product candidates, for any reason,
whether as a result of manufacturing, supply or storage issues or otherwise, we could experience delays, disruptions, suspensions or terminations of, or be
required to restart or repeat, any pending or ongoing clinical trials. Replacement of our sole manufacturer of antolimab (AK002) would result in substantial
delay and interrupt our clinical trials involving antolimab (AK002).
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 may be unable to maintain or establish required agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able
to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
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the possible failure of the third-party to manufacture our product candidate according to our schedule, or at all, including if our third-party
contractors give greater priority to the supply of other products over our product candidates or otherwise do not satisfactorily perform
according to the terms of the agreements between us and them;
the possible termination or nonrenewal of agreements by our third-party contractors at a time that is costly or inconvenient for us;
the possible breach by the third-party contractors of our agreements with them;
the failure of third-party contractors to comply with applicable regulatory requirements;
the possible failure of the third-party to manufacture our product candidates according to our specifications;
the possible mislabeling of clinical supplies, potentially resulting in the wrong dose amounts being supplied or active drug or placebo not
being properly identified;
the possibility of clinical supplies not being delivered to clinical sites on time, leading to clinical trial interruptions, or of drug supplies not
being distributed to commercial vendors in a timely manner, resulting in lost sales; and
the possible misappropriation of our proprietary information, including our trade secrets and know-how.
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We do not have complete control over all aspects of the manufacturing process of, and are dependent on, our contract manufacturing partners,
including Lonza, for compliance with cGMP regulations for manufacturing both active drug substances and finished drug products. Third-party
manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside of the United States. If our contract
manufacturers, including Lonza, cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the
FDA or others, they will not be able to secure and/or maintain marketing approval for their manufacturing facilities. In addition, we do not have control over
the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign
regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may
need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain marketing approval for or market our product
candidates, if approved. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being
imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product
candidates or drugs, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our drugs and harm our
business and results of operations.
Our current and anticipated future dependence upon others for the manufacture of our product candidates or drugs may adversely affect our future
profit margins and our ability to commercialize any drugs that receive marketing approval on a timely and competitive basis.
We may not gain the efficiencies we expect from further scale-up of manufacturing of antolimab (AK002), and our third-party manufacturers may be
unable to successfully scale-up manufacturing in sufficient quality and quantity for antolimab (AK002) or our other product candidates, which could
delay or prevent the conducting of our clinical trials or the development or commercialization of our other product candidates.
Our third-party manufacturer, Lonza, is currently manufacturing antolimab (AK002) at a scale that is sufficient for us to complete our planned
clinical trials and, if we receive marketing approval, to commercialize antolimab (AK002) for the indications we are currently targeting. However, we may
consider increasing the batch scale to gain cost efficiencies. If Lonza is unable to scale-up the manufacture of antolimab (AK002) at such time, we may not
gain such cost efficiencies and may not realize the benefits that would typically be expected from further scale-up of manufacturing of antolimab (AK002).
In addition, in order to conduct clinical trials of any of our other product candidates, we may need to manufacture them in large quantities. Our third-
party manufacturers, including Lonza, may be unable to successfully increase the manufacturing capacity for any of these product candidates in a timely or
cost-effective manner, or at all. In addition, quality issues may arise during scale-up activities. If our third-party manufacturers are unable to successfully
scale up the manufacture of our other product candidates in sufficient quality and quantity, the development, testing and clinical trials of that product
candidate may be delayed or become infeasible, and marketing approval or commercial launch of any resulting product may be delayed or not obtained,
which could significantly harm our business.
Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.
As product candidates progress through preclinical and late stage clinical trials to marketing approval and commercialization, it is common that
various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimize yield,
manufacturing batch size, minimize costs and achieve consistent quality and results. Such changes carry the risk that they will not achieve these intended
objectives. 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 conducted with the altered materials. This could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition
of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates and jeopardize our ability to commercialize our product
candidates and generate revenue.
The manufacture of biologics is complex and our third-party manufacturers may encounter difficulties in production. If any of our third-party
manufacturers encounter such difficulties, our ability to provide adequate
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supply of our product candidates for clinical trials or our products for patients, if approved, could be delayed or prevented.
Manufacturing biologics, especially in large quantities, is complex and may require the use of innovative technologies to handle living cells. Each lot
of an approved biologic must undergo thorough testing for identity, strength, quality, purity and potency. Manufacturing biologics requires facilities
specifically designed for and validated for this purpose, and sophisticated quality assurance and quality control procedures are necessary. Slight deviations
anywhere in the manufacturing process, including filling, labeling, packaging, storage and shipping and quality control and testing, may result in lot failures,
product recalls or spoilage. Lonza, our current third-party manufacturer, has, and our future third-party manufacturers may have, multiple locations at which
they conduct manufacturing. However, antolimab (AK002) and our other product candidates are currently only being manufactured at one of Lonza’s
locations. If this location becomes unavailable at its anticipated capacity or the location of the manufacture of antolimab (AK002) or our other product
candidates is changed for any reason, it could result in a delay or disruption to the manufacturing process or lead to difficulties that we did not experience at
the original manufacturing location. When changes are made to the manufacturing process, we may be required to provide preclinical and clinical data
showing the comparable identity, strength, quality, purity or potency of the products before and after such changes. If microbial, viral or other contaminations
are discovered at the facilities of our manufacturer, such facilities may need to be closed for an extended period of time to investigate and remedy the
contamination, which could delay clinical trials and adversely harm our business. The use of biologically derived ingredients can also lead to allegations of
harm, including infections or allergic reactions, or closure of product facilities due to possible contamination. If our manufacturers are unable to produce
sufficient quantities for clinical trials or for commercialization as a result of these challenges, our development and commercialization efforts would be
impaired, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.
If we engage in future acquisitions or strategic partnerships, this may increase our capital requirements, dilute our stockholders, cause us to incur debt or
assume contingent liabilities, and subject us to other risks.
We may evaluate various acquisition opportunities and strategic partnerships, including licensing or acquiring complementary products, intellectual
property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:
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increased operating expenses and cash requirements;
the assumption of additional indebtedness or contingent liabilities;
the issuance of our equity securities;
assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new
personnel;
the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or
acquisition;
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 marketing approvals; and
our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or
even to offset the associated acquisition and maintenance costs.
In addition, if we undertake acquisitions, 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. Moreover, we may not be able to locate suitable acquisition
opportunities, and this inability could impair our ability to grow or obtain access to technology or products that may be important to the development of our
business.
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If we decide to establish collaborations, but are not able to establish those collaborations, we may have to alter our development and commercialization
plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund
expenses. We may seek to selectively form collaborations to expand our capabilities, potentially accelerate research and development activities and provide
for commercialization activities by third-parties.
We would face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,
among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the
proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the
FDA or comparable foreign regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and
delivering such product candidate to patients, the potential of competing drugs, the existence of uncertainty with respect to our ownership of intellectual
property and industry and market conditions generally. The potential collaborator may also consider alternative product candidates or technologies for similar
indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate.
Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators. Even if we are successful in
entering into a collaboration, the terms and conditions of that collaboration may restrict us from entering into future agreements on certain terms with
potential collaborators.
If and when we seek to enter into collaborations, 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 a product candidate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and
undertake development or commercialization activities at our own expense.
Risks Related to Ownership of Our Common Stock
The market price of our stock may continue to be volatile, which could result in substantial losses for investors.
The trading price of our common stock has been, and is likely to continue to be, highly volatile and subject to wide fluctuations in response to various
factors, some of which we cannot control. We priced our IPO at $18.00 per share on July 19, 2018 and, our common stock reached a high of $139.99 per
share during the fourth quarter of 2019. As of February 20, 2020, the closing price of our common stock was $63.86. The trading price of our common stock
could be subject to wide fluctuations in response to various factors, which in addition to the factors discussed in this “Risk Factors” section and elsewhere in
this Annual Report on Form 10-K, include:
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the timing and results of preclinical studies and clinical trials of our product candidates or those of our competitors;
the success of competitive products or announcements by potential competitors of their product development efforts;
regulatory actions with respect to our products or our competitors’ products;
actual or anticipated changes in our growth rate relative to 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 scientific or management personnel;
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announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures, collaborations or capital
commitments;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
market conditions in the pharmaceutical and biotechnology sector;
changes in the structure of healthcare payment systems;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders or our other stockholders;
expiration of market stand-off or lock-up agreements; and
general economic, industry and market conditions.
In addition, the stock market in general, and pharmaceutical and biotechnology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may
negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a
broad range of other risks, including those described in this “Risk Factors” section, could have a dramatic and adverse impact on the market price of our
common stock.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our
stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our
business. If any of the analysts covering us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our stock
performance, or if our operating results fail to meet the expectations of analysts, our stock price would likely decline. In addition, if one or more of these
analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock
price or trading volume to decline.
Raising additional capital may restrict our operations or require us to relinquish rights to our technologies or product candidates, and if we sell shares of
our common stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity
offerings, debt financings, partnerships and marketing, distribution or licensing arrangements. We do not have any committed external source of funds. We
may also from time to time issue additional shares of common stock at a discount from the then current trading price of our common stock. As a result, our
stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, as opportunities
present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common
stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result,
our stock price may decline. 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 partnerships or marketing, distribution or licensing arrangements with third parties, we may have to relinquish
valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product
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development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and
market ourselves.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to
fall below expectations or our guidance.
Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating
results. From time to time, we may enter into license or collaboration agreements or strategic partnerships with other companies that include development
funding and significant upfront and milestone payments and/or royalties, which may become an important source of our revenue. These upfront and milestone
payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to
the next.
In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the
award as determined by our board of directors, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use
as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the magnitude of the expense that we
must recognize may vary significantly.
Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to
predict, including the following:
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the timing and cost of, and level of investment in, research and development activities relating to our current and any future product
candidates, which will change from time to time;
our ability to enroll patients in clinical trials and the timing of enrollment;
the cost of manufacturing our current and any future product candidates, which may vary depending on FDA guidelines and requirements,
the quantity of production and the terms of our agreements with manufacturers;
expenditures that we will or may incur to acquire or develop additional product candidates and technologies;
the timing and outcomes of clinical trials for antolimab (AK002) and any of our future product candidates or competing product candidates;
the need to conduct unanticipated clinical trials or trials that are larger or more complex than anticipated;
competition from existing and potential future products that compete with antolimab (AK002) and any of our future product candidates, and
changes in the competitive landscape of our industry, including consolidation among our competitors or partners;
any delays in regulatory review or approval of antolimab (AK002) or any of our future product candidates;
the level of demand for antolimab (AK002) and any of our future product candidates, if approved, which may fluctuate significantly and be
difficult to predict;
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the risk/benefit profile, cost and reimbursement policies with respect to our products candidates, if approved, and existing and potential future
products that compete with antolimab (AK002) and any of our future product candidates;
our ability to commercialize antolimab (AK002) and any of our future product candidates, if approved, inside and outside of the United
States, either independently or working with third-parties;
our ability to establish and maintain collaborations, licensing or other arrangements;
our ability to adequately support future growth;
potential unforeseen business disruptions that increase our costs or expenses;
future accounting pronouncements or changes in our accounting policies; and
the changing and volatile global economic environment.
The cumulative effect of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result,
comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future
performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any
period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the
forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock
price decline could occur even when we have met any previously publicly stated guidance we may provide.
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to
stockholder approval.
As of December 31, 2019, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially
owned approximately 92.9% of our outstanding voting stock. As a result, this group of stockholders has the ability to significantly influence all matters
requiring stockholder approval, including the election of directors, amendments of our organizational documents or approval of any merger, sale of assets or
other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in
your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other
stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium
value for their common stock, and might affect the prevailing market price for our common stock.
Because we ceased to be an emerging growth company, we will no longer be able to take advantage of certain reduced disclosure requirements in our
public filings.
We ceased to be an emerging growth company, as defined in the JOBS Act and, as of December 31, 2019, we are a large accelerated filer. As a result,
we anticipate that costs and compliance initiatives will increase as a result of the fact that we ceased to be an “emerging growth company.” In particular, we
are now, or will be, subject to certain disclosure requirements that are applicable to other public companies that had not been applicable to us as an emerging
growth company. These requirements include:
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compliance with the auditor attestation requirements in the assessment of our internal control over financial reporting;
compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm
rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
full disclosure and analysis obligations regarding executive compensation; and
compliance with regulatory requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved.
There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all.
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We have incurred, and will likely continue to incur, significant additional costs in order to comply with the SEC rules implementing Section 404 of the
Sarbanes-Oxley Act.
We have incurred, and will likely continue to incur, significant additional costs in order to comply with the SEC rules implementing Section 404 of
the Sarbanes-Oxley Act. Under these rules, beginning with this annual report on Form 10-K for the year ending December 31, 2019, because we ceased to be
an emerging growth company, we are required to make a formal assessment of the effectiveness of our internal control over financial reporting. We are also
required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve
compliance with Section 404, we engaged in and will continue to engage in a process to document and evaluate our internal control over financial reporting,
which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed
work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate,
validate through testing that controls are designed and operating effectively, and implement a continuous reporting and improvement process for internal
control over financial reporting.
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. These
reporting and other obligations have placed and will continue to place significant demands on our management and administrative and operational resources,
including accounting resources. Any failure to maintain effective controls or any difficulties encountered in their implementation or improvement could cause
us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Ineffective disclosure controls and
procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which
would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may
not be able to remain listed on Nasdaq.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure
that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and
procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
These inherent limitations include the facts that judgments in decision-making can be faulty and that breakdowns can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized
override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be
detected.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile and, in the past, companies that have experienced volatility in the market price of their stock
have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in
substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
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We have not paid and do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to
stockholders will therefore be limited to any appreciation in the value of their stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or
prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the market price of our
common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our
company may deem advantageous. These provisions, among other things:
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establish a classified board of directors so that not all members of our board are elected at one time;
permit only the board of directors to establish the number of directors and fill vacancies on the board;
provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a
“poison pill”);
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
prohibit cumulative voting;
authorize our board of directors to amend the bylaws;
establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by
stockholders at annual stockholder meetings; and
require a super-majority vote of stockholders to amend some 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.
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Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the
United States of America will be the exclusive forums 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 certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:
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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.
Our amended and restated certificate of incorporation further provides 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 (such provision, the “Federal Forum Provision”).
However, on December 19, 2018, the Delaware Court of Chancery issued a decision in Matthew Sciabacucchi v. Matthew B. Salzberg et al., C.A. No. 2017-
0931-JTL (Del. Ch.), finding that such provisions such as the Federal Forum Provision are not valid under Delaware law. In light of this decision of the
Delaware Court of Chancery, we do not intend to enforce the federal forum provision in our amended and restated certificate of incorporation unless and until
such time there is a final determination by the Delaware Supreme Court regarding the validity of such provisions. If the decision is not appealed or if the
Delaware Supreme Court affirms the Delaware Chancery Court’s decision, then we will seek approval by our stockholders to amend our certificate of
incorporation at our next regularly-scheduled annual meeting of stockholders to remove the Federal Forum Provision.
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. If a court were to find
either exclusive-forum provision in our amended and restated certificate of incorporation 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.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are currently located in Redwood City, California, where we lease 25,136 square feet of office, research and development
and laboratory space pursuant to a lease agreement that commenced on November 1, 2018 and expires on July 31, 2029, with an option to extend for five
years.
On December 4, 2019, we entered into a lease agreement for approximately 98,000 square feet of office space to be constructed in San Carlos,
California. We expect these premises to be delivered in November 2020, and we expect to move into this new headquarters in mid-2021 after making certain
improvements. The lease term will expire 123 months following the rent commencement date, which is expected to be the earlier of nine months after the
premises are delivered or the date our tenant improvements are substantially completed. This lease agreement includes an option to extend the term for an
additional period of five years and provides us a right of first refusal for certain additional office space.
We believe that our facilities will be sufficient for our needs over the next twelve months. We may need additional space as we expand our business
and believe that additional space when needed, will be available 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. Regardless of outcome, litigation can have an
adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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.
Our common stock has been listed on the NASDAQ Global Select Market under the symbol “ALLK”.
PART II
Holders of Common Stock
As of February 20, 2020, there were 17 holders of record of our common stock. Because many of our shares of common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our common stock represented by these
record holders.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds
and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition,
future debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the
discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash
needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.
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Performance Graph
This graph below 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 this Annual Report on Form 10-K or into any other filing of Allakos Inc.
under the Securities Act, as amended, except to the extent that we specifically incorporate this information by reference therein, 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 July 19, 2018 (the first day of trading of our common stock) and its relative performance is tracked through December 31, 2019. 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 indicative of future
performance, and we do not make or endorse any predictions as to future stockholder returns.
COMPARISON OF CUMULATIVE TOTAL RETURN
among Allakos Inc., the NASDAQ Composite Index
and the NASDAQ Biotechnology Index
Allakos Inc.
NASDAQ Composite
NASDAQ Biotechnology
9/30/2018
7/19/2018
12/31/2019
$ 100.00 $ 143.97 $ 167.26 $ 129.60 $ 138.66 $ 251.62 $ 305.15
116.51
102.49
103.60
84.54
103.06
103.09
100.00
100.00
103.42
92.52
99.56
94.65
85.24
81.92
12/31/2018
9/30/2019
3/31/2019
6/30/2019
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Recent Sales of Unregistered Securities
Not applicable
Use of Proceeds from Registered Securities
Not applicable
Issuer Purchases of Equity Securities
Not applicable
Item 6. Selected Financial Data.
The following tables summarize our selected financial data for the periods and as of the dates indicated. We have derived our selected statements of
operations and comprehensive loss data for the years ended December 31, 2019, 2018 and 2017, and the balance sheets data as of December 31, 2019, 2018
and 2017, from our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the financial and other data
below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial
statements and related notes included elsewhere in this Annual Report on Form 10-K.
Statements of Operations Data:
Loss from operations
Net loss
Net loss per share, basic and diluted (1)
Weighted-average shares of common stock
outstanding, basic and diluted (1)
2019
Year Ended December 31,
2017
2018
(in thousands, except per share data)
2016
$
$
$
(91,418)
(85,372)
(1.89)
$
$
$
(45,721)
(43,538)
(2.20)
$
$
$
(22,254)
(23,552)
(14.54)
$
$
$
(17,060)
(17,100)
(13.03)
45,191
19,833
1,620
1,312
(1)
See our statements of operations and comprehensive loss and Note 2 to our financial statements for further details on the calculation of net loss per
share, basic and diluted, attributable to common stockholders and the weighted-average number of shares used in the computation of the per share
amounts.
Balance Sheet Data:
Cash and cash equivalents and marketable securities
Working capital (1)
Total assets
Total liabilities
Convertible preferred stock
Accumulated deficit
Total stockholders’ equity (deficit)
2019
Year Ended December 31,
2017
2018
(in thousands)
2016
$
$
495,901
486,809
516,894
21,173
—
(189,484)
495,721
$
178,906
176,353
191,259
7,265
—
(104,112)
183,994
$
85,207
83,452
87,029
2,828
142,969
(60,574)
(58,768)
13,416
11,031
14,176
7,616
42,996
(37,022)
(36,436)
(1)
Working capital is defined as current assets less current liabilities. See our financial statements included elsewhere in this Annual Report on Form 10-
K for further details regarding our current assets and current liabilities.
79
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and
the other financial information appearing elsewhere in this Annual Report on Form 10-K. These statements generally relate to future events or to our future
financial performance and involve known and unknown risks, uncertainties and other factors which 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. The
following discussion and analysis contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual
results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those
discussed below and those discussed in the section entitled “Risk Factors” included in this Annual Report on Form 10-K. If we do update one or more
forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the SEC.
Forward-looking statements include, but are not limited to, statements about:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the impact that the adoption of new accounting pronouncements will have on our financial statements;
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;
our plans relating to commercializing antolimab (AK002), if approved, including the geographic areas of focus and sales strategy;
the size of the market opportunity for antolimab (AK002) in each of the diseases we are targeting;
the number of diseases represented in the patient population enrolled in our clinical trials, and our ability to evaluate response to treatment
of antolimab (AK002) in diseases other than the primary indication in our clinical trials;
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 beneficial characteristics, safety, efficacy and therapeutic effects of antolimab (AK002);
the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug
designation, for antolimab (AK002) or our other product candidates for various diseases;
our ability to obtain and maintain regulatory approval of antolimab (AK002) or our other product candidates;
our plans relating to the further development of antolimab (AK002) and our other product candidates;
existing regulations and regulatory developments in the United States and other jurisdictions;
our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;
our continued reliance on third-parties to conduct additional clinical trials of antolimab (AK002) and our other product candidates, and for
the manufacture of our product candidates for preclinical studies and clinical trials;
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;
80
•
•
the sufficiency of our existing cash, cash equivalents and marketable securities to fund our future operating expenses and capital expenditure
requirements; and
our anticipated use of the proceeds from our initial public offering and the concurrent private placement in July 2018 and subsequent follow-
on offering in August 2019.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including, but not limited to, those described in
“Risk Factors.” In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,”
“may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty
of future events or outcomes. These forward-looking statements reflect our beliefs and views with respect to future events and are based on estimates and
assumptions as of the date of this Annual Report on Form 10-K and are subject to risks and uncertainties. We discuss many of these risks in greater detail in
the section entitled “Risk Factors” included in Part I, Item 1A and elsewhere in this Report. Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not possible to predict all risks, nor can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we
may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking
statements in this Annual Report on Form 10-K by these cautionary statements. Except as required by law, we assume no obligation to update these forward-
looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether
as a result of new information, future events or otherwise.
Our discussion and analysis below are focused on our financial results and liquidity and capital resources for the years ended December 31, 2019 and
2018, including year-over-year comparisons of our financial performance and condition for these years. Discussion and analysis of the year ended December
31, 2017 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31, 2018 and 2017,
are located in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2018, filed with the SEC on March 14, 2019.
Overview
We are a clinical stage biotechnology company developing antolimab (AK002), our wholly owned monoclonal antibody, for the treatment of various
mast cell and eosinophil related diseases. Antolimab (AK002) selectively targets both mast cells and eosinophils, two types of white blood cells that are
widely distributed in the body and play a central role in the inflammatory response. Inappropriately activated mast cells and eosinophils have been identified
as key drivers in a number of severe diseases affecting the gastrointestinal tract, eyes, skin, lungs and other organs. As such, antolimab (AK002) has the
potential to treat a large number of severe diseases. Antolimab (AK002) completed a double-blind, randomized, placebo-controlled Phase 2 study in patients
with eosinophilic gastritis (“EG”) and/or eosinophilic gastroenteritis (“EGE”; the “ENIGMA study”). The ENIGMA study met all prespecified primary and
secondary endpoints when compared to placebo. Additionally, patients in the ENIGMA study with co-morbid eosinophilic esophagitis (“EoE”) showed
histological and symptom improvement when treated with antolimab (AK002) compared to placebo. Based on these results from the ENIGMA study, we plan
to initiate a Phase 3 study in patients with EG and/or EGE and a Phase 2/3 study in patients with EoE.
Antolimab (AK002) also showed promising activity in clinical studies in chronic urticaria (“CU”), indolent systemic mastocytosis (“ISM”), and
severe allergic conjunctivitis (“SAC”). In addition, improvements were also observed in atopic comorbidities such as asthma, atopic dermatitis, and allergic
rhinitis. The activity observed in these studies suggests that antolimab (AK002) could provide significant benefit to patients suffering from these diseases and
highlights the potential of antolimab (AK002) to broadly inhibit mast cells and deplete eosinophils in different disease settings.
Despite the knowledge that mast cells and eosinophils drive many pathological conditions, there are no approved therapies that selectively target both
mast cells and eosinophils. Antolimab (AK002) binds to Siglec-8, an inhibitory receptor found on mast cells and eosinophils, which represents a novel way to
selectively deplete or
81
inhibit these important immune cells and thereby potentially resolve inflammation. We believe antolimab (AK002) is the only Siglec-8 targeting antibody
currently in clinical development and may have advantages over current treatment options available to patients for the diseases we are pursuing.
Since our inception in 2012, we have devoted substantially all of our resources and efforts towards the research and development of our product
candidates. Our lead product candidate, antolimab (AK002), a monoclonal antibody targeting Siglec-8, entered clinical trials in 2016. In addition to activities
conducted internally at our facilities, we have utilized significant financial resources to engage contractors, consultants and other third parties to conduct
various preclinical and clinical development activities on our behalf.
To date, we have not had any products approved for sale and have not generated any revenue 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 significant operating losses to date and expect to incur significant operating losses for the foreseeable future. Our net losses were $85.4 million
and $43.5 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, we had an accumulated deficit of $189.5 million.
Prior to completing our IPO in July 2018 and subsequent follow-on offering in August 2019, our operations had been historically financed primarily
through the private placements of convertible debt instruments and convertible preferred stock. These private placements provided gross proceeds of $146.9
million. As of December 31, 2019, we had cash, cash equivalents and marketable securities of $495.9 million, which we believe will be sufficient to fund our
planned operations for at least the next 12 months from the issuance of our financial statements.
July 2018 Initial Public Offering
On July 23, 2018, we completed an IPO, selling 8,203,332 shares of common stock at $18.00 per share (the “July 2018 IPO”). Proceeds from our
July 2018 IPO, net of underwriting discounts and commissions, were $137.3 million. Concurrently with our July 2018 IPO, we completed a private placement
of 250,000 shares of common stock at $18.00 per share to an existing stockholder. Proceeds from this private placement were $4.5 million.
In connection with the completion of the July 2018 IPO, all then outstanding shares of convertible preferred stock converted into 30,971,627 shares
of common stock.
August 2019 Follow-On Offering
On August 9, 2019, we closed an underwritten public offering (the “August 2019 Offering”) under our shelf registration statement on Form S-3 (File
No. 333-233018) pursuant to which we sold an aggregate of 5,227,272 shares of our common stock at a public offering price of $77.00 per share. We received
aggregate net proceeds of $377.5 million, after deducting the underwriting discounts and commissions and offering expenses.
Components of Operating Results
Revenue
We have not generated any revenue from product sales or otherwise, and do not expect to generate any revenue for at least the next several years.
Operating Expenses
We classify operating expenses into two categories: (i) research and development and (ii) general and administrative.
82
Research and Development Expenses
Research and development expenses represent the following costs incurred by us for the discovery, development and manufacturing of our product
candidates:
•
•
•
•
•
•
consultant and personnel-related costs including salaries, benefits, travel and stock-based compensation expense;
costs incurred under service agreements with contract research organizations (“CROs”) that conduct nonclinical and clinical research
activities on our behalf;
costs incurred under service agreements with contract development and manufacturing organizations (“CDMOs”) for the manufacture and fill
finish of our preclinical and clinical materials;
costs related to in-house research and development activities conducted at our facilities including laboratory supplies, non-capital laboratory
equipment and depreciation of capital laboratory equipment and leasehold improvements to laboratories;
costs incurred under exclusive and non-exclusive license agreements with third-parties; and
allocated facility and other costs including the rent and maintenance of our facilities, insurance premiums, depreciation of shared-use
leasehold improvements and general office supplies.
The successful development of our product candidates is highly uncertain. Accordingly, it is difficult to estimate the nature, timing and extent of costs
necessary to complete the remainder of the development of our product candidates. We are also unable to predict when, if ever, we will be able to generate
revenue from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty
surrounding:
•
•
•
•
•
•
demonstrating sufficient safety and tolerability profiles of product candidates;
successful enrollment and completion of clinical trials;
requisite clearance and approvals from applicable regulatory authorities;
establishing and maintaining commercial manufacturing capabilities with CDMOs;
obtaining and maintaining protection of intellectual property; and
commercializing product candidates, if and when approved, alone or in collaboration with third-parties.
A change pertaining to any of these variables would significantly impact the timing and extent of costs incurred with respect to the development and
commercialization of our product candidates.
External costs incurred from CROs and CDMOs have comprised a significant portion of our research and development expenses since inception. We
track CRO and CDMO costs on a program-by-program basis following the advancement of a product candidate into clinical development. Consulting and
personnel-related costs, laboratory supplies and non-capital equipment utilized in the conduct of in-house research, in-licensing fees and general overhead, are
not tracked on a program-by-program basis, nor are they allocated, as they commonly benefit multiple projects, including those still in our pipeline.
The following table summarizes our research and development expenses for the periods indicated (in thousands):
Antolimab (AK002) contract research and development costs
Consulting and personnel-related costs
Other unallocated research and development costs
Total
2019
Year Ended December 31,
2018
2017
$
$
30,806
23,967
7,085
61,858
$
$
12,990
14,144
6,153
33,287
$
$
5,133
6,033
7,340
18,506
83
General and Administrative Expenses
General and administrative expenses consist of fees paid to consultants, salaries, benefits and other personnel-related costs, including stock-based
compensation, for our personnel in executive, finance, accounting and other administrative functions, legal costs, fees paid for accounting and tax services
and facility costs not otherwise included in research and development expenses. Legal costs include general corporate and patent legal fees and related costs.
We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities
including costs related to personnel, outside consultants, attorneys and accountants, among others. Additionally, we expect to incur incremental costs
associated with continuing to operate as a public company, including expenses related to maintaining compliance with the rules and regulations of the SEC,
and those of any national securities exchange on which our securities are traded, additional insurance premiums, investor relations activities and other
ancillary administrative and professional services.
Interest Income (Expense), Net
Interest income, net primarily consists of interest and investment income earned on our cash, cash equivalents and marketable securities included on
the balance sheets.
Other Income (Expense), Net
Other expense, net, primarily consists of amounts realized from gains and losses related to fluctuations in foreign currencies.
In-Licensing Agreements
We have entered into a number of exclusive and nonexclusive, royalty bearing license agreements with third-parties for certain intellectual property.
Under the terms of the license agreements described below, we are obligated to pay milestone payments upon the achievement of specified clinical, regulatory
and commercial milestones. Actual amounts due under the license agreements vary depending on factors including, but not limited to, the number of product
candidates we develop and our ability to successfully develop and commercialize our product candidates covered under the respective agreements. In addition
to milestone payments, we are also subject to future royalty payments based on sales of our product candidates covered under the agreements, as well as
certain minimum annual royalty and commercial reservation fees. Because the achievement of milestones and the timing and extent of future royalties is not
probable, these contingent amounts have not been included on our balance sheets or as part of Contractual Obligations and Commitments discussion below.
We did not incur any milestone expense for the year ended December 31, 2019. We recognized $0.3 million of milestone expense for the year ended
December 31, 2018. Milestone payments are not creditable against royalties. As of December 31, 2019, we have not incurred any royalty liabilities related to
our license agreements, as product sales have not yet commenced.
Exclusive License Agreement with The Johns Hopkins University
In December 2013, we entered into a license agreement with JHU for a worldwide exclusive license to develop, use, manufacture and commercialize
covered product candidates including antolimab (AK002), which was amended in September 2016. Under the terms of the agreement, we have made upfront
and milestone payments of $0.3 million through December 31, 2019 and we may be required to make aggregate additional milestone payments of up to $4.0
million. We also issued 88,887 shares of common stock as consideration under the JHU license agreement. In addition to milestone payments, we are also
subject to single-digit royalties to JHU based on future net sales of each licensed therapeutic product candidate by us and our affiliates and sublicensees, with
up to a low six-digit dollar minimum annual royalty payment.
84
Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG
In October 2013, we entered into a tripartite agreement with BioWa and Lonza for the non-exclusive worldwide license to develop and commercialize
product candidates including antolimab (AK002) that are manufactured using a technology jointly developed and owned by BioWa and Lonza. Under the
terms of the agreement, we have made milestone payments of $0.4 million through December 31, 2019 and we may be required to make aggregate additional
milestone payments of up to $41.0 million. In addition to milestone payments, we are also subject to minimum annual commercial license fees of $40,000 per
year to BioWa until such time as BioWa receives royalty payments, as well as low single-digit royalties to BioWa and to Lonza. Royalties are based on future
net sales by us and our affiliates and sublicensees and vary dependent on Lonza’s participation as sole manufacturer for commercial production.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of our 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 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.
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.
Accrued Contract Research and Development Expense
As part of our preparation of the financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process
involves reviewing open contracts and purchase orders, as well as working with internal personnel to identify the existence and extent of services that have
been performed on our behalf which have not yet been invoiced. We make estimates of our accrued expenses as of each balance sheet date based on facts and
circumstances known to us at that time. We periodically confirm the accuracy of our estimates, recording adjustments, if necessary.
Estimates underlying accrued contract research and development expense primarily relate to our evaluation of the timing and extent of services
performed by CROs and CDMOs that conduct various research and development activities on our behalf. As the financial terms included within service
agreements with such CROs and CDMOs vary from contract to contract and often include uneven payment flows, our evaluation focuses on the level of effort
and resources expended. Accordingly, the calculation of accrued contract research and development expense requires us to analyze a significant amount of
inputs and data from multiple internal and external sources, including information from communications with clinical operations and technical operations
personnel.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of
services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are higher or lower in any
particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred for the periods
reported.
Stock-Based Compensation
We account for stock-based compensation expense resulting from stock-based awards granted to employees and nonemployees in accordance with
ASC 718, Compensation—Stock Compensation, (“ASC 718”). Per ASC 718, we measure the fair value of stock-based awards on the date of grant and
recognize the associated compensation expense, net of impact from estimated forfeitures, over the requisite service period on a straight-line basis. The vesting
period of the stock-based award has historically served as the requisite service period for the respective grants to our employees, nonemployee directors and
consultants. At each subsequent reporting date, we are required
85
to evaluate whether the achievement of any associated vesting conditions is probable and whether or not any such events have occurred that would have
resulted in the acceleration of vesting.
Determining the amount of stock-based compensation expense to be recorded requires us to develop estimates of the fair value of stock options as of
the date of grant. We estimate the fair value of each stock-based award using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model uses highly subjective inputs such as the fair value of our common stock, as well as other assumptions including the expected volatility of our common
stock, the expected term of the respective stock-based award, the risk-free interest rate for a period that approximates the expected term of the stock-based
award being valued and the expected dividend yield on our common stock over the expected term.
Expected volatility. As we do not have sufficient trading history for our common stock, we have based our computation of expected volatility on the
historical volatility of a representative group of public life science companies with similar characteristics to us, including company age and stage of
product development. The historical volatility data is calculated based on a period of time commensurate with the expected term of the stock-based
award being valued. We will continue to utilize this approach until a sufficient amount of historical information regarding the volatility of our own
stock price becomes available or until other relevant circumstances change, such as our assessment that our identified entities are no longer
appropriate to use as representative companies. In the latter case, more suitable, similar entities with publicly available stock prices will be
incorporated in the calculation.
Expected term. In order to estimate the expected term of a stock-based award, we use the simplified method prescribed by SEC Staff Accounting
Bulletin No. 107, Share-Based Payment, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the
expected term. Under this approach, the expected term is presumed to be the average of the contractual term (ten years) and the vesting term
(generally four years) of the stock-based award. We have not historically experienced, nor do we expect there to be substantially different exercise or
post-vesting termination behavior among our employees and directors.
Risk-free interest rate. The risk-free interest rate is based on publicly available yields of U.S. Treasury instruments with maturities consistent with the
expected term of the stock-based award.
Expected dividend yield. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any
dividends on our common stock.
Income Taxes
We account for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes we
expect to pay or have refunded in the current year. Our deferred income tax assets and liabilities are determined based on differences between financial
statement reporting and tax basis accounting of assets and liabilities and net operating loss and credit carryforwards, which we measure using the enacted tax
rates and laws that will be in effect when such items are expected to reverse. We reduce deferred income tax assets, as necessary, by applying a valuation
allowance to the extent that we determined it is more likely than not that some or all of our tax benefits will not be realized.
We account for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. We assess all material positions
reflected in our income tax returns, including all significant uncertain positions, for all tax years that are subject to assessment or challenge by relevant taxing
authorities. Upon determining the sustainability of our positions, we measure the largest amount of benefit possessing greater than fifty percent likelihood of
being realized upon ultimate settlement. We reassess such positions at each balance sheet date to determine whether any factors underlying the sustainability
assertion have changed and whether or not the amount of the recognized tax benefit is still appropriate.
As of December 31, 2019, our gross deferred tax assets were $61.5 million. Due to our lack of earnings history and uncertainties surrounding our
ability to generate future taxable income, we have offset the total net deferred tax assets with a full valuation allowance. The deferred tax assets were
primarily comprised of federal and
86
state tax net operating losses, (“NOLs”), which may be limited by certain rules governing changes in ownership, as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. Similar rules may apply under state tax laws. Our ability to use our remaining NOLs may be further limited if we
experience future ownership changes.
The recognition and measurement of tax benefits requires significant judgment, especially in assessing uncertain tax positions. Judgments concerning
the recognition and measurement of our tax benefits, as well as limitations surrounding their realizability, might change as new information becomes
available.
Recent Accounting Pronouncements
See Note 2 to our financial statements for recently issued accounting pronouncements, including the respective effective dates of adoption and effects
on our results of operations and financial condition.
Results of Operations
The following table summarizes our results of operations for the periods indicated (in thousands):
Operating expenses
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income (expense), net
Other expense, net
Loss before benefit from income taxes
Benefit from income taxes
Net loss
Unrealized gain (loss) on marketable securities, net of tax
Comprehensive loss
Comparison of the Years Ended December 31, 2019 and 2018
Research and Development Expenses
2019
Year Ended December 31,
2018
2017
$
$
61,858 $
29,560
91,418
(91,418)
6,201
(155)
(85,372)
—
(85,372)
152
(85,220) $
$
33,287
12,434
45,721
(45,721)
2,375
(192)
(43,538)
—
(43,538)
(15)
(43,553) $
18,506
3,748
22,254
(22,254)
(1,302)
(287)
(23,843)
(291)
(23,552)
—
(23,552)
Research and development expenses were $61.9 million for the year ended December 31, 2019 compared to $33.3 million for the year ended
December 31, 2018, an increase of $28.6 million. The period-over-period increase in research and development expenses includes $17.9 million of
incremental antolimab (AK002) contract research and development costs, primarily attributable to $15.9 million of CDMO services and $2.0 million of CRO
services. Increased hiring of R&D personnel during fiscal year 2019 contributed to an additional $9.8 million of consulting and personnel-related costs and an
additional $1.3 million increase of other unallocated research and development costs related to the conduct of in-house research. Period-over-period increases
were offset by a decrease of $1.1 million related to reduced spend on historical product candidates that are no longer in development and a $0.3 million
license fee that was recognized during the first quarter of 2018.
General and Administrative Expenses
General and administrative expenses were $29.6 million for the year ended December 31, 2019 compared to $12.4 million for the year ended
December 31, 2018, an increase of $17.2 million. The period-over-period increase in general and administrative expenses was primarily attributable to an
additional $12.1 million of personnel-related costs resulting from our increased hiring of G&A personnel, as well as $2.3 million of incremental expense
incurred from outside professional service providers for legal, information technology, and investor relations activities associated with becoming a publicly
traded company in July 2018. Finally, we incurred incremental facilities and
87
other administrative costs of $1.8 million, which includes general business insurance premiums and other such costs not otherwise included in research and
development expenses.
Interest Income (Expense), Net
Interest income, net, was $6.2 million for the year ended December 31, 2019 compared to $2.4 million for the year ended December 31, 2018, an
increase of $3.8 million. The year-over-year increase is directly attributable to increased interest income earned on capital raised by our July 2018 IPO and
our August 2019 Offering.
Other Expense, Net
There were no significant period-over-period changes in other expense, net, for the years ended December 31, 2019 and 2018.
Benefit from Income Taxes
There was no benefit from income taxes during the years ended December 31, 2019 and 2018.
Liquidity and Capital Resources
Sources of Liquidity
We are a clinical stage biotechnology company with a limited operating history. As a result of our significant research and development expenditures,
we have generated net losses since our inception. Prior to completing our July 2018 IPO and August 2019 Offering, we historically financed our operations
primarily through the private placement of convertible preferred stock. These private placements provided gross proceeds of $146.9 million. We also had a
debt facility with SVB, for an aggregate of $5.0 million, which was fully repaid and terminated during 2017.
In connection with our July 2018 IPO, we sold 8,203,332 shares of common stock at a price of $18.00 per share. Proceeds from the July 2018 IPO,
net of underwriting discounts and commissions, were $137.3 million. Concurrently with our July 2018 IPO, we completed a private placement of 250,000
shares of common stock at $18.00 per share to an existing stockholder. Proceeds from this private placement were $4.5 million.
We closed the August 2019 Offering under our shelf registration statement on Form S-3 (File No. 333-233018) pursuant to which we sold an
aggregate of 5,227,272 shares of our common stock at a public offering price of $77.00 per share. We received aggregate net proceeds of $377.5 million, after
deducting the underwriting discounts and commissions and offering expenses.
As of December 31, 2019, we had cash, cash equivalents and marketable securities of $495.9 million.
Based on our existing business plan, we believe that our current cash, cash equivalents and marketable securities will be sufficient to fund our
anticipated level of operations through at least the next 12 months from the issuance of our financial statements.
Summary Cash Flows
The following table summarizes the primary sources and uses of our cash, cash equivalents, and restricted cash for the periods indicated (in
thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
$
Year Ended December 31,
2019
2018
$
(63,012)
(311,971)
381,163
$
(38,450)
(151,047)
138,752
2017
(22,568)
(264)
94,623
$
6,180
$
(50,745)
$
71,791
88
Comparison of the Years Ended December 31, 2019 and 2018
Cash Used in Operating Activities
Net cash used in operating activities was $63.0 million for the year ended December 31, 2019, which was primarily attributable to our net loss of
$85.4 million adjusted for net noncash charges of $14.9 million and net changes in operating assets and liabilities of $7.5 million. Noncash charges included
$15.8 million in stock-based compensation expense, $1.5 million in depreciation and amortization expense and $0.3 million in amortization of right-of-use
asset, partially offset by $2.7 million in net amortization of premiums and discounts on marketable securities.
Net cash used in operating activities was $38.5 million for the year ended December 31, 2018, which was primarily attributable to our net loss of
$43.5 million adjusted for net noncash charges of $3.4 million and net changes in operating assets and liabilities of $1.6 million. Noncash charges included
$4.6 million in stock-based compensation expense and $0.2 million in depreciation and amortization expense, partially offset by $1.3 million in net
amortization of premiums and discounts on marketable securities and $0.1 million accretion of tenant improvement allowances.
Cash Used in Investing Activities
Net cash used in investing activities was $312.0 million for the year ended December 31, 2019, which consisted of $541.7 million for the purchases
of marketable securities and $0.8 million for the purchases of property and equipment, partially offset by $231.0 million for maturities of marketable
securities.
Net cash used in investing activities was $151.0 million for the year ended December 31, 2018, which consisted of $236.6 million for the purchases
of marketable securities and $6.9 million for the purchases of property and equipment, partially offset by $92.5 million for maturities of marketable securities.
Cash Provided by Financing Activities
Net cash provided by financing activities was $381.2 million for the year ended December 31, 2019, which consisted primarily of $377.5 million in
net proceeds from the issuance of common stock, $2.4 million in proceeds received from employees for the exercise of stock options and $1.2 million in
proceeds from the issuance of common stock under the 2018 ESPP.
Net cash provided by financing activities was $138.8 million for the year ended December 31, 2018, which consisted primarily of $138.4 million in
proceeds from the issuance of common stock, $0.3 million in proceeds received from employees for the exercise of stock options and $0.1 million in proceeds
from the repayment of recourse promissory notes.
Funding Requirements
We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We may seek to raise
funding through private or public equity or debt financings, or other sources such as strategic collaborations. Adequate additional funding may not be
available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our
ability to pursue our business strategies.
The timing and amount of our capital expenditures will depend on many factors, including:
•
•
•
•
•
the number and scope of clinical indications and clinical trials we decide to pursue;
the scope and costs of commercial manufacturing activities;
the extent to which we acquire or in-license other product candidates and technologies, if any;
the cost, timing and outcome of regulatory review of our product candidates;
the cost and timing of establishing sales and marketing capabilities for product candidates receiving marketing approval, if any;
89
•
•
•
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the
development of our product candidates; and
the costs associated with being a public company.
If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development and
commercialization efforts. We may also be required to sell or license to others rights to our product candidates in certain territories or indications that we
would prefer to develop and commercialize ourselves.
The issuance of additional equity securities may cause our stockholders to experience dilution. Future equity or debt financings may contain terms
that are not favorable to us or our stockholders including debt instruments imposing covenants that restrict our operations and limit our ability to incur liens,
issue additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation, licensing or asset
sale transactions.
Contractual Obligations and Commitments
The following table outlines our contractual obligations and commitments at December 31, 2019 (in thousands):
Operating lease obligations (1)
Purchase obligations (2)
Total
Payments Due by Period
Total
91,105
8,719
99,824
$
$
$
$
Less than
1 Year
1-3
Years
3-5
Years
1,233
7,216
8,449
$
$
9,998
1,503
11,501
$
$
17,071
—
17,071
More
than 5
Years
$ 62,803
—
$ 62,803
(1)
(2)
Operating lease obligations represent future minimum lease payments due under our two lease agreements.
Purchase obligations represent noncancelable minimum service fees due to counterparties under various master service agreements.
In addition to the amounts included in the table above, we enter into contracts in the normal course of business with CROs and other counterparties
assisting with our preclinical studies and clinical trials. Such contracts are generally cancellable, with varying provisions regarding termination. In the event
of a contract being terminated, we would only be obligated for services received as of the effective date of the termination, along with cancellation fees, as
applicable.
Off-Balance Sheet Arrangements
Since our inception, we have not entered into any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by
changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in money market funds that invest in
U.S. Treasury obligations. 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. Due to the short-term maturities and low
90
credit risk profile of our balances held in money market funds, a hypothetical 10% change in interest rates would not have a material effect on the fair market
value of our cash equivalents and marketable securities.
Foreign Currency Sensitivity
Our primary operations are transacted in U.S. Dollars, however, certain service agreements with third parties are denominated in currencies other than
the U.S. Dollar, primarily the British Pound and Euro. As such, we are subject to foreign exchange risk and therefore, fluctuations in the value of the
U.S. Dollar against the British Pound and Euro may impact the amounts reported for expenses and obligations incurred under such agreements. We do not
currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A
hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our financial condition or
results of operations.
91
Item 8. Financial Statements and Supplementary Data.
ALLAKOS INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Audited Financial Statements:
Balance Sheets
Statements of Operations and Comprehensive Loss
Statements of Stockholders’ Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
92
Page
93
95
96
97
98
99
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Allakos Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Allakos Inc. (the Company) as of December 31, 2019 and 2018, the related statements of operations and
comprehensive loss, statements of convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, 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, 2019, 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, 2020 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
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.
93
Accrued contract research and development expenses
Description of the Matter During 2019, the Company incurred $61.9 million of research and development expenses and accrued $5.0 million for contract
research and development expenses as of December 31, 2019. As described in Note 2 to the Financial Statements, service
agreements with third party service providers including contract research organizations (“CROs”) and contract development and
manufacturing organizations (“CDMOs”) comprise a significant component of the Company’s research and development
activities. External costs owed to third parties are accrued and expensed based upon estimates of the proportion of work completed
over the term of the individual clinical trial and manufacturing activities in accordance with signed agreements. The timing and the
amount of payments required under each individual arrangement are often different from the pattern of costs actually incurred. The
Company accrues the cost of the services with these third-party organizations based on the extent of activities completed by
vendors and measured by internal project managers.
Auditing management’s accounting for accrued contract research and development expenses is especially challenging because the
evaluation is dependent upon on a high-volume of data exchanged between the third-party service providers, internal clinical and
manufacturing personnel and the company’s finance team. Determining the accrued amounts is based on an evaluation of the
unique terms and conditions set in each respective CRO and CDMO agreement. Additionally, due to the duration of clinical-
related development activities and the timing of invoices received from third parties, the determination of the accrual for services
incurred requires application of judgment by management. The lack of timely information related to certain manufacturing
activities in determining the progress to completion of specific tasks conducted for each project can increase the risk of inaccurate
assumptions applied to project completion when estimating the costs to be accrued.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s
accounting for accrued contract research and development expenses process, including controls over management’s review of
clinical trial and manufacturing activity progress in comparison to budgets and invoices received from third parties.
To test accrued contract research and development expense, our audit procedures included, among others, testing the accuracy and
completeness of the inputs used in management’s analysis to determine costs incurred. We also inspected terms and conditions for
material vendor contracts and change orders and compared these to the cost models management used in tracking progress of
service agreements. We evaluated estimated services incurred by third parties by understanding the terms and timeline of
significant projects, evaluating management’s estimate of work performed and costs incurred, and obtaining external confirmation
of key terms and conditions for a sample of contracts. We met with internal clinical and manufacturing personnel to understand the
status of significant contract research and development activities. Further, we inspected material invoices received from third
parties after the balance sheet date and evaluated whether services performed prior to the balance sheet date had been properly
included in the accrual.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Redwood City, California
February 25, 2020
94
ALLAKOS INC.
BALANCE SHEETS
(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Investments in marketable securities
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Other long-term assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Total current liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value per share; 20,000 shares
authorized as of December 31, 2019 and 2018; no
shares issued and outstanding as of December 31, 2019 and 2018
Common stock, $0.001 par value per share; 200,000 shares
authorized as of December 31, 2019 and 2018; 48,668
and 42,117 shares issued and outstanding as of December 31, 2019
and 2018, respectively
Additional paid-in capital
Accumulated other comprehensive gain (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to financial statements
95
December 31,
2019
2018
$
38,367
457,534
3,969
499,870
8,410
5,775
2,839
516,894 $
$
5,963
7,098
13,061
8,112
21,173
33,660
145,246
2,703
181,609
8,848
—
802
191,259
2,092
3,164
5,256
2,009
7,265
—
—
48
685,020
137
(189,484)
495,721
516,894 $
42
288,079
(15)
(104,112)
183,994
191,259
$
$
$
$
ALLAKOS INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Operating expenses
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income (expense), net
Other expense, net
Loss before benefit from income taxes
Provision for (benefit from) income taxes
Net loss
Unrealized gain (loss) on marketable securities, net of tax
Comprehensive loss
Net loss per common share:
Basic and diluted
Weighted-average number of common shares
outstanding:
Basic and diluted
2019
Year Ended December 31,
2018
2017
$
$
$
61,858 $
29,560
91,418
(91,418)
6,201
(155)
(85,372)
—
(85,372)
152
(85,220) $
33,287
12,434
45,721
(45,721)
2,375
(192)
(43,538)
—
(43,538)
(15)
(43,553)
$
$
18,506
3,748
22,254
(22,254)
(1,302)
(287)
(23,843)
(291)
(23,552)
—
(23,552)
(1.89)
$
(2.20)
$
(14.54)
45,191
19,833
1,620
See accompanying notes to financial statements
96
ALLAKOS INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
Convertible
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Gain (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
Amount
2
$
$
584
$
—
$
(37,022) $
(36,436)
Balance as of December 31, 2016
Issuance of Series B convertible preferred stock for cash,
net of issuance costs of $168
Issuance of Series B convertible preferred stock upon
conversion of convertible promissory notes
Stock-based compensation expense
Repurchase of unvested restricted common stock
Issuance of common stock upon exercise of stock options
Vesting of restricted common stock
Recognition of beneficial conversion feature related to
convertible promissory notes payable to related parties,
net of $966 tax benefit
Reclassification of beneficial conversion feature related to
convertible promissory notes payable to related parties,
net of $675 tax expense
Net loss
Balance as of December 31, 2017
Proceeds from repayment of recourse promissory note
Conversion of preferred stock upon initial public offering
Issuance of common stock upon initial public offering, net of
offering costs of $3,466
Stock-based compensation expense
Issuance of common stock upon exercise of stock options
Issuance of common stock upon exercise of warrants
Vesting of restricted common stock
Unrealized loss on marketable securities, net of tax
Net loss
Balance as of December 31, 2018
Stock-based compensation expense
Issuance of common stock upon exercise of stock options
Issuance of common stock upon 2018 ESPP purchase
Issuance of common stock upon follow-on offering, net of
offering costs of $24,975
Vesting of restricted common stock
Unrealized gain on marketable securities, net of tax
Net loss
Balance as of December 31, 2019
Shares
Amount
Shares
20,866
$
42,996
9,334
92,331
1,605
—
771
—
—
—
—
—
7,642
—
—
—
—
—
—
(34)
543
—
—
—
—
—
30,971
—
$
—
—
142,969
—
(30,971)
(142,969)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,114
—
30,972
8,453
—
531
47
—
—
—
42,117
—
1,250
74
5,227
—
—
—
48,668
$
$
$
—
—
—
—
1
—
—
—
—
3
—
30
8
—
1
—
—
—
—
42
—
1
—
5
—
—
—
48
—
—
402
—
227
28
1,867
$
(1,305)
—
1,803
50
142,939
$
138,349
4,570
344
—
24
—
—
288,079
15,764
2,447
1,190
377,520
20
—
—
685,020
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
(23,552)
(60,574) $
—
—
—
—
—
—
—
—
(43,538)
(104,112) $
—
—
—
—
—
—
—
—
—
—
—
(15)
—
(15) $
—
—
—
—
—
152
—
137
(85,372)
(189,484) $
$
—
—
402
—
228
28
1,867
(1,305)
(23,552)
(58,768)
50
142,969
138,357
4,570
345
—
24
(15)
(43,538)
183,994
15,764
2,448
1,190
377,525
20
152
(85,372)
495,721
See accompanying notes to financial statements
97
ALLAKOS INC.
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:
Stock-based compensation
Net amortization of premiums and discounts on marketable securities
Amortization of beneficial conversion feature related to convertible
promissory notes payable to related parties
Benefit from deferred income taxes
Depreciation and amortization
Noncash lease expense
Noncash interest related to convertible promissory notes payable to
related parties
Loss on extinguishment of debt facility
Noncash interest related to debt facility
Accretion of tenant improvement allowance
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Other long-term assets
Accounts payable
Accrued expenses and other current liabilities
Other long-term liabilities
Net cash used in operating activities
Cash flows from investing activities
Purchases of marketable securities
Proceeds from maturities of marketable securities
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of convertible preferred stock,
net of issuance costs
Proceeds from issuance of convertible promissory notes,
net of issuance costs
Repayment of debt facility
Proceeds from exercise of stock options, net of repurchases
Proceeds from issuance of common stock under 2018 ESPP
Payments for deferred financing costs
Proceeds from repayment of recourse promissory note
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosures
Cash paid for interest
Noncash investing and financing items:
Right-of-use assets obtained in exchange for lease obligations
Conversion of convertible promissory notes payable to related parties
Recognition of beneficial conversion feature related to convertible
promissory notes to related parties, net of benefit for income taxes
Lessor funded lease incentives included in property and equipment
Reclassification of beneficial conversion feature related to convertible
promissory notes payable to related parties, net of tax expense
Property and equipment purchased in accounts payable
Deferred initial public offering costs in accounts payable
Vesting of restricted common stock subject to repurchase
2019
Year Ended December 31,
2018
2017
$
(85,372) $
(43,538) $
(23,552)
15,764
(2,664)
4,570
(1,310)
—
—
1,508
275
—
—
—
—
463
(564)
3,571
4,077
(70)
(63,012)
(541,701)
230,500
(770)
(311,971)
377,525
—
—
—
2,448
1,190
—
—
381,163
6,180
34,462
40,642
$
—
$
6,050
—
$
$
—
—
$
$
—
—
—
20
$
$
$
$
—
—
242
—
—
—
—
(82)
(1,489)
313
76
2,063
705
(38,450)
(236,601)
92,500
(6,946)
(151,047)
138,357
—
—
—
345
—
—
50
138,752
(50,745)
85,207
34,462
$
—
—
—
—
1,386
—
313
—
24
$
$
$
$
$
$
$
$
$
402
—
853
(291)
241
—
228
159
101
—
(637)
(150)
510
(432)
—
(22,568)
—
—
(264)
(264)
—
92,331
7,414
(5,250)
228
—
(100)
—
94,623
71,791
13,416
85,207
228
—
7,642
1,867
—
1,305
89
63
28
$
$
$
$
$
$
$
$
$
$
See accompanying notes to financial statements
98
ALLAKOS INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business
Allakos Inc. (“Allakos” or the “Company”) was incorporated in the state of Delaware in March 2012. Allakos is a clinical stage biopharmaceutical
company focused on the development of antolimab (AK002) for the treatment of eosinophil and mast cell related diseases. The Company’s primary activities
to date have included establishing its facilities, recruiting personnel, conducting research and development of its product candidates and raising capital. The
Company’s operations are located in Redwood City, California.
Liquidity Matters
Since inception, the Company has incurred net losses and negative cash flows from operations. During the year ended December 31, 2019, the
Company incurred a net loss of $85.4 million and used $63.0 million of cash in operations. As of December 31, 2019, the Company had an accumulated
deficit of $189.5 million and does not expect to experience positive cash flows from operating activities in the foreseeable future. The Company has financed
its operations to date primarily through the sale of common stock and issuance of convertible preferred stock. Management expects to incur additional
operating losses in the future as the Company continues to further develop, seek regulatory approval for and, if approved, commence commercialization of its
product candidates. The Company had $495.9 million of cash, cash equivalents and marketable securities at December 31, 2019. Management believes that
this amount is sufficient to fund the Company’s operations for at least the next 12 months from the issuance date of these financial statements.
July 2018 Initial Public Offering and Related Transactions
On July 23, 2018, the Company completed an initial public offering (“IPO”), selling 8,203,332 shares of common stock at an offering price of $18.00
per share (the “July 2018 IPO”). Proceeds from the IPO, net of underwriting discounts and commissions, were $137.3 million. Concurrently with the July
2018 IPO, the Company completed a private placement of 250,000 shares of common stock at the IPO offering price of $18.00 per share to an existing
stockholder. Proceeds from this private placement were $4.5 million.
In connection with the completion of the July 2018 IPO on July 23, 2018, all then outstanding shares of convertible preferred stock were converted
into 30,971,627 shares of common stock.
Upon the completion of the July 2018 IPO, the Company’s certificate of incorporation was amended and restated. Under the amended and restated
certificate of incorporation, the Company’s authorized capital stock consists of 200,000,000 shares of common stock with a par value $0.001 per share and
20,000,000 shares of convertible preferred stock with a par value $0.001 per share.
August 2019 Follow-On Offering
On August 9, 2019, the Company closed an underwritten public offering (the “August 2019 Offering”) under its shelf registration statement on Form
S-3 (File No. 333-233018) pursuant to which the Company sold an aggregate of 5,227,272 shares of common stock of the Company at a public offering price
of $77.00 per share. The Company received aggregate net proceeds of $377.5 million, after deducting the underwriting discounts and commissions and
offering expenses.
Reverse Stock Split
On July 6, 2018, the Company amended its certificate of incorporation to effect a 1-for-1.25 reverse stock split of every outstanding share of its
convertible preferred stock and common stock. All issued and outstanding common stock and convertible preferred stock and related per share amounts
contained in the Company’s audited financial statements and accompanying notes have been adjusted to reflect the reverse stock split.
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2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and
disclosures reported in the financial statements and accompanying notes.
Use of Estimates
Management uses significant judgment when making estimates related to common stock valuation and related stock-based compensation expense,
accrued expenses related to clinical trials and deferred tax valuation allowances. Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or
conditions, and those differences could be material to the financial position and results of operations.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to credit risk principally consist of cash, cash equivalents and marketable securities. These
financial instruments are held in accounts at a single financial institution that management believes possesses high credit quality. Amounts on deposit with
this financial institution have and will continue to exceed federally-insured limits. The Company has not experienced any losses on its cash deposits.
Additionally, the Company’s investment policy limits its investments to certain types of securities issued by the United States government and its agencies.
The Company is subject to a number of risks similar to that of other early-stage biopharmaceutical companies, including, but not limited to, the need
to obtain adequate additional funding, possible failure of current or future clinical trials, its reliance on third-parties to conduct its clinical trials, the need to
obtain regulatory and marketing approvals for its product candidates, competitive developments, the need to successfully commercialize and gain market
acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the
licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under licensing
agreements, and the need to secure and maintain adequate manufacturing arrangements with third-parties. If the Company does not successfully
commercialize or partner its product candidates, it will be unable to generate product revenue or achieve profitability.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash
equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s balance sheets and
which, in aggregate, represent the amounts reported in the statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash
Total
$
$
2019
38,367 $
2,275
40,642 $
December 31,
2018
33,660
802
34,462
$
$
2017
85,207
—
85,207
Restricted cash at December 31, 2019 represents $2.3 million of security deposits for the lease of the Company’s facilities in Redwood City,
California and San Carlos, California. Both security deposits are in the form of letters of credit secured by restricted cash. Restricted cash amounts are
included within other long-term assets on the Company’s balance sheets.
Marketable Securities
The Company invests in marketable securities, primarily securities issued by the United States government and its agencies. The Company’s
marketable securities are considered available-for-sale and are classified as current
100
assets even when the stated maturities of the underlying securities exceed one year from the date of the current balance sheet being reported. This
classification reflects management’s ability and intent to utilize proceeds from the sale of such investments to fund ongoing operations. Unrealized gains and
losses are excluded from earnings and are reported as a component of accumulated comprehensive income (loss). The cost of securities sold is determined
using the specific-identification method. Interest earned and adjustments for the amortization of premiums and discounts on investments are included in
interest income, net, on the statements of operations and comprehensive loss. Realized gains and losses and declines in fair value judged to be other than
temporary, if any, on investments in marketable securities are included in other expense, net, on the statements of operations and comprehensive loss.
Fair Value Measurements
The Company accounts for fair value of its financial instruments in accordance with Financial Accounting Standards Board (the “FASB”) Accounting
Standards Codification (“ASC”) Topic No. 820, Fair Value Measurements (“ASC 820”). ASC 820 establishes a common definition for fair value, establishes
a framework for measuring fair value and expands disclosures about such fair value measurements. Additionally, ASC 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company measures fair value based on a three-level hierarchy of inputs, of which the first two are considered observable and the last
unobservable. Unobservable inputs reflect the Company’s own assumptions about current market conditions. The three-level hierarchy of inputs is as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices
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 assets
or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in
Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement.
The carrying amounts reflected in the Company’s balance sheets for cash and cash equivalents, prepaid expenses and other current assets, other long-
term assets, accounts payable, and accrued expenses and other current liabilities approximate fair value, due to their short-term nature. The Company’s
investments in marketable securities are measured at fair value in accordance with the levels above.
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The useful lives of property and equipment are as follows:
Laboratory equipment – 3 to 5 years
Leasehold improvements – Shorter of remaining lease term or estimated life of the assets
Upon retirement or sale, the cost of disposed assets and their related accumulated depreciation are removed from the balance sheet. Any resulting
gains or losses on dispositions of property and equipment are included as a component of other income (expense), net, within the Company’s statements of
operations and comprehensive loss. Repair and maintenance costs that do not significantly add value to the property and equipment, or prolong its life, are
charged to operating expense as incurred.
Leases
101
Effective January 1, 2019, the Company accounts for its leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). Prior period amounts continue to be reported in accordance with the Company’s historic
accounting under previous lease guidance. Additionally, the Company elected a number of optional practical expedients made available under the ASC 842
transition guidance. Such elections include (i) carrying forward the Company’s historical lease classifications, (ii) foregoing a re-evaluation of historical
contracts to identify embedded leases, (iii) foregoing a re-assessment of initial direct costs related to leases that existed prior to adoption, (iv) combining lease
and non-lease components, and (v) recognizing lease expense for all contracts with an initial term of 12 months or less within the statements of operations and
comprehensive loss on a straight-line basis over the requisite lease term.
The Company accounts for its leases by recording right-of-use assets and lease liabilities on the Balance Sheet. Right-of-use assets represent the
Company’s right to use an underlying asset over the lease term and include any lease payments made prior to the lease commencement date and exclude lease
incentives. Lease liabilities represent the present value of the total lease payments over the lease term, calculated using the Company’s incremental borrowing
rate. In determining the Company’s incremental borrowing rate, consideration is given to the term of the lease and the Company’s credit risk. The Company’s
recognizes options to extend or terminate a lease when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized
on a straight-line basis over the expected lease term.
Accrued Contract Research and Development Expense
Costs associated with research and development services performed on behalf of the Company by third-party CROs and CDMOs comprise a
significant component of total research and development expense included on the statements of operations and comprehensive loss. Services performed by
these CROs and CDMOs include various research and development activities supporting the Company’s preclinical studies, clinical trials and drug
manufacturing activities, which are governed by executed service agreements. Underlying amounts included in these service agreements with CROs and
CDMOs are expensed as incurred. The Company accrues for expenses related to services performed by CROs and CDMOs during the reporting period that
had not yet been invoiced as of the balance sheet date.
Accrued contract research and development expense requires certain estimates by management surrounding the extent of unbilled services received
and the extent and duration of remaining services still to be performed. Management’s estimates are based on the evaluation of data obtained from multiple
internal and external sources including, but not limited to, clinical site activity logs, subject visit reports, and project management timelines. Results from
these evaluations are reviewed by internal personnel from the Company’s clinical and technical operations departments. The actual timing and amount of
services billed by CROs and CDMOs may vary from management’s estimates, which would require adjustments to research and development expense in
future periods. To date, management’s estimates have not been materially different from actual amounts recorded for the periods reported.
Research and Development Expense
Research and development costs are expensed as incurred. Research and development costs include, among others, consulting fees, salaries, benefits,
travel, stock-based compensation, laboratory supplies and other non-capital equipment utilized for in-house research, allocations of facilities and overhead
costs, amounts owed under in-licensing agreements, and amounts paid to CROs and CDMOs that conduct research and development activities on the
Company’s behalf.
Goods or services incurred for research and development activities that have not yet been invoiced are recorded as liabilities within accrued expenses
and other current liabilities on the Company’s balance sheets. Amounts recorded for unbilled services often represent estimates, which are typically based on
contracted amounts for the proportion of work performed and determined through analysis with internal personnel and external service providers as to the
progress or stage of completion of the associated services.
102
Non-refundable advance payments for goods or services to be rendered as part of future research and development activities are capitalized on the
Company’s balance sheets. Classification between current and long-term assets is based on an evaluation of when the goods will be delivered and/or services
will be performed, with such amounts subsequently amortized to expense once realized.
Segments
Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief
operating decision maker or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating
decision maker, its Chief Executive Officer, views its operations and manages its business in one operating segment operating exclusively in the United
States.
Patent Costs
The Company expenses patent application and related legal costs as incurred and classifies such costs as general and administrative expenses in the
statements of operations and comprehensive loss
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC
718”). ASC 718 requires all stock-based awards issued to employees and nonemployees to be recognized as expense in the statements of operations and
comprehensive loss based on their grant date fair values. Stock-based awards issued to nonemployee consultants are accounted for based on the fair value of
services to be received or of the intrinsic value of equity instruments to be issued, whichever is more reliably measured. The measurement date for awards
issued to nonemployee consultants is the date of grant.
For purposes of determining the estimated fair value of stock options granted to employees and nonemployees, the Company uses the Black-Scholes
option pricing model. The Black-Scholes option pricing model requires the input of certain assumptions that involve judgment, for which changes can
materially affect the resulting estimates of fair value. The assumptions used to determine the fair value of stock options granted were as follows:
Expected volatility – As there is insufficient trading history for the Company’s common stock, the Company has based its computation of expected
volatility on the historical volatility of a representative group of public companies with similar characteristics to the Company, including stage of
product development and life science industry focus. The historical volatility is calculated based on a period of time commensurate with the expected
term assumption.
Expected term – The Company determines the expected term in accordance with the “simplified method” described by SEC Staff Accounting
Bulletin No. 107, Share-Based Payment, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate
the expected term.
Risk-free interest rate – The Company bases the risk-free interest rate on United States Treasury securities with terms consistent to the expected term
of the stock option being valued.
Expected dividends – The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay
any dividends on its common stock.
The fair value of restricted stock units (“RSUs”) is determined using the quoted market price of the Company’s common stock on the date of grant.
The Company uses historical data to estimate pre-vesting forfeitures and records stock-based compensation expense only for those awards expected
to vest. To the extent that actual forfeitures differ from estimates, the difference is recorded as a cumulative adjustment in the period the estimate are revised.
The Company expenses the fair value of its stock-based compensation awards to employees and nonemployees on a straight-line basis over the requisite
service period, which is generally the vesting period.
103
Income Taxes
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act, among other changes, lowered the
Company’s federal tax rate from 34% to 21%. Based on provisions of the Tax Act, the Company remeasured its deferred tax assets and liabilities at December
31, 2017 to reflect the lower statutory tax rate, however, since the Company established a full valuation allowance to offset its deferred tax assets, there was
no impact to the effective tax rate. The deferred tax remeasurement was provisional and represented our reasonable estimate within the meaning of Staff
Accounting Board 118, which provided a measurement period that should not extend beyond one year from the Tax Act’s enactment date for companies to
complete the accounting under ASC 740. As of December 31, 2018, the Company has completed its analysis of the income tax effects of the Tax Act. The
results of this analysis have been reflected in the Company’s financial statements and related footnotes.
Comprehensive Loss
Comprehensive loss is defined as the change in stockholders’ equity (deficit) during a period from transactions and other events and circumstances
from non-owner sources. The difference between net loss and comprehensive loss for the years ended December 31, 2019 and 2018 are a result of unrealized
gains and losses on the Company’s investments in marketable securities included in current assets on the balance sheets.
Net Loss per Share
The Company calculates basic net loss per share by dividing the net loss attributable to common stockholders by the weighted-average shares of
common stock outstanding during the period. The Company calculates diluted net loss per share after giving consideration to all potentially dilutive securities
outstanding during the period using the treasury-stock and if-converted methods, except where the effect of including such securities would be anti-dilutive.
Because the Company has reported net losses since inception, the effect from potentially dilutive securities would have been anti-dilutive and therefore has
been excluded from the calculation of diluted net loss per share.
Basic and diluted net loss per share was calculated as follows (in thousands, except per share data):
Numerator:
Net loss
Denominator:
Weighted-average shares of common stock
outstanding, basic and diluted
Net loss per share, basic and diluted
2019
Year Ended December 31,
2018
2017
(85,372) $
(43,538)
$
(23,552)
45,191
(1.89) $
19,833
(2.20)
$
1,620
(14.54)
$
$
The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share due to their
anti-dilutive effect for the periods indicated (in thousands):
Series A convertible preferred stock
Series B convertible preferred stock
Options to purchase common stock
Unvested restricted stock units
Warrants to purchase common stock
Unvested restricted common stock
Shares issuable under employee stock purchase plans
Total
2019
Year Ended December 31,
2018
2017
—
—
7,148
542
—
—
31
7,721
—
—
7,811
—
—
47
29
7,887
20,866
10,105
4,884
—
48
104
—
36,007
104
Foreign Currency Transactions
The Company is party to multiple contract manufacturing and clinical research agreements for which services to be performed are denominated in
foreign currencies other than the United States Dollar. The Company records gains and losses attributable to fluctuations in foreign currencies as a component
of other income (expense), net, on the statements of operations and comprehensive loss.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 842 which became
effective for fiscal years beginning after December 15, 2018. ASC 842 requires an entity to recognize a right-of-use asset and lease liability for all leases with
terms of more than 12 months. The recognition, measurement and presentation of expenses will depend on the lease’s classification as a finance or operating
lease. ASC 842 also requires certain quantitative and qualitative disclosures about leasing arrangements. The Company adopted ASC 842 using a modified
retrospective approach effective January 1, 2019, recording a right-of-use asset of $6.1 million and a long-term lease liability of $8.2 million. Adoption of
ASC 842 did not result in a cumulative effect adjustment to accumulated deficit. See Note 6 for further disclosure.
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2018-07, Compensation-Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which simplifies several aspects of the accounting for nonemployee
share-based payment transactions resulting from expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and
services from nonemployees. The Company’s adoption of this standard did not have a material impact on its financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU affects
general principles within Topic 740 and are meant to simplify the accounting for income taxes by removing certain exceptions to the general framework. The
ASU further adds guidance to reduce complexity in certain areas, including recognizing a franchise (or similar) tax that is partially based on income as an
income-based tax and incremental amounts incurred as a non-income-based tax and recognizing deferred taxes for tax goodwill. The amendments in this ASU
are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is
permitted, including adoption in any interim period for which financial statements have not yet been issued. An entity that elects to early adopt the
amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an
entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the effects of this ASU on its
financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in
this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.
The Company does not expect the adoption of this ASU to have a material impact on its financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, as clarified in ASU No. 2019-04 and ASU No. 2019-05. This guidance will require companies to recognize an allowance for credit losses on
available-for-sale debt securities rather than the current approach of recording a reduction to the carrying value of the asset. The ASU is effective for fiscal
years beginning after December 15, 2019 and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and
interim periods therein. The Company is currently evaluating the effects of this ASU on its financial statements and related disclosures and does not expect
there to be a material impact.
105
3. Fair Value Measurements
The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The Company’s financial
assets measured at fair value on a recurring basis were as follows (in thousands):
Cash equivalents
Money market funds
Total cash equivalents
Marketable securities
U.S. treasuries
Total marketable securities
Total cash equivalents and marketable
securities
Cash equivalents
Money market funds
Total cash equivalents
Marketable securities
U.S. treasuries
Total marketable securities
Total cash equivalents and marketable
securities
Level 1
Level 2
Level 3
Total
December 31, 2019
$
35,935 $
35,935
457,534
457,534
— $
—
—
—
— $
—
—
—
35,935
35,935
457,534
457,534
$
493,469 $
— $
— $
493,469
Level 1
Level 2
Level 3
Total
December 31, 2018
$
31,555 $
31,555
145,246
145,246
— $
—
—
—
— $
—
—
—
31,555
31,555
145,246
145,246
$
176,801 $
— $
— $
176,801
The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between levels
during the years ended December 31, 2019 and 2018.
4. Marketable Securities
All marketable securities were considered available-for-sale at December 31, 2019 and 2018. The amortized cost, gross unrealized holding gains or
losses, and fair value of the Company’s marketable securities by major security type are summarized in the table below (in thousands):
Available-for-sale securities
U.S. treasuries classified as investments
Total
Available-for-sale securities
U.S. treasuries classified as investments
Total
Amortized
Cost Basis
December 31, 2019
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
457,397 $
457,397 $
161 $
161 $
(24) $
(24) $
457,534
457,534
Amortized
Cost Basis
December 31, 2018
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
145,261 $
145,261 $
— $
— $
(15) $
(15) $
145,246
145,246
The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. As of December
31, 2019 and 2018, the aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months was $187.4 million
and $132.2 million, respectively. All of these securities had remaining maturities of less than one year. The Company has the intent and
106
ability to hold such securities until recovery and has determined that there has been no material change to their credit risk. As a result, the Company
determined it did not hold any investments with any other-than-temporary impairment as of December 31, 2019 and 2018.
There were no material realized gains or losses recognized on the sale or maturity of available-for-sale securities during the years ended December
31, 2019 or 2018, and as a result, there were no material reclassifications out of accumulated other comprehensive gain (loss) for the same periods.
5. Balance Sheet Components and Supplemental Disclosures
Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
Laboratory equipment
Furniture and office equipment
Leasehold improvements
Less accumulated depreciation
Property and equipment, net
December 31,
2019
2018
$
$
4,170 $
1,695
4,581
10,446
(2,036)
8,410 $
3,272
1,666
4,545
9,483
(635)
8,848
Depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 was $1.5 million, $0.2 million and $0.2 million,
respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
Accrued contract research and development expense
Accrued compensation and benefits expense
Lease liability, current
Lease incentive obligation, current
Other current liabilities
Total
6. Commitments and Contingencies
Lease Obligations
December 31,
2019
2018
$
$
4,990
1,608
410
—
90
$
7,098
$
1,866
1,041
—
123
134
3,164
The Company’s lease obligations primarily relate to leased office and laboratory space under noncancelable operating leases.
In January 2018, the Company entered into a lease agreement for approximately 25,000 square feet of office and laboratory space in Redwood City,
California (the “2018 Redwood City Lease”). The 2018 Redwood City Lease includes a contractual lease term commencing upon substantial completion and
delivery of the premises, which occurred in November 2018. The Company subsequently terminated its previous lease agreement for office and laboratory
space in San Carlos, California (the “2015 San Carlos Lease”).
The base term of the 2018 Redwood City Lease is 10.75 years and contains a one-time option to extend the lease term for five years. This option to
extend the lease term has not been included in the Company’s calculations under ASC 842 as the exercise of the option is highly uncertain and therefore
deemed not probable.
107
The 2018 Redwood City Lease also included a $1.4 million tenant improvement allowance that has been applied to the total cost of tenant
improvements made to the leased premises. Tenant improvement allowances received under the 2018 Redwood City Lease were recorded as leasehold
improvements with an offsetting adjustment included in the Company’s calculation of its right-of-use asset under ASC 842. Leasehold improvements are
depreciated over the term of the lease.
In December 2019, the Company entered into an additional lease agreement for approximately 98,000 square feet of office and laboratory space in
San Carlos, California (the “2019 San Carlos Lease”). The 2019 San Carlos Lease provides for certain limited rent abatement and annual scheduled rent
increases over the contractual lease term. The contractual lease term is expected to commence in November 2020 and terminate in August 2031. Future
minimum rental payments under the 2019 San Carlos Lease total $77.6 million, which does not include rental payments related to the Company’s one-time
option to extend for an additional five years. There was no right-of-use asset or lease liability reflected on the balance sheet as of December 31, 2019 for the
2019 San Carlos Lease as the Company has not yet obtained possession of the space.
The 2018 Redwood City Lease and the 2019 San Carlos Lease required security deposits of $0.8 million and $1.5 million, respectively, which the
Company satisfied by establishing letters of credit secured by restricted cash. Restricted cash related to the Company’s lease agreements are recorded in other
long-term assets on the Company’s balance sheets.
As described in Note 2, the Company adopted ASC 842 effective January 1, 2019. In accordance with ASC 842, the Company has performed an
evaluation of its other contracts with vendors and has determined that, except for the leases described above, none of its other contracts contain a lease.
Classification of the Company’s lease liabilities included on the Balance Sheet at December 31, 2019 was as follows (in thousands):
Operating lease liabilities
Current portion included in accrued expenses and other current liabilities
Non-current portion included in other long-term liabilities
Total operating lease liabilities
$
$
410
8,112
8,522
The components of lease costs, which are included in operating expenses in the Company’s statements of operations and comprehensive loss were as
follows (in thousands):
Operating lease cost
Variable cost
Total lease costs
Year ended
December 31, 2019
$
$
1,118
346
1,464
In addition to the minimum future lease commitments presented below, the lease requires the Company to pay property taxes, insurance, maintenance
and repair costs. Rent expense is recognized using the straight-line method over the respective terms. The Company records a deferred rent liability calculated
as the difference between rent expense and cash rental payments. The current portion of the liability is included within accrued expenses and other current
liabilities on the Company’s balance sheets. The remaining non-current portion is classified in other long-term liabilities.
108
Future minimum lease payments required under operating leases included on the Company’s Balance Sheet at December 31, 2019 are as follows (in
thousands):
Fiscal Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total minimum future lease payments (1)
Less:
Present value adjustment
Operating lease liabilities
$
$
1,233
1,270
1,308
1,348
1,388
6,916
13,463
4,941
8,522
(1)
Excludes minimum future lease payments of $77.6 million related to the Company’s 2019 San Carlos Lease.
Net rent expense was $1.1 million, $1.0 million and $0.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the
present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of
December 31, 2019, the remaining lease term is 9.6 years and the discount rate used to determine the operating lease liability was 10.0%.
As of December 31, 2019, the Company is not party to any lease agreements containing material residual value guarantees or material restrictive
covenants.
Purchase Obligations
The Company has entered into contractual agreements with various research and development organizations and suppliers in the normal course of its
business. All contracts are terminable, with varying provisions regarding termination. If a contract were to be terminated, the Company would only be
obligated for the products or services that the Company had received through the time of termination as well as any noncancelable minimum payments
contractually agreed upon prior to the effective date of termination. In the case of terminating a clinical trial agreement with an investigational site conducting
clinical activities on behalf of the Company, the Company would also be obligated to provide continued support for appropriate safety procedures through
completion or termination of the associated study. As of December 31, 2019, the Company had $8.7 million of noncancelable purchase obligations under
these agreements.
In-Licensing Agreements
The Company has entered into exclusive and non-exclusive, royalty bearing license agreements with third-parties for certain intellectual property.
Under the terms of the license agreements, the Company is obligated to pay milestone payments upon the achievement of specified clinical, regulatory and
commercial milestones. Actual amounts due under the license agreements will vary depending on factors including, but not limited to, the number of products
developed and the Company’s ability to further develop and commercialize the licensed products. The Company is also subject to future royalty payments
based on sales of the licensed products. In-licensing payments to third-parties for milestones are recognized as research and development expense in the
period of achievement.
The Company did not incur any milestone expense for the years ended December 31, 2019 and 2017. The Company recognized $0.3 million in
milestone expense for the years ended December 31, 2018. Milestone payments are not creditable against royalties. As of December 31, 2019, the Company
has not incurred any royalty liabilities related to its license agreements, as product sales have not yet commenced.
109
Exclusive License Agreement with The Johns Hopkins University
In December 2013, the Company entered into a license agreement with The Johns Hopkins University (“JHU”) for a worldwide exclusive license to
develop, use, manufacture and commercialize covered product candidates including antolimab (AK002), which was amended in September 30, 2016. Under
the terms of the agreement, the Company has made upfront and milestone payments of $0.3 million through December 31, 2019 and may be required to make
aggregate additional milestone payments of up to $4.0 million. The Company also issued 88,887 shares of common stock as consideration under the JHU
license agreement. In addition to milestone payments, the Company is also subject to single-digit royalties to JHU based on future net sales of each licensed
therapeutic product candidate by the Company and its affiliates and sublicensees, with up to a low six-digit dollar minimum annual royalty payment.
Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG
In October 2013, the Company entered into a tripartite agreement with BioWa Inc. (“BioWa”), and Lonza Sales AG (“Lonza”), for the non-exclusive
worldwide license to develop and commercialize product candidates including antolimab (AK002) that are manufactured using a technology jointly
developed and owned by BioWa and Lonza. Under the terms of the agreement, the Company has made milestone payments of $0.4 million through December
31, 2019 and may be required to make aggregate additional milestone payments of up to $41.0 million. In addition to milestone payments, the Company is
also subject to minimum annual commercial license fees of $40,000 per year to BioWa until such time as BioWa receives royalty payments, as well as low
single-digit royalties to BioWa and to Lonza. Royalties are based on future net sales by the Company and its affiliates and sublicensees and vary dependent on
Lonza’s participation as sole manufacturer for commercial production.
Indemnification Agreements
The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to
indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no such matters have arisen and
the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial
positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications at December 31, 2019.
7. Stockholders’ Equity
The Company’s amended and restated certificate of incorporation filed on July 23, 2018 authorizes the issuance of a total of 220,000,000 shares of
stock. Of these shares, 200,000,000 are designated as common stock and 20,000,000 are designated as preferred stock.
Common Stock
There were 48,667,809 shares of common stock issued and outstanding at December 31, 2019. Common shares reserved for future issuance upon the
exercise, issuance or conversion of the respective equity instruments are as follows (in thousands):
Exercise of common stock options outstanding
Shares reserved for issuance under equity incentive plans
Vesting of restricted stock units
Shares reserved for issuance under employee stock purchase plans
Total
December 31,
2019
2018
7,148
3,762
542
848
12,300
7,811
2,785
—
500
11,096
Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the prior rights of preferred stockholders.
As of December 31, 2019, no dividends on common stock had been declared by the Board of Directors.
110
Preferred Stock
There were no shares of preferred stock issued and outstanding at December 31, 2019.
8. Stock-Based Compensation
Total stock-based compensation expense recognized is as follows (in thousands):
Research and development
General and administrative
Total
2019
Year Ended December 31,
2018
2017
$
$
5,351
10,413
15,764
$
$
1,792
2,778
4,570
$
$
175
227
402
No income tax benefits for stock-based compensation expense have been recognized for the years ended December 31, 2019, 2018 and 2017 as a
result of the Company’s full valuation allowance applied to net deferred tax assets and net operating loss carryforwards.
Equity Incentive Plans
In July 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive
stock options, non-statutory stock options, restricted stock awards, restricted stock units (“RSUs”), stock appreciation rights and other stock-based awards.
The Company initially reserved 4,000,000 shares of common stock for issuance under the 2018 Plan. The number of shares of common stock that may be
issued under the 2018 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i)
5,000,000 shares, (ii) 5% of the outstanding shares of common stock as of the last day of the preceding fiscal year and (iii) such other amount as the Board of
Directors may determine. Stock options and RSUs granted under the 2018 Plan generally vest over four years and expire no more than 10 years from the date
of grant.
Following the IPO and upon the effectiveness of the 2018 Plan, the Company’s 2012 Equity Incentive Plan, as amended, (the “2012 Plan”),
terminated and no further awards will be granted thereunder. All outstanding awards under the 2012 Plan will continue to be governed by their existing terms.
Any shares subject to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, expire or terminate and shares previously issued
pursuant to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, are forfeited or repurchased by the Company will be
transferred into the 2018 Plan. As of December 31, 2019, the maximum number of shares that may be added to the 2018 Plan pursuant to the preceding clause
is 5,276,050 shares.
Prior to its termination, the 2012 Plan provided for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to
employees, directors and consultants. Stock options granted under the 2012 Plan generally vest over four years and expire no more than 10 years from the
date of grant.
111
Stock Options
Stock option activity under the 2018 Plan and the 2012 Plan is summarized as follows (in thousands, except per share data):
Balance at December 31, 2018
Granted
Exercised
Forfeited
Balance at December 31, 2019
Options exercisable
Options vested and expected to vest
Options
Outstanding
Weighted-
Average
Exercise
Price
7,811 $
645 $
(1,251) $
(57) $
7,148 $
3,982 $
7,119 $
8.60
46.75
2.11
35.60
12.96
5.10
12.91
Weighted-
Average
Remaining
Years
8.2
Aggregate
Intrinsic
Value
$
342,292
8.0
7.6
8.0
$
$
$
589,114
359,399
587,065
The following weighted-average assumptions were used to calculate the fair value of stock options granted during the periods indicated:
Risk-free interest rate
Expected volatility
Expected dividend yield
Expected term (in years)
2019
Year Ended December 31,
2018
2017
1.91%
67.22%
—
6.01
2.79%
73.47%
—
6.01
1.83%
77.59%
—
6.08
The weighted-average fair value of options granted during the years ended December 31, 2019, 2018 and 2017 was $28.66, $11.05 and $0.54 per
share, respectively.
The aggregate fair value of stock options that vested during the years ended December 31, 2019, 2018 and 2017 was $12.6 million, $1.8 million and
$0.2 million, respectively.
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the
Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. Following the IPO, the
aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the year in excess of the weighted-average
exercise price multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value of stock options exercised during the years ended
December 31, 2019, 2018 and 2017 was $55.8 million, $ 2.0 million and $0.1 million, respectively.
During the years ended December 31, 2019 and 2018, the Company did not grant any stock options with performance-based or market-based vesting
conditions.
As of December 31, 2019, total unrecognized stock-based compensation expense relating to unvested stock options was $41.6 million. This amount is
expected to be recognized over a weighted-average period of 2.9 years.
Restricted Stock Awards
The 2012 Plan allows for the issuance of restricted common stock and early exercise of unvested stock options in exchange for restricted common
stock. Unvested shares of restricted common stock are subject to repurchase by the Company at the original issuance price in the event of the employee’s
termination, either voluntarily or involuntarily. Consideration received for unvested stock-based awards is initially recorded as a liability and subsequently
reclassified into stockholders’ deficit as the related awards vest.
112
A summary of the restricted common stock activity during the year ended December 31, 2019 is as follows (in thousands, except per share data):
Balance at December 31, 2018
Vested
Balance at December 31, 2019
Number
of Shares
Weighted-
Average
Grant Date
Fair Value
47 $
(47) $
— $
0.43
0.43
—
The fair value of restricted common stock that vested during the years ended December 31, 2019 and 2018 was $20,000 and $24,000, respectively.
There were no unvested shares of restricted common stock at December 31, 2019.
Restricted Stock Units
RSU activity under the 2018 Plan is summarized as follows (in thousands, except per share data):
Balance at December 31, 2018
Granted
Balance at December 31, 2019
Number
of Shares
Weighted-
Average
Grant Date
Fair Value
— $
542 $
542 $
—
93.67
93.67
The weighted-average fair value of RSUs granted during the year ended December 31, 2019 was $93.67. No RSUs were granted during the years
ended December 31, 2018 and 2017.
As of December 31, 2019, total unrecognized stock-based compensation expense relating to unvested RSUs was $48.7 million and the weighted-
average remaining vesting period was 3.9 years.
The aggregate intrinsic value of RSUs is calculated as the closing price per share of the Company’s common stock on the last trading day of the fiscal
period, multiplied by the number of RSUs expected to vest as of December 31, 2019. As of December 31, 2019, the aggregate intrinsic value of RSUs was
$51.7 million
113
Employee Stock Purchase Plan
In July 2018, the Company’s Board of Directors and stockholders approved the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). There were
500,000 shares of common stock initially reserved for issuance under the 2018 ESPP. The number of shares of common stock that may be issued under the
2018 ESPP shall automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i) 1,000,000
shares, (ii) 1% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year and (iii) such other amount determined
by the 2018 ESPP administrator. Under the 2018 ESPP, employees may purchase shares of the Company’s common stock at a price per share equal to 85% of
the lower of the fair market value of the common stock on the first trading day of the offering period or on the exercise date. The 2018 ESPP provides for
consecutive, overlapping 24-month offering periods, each of which will include purchase periods. The first offering period commenced on July 18, 2018 and
will end on the first trading day on or before August 15, 2020. The second and third offering periods commenced on February 15, 2019 and August 16, 2019,
respectively.
During the year ended December 31, 2019 and 2018, stock-based compensation related to the 2018 ESPP was $0.7 million and $0.2 million,
respectively.
The following weighted-average assumptions were used to calculate the fair value of ESPP shares during the periods indicated:
Risk-free interest rate
Expected volatility
Expected dividend yield
Expected term (in years)
Year Ended December 31,
2019
2018
2.37%
64.26%
—
1.22
2.42%
65.92%
—
1.24
As of December 31, 2019, total unrecognized compensation expense relating to shares to be purchased under ESPP was $0.6 million over a weighted-
average period of 1.0 years.
9. Income Taxes
The Company’s deferred income tax assets include operating losses and tax credit carryforwards, as well as certain temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Total deferred income tax assets, net
of valuation allowance, at December 31, 2019 and 2018 were as follows (in thousands):
Deferred tax assets
Net operating loss carryforwards
Research and development credits
Accruals and reserves
Stock-based compensation
Lease liability
Gross deferred tax assets
Less: valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities
Fixed and intangible assets
Right-of-use asset
Gross deferred tax liabilities
Net deferred tax assets
December 31,
2019
2018
$
47,003 $
8,644
1,199
2,870
1,798
61,514
(59,901)
1,613
395
1,218
1,613
$
— $
114
24,091
3,995
260
611
—
28,957
(28,892)
65
65
—
65
—
Management has evaluated the positive and negative evidence surrounding the realizability of its deferred tax assets and has determined that it is more
likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, and as a result, a valuation allowance of
$59.9 million and $28.9 million has been established at December 31, 2019 and 2018, respectively. The change in the valuation allowance was $31.0 million
and $10.8 million for the years ended December 31, 2019 and 2018, respectively. The Company has incurred net operating losses (“NOL”) since inception.
As of December 31, 2019, the Company had federal and state NOL carryforwards of $210.2 million and $42.4 million, respectively. Federal NOL
carryforwards of $148.3 million, which were generated after December 31, 2017, do not expire. The remaining $61.9 million of Federal NOL carryforwards
expire beginning in 2032. As of December 31, 2019, the Company had federal and California research and other tax credit carryforwards of $8.8 million and
$4.0 million, respectively. The federal tax credits expire beginning in 2033. The California tax credits can be carried forward indefinitely.
The Internal Revenue Code of 1986, as amended (the “Code”), provides for a limitation of the annual use of net operating losses and other tax
attributes (such as research and development tax credit carryforwards) following certain ownership changes defined by the Code that could limit the
Company’s ability to utilize these carryforwards in the future. At this time, the Company has not completed a study to assess whether an ownership change
under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since the Company’s formation. The Company may have
experienced ownership changes, as defined by the Code, as a result of past financing transactions and may not be able to take full advantage of these
carryforwards for federal or state income tax purposes.
The effective tax rate for the years ended December 31, 2019 and 2018 is different from the federal statutory rate primarily due to the valuation
allowance against deferred tax assets as a result of insufficient income. The Company’s effective tax rate differs from the federal statutory tax rate as follows:
Federal statutory tax rate
Change in deferred tax asset valuation allowance
State taxes, net of federal benefit
Research and development tax credits
Stock-based compensation
Other
Effective tax rate
Uncertain Tax Positions
Year Ended December 31,
2019
2018
21.0%
(36.4)%
1.1%
4.4%
9.9%
—%
—%
21.0%
(24.8)%
0.9%
3.3%
(0.2)%
(0.2)%
—%
The Company accounts for its uncertain tax positions in accordance with FASB ASC Topic No. 740-10, Accounting for Uncertainty in Income
Taxes (“ASC 740-10”). Per ASC 740-10, the Company determines its uncertain tax positions based on a determination of whether and how much of a tax
benefit taken by the Company in its tax filings is more likely than not to be sustained upon examination by the relevant income tax authorities.
A reconciliation of the beginning and ending amount of unrecognized benefits is as follows (in thousands):
Balance at the beginning of the year
Increase related to current year tax positions
Balance at the end of the year
Year Ended December 31,
2019
2018
$
$
1,827 $
1,718
3,545 $
1,149
678
1,827
The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. During the years ended
December 31, 2019 and 2018, the Company did not recognize accrued interest
115
and penalties related to unrecognized tax benefits. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly
increase or decrease during the next twelve months.
The Company files income tax returns in the U.S. federal and California tax jurisdictions. The federal and state income tax returns from inception to
December 31, 2019 remain subject to examination.
It is the Company’s policy to include penalties and interest expense related to income taxes as a component of the income tax provision as necessary.
Management determined that no accrual for interest and penalties was required at December 31, 2019 and 2018. Since the Company is in a loss carryforward
position, it is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is
available.
Recent Changes to U.S. Tax Law
In December 2017, the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted and includes a broad range of provisions, many of which differ
significantly from those contained in previous U.S. tax law. The Company accounts for changes in tax law in accordance with ASC 740 which requires
companies to recognize the effect of such changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which will allow
companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business
combinations. Accordingly, the Company adjusted its deferred taxes and related valuation allowances on a provisional basis to reflect the reduction in U.S.
federal corporate tax rate from 35% to 21%, based on current understanding of the new law. As of December 31, 2018, the Company has completed its
analysis of the income effects of the 2017 Tax Act. There was no material impact on the Company’s financial statements as a result of the analysis.
10. Defined Contribution Plans
In July 2013, the Company established a Savings Incentive Match Plan (the “SIMPLE IRA plan”) for its employees, allowing for both employee and
employer contributions for those employees who meet defined minimum age and service requirements. The SIMPLE IRA plan allows participants to defer a
portion of their annual compensation on a pretax basis. During the year ended December 31, 2017, the Company made contributions to the SIMPLE IRA plan
of $0.1 million.
In January 2018, the Company terminated and replaced the SIMPLE IRA with a defined contribution plan under Section 401(k) of the Internal
Revenue Code (the “401(k) plan”). The 401(k) plan covers all employees who meet defined minimum age and service requirements. Employee contributions
are voluntary and are determined on an individual basis, limited to the maximum amount allowable under U.S. federal tax regulations. The Company makes
matching contributions of up to 4% of the eligible employees’ compensation to the 401(k) plan. During the years ended December 31, 2019 and 2018, the
Company made contributions to the 401(k) plan of $0.5 million and $0.3 million, respectively.
11. Selected Quarterly Financial Data (Unaudited)
The following tables summarize the Company’s quarterly results for the years ended December 31, 2019 and 2018 (in thousands, except per share
data):
2019
Loss from operations
Net loss
Net loss per common share, basic and diluted
Quarter Ended
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
(20,927) $
(19,953) $
(0.47) $
(20,057) $
(19,072) $
(0.44) $
(23,584) $
(21,732) $
(0.47) $
(26,850)
(24,615)
(0.51)
$
$
$
116
2018
Loss from operations
Net loss
Net loss per common share, basic and diluted
Quarter Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
$
$
$
(8,709) $
(8,485) $
(4.19) $
(9,524) $
(9,377) $
(4.17) $
(11,975) $
(11,148) $
(0.34) $
(15,513)
(14,528)
(0.35)
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2019, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness
of our internal control over financial reporting based on criteria established in the Internal Control–Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has also been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in its report included in this Annual Report on Form 10-K.
Inherent Limitations on the Effectiveness of Internal Control
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
There was no significant change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-
15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth quarter
117
of the year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
118
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Allakos Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Allakos Inc.‘s internal control over financial reporting as of December 31, 2019, 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,
Allakos Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, 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 balance sheets
of the Company as of December 31, 2019 and 2018, the related statements of operations and comprehensive loss, statements of convertible preferred stock
and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated
February 25, 2020 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 Annual 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
Redwood City, California
February 25, 2020
119
Item 9B. Other Information.
None.
120
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required under this item is incorporated herein by reference to our definitive proxy statement pursuant to regulation 14A, or the
Proxy Statement, which proxy statement is expected to be filed with Securities and Exchange Commission not later than 120 days after the close of our fiscal
year ended December 31, 2019.
Item 11. Executive Compensation.
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.
121
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
(1)
Financial Statements
PART IV
See Index to Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K
(2)
Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3)
List of Exhibits required by Item 601 of Regulation S-K
Exhibit
Number
Description
Form
File No.
Number Filing Date
Filed
Herewith
Incorporated by Reference
3.1
3.2
4.2
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
Amended and Restated Certificate of
Incorporation of the Registrant.
8-K 001-38582
3.1
7/24/2018
Amended and Restated Bylaws of the Registrant. 8-K 001-38582
S-1/A 333-225836
3.2
4.2
7/24/2018
7/09/2018
Specimen common stock certificate of the
Registrant.
Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers.
2012 Equity Incentive Plan, as amended, and
forms of agreement thereunder.
2018 Equity Incentive Plan and forms of
agreements thereunder.
S-1
333-225836 10.1+ 6/22/2018
S-1
333-225836 10.2+ 6/22/2018
S-1/A 333-225836 10.3+ 7/09/2018
2018 Employee Stock Purchase Plan.
S-1/A 333-225836
10.4
7/09/2018
Employment Letter between the Registrant and
Robert Alexander, Ph.D.
Employment Letter between the Registrant and
Adam Tomasi, Ph.D.
Employment Letter between the Registrant and
Henrik Rasmussen, M.D., Ph.D.
Employment Letter between the Registrant and
Leo Redmond
S-1/A 333-225836 10.5+ 7/09/2018
S-1/A 333-225836 10.6+ 7/09/2018
S-1/A 333-225836 10.7+ 7/09/2018
10-Q
10.8+ 8/05/2019
10.9+
Executive Incentive Compensation Plan.
S-1
333-225836 10.9+ 6/22/2018
10.10+ Outside Director Compensation Policy.
S-1/A 333-225836 10.10+ 7/09/2018
10.11+ Change in Control and Severance Policy.
S-1/A 333-225836 10.11+ 7/09/2018
10.12
10.13*
Lease Agreement between the Registrant and
Westport Office Park, LLC, dated January 4,
2018, as amended.
Lease Agreement between the Registrant and
ARE-San Francisco No. 63, LLC, dated
December 4, 2019.
122
S-1
333-225836 10.12 6/22/2018
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10.14#
10.15#
23.1*
31.1*
31.2*
32.1**
32.2**
Non-exclusive License Agreement between the
Registrant, BioWa, Inc. and Lonza Sales AG,
dated October 31, 2013.
Amended and Restated Exclusive License
Agreement between the Registrant and the Johns
Hopkins University, dated September 30, 2016.
Consent of Independent Registered Public
Accounting Firm.
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 Inline XBRL Instance Document - the instance
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the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema
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101.CAL Inline XBRL Taxonomy Extension Calculation
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101.DEF Inline XBRL Taxonomy Extension Definition
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101.LAB Inline XBRL Taxonomy Extension Label
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101.PRE Inline XBRL Taxonomy Extension Presentation
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104
Cover Page Interactive Data File (formatted in
Inline XBRL)
S-1/A 333-225836 10.14# 7/17/2018
S-1/A 333-225836 10.15# 7/17/2018
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X
X
X
X
X
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X
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X
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*
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+
#
Filed herewith.
Furnished herewith.
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.
123
Item 16. Form 10-K Summary
None.
124
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, 2020
ALLAKOS INC.
By:
/s/ Robert Alexander
Robert Alexander, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
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.
Name
/s/ Robert Alexander
Robert Alexander, Ph.D.
/s/ Leo Redmond
Leo Redmond
/s/ Adam Tomasi
Adam Tomasi, Ph.D.
/s/ Daniel Janney
Daniel Janney
/s/ Robert Andreatta
Robert Andreatta
/s/ Steve James
Steve James
/s/ John McKearn
John McKearn, Ph.D.
/s/ Paul Walker
Paul Walker
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
President and Chief Operating Officer
Chair of the Board
Director
Director
Director
Director
125
Date
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
LEASE AGREEMENT
Exhibit 10.13
THIS LEASE AGREEMENT (this “Lease”) is made this 4th day of December, 2019, between ARE-SAN FRANCISCO NO. 63, LLC,
a Delaware limited liability company (“Landlord”), and ALLAKOS INC., a Delaware corporation (“Tenant”).
Building:
Premises:
Project:
That certain to-be-constructed 6-story building to be known as 825 Industrial Road, San Carlos, California
A portion of the Building consisting of the entire 5th floor and the entire 6th floor, containing approximately 98,133
rentable square feet, as shown on Exhibit A, subject to re-measurement and adjustment pursuant to Section 5
hereof.
The real property on which the Building in which the Premises are located, together with all improvements thereon
and appurtenances thereto as described on Exhibit B.
Base Rent:
$5.75 per rentable square foot of the Premises per month, subject to adjustment pursuant to Section 4 hereof.
Rentable Area of Premises: 98,133 sq. ft., subject to adjustment pursuant to Section 5 hereof.
Rentable Area of Building: 282,190 sq. ft., subject to adjustment pursuant to Section 5 hereof.
Rentable Area of Project: 526,178 sq. ft., subject to adjustment pursuant to Section 5 hereof.
Tenant’s Share of Operating Expenses of Building: 34.77%, subject to adjustment pursuant to Section 5 hereof.
Building’s Share of Project: 53.63% sq. ft., subject to adjustment pursuant to Section 5 hereof.
Security Deposit: $1,472,475.00Target Commencement Date: November 1, 2020
Rent Adjustment Percentage: 3%
Base Term:
Beginning on the Commencement Date and ending 123 months from the first day of the first full month following the
Rent Commencement Date. For clarity, if the Rent Commencement Date occurs on the first day of a month, the
expiration of the Base Term shall be measured from that date. If the Rent Commencement Date occurs on a day
other than the first day of a month, the expiration of the Base Term shall be measured from the first day of the
following month.
Permitted Use:
Research and development laboratory, related office and other related uses consistent with the character of the
Project and otherwise in compliance with the provisions of Section 7 hereof.
Address for Rent Payment:
P.O Box 975383
Dallas, TX 75397-5383
Landlord’s Notice Address:
26 North Euclid Avenue
Pasadena, CA 91101
Attention: Corporate Secretary
825 Industrial/Allakos - Page 2
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Tenant’s Notice Address
Prior to the Commencement Date:
975 Island Drive, Suite 201
Redwood City, California 94065
Attention: Adam Tomasi, President and COO
Tenant’s Notice Address
After the Commencement Date:
825 Industrial Road, 5th Floor
San Carlos, California 94070
Attention: Lease Administrator
The following Exhibits and Addenda are attached hereto and incorporated herein by this reference:
[X] EXHIBIT A - PREMISES DESCRIPTION
[X] EXHIBIT C - WORK LETTER
[X] EXHIBIT E - RULES AND REGULATIONS
[X] EXHIBIT B - DESCRIPTION OF PROJECT
[X] EXHIBIT D - COMMENCEMENT DATE
[X] EXHIBIT F - TENANT’S PERSONAL PROPERTY
1.
Lease of Premises. Upon and subject to all of the terms and conditions hereof, Landlord hereby leases the
Premises to Tenant and Tenant hereby leases the Premises from Landlord. The portions of the Project which are for the non-exclusive use of
tenants of the Project are collectively referred to herein as the “Common Areas.” Tenant shall have the non-exclusive right during the Term to
use the Common Areas along with others having the right to use the Common Areas. Landlord reserves the right to modify Common Areas,
provided that such modifications do not materially adversely affect Tenant’s access to or use of the Premises for the Permitted Use. From and
after the Commencement Date through the expiration of the Term, Tenant shall have access to the Building and the Premises 24 hours a day, 7
days a week, except in the case of emergencies, as the result of Legal Requirements, the performance by Landlord of any installation,
maintenance or repairs, or any other temporary interruptions, and otherwise subject to the terms of this Lease.
2.
Delivery; Acceptance of Premises; Commencement Date. Landlord shall use reasonable efforts to deliver the
Premises (“Delivery” or “Deliver”) for Tenant’s construction of the Tenant Improvements pursuant to the Work Letter in Tenant Improvement
Work Readiness Condition on or before the Target Commencement Date. If Landlord fails to timely Deliver the Premises, Landlord shall not be
liable to Tenant for any loss or damage resulting therefrom, and this Lease shall not be void or voidable except as provided
herein. Notwithstanding anything to the contrary contained herein, if Landlord fails to Deliver the Premises to Tenant on or before the date that
is 90 days after the Target Commencement Date (as such date may be extended for Force Majeure delays, the “Abatement Date”), then,
commencing immediately following the Abatement Period (as defined below), Base Rent shall be abated 1 day for each day from and including
the Abatement Date (as such date may be amended for Force Majeure) that Landlord fails to Deliver the Premises to Tenant. If Landlord does
not Deliver the Premises within 150 days of the Target Commencement Date for any reason other than no more than six (6) months of Force
Majeure delays, this Lease may be terminated by Tenant by written notice to Landlord, and if so terminated by Tenant: (a) the Security Deposit,
or any balance thereof (i.e., after deducting therefrom all amounts to which Landlord is entitled under the provisions of this Lease), shall be
returned to Tenant, and (b) neither Landlord nor Tenant shall have any further rights, duties or obligations under this Lease, except with respect
to provisions which expressly survive termination of this Lease. As used herein, the terms “Tenant Improvements” and “Tenant Improvement
Work Readiness Condition” shall have the meanings set forth for such terms in the Work Letter. If Tenant does not elect to void this Lease
within 5 business days of the lapse of such 150 day period (as extended for Force Majeure as provided for above), such right to void this Lease
shall be waived and this Lease shall remain in full force and effect.
The “Commencement Date” shall be the date that Landlord Delivers the Premises to Tenant for Tenant’s construction of the Tenant
Improvements pursuant to the Work Letter. The “Rent Commencement Date” shall be the earlier to occur of (i) the date that is 9 months after
the Commencement Date, or (ii) the date that the Tenant Improvements are Substantially Completed (as defined in the Work Letter); provided,
however, if the Rent Commencement Date occurs prior to the date that Landlord’s Work is substantially completed, then the Rent
Commencement Date shall be delayed until the date Landlord substantially completes Landlord’s Work. Upon request of Landlord, Tenant
shall execute and deliver a written acknowledgment of the Commencement Date, the Rent Commencement Date and the expiration date of the
Term when such are established in the form of the “Acknowledgement of Commencement Date”
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attached to this Lease as Exhibit D; provided, however, Tenant’s failure to execute and deliver such acknowledgment shall not affect
Landlord’s rights hereunder. The “Term” of this Lease shall be the Base Term, as defined above on the first page of this Lease and the
Extension Term which Tenant may elect pursuant to Section 40 hereof.
825 Industrial/Allakos - Page 3
Except as set forth in the Work Letter: (i) Tenant shall accept the Premises in their condition as of the Commencement Date; (ii)
Landlord shall have no obligation for any defects in the Premises; and (iii) Tenant’s taking possession of the Premises shall be conclusive
evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken. Any occupancy of
the Premises by Tenant before the Commencement Date or the Rent Commencement Date shall be subject to all of the terms and conditions
of this Lease, excluding the obligation to pay Base Rent and Operating Expenses.
Tenant agrees and acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with
respect to the condition of all or any portion of the Premises or the Project, and/or the suitability of the Premises or the Project for the conduct
of Tenant’s business, and Tenant waives any implied warranty that the Premises or the Project are suitable for the Permitted Use. This Lease
constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof and supersedes any and all prior
representations, inducements, promises, agreements, understandings and negotiations which are not contained herein. Landlord in executing
this Lease does so in reliance upon Tenant’s representations, warranties, acknowledgments and agreements contained herein.
3.
Rent.
(a)
Base Rent. The first month’s Base Rent and the Security Deposit shall be due and payable on delivery of an
executed copy of this Lease to Landlord. Tenant shall pay to Landlord in advance, without demand, abatement, deduction or set-off, monthly
installments of Base Rent on or before the first day of each calendar month during the Term hereof after the Rent Commencement Date, in
lawful money of the United States of America, at the office of Landlord for payment of Rent set forth above, or to such other person or at such
other place as Landlord may from time to time designate in writing. Payments of Base Rent for any fractional calendar month shall be
prorated. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are
independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any Rent (as defined in Section 5) due hereunder
except for any abatement or set-off as may be expressly provided in this Lease.
Notwithstanding anything contained herein to the contrary, so long as Tenant is not then in default under this Lease (beyond any
applicable notice or cure periods), Base Rent shall be abated for the period commencing on the Rent Commencement Date through the date
that is 90 days after the Rent Commencement Date (the “Abatement Period”). Tenant shall commence paying full Base Rent with respect to
the entire Premises on the day immediately following the expiration of the Abatement Period.
(b)
Additional Rent. In addition to Base Rent, Tenant agrees to pay to Landlord as additional rent (“Additional
Rent”): (i) commencing on the Rent Commencement Date, Tenant’s Share of “Operating Expenses” (as defined in Section 5), and (ii) any and
all other amounts Tenant assumes or agrees to pay under the provisions of this Lease, including, without limitation, any and all other sums that
may become due by reason of any default of Tenant or failure to comply with the agreements, terms, covenants and conditions of this Lease to
be performed by Tenant, after any applicable notice and cure period.
4.
Base Rent Adjustments.
(a)
Annual Adjustments. Base Rent shall be increased on each annual anniversary of the Rent Commencement
Date (or, if the Rent Commencement Date occurs on a date other than the first day of a calendar month, then on each annual anniversary of
the first day of the full calendar month immediately following the Rent Commencement Date) (each an “Adjustment Date”) by multiplying the
Base Rent payable immediately before such Adjustment Date by the Rent Adjustment Percentage and adding the
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resulting amount to the Base Rent payable immediately before such Adjustment Date. Base Rent, as so adjusted, shall thereafter be due as
provided herein. Base Rent adjustments for any fractional calendar month shall be prorated.
825 Industrial/Allakos - Page 4
(b)
Additional TI Allowance. In addition to the Tenant Improvement Allowance (as defined in the Work Letter),
Landlord shall, subject to the terms of the Work Letter, make available to Tenant the Additional Tenant Improvement Allowance (as defined in
the Work Letter). Commencing on the first day immediately following the expiration of the Abatement Period and continuing thereafter on the
first day of each month during the Base Term, Tenant shall pay the amount necessary to fully amortize the portion of the Additional Tenant
Improvement Allowance actually funded by Landlord, if any, in equal monthly payments with interest at a rate of 8% per annum over the Base
Term, which interest shall begin to accrue on the date that Landlord first disburses such Additional Tenant Improvement Allowance or any
portion(s) thereof (“TI Rent”). Any TI Rent remaining unpaid as of the expiration or earlier termination of this Lease shall be paid to Landlord in
a lump sum at the expiration or earlier termination of this Lease.
5.
Operating Expense Payments. Landlord shall deliver to Tenant a written estimate of Operating Expenses for
each calendar year during the Term (the “Annual Estimate”), which may be revised by Landlord from time to time during such calendar
year. Commencing on the Rent Commencement Date and continuing thereafter on the first day of each month during the Term, Tenant shall
pay Landlord an amount equal to 1/12th of Tenant’s Share of the Annual Estimate. Payments for any fractional calendar month shall be
prorated.
The term “Operating Expenses” means all costs and expenses of any kind or description whatsoever incurred or accrued each
calendar year by Landlord with respect to the Project (including, without duplication, (v) Taxes (as defined in Section 9), (w) capital repairs,
improvements and replacements for Permitted Capital Expenditures (as defined below) provided that the same are amortized over the useful
life of such capital items consistent with GAAP (except for capital repairs, replacements and improvements to the roof, which shall be amortized
over 15 years), as reasonably adjusted by Landlord to take into account, the operation of the Building and Building Systems 24 hours per day,
7 days per week and 365 days per year (provided that those Operating Expenses incurred or accrued by Landlord with respect to any capital
repairs, replacements or improvements which are for the intended purpose of promoting sustainability (for example, without limitation, by
reducing energy usage at the Project) (a “Capital Sustainability Expenditure”) may be amortized over a shorter period, at Landlord’s
discretion, to the extent the cost of a Capital Sustainability Expenditure is offset by a reduction in Operating Expenses), (x) the cost (including,
without limitation, any subsidies which Landlord may provide in connection with the common area amenities (the “Common Area Amenities”))
of the Common Area Amenities now or hereafter located at the Project, (y) costs related to any parking structure or parking areas serving the
Project and costs for transportation services (including costs associated with Landlord’s operation of or participation in a shuttle service), and
(z) and the costs of Landlord’s third party property manager (not to exceed 3% of Base Rent) or, if there is no third party property manager,
administration rent in the amount of 3% of Base Rent (provided that during the Abatement Period, Tenant shall nonetheless be required to pay
administration rent each month equal to the amount of the administration rent that Tenant would have been required to pay in the absence of
there being an Abatement Period)), excluding only:
(a)
the original construction costs of the Project and renovation prior to the Rent Commencement Date and costs of
correcting defects in such original construction or renovation;
(b)
Expenditures;
capital expenditures for expansion of the Project and capital expenditures other than Permitted Capital
(c)
interest, principal payments of Mortgage (as defined in Section 27) debts of Landlord, financing costs and
amortization of funds borrowed by Landlord, whether secured or unsecured, and all payments of base rent (but not taxes or operating
expenses) under any ground lease or other underlying lease of all or any portion of the Project;
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825 Industrial/Allakos - Page 5
(d)
Expenses);
depreciation of the Project (except for capital improvements, the cost of which are includable in Operating
(e)
advertising, legal and space planning expenses and leasing commissions and other costs and expenses incurred
in procuring and leasing space to tenants for the Project, including any leasing office maintained in the Project, free rent and construction
allowances for tenants;
(f)
(g)
legal and other expenses incurred in the negotiation or enforcement of leases;
completing, fixturing, improving, renovating, painting, redecorating or other work, which Landlord pays for or
performs for other tenants within their premises, and costs of correcting defects in such work;
(h)
costs to be reimbursed by other tenants of the Project or Taxes to be paid directly by Tenant or other tenants of
the Project, whether or not actually paid;
(i)
salaries, wages, benefits and other compensation paid to (i) personnel of Landlord or its agents or contractors
above the position of the person, regardless of title, who has day-to-day management responsibility for the Project or (ii) officers and
employees of Landlord or its affiliates who are not assigned in whole or in part to the operation, management, maintenance or repair of the
Project; provided, however, that with respect to any such person who does not devote substantially all of his or her employed time to the
Project, the salaries, wages, benefits and other compensation of such person shall be prorated to reflect time spent on matters related to
operating, managing, maintaining or repairing the Project in comparison to the time spent on matters unrelated to operating, managing,
maintaining or repairing the Project;
(j)
general organizational, administrative and overhead costs relating to maintaining Landlord’s existence, either as a
corporation, partnership, or other entity, including general corporate, legal and accounting expenses;
(k)
costs (including attorneys’ fees and costs of settlement, judgments and payments in lieu thereof) incurred in
connection with disputes with tenants, other occupants, or prospective tenants, and costs and expenses, including legal fees, incurred in
connection with negotiations or disputes with employees, consultants, management agents, leasing agents, purchasers or mortgagees of the
Building;
(l)
costs incurred by Landlord due to the violation by Landlord, its employees, agents or contractors or any tenant of
the terms and conditions of any lease of space in the Project or any Legal Requirement (as defined in Section 7);
(m)
penalties, fines or interest incurred as a result of Landlord’s inability or failure to make payment of Taxes and/or
to file any tax or informational returns when due, or from Landlord’s failure to make any payment of Taxes required to be made by Landlord
hereunder before delinquency;
(n)
overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or
services in or to the Project to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a
competitive basis;
(o)
costs of Landlord’s charitable or political contributions, or of fine art maintained at the Project;
(p)
costs in connection with services (including electricity), items or other benefits of a type which are not standard
for the Project and which are not available to Tenant without specific charges therefor, but which are provided to another tenant or occupant of
the Project, whether or not such other tenant or occupant is specifically charged therefor by Landlord;
(q)
costs incurred in the sale or refinancing of the Project;
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825 Industrial/Allakos - Page 6
(r)
net income taxes of Landlord or the owner of any interest in the Project, franchise, capital stock, gift, estate or
inheritance taxes or any federal, state or local documentary taxes imposed against the Project or any portion thereof or interest therein;
(s)
(t)
reserves;
any costs incurred to remove, study, test or remediate, or otherwise related to the presence of Hazardous
Materials in or about the Building or the Project for which Tenant is not responsible under this Lease;
(u)
(i) insurance deductibles in excess of deductibles that Tenant can demonstrate are in excess of customary
deductible amounts carried by institutional owners of Class A laboratory/office buildings in the San Carlos area and (ii) the cost of any
uninsured casualty to the extent Tenant’s Share thereof exceeds $750,000 provided, however, Tenant’s Share of any insurance deductible or
uninsured casualty which Landlord is permitted to include as part of Operating Expenses exceeding $100,000 shall be amortized over a period
of 10 years (with interest not to exceed 8% per annum); and
(v)
any expenses otherwise includable within Operating Expenses to the extent actually reimbursed by persons other
than tenants of the Project under leases for space in the Project.
“Permitted Capital Expenditures” shall mean capital expenditures (i) required in order to comply with Legal Requirements (other
than Legal Requirements that the Building structure and Common Areas of the Project were specifically required to comply with as of the
Delivery Date); (ii) intended to reduce Operating Expenses (including, without limitation, Capital Sustainability Expenditures intended to reduce
Operating Expenses); (iii) following the first 120 months after the Delivery Date, intended to maintain or improve the utility, efficiency or capacity
of any Building Systems, (iv) incurred in connection with replacement of any capital items (not including any replacements performed solely for
cosmetic reasons) to keep the Project, Building and/or Building Systems in good working order and repair; (v) triggered by Tenant’s particular
use of the Premises or Tenant’s Alterations; and/or (vi) incurred in connection with repairs that extend the life of any capital
items. Notwithstanding the foregoing, with respect to those Permitted Capital Expenditures incurred by Landlord which are solely intended to
reduce Operating Expenses, Landlord shall be limited to passing through as part of Operating Expenses each year no more than the actual
annual savings of such Permitted Capital Expenditures.
Within 90 days after the end of each calendar year (or such longer period as may be reasonably required), Landlord shall furnish to
Tenant a statement (an “Annual Statement”) showing in reasonable detail: (a) the total and Tenant’s Share of actual Operating Expenses for
the previous calendar year, and (b) the total of Tenant’s payments in respect of Operating Expenses for such year. If Tenant’s Share of actual
Operating Expenses for such year exceeds Tenant’s payments of Operating Expenses for such year, the excess shall be due and payable by
Tenant as Rent within 30 days after delivery of such Annual Statement to Tenant. If Tenant’s payments of Operating Expenses for such year
exceed Tenant’s Share of actual Operating Expenses for such year Landlord shall pay the excess to Tenant within 30 days after delivery of
such Annual Statement, except that after the expiration, or earlier termination of the Term or if Tenant is delinquent in its obligation to pay Rent,
Landlord shall pay the excess to Tenant after deducting all other amounts due Landlord. Landlord’s and Tenant’s obligations to pay any
overpayments or deficiencies due pursuant to this paragraph shall survive the expiration or earlier termination of this Lease.
The Annual Statement shall be final and binding upon Tenant unless Tenant, within 120 days after Tenant’s receipt thereof, shall
contest any item therein by giving written notice to Landlord, specifying each item contested and the reason therefor. If, during such 120 day
period, Tenant reasonably and in good faith questions or contests the accuracy of Landlord’s statement of Tenant’s Share of Operating
Expenses, Landlord will provide Tenant with access to Landlord’s books and records relating to the operation of the Project and such
information as Landlord reasonably determines to be responsive to Tenant’s questions (the “Expense Information”). If after Tenant’s review of
such Expense Information, Landlord and Tenant cannot agree upon the amount of Tenant’s Share of Operating Expenses, then Tenant shall
have the right
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to have a regionally or nationally recognized independent public accounting firm selected by Tenant and approved by Landlord (which approval
shall not be unreasonably withheld or delayed), working pursuant to a fee arrangement other than a contingent fee (at Tenant’s sole cost and
expense), audit and/or review the Expense Information for the year in question (the “Independent Review”). The results of any such
Independent Review shall be binding on Landlord and Tenant. If the Independent Review shows that the payments actually made by Tenant
with respect to Operating Expenses for the calendar year in question exceeded Tenant’s Share of Operating Expenses for such calendar year,
Landlord shall at Landlord’s option either (i) credit the excess amount to the next succeeding installments of estimated Operating Expenses or
(ii) pay the excess to Tenant within 30 days after delivery of such statement, except that after the expiration or earlier termination of this Lease
or if Tenant is delinquent in its obligation to pay Rent, Landlord shall pay the excess to Tenant after deducting all other amounts due
Landlord. If the Independent Review shows that Tenant’s payments with respect to Operating Expenses for such calendar year were less than
Tenant’s Share of Operating Expenses for the calendar year, Tenant shall pay the deficiency to Landlord within 30 days after delivery of such
statement. If the Independent Review shows that Tenant has overpaid with respect to Operating Expenses by more than 5% then Landlord
shall reimburse Tenant for all costs incurred by Tenant for the Independent Review. Operating Expenses for the calendar years in which
Tenant’s obligation to share therein begins and ends shall be prorated. Notwithstanding anything set forth herein to the contrary, if the Building
is not at least 95% occupied on average during any year of the Term, Tenant’s Share of Operating Expenses for such year shall be computed
as though the Building had been 95% occupied on average during such year.
“Tenant’s Share” shall be the percentage set forth on the first page of this Lease as Tenant’s Share as reasonably adjusted by
Landlord for changes in the physical size of the Premises or the Project occurring thereafter. Landlord shall, prior to the Rent Commencement
Date, cause the rentable square footage of the Premises, the Building and/or the Project to be re-measured by the Architect (as defined in the
Work Letter) in accordance with the Building Owners and Managers Association (ANSI/BOMA Z65.1-2017), as customarily modified for
office/laboratory properties in the San Carlos area. Such re‑measurement shall be subject to Tenant’s reasonable verification with an architect
reasonably acceptable to Landlord. If the actual rentable square footage of the Premises, the Building or the Project deviates from the amount
specified in the definitions of “Premises,” “Rentable Area of Premises,” “Rentable Area of Building” or “Rentable Area of Project” on page
1 of this Lease, then, promptly following such measurement, this Lease shall be amended so as to (i) reflect the actual rentable square footage
thereof in the definitions of “Premises,” “Rentable Area of Premises” and “Rentable Area of Project,” and (ii) appropriately adjust the
amount set forth in the definition of “Tenant’s Share of Operating Expenses of Building” and “Building’s Share of Operating Expenses of
Project” which were calculated based on the rentable square footages of the Premises, Building and Project originally set forth on page
1. Landlord may equitably increase Tenant’s Share for any item of expense or cost reimbursable by Tenant that relates to a repair,
replacement, or service that benefits only the Premises or only a portion of the Project that includes the Premises or that varies with occupancy
or use. Base Rent, Tenant’s Share of Operating Expenses and all other amounts payable by Tenant to Landlord hereunder are collectively
referred to herein as “Rent.”
6.
Security Deposit. Tenant shall deposit with Landlord, upon delivery of an executed copy of this Lease to
Landlord, a security deposit (the “Security Deposit”) for the performance of all of Tenant’s obligations hereunder in the amount set forth on
page 1 of this Lease, which Security Deposit shall be in the form of an unconditional and irrevocable letter of credit (the “Letter of Credit”): (i)
in form and substance reasonably satisfactory to Landlord, (ii) naming Landlord as beneficiary, (iii) expressly allowing Landlord to draw upon it
at any time from time to time by delivering to the issuer notice that Landlord is entitled to draw thereunder, (iv) issued by an FDIC-insured
financial institution reasonably satisfactory to Landlord, and (v) redeemable by presentation of a sight draft in the State of California. If Tenant
does not provide Landlord with a substitute Letter of Credit complying with all of the requirements hereof at least 10 days before the stated
expiration date of any then current Letter of Credit, Landlord shall have the right to draw the full amount of the current Letter of Credit and hold
the funds drawn in cash without obligation for interest thereon as the Security Deposit. The Security Deposit shall be held by Landlord as
security for the performance of Tenant’s obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of
Landlord’s damages in case of Tenant’s default. Upon each occurrence of a Default (as defined in Section 20), Landlord may use all or any
part of the Security Deposit to pay delinquent payments due under
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this Lease, future rent damages under California Civil Code Section 1951.2, and the cost of any damage, injury, expense or liability caused by
such Default, without prejudice to any other remedy provided herein or provided by law. Landlord’s right to use the Security Deposit under this
Section 6 includes the right to use the Security Deposit to pay future rent damages following the termination of this Lease pursuant to Section
21(c) below. Upon any use of all or any portion of the Security Deposit, Tenant shall pay Landlord on demand the amount that will restore the
Security Deposit to the amount set forth on Page 1 of this Lease. Tenant hereby waives the provisions of any law, now or hereafter in force,
including, without limitation, California Civil Code Section 1950.7, which provide that Landlord may claim from a security deposit only those
sums reasonably necessary to remedy defaults in the payment of Rent, to repair damage caused by Tenant or to clean the Premises, it being
agreed that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other loss or damage,
foreseeable or unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee of Tenant. Upon bankruptcy
or other debtor-creditor proceedings against Tenant, the Security Deposit shall be deemed to be applied first to the payment of Rent and other
charges due Landlord for periods prior to the filing of such proceedings. If Tenant shall fully perform every provision of this Lease to be
performed by Tenant, the Security Deposit, or any balance thereof (i.e., after deducting therefrom all amounts to which Landlord is entitled
under the provisions of this Lease), shall be returned to Tenant (or, at Landlord’s option, to the last assignee of Tenant’s interest hereunder)
within 90 days after the expiration or earlier termination of this Lease.
If Landlord transfers its interest in the Project or this Lease, Landlord shall either (a) transfer any Security Deposit then held by
Landlord to a person or entity assuming Landlord’s obligations under this Section 6, or (b) return to Tenant any Security Deposit then held by
Landlord and remaining after the deductions permitted herein. Upon such transfer to such transferee or the return of the Security Deposit to
Tenant, Landlord shall have no further obligation with respect to the Security Deposit, and Tenant’s right to the return of the Security Deposit
shall apply solely against Landlord’s transferee. The Security Deposit is not an advance rental deposit or a measure of Landlord’s damages in
case of Tenant’s default. Landlord’s obligation respecting the Security Deposit is that of a debtor, not a trustee, and no interest shall accrue
thereon.
7.
Use. The Premises shall be used solely for the Permitted Use set forth in the basic lease provisions on page 1 of
this Lease, and in compliance with all laws, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and
restrictions now or hereafter applicable to the Premises, and to the use and occupancy thereof, including, without limitation, the Americans With
Disabilities Act, 42 U.S.C. § 12101, et seq. (together with the regulations promulgated pursuant thereto, “ADA”) (collectively, “Legal
Requirements” and each, a “Legal Requirement”). Tenant shall, upon 5 days’ written notice from Landlord, discontinue any use of the
Premises which is declared by any Governmental Authority (as defined in Section 9) having jurisdiction to be a violation of a Legal
Requirement. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant’s or Landlord’s
insurance, increase the insurance risk, or cause the disallowance of any sprinkler or other credits. Tenant shall not permit any part of the
Premises to be used as a “place of public accommodation”, as defined in the ADA or any similar legal requirement. Tenant shall reimburse
Landlord promptly upon demand for any additional premium charged for any such insurance policy by reason of Tenant’s failure to comply with
the provisions of this Section or otherwise caused by Tenant’s use and/or occupancy of the Premises. Tenant will use the Premises in a
careful, safe and proper manner and will not commit or permit waste, overload the floor or structure of the Premises, subject the Premises to
use that would damage the Premises or obstruct or interfere with the rights of Landlord or other tenants or occupants of the Project, including
conducting or giving notice of any auction, liquidation, or going out of business sale on the Premises, or using or allowing the Premises to be
used for any unlawful purpose. Tenant shall cause any equipment or machinery to be installed in the Premises so as to reasonably prevent
sounds or vibrations from the Premises from extending into Common Areas, or other space in the Project. Tenant shall not place any
machinery or equipment which would overload the floor in or upon the Premises or transport or move such items through the Common Areas of
the Project or in the Project elevators without the prior written consent of Landlord. Except as may be provided under the Work Letter, Tenant
shall not, without the prior written consent of Landlord, use the Premises in any manner which will require ventilation, air exchange, heating,
gas, steam, electricity or water beyond the existing capacity of the Project as
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proportionately allocated to the Premises based upon Tenant’s Share as usually furnished for the Permitted Use.
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Landlord shall be responsible for the compliance of the Common Areas of the Project and Landlord’s Work with Legal Requirements
as of the Rent Commencement Date. Following the Commencement Date, Landlord shall, as an Operating Expense (to the extent such Legal
Requirement is generally applicable to similar buildings in the area in which the Project is located) and at Tenant’s expense (to the extent such
Legal Requirement is triggered by reason of Tenant’s, as compared to other tenants of the Project, specific use of the Premises or Tenant’s
Alterations) make any alterations or modifications to the Common Areas or the exterior of the Building that are required by Legal Requirements.
Except as provided in the two immediately preceding sentence, Tenant, at its sole expense, shall make any alterations or modifications to the
interior or the exterior of the Premises or the Project that are required by Legal Requirements (including, without limitation, compliance of the
Premises with the ADA) related to Tenant’s use or occupancy of the Premises. Notwithstanding any other provision herein to the contrary,
Tenant shall be responsible for any and all demands, claims, liabilities, losses, costs, expenses, actions, causes of action, damages or
judgments, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys’ fees,
charges and disbursements and costs of suit) (collectively, “Claims”) arising out of or in connection with Legal Requirements related to Tenant’s
use or occupancy of the Premises, the Tenant Improvements or Tenant’s Alterations (but not including Landlord’s Work), and Tenant shall
indemnify, defend, hold and save Landlord harmless from and against any and all Claims arising out of or in connection with any breach of this
sentence.
Tenant acknowledges that Landlord may, but shall not be obligated to, seek to obtain Leadership in Energy and Environmental
Design (LEED), WELL Building Standard, or other similar “green” certification with respect to the Project and/or the Premises, and Tenant
agrees, at no material cost to Tenant, to reasonably cooperate with Landlord, and to provide such information and/or documentation as
Landlord may reasonably request, in connection therewith.
8.
Holding Over. If, with Landlord’s express written consent, Tenant retains possession of the Premises after the
termination of the Term, (i) unless otherwise agreed in such written consent, such possession shall be subject to immediate termination by
Landlord at any time, (ii) all of the other terms and provisions of this Lease (including, without limitation, the adjustment of Base Rent pursuant
to Section 4 hereof) shall remain in full force and effect (excluding any expansion or renewal option or other similar right or option) during such
holdover period, (iii) Tenant shall continue to pay Base Rent in the amount payable upon the date of the expiration or earlier termination of this
Lease or such other amount as Landlord and Tenant may agree in such written consent, and (iv) all other payments shall continue under the
terms of this Lease. If Tenant remains in possession of the Premises after the expiration or earlier termination of the Term without the express
written consent of Landlord, (A) Tenant shall become a tenant at sufferance upon the terms of this Lease except that the monthly rental shall be
equal to 150% of Base Rent (plus 100% of all Additional Rent) in effect during the last 30 days of the Term, and (B) Tenant shall be responsible
for all damages suffered by Landlord resulting from or occasioned by Tenant’s holding over, including consequential damages; provided,
however, that if Tenant delivers a written inquiry to Landlord within 30 days prior to the expiration or earlier termination of the Term, Landlord
will notify Tenant whether the potential exists for consequential damages. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease except as otherwise expressly provided, and this Section 8 shall not be construed as consent for
Tenant to retain possession of the Premises. Acceptance by Landlord of Rent after the expiration of the Term or earlier termination of this
Lease shall not result in a renewal or reinstatement of this Lease.
9.
Taxes. Landlord shall pay, as part of Operating Expenses, all taxes, levies, fees, assessments and governmental
charges of any kind, existing as of the Commencement Date or thereafter enacted (collectively referred to as “Taxes”), imposed by any federal,
state, regional, municipal, local or other governmental authority or agency, including, without limitation, quasi-public agencies (collectively,
“Governmental Authority”) during the Term, including, without limitation, all Taxes: (i) imposed on or measured by or based, in whole or in
part, on rent payable to (or gross receipts received by) Landlord under this Lease and/or from the rental by Landlord of the Project or any
portion thereof, or (ii) based on the
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square footage, assessed value or other measure or evaluation of any kind of the Premises or the Project, or (iii) assessed or imposed by or on
the operation or maintenance of any portion of the Premises or the Project, including parking, or (iv) assessed or imposed by, or at the direction
of, or resulting from Legal Requirements, or interpretations thereof, promulgated by any Governmental Authority, or (v) imposed as a license or
other fee, charge, tax, or assessment on Landlord’s business or occupation of leasing space in the Project. Landlord may contest by
appropriate legal proceedings the amount, validity, or application of any Taxes or liens securing Taxes. Notwithstanding anything to the
contrary herein, Landlord shall only charge Tenant for assessments as if those assessments were paid by Landlord over the longest possible
term which Landlord is permitted to pay for the applicable assessments without additional charge other than interest, if any, provided under the
terms of the underlying assessments. Taxes shall not include any net income taxes imposed on Landlord except to the extent such net income
taxes are in substitution for any Taxes payable hereunder. If any such Tax is levied or assessed directly against Tenant, then Tenant shall be
responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall pay, prior to
delinquency, any and all Taxes levied or assessed against any personal property or trade fixtures placed by Tenant in the Premises, whether
levied or assessed against Landlord or Tenant. If any Taxes on Tenant’s personal property or trade fixtures are levied against Landlord or
Landlord’s property, or if the assessed valuation of the Project is increased by a value attributable to improvements in or alterations to the
Premises, whether owned by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, higher than the
base valuation on which Landlord from time-to-time allocates Taxes to all tenants in the Project, Landlord shall have the right, but not the
obligation, to pay such Taxes. Landlord’s determination of any excess assessed valuation shall be binding and conclusive, absent manifest
error. The amount of any such payment by Landlord shall constitute Additional Rent due from Tenant to Landlord immediately upon demand.
10.
Parking. Subject to all applicable Legal Requirements, Force Majeure, a Taking (as defined in Section 19
below) and the exercise by Landlord of its rights hereunder, Tenant shall have the right to use 2.85 parking spaces per 1,000 rentable square
feet of the Premises, in common with other tenants of the Project, which parking spaces shall be in those areas designated for non-reserved
parking, subject in each case to Landlord’s rules and regulations. Landlord may allocate parking spaces among Tenant and other tenants in
the Project pro rata as described above if Landlord determines that such parking facilities are becoming crowded. Landlord shall not
oversubscribe parking among tenants leasing space at the Project.
Subject to compliance with Legal Requirements, Landlord shall, at Landlord’s cost and expense, install, and, as part of Operating
Expenses, power and maintain, approximately 21 dual-charging electric vehicle charging stations in the parking areas of the Project, which
shall be available on a non-reserved basis.
If applicable to the Project, Tenant shall comply with the requirements of any TDMP (as defined below) which may be required by
the City of San Carlos or other Governmental Authority with respect to the parking areas at the Project which are binding on tenants in the
Project or tenants using the parking lots or structures available at the Project. A copy of any TDMP in effect from time to time during the Term
shall be made available to Tenant. Notwithstanding anything to the contrary contained in this Lease, if applicable to the Project, Tenant shall be
required to comply with the requirements of (and Operating Expenses shall expressly include any costs incurred by Landlord to comply with)
any transportation demand management plan (“TDMP”) and any other permit conditions (e.g. rider sharing and carpooling initiatives) imposed
by the City of San Carlos or other Governmental Authority.
11.
Utilities, Services. Landlord shall provide, subject to the terms of this Section 11 and the other provisions of this
Lease, water, electricity, HVAC (twenty-four hours per day, seven days per week), light, power, sewer, and other utilities (including gas and fire
sprinklers to the extent the Project is plumbed for such services), and, with respect to the Common Areas, refuse and trash collection and
janitorial services (collectively, “Utilities”). Landlord shall pay, as Operating Expenses or subject to Tenant’s reimbursement obligation, for all
Utilities used on the Premises, all maintenance charges for Utilities, and any storm sewer charges or other similar charges for Utilities imposed
by any Governmental Authority or Utility provider, and any taxes, penalties, surcharges or similar charges thereon. Landlord may cause, at
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Tenant’s expense, any Utilities to be separately metered or charged directly to Tenant by the provider. Tenant shall pay directly to the Utility
provider, prior to delinquency, any separately metered Utilities and services which may be furnished to Tenant or the Premises during the
Term. Tenant shall pay, as part of Operating Expenses, its share of all charges for jointly metered Utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of Utilities, from any cause whatsoever other than Landlord’s willful misconduct,
shall result in eviction or constructive eviction of Tenant, termination of this Lease or the abatement of Rent. Tenant agrees to limit use of water
and sewer with respect to Common Areas to normal restroom use. Tenant shall retain third parties reasonably acceptable to Landlord to
provide janitorial services and trash collection services to the Premises and Tenant shall pay such third parties directly for such janitorial and
trash collection services.
Notwithstanding anything to the contrary set forth herein, if (i) a stoppage of an Essential Service (as defined below) to the Premises
shall occur and such stoppage is due solely to the gross negligence or willful misconduct of Landlord and not due in any part to any act or
omission on the part of Tenant or any Tenant Party or any matter beyond Landlord’s reasonable control (any such stoppage of an Essential
Service being hereinafter referred to as a “Service Interruption”), and (ii) such Service Interruption continues for more than 5 consecutive
business days after Landlord shall have received written notice thereof from Tenant, and (iii) as a result of such Service Interruption, the
conduct of Tenant’s normal operations in the Premises are materially and adversely affected, then there shall be an abatement of one day’s
Base Rent for each day during which such Service Interruption continues after such 5 business day period; provided, however, that if any part
of the Premises is reasonably useable for Tenant’s normal business operations or if Tenant conducts all or any part of its operations in any
portion of the Premises notwithstanding such Service Interruption, then the amount of each daily abatement of Base Rent shall only be
proportionate to the nature and extent of the interruption of Tenant’s normal operations or ability to use the Premises. The rights granted to
Tenant under this paragraph shall be Tenant’s sole and exclusive remedy resulting from a failure of Landlord to provide services, and Landlord
shall not otherwise be liable for any loss or damage suffered or sustained by Tenant resulting from any failure or cessation of services. For
purposes hereof, the term “Essential Services” shall mean the following services: HVAC service, water, sewer and electricity, but in each case
only to the extent that Landlord has an obligation to provide same to Tenant under this Lease. The provisions of this paragraph shall only apply
as long as the original Tenant is the tenant occupying the Premises under this Lease and shall not apply to any assignee or sublessee
Landlord’s sole obligation for either providing emergency generators or providing emergency back-up power to Tenant shall be: (i) to
provide an emergency generator with not less than the capacity of the emergency generator located in the Building as of the Rent
Commencement Date which will be designed to have a capacity of 1.25mW, and (ii) to contract with a third party to maintain the emergency
generator as per the manufacturer’s standard maintenance guidelines. Except as otherwise provided in the immediately preceding sentence,
Landlord shall have no obligation to provide Tenant with operational emergency generators or back-up power or to supervise, oversee or
confirm that the third party maintaining the emergency generators is maintaining the generators as per the manufacturer’s standard guidelines
or otherwise. Notwithstanding anything to the contrary contained herein, Landlord shall, on a weekly basis, as part of the maintenance of the
Building, run the emergency generator for a period reasonably determined by Landlord for the purpose of determining whether it operates when
started. Landlord shall, upon written request from Tenant (not more frequently than twice per calendar year), make available for Tenant’s
inspection the maintenance contracts (including contracts regarding provision of fuel for the emergency generators) and maintenance records
for the emergency generators for the 6 month period immediately preceding Landlord’s receipt of Tenant’s written request. During any period of
replacement, repair or maintenance of the emergency generator when the emergency generator is not operational, including any delays thereto
due to the inability to obtain parts or replacement equipment, Landlord shall have no obligation to provide Tenant with an alternative back-up
generator or generators or alternative sources of back-up power. Tenant expressly acknowledges and agrees that Landlord does not guaranty
that such emergency generator will be operational at all times or that emergency power will be available to the Premises when needed.
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Tenant agrees to provide Landlord with access to Tenant’s water and/or energy usage data on a monthly basis, either by providing
Tenant’s applicable utility login credentials to Landlord’s Measurabl online portal, or by another delivery method reasonably agreed to by
Landlord and Tenant. The costs and expenses incurred by Landlord in connection with receiving and analyzing such water and/or energy
usage data (including, without limitation, as may be required pursuant to applicable Legal Requirements) shall be included as part of Operating
Expenses.
12.
Alterations and Tenant’s Property. Any alterations, additions, or improvements made to the Premises by or on
behalf of Tenant, including additional locks or bolts of any kind or nature upon any doors or windows in the Premises, but excluding installation,
removal or realignment of furniture systems (other than removal of furniture systems owned or paid for by Landlord) not involving any
modifications to the structure or connections (other than by ordinary plugs or jacks) to Building Systems (as defined in Section 13)
(“Alterations”) shall be subject to Landlord’s prior written consent, which may be given or withheld in Landlord’s sole discretion if any such
Alteration affects the structure or Building Systems and shall not be otherwise unreasonably withheld, conditioned or delayed. Tenant may
construct nonstructural, Alterations in the Premises from time to time without Landlord’s prior approval if the cost of the applicable Alteration
project does not exceed $100,000 (a “Notice-Only Alteration”), provided Tenant notifies Landlord in writing (which written notice may be given
by email to persons designated by Landlord in writing from time to time as Landlord’s representatives for the purpose of receiving such notices)
of such intended Notice-Only Alteration, and such notice shall be accompanied by plans, specifications and such other information concerning
the nature and cost of the Notice-Only Alteration as may be reasonably requested by Landlord, which notice and accompanying materials shall
be delivered to Landlord not less than 5 business days in advance of any proposed construction. If Landlord approves any Alterations,
Landlord may impose such conditions on Tenant in connection with the commencement, performance and completion of such Alterations as
Landlord may deem appropriate in Landlord’s reasonable discretion. Any request for approval shall be in writing, delivered not less than 15
business days in advance of any proposed construction, and accompanied by plans, specifications, bid proposals, work contracts and such
other information concerning the nature and cost of the alterations as may be reasonably requested by Landlord, including the identities and
mailing addresses of all persons performing work or supplying materials. Landlord’s right to review plans and specifications and to monitor
construction shall be solely for its own benefit, and Landlord shall have no duty to ensure that such plans and specifications or construction
comply with applicable Legal Requirements. Tenant shall cause, at its sole cost and expense, all Alterations to comply with insurance
requirements and with Legal Requirements and shall implement at its sole cost and expense any alteration or modification required by Legal
Requirements as a result of any Alterations. Tenant shall pay to Landlord, as Additional Rent, on demand an amount equal to 3% of all
charges incurred by Tenant or its contractors or agents in connection with any Alteration to cover Landlord’s overhead and expenses for plan
review, coordination, scheduling and supervision. Before Tenant begins any Alteration, Landlord may post on and about the Premises notices
of non-responsibility pursuant to applicable law. Tenant shall reimburse Landlord for, and indemnify and hold Landlord harmless from, any
expense incurred by Landlord by reason of faulty work done by Tenant or its contractors, delays caused by such work, or inadequate cleanup.
Tenant shall complete all Alterations work free and clear of liens, and shall provide (and cause each contractor or subcontractor to
provide) certificates of insurance for workers’ compensation and other coverage in amounts and from an insurance company satisfactory to
Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Alterations,
Tenant shall deliver to Landlord: (i) sworn statements setting forth the names of all contractors and subcontractors who did the work and final
lien waivers from all such contractors and subcontractors; and (ii) “as built” plans for any such Alteration.
Except for Removable Installations (as hereinafter defined), all Installations (as defined in the immediately following paragraph) shall
be and shall remain the property of Landlord during the Term and following the expiration or earlier termination of the Term, shall not be
removed by Tenant at any time during the Term, and shall remain upon and be surrendered with the Premises as a part
thereof. Notwithstanding the foregoing, Landlord shall, if Tenant makes a request in writing at the time its approval of any such Installation is
requested or at the time Tenant delivers notice to Landlord of a Notice-Only Alteration, notify
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Tenant whether Landlord will require that Tenant remove such Installation upon the expiration or earlier termination of the Term. If removal is
so required by Landlord, Tenant shall remove such Installation in accordance with the immediately succeeding sentence. Upon the expiration
or earlier termination of the Term, Tenant shall remove (i) if required by applicable Legal Requirements, all wires, cables or similar equipment
which Tenant has installed in the Premises or in the risers or plenums of the Building, (ii) any Installations for which Landlord has given Tenant
notice of removal in accordance with the immediately preceding sentence, and (iii) all of Tenant’s Property (as hereinafter defined), and Tenant
shall restore and repair any damage caused by or occasioned as a result of such removal, including, without limitation, capping off all such
connections behind the walls of the Premises and repairing any holes. During any restoration period beyond the expiration or earlier
termination of the Term, Tenant shall pay Rent to Landlord as provided herein as if said space were otherwise occupied by Tenant. If Landlord
is requested by Tenant or any lender, lessor or other person or entity claiming an interest in any of Tenant’s Property to waive any lien Landlord
may have against any of Tenant’s Property, and Landlord consents to such waiver, then Landlord shall be entitled to be paid as administrative
rent a fee of $1,000 per occurrence for its time and effort in preparing and negotiating such a waiver of lien. Notwithstanding anything to the
contrary, in no event shall Tenant be required to remove or restore (nor shall Tenant have the right to remove) the Tenant Improvements
(including any Installations installed in the Premises as part of the Tenant Improvements).
For purposes of this Lease, (x) “Removable Installations” means any items listed on Exhibit F attached hereto and any items
agreed by Landlord in writing to be included on Exhibit F in the future, (y) ”Tenant’s Property” means Removable Installations and, other than
Installations, any personal property or equipment of Tenant that may be removed without material damage to the Premises, and
(z) ”Installations” means all property of any kind paid for with the TI Fund, all Alterations, all fixtures, and all partitions, hardware, built-in
machinery, built-in casework and cabinets and other similar additions, equipment, property and improvements built into the Premises so as to
become an integral part of the Premises, including, without limitation, fume hoods which penetrate the roof or plenum area, built-in cold rooms,
built-in warm rooms, walk-in cold rooms, walk-in warm rooms, deionized water systems, glass washing equipment, autoclaves, chillers, built-in
plumbing, electrical and mechanical equipment and systems, and any power generator and transfer switch.
13.
Landlord’s Repairs. Landlord, as an Operating Expense, shall maintain all of the structural, exterior, parking
and other Common Areas of the Project, and the HVAC, plumbing, fire sprinklers, elevators and all other building systems serving the Premises
and other portions of the Project (“Building Systems”), in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, or by any of Tenant’s assignees, sublessees, licensees, agents, servants, employees, invitees and contractors (or any of Tenant’s
assignees, sublessees and/or licensees respective agents, servants, employees, invitees and contractors) (collectively, “Tenant Parties”)
excluded. Losses and damages caused by Tenant or any Tenant Party shall be repaired by Landlord, to the extent not covered by insurance,
at Tenant’s sole cost and expense. Landlord reserves the right to stop Building Systems services when necessary (i) by reason of accident or
emergency, or (ii) for planned repairs, alterations or improvements, which are, in the judgment of Landlord, desirable or necessary to be made,
until said repairs, alterations or improvements shall have been completed. Landlord shall have no responsibility or liability for failure to supply
Building Systems services during any such period of interruption; provided, however, that Landlord shall, except in case of emergency, give
Tenant 48 hours advance notice of any planned stoppage of Building Systems services for routine maintenance, repairs, alterations or
improvements. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Section, after which
Landlord shall make a commercially reasonable effort to effect such repair. Landlord shall not be liable for any failure to make any repairs or to
perform any maintenance unless such failure shall persist for an unreasonable time after Tenant’s written notice of the need for such repairs or
maintenance. Tenant waives its rights under any state or local law to terminate this Lease or to make such repairs at Landlord’s expense and
agrees that the parties’ respective rights with respect to such matters shall be solely as set forth herein. Repairs required as the result of fire,
earthquake, flood, vandalism, war, or similar cause of damage or destruction shall be controlled by Section 18.
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14.
Tenant’s Repairs. Subject to Section 13 hereof, Tenant, at its expense, shall repair, replace and maintain in
good condition all portions of the Premises, including, without limitation, entries, doors, ceilings, interior windows, interior walls, and the interior
side of demising walls. Should Tenant fail to make any such repair or replacement or fail to maintain the Premises, Landlord shall give Tenant
notice of such failure. If Tenant fails to commence cure of such failure within 10 days of Landlord’s notice, and thereafter diligently prosecute
such cure to completion, Landlord may perform such work and shall be reimbursed by Tenant within 10 days after demand therefor; provided,
however, that if such failure by Tenant creates or could create an emergency, Landlord may immediately commence cure of such failure and
shall thereafter be entitled to recover the costs of such cure from Tenant. Subject to Sections 17 and 18, Tenant shall bear the full uninsured
cost of any repair or replacement to any part of the Project that results from damage caused by Tenant or any Tenant Party.
15.
Mechanic’s Liens. Tenant shall discharge, by bond or otherwise, any mechanic’s lien filed against the Premises
or against the Project for work claimed to have been done for, or materials claimed to have been furnished to, Tenant within 10 days after
Tenant receives written notice of the filing thereof, at Tenant’s sole cost and shall otherwise keep the Premises and the Project free from any
liens arising out of work performed, materials furnished or obligations incurred by Tenant. Should Tenant fail to discharge any lien described
herein, Landlord shall have the right, but not the obligation, to pay such claim or post a bond or otherwise provide security to eliminate the lien
as a claim against title to the Project and the cost thereof shall be immediately due from Tenant as Additional Rent. If Tenant shall lease or
finance the acquisition of office equipment, furnishings, or other personal property of a removable nature utilized by Tenant in the operation of
Tenant’s business, Tenant warrants that any Uniform Commercial Code Financing Statement filed as a matter of public record by any lessor or
creditor of Tenant will upon its face or by exhibit thereto indicate that such Financing Statement is applicable only to removable personal
property of Tenant located within the Premises. In no event shall the address of the Project be furnished on the statement without qualifying
language as to applicability of the lien only to removable personal property, located in an identified suite held by Tenant.
16.
Indemnification. Tenant hereby indemnifies and agrees to defend, save and hold Landlord, its officers,
directors, employees, managers, agents, sub-agents, constituent entities and lease signators (collectively, “Landlord Indemnified Parties”)
harmless from and against any and all Claims for injury or death to persons or damage to property occurring within or about the Premises or
the Project arising directly or indirectly out of use or occupancy of the Premises or the Project by Tenant or any Tenant Parties (including,
without limitation, any act, omission or neglect by Tenant or any Tenant’s Parties in or about the Premises or at the Project) or the a breach or
default by Tenant in the performance of any of its obligations hereunder, except to the extent caused by the willful misconduct, gross
negligence or active negligence of Landlord Indemnified Parties. Landlord shall not be liable to Tenant for, and Tenant assumes all risk of
damage to, personal property (including, without limitation, loss of records kept within the Premises). Tenant further waives any and all Claims
for injury to Tenant’s business or loss of income relating to any such damage or destruction of personal property (including, without limitation,
any loss of records). Landlord Indemnified Parties shall not be liable for any damages arising from any act, omission or neglect of any tenant in
the Project or of any other third party or Tenant Parties.
17.
Insurance. Landlord shall maintain all risk property and, if applicable, sprinkler damage insurance covering the
full replacement cost of the Project. Landlord shall further procure and maintain commercial general liability insurance with a single loss limit of
not less than $2,000,000 for bodily injury and property damage with respect to the Project. Landlord may, but is not obligated to, maintain such
other insurance and additional coverages as it may deem necessary, including, but not limited to, flood, environmental hazard and earthquake,
loss or failure of building equipment, errors and omissions, rental loss during the period of repair or rebuilding, workers’ compensation
insurance and fidelity bonds for employees employed to perform services and insurance for any improvements installed by Tenant or which are
in addition to the standard improvements customarily furnished by Landlord without regard to whether or not such are made a part of the
Project. All such insurance shall be included as part of the Operating Expenses. The Project may be included in a blanket policy (in which
case the cost of such insurance allocable to the Project will be determined by Landlord based upon the insurer’s cost calculations). Tenant
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shall also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of
Tenant’s use of the Premises.
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Tenant, at its sole cost and expense, shall maintain during the Term: all risk property insurance with business interruption and extra
expense coverage, covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant at
Tenant’s expense; workers’ compensation insurance with no less than the minimum limits required by law; employer’s liability insurance with
employers liability limits of $1,000,000 bodily injury by accident – each accident, $1,000,000 bodily injury by disease – policy limit, and
$1,000,000 bodily injury by disease – each employee; and commercial general liability insurance, with a minimum limit of not less than
$2,000,000 per occurrence for bodily injury and property damage with respect to the Premises. The commercial general liability insurance
maintained by Tenant shall name Alexandria Real Estate Equities, Inc., and Landlord, its officers, directors, employees, managers, agents, sub-
agents, constituent entities and lease signators (collectively, “Landlord Insured Parties”), as additional insureds; insure on an occurrence and
not a claims-made basis; be issued by insurance companies which have a rating of not less than policyholder rating of A and financial category
rating of at least Class X in “Best’s Insurance Guide”; not contain a hostile fire exclusion; contain a contractual liability endorsement; and
provide primary coverage to Landlord Insured Parties (any policy issued to Landlord Insured Parties providing duplicate or similar coverage
shall be deemed excess over Tenant’s policies, regardless of limits). Tenant shall (i) provide Landlord with 30 days advance written notice of
cancellation of such commercial general liability policy, and (ii) request Tenant’s insurer to endeavor to provide 30 days advance written notice
to Landlord of cancellation of such commercial general liability policy (or 10 days in the event of a cancellation due to non-payment of
premium). Certificates of insurance showing the limits of coverage required hereunder and showing Landlord as an additional insured, along
with reasonable evidence of the payment of premiums for the applicable period, shall be delivered to Landlord by Tenant prior to (i) the earlier
to occur of (x) the Commencement Date, or (y) the date that Tenant accesses the Premises under this Lease, and (ii) each renewal of said
insurance. Tenant’s policy may be a “blanket policy” with an aggregate per location endorsement which specifically provides that the amount of
insurance shall not be prejudiced by other losses covered by the policy. Tenant shall, at least 5 days prior to the expiration of such policies,
furnish Landlord with renewal certificates.
In each instance where insurance is to name Landlord as an additional insured, Tenant shall upon written request of Landlord also
designate and furnish certificates so evidencing Landlord as additional insured to: (i) any lender of Landlord holding a security interest in the
Project or any portion thereof, (ii) the landlord under any lease wherein Landlord is tenant of the real property on which the Project is located, if
the interest of Landlord is or shall become that of a tenant under a ground or other underlying lease rather than that of a fee owner, and/or (iii)
any management company retained by Landlord to manage the Project.
The property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based
upon an assignment from its insured, against Landlord or Tenant, and their respective officers, directors, employees, managers, agents,
invitees and contractors (“Related Parties”), in connection with any loss or damage thereby insured against. Neither party nor its respective
Related Parties shall be liable to the other for loss or damage caused by any risk insured against under property insurance required to be
maintained hereunder, and each party waives any claims against the other party, and its respective Related Parties, for such loss or
damage. The failure of a party to insure its property shall not void this waiver. Landlord and its respective Related Parties shall not be liable
for, and Tenant hereby waives all claims against such parties for, business interruption and losses occasioned thereby sustained by Tenant or
any person claiming through Tenant resulting from any accident or occurrence in or upon the Premises or the Project from any cause
whatsoever. If the foregoing waivers shall contravene any law with respect to exculpatory agreements, the liability of Landlord or Tenant shall
be deemed not released but shall be secondary to the other’s insurer.
Landlord may require insurance policy limits to be raised to conform with requirements of Landlord’s lender and/or to bring coverage
limits to levels then being generally required of new tenants within the Project; provided, however, that the increased amount of coverage is
consistent with coverage amounts then being required by institutional owners of similar projects with tenants occupying similar size premises in
the geographical area in which the Project is located.
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18.
Restoration. If, at any time during the Term, the Project or the Premises are damaged or destroyed by a fire or
other casualty, Landlord shall notify Tenant within 60 days after discovery of such damage as to the amount of time Landlord reasonably
estimates it will take to restore the Project or the Premises, as applicable (the “Restoration Period”). If the Restoration Period is estimated to
exceed 12 months (the “Maximum Restoration Period”), Landlord may, in such notice, elect to terminate this Lease as of the date that is 75
days after the date of discovery of such damage or destruction; provided, however, that notwithstanding Landlord’s election to restore, Tenant
may elect to terminate this Lease by written notice to Landlord delivered within 5 business days of receipt of a notice from Landlord estimating
a Restoration Period for the Premises longer than the Maximum Restoration Period. Unless either Landlord or Tenant so elects to terminate
this Lease, Landlord shall, subject to receipt of sufficient insurance proceeds (with any deductible to be treated as a current Operating
Expense, subject to the terms of Section 5 above), promptly restore the Premises (excluding the improvements installed by Tenant or by
Landlord and paid for by Tenant), subject to delays arising from the collection of insurance proceeds, from Force Majeure events or as needed
to obtain any license, clearance or other authorization of any kind required to enter into and restore the Premises issued by any Governmental
Authority having jurisdiction over the use, storage, handling, treatment, generation, release, disposal, removal or remediation of Hazardous
Materials (as defined in Section 30) in, on or about the Premises (collectively referred to herein as “Hazardous Materials Clearances”);
provided, however, that if repair or restoration of the Premises is not substantially complete as of the end of the Maximum Restoration Period
or, if longer, the Restoration Period, Landlord may, in its sole and absolute discretion, elect not to proceed with such repair and restoration, or
Tenant may by written notice to Landlord delivered within 5 business days of the expiration of the Maximum Restoration Period or, if longer, the
Restoration Period, elect to terminate this Lease, in which event Landlord shall be relieved of its obligation to make such repairs or restoration
and this Lease shall terminate as of the date that is 75 days after the later of: (i) discovery of such damage or destruction, or (ii) the date all
required Hazardous Materials Clearances are obtained, but Landlord shall retain any Rent paid and the right to any Rent payable by Tenant
prior to such election by Landlord or Tenant.
Promptly following the date that Landlord makes the Premises available to Tenant for Tenant’s repairs and restoration, Tenant, at its
expense, shall promptly perform, subject to delays arising from the collection of insurance proceeds, from Force Majeure (as defined in Section
34) events or to obtain Hazardous Material Clearances, shall make all repairs or restoration to the improvements in the Premises installed by
Tenant or by Landlord and paid for by Tenant and improvements in the Premises required to be insured by Tenant. Notwithstanding the
foregoing, either Landlord or Tenant may terminate this Lease upon written notice to the other if the Premises are damaged during the last year
of the Term and Landlord reasonably estimates that it will take more than 2 months to repair such damage; provided, however, that such notice
is delivered within 10 business days after the date that Landlord provides Tenant with written notice of the estimated Restoration
Period. Notwithstanding anything to the contrary contained herein, Landlord shall also have the right to terminate this Lease if insurance
proceeds are not available for such restoration. Rent shall be abated from the date all required Hazardous Material Clearances are obtained
until the Premises are repaired and restored, in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the
total area of the Premises, unless Landlord provides Tenant with other space during the period of repair that is suitable for the temporary
conduct of Tenant’s business. In the event that no Hazardous Material Clearances are required to be obtained by Tenant with respect to the
Premises, rent abatement shall commence on the date of discovery of the damage or destruction. Such abatement shall be the sole remedy of
Tenant, and except as provided in this Section 18, Tenant waives any right to terminate this Lease by reason of damage or casualty loss.
The provisions of this Lease, including this Section 18, constitute an express agreement between Landlord and Tenant with respect
to any and all damage to, or destruction of, all or any part of the Premises, or any other portion of the Project, and any statute or regulation
which is now or may hereafter be in effect shall have no application to this Lease or any damage or destruction to all or any part of the
Premises or any other portion of the Project, the parties hereto expressly agreeing that this Section 18 sets forth their entire understanding and
agreement with respect to such matters.
19.
Condemnation. If the whole or any material part of the Premises or the Project is taken for any public or quasi-
public use under governmental law, ordinance, or regulation, or by right of eminent
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domain, or by private purchase in lieu thereof (a “Taking” or “Taken”), and the Taking would in Landlord’s reasonable judgment, materially
interfere with or impair Landlord’s ownership or operation of the Project or would in the reasonable judgment of Landlord and Tenant either
prevent or materially interfere with Tenant’s use of the Premises (as resolved, if the parties are unable to agree, by arbitration by a single
arbitrator with the qualifications and experience appropriate to resolve the matter and appointed pursuant to and acting in accordance with the
rules of the American Arbitration Association), then upon written notice by Landlord or Tenant to the other this Lease shall terminate and Rent
shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, Landlord shall
promptly restore the Premises and the Project as nearly as is commercially reasonable under the circumstances to their condition prior to such
partial Taking and the rentable square footage of the Building, the rentable square footage of the Premises, Tenant’s Share of Operating
Expenses and the Rent payable hereunder during the unexpired Term shall be reduced to such extent as may be fair and reasonable under the
circumstances. Upon any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any
payment to Tenant, and Tenant hereby assigns to Landlord Tenant’s interest, if any, in such award. Tenant shall have the right, to the extent
that same shall not diminish Landlord’s award, to make a separate claim against the condemning authority (but not Landlord) for such
compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to improvements paid for by Tenant
and Tenant’s trade fixtures, if a separate award for such items is made to Tenant. Tenant hereby waives any and all rights it might otherwise
have pursuant to any provision of state law to terminate this Lease upon a partial Taking of the Premises or the Project.
20.
Events of Default. Each of the following events shall be a default (“Default”) by Tenant under this Lease:
(a)
Payment Defaults. Tenant shall fail to pay any installment of Rent or any other payment hereunder when due;
provided, however, that Landlord will give Tenant notice and an opportunity to cure any failure to pay Rent within 5 days of any such notice not
more than once in any 12 month period and Tenant agrees that such notice shall be in lieu of and not in addition to, or shall be deemed to be,
any notice required by law.
(b)
Insurance. Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or
terminated or shall expire or shall be reduced or materially changed, or Landlord shall receive a notice of nonrenewal of any such insurance
and Tenant shall fail to obtain replacement insurance at least 20 days before the expiration of the current coverage.
(c)
Abandonment. Tenant shall abandon the Premises.
(d)
Improper Transfer. Tenant shall assign, sublease or otherwise transfer or attempt to transfer all or any portion
of Tenant’s interest in this Lease or the Premises except as expressly permitted herein, or Tenant’s interest in this Lease shall be attached,
executed upon, or otherwise judicially seized and such action is not released within 90 days of the action.
(e)
Liens. Tenant shall fail to discharge or otherwise obtain the release of any lien placed upon the Premises in
violation of this Lease within 10 days after Tenant receives written notice that any such lien is filed against the Premises.
(f)
Insolvency Events. Tenant or any guarantor or surety of Tenant’s obligations hereunder shall: (A) make a
general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered
on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution
or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any
substantial part of its property (collectively a “Proceeding for Relief”); (C) become the subject of any Proceeding for Relief which is not
dismissed within 90 days of its filing or entry; or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved
or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity).
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(g)
Estoppel Certificate or Subordination Agreement. Tenant fails to execute any document required from Tenant
under Sections 23 or 27 within 5 days after a second notice requesting such document.
(h)
Other Defaults. Tenant shall fail to comply with any provision of this Lease other than those specifically referred
to in this Section 20, and, except as otherwise expressly provided herein, such failure shall continue for a period of 30 days after written notice
thereof from Landlord to Tenant.
Any notice given under Section 20(h) hereof shall: (i) specify the alleged default, (ii) demand that Tenant cure such default, (iii) be in lieu of,
and not in addition to, or shall be deemed to be, any notice required under any provision of applicable law, and (iv) not be deemed a forfeiture
or a termination of this Lease unless Landlord elects otherwise in such notice; provided that if the nature of Tenant’s default pursuant to Section
20(h) is such that it cannot be cured by the payment of money and reasonably requires more than 30 days to cure, then Tenant shall not be
deemed to be in default if Tenant commences such cure within said 30 day period and thereafter diligently prosecutes the same to completion;
provided, however, that such cure shall be completed no later than 90 days from the date of Landlord’s notice.
21.
Landlord’s Remedies.
(a)
Payment By Landlord; Interest. Upon a Default by Tenant hereunder, Landlord may, without waiving or
releasing any obligation of Tenant hereunder, make such payment or perform such act. All sums so paid or incurred by Landlord, together with
interest thereon, from the date such sums were paid or incurred, at the annual rate equal to 12% per annum or the highest rate permitted by
law (the “Default Rate”), whichever is less, shall be payable to Landlord on demand as Additional Rent. Nothing herein shall be construed to
create or impose a duty on Landlord to mitigate any damages resulting from Tenant’s Default hereunder.
(b)
Late Payment Rent. Late payment by Tenant to Landlord of Rent and other sums due will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such costs
include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord under any Mortgage
covering the Premises. Therefore, if any installment of Rent due from Tenant is not received by Landlord within 5 days after the date such
payment is due, Tenant shall pay to Landlord an additional sum equal to 6% of the overdue Rent as a late charge. Notwithstanding the
foregoing, before assessing a late charge the first time in any calendar year, Landlord shall provide Tenant written notice of the delinquency
and will waive the right if Tenant pays such delinquency within 5 days thereafter. The parties agree that this late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. In addition to the late charge, Rent not paid when
due shall bear interest at the Default Rate from the 5th day after the date due until paid.
(c)
Remedies. Upon the occurrence of a Default, Landlord, at its option, without further notice or demand to Tenant,
shall have in addition to all other rights and remedies provided in this Lease, at law or in equity, the option to pursue any one or more of the
following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.
(i)
Terminate this Lease, or at Landlord’s option, Tenant’s right to possession only, in which event
Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any
other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or
any claim for damages therefor;
(ii)
Upon any termination of this Lease, whether pursuant to the foregoing Section 21(c)(i) or
otherwise, Landlord may recover from Tenant the following:
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(A)
The worth at the time of award of any unpaid rent which has been earned at
the time of such termination; plus
(B)
The worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus
(C)
The worth at the time of award of the amount by which the unpaid rent for
the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; plus
(D)
Any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of
things would be likely to result therefrom, specifically including, but not limited to, brokerage commissions and advertising
expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same
or a different use, and any special concessions made to obtain a new tenant; and
(E)
At Landlord’s election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law.
The term “rent” as used in this Section 21 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant
to the terms of this Lease, whether to Landlord or to others. As used in Sections 21(c)(ii)(A) and (B), above, the “worth at the time of award”
shall be computed by allowing interest at the Default Rate. As used in Section 21(c)(ii)(C) above, the “worth at the time of award” shall be
computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%.
(iii)
Landlord may continue this Lease in effect after Tenant’s Default and recover rent as it
becomes due (Landlord and Tenant hereby agreeing that Tenant has the right to sublet or assign hereunder, subject only to
reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease following a Default by Tenant, Landlord may,
from time to time, without terminating this Lease, enforce all of its rights and remedies hereunder, including the right to recover all
Rent as it becomes due.
(iv)
Whether or not Landlord elects to terminate this Lease following a Default by Tenant, Landlord
shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession
entered into by Tenant and affecting the Premises or may, in Landlord’s sole discretion, succeed to Tenant’s interest in such
subleases, licenses, concessions or arrangements. Upon Landlord’s election to succeed to Tenant’s interest in any such subleases,
licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or
interest in the rent or other consideration receivable thereunder.
(v)
Independent of the exercise of any other remedy of Landlord hereunder or under applicable
law, Landlord may conduct an environmental test of the Premises as generally described in Section 30(d) hereof, at Tenant’s
expense.
(d)
Effect of Exercise. Exercise by Landlord of any remedies hereunder or otherwise available shall not be deemed
to be an acceptance of surrender of the Premises and/or a termination of this Lease by Landlord, it being understood that such surrender
and/or termination can be effected only by the express written agreement of Landlord and Tenant. Any law, usage, or custom to the contrary
notwithstanding, Landlord shall have the right at all times to enforce the provisions of this Lease in strict accordance with the terms hereof; and
the failure of Landlord at any time to enforce its rights under this Lease strictly in accordance with same shall not be construed as having
created a custom in any way or
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manner contrary to the specific terms, provisions, and covenants of this Lease or as having modified the same and shall not be deemed a
waiver of Landlord’s right to enforce one or more of its rights in connection with any subsequent default. A receipt by Landlord of Rent or other
payment with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any
provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. To the greatest extent
permitted by law, Tenant waives the service of notice of Landlord’s intention to re-enter, re-take or otherwise obtain possession of the Premises
as provided in any statute, or to institute legal proceedings to that end, and also waives all right of redemption in case Tenant shall be
dispossessed by a judgment or by warrant of any court or judge. Any reletting of the Premises or any portion thereof shall be on such terms
and conditions as Landlord in its sole discretion may determine. Landlord shall not be liable for, nor shall Tenant’s obligations hereunder be
diminished because of, Landlord’s failure to relet the Premises or collect rent due in respect of such reletting or otherwise to mitigate any
damages arising by reason of Tenant’s Default.
22.
Assignment and Subletting.
(a)
General Prohibition. Without Landlord’s prior written consent subject to and on the conditions described in this
Section 22, Tenant shall not, directly or indirectly, voluntarily or by operation of law, assign this Lease or sublease the Premises or any part
thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises, and any attempt to
do any of the foregoing shall be void and of no effect. If Tenant is a corporation, partnership or limited liability company, the shares or other
ownership interests thereof which are not actively traded upon a stock exchange or in the over-the-counter market, a transfer or series of
transfers whereby 49% or more of the issued and outstanding shares or other ownership interests of such corporation are, or voting control is,
transferred (but excepting transfers upon deaths of individual owners) from a person or persons or entity or entities which were owners thereof
at time of execution of this Lease to persons or entities who were not owners of shares or other ownership interests of the corporation,
partnership or limited liability company at time of execution of this Lease, shall be deemed an assignment of this Lease requiring the consent of
Landlord as provided in this Section 22.
(b)
Permitted Transfers. If Tenant desires to assign, sublease, hypothecate or otherwise transfer this Lease or
sublet the Premises other than pursuant to a Permitted Assignment (as defined below), then at least 15 business days, but not more than 4
months, before the date Tenant desires the assignment or sublease to be effective (the “Assignment Date”), Tenant shall give Landlord a
notice (the “Assignment Notice”) containing such information about the proposed assignee or sublessee, including the proposed use of the
Premises and any Hazardous Materials proposed to be used, stored handled, treated, generated in or released or disposed of from the
Premises, the Assignment Date, any relationship between Tenant and the proposed assignee or sublessee, and all material terms and
conditions of the proposed assignment or sublease, including a copy of any proposed assignment or sublease in its final form, and such other
information as Landlord may deem reasonably necessary or appropriate to its consideration whether to grant its consent. Landlord may, by
giving written notice to Tenant within 15 days after receipt of the Assignment Notice: (i) grant such consent (provided that Landlord shall further
have the right to review and approve or disapprove the proposed form of sublease prior to the effective date of any such subletting), (ii) refuse
such consent, in its reasonable discretion; or (iii) in the event of an assignment or a sublease that would result in more than 50% of the
Premises being subleased for substantially the remainder of the Term, terminate this Lease with respect to the space described in the
Assignment Notice as of the Assignment Date (an “Assignment Termination”). Among other reasons, it shall be reasonable for Landlord to
withhold its consent in any of these instances: (1) the proposed assignee or subtenant is a governmental agency; (2) in Landlord’s reasonable
judgment, the use of the Premises by the proposed assignee or subtenant would entail any alterations that would lessen the value of the
leasehold improvements in the Premises, or would require increased services by Landlord; (3) in Landlord’s reasonable judgment, the
proposed assignee or subtenant is engaged in areas of scientific research or other business concerns that are controversial; (4) in Landlord’s
reasonable judgment, the proposed assignee or subtenant lacks the creditworthiness to support the financial obligations it will incur under the
proposed assignment or sublease; (5) in Landlord’s reasonable judgment, the character, reputation, or business of the proposed assignee or
subtenant is inconsistent with the desired tenant-mix or the quality
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of other tenancies in the Project or is inconsistent with the type and quality of the nature of the Building; (6) intentionally omitted; (7) Landlord
has experienced previous defaults by or is in litigation with the proposed assignee or subtenant; (8) the use of the Premises by the proposed
assignee or subtenant will violate any applicable Legal Requirement; (9) the proposed assignee or subtenant, or any entity that, directly or
indirectly, controls, is controlled by, or is under common control with the proposed assignee or subtenant, is then an occupant of the Project and
Landlord has comparable space available which is suitable for the needs of such proposed assignee or subtenant; or (10) the proposed
assignee or subtenant is an entity with whom Landlord is negotiating to lease space in the Project. If Landlord delivers notice of its election to
exercise an Assignment Termination, Tenant shall have the right to withdraw such Assignment Notice by written notice to Landlord of such
election within 5 business days after Landlord’s notice electing to exercise the Assignment Termination. If Tenant withdraws such Assignment
Notice, this Lease shall continue in full force and effect. If Tenant does not withdraw such Assignment Notice, this Lease, and the term and
estate herein granted, shall terminate as of the Assignment Date with respect to the space described in such Assignment Notice. No failure of
Landlord to exercise any such option to terminate this Lease, or to deliver a timely notice in response to the Assignment Notice, shall be
deemed to be Landlord’s consent to the proposed assignment, sublease or other transfer. Tenant shall pay to Landlord a fee equal to Two
Thousand Five Hundred Dollars ($2,500) in connection with its consideration of any Assignment Notice and/or its preparation or review of any
consent documents. Notwithstanding the foregoing, Landlord’s consent to an assignment of this Lease or a subletting of any portion of the
Premises to any entity controlling, controlled by or under common control with Tenant (a “Control Permitted Assignment”) shall not be
required, provided that Landlord shall have the right to approve the form of any such sublease or assignment. In addition, Tenant shall have
the right to assign this Lease, upon 30 days prior written notice to Landlord ((x) unless Tenant is prohibited from providing such notice by
applicable Legal Requirements or confidentiality restrictions, in which case Tenant shall notify Landlord within 10 days after the closing of such
Control Permitted Assignment) but without obtaining Landlord’s prior written consent, to a corporation or other entity which is a successor-in-
interest to Tenant, by way of merger, consolidation or corporate reorganization, or by the purchase of all or substantially all of the assets or the
ownership interests of Tenant provided that (i) such merger or consolidation, or such acquisition or assumption, as the case may be, is for a
good business purpose and not principally for the purpose of transferring this Lease, and (ii) the net worth (as determined in accordance with
generally accepted accounting principles (“GAAP”)) of the assignee (or the successor entity, to the extent Tenant remains the tenant under this
Lease following such Corporate Permitted Assignment) is not less than the net worth (as determined in accordance with GAAP) of Tenant
immediately prior to such assignment, and (iii) such assignee shall agree in writing to assume all of the terms, covenants and conditions of this
Lease (a “Corporate Permitted Assignment”). Control Permitted Assignments and Corporate Permitted Assignments are hereinafter referred
to as “Permitted Assignments.”
(c)
Additional Conditions. As a condition to any such assignment or subletting, whether or not Landlord’s consent
is required, Landlord may require:
(i)
that any assignee or subtenant agree, in writing at the time of such assignment or subletting,
that if Landlord gives such party notice that Tenant is in default under this Lease, such party shall thereafter make all payments
otherwise due Tenant directly to Landlord, which payments will be received by Landlord without any liability except to credit such
payment against those due under this Lease, and any such third party shall agree to attorn to Landlord or its successors and
assigns should this Lease be terminated for any reason; provided, however, in no event shall Landlord or its successors or assigns
be obligated to accept such attornment; and
(ii)
A list of Hazardous Materials, certified by the proposed assignee or sublessee to be true and
correct, which the proposed assignee or sublessee intends to use, store, handle, treat, generate in or release or dispose of from the
Premises, together with copies of all documents relating to such use, storage, handling, treatment, generation, release or disposal of
Hazardous Materials by the proposed assignee or subtenant in the Premises or on the Project, prior to the proposed assignment or
subletting, including, without limitation: permits; approvals; reports and correspondence; storage and management plans; plans
relating to the installation of any storage tanks to be installed in or under the Project (provided, said installation of tanks shall only be
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permitted after Landlord has given its written consent to do so, which consent may be withheld in Landlord’s sole and absolute
discretion); and all closure plans or any other documents required by any and all federal, state and local Governmental Authorities
for any storage tanks installed in, on or under the Project for the closure of any such tanks. Neither Tenant nor any such proposed
assignee or subtenant is required, however, to provide Landlord with any portion(s) of the such documents containing information of
a proprietary nature which, in and of themselves, do not contain a reference to any Hazardous Materials or hazardous activities.
(d)
No Release of Tenant, Sharing of Excess Rents. Notwithstanding any assignment or subletting, Tenant and
any guarantor or surety of Tenant’s obligations under this Lease shall at all times remain fully and primarily responsible and liable for the
payment of Rent and for compliance with all of Tenant’s other obligations under this Lease. If the Rent due and payable by a sublessee or
assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident
thereto in any form, excluding consideration for services or furniture, fixtures and equipment paid for exclusively by Tenant, to the extent such
consideration does not exceed fair market value for such items) exceeds the sum of the rental payable under this Lease, (excluding however,
any Rent payable under this Section) and actual and reasonable brokerage fees, legal costs, reasonable free rent periods and other market
financial concessions and any design or construction fees directly related to and required pursuant to the terms of any such sublease, and the
unamortized cost of any Alterations or other improvements paid for by Tenant) (“Excess Rent”), then Tenant shall be bound and obligated to
pay Landlord as Additional Rent hereunder 50% of such Excess Rent within 10 days following receipt thereof by Tenant. If Tenant shall sublet
the Premises or any part thereof, Tenant hereby immediately and irrevocably assigns to Landlord, as security for Tenant’s obligations under this
Lease, all rent from any such subletting, and Landlord, or a receiver for Tenant appointed on Landlord’s application, may collect such rent and
apply it toward Tenant’s obligations under this Lease; except that, until the occurrence of a Default, Tenant shall have the right to collect such
rent.
(e)
No Waiver. The consent by Landlord to an assignment or subletting shall not relieve Tenant or any assignees of
this Lease or any sublessees of the Premises from obtaining the consent of Landlord to any further assignment or subletting nor shall it release
Tenant or any assignee or sublessee of Tenant from full and primary liability under this Lease. The acceptance of Rent hereunder, or the
acceptance of performance of any other term, covenant, or condition thereof, from any other person or entity shall not be deemed to be a
waiver of any of the provisions of this Lease or a consent to any subletting, assignment or other transfer of the Premises.
(f)
Prior Conduct of Proposed Transferee. Notwithstanding any other provision of this Section 22, if (i) the
proposed assignee or sublessee of Tenant has been required by any prior landlord, lender or Governmental Authority to take remedial action in
connection with Hazardous Materials contaminating a property, where the contamination resulted from such party’s action or use of the
property in question, (ii) the proposed assignee or sublessee is subject to an enforcement order issued by any Governmental Authority in
connection with the use, storage, handling, treatment, generation, release or disposal of Hazardous Materials (including, without limitation, any
order related to the failure to make a required reporting to any Governmental Authority), or (iii) because of the existence of a pre-existing
environmental condition in the vicinity of or underlying the Project, the risk that Landlord would be targeted as a responsible party in connection
with the remediation of such pre-existing environmental condition would be materially increased or exacerbated by the proposed use of
Hazardous Materials by such proposed assignee or sublessee, Landlord shall have the absolute right to refuse to consent to any assignment or
subletting to any such party. This Section 22(f) shall not apply to any Corporate Permitted Assignment.
23.
Estoppel Certificate. Tenant shall, within 10 business days of written notice from Landlord, execute,
acknowledge and deliver a statement in writing in any form reasonably requested by a proposed lender or purchaser, (i) certifying that this
Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so
modified is in full force and effect) and the dates to which the rental and other charges are paid in advance, if any, (ii) acknowledging that, to
Tenant’s knowledge, there are not any uncured defaults on the part of Landlord
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hereunder, or specifying such defaults if any are claimed, and (iii) setting forth such further information with respect to the status of this Lease
or the Premises as may be requested thereon. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or
any portion of the real property of which the Premises are a part. Tenant’s failure to deliver such statement within such time shall, at the option
of Landlord, constitute a Default under this Lease, and, in any event, shall be conclusive upon Tenant that this Lease is in full force and effect
and without modification except as may be represented by Landlord in any certificate prepared by Landlord and delivered to Tenant for
execution.
24.
Quiet Enjoyment. So long as Tenant is not in Default under this Lease, Tenant shall, subject to the terms of this
Lease, at all times during the Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
25.
year and 30 day months.
Prorations. All prorations required or permitted to be made hereunder shall be made on the basis of a 360 day
26.
Rules and Regulations. Tenant shall, at all times during the Term and any extension thereof, comply with all
reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project. The
current rules and regulations are attached hereto as Exhibit E. If there is any conflict between said rules and regulations and other provisions
of this Lease, the terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules
or regulations by other tenants in the Project and shall not enforce such rules and regulations in a discriminatory manner.
27.
Subordination. This Lease and Tenant’s interest and rights hereunder are hereby made and shall be subject
and subordinate at all times to the lien of any Mortgage now existing or hereafter created on or against the Project or the Premises, and all
amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of
any further instrument or act on the part of Tenant; provided, however that so long as there is no Default hereunder, Tenant’s right to
possession of the Premises and rights under this Lease shall not be disturbed by the Holder of any such Mortgage. Tenant agrees, at the
election of the Holder of any such Mortgage, to attorn to any such Holder. Tenant agrees upon demand to execute, acknowledge and deliver
such instruments, confirming such subordination, and such instruments of attornment as shall be requested by any such Holder, provided any
such instruments contain appropriate non-disturbance provisions assuring Tenant’s quiet enjoyment of the Premises as set forth in Section 24
hereof. Notwithstanding the foregoing, any such Holder may at any time subordinate its Mortgage to this Lease, without Tenant’s consent, by
notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such Mortgage without regard to their respective dates of
execution, delivery or recording and in that event such Holder shall have the same rights with respect to this Lease as though this Lease had
been executed prior to the execution, delivery and recording of such Mortgage and had been assigned to such Holder. The term “Mortgage”
whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference
to the “Holder” of a Mortgage shall be deemed to include the beneficiary under a deed of trust. As of the date of this Lease, there is no existing
Mortgage encumbering the Project.
Upon written request from Tenant, Landlord agrees to use reasonable efforts to cause the Holder of any future Mortgage to enter
into a subordination, non-disturbance and attornment agreement (“SNDA”) with Tenant with respect to this Lease. The SNDA shall be on the
form reasonably proscribed by the Holder and Tenant shall pay the Holder’s fees and costs in connection with obtaining such SNDA; provided,
however, that Landlord shall request that Holder make any reasonable changes to the SNDA requested by Tenant. Landlord’s failure to cause
the Holder to enter into the SNDA with Tenant (or make any of the changes requested by Tenant) despite such efforts shall not be a default by
Landlord under this Lease.
28.
Surrender. Upon the expiration of the Term or earlier termination of Tenant’s right of possession, Tenant shall
surrender the Premises to Landlord in the same condition as received, subject to any Alterations or Installations permitted under this Lease to
remain in the Premises, free of Hazardous Materials brought upon, kept, used, stored, handled, treated, generated in, or released or disposed
of from,
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the Premises by any person other than a Landlord Party (collectively, “Tenant HazMat Operations”) and released of all Hazardous Materials
Clearances, broom clean, ordinary wear and tear and casualty loss and condemnation covered by Sections 18 and 19 excepted. At least 3
months prior to the surrender of the Premises or such earlier date as Tenant may elect to cease operations at the Premises, Tenant shall
deliver to Landlord a narrative description of the actions proposed (or required by any Governmental Authority) to be taken by Tenant in order
to surrender the Premises (including any Installations permitted by Landlord to remain in the Premises) at the expiration or earlier termination of
the Term, free from any residual impact from the Tenant HazMat Operations and otherwise released for unrestricted use and occupancy (the
“Decommissioning and HazMat Closure Plan”). Such Decommissioning and HazMat Closure Plan shall be accompanied by a current listing
of (i) all Hazardous Materials licenses and permits held by or on behalf of any Tenant Party with respect to the Premises, and (ii) all Hazardous
Materials used, stored, handled, treated, generated, released or disposed of from the Premises, and shall be subject to the review and
approval of Landlord’s environmental consultant. In connection with the review and approval of the Decommissioning and HazMat Closure
Plan, upon the request of Landlord, Tenant shall deliver to Landlord or its consultant such additional non-proprietary information concerning
Tenant HazMat Operations as Landlord shall request. On or before such surrender, Tenant shall deliver to Landlord evidence that the
approved Decommissioning and HazMat Closure Plan shall have been satisfactorily completed and Landlord shall have the right, subject to
reimbursement at Tenant’s expense as set forth below, to cause Landlord’s environmental consultant to inspect the Premises and perform such
additional procedures as may be deemed reasonably necessary to confirm that the Premises are, as of the effective date of such surrender or
early termination of this Lease, free from any residual impact from Tenant HazMat Operations. Tenant shall reimburse Landlord, as Additional
Rent, for the actual out-of-pocket expense incurred by Landlord for Landlord’s environmental consultant to review and approve the
Decommissioning and HazMat Closure Plan and to visit the Premises and verify satisfactory completion of the same, which cost shall not
exceed $5,000. Landlord shall have the unrestricted right to deliver such Decommissioning and HazMat Closure Plan and any report by
Landlord’s environmental consultant with respect to the surrender of the Premises to third parties.
If Tenant shall fail to prepare or submit a Decommissioning and HazMat Closure Plan approved by Landlord, or if Tenant shall fail to
complete the approved Decommissioning and HazMat Closure Plan, or if such Decommissioning and HazMat Closure Plan, whether or not
approved by Landlord, shall fail to adequately address any residual effect of Tenant HazMat Operations in, on or about the Premises, Landlord
shall have the right to take such actions as Landlord may deem reasonable or appropriate to assure that the Premises and the Project are
surrendered free from any residual impact from Tenant HazMat Operations, the cost of which actions shall be reimbursed by Tenant as
Additional Rent, without regard to the limitation set forth in the first paragraph of this Section 28.
Tenant shall immediately return to Landlord all keys and/or access cards to parking, the Project, restrooms or all or any portion of
the Premises furnished to or otherwise procured by Tenant. If any such access card or key is lost, Tenant shall pay to Landlord, at Landlord’s
election, either the cost of replacing such lost access card or key or the cost of reprogramming the access security system in which such
access card was used or changing the lock or locks opened by such lost key. Any Tenant’s Property, Alterations and property not so removed
by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant’s
expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord’s retention and/or disposition of such
property. All obligations of Tenant hereunder not fully performed as of the termination of the Term, including the obligations of Tenant under
Section 30 hereof, shall survive the expiration or earlier termination of the Term, including, without limitation, indemnity obligations, payment
obligations with respect to Rent and obligations concerning the condition and repair of the Premises.
29.
Waiver of Jury Trial. TO THE EXTENT PERMITTED BY LAW, TENANT AND LANDLORD WAIVE ANY RIGHT
TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
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30.
Environmental Requirements.
(a)
Prohibition/Compliance/Indemnity. Tenant shall not cause or permit any Hazardous Materials (as hereinafter
defined) to be brought upon, kept, used, stored, handled, treated, generated in or about, or released or disposed of from, the Premises or the
Project in violation of applicable Environmental Requirements (as hereinafter defined) by Tenant or any Tenant Party. If Tenant breaches the
obligation stated in the preceding sentence, or if the presence of Hazardous Materials in the Premises during the Term or any holding over
results in contamination of the Premises, the Project or any adjacent property or if contamination of the Premises, the Project or any adjacent
property by Hazardous Materials brought into, kept, used, stored, handled, treated, generated in or about, or released or disposed of from, the
Premises by anyone other than Landlord and Landlord’s employees, agents and contractors otherwise occurs during the Term or any holding
over, Tenant hereby indemnifies and shall defend and hold Landlord, its officers, directors, employees, agents and contractors harmless from
any and all actions (including, without limitation, remedial or enforcement actions of any kind, administrative or judicial proceedings, and orders
or judgments arising out of or resulting therefrom), costs, claims, damages (including, without limitation, punitive damages and damages based
upon diminution in value of the Premises or the Project, or the loss of, or restriction on, use of the Premises or any portion of the Project),
expenses (including, without limitation, attorneys’, consultants’ and experts’ fees, court costs and amounts paid in settlement of any claims or
actions), fines, forfeitures or other civil, administrative or criminal penalties, injunctive or other relief (whether or not based upon personal injury,
property damage, or contamination of, or adverse effects upon, the environment, water tables or natural resources), liabilities or losses
(collectively, “Environmental Claims”) which arise during or after the Term as a result of such contamination. This indemnification of Landlord
by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, treatment, remedial,
removal, or restoration work required by any federal, state or local Governmental Authority because of Hazardous Materials present in the air,
soil or ground water above, on, or under the Premises. Without limiting the foregoing, if the presence of any Hazardous Materials on the
Premises, the Building, the Project or any adjacent property caused or permitted by Tenant or any Tenant Party results in any contamination of
the Premises, the Building, the Project or any adjacent property, Tenant shall promptly take all actions at its sole expense and in accordance
with applicable Environmental Requirements as are necessary to return the Premises, the Building, the Project or any adjacent property to the
condition existing prior to the time of such contamination, provided that Landlord’s approval of such action shall first be obtained, which
approval shall not unreasonably be withheld so long as such actions would not potentially have any material adverse long-term or short-term
effect on the Premises or the Project. Notwithstanding anything to the contrary contained in Section 28 or this Section 30, Tenant shall not be
responsible for, and the indemnification and hold harmless obligation set forth in this paragraph shall not apply to (i) contamination in the
Premises which Tenant can reasonably prove existed in the Premises immediately prior to the Commencement Date, or (ii) the presence of any
Hazardous Materials in the Premises which Tenant can reasonably prove migrated from outside of the Premises into the Premises, unless in
either case, the presence of such Hazardous Materials (x) is the result of a breach by Tenant of any of its obligations under this Lease, or (y)
was caused, contributed to or exacerbated by Tenant or any Tenant Party.
(b)
Business. Landlord acknowledges that it is not the intent of this Section 30 to prohibit Tenant from using the
Premises for the Permitted Use. Tenant may operate its business according to prudent industry practices so long as the use or presence of
Hazardous Materials is strictly and properly monitored according to all then applicable Environmental Requirements. As a material inducement
to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord prior to the
Commencement Date a list identifying each type of Hazardous Materials to be brought upon, kept, used, stored, handled, treated, generated
on, or released or disposed of from, the Premises and setting forth any and all governmental approvals or permits required in connection with
the presence, use, storage, handling, treatment, generation, release or disposal of such Hazardous Materials on or from the Premises
(“Hazardous Materials List”). Upon Landlord’s request, or any time that Tenant is required to deliver a Hazardous Materials List to any
Governmental Authority (e.g., the fire department) in connection with Tenant’s use or occupancy of the Premises, Tenant shall deliver to
Landlord a copy of such Hazardous Materials List. Tenant shall deliver to Landlord true and correct copies of the following documents (the
“Haz Mat Documents”) relating to the use, storage, handling, treatment, generation,
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release or disposal of Hazardous Materials prior to the Commencement Date, or if unavailable at that time, concurrent with the receipt from or
submission to a Governmental Authority: permits; approvals; reports and correspondence; storage and management plans, notice of violations
of any Legal Requirements; plans relating to the installation of any storage tanks to be installed in or under the Project (provided, said
installation of tanks shall only be permitted after Landlord has given Tenant its written consent to do so, which consent may be withheld in
Landlord’s sole and absolute discretion); all closure plans or any other documents required by any and all federal, state and local
Governmental Authorities for any storage tanks installed in, on or under the Project for the closure of any such tanks; and a Decommissioning
and HazMat Closure Plan (to the extent surrender in accordance with Section 28 cannot be accomplished in 3 months). Tenant is not required,
however, to provide Landlord with any portion(s) of the Haz Mat Documents containing information of a proprietary nature which, in and of
themselves, do not contain a reference to any Hazardous Materials or hazardous activities. It is not the intent of this Section to provide
Landlord with information which could be detrimental to Tenant’s business should such information become possessed by Tenant’s
competitors.
(c)
Tenant Representation and Warranty. Tenant hereby represents and warrants to Landlord that (i) neither
Tenant nor any of its legal predecessors has been required by any prior landlord, lender or Governmental Authority at any time to take remedial
action in connection with Hazardous Materials contaminating a property which contamination was permitted by Tenant of such predecessor or
resulted from Tenant’s or such predecessor’s action or use of the property in question, and (ii) Tenant is not subject to any enforcement order
issued by any Governmental Authority in connection with the use, storage, handling, treatment, generation, release or disposal of Hazardous
Materials (including, without limitation, any order related to the failure to make a required reporting to any Governmental Authority). If Landlord
determines that this representation and warranty was not true as of the date of this lease, Landlord shall have the right to terminate this Lease
in Landlord’s sole and absolute discretion.
(d)
Testing. Landlord shall have the right to conduct annual tests of the Premises to determine whether any
contamination of the Premises or the Project has occurred as a result of Tenant’s use. Tenant shall be required to pay the cost of such annual
test of the Premises only if there is violation of this Section 30 or if contamination for which Tenant is responsible under this Section 30 is
identified; provided, however, that if Tenant conducts its own tests of the Premises using third party contractors and test procedures acceptable
to Landlord which tests are certified to Landlord, Landlord shall accept such tests in lieu of the annual tests. In addition, at any time, and from
time to time, prior to the expiration or earlier termination of the Term, Landlord shall have the right to conduct appropriate tests of the Premises
and the Project to determine if contamination has occurred as a result of Tenant’s use of the Premises. In connection with such testing, upon
the request of Landlord, Tenant shall deliver to Landlord or its consultant such non-proprietary information concerning the use of Hazardous
Materials in or about the Premises by Tenant or any Tenant Party. If contamination has occurred for which Tenant is liable under this Section
30, Tenant shall pay all costs to conduct such tests. If no such contamination is found, Landlord shall pay the costs of such tests (which shall
not constitute an Operating Expense). Landlord shall provide Tenant with a copy of all third party, non-confidential reports and tests of the
Premises made by or on behalf of Landlord during the Term without representation or warranty and subject to a confidentiality
agreement. Tenant shall, at its sole cost and expense, promptly and satisfactorily remediate any environmental conditions identified by such
testing for which Tenant or any Tenant Party is responsible in accordance with all Environmental Requirements. Landlord’s receipt of or
satisfaction with any environmental assessment in no way waives any rights which Landlord may have against Tenant.
(e)
Control Areas. Tenant shall be allowed to utilize up to its pro rata share of the Hazardous Materials inventory
within any control area or zone (located within the Premises), as designated by the applicable building code, for chemical use or storage. As
used in the preceding sentence, Tenant’s pro rata share of any control areas or zones located within the Premises shall be determined based
on the rentable square footage that Tenant leases within the applicable control area or zone. For purposes of example only, if a control area or
zone contains 10,000 rentable square feet and 2,000 rentable square feet of a tenant’s premises are located within such control area or zone
(while such premises as a whole contains 5,000 rentable square feet), the applicable tenant’s pro rata share of such control area would be
20%.
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(f)
Underground Tanks. Tenant shall have no right to use or install any underground or other storage tanks at the
Project.
(g)
Tenant’s Obligations. Tenant’s obligations under this Section 30 shall survive the expiration or earlier
termination of this Lease. During any period of time after the expiration or earlier termination of this Lease required by Tenant or Landlord to
complete the removal from the Premises of any Hazardous Materials (including, without limitation, the release and termination of any licenses
or permits restricting the use of the Premises and the completion of the approved Decommissioning and HazMat Closure Plan), Tenant shall
continue to pay the full Rent in accordance with this Lease for any portion of the Premises not relet by Landlord in Landlord’s sole discretion,
which Rent shall be prorated daily.
(h)
Definitions. As used herein, the term “Environmental Requirements” means all applicable present and future
statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any Governmental Authority regulating or
relating to health, safety, or environmental conditions on, under, or about the Premises or the Project, or the environment, including without
limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and
Recovery Act; and all state and local counterparts thereto, and any regulations or policies promulgated or issued thereunder. As used herein,
the term “Hazardous Materials” means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous
or toxic, or regulated by reason of its impact or potential impact on humans, animals and/or the environment under any Environmental
Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas
usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed
to be the “operator” of Tenant’s “facility” and the “owner” of all Hazardous Materials brought on the Premises by Tenant or any Tenant Party,
and the wastes, by-products, or residues generated, resulting, or produced therefrom.
31.
Tenant’s Remedies/Limitation of Liability. Landlord shall not be in default hereunder unless Landlord fails to
perform any of its obligations hereunder within 30 days after written notice from Tenant specifying such failure (unless such performance will,
due to the nature of the obligation, require a period of time in excess of 30 days, then after such period of time as is reasonably
necessary). Upon any default by Landlord, Tenant shall give notice by registered or certified mail to any Holder of a Mortgage covering the
Premises and to any landlord of any lease of property in or on which the Premises are located and Tenant shall offer such Holder and/or
landlord a reasonable opportunity to cure the default, including time to obtain possession of the Project by power of sale or a judicial action if
such should prove necessary to effect a cure; provided Landlord shall have furnished to Tenant in writing the names and addresses of all such
persons who are to receive such notices. All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as
may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord’s obligations hereunder.
All obligations of Landlord under this Lease will be binding upon Landlord only to the extent accruing during the period of its
ownership of the Premises and not thereafter. The term “Landlord” in this Lease shall mean only the owner for the time being of the
Premises. Upon the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all
obligations of Landlord thereafter accruing, but such obligations shall be binding during the Term upon each new owner for the duration of such
owner’s ownership.
32.
Inspection and Access. Landlord and its agents, representatives, and contractors may enter the Premises at
any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease and for any
other business purpose. Landlord and Landlord’s representatives may enter the Premises during business hours on not less than 48 hours
advance written notice (except in the case of emergencies in which case no such notice shall be required and such entry may be at any time)
for the purpose of effecting any such repairs, inspecting the Premises, showing the Premises to prospective purchasers and, during the last 12
months of the Term, to prospective tenants or for any other business purpose. Landlord shall use reasonable efforts to minimize interference
with
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Tenant’s operations in the Premises during any entry into the Premises by Landlord pursuant to this Section 32. Landlord may erect a suitable
sign on the Premises stating the Premises are available to let or that the Project is available for sale. Landlord may grant easements, make
public dedications, designate Common Areas and create restrictions on or about the Premises, provided that no such easement, dedication,
designation or restriction materially, adversely affects Tenant’s use or occupancy of the Premises for the Permitted Use. At Landlord’s request,
Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. Tenant shall at all times, except in
the case of emergencies, have the right to escort Landlord or its agents, representatives, contractors or guests while the same are in the
Premises, provided such escort does not materially and adversely affect Landlord’s access rights hereunder. Landlord shall use reasonable
efforts to comply with Tenant’s reasonable security, confidentiality and safety requirements with respect to entering restricted portions of the
Premises; provided, however, that Tenant has notified Landlord of such security, confidentiality and safety requirements reasonably prior to
Landlord’s entry into the Premises.
33.
Security. Tenant acknowledges and agrees that security devices and services, if any, while intended to deter
crime may not in given instances prevent theft or other criminal acts and that Landlord is not providing any security services with respect to the
Premises. Tenant agrees that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss
by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of
security with respect to the Premises. Tenant shall be solely responsible for the personal safety of Tenant’s officers, employees, agents,
contractors, guests and invitees while any such person is in, on or about the Premises and/or the Project. Tenant shall at Tenant’s cost obtain
insurance coverage to the extent Tenant desires protection against such criminal acts.
34.
Force Majeure. Except for the payment of Rent, neither Landlord nor Tenant shall be held responsible or liable
for delays in the performance of its obligations hereunder when caused by, related to, or arising out of acts of God, sinkholes or subsidence,
strikes, lockouts, or other labor disputes, embargoes, quarantines, weather, national, regional, or local disasters, calamities, or catastrophes,
inability to obtain labor or materials (or reasonable substitutes therefor) at reasonable costs or failure of, or inability to obtain, utilities necessary
for performance, governmental restrictions, orders, limitations, regulations, or controls, national emergencies, delay in issuance or revocation of
permits, enemy or hostile governmental action, terrorism, insurrection, riots, civil disturbance or commotion, fire or other casualty, and other
causes or events beyond their reasonable (“Force Majeure”).
35.
Brokers. Landlord and Tenant each represents and warrants that it has not dealt with any broker, agent or other
person (collectively, “Broker”) in connection with this transaction and that no Broker brought about this transaction, other than T3 Advisors,
Jones Lang LaSalle and Newmark Cornish & Carey. Landlord and Tenant each hereby agree to indemnify and hold the other harmless from
and against any claims by any Broker, other than T3 Advisors, Jones Lang LaSalle and Newmark Cornish & Carey, claiming a commission or
other form of compensation by virtue of having dealt with Tenant or Landlord, as applicable, with regard to this leasing transaction. Landlord
shall be responsible for all commissions due to T3 Advisors, Jones Lang LaSalle and Newmark Cornish & Carey arising out of the execution of
this Lease in accordance with the terms of a separate written agreement between Landlord, on the one hand, and T3 Advisors, Jones Lang
LaSalle and Newmark Cornish & Carey, on the other hand.
36.
Limitation on Landlord’s Liability. NOTWITHSTANDING ANYTHING SET FORTH HEREIN OR IN ANY
OTHER AGREEMENT BETWEEN LANDLORD AND TENANT TO THE CONTRARY: (A) LANDLORD SHALL NOT BE LIABLE TO TENANT
OR ANY OTHER PERSON FOR (AND TENANT AND EACH SUCH OTHER PERSON ASSUME ALL RISK OF) LOSS, DAMAGE OR INJURY,
WHETHER ACTUAL OR CONSEQUENTIAL TO: TENANT’S PERSONAL PROPERTY OF EVERY KIND AND DESCRIPTION, INCLUDING,
INVENTORY, SCIENTIFIC RESEARCH, SCIENTIFIC EXPERIMENTS,
WITHOUT LIMITATION TRADE FIXTURES, EQUIPMENT,
LABORATORY ANIMALS, PRODUCT, SPECIMENS, SAMPLES, AND/OR SCIENTIFIC, BUSINESS, ACCOUNTING AND OTHER RECORDS
OF EVERY KIND AND DESCRIPTION KEPT AT THE PREMISES AND ANY AND ALL INCOME DERIVED OR DERIVABLE THEREFROM;
(B) THERE SHALL BE NO PERSONAL RECOURSE TO LANDLORD FOR ANY ACT OR OCCURRENCE IN, ON OR ABOUT THE
PREMISES OR ARISING IN ANY WAY
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UNDER THIS LEASE OR ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT WITH RESPECT TO THE SUBJECT MATTER
HEREOF AND ANY LIABILITY OF LANDLORD HEREUNDER SHALL BE STRICTLY LIMITED SOLELY TO LANDLORD’S INTEREST IN THE
PROJECT OR ANY PROCEEDS FROM SALE OR CONDEMNATION THEREOF AND ANY INSURANCE PROCEEDS PAYABLE IN
RESPECT OF LANDLORD’S INTEREST IN THE PROJECT OR IN CONNECTION WITH ANY SUCH LOSS; AND (C) IN NO EVENT SHALL
ANY PERSONAL LIABILITY BE ASSERTED AGAINST LANDLORD IN CONNECTION WITH THIS LEASE NOR SHALL ANY RECOURSE BE
HAD TO ANY OTHER PROPERTY OR ASSETS OF LANDLORD OR ANY OF LANDLORD’S OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS OR CONTRACTORS. UNDER NO CIRCUMSTANCES SHALL LANDLORD OR ANY OF LANDLORD’S OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS OR CONTRACTORS BE LIABLE FOR INJURY TO TENANT’S BUSINESS OR FOR ANY LOSS OF INCOME OR
PROFIT THEREFROM.
37.
Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future
laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the
intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added,
as a part of this Lease, a clause or provision as similar in effect to such illegal, invalid or unenforceable clause or provision as shall be legal,
valid and enforceable.
38.
Signs; Exterior Appearance. Tenant shall not, without the prior written consent of Landlord, which may be
granted or withheld in Landlord’s sole discretion: (i) attach any awnings, exterior lights, decorations, balloons, flags, pennants, banners,
painting or other projection to any outside wall of the Project, (ii) use any curtains, blinds, shades or screens other than Landlord’s standard
window coverings, (iii) coat or otherwise sunscreen the interior or exterior of any windows, (iv) place any bottles, parcels, or other articles on
the window sills, (v) place any equipment, furniture or other items of personal property on any exterior balcony, or (vi) paint, affix or exhibit on
any part of the Premises or the Project any signs, notices, window or door lettering, placards, decorations, or advertising media of any type
which can be viewed from the exterior of the Premises. Suite entry signage and signage on the lobby directory shall be inscribed, painted or
affixed for Tenant by Landlord at the sole cost and expense of Landlord, and shall be of a size, color and type reasonably acceptable to
Landlord. Nothing may be placed on the exterior of corridor walls or corridor doors other than Landlord’s standard lettering. The directory
tablet shall be provided exclusively for the display of the name and location of tenants.
Tenant shall also have the non-exclusive right to display, at Tenant’s cost and expense, a sign bearing Tenant’s name and/or logo at
a location on the Building façade facing the 101 freeway and otherwise in a location designated by Landlord and reasonably acceptable to
Tenant (“Building Sign”). Tenant shall be entitled to its pro-rata share of available Building façade signage. Notwithstanding the foregoing,
Tenant acknowledges and agrees that Tenant’s Building Sign including, without limitation, the size, color and type, shall be subject to Landlord’s
prior written approval (which approval shall not be unreasonably withheld, conditioned or delayed) and shall be consistent with Landlord’s
signage program at the Project and applicable Legal Requirements. Tenant shall be responsible, at Tenant’s sole cost and expense, for the
maintenance of Tenant’s Building Sign, for the removal of Tenant’s Building Sign at the expiration or earlier termination of this Lease and for the
repair all damage resulting from such removal.
39.
Right to Expand.
(a)
Right of First Refusal. Subject to the terms of this Section 39(a), the first time after the mutual execution and
delivery of this Lease by the parties through the date that is 12 months after the Rent Commencement Date (the “ROFR Expiration Date”) that
Landlord intends to accept a bona fide written proposal (the “Pending Deal”) to lease all or a portion the ROFR Space (as hereinafter defined)
to a third party, Landlord shall deliver to Tenant written notice (the “Pending Deal Notice”) of the existence of such Pending Deal and the
material terms of such Pending Deal. For purposes of this Section 39(a), “ROFR Space” shall mean all leasable space located on the fourth
floor of the Building. For the avoidance of doubt, Tenant shall be required to exercise its right under this Section 39(a) with respect to all of the
space
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described in the Pending Deal Notice, including, at Landlord’s option, any space in addition to the ROFR Space that is described in the
Pending Deal Notice, which additional space shall be deemed to be included as part of the ROFR Space (the “Identified Space”). Within 10
business days after Tenant’s receipt of the Pending Deal Notice, Tenant shall deliver to Landlord written notice (the “Acceptance Notice”) if
Tenant elects to lease the Identified Space. Tenant’s right to receive the Pending Deal Notice and election to lease or not lease the Identified
Space pursuant to this Section 39(a) is hereinafter referred to as the “Right of First Refusal.” If Tenant elects to lease the Identified Space
described in the Pending Deal Notice by delivering the Space Acceptance Notice within the required 10 business day period, Tenant shall be
deemed to agree to expand the Premises to include the Identified Space and to lease the Identified Space on the same general terms and
conditions as this Lease except that the terms of this Lease shall be modified to reflect the terms of the Pending Deal Notice for the rental of
the Identified Space. Tenant acknowledges that the term of this Lease with respect to the Identified Space and the Term of this Lease with
respect to the existing Premises may not be co-terminous. Notwithstanding anything to the contrary contained herein, in no event shall the
Work Letter apply to the Identified Space. If Tenant fails to deliver a Space Acceptance Notice to Landlord within the required 10 business day
period, Tenant shall have deemed to have waived its rights under this Section 39(a) with respect to the Identified Space. Notwithstanding
anything to the contrary contained herein, Tenant’s rights under this Section 39(a) shall terminate and be of no further force or effect as of the
ROFR Expiration Date. Notwithstanding anything to the contrary contained herein, if Landlord fails to execute a lease for the Identified Space
within 6 months after the above-referenced 10 business day period, Tenant’s Right of Refusal shall be restored with respect to the next
Pending Deal with respect to such Identified Space. Notwithstanding anything to the contrary contained herein, Tenant’s rights under this
Section 39(a) shall terminate and be of no further force or effect after the date that is 12 months prior to the expiration of the Base Term if
Tenant has not exercised its Extension Right (as defined in Section 40 below) pursuant to the terms of Section 40.
(b)
Amended Lease. If: (i) Tenant fails to timely deliver an Acceptance Notice, or (ii) after the expiration of a period
of 120 days after Landlord’s delivery to Tenant of a lease amendment for Tenant’s lease of the Identified Space, no lease amendment for the
Identified Space acceptable to both parties each in their reasonable discretion after using diligent good faith efforts negotiate the same, has
been executed, Tenant shall, notwithstanding anything to the contrary contained herein, be deemed to have forever waived its right to lease
such Identified Space.
(c)
Exceptions. Notwithstanding the above, the Right of First Refusal shall, at Landlord’s option, not be in effect
and may not be exercised by Tenant:
(i)
(ii)
during any period of time that Tenant is in Default under any provision of this Lease; or
if Tenant has been in Default under any provision of this Lease 3 or more times, whether or not
the Defaults are cured, during the 12 month period prior to the date on which Tenant seeks to exercise the Right of First Refusal.
(d)
Termination. The Right of First Refusal shall, at Landlord’s option, terminate and be of no further force or effect
even after Tenant’s due and timely exercise of Right of First Refusal if, after such exercise, but prior to the commencement date of the lease of
the Identified Space, (i) Tenant fails to cure any default by Tenant under this Lease within the applicable notice and cure period; or (ii) Tenant
has Defaulted 3 or more times during the period from the date of the exercise of the Right of First Refusal to the date of the commencement of
the lease of the Identified Space, whether or not such Defaults are cured.
(e)
Rights Personal. The Right of First Refusal is personal to Tenant and is not assignable without Landlord’s
consent, which may be granted or withheld in Landlord’s sole discretion separate and apart from any consent by Landlord to an assignment of
Tenant’s interest in this Lease, except that it may be assigned in connection with any Permitted Assignment of this Lease.
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(f)
No Extensions. The period of time within which the Right of First Refusal may be exercised shall not be
extended or enlarged by reason of Tenant’s inability to exercise the Right of First Refusal.
40.
and conditions:
Right to Extend Term. Tenant shall have the right to extend the Term of this Lease upon the following terms
(a)
Extension Rights. Tenant shall have 1 right (the “Extension Right”) to extend the term of this Lease for 5 years
(the “Extension Term”) on the same terms and conditions as this Lease (other than with respect to Base Rent and the Work Letter) by giving
Landlord written notice of its election to exercise the Extension Right at least 12 months prior, and no earlier than 15 months prior, to the
expiration of the Base Term of this Lease.
Upon the commencement of the Extension Term, Base Rent shall be payable at the Market Rate (as defined below). Base Rent shall
thereafter be adjusted on each annual anniversary of the commencement of such Extension Term by a percentage as determined by Landlord
and agreed to by Tenant at the time the Market Rate is determined. As used herein, “Market Rate” shall mean the rate that comparable
landlords of comparable buildings have accepted in current transactions from non-equity (i.e., not being offered equity in the buildings) and
nonaffiliated tenants of similar financial strength for space of comparable size, quality (including all Tenant Improvements, Alterations and other
improvements) and floor height in Class A laboratory/office buildings in the San Mateo/San Carlos/Redwood City area for a comparable term,
with the determination of the Market Rate to take into account all relevant factors, including tenant inducements, views, available amenities,
parking costs, leasing commissions, allowances or concessions, if any. In addition, if the Market Rate then includes rent for parking, Landlord
may impose a market rent for the parking rights provided hereunder.
If, on or before the date which is 270 days prior to the expiration of the Base Term of this Lease, Tenant has not agreed with
Landlord’s determination of the Market Rate and the rent escalations during the Extension Term after negotiating in good faith, Tenant shall be
deemed to have elected arbitration as described in Section 40(b). Tenant acknowledges and agrees that, if Tenant has elected to exercise the
Extension Right by delivering notice to Landlord as required in this Section 40(a), Tenant shall have no right thereafter to rescind or elect not to
extend the term of this Lease for the Extension Term.
(b)
Arbitration.
(i)
Within 10 days of Tenant’s notice to Landlord of its election (or deemed election) to arbitrate
Market Rate and escalations, each party shall deliver to the other a proposal containing the Market Rate and escalations that the
submitting party believes to be correct (“Extension Proposal”). If either party fails to timely submit an Extension Proposal, the other
party’s submitted proposal shall determine the Base Rent and escalations for the Extension Term. If both parties submit Extension
Proposals, then Landlord and Tenant shall meet within 7 days after delivery of the last Extension Proposal and make a good faith
attempt to mutually appoint a single Arbitrator (and defined below) to determine the Market Rate and escalations. If Landlord and
Tenant are unable to agree upon a single Arbitrator, then each shall, by written notice delivered to the other within 10 days after the
meeting, select an Arbitrator. If either party fails to timely give notice of its selection for an Arbitrator, the other party’s submitted
proposal shall determine the Base Rent for the Extension Term. The 2 Arbitrators so appointed shall, within 5 business days after
their appointment, appoint a third Arbitrator. If the 2 Arbitrators so selected cannot agree on the selection of the third Arbitrator
within the time above specified, then either party, on behalf of both parties, may request such appointment of such third Arbitrator by
application to any state court of general jurisdiction in the jurisdiction in which the Premises are located, upon 10 days prior written
notice to the other party of such intent.
(ii)
The decision of the Arbitrator(s) shall be made within 30 days after the appointment of a single
Arbitrator or the third Arbitrator, as applicable. The decision of the single Arbitrator shall
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be final and binding upon the parties. The average of the two closest Arbitrators in a three Arbitrator panel shall be final and binding
upon the parties. Each party shall pay the fees and expenses of the Arbitrator appointed by or on behalf of such party and the fees
and expenses of the third Arbitrator shall be borne equally by both parties. If the Market Rate and escalations are not determined by
the first day of the Extension Term, then Tenant shall pay Landlord Base Rent in an amount equal to the Base Rent in effect
immediately prior to the Extension Term and increased by the Rent Adjustment Percentage until such determination is made. After
the determination of the Market Rate and escalations, the parties shall make any necessary adjustments to such payments made by
Tenant. Landlord and Tenant shall then execute an amendment recognizing the Market Rate and escalations for the Extension
Term.
(iii)
An “Arbitrator” shall be any person appointed by or on behalf of either party or appointed
pursuant to the provisions hereof and: (i) shall be (A) a member of the American Institute of Real Estate Appraisers with not less
than 10 years of experience in the appraisal of improved office and high tech industrial real estate in the San Francisco peninsula
area, or (B) a licensed commercial real estate broker with not less than 15 years’ experience representing landlords and/or tenants
in the leasing of high tech or life sciences space in the San Francisco peninsula area, (ii) devoting substantially all of their time to
professional appraisal or brokerage work, as applicable, at the time of appointment and (iii) be in all respects impartial and
disinterested.
(c)
Rights Personal. The Extension Right is personal to Tenant and is not assignable without Landlord’s consent,
which may be granted or withheld in Landlord’s sole discretion separate and apart from any consent by Landlord to an assignment of Tenant’s
interest in this Lease, except that they may be assigned in connection with any Permitted Assignment of this Lease.
(d)
Exceptions. Notwithstanding anything set forth above to the contrary, the Extension Right shall, at Landlord’s
option, not be in effect and Tenant may not exercise any of the Extension Right:
(i)
during any period of time that Tenant is in Default under any provision of this Lease; or
(ii)
if Tenant has been in Default under any provision of this Lease 3 or more times, whether or not
the Defaults are cured, during the 12 month period immediately prior to the date that Tenant intends to exercise the Extension Right,
whether or not the Defaults are cured.
(e)
No Extensions. The period of time within which the Extension Right may be exercised shall not be extended or
enlarged by reason of Tenant’s inability to exercise the Extension Right.
(f)
Termination. The Extension Right shall, at Landlord’s option, terminate and be of no further force or effect even
after Tenant’s due and timely exercise of the Extension Right, if, after such exercise, but prior to the commencement date of the Extension
Term, (i) Tenant fails to cure any default by Tenant under this Lease within the applicable notice and cure period; or (ii) Tenant has Defaulted 3
or more times during the period from the date of the exercise of the Extension Right to the date of the commencement of the Extension Term,
whether or not such Defaults are cured.
41.
Roof Equipment. As long as Tenant is not in default under this Lease, Tenant shall have the right at its sole
cost and expense, subject to compliance with all Legal Requirements, to install, maintain, and remove on the top of the roof of the Building in a
location designated by Landlord a satellite dish, communication antennae, or other telecommunications equipment (all of which having a size,
diameter and height acceptable to Landlord) for the transmission or reception of communication of signals as Tenant may from time to time
desire (collectively, the “Roof Equipment”) on the following terms and conditions:
(a)
Requirements. Tenant shall submit to Landlord (i) the plans and specifications for the installation of the Roof
Equipment, (ii) copies of all required governmental and quasi-governmental permits, licenses, and authorizations that Tenant will and must
obtain at its own expense, with the cooperation of
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Landlord, if necessary for the installation and operation of the Roof Equipment, and (iii) an insurance policy or certificate of insurance
evidencing insurance coverage as required by this Lease and any other insurance as reasonably required by Landlord for the installation and
operation of the Roof Equipment. Landlord shall not unreasonably withhold or delay its approval for the installation and operation of the Roof
Equipment; provided, however, that Landlord may reasonably withhold its approval if the installation or operation of the Roof Equipment (A)
may damage the structural integrity of the Building, (B) may void, terminate, or invalidate any applicable roof warranty, (C) may interfere with
any service provided by Landlord or any tenant of the Building, (D) may reduce the leasable space in the Building, or (E) is not properly
screened from the viewing public.
(b)
No Damage to Roof. If installation of the Roof Equipment requires Tenant to make any roof cuts or perform any
other roofing work, such cuts shall only be made to the roof area of the Building located directly above the Premises and only in the manner
designated in writing by Landlord; and any such installation work (including any roof cuts or other roofing work) shall be performed by Tenant,
at Tenant’s sole cost and expense by a roofing contractor designated by Landlord. If Tenant or its agents shall otherwise cause any damage to
the roof during the installation, operation, and removal of the Roof Equipment such damage shall be repaired promptly at Tenant’s expense and
the roof shall be restored in the same condition it was in before the damage. Landlord shall not charge Tenant Additional Rent for the
installation and use of the Roof Equipment. If, however, Landlord’s insurance premium or Tax assessment increases as a result of the Roof
Equipment, Tenant shall pay such increase as Additional Rent within ten (10) days after receipt of a reasonably detailed invoice from
Landlord. Tenant shall not be entitled to any abatement or reduction in the amount of Rent payable under this Lease if for any reason Tenant is
unable to use the Roof Equipment. In no event whatsoever shall the installation, operation, maintenance, or removal of the Roof Equipment by
Tenant or its agents void, terminate, or invalidate any applicable roof warranty.
(c)
Protection. The installation, operation, and removal of the Roof Equipment shall be at Tenant’s sole risk. Tenant
shall indemnify, defend, and hold Landlord harmless from and against any and all claims, costs, damages, liabilities and expenses (including,
but not limited to, attorneys’ fees) of every kind and description that may arise out of or be connected in any way with Tenant’s installation,
operation, or removal of the Roof Equipment.
(d)
Removal. At the expiration or earlier termination of this Lease or the discontinuance of the use of the Roof
Equipment by Tenant, Tenant shall, at its sole cost and expense, remove the Roof Equipment from the Building. Tenant shall leave the portion
of the roof where the Roof Equipment was located in good order and repair, reasonable wear and tear excepted. If Tenant does not so remove
the Roof Equipment, Tenant hereby authorizes Landlord to remove and dispose of the Roof Equipment and charge Tenant as Additional Rent
for all costs and expenses incurred by Landlord in such removal and disposal. Tenant agrees that Landlord shall not be liable for any Roof
Equipment or related property disposed of or removed by Landlord.
(e)
No Interference. The Roof Equipment shall not interfere with the proper functioning of any telecommunications
equipment or devices that have been installed or will be installed by Landlord or for any other tenant or future tenant of the Building. Tenant
acknowledges that other tenant(s) may have approval rights over the installation and operation of telecommunications equipment and devices
on or about the roof, and that Tenant’s right to install and operate the Roof Equipment is subject and subordinate to the rights of such other
tenants. Tenant agrees that any other tenant of the Building that currently has or in the future takes possession of any portion of the Building
will be permitted to install such telecommunication equipment that is of a type and frequency that will not cause unreasonable interference to
the Roof Equipment.
(f)
Relocation. Landlord shall have the right, at its expense and after 60 days prior notice to Tenant, to relocate the
Roof Equipment to another site on the roof of the Building as long as such site reasonably meets Tenant’s sight line and interference
requirements and does not unreasonably interfere with Tenant’s use and operation of the Roof Equipment.
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(g)
Access. Landlord grants to Tenant the right of ingress and egress to install, operate, and maintain the Roof
Equipment; provided, however, that Tenant shall have no right to exercise any such ingress and egress right unless Tenant is accompanied by
a representative of Landlord at all times while Tenant is accessing the roof. Upon Tenant’s request, Landlord shall supply Tenant with the
name, telephone, and pager numbers of the contact individual(s) responsible for providing access.
(h)
Appearance. If permissible by Legal Requirements, the Roof Equipment shall be painted the same color as the
Building so as to render the Roof Equipment virtually invisible from ground level.
(i)
No Assignment. Except as otherwise expressly provided herein, the right of Tenant to use and operate the Roof
Equipment shall be personal solely to Tenant, and (i) no other person or entity shall have any right to use or operate the Roof Equipment, and
(ii) Tenant shall not assign, convey, or otherwise transfer to any person or entity any right, title, or interest in all or any portion of the Roof
Equipment or the use and operation thereof other than in connection with a sublease of the Premises or an assignment of the Lease pursuant
to Section 22(b).
42.
Miscellaneous.
(a)
Notices. All notices or other communications between the parties shall be in writing and shall be deemed duly
given upon delivery or refusal to accept delivery by the addressee thereof if delivered in person, or upon actual receipt if delivered by reputable
overnight guaranty courier, addressed and sent to the parties at their addresses set forth above. Landlord and Tenant may from time to time by
written notice to the other designate another address for receipt of future notices.
(b)
Joint and Several Liability. If and when included within the term “Tenant,” as used in this instrument, there is
more than one person or entity, each shall be jointly and severally liable for the obligations of Tenant.
(c)
Financial Information. Tenant shall furnish Landlord with true and complete copies of (i) Tenant’s most recent
audited annual financial statements within 90 days of the end of each of Tenant’s fiscal years during the Term, (ii) Tenant’s most recent
unaudited quarterly financial statements within 45 days of the end of each of Tenant’s first three fiscal quarters of each of Tenant’s fiscal years
during the Term, and (iii) any other financial information or summaries that Tenant typically provides to its lenders or shareholders. So long as
Tenant is a “public company” and its financial information is publicly available, then the foregoing delivery requirements of this Section 41(c)
shall not apply. Landlord shall treat Tenant’s financial information as confidential information belonging to Tenant and will not disclose the same
other than on a need-to-know basis to Landlord’s affiliates, legal, financial or tax advisors, consultants, potential lenders and potential
purchasers and as required by Legal Requirements.
(d)
Recordation. Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any
public record. Landlord may prepare and file, and upon request by Landlord Tenant will execute, a memorandum of lease.
(e)
Interpretation. The normal rule of construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto. Words of any gender used in this
Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the
context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the
scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease.
(f)
Not Binding Until Executed. The submission by Landlord to Tenant of this Lease shall have no binding force or
effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
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(g)
Limitations on Interest. It is expressly the intent of Landlord and Tenant at all times to comply with applicable
law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially
interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord’s and Tenant’s express intent that all excess amounts theretofore collected by Landlord be credited on
the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease
immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any
new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder.
(h)
Choice of Law. Construction and interpretation of this Lease shall be governed by the internal laws of the state
in which the Premises are located, excluding any principles of conflicts of laws.
(i)
Time. Time is of the essence as to the performance of Tenant’s obligations under this Lease.
(j)
OFAC. Tenant and all beneficial owners of Tenant are currently (a) in compliance with and shall at all times during
the Term of this Lease remain in compliance with the regulations of the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of
Treasury and any statute, executive order, or regulation relating thereto (collectively, the “OFAC Rules”), (b) not listed on, and shall not during
the term of this Lease be listed on, the Specially Designated Nationals and Blocked Persons List, Foreign Sanctions Evaders List, or the
Sectoral Sanctions Identification List, which are all maintained by OFAC and/or on any other similar list maintained by OFAC or other
governmental authority pursuant to any authorizing statute, executive order, or regulation, and (c) not a person or entity with whom a U.S.
person is prohibited from conducting business under the OFAC Rules.
(k)
Incorporation by Reference. All exhibits and addenda attached hereto are hereby incorporated into this Lease
and made a part hereof. If there is any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall
control.
(l)
Entire Agreement. This Lease, including the exhibits attached hereto, constitutes the entire agreement between
Landlord and Tenant pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings,
letters of intent, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other
agreements, express or implied, made to either party by the other party in connection with the subject matter hereof except as specifically set
forth herein.
(m)
No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the
monthly installment of Base Rent or any Additional Rent will be other than on account of the earliest stipulated Base Rent and Additional Rent,
nor will any endorsement or statement on any check or letter accompanying a check for payment of any Base Rent or Additional Rent be an
accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent
or to pursue any other remedy provided in this Lease.
(n)
Hazardous Activities. Notwithstanding any other provision of this Lease, Landlord, for itself and its employees,
agents and contractors, reserves the right to refuse to perform any repairs or services in any portion of the Premises which, pursuant to
Tenant’s routine safety guidelines, practices or custom or prudent industry practices, require any form of protective clothing or equipment other
than safety glasses. In any such case, Tenant shall contract with parties who are acceptable to Landlord, in Landlord’s reasonable discretion,
for all such repairs and services, and Landlord shall, to the extent required, equitably adjust Tenant’s Share of Operating Expenses in respect
of such repairs or services to reflect that Landlord is not providing such repairs or services to Tenant.
(o)
Intentionally Omitted.
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(p)
EV Charging Stations. Landlord shall not unreasonably withhold its consent to Tenant’s written request to
install 1 or more electric vehicle car charging stations (“EV Stations”) in the parking area serving the Project; provided, however, that Tenant
complies with all reasonable requirements, standards, rules and regulations which may be imposed by Landlord, at the time Landlord’s consent
is granted, in connection with Tenant’s installation, maintenance, repair and operation of such EV Stations, which may include, without
limitation, the charge to Tenant of a reasonable monthly rental amount for the parking spaces used by Tenant for such EV Stations, Landlord’s
designation of the location of Tenant’s EV Stations, and Tenant’s payment of all costs whether incurred by Landlord or Tenant in connection
with the installation, maintenance, repair and operation of each Tenant’s EV Station(s). Nothing contained in this paragraph is intended to
increase the number of parking spaces which Tenant is otherwise entitled to use at the Project under Section 10 of this Lease nor impose any
additional obligations on Landlord with respect to Tenant’s parking rights at the Project.
(q)
California Accessibility Disclosure. For purposes of Section 1938(a) of the California Civil Code, Landlord
hereby discloses to Tenant, and Tenant hereby acknowledges, that the Project has not undergone inspection by a Certified Access Specialist
(CASp). In addition, the following notice is hereby provided pursuant to Section 1938(e) of the California Civil Code: “A Certified Access
Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-
related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial
property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or
potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the
time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to
correct violations of construction-related accessibility standards within the premises.” In furtherance of and in connection with such notice: (i)
Tenant, having read such notice and understanding Tenant’s right to request and obtain a CASp inspection, hereby elects not to obtain such
CASp inspection and forever waives its rights to obtain a CASp inspection with respect to the Premises, Building and/or Project to the extent
permitted by Legal Requirements; and (ii) if the waiver set forth in clause (i) hereinabove is not enforceable pursuant to Legal Requirements,
then Landlord and Tenant hereby agree as follows (which constitutes the mutual agreement of the parties as to the matters described in the last
sentence of the foregoing notice): (A) Tenant shall have the one-time right to request for and obtain a CASp inspection, which request must be
made, if at all, in a written notice delivered by Tenant to Landlord; (B) any CASp inspection timely requested by Tenant shall be conducted (1)
at a time mutually agreed to by Landlord and Tenant, (2) in a professional manner by a CASp designated by Landlord and without any testing
that would damage the Premises, Building or Project in any way, and (3) at Tenant’s sole cost and expense, including, without limitation,
Tenant’s payment of the fee for such CASp inspection, the fee for any reports prepared by the CASp in connection with such CASp inspection
(collectively, the “CASp Reports”) and all other costs and expenses in connection therewith; (C) the CASp Reports shall be delivered by the
CASp simultaneously to Landlord and Tenant; (D) Tenant, at its sole cost and expense, shall be responsible for making any improvements,
alterations, modifications and/or repairs to or within the Premises to correct violations of construction-related accessibility standards including,
without limitation, any violations disclosed by such CASp inspection; and (E) if such CASp inspection identifies any improvements, alterations,
modifications and/or repairs necessary to correct violations of construction-related accessibility standards relating to those items of the Building
and Project located outside the Premises that are Landlord’s obligation to repair as set forth in this Lease, then Landlord shall perform such
improvements, alterations, modifications and/or repairs as and to the extent required by Legal Requirements to correct such violations, and
Tenant shall reimburse Landlord for the cost of such improvements, alterations, modifications and/or repairs within 10 business days after
Tenant’s receipt of an invoice therefor from Landlord.
(r)
Counterparts. This Lease may be executed in 2 or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail
(including pdf or any electronic signature process complying with the U.S. federal ESIGN Act of 2000) or other transmission method and any
counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
Net Multi-Tenant Laboratory
Electronic signatures shall be deemed original signatures for purposes of this Lease and all matters related thereto, with such electronic
signatures having the same legal effect as original signatures.
825 Industrial/Allakos - Page 37
[ Signatures on next page ]
Net Multi-Tenant Laboratory
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written.
825 Industrial/Allakos - Page 38
TENANT:
ALLAKOS INC.,
a Delaware corporation
By: /s/ Robert Alexander
Its: CEO______________
LANDLORD:
ARE-SAN FRANCISCO NO. 63, LLC,
a Delaware limited liability company
By:
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
a Delaware limited partnership,
managing member
By:
ARE-QRS CORP.,
a Maryland corporation,
general partner
By: /s/ Jennifer Banks
Its: Co-Chief Operating Officer
& General Counsel
825 Industrial/Allakos - Page 1
EXHIBIT A TO LEASE
DESCRIPTION OF PREMISES
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Work Letter – Landlord Build
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EXHIBIT B TO LEASE
DESCRIPTION OF PROJECT
Work Letter – Landlord Build
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Work Letter – Landlord Build
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EXHIBIT C TO LEASE
WORK LETTER
THIS WORK LETTER (this “Work Letter”) is incorporated into that certain Lease Agreement (the “Lease”) dated as of November
____, 2019 by and between ARE-SAN FRANCISCO NO. 63, LLC, a Delaware limited liability company (“Landlord”), and ALLAKOS INC., a
Delaware corporation (“Tenant”). Any initially capitalized terms used but not defined herein shall have the meanings given them in the Lease.
1.
General Requirements.
(a)
Tenant’s Authorized Representative. Tenant designates XXXXXXXXX (“Tenant’s Representative”) as the
only person authorized to act for Tenant pursuant to this Work Letter. Landlord shall not be obligated to respond to or act upon any request,
approval, inquiry or other communication (“Communication”) from or on behalf of Tenant in connection with this Work Letter unless such
Communication is in writing from Tenant’s Representative. Tenant may change Tenant’s Representative at any time upon not less than 5
business days advance written notice to Landlord.
(b)
Landlord’s Authorized Representative. Landlord designates Dan Tsang and Dan Stoddard (either such
individual acting alone, “Landlord’s Representative”) as the only persons authorized to act for Landlord pursuant to this Work Letter. Tenant
shall not be obligated to respond to or act upon any request, approval, inquiry or other Communication from or on behalf of Landlord in
connection with this Work Letter unless such Communication is in writing from Landlord’s Representative. Landlord may change either
Landlord’s Representative at any time upon not less than 5 business days advance written notice to Tenant.
(c)
Architects, Consultants and Contractors. Landlord and Tenant hereby acknowledge and agree that the
architect (the “TI Architect”) for the Tenant Improvements (as defined in Section 2(a) below), the general contractor and any subcontractors for
the Tenant Improvements shall be selected by Tenant, subject to Landlord’s approval, which approval shall not be unreasonably withheld,
conditioned or delayed. Landlord shall be named a third party beneficiary of any contract entered into by Tenant with the TI Architect and the
general contractor and of any warranty given by such parties.
ARC-TEC shall be the architect (the “Architect”) for Landlord’s Work (as defined below) and Truebeck shall be the general
contractor for Landlord’s Work. Landlord shall select any subcontractors for Landlord’s Work in Landlord’s sole and absolute discretion.
2.
Landlord’s Work and Tenant Improvements.
(a)
Landlord’s Work and Tenant Improvements Defined. As used herein, (i) “Landlord’s Work” shall mean the
design and construction of the building shell and related site improvements (“Building Shell”) consisting of the elements described on the
Basis of Design attached hereto as Schedule 1 under the categories of “Cold Shell” and “Full Shell Warm Up” and related site improvements
marked with an “X” (collectively, the “Basis of Design”) and the index referencing plans attached hereto as Schedule 2 (“Building Shell
Construction Drawings”), and (ii) “Tenant Improvements” shall mean the design and construction of improvements to the Premises of a fixed
and permanent nature as more particularly provided for in this Work Letter. The design of the Building Shell shall be generally consistent with
the Basis of Design and the Building Shell Construction Drawings described on Schedule 1 and Schedule 2, respectively; provided, however,
that Tenant acknowledges that Landlord may make changes to the Building Shell, as determined by Landlord in its reasonable discretion;
provided, however, that Landlord shall not make any changes to the Building Shell that would materially adversely affect Tenant’s use of the
Premises or result in a material increase in the cost of the Tenant Improvements (as reflected in the Budget (as defined in Section 5(a) below))
or a material delay in the schedule for the construction of the Tenant Improvements or require material changes to the Space Plans or TI
Construction Drawings, without Tenant’s approval, which approval shall not be unreasonably withheld, conditioned or delayed.
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Work Letter – Landlord Build
Landlord shall promptly notify Tenant in writing of any material changes made by Landlord to the Building Shell that could be reasonably
anticipated to result in a material increase in the cost of the Tenant Improvements or a material delay in the schedule for the construction of the
Tenant Improvements or require changes to the Space Plans or TI Construction Drawings. Notwithstanding anything to the contrary contained
herein, Landlord is under no obligation to make any changes that may be requested by Tenant to the Building Shell except as set forth
below. Other than (i) completing Landlord’s Work, at Landlord’s sole cost and expense, and (ii) funding the TI Allowance, Landlord shall not
have any obligation whatsoever with respect to the finishing of the Premises or the Project for Tenant’s use and occupancy. Landlord shall
perform Landlord’s Work in a good and workmanlike manner and in compliance with Legal Requirements.
(b)
Tenant’s Space Plans. Tenant shall deliver to Landlord schematic drawings and outline specifications (the
“Space Plans”) detailing Tenant’s requirements for the Tenant Improvements. Not more than 10 days thereafter, Landlord shall deliver to
Tenant the written objections, questions or comments of Landlord and the TI Architect with regard to the Space Plans. Tenant shall cause the
Space Plans to be revised to address such written comments and shall resubmit said drawings to Landlord for approval (which approval shall
not be unreasonably withheld) within 5 business days thereafter. Such process shall continue until Landlord has approved the Space
Plans. Landlord shall not unreasonably withhold, condition or delay its approval of the Space Plans. Landlord and Tenant acknowledge and
agree that the Tenant Improvements shall comply in all respects with the LEED Standards set forth on Schedule 3 attached hereto; provided,
however, that Landlord shall install the HVAC systems necessary to comply with the same.
(c)
Working Drawings. Tenant shall cause the TI Architect to prepare and deliver to Landlord for review and
comment construction plans, specifications and drawings for the Tenant Improvements (“TI Construction Drawings”), which TI Construction
Drawings shall be prepared substantially in accordance with the Space Plans. Tenant shall be solely responsible for ensuring that the TI
Construction Drawings reflect Tenant’s requirements for the Tenant Improvements. Landlord shall deliver its written comments on the TI
Construction Drawings to Tenant not later than 10 days after Landlord’s receipt of the same; provided, however, that Landlord may not
disapprove any matter that is consistent with the Space Plans. Landlord shall not unreasonably withhold, condition or delay its approval of the
TI Construction Drawings so long as such TI Construction Drawings are consistent with the Space Plans. Tenant and the TI Architect shall
consider all such comments in good faith and shall, within 10 business days after receipt, notify Landlord how Tenant proposes to respond to
such comments. Any disputes in connection with such comments shall be resolved in accordance with Section 2(d) hereof. Provided that the
design reflected in the TI Construction Drawings is consistent with the Space Plans, Landlord shall approve the TI Construction Drawings
submitted by Tenant. Once approved by Landlord, subject to the provisions of Section 4 below, Tenant shall not materially modify the TI
Construction Drawings except as may be reasonably required in connection with the issuance of the TI Permit (as defined in Section 3(a)
below).
(d)
Approval and Completion. If any dispute regarding the design of the Tenant Improvements is not settled within
10 business days after notice of such dispute is delivered by one party to the other, Tenant may make the final decision regarding the design of
the Tenant Improvements, provided (i) Tenant acts reasonably and such final decision is either consistent with or a compromise between
Landlord’s and Tenant’s positions with respect to such dispute, (ii) that all costs and expenses resulting from any such decision by Tenant shall
be payable out of the TI Fund (as defined in Section 5(d) below), and (iii) Tenant’s decision will not affect the base Building, structural
components of the Building or any Building systems (in which case Landlord shall make the final decision). Any changes to the TI Construction
Drawings following Landlord’s and Tenant’s approval of same requested by Tenant shall be processed as provided in Section 4 hereof.
(e)
Coordination Obligations. Tenant acknowledges that Landlord shall continue to require access to the Building
following Landlord’s delivery to Tenant of the Premises for the construction of the Tenant Improvements in order to complete Landlord’s Work
and Tenant agrees to comply with the Site Logistics Instructions attached to this Work Letter as Schedule 4. “Tenant Improvement Work
Readiness Condition” shall mean the point in the construction of Landlord’s Work when the elements described on Schedule 5 have been
achieved. When Tenant Improvement Work Readiness Condition has been
825 Industrial/Allakos - Page 3
Work Letter – Landlord Build
achieved, Landlord shall notify Tenant in writing of the same and Deliver the Premises to Tenant Commencing on the Commencement Date,
Landlord and Tenant shall work together in a cooperative manner, and shall likewise require each of their respective architects and engineers
and contractors to work together in a cooperative manner, to coordinate the remaining Landlord’s Work and the Tenant Improvements and to
achieve the substantial completion of all such work in as prompt and efficient manner as reasonably practicable. Landlord shall provide the
anticipated schedule for the performance of Landlord’s Work within a reasonable period following the mutual execution and delivery of the
Lease by the parties..
3.
Performance of the Tenant Improvements.
(a)
Commencement and Permitting of the Tenant Improvements. Tenant shall commence construction of the
Tenant Improvements upon obtaining and delivering to Landlord a building permit (the “TI Permit”) authorizing the construction of the Tenant
Improvements consistent with the TI Construction Drawings approved by Landlord. The cost of obtaining the TI Permit shall be payable from
the TI Fund. Landlord shall assist Tenant in obtaining the TI Permit. Prior to the commencement of the Tenant Improvements, Tenant shall
deliver to Landlord a copy of any contract with Tenant’s contractors (including the TI Architect), and certificates of insurance from any contractor
performing any part of the Tenant Improvement evidencing industry standard commercial general liability, automotive liability, “builder’s risk”,
and workers’ compensation insurance. Tenant shall cause the general contractor to provide a certificate of insurance naming Landlord,
Alexandria Real Estate Equities, Inc., and Landlord’s lender (if any) as additional insureds for the general contractor’s liability coverages
required above.
(b)
Selection of Materials, Etc. Where more than one type of material or structure is indicated on the TI
Construction Drawings approved by Tenant and Landlord, the option will be within Tenant’s reasonable discretion if the matter concerns the
Tenant Improvements, and within Landlord’s sole and absolute subjective discretion if the matter concerns the structural components of the
Building or any Building system.
(c)
Improvements.
Tenant Liability. Tenant shall be responsible for correcting any deficiencies or defects in the Tenant
(d)
Substantial Completion. Tenant shall substantially complete or cause to be substantially completed the Tenant
Improvements in a good and workmanlike manner, in accordance with the TI Permit subject, in each case, to Minor Variations and normal
“punch list” items of a non-material nature which do not interfere with the use of the Premises (“Substantial Completion” or “Substantially
Complete”). Upon Substantial Completion of the Tenant Improvements, Tenant shall require the TI Architect and the general contractor to
execute and deliver, for the benefit of Tenant and Landlord, a Certificate of Substantial Completion in the form of the American Institute of
Architects (“AIA”) document G704. For purposes of this Work Letter, “Minor Variations” shall mean any modifications reasonably required: (i)
to comply with all applicable Legal Requirements and/or to obtain or to comply with any required permit (including the TI Permit); (ii) to comport
with good design, engineering, and construction practices which are not material; or (iii) to make reasonable adjustments for field deviations or
conditions encountered during the construction of the Tenant Improvements.
4.
Changes. Any changes requested by Tenant to the Tenant Improvements after the delivery and approval by
Landlord of the Space Plans, shall be requested and instituted in accordance with the provisions of this Section 4 and shall be subject to the
written approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. Landlord’s consent shall not be
required for minor changes to the Tenant Improvements customarily made in the field.
(a)
Tenant’s Right to Request Changes. If Tenant shall request changes to the Tenant Improvements
(“Changes”), Tenant shall request such Changes by notifying Landlord in writing in substantially the same form as the AIA standard change
order form (a “Change Request”), which Change Request shall detail the nature and extent of any such Change. Such Change Request must
be signed by
Work Letter – Landlord Build
Tenant’s Representative. Landlord shall review and approve or disapprove such Change Request within 10 days thereafter (but such 10 day
period shall be reduced to 5 days if Tenant already commenced construction of the Tenant Improvements), provided that Landlord’s approval
shall not be unreasonably withheld, conditioned or delayed.
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(b)
Implementation of Changes. If Landlord approves such Change, Tenant may cause the approved Change to
be instituted. If any TI Permit modification or change is required as a result of such Change, Tenant shall promptly provide Landlord with a
copy of such TI Permit modification or change.
5.
Costs.
(a)
Budget For Tenant Improvements. Before the commencement of construction of the Tenant Improvements,
Tenant shall obtain a detailed breakdown, by trade, of the costs incurred or that will be incurred, in connection with the design and construction
of the Tenant Improvements (the “Budget”), and deliver a copy of the Budget to Landlord for Landlord’s approval, which shall not be
unreasonably withheld or delayed. The Budget shall be based upon the TI Construction Drawings approved by Landlord. The Budget shall
include a payment to Landlord of administrative rent (“Administrative Rent”) equal to 1% of the TI Costs (as hereinafter defined), for
monitoring and inspecting the construction of the Tenant Improvements, which sum shall be payable from the TI Fund. Except for the
Administrative Rent provided for in the preceding sentence, Landlord shall not charge Tenant any other fees in connection with Landlord’s
review, coordination, scheduling, monitoring and inspection of the Tenant Improvements.
(b)
Allowance”) as follows:
TI Allowance. Landlord shall provide to Tenant a tenant improvement allowance (collectively, the “TI
1.
2.
a “Tenant Improvement Allowance” in the maximum amount of $150.00 per rentable square foot in the Premises, which
is included in the Base Rent set forth in the Lease; and
an “Additional Tenant Improvement Allowance” in the maximum amount of $60.00 per rentable square foot in the
Premises, which shall, to the extent used, result in TI Rent as set forth in Section 4(b) of the Lease.
Before commencing the construction of the Tenant Improvements, Tenant shall notify Landlord how much Additional Tenant
Improvement Allowance Tenant has elected to receive from Landlord. Such election shall be final and binding on Tenant, and may not
thereafter be modified without Landlord’s consent, which may be granted or withheld in Landlord’s sole and absolute subjective discretion The
TI Allowance shall be disbursed in accordance with this Work Letter.
In addition to the TI Allowance, Landlord shall pay for an initial test fit for the Premises prepared by the Architect, plus one revision.
Tenant shall have no right to the use or benefit (including any reduction to Base Rent) of any portion of the TI Allowance not required
for the construction of (i) the Tenant Improvements described in the TI Construction Drawings approved pursuant to Section 2(d) or (ii) any
Changes pursuant to Section 4. Tenant shall have no right to any portion of the TI Allowance that is not disbursed before the last day of the
month that is 18 months after the Commencement Date (with such 18 month period being extended on a day for day basis by Force Majeure).
(c)
Costs Includable in TI Fund. The TI Fund shall be used solely for the payment of design, permits and
construction costs in connection with the construction of the Tenant Improvements, including, without limitation, the cost of electrical power and
other utilities used in connection with the construction of the Tenant Improvements, the cost of preparing the TI Design Drawings and the TI
Construction Drawings, construction management, all costs set forth in the Budget, including Landlord’s Administrative Rent, and the cost of
Changes (collectively, “TI Costs”). Notwithstanding anything to the contrary contained herein, the TI Fund shall not be used to purchase any
furniture, personal property or other non-Building system
Work Letter – Landlord Build
materials or equipment (other than Installations installed as part of the Tenant Improvements), including, but not be limited to, Tenant’s voice or
data cabling, non-ducted biological safety cabinets and other scientific equipment not incorporated into the Tenant Improvements.
825 Industrial/Allakos - Page 5
(d)
Excess TI Costs. Landlord shall have no obligation to bear any portion of the cost of any of the Tenant
Improvements except to the extent of the TI Allowance. If at any time and from time-to-time, the remaining TI Costs under the Budget exceed
the remaining unexpended TI Allowance (“Excess TI Costs”), monthly disbursements of the TI Allowance shall be made in the proportion that
the remaining TI Allowance bears to the outstanding TI Costs under the Budget, and Tenant shall fund the balance of each such monthly
draw. For purposes of any litigation instituted with regard to such amounts, those amounts required to be paid by Tenant will be deemed Rent
under the Lease. The TI Allowance and Excess TI Costs are herein referred to as the “TI Fund.” Notwithstanding anything to the contrary set
forth in this Section 5(d), Tenant shall be fully and solely liable for TI Costs and the cost of Minor Variations in excess of the TI Allowance.
(e)
Payment for TI Costs. During the course of design and construction of the Tenant Improvements, subject to the
terms of Section 5(d), Landlord shall reimburse Tenant for TI Costs once a month against a draw request in Landlord’s standard form,
containing evidence of payment of such TI Costs by Tenant and such certifications, lien waivers (including a conditional lien release for each
progress payment and unconditional lien releases for the prior month’s progress payments), inspection reports and other matters as Landlord
customarily obtains, to the extent of Landlord’s approval thereof for payment, no later than 30 days following receipt of such draw
request. Upon completion of the Tenant Improvements (and prior to any final disbursement of the TI Fund), Tenant shall deliver to Landlord: (i)
sworn statements setting forth the names of all contractors and first tier subcontractors who did the work and final, unconditional lien waivers
from all such contractors and first tier subcontractors; (ii) as-built plans (one copy in print format and two copies in electronic CAD format) for
such Tenant Improvements; (iii) a certification of substantial completion in Form AIA G704, (iv) a certificate of occupancy for the Premises; and
(v) copies of all operation and maintenance manuals and warranties affecting the Premises
(f)
Failure to Disburse TI Allowance. If Landlord fails to make a disbursement from the TI Allowance in
accordance with the terms hereof, and the amount thereof remains unpaid by Landlord for 30 days after written notice from Tenant to Landlord
and any Holder and which notice describes in detail the basis on which Tenant asserts that Landlord has wrongfully failed to disburse such
amount, Tenant may, after Landlord’s failure to pay such amounts within 10 business days after Tenant’s second written notice to Landlord and
any Holder stating in bold and all caps 12 point font that Tenant intends to offset against Base Rent the amount which Landlord has wrongfully
failed to disburse, offset the amount thereof against the Base Rent payment(s) next due and owing under the Lease. However, if Landlord
notifies Tenant prior to the expiration of such 10 business day period that Landlord disputes whether Landlord has wrongfully failed to disburse
funds and/or the amount claimed by Tenant, and if Landlord and Tenant are not able to reach agreement with respect to the disputed matters
(with Landlord disbursing any undisputed amounts which Landlord is required to disburse under this Work Letter) within 10 days after Tenant’s
receipt of a such notice from Landlord, the parties shall submit such dispute to arbitration conducted by the American Arbitration Association in
San Francisco in accordance with the “Expedited Procedures” of its Commercial Arbitration Rules in which case Tenant shall not withhold Base
Rent unless and until Tenant prevails in such arbitration and the arbitrator concludes that Tenant has the right to exercise such offset right and
determines the amount owed to Tenant by Landlord, if any. All costs associated with arbitration shall be awarded to the prevailing party as
determined by the arbitrator.
6.
(a)
Miscellaneous.
Consents. Whenever consent or approval of either party is required under this Work Letter, that party shall not
unreasonably withhold, condition or delay such consent or approval, except as may be expressly set forth herein to the contrary.
Work Letter – Landlord Build
825 Industrial/Allakos - Page 6
(b)
Modification. No modification, waiver or amendment of this Work Letter or of any of its conditions or provisions
shall be binding upon Landlord or Tenant unless in writing signed by Landlord and Tenant.
(c)
No Default Funding. In no event shall Landlord have any obligation to fund any portion of the TI Allowance
during any period that Tenant is in Default under the Lease.
Work Letter – Landlord Build
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Schedule 1
Basis of Design
Work Letter – Landlord Build
825 Industrial/Allakos - Page 8
Work Letter – Landlord Build
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Schedule 2
Building Shell Construction Drawings
Work Letter – Landlord Build
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Schedule 3
LEED Standards for Tenant Improvements
TENANT IMPROVEMENT COMPLIANCE REQUIREMENTS
Landlord to strive for LEED Gold level rating for the Core & Shell project. Landlord is seeking LEED-CS v3 certification of the Base
Building Project. Tenant supports that effort and agrees to comply with the following requirements as listed below to support LEED
Core & Shell Certification within the Tenant Improvements.
The tenant shall meet all State of California Title 24 2016-Part 6, California Green Building Code, energy efficiency, and sustainable
operations requirements for first time tenant improvements, including but not limited to the following:
The tenant plumbing scope of work shall include fixtures with flush and flow rates that do not exceed the following:
Break sink (in kitchen break rooms only) – 1.5 gpm
Pre-Rinse Spray Valves (for kitchen equipment) – 1.3 gpm
(Water Efficiency credit 3, Indoor Water Use Reduction, 40%)
The tenant HVAC design scope of work must meet the mandatory provisions of ASHRAE 90.1-2010. The tenant lighting
scope of work shall comply with Title 24, 2016 prescriptive code lighting power densities, daylighting, and occupancy sensor
controls and meet the following maximum lighting power density values 30% below Title 24 requirements:
0.8 W/SF
Conference/Meeting:
Corridor:
Dining Area:
Food Prepare:
Lobby:
Open Office:
Lab/Vivarium:
Stairwells:
0.4 W/SF
0.67 W/SF
0.8 W/SF
0.4 W/SF
0.5 W/SF
0.93 W/SF
0.6 W/SF
(Energy & Atmosphere credit 1, Optimize Energy Performance)
The tenant HVAC and/or refrigeration equipment scope of work shall include zero use of chlorofluorocarbon (CFC)-based
refrigerants in new base building heating, ventilating, air conditioning and refrigeration (HVAC&R) systems. Additionally, for all
equipment over 0.5lbs of refrigerant, select refrigerants and heating, ventilating, air conditioning and refrigeration (HVAC&R)
equipment that minimize or eliminate the emission of compounds that contribute to ozone depletion and global climate
change such that all equipment is in compliance with the following formula: LCGWP + LCODP x 105 ≤ 100
(Energy & Atmosphere prerequisite 3 and credit 4, Fundamental & Enhanced Refrigeration Management)
The tenant HVAC scope of work shall meet the minimum requirements of Sections 4 through 7 of ASHRAE Standard 62.1 -
2007, Ventilation for Acceptable Indoor Air Quality. Mechanical ventilation systems must be designed using the ventilation
rate procedure or the applicable local code, whichever is more stringent. The tenant HVAC scope of work shall include
permanent monitoring systems to ensure that ventilation systems maintain design minimum requirements.
(Environmental Quality prerequisite 1, Minimum IAQ Performance)
Provide a direct outdoor airflow measurement device capable of measuring the minimum outdoor air intake flow with an
accuracy of plus or minus 15% of the design minimum outdoor air rate, as defined by ASHRAE 62.1-2007 for mechanical
ventilation systems where 20% or
Work Letter – Landlord Build
825 Industrial/Allakos - Page 2
more of the design supply airflow serves non-densely occupied spaces. The tenant HVAC scope of work shall include
permanent monitoring systems to ensure that ventilation systems maintain design minimum requirements. Configure all
monitoring equipment to generate an alarm when the airflow values or carbon dioxide (CO2) levels vary by 10% or more from
the design values via either a building automation system alarm to the building operator or a visual or audible alert to the
building occupants. Monitor CO2 concentrations within all densely occupied spaces (those with a design occupant density of
25 people or more per 1,000 square feet). CO2 monitors must be between 3 and 6 feet above the floor
(Environmental Quality credit 1, Outdoor Delivery Air Monitoring)
The tenant HVAC scope of work shall increase mechanical ventilation systems to perform 30% better than Sections 4 through
7 of ASHRAE Standard 62.1-2007, Ventilation for Acceptable Indoor Air Quality.
(Environmental Quality credit 2, Increased Ventilation)
The tenant scope of work shall meet California Green Building Code and LEED requirements to develop and implement a
plan to manage indoor air quality (IAQ) during construction that meets or exceeds SMANCA Guidelines for Occupied
Buildings Under Construction, 2nd Edition 2007, ANSI/SMACNA 008-2008, protect stored on-site and installed absorptive
materials from moisture damage, and if permanently installed air handlers are used during construction, filtration media with a
minimum efficiency reporting value (MERV) of 8 must be used at each return air grille, as determined by ASHRAE Standard
52.2-1999 (with errata but without addenda). Replace all filtration media immediately prior to occupancy.
(Environmental Quality credit 3, Construction IAQ, During Construction)
The tenant scope of work shall meet California Green Building Code and LEED requirements to ensure that all adhesives and
sealants used on the project site must comply with the volatile organic compounds (VOCs) emissions established by South
Coast Air Quality Management District (SCAQMD) Rule 1168 and Green Seal Standard GS-36.
(Environmental Quality credit 4.1, Low-Emitting Materials, Adhesives & Sealants)
The tenant scope of work shall meet California Green Building Code and LEED requirements to ensure that all paints and
coatings used on the project site must comply with the designated standard: Green Seal Standard GS-11, Green Seal
Standard GS-03, and South Coast Air Quality Management District (SCAQMD) Rule 1113.
(Environmental Quality credit 4.2, Low-Emitting Materials, Paints & Coatings)
The tenant scope of work shall meet California Green Building Code and LEED requirements to ensure that all flooring and
flooring adhesives used in the building have to comply with designated flooring standards, such as Carpet and Rug Institute’s
Green Label Plus, Scientific Certification Systems’ FloorScore, and/or California Dept of Health Volatile Organic Emissions.
(Environmental Quality credit 4.3, Low-Emitting Materials, Flooring Systems)
The tenant scope of work shall meet California Green Building Code and LEED requirements to ensure that all composite
wood, agrifiber products and laminating adhesives used on the interior of the building can’t have added urea-formaldehyde
resins and those used in the exterior should meet California Air Resources Board standard.
(Environmental Quality credit 4.4, Low-Emitting Materials, Composite Wood & Agrifiber Products)
The tenant shall sufficiently exhaust each space where hazardous gases or chemicals may be present or used (e.g.,
garages, housekeeping and laundry areas, copying and printing rooms), using the exhaust rates determined in EQ
Prerequisite Minimum Indoor Air Quality Performance or a minimum of 0.50 cfm per square foot (2.54 l/s per square meter),
to create negative pressure with respect to adjacent spaces when the doors to the room are closed.
Work Letter – Landlord Build
825 Industrial/Allakos - Page 3
For each of these spaces, provide self-closing doors and deck-to-deck partitions or a hard-lid ceiling. Each ventilation system
that supplies outdoor air to occupied spaces must have particle filters or air-cleaning devices that meet one of the following
filtration media requirements: a minimum efficiency reporting value (MERV) of 13 or higher, in accordance with ASHRAE
Standard 52.2–2010; or Class F7 or higher as defined by CEN Standard EN 779–2002, Particulate Air Filters for General
Ventilation, Determination of the Filtration Performance.
(Environmental Quality credit 5, Indoor and Chemical Pollutant Source Control)
The Tenant is responsible for pest management services. The Tenant’s pest management vendor is to implement an
Integrated Pest Management Program based on the Integrated Pest Management Policy developed for the Core and Shell of
this project. Refer to Attachment A - Integrated Pest Management Policy. Tenant shall provide as evidence a signed contract,
financials omitted, showing that an ongoing, 2 year Integrated Pest Management is to be provided by the pest management
vendor.
(Innovation in Design credit 1.3, Integrated Pest Management)
The Tenant is responsible janitorial services. The Tenant’s janitorial vendor is to implement a Green Cleaning Program based
on the Green Cleaning Policy developed for the Core and Shell of this project. Refer to Attachment B - Green Cleaning
Policy. Tenant shall provide as evidence a signed contract, financials omitted, showing that an ongoing, 2 year Green
Cleaning Program is to be provided by the janitorial vendor.
(Innovation in Design credit 1.4, Green Cleaning)
Work Letter – Landlord Build
825 Industrial/Allakos - Page 4
Schedule 4
Site Logistic Instructions
Site Logistics Instructions to Tenant
1.
2.
3.
4.
Site Control: The site is under the care, custody and control of Truebeck through campus completion of all Shell & Core, Parking
Structure, and Sitework activities.
Site Security: Site security system for multiple GC on site should be considered by ARE. Having multiple GCs will require a system
of identification of who is a member of the Industrial Road team to prevent people entering the site that should not be here.
Power and Water: TI contractor to provide their own temporary power and water. Note design based on infrastructure under
construction per Schedule for base buildings, depending on the start time of TI, source of power may change.
Union: Landlord requires that all TI contractors and subcontractors must be union labor. If non-union trades are hired, the TI
contractor would be required to implement dual gates, which may not be feasible to due complex site logistics. Impacts to Shell cost
and schedule due to dual gates would be by TI. Any modifications to site logistics must be coordinated and approved by Truebeck.
5. Wheel Wash: Provisions for wheel washing of vehicular traffic on site - trucking, delivery, etc. should be by the TI contractor and
follow all conditions of approval.
6.
7.
8.
9.
Parking: All TI personnel must park in the designated parking area behind 960 Industrial. The designated parking lot will be
provided by ARE, management of the TI workers in the parking area by the TI contractor – signage, trash, toilets, etc.
Trucking/Deliveries: All delivery and trucking requirements must be per the Conditions of Approval and the trucking routes are
attached to the Work Letter as Schedule 6. Deliveries on site must be coordinated with Truebeck activities and only approved ‘live’
deliveries and drop offs of equipment will be allowed.
Lay Down/Logistics: There is no space for laydown onsite. Plan for zero lot line deliveries. Coordinate any staging on floors prior
to Shell completion with Truebeck. Due to constrained site logistics, temp toilets and debris management plan need to be consider
the tight site logistics. Debris removal will need to plan for daily off haul without a standing dumpster.
Loading: Leave out bays, hoisting bays, off hours use of the personnel hoist, would be the TI responsibility to coordinate, pay for, or
coordinate the use agreement of.
10. Lift: Personnel lift will be running on the exterior of the building through the construction and sign-off of the freight elevator. Freight
elevator capacity 5000lb. Loads must be spread in accordance with elevator requirements to prevent damage. TI contractor will be
responsible for a portion of operator costs through shell completion. TI contractor will be responsible for monthly charges for Kone
temp use of interior freight elevator if extended beyond Shell schedule. Current costs, which are subject to change, are as follows:
Manlift & Freight Elevator for Construction Use - $98/hr. Standard Time & $124/hr. OT & $150/hr. DT.
11. Walls: To allow Shell work adequate space to complete, construction of TI work within 10’ of exterior wall, stairs, shafts, or cores
cannot not begin until the skin is substantially complete, or through coordination and approval following rock on interior walls.
12. Roof: Roof access is restricted. Access by TI contractor will be allowed following coordination and permission by Truebeck
Construction.
13. Specialty TI Work: Specialty work such as a bridge between buildings, interconnecting floor stairs, etc. would need to be
coordinated as to the impacts to the Shell permit and schedule.
Work Letter – Landlord Build
825 Industrial/Allakos - Page 5
Schedule 5
Tenant Improvement Work Readiness Condition
General
1.
accepted by the tenant .
Tenant has the right to commence tenant improvement construction once the below requirements have been met by the landlord and
2.
Floors that are released to begin TI work should be in a condition to safely allow Tenant’s work to commence in an efficient and safe
manner. Each floor released shall be delivered in broom-clean condition, free of any debris or material , with the exception of material and tools
related to ongoing work for the warm shell construction or commissioning as indicated by the shell schedule.
3.
Trimble reference points.
Floors that are released to begin TI work should be complete to allow layout to begin off floor surfaces, column lines, control lines or
Shell contractor will be responsible for coordination with TI contractor and TI contractor will work collaboratively with the Shell
4.
contractor to minimize any TI construction disruption. Once the schedule and work sequences have been agreed to by both contractors, a)
Shell contractor shall pay for any damage or removal to any completed TI work or any disruption of the agreed to TI schedule. b) TI contractor
shall pay for any damage or removal to any completed Shell Core work or any disruption of the agreed to Shell Core schedule. To facilitate this
coordination effort, TI contractors are required to have a representative with the knowledge of their daily work plans and authority to make/
change/ adjust plans attend a morning huddle to coordinate daily site logistics.
TI contractor shall have shared access to exterior personnel hoist man-lift and crane and once the main lift is removed the freight
5.
elevator during construction (construction elevator). There will be one personnel hoist or construction elevator per building. Tenant shall be
responsible for a pro-rata share of the elevator operating cost based on elevator usage. TI contractor shall coordinate use of the construction
elevators with the Shell contractor. In the case of crane, C&S contractor has priority of use . Personnel hoist or freight elevator use is for
moving personnel and small hand tools between floors. Loading of the building for construction materials is through after hours use of the lifts.
If removal of curtain wall is required to load TI materials, TI contractor is responsible to coordinate and contract with Walters & Wolf to remove
and replace glass. Current costs, which are subject to change, are as follows: Manlift & Freight Elevator for Construction Use - $98/hr.
Standard Time & $124/hr. OT & $150/hr. DT. With respect to glass removal, TI contractor to determine the need and cost for removal and
associated logistics
Because elevators will be in the process of being installed concurrent with the tenant improvements, the skin will not be completely
6.
installed. Once the elevators are complete and approved by the state, the exterior man-lift can be removed and the TI contractor will work
collaboratively with the Shell contractor to allow building exterior enclosure to be completed. All elevators to be signed off no later than 5
months after delivery of the final floors. Site improvements and infrastructure will be ongoing during TI loading of materials. TI contractor to
provide protection of sitework and finishes.
Prior start of construction, TI contractor shall fully coordinate HVAC, Plumbing, Electrical, and Fire Sprinkler systems with core and
7.
shell model. Points of connection to the warm shell infrastructure by TI build out will need to be coordinated between teams. Warm shell
systems will be commissioned to the point of completion less required loads prior to connection to completed and tested TI systems.
Connection is by TI contractor.
8.
Building information Model (BIM).
TI Plumbing systems to be fully coordinated between the base building and the tenant improvements in the form of a clash free
9.
information Model (BIM).
TI Fire Sprinkler to be fully coordinated between the base building and the tenant improvements in the form of a clash free Building
10.
Building information Model (BIM).
TI Electrical system to be fully coordinated between the base building and the tenant improvements in the form of a clash free
Work Letter – Landlord Build
11.
Where practical, building Shell commissioning will be concurrent with the TI commissioning. This will allow the TI will provide the
necessary loads to allow the base building equipment to be commissioned and the Building Automations System to be coordinated between
the base building and the tenant improvements . Warm shell commissioning will be completed as far as possible, short of the portion of work
requiring a TI load. Commissioning of the building systems requiring a load shall occur after the TI contractor has completed their
documentation of functional testing.
825 Industrial/Allakos - Page 6
Water to be available to tenant use for construction proposes . Temp water is available through the Janitor Closet on each floor. The
12.
Janitor closet construction at turn over to TI construction with ‘end state’ finishes. Any additional temp water requirements would be by the TI
contractor.
13.
for welding is by TI contractor. Temp Power requirements are to be coordinated with warm shell contractor.
Tenant contractor will at all times have access to sufficient power at the house panel to allow for TI construction hand tools. Power
Core & Shell logistical plan, inclusive of location of cranes, concrete pumps and booms, and any other item that would impact TI
14.
construction, to be communicated and closely coordinated with the design and construction of the Tenant Improvements . Overall Site Logistics
for the campus is very congested. There is no laydown area available for TI construction outside the building. Delivery coordination is through
StruxHub. To facilitate this coordination effort, TI contractor to attend weekly coordination meetings in addition to daily morning huddles.
Tenant contractor will allow shell contractor access and laydown area sufficient to complete the shell components on each
15.
floor. Laydown areas and work areas will be coordinated between the Shell and TI contractors prior to TI contractor starting work on each floor
in order to minimize the impact and not cause any delay to the construction of either the Shell or the TI work.
Export of the editable BIM model can be provided to Tenant’s construction team upon Landlord’s design team’s release of the same.
Building Core and Shell Condition:
In addition to the general requirements stated above the following building shell components will be in the following state of completion at the
time of TI rough-in starting on each floor to satisfy the Tenant Improvement Work Readiness Condition:
1.
Building floor decks will need to be poured at least three floors above the floors that are released.
2.
in shell specifications.
The floors as they are released shall be free of any shoring or temporary supports and shall meet, floor flatness standards referenced
Building enclosure on each floor will be 75 % complete at the start of TI rough-in and 90% complete at the time of starting TI interior
3.
finishes. 90% completion shall occur no later than 4 weeks following 75% completion. It is understood that a portion of the façade and the
floor slab may be open to provide access to the exterior manlift(s) and/or tower cranes but any such opening shall be protected by TI contractor
through temporary measures to create a “water-tight” condition. TI contractor will allow Shell contractor access required to complete the
building shell exterior skin.
4.
Building code required stairs on each floor will be installed but not completed.
5.
to be fully complete with Tenant’s side fire taped and sanded to level IV finish.
“Exterior shell” of all base building rooms within or adjacent to the Premises (stairs, electrical rooms, mechanical rooms, MPOE, etc.)
6.
Exterior shell” of MPOE room to be complete with interior walls.
7.
local jurisdiction having authority.
Fire Sprinklers main loops and upheads installed on each floor as it is released ready for TI connections to the extent allowed by
8.
and plywood back boards installed.
Prior to starting TI interior Finishes “Interior shell” of MPOE room to be complete with Interior walls taped and sanded to level IV finish
Work Letter – Landlord Build
9.
walls taped and sanded to level IV finish.
825 Industrial/Allakos - Page 7
Prior to starting TI interior Finishes “Interior shell” of Structured Cable Distribution Closet on each floor to be complete with Exterior
10.
11.
See also Site Logistics Instructions to Tenant sent to ARE 4/3/2019. See Schedule 6 to the Work Letter.
Skin is substantially complete as required per Section 11 of Schedule 4.
Work Letter – Landlord Build
825 Industrial/Allakos - Page 8
Schedule 6
Trucking Routes
Work Letter – Landlord Build
825 Industrial/Allakos - Page 9
825 Industrial/Allakos - Page 1
EXHIBIT D TO LEASE
ACKNOWLEDGMENT OF COMMENCEMENT DATE
This ACKNOWLEDGMENT OF COMMENCEMENT DATE is made this _____ day of ______________, ____, between ARE-SAN
FRANCISCO NO. 63, LLC, a Delaware limited liability company (“Landlord”), and ALLAKOS INC., a Delaware corporation (“Tenant”), and is
attached to and made a part of the Lease dated ______________, _____ (the “Lease”), by and between Landlord and Tenant. Any initially
capitalized terms used but not defined herein shall have the meanings given them in the Lease.
Landlord and Tenant hereby acknowledge and agree, for all purposes of the Lease, that the Commencement Date of the Base Term
of the Lease is ______________, _____, the Rent Commencement Date is ______________, _____, and the termination date of the Base
Term of the Lease shall be midnight on ______________, _____. In case of a conflict between the terms of the Lease and the terms of this
Acknowledgment of Commencement Date, this Acknowledgment of Commencement Date shall control for all purposes.
IN WITNESS WHEREOF, Landlord and Tenant have executed this ACKNOWLEDGMENT OF COMMENCEMENT DATE to be
effective on the date first above written.
TENANT:
ALLAKOS INC.,
a Delaware corporation
By:
Its:
LANDLORD:
ARE-SAN FRANCISCO NO. 63, LLC,
a Delaware limited liability company
By:
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
a Delaware limited partnership,
managing member
By:
ARE-QRS CORP.,
a Maryland corporation,
general partner
By:
Its:
Rules and Regulations
825 Industrial/Allakos - Page 1
EXHIBIT E TO LEASE
Rules and Regulations
1.
The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or any Tenant Party, or
used by them for any purpose other than ingress and egress to and from the Premises.
2.
Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped
areas or other areas outside of its Premises, or on the roof of the Project.
Project.
3.
4.
Except for animals assisting the disabled, no animals shall be allowed in the offices, halls, or corridors in the
Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical
instrument or by the making of loud or improper noises.
5.
If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will
direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be
permitted. Any such installation or connection shall be made at Tenant’s expense.
6.
Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the
Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is
expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project.
7.
Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the
overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is
disabled, it shall be removed within 48 hours. There shall be no “For Sale” or other advertising signs on or about any parked vehicle. All
vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and
no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord.
8.
9.
Tenant shall maintain the Premises free from rodents, insects and other pests.
Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is
intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of these Rules and Regulations.
10.
Tenant shall not cause any unnecessary labor by reason of Tenant’s carelessness or indifference in the
preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however
occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person.
11.
Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical
lights and fixtures, heating apparatus, or any other service equipment affecting the Premises.
12.
Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and
other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or
about the Premises.
13.
All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash
enclosure areas, if any, provided for that purpose.
Rules and Regulations
14.
825 Industrial/Allakos - Page 2
No auction, public or private, will be permitted on the Premises or the Project.
15.
No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord.
16.
The Premises shall not be used for lodging, sleeping or cooking (except for cooking by licensed caterers (e.g.,
for Tenant’s company events) and except that Tenant may use microwave ovens, toasters and coffee makers in the Premises for the benefit of
Tenant employees and contractors in areas designated for such items, but only if the use thereof is at all times supervised by the individual
using the same) or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No illegal gaming devices
shall be operated in the Premises.
17.
Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the
Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not
use more than such safe capacity. Landlord’s consent to the installation of electric equipment shall not relieve Tenant from the obligation not to
use more electricity than such safe capacity.
18.
Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage.
19.
Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly
related to Tenant’s ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be
transmitted beyond the Premises.
20.
Tenant shall cause any vendors and other service providers hired by Tenant to perform services at the Premises
or the Project to maintain in effect workers’ compensation insurance as required by Legal Requirements and commercial general liability
insurance with coverage amounts reasonably acceptable to Landlord. Tenant shall cause such vendors and service providers to name
Landlord and Alexandria Real Estate Equities, Inc. as additional insureds under such policies and shall provide Landlord with certificates of
insurance evidencing the required coverages (and showing Landlord and Alexandria Real Estate Equities, Inc. as additional insureds under
such policies) prior to the applicable vendor or service provider providing any services to Tenant at the Project.
21.
Neither Tenant nor any of the Tenant Parties shall have the right to photograph, videotape, film, digitally record or
by any other means record, transmit and/or distribute any images, pictures or videos of areas outside of the Premises at the Project.
825 Industrial/Allakos - Page 1
EXHIBIT F TO LEASE
TENANT’S PERSONAL PROPERTY
None.
We consent to the incorporation by reference in the Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statement (Form S-3 No. 333-233018) of Allakos Inc.,
(2) Registration Statement (Form S-8 No. 333-226247) pertaining to the 2018 Equity Incentive Plan, the 2018 Employee Stock Purchase Plan and the
amended 2012 Equity Incentive Plan of Allakos Inc.
(3) Registration Statement (Form S-8 No. 333-231276) pertaining to the 2018 Equity Incentive Plan, and the 2018 Employee Stock Purchase Plan
of our report dated February 25, 2020, with respect to the financial statements of Allakos Inc. and the effectiveness of internal control over financial reporting
of Allakos Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2019.
Exhibit 23.1
/s/ Ernst & Young LLP
Redwood City, California
February 25, 2020
CERTIFICATION 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
Exhibit 31.1
I, Robert Alexander, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Allakos 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
(b)
(c)
(d)
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;
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;
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, 2020
By:
/s/ Robert Alexander
Robert Alexander
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION 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
Exhibit 31.2
I, Leo Redmond, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Allakos 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
(b)
(c)
(d)
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;
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;
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, 2020
By:
/s/ Leo Redmond
Leo Redmond
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
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
In connection with the Annual Report of Allakos Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 25, 2020
By:
/s/ Robert Alexander
Robert Alexander
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
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
In connection with the Annual Report of Allakos Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: February 25, 2020
By:
/s/ Leo Redmond
Leo Redmond
Chief Financial Officer
(Principal Financial and Accounting Officer)