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Allakos Inc.

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FY2020 Annual Report · Allakos Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

☒

☐

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO
Commission File Number 001-38582

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

  ☒
  ☐
  ☐

   Accelerated filer
   Smaller reporting company

  ☐
  ☐

If  an  emerging  growth  company,  indicate  by  check  mark  if  the  registrant  has  elected  not  to  use  the  extended  transition  period  for  complying  with  any  new  or  revised  financial  accounting
standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒
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 30, 2020 was $2,155.5 million.
The number of shares of Registrant’s Common Stock outstanding as of February 23, 2021 was 53,117,414.
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  2020  fiscal  year  ended
December 31, 2020.

 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
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.

Page

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i

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1. Business.

Overview

PART I

We are a clinical stage biotechnology company developing lirentelimab (AK002), our wholly owned monoclonal antibody, for the treatment of

various mast cell and eosinophil related diseases. Lirentelimab 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. Our initial focus is on
eosinophilic gastrointestinal diseases which include eosinophilic gastritis (“EG”), eosinophilic duodenitis (“EoD”) which has also been referred to as
eosinophilic gastroenteritis, and eosinophilic esophagitis (“EoE”); in addition, lirentelimab has the potential to treat a number of other severe diseases.
Lirentelimab has received orphan disease status for EG, EoD, and EoE from the U.S. Food and Drug Administration (the “FDA”). Lirentelimab completed
a randomized, double-blind, placebo-controlled Phase 2 study in patients with EG and/or EoD (see ENIGMA study results). The ENIGMA study met all
prespecified primary and secondary endpoints when compared to placebo and results were published in the New England Journal of Medicine. ENIGMA
patients that continued to receive lirentelimab treatment for at least 52 weeks have experienced continued symptom improvement with an average 70%
reduction in EG and EoD symptoms. Additionally, patients in the ENIGMA study with co-morbid EoE showed histologic and symptomatic improvement
when treated with lirentelimab compared to placebo. Based on the results from the ENIGMA study and End of Phase 2 meeting with the FDA, we began
enrollment of a Phase 3 study in patients with EG and/or EoD and a Phase 2/3 study in patients with EoE. We expect results from these trials in the fourth
quarter of 2021.

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. Lirentelimab binds to Siglec-8, an inhibitory receptor found on mast cells and eosinophils, which represents a novel
mechanism to selectively inhibit or deplete these important immune cells and thereby potentially resolve inflammation. We believe lirentelimab 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.

Our lead indication is EG and/or EoD, which are chronic, often severe, inflammatory diseases characterized by persistent gastrointestinal symptoms

and elevated and activated eosinophils in the stomach and/or, duodenum, respectively. Emerging data suggests that activated mast cells also contribute to
disease pathogenesis. Common symptoms of the diseases include abdominal pain, nausea, diarrhea, bloating, cramping, early satiety, loss of appetite,
vomiting and weight loss. There are no treatments approved specifically for these diseases. Treatment with systemic steroids can provide symptomatic
improvement, but long-term treatment with steroids is generally not possible due to the numerous side effects. Published literature reports the prevalence of
EG and EoD in the United States to be approximately 50,000 people. However, we believe that these diseases may be significantly underdiagnosed or
misdiagnosed as other gastrointestinal diseases.

Initial evidence of underdiagnosis came from the ENIGMA study. During the enrollment phase of the ENIGMA study, our investigational sites

screened patients that had not been previously diagnosed with EG or EoD. Many of these patients had chronic unexplained gastrointestinal symptoms or
had been previously diagnosed with a functional gastrointestinal disorder (“FGID”) such as irritable bowel syndrome (“IBS”) and functional dyspepsia
(“FD”). Of 26 patients biopsied with no prior EG or EoD diagnosis, 15 (58%) were found to have EG or EoD and were therefore eligible for enrollment in
the ENGIMA study. The high rate of discovery among previously undiagnosed patients suggested that many patients with chronic gastrointestinal
symptoms (including those diagnosed with IBS, FD or nonspecific gastritis) have EG and/or EoD. More recently, we have confirmed these findings in a
large prospective study examining the rates of elevated eosinophil and mast cell levels in patients with chronic unexplained gastrointestinal symptoms or
FGIDs such as IBS and FD. In this prevalence study 45% (181 of 405) of patients biopsied met the histologic criteria for EG and/or EoD (See Prevalence
Study results for more information). Millions of patients in the U.S. are under the care of a gastroenterologist and suffer from chronic unexplained
gastrointestinal symptoms or FGIDs. Our results provide evidence that prevalence of EG and EoD is significantly higher than reported in the literature.

1

 
Our other late-stage trial is in EoE, a severe orphan gastrointestinal disease characterized by dysphagia (difficulty swallowing) resulting from
inflammation caused by elevated and inappropriately activated mast cells and eosinophils. Lirentelimab has received orphan drug designation for EoE from
the FDA. The estimated prevalence of EoE in the United States is approximately 150,000-200,000 patients and there are no treatments currently approved
specifically for this disease.

Lirentelimab also showed promising activity in clinical studies in chronic urticaria (“CU”, see Chronic Urticarias for clinical results), indolent

systemic mastocytosis (“ISM”, see Indolent Systemic Mastocytosis for clinical results), severe allergic conjunctivitis (“SAC”, see severe allergic
conjunctivitis for clinical results), and mast cell gastrointestinal disease (“MGID”, see mast cell gastritis clinical results). In addition, patients in clinical
studies with atopic comorbidities such as asthma, atopic dermatitis, and allergic rhinitis experienced improvements in these conditions. The activity
observed in these studies suggests that lirentelimab could provide significant benefit to patients suffering from these diseases and highlights the potential of
lirentelimab to broadly inhibit mast cells and deplete eosinophils in different disease settings.

Figure 1: Potential lirentelimab clinical indications, indications with completed studies shown in bold

To date, lirentelimab has been administered intravenously in our clinical efficacy studies. Lirentelimab has generally been well-tolerated in each of

our clinical trials. The most common adverse event with intravenous lirentelimab has been the occurrence of mild to moderate infusion related reactions,
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. We also have developed a formulation of lirentelimab for subcutaneous (“SC”) administration and have completed a Phase 1 study in
healthy volunteers evaluating the safety, tolerability and pharmacokinetics of SC lirentelimab (for additional information, see “Lirentelimab Clinical
Development–Subcutaneous Lirentelimab”). SC lirentelimab provided prolonged eosinophil depletion supporting monthly administration and was well
tolerated; there were no serious adverse events, no injection site reactions, and no injection-related reactions.

2

 
 
 
Lirentelimab efficacy and proof of concept studies are listed in Figure 2 below.  See “Lirentelimab Clinical Development” for further detail on

these studies.

Figure 2. Lirentelimab Efficacy and Proof of Concept Studies

Study
Phase 3 Eosinophilic Gastritis and/or Duodenitis
Phase 2/3 Eosinophilic Esophagitis
Phase 3 Eosinophilic Duodenitis
Phase 2/3 SC Lirentelimab Eosinophilic Gastritis and/or Duodenitis
Phase 1 Mast Cell Gastrointestinal Disease
Phase 2 Eosinophilic Gastritis and/or Duodenitis
Phase 2 Chronic Urticaria
Phase 1 Severe Allergic Conjunctivitis
Phase 1 Indolent Systemic Mastocytosis

Understanding the Foundation of Our Approach

Background on Mast Cells, Eosinophils and Siglec-8

  Milestone

  Data Expected Q4 2021
  Data Expected Q4 2021
  Initiation Expected Q2 2021
  Initiation Expected H2 2021
  Completed 2020
  Completed 2019
  Completed 2019
  Completed 2019
  Completed 2019

Mast cells and eosinophils 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 lower 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.

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, lirentelimab 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
(such as Substance P), 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.

3

 
 
 
 
 
•

•

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.

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, lirentelimab has depleted eosinophils and demonstrated mast cell inhibitory activity
in multiple disease settings including EG, EoD, 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.

4

 
 
 
 
 
 
 
Figure 4. Siglec-8 Triggers Apoptosis of Eosinophils and Inhibition of Mast Cells

Our Strategy

Lirentelimab 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 lirentelimab 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 lirentelimab through clinical development in EG, EoD and EoE. Lirentelimab has secured orphan drug designation for
the treatment of EG and EoD from the FDA. We believe the positive results from our Phase 2 ENIGMA study in patients with EG and/or
EoD, in conjunction with our Phase 3 study, will serve as the basis for demonstrating safety and efficacy in our biologics license
application (“BLA”) and market authorization application submissions. Lirentelimab has secured orphan drug designation for the treatment
of EoE from the FDA. We are conducting a Phase 2/3 study in patients with EoE and expect results in Q4 2021.

Evaluate additional eosinophilic and mast cell driven conditions. We have completed trials in patients with MGID, CU, ISM, and SAC
and will continue to evaluate commercial opportunities in these, as well as other indications.

Build commercial capability and retain rights in key markets. We intend to retain the rights to lirentelimab in key markets for the time
being, and plan to commercialize lirentelimab in the U.S through a specialty sales force.

Lirentelimab Clinical Development

Lirentelimab 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. Lirentelimab 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 lirentelimab to Siglec-8 on mast cells and eosinophils triggers
apoptosis of eosinophils and inhibition of mast cells. Lirentelimab is a non-fucosylated IgG1 antibody engineered to have potent ADCC. ADCC is a
mechanism whereby the binding of an antibody like lirentelimab 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 lirentelimab with an additional

5

 
 
 
 
 
 
mechanism to deplete eosinophils present in blood. As a result of these dual modes of action, lirentelimab has been shown to deplete eosinophils in blood
and tissue, and to inhibit the release of inflammatory mediators from mast cells.

Lirentelimab 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 lirentelimab depletes blood eosinophils and inhibits mast cells in multiple different diseases including EG,
EoD, EoE, CU, ISM, and SAC. Based on the promising results in the ENIGMA study, we have initiated a Phase 3 study in EG and/or EoD and a Phase 2/3
study in EoE, with the results of the studies expected in the fourth quarter of 2021. To date, lirentelimab has been administered intravenously in our clinical
efficacy studies. Lirentelimab has generally been well-tolerated in each of our clinical trials. The most common adverse event with intravenous lirentelimab
has been the occurrence of mild to moderate infusion related reactions, 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.

Subcutaneous Lirentelimab

We also have developed a formulation of lirentelimab for subcutaneous administration and have completed a randomized, double-blind, placebo-

controlled, single dose, dose ranging Phase 1 study in healthy volunteers evaluating the safety, tolerability and pharmacokinetics of SC lirentelimab.
Bioavailability of SC lirentelimab was 63% and SC lirentelimab resulted in extended eosinophil suppression at all dose levels tested. At dose levels of 3.0
and 5.0 mg/kg and with the fixed dose of 300 mg, SC lirentelimab resulted in eosinophil suppression in all subjects through Day 85. The pharmacokinetic
and pharmacodynamic results suggest that SC lirentelimab may be given monthly or potentially less frequently. SC lirentelimab was well tolerated, and
there were no serious adverse events, no injection site reactions, and no injection-related reactions with SC lirentelimab.

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), EoD
(duodenum), and eosinophilic colitis (colon). There are no treatments currently approved specifically for these diseases and lirentelimab has secured orphan
drug designation for EG, EoD, 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 activated and are 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 lirentelimab 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 Duodenitis

EG and EoD are diseases characterized by chronic inflammation due to infiltration of eosinophils and mast cells into layers of the stomach and

duodenum. Symptoms commonly include abdominal pain, nausea, vomiting, diarrhea, early satiety, loss of appetite, abdominal cramping, bloating,
malnutrition and weight loss. EG and EoD can occur with eosinophilia isolated to the stomach or duodenum, or often in combination. 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 high-powered field (“HPF”) in 5
HPFs in the stomach indicates the presence of EG, and the presence of greater than or equal to 30 eosinophils per HPF in 3 HPFs in the duodenum
indicates the presence of EoD. Based on ICD-9 codes, the prevalence of EG and EoD in the United States has previously been reported in the literature to
be approximately 50,000 patients. However, we believe these diseases may be significantly under-diagnosed, or mis-diagnosed as other gastrointestinal
diseases (such as irritable bowel syndrome or functional dyspepsia), based on observations from the ENIGMA study as well as results of a prevalence
study we conducted to assess the prevalence of EG and EoD in patients with chronic gastrointestinal symptoms.

Eosinophilic Gastritis and Eosinophilic Duodenitis Prevalence Study

Initial evidence of underdiagnosis came from the ENIGMA study. During the enrollment phase of the ENIGMA study, our investigational sites
screened patients that had not been previously diagnosed with EG or EoD. Many of these patients had chronic unexplained gastrointestinal symptoms or
had been previously diagnosed with a functional gastrointestinal disorder (“FGID”) such as irritable bowel syndrome (“IBS”) and functional dyspepsia
(“FD”). Of 26 patients biopsied with no prior EG or EoD diagnosis, 15 (58%) were found to have EG or EoD and were therefore eligible for enrollment in
the ENGIMA study. The high rate of discovery among previously undiagnosed patients suggested that some patients with chronic gastrointestinal
symptoms (including those with IBS, FD or nonspecific gastritis) have EG and/or EoD.

More recently, we have confirmed these findings in a prospective prevalence study examining the rates of elevated eosinophil and mast cell levels
in 556 patients with chronic unexplained gastrointestinal symptoms or FGIDs such as IBS and FD. The prospective, multi-center study assessed eosinophil
and mast cell levels in biopsies obtained from patients with active, chronic unexplained gastrointestinal symptoms or FGIDs. Inclusion in the study
required patients to have ≥6-month history of abdominal pain, abdominal cramping, nausea, vomiting, diarrhea, bloating and/or early satiety without
identifiable cause and unresponsive to pharmacologic or dietary intervention, or a diagnosis of IBS or FD. Gastric and duodenal biopsies were performed in
patients who had an average weekly single symptom severity score ≥3 (on a 10 point scale) for abdominal pain, abdominal cramping, nausea, vomiting,
diarrhea, bloating or early satiety and a total symptom severity score ≥10 as assessed by the patient reported outcome (“PRO”) questionnaire used in our
Phase 2 (ENIGMA) and Phase 3 EG and/or EoD studies.

7

 
 
In this study, 73% (405 of 556) of patients screened met the symptom severity criteria and underwent endoscopy with biopsy. Of the patients
biopsied, 45% (181 of 405) met the histologic criteria for EG and/or EoD (≥30 eosinophils/HPF in 5 HPFs of the stomach and/or ≥30 eosinophils/HPF in 3
HPFs of the duodenum, respectively), representing 33% (181 of 556) of patients screened. Since millions of people in the United States and worldwide
suffer from chronic unexplained gastrointestinal symptoms or FGIDs, the results from these studies suggest that EG and/or EoD may be more common
than previously documented in the literature.

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 esophageal 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, EoD 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.

ENIGMA Study: Phase 2 Study in Patients with EG and/or EoD

Study Design

The ENIGMA study, a randomized, double-blind, placebo-controlled Phase 2 study of lirentelimab enrolled patients with active, biopsy-confirmed

EG and/or EoD. 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 lirentelimab for the first month followed by three doses of 1.0 mg/kg given monthly,
(b) 0.3 mg/kg of lirentelimab 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

Lirentelimab showed a statistically significant benefit when compared to placebo on all primary and secondary endpoints for each of the high dose,

low dose, and combined high/low dose lirentelimab groups. The data demonstrate that lirentelimab produced histological resolution of gastrointestinal
tissue eosinophilia and improved disease symptoms, and that these benefits occurred in the same individuals. Results from this study were recently
published in the New England Journal of Medicine.

8

 
 
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
lirentelimab
(n=20)
-97%
<0.0001
70%
0.0009
-58%
0.0012

Low Dose
lirentelimab
(n=19)
-92%
<0.0001
68%
0.0019
-49%
0.0150

Combined
lirentelimab
(n=39)
-95%
<0.0001
69%
0.0008
-53%
0.0012

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).

1
2

Safety

Lirentelimab was generally well tolerated. The only treatment emergent adverse event occurring more frequently on lirentelimab 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
lirentelimab 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 lirentelimab 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
lirentelimab
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 lirentelimab and placebo groups with 28% and 35% of patients in the
lirentelimab and placebo group receiving acute steroids, respectively. 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 a long-term extension study. These patients have reported further

disease symptom improvement with continued lirentelimab treatment. For example, in EG and/or EoD patients with at least 52 weeks of lirentelimab
treatment, mean total symptom scores were reduced 70%.

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 lirentelimab. This evaluation included lirentelimab naïve patients receiving an initial 1.0 mg/kg of lirentelimab.  No IRRs were observed in patients
pre-treated with prednisone the day prior to receiving lirentelimab despite using a higher initial dose than the 0.3 mg/kg dose used in the ENIGMA

9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
study. These results suggest prednisone may be a useful pre-treatment to reduce or eliminate IRRs in future studies of lirentelimab.

Current and Future Studies

Lirentelimab has secured orphan drug designation for EG, EoD, and EoE from the FDA. Based on the promising results from the ENIGMA study,
we have initiated a Phase 3 study in patients with EG and/or EoD and a Phase 2/3 study in patients EoE. We expect results from both of these studies in Q4
2021.  Based on communications with the FDA, we believe the results of the ENGIMA study, in conjunction with the results from the Phase 3 study, if
successful, will be sufficient for regulatory approval. We plan to initiate a Phase 3 study in patients with EoD without EG in Q2 2021. In this study, in
addition to the duodenum, we plan to examine eosinophil and mast cell levels in the terminal ileum and colon before and after lirentelimab treatment.
Evaluation of the terminal ileum and colon will help characterize EoD patients and could provide insights for further development of lirentelimab in
colonic conditions such as eosinophilic colitis and ulcerative colitis. We also plan to initiate a Phase 2/3 study of fixed doses of monthly SC lirentelimab in
patients with EG and/or EoD in H2 of 2021.

Figure 8. Ongoing and Planned Lirentelimab EG, EoD, and EoE Clinical Studies

Study
Phase 3 Eosinophilic Gastritis and/or Duodenitis
Phase 2/3 Eosinophilic Esophagitis
Phase 3 Eosinophilic Duodenitis
Phase 2/3 SC Lirentelimab Eosinophilic Gastritis and/or Duodenitis

Mast Cell Gastrointestinal Disease

  Milestone

  Data Expected Q4 2021
  Data Expected Q4 2021
  Initiation Expected Q2 2021
  Initiation Expected H2 2021

During the enrollment phase of the ENIGMA study, we identified a group of patients who were symptomatic but upon biopsy had ≥ 30 stomach

and/or duodenal mast cell counts in the absence of elevated eosinophils (<30 eosinophils/HPF). The presence of elevated mast cell counts and lack of
elevated eosinophils or other cell type suggests that these patients may suffer from mast cell driven gastrointestinal symptoms.  We refer to this condition as
Mast Cell Gastrointestinal Disease (“MGID”).  As detailed above, we conducted a prospective prevalence study examining the rates of elevated eosinophil
and mast cell levels in 556 patients with chronic unexplained gastrointestinal symptoms or FGIDs such as IBS and FD. 73% (405 of 556) of patients
screened underwent endoscopy with biopsy. Of the patients biopsied, 50% (204 of 405) met the histologic criteria for MGID, representing 37% (204 of
556) of patients screened. The results suggest that a large number of patients meet the criteria we established for MGID.

We have conducted a proof of concept Phase 1 study with lirentelimab in patients with MGID. The open-label, multi-dose, 6-month, Phase 1 study

of lirentelimab consisted of seven patients with moderate to severe gastrointestinal symptoms and elevated mast cells (≥30 mast cells/HPF in at least 5
HPFs in the stomach and/or ≥30 mast cells/HPF in at least 3 HPFs in the duodenum) who did not have >30 eosinophils/HPF. Patients received 0.3 mg/kg of
lirentelimab for the first dose, followed by 1.0 mg/kg the following month, then monthly doses of 3.0 mg/kg for four additional months. Disease symptoms
were assessed using the patient reported outcome (“PRO”) questionnaire used in our Phase 2 (ENIGMA) and Phase 3 EG and/or EoD studies (Total
Symptom Score TSS-8: abdominal pain, nausea, vomiting, early satiety, loss of appetite, abdominal cramping, bloating, and diarrhea). Six-month treatment
with lirentelimab resulted in a 64% mean reduction in TSS-8 compared to baseline and five of seven (71%) patients had >50% reduction in TSS-8. The
treatment effect of lirentelimab in this open label study was similar to that observed with lirentelimab in patients with EG and/or EoD in the Phase 2
ENIGMA Study.

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, burning, warmth, tingling and irritation of the skin. Patients with CU are
often severely impaired in their

10

 
 
 
 
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.

Despite sharing similar inflammatory pathology, the various forms of urticaria differ in the triggers that elicit the inflammatory response and

symptoms. Patients with cholinergic urticaria 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 hives
and pruritis following a minor stroking pressure, rubbing or scratching of the skin. In CSU, pruritic 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 estimate that approximately 200,000-500,000 patients with severe CSU, cholinergic urticaria and symptomatic dermatographism
could be candidates for therapy with lirentelimab 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 who 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 who 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.

Phase 2 Study Design and Results

We conducted an open-label Phase 2 study with lirentelimab 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 lirentelimab 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 lirentelimab. Importantly, lirentelimab also produced high levels of response in patients that were
refractory to Xolair. This suggests that lirentelimab, if approved, could become the treatment of choice for antihistamine refractory CU patients.
Additionally, lirentelimab depleted blood eosinophils in subjects throughout the dosing period.

11

 
 
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

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
3.2
—
—
—
18.5
0%
0%
0%
0%

Baseline
3.7
—
—
—
28.7
0%
0%
0%
0%

Baseline
5.4
—
—
—
0%

Baseline
5.7
—
—
—
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%)

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%)

Intravenous lirentelimab 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 4% of subsequent
infusions.

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

12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 lirentelimab.

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 study with lirentelimab 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 lirentelimab 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 lirentelimab 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 lirentelimab.

Intravenous lirentelimab 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.

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

-67%
-67%
-50%
-100%

13

 
 
 
 
 
 
 
 
Comorbid Condition

Asthma (N = 9)
Atopic Dermatitis (N = 11)
Rhinitis (N = 11)

Patient Assessed
Change in Median Global Severity from
Baseline to Weeks 21 to 22

-72%
-65%
-69%

Indolent Systemic Mastocytosis

Disease Overview

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. Lirentelimab 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

Lirentelimab 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
lirentelimab, including peripheral counts of eosinophils and patient-reported mastocytosis disease 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 lirentelimab. 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 lirentelimab 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 lirentelimab for the five months thereafter. Depletion of eosinophils was observed for all
patients throughout the dosing period with lirentelimab. 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 lirentelimab. 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, lirentelimab produced clinically meaningful improvement in patient symptoms for multiple symptoms across all three PROs used in the study.

14

 
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%

Intravenous lirentelimab 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.

Preclinical Results

Lirentelimab 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 functionally active. The transgenic mouse provides us with a proprietary tool to
assess the safety, tolerability and activity of anti-Siglec-8 antibodies.

Lirentelimab has completed short- and long-term toxicity studies in Siglec-8 transgenic mice. Chronic weekly dosing for six months with

lirentelimab 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

15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
lirentelimab. The no-observed-adverse-effect-level of lirentelimab after chronic dosing for six months was 100 mg/kg/week.

We have shown that lirentelimab or antibodies to Siglec-8 have broad activity in animal disease models (eosinophilic gastroenteritis, anaphylaxis,

fibrosis, chronic obstructive pulmonary disease, and Substance P mediated inflammation) and in human ex vivo diseased tissue (eosinophilic
gastrointestinal disease, mastocytosis, atopic dermatitis and lung).

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

16

 
 
 
 
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
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 lirentelimab 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 lirentelimab.
Chemokines are known to recruit and activate cells of the innate and adaptive immune system. By normalizing chemokine secretions, lirentelimab may be
able to prevent further recruitment of immune cells and thereby interrupt the inflammatory cascade.

17

 
 
 
    
 
 
Figure 14. Ex Vivo Skin Tissue Response to IL33/TSLP

Anti-Siglec-8 Antibody Reduces Eosinophil and Mast Cell Levels in EG/EoD 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/EoD 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,
lirentelimab may be able to reduce further recruitment of immune cells and thereby interrupt the inflammatory cascade.

18

 
 
 
 
 
 
 
Figure 16. Chemokine Levels in the EG/EoD Mouse Model

Anti-Siglec-8 Antibody Inhibits MRGPRX2-Mediated Mast Cell Activation in Mouse Model

The mast cell specific MRGPRX2 receptor is a potent activator of mast cells and is believed to contribute chronic inflammation, itch, and pain in a
number of diseases due to the presence of the MRGPRX2 ligand, Substance P. In a mouse model of Substance P mediated inflammation, Substance P was
administered to Siglec-8 transgenic mice to induce mast cell activation and inflammation. An anti-Siglec-8 or isotype control antibody was administered 1
hour after Substance P. Relative to isotype control antibody mice (“ISO’), mice treated with an anti-Siglec-8 antibody displayed reduced MRGPRX2-
mediated mast cell activation as assessed by CD63 expression compared to sham treated mice (mice that did not receive Substance P). In addition, anti-
Siglec-8 treated mice displayed reduced levels of infiltrating neutrophils and inflammatory mediators (CCL3) compared to isotype control mice.

Figure 17: Mast Cell Activation and Inflammation in MRGPRX2 Mouse Model

In the above models, anti-Siglec-8 antibodies have significantly reduced eosinophils and inhibited mast cells. The activity in these models suggests

lirentelimab has the potential to treat eosinophil and mast cell inflammation in a number of disease settings and highlights the ability of lirentelimab to
inhibit the inflammatory cascade triggered by different activating signals.

Preclinical Programs

We are developing additional antibodies targeting novel immune system receptors. These antibodies have demonstrated promising in vitro and

animal activity and are being evaluated for further development.

19

 
 
 
 
 
 
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 lirentelimab includes:

•

•

•

•

EG, EoD and EoE. Currently, there are no therapies that have been approved by the FDA specifically for EG, EoD or EoE. Several
companies, including but not limited to, Regeneron (dupilumab), AstraZeneca (benralizumab), Bristol Myers Squibb (cendakimab), Shire
(oral budesonide), and Dr. Falk Pharma (oral budesonide) have or are conducting studies in these indications.

ISM. We are not aware of any FDA-approved treatments for ISM. Blueprint Medicines is developing avapritinib in smoldering systemic
mastocytosis and ISM.

CU. Omalizumab (Roche and Novartis) is an FDA-approved drug 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 (ligelizumab), Genentech (fenebrutinib), Regeneron (dupilumab), Celldex (CDX-0159), 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. Companies conducting studies in SAC include Aldeyra (reproxalap).

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 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.

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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 lirentelimab, we rely on a single third-party manufacturer, Lonza, and we currently
have no alternative manufacturer in place. 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.

In-Licensing Agreements

We have entered into two in-licensing agreements with third-parties for the development, manufacturing and commercialization of our products

including lirentelimab. 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

21

 
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.

Total Royalty Burden

In aggregate, we anticipate our total royalty obligation on lirentelimab 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:

•

•

•

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;

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•

•

•

•

•

•

•

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;

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.

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Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part of the IND. Furthermore, each clinical trial must be
reviewed and approved by an IRB for each institution at which the clinical trial will be conducted to ensure that the risks to individuals participating in the
clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that must be provided
to each clinical trial subject or his or her legal representative, and must monitor the clinical trial until completed. There also are requirements governing the
reporting of ongoing clinical trials and completed clinical trial results to public registries.

A sponsor who wishes to conduct a clinical trial outside of the United States may, but need not, obtain FDA authorization to conduct the clinical

trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an
NDA or BLA. The FDA will accept a well-designed and well-conducted foreign clinical trial not conducted under an IND if the trial was conducted in
accordance with GCP requirements and the FDA is able to validate the data through an onsite inspection if deemed necessary.

Clinical trials in the United States generally are conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap.

•

•

•

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

24

 
 
 
 
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 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 December 31, 2021, 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,

25

 
addressing all of the deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide
that the NDA or BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data
differently than we interpret the same data.

Orphan Drugs

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition,
which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United
States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of
disease or condition will be recovered from sales of the product.

Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the identity of the
therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the
duration of the regulatory review and approval process.

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.

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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.

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:

•

•

•

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:

•

•

•

•

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:

•

•

•

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

27

 
 
 
 
 
 
 
 
 
 
 
FDA. For example, the FDA has discretion over the kind and amount of scientific evidence—laboratory, preclinical and/or clinical—required to
demonstrate biosimilarity to a licensed biological product.

The FDA intends to consider the totality of the evidence, provided by a sponsor to support a demonstration of biosimilarity, and recommends that

sponsors use a stepwise approach in the development of their biosimilar products. Biosimilar product applications thus may not be required to duplicate the
entirety of preclinical and clinical testing used to establish the underlying safety and effectiveness of the reference product. However, the FDA may refuse
to approve a biosimilar application if there is insufficient information to show that the active ingredients are the same or to demonstrate that any impurities
or differences in active ingredients do not affect the safety, purity 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

28

 
biologic, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA
approval of a new NDA/BLA or NDA/BLA supplement, which may require the development of additional data or preclinical studies and clinical trials.

The FDA may also place other conditions on approvals including the requirement for 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:

•

•

•

•

•

•

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.

29

 
 
 
 
 
 
 
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.

30

 
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

31

 
 
 
of application, it can be approved simultaneously in various Member States through the Decentralized Procedure. Under the Decentralized
Procedure an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of
which is selected by the applicant as the Reference Member State (“RMS”). The competent authority of the RMS prepares a draft
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

32

 
 
developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand
for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan likely
will be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors
often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA
may result in a similar reduction in payments from non-governmental payors.

For a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government

agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a
given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. As 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.

Human Capital

We believe we must attract, develop, motivate and retain exceptional employees to achieve our objectives. To accomplish this, we offer competitive

compensation, promote diversity and inclusion, and focus on employee health, safety and well-being. Our board of directors engages regularly with
management on human capital matters. As of December 31, 2020, we had 125 full-time employees, 87 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

33

 
98,000 square feet of office space to be constructed in San Carlos, California. These premises were delivered in November 2020, and we expect to move
into this new headquarters in second half of 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 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

For information on our legal proceedings, see Item 3, Legal Proceedings, in this Annual Report on Form 10-K.

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 23, 2021 contains eight issued and unexpired U.S. patents and seven pending U.S. utility 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 four granted U.S. patents that claim the
active component of lirentelimab, an anti-Siglec-8 antibody, pharmaceutical compositions comprising lirentelimab, 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 patents are issued in
Europe, Japan and other territories. We have twelve 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, methods of delivering antibodies to Siglec-8, and formulations for
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

34

 
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 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 lirentelimab, 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.

Impact of COVID-19 on Our Business

The pandemic caused by an outbreak of a novel coronavirus causing a disease known as COVID-19 (“COVID-19”) has resulted, and is likely to

continue to result, in significant national and global economic disruption and may have an adverse impact on our operations, supply chains and distribution
systems or those of our contractors, and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that
are being taken, such as restrictions on travel, quarantine polices and social distancing. For example, the ability of our employees or those of our
contractors to work has been and is likely to continue to be adversely affected. Moreover, we and our contractors have and are likely to continue to
experience disruptions in supply of items that are essential for our research and development activities, including, for example, raw materials and other
consumables used in the manufacturing of our product candidates or medical and laboratory supplies used in our clinical trials or preclinical studies, in each
case, for which there are or may be shortages because of ongoing efforts to address the outbreak. In particular, pursuant to the U.S. Defense Production Act,
as amended (the “Defense Production Act”), the U.S. federal government can require domestic industries to provide essential goods and services needed for
the national defense, and they have begun to use it in the context of COVID-19 to divert supplies and materials to vaccine producers, and this has and likely
will continue to cause delays with some of our suppliers.

35

 
In addition, enrollment for our clinical studies may be adversely affected and the completion of such studies may be delayed. Also, the spread of COVID-
19 has disrupted the United States’ healthcare and healthcare regulatory systems which could divert healthcare resources away from, or materially delay,
FDA approval or any applicable foreign regulatory approval with respect to our product candidates. Furthermore, our clinical trials may be negatively
affected by the COVID-19 outbreak. Given the daily evolution of the COVID-19 outbreak and the response to curb its spread, currently we are not able to
estimate the effects of the COVID-19 outbreak to our results of operations or financial condition. For additional information, see “Risk Factors–Risks
Related to the Discovery, Development and Commercialization of Our Product Candidates–Our business may be adversely affected by health epidemics,
including the recent coronavirus outbreak.”

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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.

Risk Factors Summary

Risks Related to Our Financial Position and Need for Additional Capital

•

•

•

We are engaged in clinical drug development and have a 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 have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.

Our ability to generate revenue and achieve profitability depends significantly on our ability to achieve a number of objectives.

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

•

•

•

Our business may be adversely affected by health epidemics, including the recent coronavirus outbreak.

We are dependent on the success of our lead compound, lirentelimab, which is currently in multiple clinical trials, and if we are unable to
obtain approval for and commercialize lirentelimab for one or more indications in a timely manner, our business could be materially
harmed.

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.

Risks Related to Regulatory Approval and Other Legal Compliance Matters

•

•

•

The regulatory approval processes of the FDA, European Medicines Agency (“EMA”) and comparable foreign regulatory authorities are
lengthy, time-consuming and inherently unpredictable, and 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.

We may be unable to obtain U.S. or foreign regulatory approval and, as a result, unable to commercialize our product candidates.

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.

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, Chief Operating
Officer and Chief Financial Officer, Dr. Adam Tomasi, and our ability to attract and retain highly skilled executive officers and employees.

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.

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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.

Risks Related to Intellectual Property

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•

•

If we are unable to obtain or protect intellectual property rights, we may not be able to compete effectively in our market.

We may not be able to protect our intellectual property rights throughout the world.

Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

Risks Related to Our Dependence on Third-Parties

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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 contract with third-parties for the production of our product candidates for preclinical studies and, in the case of lirentelimab, our
ongoing clinical trials, and expect to continue to do so for additional clinical trials and ultimately for commercialization, and 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 may not gain the efficiencies we expect from further scale-up of manufacturing of lirentelimab, and our third-party manufacturers may
be unable to successfully scale-up manufacturing in sufficient quality and quantity for lirentelimab 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.

Risks Related to Ownership of Our Common Stock

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•

The market price of our stock may continue to be volatile, which could result in substantial losses for investors.

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.

The other factors discussed under “Risk Factors”.

General Business Risks

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•

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur
costs that could have a material adverse effect on our business.

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 may experience disruptions and delays or incur financial damages as a result of system failures or security breaches.

Risks Related to Our Financial Position and Need for Additional Capital

We are engaged in clinical drug development and have a 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 a 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

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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
lirentelimab, our lead compound. All of our product candidates currently under development, other than lirentelimab, are in preclinical development. We
have  not  yet  demonstrated  our  ability  to  successfully  complete  any  pivotal  clinical  trials,  obtain  marketing  approvals,  complete  large-scale  drug
manufacturing 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 clinical 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.

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 $153.5 million, $85.4 million and $43.5 million for the
year ended December 31, 2020, 2019 and 2018. As of December 31, 2020, we had an accumulated deficit of $343.0 million. We have devoted substantially
all of our resources and efforts to research and development. Our lead compound, lirentelimab, 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, lirentelimab, and any other future product
candidates;

timely  receipt  of  marketing  approvals  for  lirentelimab  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;

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developing an efficient and scalable manufacturing process for lirentelimab 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 lirentelimab 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;

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, lirentelimab 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, 2020, we had $659.0 million in cash, cash equivalents and investments in marketable securities, which includes proceeds from
our July 2018 initial public offering and concurrent private placement that we completed on July 23, 2018 and from our subsequent follow-on offerings in
August  2019  and  November  2020,  after  deducting  underwriting  discounts  and  commissions.  We  believe  that  our  existing  cash,  cash  equivalents  and
investments  in  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  investments  in  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.

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We plan to use our existing cash, cash equivalents and investments in marketable securities to fund our development of lirentelimab 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  lirentelimab  and  any  other  product
candidates will require a significant amount of capital. Our existing cash, cash equivalents and investments in marketable securities will not be sufficient to
fund all of the actions that are necessary to complete the development of lirentelimab 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.

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

Our business may be adversely affected by health epidemics, including the recent coronavirus outbreak.

In December 2019, an outbreak of a novel coronavirus causing a disease known as COVID-19 (“COVID-19”) originated and spread to a number of

countries, including the U.S. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.

COVID-19 may have an adverse impact on our operations, supply chains and distribution systems or those of our contractors, and increase our
expenses,  including  as  a  result  of  impacts  associated  with  preventive  and  precautionary  measures  that  are  being  taken,  such  as  restrictions  on  travel,
quarantine polices and social distancing. For example, the ability of our employees or those of our contractors to work has been and is likely to continue to
be adversely affected. Moreover, we and our contractors have experienced and are likely to continue to experience disruptions in supply of items that are
essential  for  our  research  and  development  activities,  including,  for  example,  raw  materials  and  other  consumables  used  in  the  manufacturing  of  our
product candidates or medical and laboratory supplies used in our clinical trials or preclinical studies, in each case, for which there are or may be shortages
because of ongoing efforts to address the outbreak. In particular, pursuant to the U.S. Defense Production Act, as amended (the “Defense Production Act”),
the U.S. federal government may, among other things, require domestic industries to provide essential goods and services needed for the national defense,
and they have begun to use the Defense Production Act in the context of COVID-19 to divert supplies and materials to vaccine producers. For example,
one of our suppliers has recently informed us that, due to their obligation to prioritize other products or customers pursuant to the Defense Production Act,
they are currently not able to fulfill our orders for certain materials previously ordered to be used in our manufacturing process. While this and similar
delays in materials have not yet caused delays in our overall timeline for clinical trials or regulatory filings, it is quite possible that this or other such delays
may occur in the future, whether as a result of actions taken pursuant to the Defense Production Act or general shortages of materials attributable to the
global efforts to combat Covid-19, which could impact our proposed timeline for developing and commercializing lirentelimab and adversely impact our
business, financial condition and results of operations.

In addition, the spread of COVID-19 has disrupted the United States’ healthcare and healthcare regulatory systems which could divert healthcare
resources away from, or materially delay, U.S. Food and Drug Administration (“FDA”) approval or any applicable foreign regulatory approval with respect
to our product candidates. Furthermore, our clinical trials may be negatively affected by the COVID-19 outbreak. Site initiation and patient enrollment may
be  delayed,  for  example,  due  to  factors  including  prioritization  of  hospital  resources  toward  the  COVID-19  outbreak,  travel  restrictions,  the  inability  to
access  sites  for  initiation  and  monitoring,  and  difficulties  recruiting  or  retaining  patients  in  our  ongoing  and  planned  clinical  trials.  Furthermore,  if  we
determine  that  our  clinical  trial  participants  may  suffer  from  exposure  to  COVID-19  as  a  result  of  their  participation  in  our  clinical  studies,  we  may
voluntarily terminate certain clinical sites as a safety measure until we reasonably believe that the likelihood of exposure has subsided. We may therefore
be unable to complete our clinical trials on the timelines we expect, if at all, which could materially and adversely impact our ability to seek regulatory
approval  for  our  product  candidates.  COVID-19  may  also  reduce  the  effectiveness  of  our  future  sales  efforts  and/or  impact  our  ability  to  launch  and
commercialize such product candidates; we have no experience in launching or selling a product amid pandemic conditions. COVID-19 also may have an
adverse impact on the economies and financial markets of many

41

 
countries, including the United States, potentially  resulting  in  an  economic  downturn  that  could  affect  demand  for  our  product  candidates,  if  approved,
impair our ability to raise capital when needed or otherwise impact our business, results of operations, cash flows and financial condition. In addition, if the
spread  of  COVID-19  continues  and  our  operations  are  impacted,  we  risk  a  delay,  default  and/or  nonperformance  under  our  existing  agreements  arising
from force majeure. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which health epidemics such as COVID-19
could  adversely  impact  our  business.  Although  we  are  continuing  to  monitor  and  assess  the  effects  of  the  COVID-19  pandemic  on  our  business,  the
ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change.

We are dependent on the success of our lead compound, lirentelimab, which is currently in multiple clinical trials. If we are unable to obtain approval
for and commercialize lirentelimab 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 lirentelimab, our lead compound, for one or more indications. Lirentelimab is in the clinical stages of development and we are investing the
majority of our efforts and financial resources in the research and development of lirentelimab for multiple indications. Lirentelimab 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 lirentelimab,
or any other product candidates, before we receive marketing approval from the FDA and comparable foreign regulatory authorities, and we may never
receive such marketing approvals.

The success of lirentelimab will depend on several factors, including the following:

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successful and timely completion of our clinical trials of lirentelimab;

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 lirentelimab 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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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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travel and other restrictions due to pandemics such as COVID-19;

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.  The  COVID-19  global  pandemic  has  created  uncertainties  in  the  expected  timelines  for  clinical  stage  biotechnology
companies such as us, and because of such uncertainties, it is extremely difficult for us to accurately predict at this time if we can continue to enroll patients
and when we can complete our Phase 3 clinical trial. 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 approval to commence a trial;

reaching agreement on acceptable terms with prospective CROs and clinical trial sites;

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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;

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 any of these events occur, 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 lirentelimab 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

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subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues 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.  Lirentelimab  is  administered
intravenously  in  our  lead  Phase  3  and  Phase  2/3  ongoing  studies.  Intravenous  drugs  are  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  lirentelimab  and  any  other  future  product  candidates,  are  estimates.  These  estimates  have  been
derived from a variety of sources, including

45

 
 
 
 
 
 
 
 
 
 
 
 
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 population for lirentelimab and any other future product candidates may be limited or may not be amenable to treatment
with lirentelimab and any other products, if and when approved. Even if we obtain significant market share for lirentelimab 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 lirentelimab into clinical development and through to
regulatory approval and commercialization. Our other product candidates are at even earlier stages of development than lirentelimab and may fail in
development or suffer delays that adversely affect their commercial viability.

Our  other  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 lirentelimab. The success of any product candidates we may develop will depend on many factors,
including, among other things, the following:

•

•

•

•

•

•

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.

46

 
 
 
 
 
 
 
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  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 lirentelimab includes, without limitation, Regeneron, AstraZeneca, Bristol Meyers Squibb, Shire, and Dr. Falk Pharma for EGIDs, Blueprint

47

 
Medicines for ISM, Roche, Novartis, Regeneron, Celldex and Gossamer Bio for CU and Aldeyra for SAC. 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
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 clinical 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  lirentelimab  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.

48

 
Risks Related to Regulatory Approval and Other Legal Compliance Matters

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:

•

•

•

•

•

•

•

•

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.

Our development program is studying patients with eosinophilic gastritis (“EG”) and/or eosinophilic duodenitis (“EoD”). Varied terminology had
been  used  in  the  literature  to  describe  mucosal  eosinophilia  in  the  stomach  and  duodenum  (including  eosinophilic  gastritis,  eosinophilic  duodenitis,
eosinophilic gastroenteritis and eosinophilic enteritis), and the nomenclature for grouping non-esophageal eosinophil gastrointestinal disorders (“EGIDs”),
both  within  the  medical  industry  and  the  relevant  regulatory  agencies,  as  well  as  the  ultimate  indication  and  label  for  lirentelimab,  have  yet  to  be
finalized/agreed upon. For example, in a recent communication with the FDA, they commented that they believe further characterization of isolated EoD is
needed to determine whether this condition is a subtype of EG or whether it should be considered a distinct indication.   The FDA stated they were

49

 
 
 
 
 
 
 
 
 
taking  this  position  because  the  field  of  eosinophilic  gastrointestinal  diseases  is  advancing  rapidly  and  that  data  from  published  literature,  the  academic
community, and your development program would be informative. It is possible based on our communications that the FDA may determine EoD or any
other subset of EGIDs are not separate disease processes.  If the FDA determines that EoD is not a separate disease process, but the EoD population is
included in the approval as a subset of an approved condition, then such  a determination could cause confusion and adversely impact doctors’ ability or
willingness to prescribe our medication. In addition, if any particular subset of the EGID population falls outside the label, our marketing authorization
would not extend to that population, which would impact the potential addressable market for our drug.  Ultimately, whether lirentelimab will be used to
treat  any  subset  of  EGID  patients  will  depend  on  the  agency’s  view  of  the  efficacy  and  safety  of  lirentelimab,  and  our  overall  clinical  development
program.

The lengthy regulatory 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.

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
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  EoD,  significant  regulatory  hurdles  remain,  both  near  term  and  long  term,  before
lirentelimab can obtain regulatory approval in the United States. 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 or due to any delays in FDA regulatory review due to the COVID-19 outbreak.
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.

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

50

 
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, EoD, 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 lirentelimab 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.

Lirentelimab 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 lirentelimab 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.

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

51

 
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.

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

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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:

•

•

•

•

•
•

•

•

•

•

•

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.

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, EoD 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.

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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.

Given the FDA’s stated uncertainty surrounding EGID diseases, it is possible the FDA could decide EGIDs in general, or any subset of the EGID
population, is a much larger market and accordingly ineligible for orphan drug status.  We have obtained orphan drug designation for EG, EoD and EoE in
the U.S. but further redefinitions of the EGID diseases by the FDA could cause us to lose such status.  Were this to occur, we would not only lose the
financial incentives and exclusivity granted to orphan drugs, we could also be forced to undertake larger or additional clinical trials which could impact our
proposed timeline for introducing lirentelimab and impact our business, financial condition and results of operations.

Although we may seek a breakthrough therapy designation for lirentelimab 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  lirentelimab  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.

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.

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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 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, President Biden made drug price reform a
focal  point  of  his  2020  presidential  campaign.  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.

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.  Additionally,  the  California  Privacy  Rights  Act,  amending  and  expanding  CCPA,  was  passed  via  ballot  initiative  during  the  November  2020
election,  which  will  further  strengthen  privacy  laws  in  California  and  create  a  new  privacy  regulatory  agency  in  the  state.  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

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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.  For  example,  on  July  16,  2020,  the  Court  of  Justice  of  the  European  Union  invalidated  the  EU-US  Privacy  Shield
Framework under which personal data could be transferred from the EEA to United States entities that had self-certified under the Privacy Shield scheme.
It is currently unclear what additional measures will need to be put in place as a result of this court ruling. It is also possible that each of these privacy laws
may be interpreted and applied in a manner that is inconsistent with our practices. 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.

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;

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•

•

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.

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.

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, Chief Operating Officer and
Chief Financial 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, Chief Operating Officer and Chief Financial 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

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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.

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, 2020, we had 125 full-time employees, including 87 employees engaged in research and development. In order to successfully
implement our development and commercialization plans and strategies, 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 lirentelimab 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 lirentelimab 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  most  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

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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  lirentelimab  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.

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 lirentelimab and any other future product candidates and,
accordingly, may not achieve our research, development and commercialization goals.

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

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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 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

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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-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. 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

61

 
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.

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:

•

•

•

•

•

•

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.

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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  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.

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.

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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 lirentelimab and expect to continue to rely upon third-parties to
conduct additional clinical trials of lirentelimab 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 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
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 lirentelimab, 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

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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 lirentelimab, we rely on a single third-party manufacturer, Lonza, and we currently have no alternative manufacturer in place. If we were to
experience  an  unexpected  loss  of  supply  of  lirentelimab,  or  any  of  our  other  product  candidates,  for  any  reason,  whether  as  a  result  of  manufacturing,
supply or storage issues or otherwise, including issues related to the COVID-19 global pandemic, 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 lirentelimab would result
in substantial delay and interrupt our clinical trials involving lirentelimab.

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 required agreements with third-party manufacturers or to do so on acceptable terms. Reliance on third-
party manufacturers entails additional risks, including:

•

•

•
•

•

•

•

•

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.

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.

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We may not gain the efficiencies we expect from further scale-up of manufacturing of lirentelimab, and our third-party manufacturers may be unable
to successfully scale-up manufacturing in sufficient quality and quantity for lirentelimab 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  lirentelimab  at  a  scale  that  is  sufficient  for  us  to  complete  our  planned  clinical
trials and, if we receive marketing approval, to launch lirentelimab 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 lirentelimab 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 lirentelimab.

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  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, lirentelimab and our other product candidates are currently only being manufactured at a few of Lonza’s
locations.  If  these  locations  become  unavailable  at  their  anticipated  capacities  or  the  location  of  the  manufacture  of  lirentelimab  or  our  other  product
candidates  is  changed  for  any  reason,  including  for  reasons  related  to  the  COVID-19  global  pandemic,  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  locations.  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

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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 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.

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.

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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 initial public offering at $18.00 per share on July 19, 2018, and our common stock reached
a high of $157.98 per share during the first quarter of 2021. As of February 23, 2021, the closing price of our common stock was $119.52. 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;

impacts and developments in the COVID-19 pandemic;

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;

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,  including  in  response  to  the
COVID-19 pandemic. 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.

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

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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,  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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delays or increased costs related to the COVID-19 global pandemic;

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 lirentelimab 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  lirentelimab  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 lirentelimab or any of our future product candidates;

the  level  of  demand  for  lirentelimab  and  any  of  our  future  product  candidates,  if  approved,  which  may  fluctuate  significantly  and  be
difficult to predict;

the  risk/benefit  profile,  cost  and  reimbursement  policies  with  respect  to  our  product  candidates,  if  approved,  and  existing  and  potential
future products that compete with lirentelimab and any of our future product candidates;

our ability to commercialize lirentelimab 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

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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.

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 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
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 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, 2020, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially
owned approximately 88.5% 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.

We are currently and may in the future 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 are currently and may in the future be the target of this type of litigation. For example, on
March 10, 2020, a putative securities class action complaint captioned Kim v. Allakos et al., No. 20-cv-01720 (N.D. Cal.) was filed in the United States
District Court for the Northern District of California against us, our Chief Executive Officer, Dr. Robert Alexander, and our former Chief Financial Officer,
Mr.  Leo  Redmond.  The  complaint  asserts  claims  for  violations  of  Sections  10(b)  and  20(a)  of  the  Securities  Exchange  Act  of  1934  and  Rule  10b-5
promulgated  thereunder  and  seeks  damages  based  on  alleged  material  misrepresentations  and  omissions  concerning  our  Phase  2  clinical  trials  of
lirentelimab. The proposed class period is August 5, 2019, through December 17, 2019, inclusive. This or other 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.

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 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.

General Business Risks

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.

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

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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.

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.

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;

73

 
 
 
 
 
•

•

•

•

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.

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.

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 Securities Exchange Act of 1934, as amended (“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.

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 are in the process of constructing a new office and laboratory
facility in San Carlos, California pursuant to a lease agreement we entered into in December 2019. We may encounter difficulties and delays in construction
as  well  as  in  obtaining  necessary  validation,  permits,  licenses,  and  certifications  for  this  facility.  For  example,  as  circumstances  around  the  COVID-19
pandemic  are  evolving,  government-imposed  quarantines  and  restrictions  may  require  us  to  temporarily  halt  construction  or  validation  activities.
Furthermore, we may not be able to fully occupy this facility on our currently anticipated timeline, which

74

 
 
 
 
 
could  negatively  impact  our  financial  results  given  the  fixed  costs  associated  with  the  lease.  If  we  are  unable  to  complete  construction  in  a  timely  and
satisfactory  manner,  obtain  the  necessary  permits,  licenses,  certificates,  and  accreditations  or  fully  occupy  this  facility,  we  may  be  unable  to  meet  our
currently  anticipated  development  timelines  for  our  product  candidates,  which  would  negatively  impact  our  reputation,  commercial  plans  and  results  of
operations.

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 discover new targets.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

As of December 31, 2020, we had gross U.S. federal and state net operating loss carryforwards of $399.9 million and $48.1 million , respectively.
Federal net operating loss carryforwards of $338.0 million, which were generated after December 31, 2017, do not expire.  The remaining $61.9 million of
federal net operating loss carryforwards expire beginning in 2032.  It is possible that we will not generate taxable income in time to use our net operating
loss carryforwards before their expiration (if applicable) 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 and certain
other tax attributes could be limited by an “ownership change” as described above, which could result in increased tax liability to our company.

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. These premises were delivered in November 2020, and we expect to move into this new headquarters in the second half of 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.

75

 
Item 3. Legal Proceedings.

From  time  to  time,  we  may  become  involved  in  litigation  or  other  legal  proceedings.  On  March  10,  2020,  a  putative  securities  class  action
complaint captioned Kim v. Allakos et al., No. 20-cv-01720 (N.D. Cal.) was filed in the United States District Court for the Northern District of California
against us, our Chief Executive Officer, Dr. Robert Alexander, and our former Chief Financial Officer, Mr. Leo Redmond. The complaint asserts claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks damages based on alleged
material  misrepresentations  and  omissions  concerning  its  Phase  2  clinical  trials  of  lirentelimab.  The  proposed  class  period  is  August  5,  2019,  through
December 17, 2019, inclusive. On August 28, 2020, the plaintiff filed an amended complaint, adding as defendants Dr. Adam Tomasi, our President, Chief
Operating Officer and Chief Financial Officer, and Dr. Henrik Rasmussen, our Chief Medical Officer. Given the early stage of this litigation matter, we
cannot reasonably estimate a potential future loss or a range of potential future losses and have not recorded a contingent liability accrual as of December
31, 2020.

Item 4. Mine Safety Disclosures.

Not applicable.

76

 
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 23, 2021, there were 43 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.

77

 
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,  2020.  Pursuant  to
applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been
declared on our common stock to date. The stockholder returns shown on the graph below are based on historical results and are not 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

  7/19/2018     9/30/2018     12/31/2018 
  12/31/2020 
  9/30/2019  
  $ 100.00    $ 143.97    $ 167.26     $ 129.60    $ 138.66    $ 251.62    $ 305.15     $ 142.37    $ 229.95    $ 260.64    $ 448.00  
    100.00      103.06      85.24       99.56       103.42      103.60      116.51       100.26      131.28      146.03      168.85  
    100.00      103.09      81.92       94.65       92.52       84.54       102.49       91.96       116.70       115.74       129.57  

  12/31/2019 

  9/30/2020  

  6/30/2019  

  3/31/2020  

  6/30/2020  

  3/31/2019  

78

 
 
 
 
 
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,  2020,  2019,  2018,  2017  and  2016,  and  the  balance  sheets  data  as  of
December 31, 2020, 2019, 2018, 2017 and 2016, 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)

2020

2019

Year Ended December 31,
2018
(in thousands, except per share data)

2017

2016

  $
  $
  $

(157,057)  $
(153,480)  $
(3.10)  $

(91,418)  $
(85,372)  $
(1.89)  $

(45,721)  $
(43,538)  $
(2.20)  $

(22,254)  $
(23,552)  $
(14.54)  $

(17,060)
(17,100)
(13.03)

49,492 

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)

2020

2019

Year Ended December 31,
2018
(in thousands)

2017

2016

  $

 $

658,997 
646,817 
719,618 
65,223 
— 

 $

495,901 
486,809 
516,894 
21,173 
— 

 $

178,906 
176,353 
191,259 
7,265 
— 

(342,964)   
654,395 

(189,484)   
495,721 

(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.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

risks related to the COVID-19 pandemic;

our  plans  and  ability  to  manufacture,  or  have  manufactured,  sufficient  quantities  of  lirentelimab  for  preclinical  studies  and  to  conduct
clinical trials and to eventually commercialize the product, and our reliance on third parties in relation to the foregoing;

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 lirentelimab, if approved, including the geographic areas of focus and sales strategy;

the size of the market opportunity for lirentelimab 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 lirentelimab 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 lirentelimab;

the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug
designation, for lirentelimab or our other product candidates for various diseases;

our ability to obtain and maintain regulatory approval of lirentelimab or our other product candidates;

our plans relating to the further development of lirentelimab 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 lirentelimab and our other product candidates;

the need to hire additional personnel and our ability to attract and retain such personnel;

80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
•

•

•

•

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

our financial performance;

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 offerings in August 2019 and November 2020.

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, 2020
and  2019,  including  year-over-year  comparisons  of  our  financial  performance  and  condition  for  these  years.  Discussion  and  analysis  of  the  year  ended
December 31, 2018 specifically, as well as the year-over-year comparison of our financial performance and condition for the years ended December 31,
2019 and 2018, 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, 2019, filed with the SEC on February 25, 2020.

Overview

We are a clinical stage biotechnology company developing lirentelimab (AK002), our wholly owned monoclonal antibody, for the treatment of

various mast cell and eosinophil related diseases. Lirentelimab 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. Our initial focus is on
eosinophilic gastrointestinal diseases which include eosinophilic gastritis (“EG”), eosinophilic duodenitis (“EoD”) which has also been referred to as
eosinophilic gastroenteritis, and eosinophilic esophagitis (“EoE”); in addition, lirentelimab has the potential to treat a number of other severe diseases.
Lirentelimab has received orphan disease status for EG, EoD, and EoE from the U.S. Food and Drug Administration (the “FDA”). Lirentelimab completed
a randomized, double-blind, placebo-controlled Phase 2 study in patients with EG and/or EoD (see ENIGMA study results). The ENIGMA study met all
prespecified primary and secondary endpoints when compared to placebo and results were published in the New England Journal of Medicine. ENIGMA
patients that continued to receive lirentelimab treatment for at least 52 weeks have experienced continued symptom improvement with an average 70%
reduction in EG and EoD symptoms. Additionally, patients in the ENIGMA study with co-morbid EoE showed histologic and symptomatic improvement
when treated with lirentelimab compared to placebo. Based on the results from the ENIGMA study and End of Phase 2 meeting with the FDA, we began
enrollment of a Phase 3 study in patients with EG and/or EoD and a Phase 2/3 study in patients with EoE. We expect results from these trials in the fourth
quarter of 2021.

81

 
 
 
 
 
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. Lirentelimab binds to Siglec-8, an inhibitory receptor found on mast cells and eosinophils, which represents a novel
mechanism to selectively inhibit or deplete these important immune cells and thereby potentially resolve inflammation. We believe lirentelimab 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,  lirentelimab,  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
$153.5 million and $85.4 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit
of $343.0 million.

Prior  to  completing  our  IPO  in  July  2018  and  subsequent  follow-on  offerings  in  August  2019  and  November  2020,  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, 2020, we had cash, cash equivalents and marketable securities of $659.0 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.

November 2020 Follow-On Offering

On November 2, 2020, we closed an underwritten public offering (the “November 2020 Offering”) under our shelf registration statement on Form
S-3 (File  No.  333-233018)  pursuant  to  which  we  sold  an  aggregate  of  3,506,098  shares  of  our  common  stock  at  a  public  offering  price  of  $82.00  per
share.  We received aggregate net proceeds of $271.7 million, after deducting the underwriting discounts and commissions.

82

 
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.

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  consulting  fees,  employee  salaries  and  benefits,  travel  and  stock-based  compensation
expense;

costs incurred under service agreements with contract research organizations (“CROs”) that conduct nonclinical research and development
activities on our behalf;

costs incurred under service agreements with clinical CROs and clinical investigative sites to conduct our clinical studies;

costs incurred under service agreements with contract development and manufacturing organizations (“CDMOs”) for the manufacture and
fill finish of our product candidates;

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;

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.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an
evaluation of the progress to completion of specific tasks using data such as clinical site activations, patient enrollment or information provided to us by our
clinical CROs and clinical investigative sites, along with analysis by our in-house clinical operations personnel. Advance payments for goods or services to
be received in the future for use in research and development activities are deferred and capitalized as prepaid expenses, even when there is no alternative
future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Prior  to  the  regulatory  approval  of  our  product  candidates,  we  recognize  expenses  incurred  with  our  CDMOs  for  the  manufacture  of  product
candidates that could potentially be available to support future commercial sales, if approved, in the period in which they have occurred. To date, we have
not yet capitalized any costs to inventory as we are unable to determine if these costs will provide a future economic benefit, given the unapproved nature
of our product candidates.

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;

83

 
 
 
 
 
 
 
 
 
 
•

•

•

•

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  CDMOs,  clinical  CROs  and  clinical  investigative  sites  have  comprised  a  significant  portion  of  our  research  and
development expenses since inception. We track these 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):

Lirentelimab contract research and development costs
Consulting and personnel-related costs
Other unallocated research and development costs

Total

2020

Year Ended December 31,
2019

2018

  $

  $

55,322 
37,560 
12,651 
105,533 

 $

 $

30,806 
23,967 
7,085 
61,858 

 $

 $

12,990 
14,144 
6,153 
33,287

We anticipate that our research and development expenses will increase in the future, primarily driven by costs associated with the manufacturing
of  our  lead  product  candidate,  lirentelimab,  as  we  continue  to  increase  the  frequency  and  scale  of  our  manufacturing  batches  in  anticipation  of  a
commercial launch if we are able to obtain FDA approval. Additionally, we expect to incur increasing costs associated with the conduct of our ongoing and
future late stage clinical trials.

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,
costs associated with pre-commercialization activities 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,
as  well  as  progress  on  our  preliminary  commercial  development  activities,  including  costs  related  to  personnel,  outside  consultants,  attorneys  and
accountants, among others. Additionally, we expect to incur 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

Interest income primarily consists of interest and investment income earned on our cash, cash equivalents and marketable securities included on the

balance sheets.

84

 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
  
  
 
 
  
  
 
 
Other 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.  Research  and  development  expense  associated  with  the  Company’s  milestone  payments  are  recognized
when  such  milestone  has  been  achieved.  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 incurred $3.4 million of milestone expense for the year ended December 31, 2020 related to development milestones associated with the first
patient dosed in our Phase 3 study with lirentelimab. 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 related to development milestones associated with the first patient dosed in our Phase 2
study with lirentelimab. Milestone payments are not creditable against royalties. As of December 31, 2020, 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  lirentelimab,  which  was  amended  in  September  2016.  Under  the  terms  of  the  agreement,  we  have
made  upfront  and  milestone  payments  of  $0.7  million  through  December  31,  2020  and  we  may  be  required  to  make  aggregate  additional  milestone
payments of up to $3.6 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.

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  lirentelimab  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  $3.4  million  through  December  31,  2020  and  we  may  be  required  to  make
aggregate additional milestone payments of up to $38.0 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

85

 
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
development  and  manufacturing  services  performed  by  our  CDMOs,  as  well  as  research  activities  performed  by  CROs  and  clinical  investigative  sites
activities  on  our  behalf.  As  the  financial  terms  included  within  service  agreements  with  such  vendors  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.

Operating Leases

Effective January 1, 2019, we account for our leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 842, “Leases” (“ASC 842”). As part of this transition, we elected a number of optional practical expedients made available under the
ASC  842  transition  guidance  including  (i)  carrying  forward  the  Company’s  historical  lease  classifications,  (ii)  foregoing  of  re-evaluation  of  historical
contracts using ASC 842’s definition of a lease, (iii) foregoing a re-assessment of initial direct costs related to leases that existed prior to adoption, (iv)
combining lease and non-lease components for all classes of assets, 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.

Under ASC 842, we account for our leases by recording right-of-use assets and lease liabilities on the balance sheets. Right-of-use assets represent
our right to use an underlying asset over the lease term and include any lease payments made prior to the lease commencement date and are reduced by
lease incentives. Lease liabilities represent the present value of our total lease payments over the lease term, calculated using our incremental borrowing
rate. In determining our incremental borrowing rate, we considered the term of the lease and our credit risk. We recognize options to extend a lease when it
is reasonably certain that we will exercise such extension. We do not recognize options to terminate a lease when it is reasonably certain that we will not
exercise such early termination options. We recognize lease expense on a straight-line basis over the expected lease term.

Prior to our adoption of ASC 842, we accounted for our leases in accordance with FASB ASC 840, Leases (“ASC 840”). Under ASC 840, rent
expense  is  recorded  on  a  straight-line  basis  over  the  term  of  the  lease.  Differences  that  exist  between  cash  rent  payments  and  the  recognition  of  rent
expense,  such  as  those  resulting  from  rent  abatements  or  contractual  escalations  of  future  lease  payments,  are  recorded  as  a  deferred  rent  liability  and
recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The current portion of

86

 
the deferred rent liability is included within accrued expenses and other current liabilities on our balance sheets with the remainder reported as operating
lease liabilities, net of current portion. Tenant improvement allowances received are recorded as lease incentive obligations included in accrued expenses
and other current liabilities and operating lease liabilities, net of current portion on our balance sheets and amortized to rent expense over the term of the
lease.

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 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.

87

 
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, 2020, our gross deferred tax assets were $121.4 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 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
Other expense, net
Net loss
Unrealized gain (loss) on marketable securities
Comprehensive loss

Comparison of the Years Ended December 31, 2020 and 2019

Research and Development Expenses

2020

Year Ended December 31,
2019

2018

  $

  $

105,533    $
51,524   
157,057   
(157,057)  
4,313   
(736)  
(153,480)  
(129)  
(153,609)   $

 $

61,858 
29,560 
91,418   
(91,418)  
6,201   
(155)  
(85,372)  
152   
(85,220)   $

33,287 
12,434 
45,721 
(45,721)
2,375 
(192)
(43,538)
(15)
(43,553)

Research  and  development  expenses  were  $105.5  million  for  the  year  ended  December  31,  2020  compared  to  $61.9  million  for  the  year  ended
December  31,  2019,  an  increase  of  $43.6  million.  The  period-over-period  increase  in  research  and  development  expenses  is  primarily  driven  by  an
additional $24.5 million of lirentelimab contract research and development costs. Increases to contract research and development costs were comprised of
$14.7 million of incremental spend with clinical CROs and clinical investigative sites associated with the advancement of our clinical development with
lirentelimab, as well as $9.8 million of incremental spend with CDMOs resulting from manufacturing activities associated with the scale up and increased
production  of  lirentelimab  as  we  progress  closer  to  a  potential  commercial  launch.  Additional  period-over-period  increases  included  $13.6  million  of
consulting  and  personnel-related  costs  primarily  associated  with  increased  hiring  of  R&D  personnel,  $3.4  million  related  to  a  one-time  in-licensing
milestone expenses incurred during the current year associated with the initiation

88

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
   
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
of our Phase 3 study of lirentelimab, and $2.1 million of other unallocated research and development costs primarily related to the conduct of in-house
research.

General and Administrative Expenses

General  and  administrative  expenses  were  $51.5  million  for  the  year  ended  December  31,  2020  compared  to  $29.6  million  for  the  year  ended
December 31, 2019, an increase of $21.9 million. The period-over-period increase in general and administrative expenses was primarily attributable to an
additional  $18.0  million  of  personnel-related  costs,  including  associated  stock-based  compensation  expense.  Other  period-over-period  changes  included
increases to G&A outside spend of $3.0 million related to legal costs, accounting and financial service costs, and costs incurred by our early commercial
development  efforts.  Finally,  we  incurred  incremental  facilities  and  other  administrative  costs  of  $0.9  million  not  otherwise  included  in  research  and
development expenses.

Interest Income

Interest  income  was  $4.3  million  for  the  year  ended  December  31,  2019  compared  to  $6.2  million  for  the  year  ended  December  31,  2018,  a
decrease  of  $1.9  million.  The  year-over-year  decrease  is  directly  attributable  to  lower  interest  rates  on  our  short-term  investments  purchased  during  the
current year.

Other Expense, Net

There were no significant period-over-period changes in other expense, net, for the years ended December 31, 2020 and 2019.

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. We have financed our operations through our July 2018 IPO, August 2019 Offering and
November 2020 Offering.

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.

We closed the November 2020 Offering under our shelf registration statement on Form S-3 (File No. 333-233018) pursuant to which we sold an
aggregate of 3,506,098 shares of our common stock at a public offering price of $82.00 per share.  We received aggregate net proceeds of $271.7 million,
after deducting underwriting discounts and commissions.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of $659.0 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.

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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 provided by (used in) investing activities
Net cash provided by financing activities

Net increase (decrease) in cash, cash equivalents and
   restricted cash

Comparison of the Years Ended December 31, 2020 and 2019

Cash Used in Operating Activities

  $

Year Ended December 31,

2020

2019

   $

(113,924)  
3,897   
278,837   

   $

(63,012)  
(311,971)  
381,163   

2018

(38,450)
(151,047)
138,752 

  $

168,810   

   $

6,180   

   $

(50,745)

Net cash used in operating activities was $113.9 million for the year ended December 31, 2020, which was primarily attributable to our net loss of
$153.5  million  adjusted  for  net  noncash  charges  of  $1.4  million  and  net  changes  in  operating  cash  and  liabilities  of  $38.2  million.  Noncash  charges
included $33.4 million in stock-based compensation expense, $2.4 million in net amortization of premiums and discounts on marketable securities, $1.5
million in depreciation and amortization expense and $0.9 million in amortization of right-of-use asset.

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.

Cash Used in Investing Activities

Net cash provided by investing activities was $3.9 million for the year ended December 31, 2020, which consisted of $546.8 million in proceeds
from maturities of marketable securities, partially offset by $542.3 million for the purchases of marketable securities and $0.6 million for the purchases of
property and equipment.

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.

Cash Provided by Financing Activities

Net cash provided by financing activities was $278.8 million for the year ended December 31, 2020, which consisted primarily of $271.7 million in
net proceeds from the issuance of common stock, $5.7 million in proceeds received from employees for the exercise of stock options and $1.5 million in
proceeds from the issuance of common stock under the 2018 ESPP.

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.

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

90

 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
 
    
    
 
 
    
    
 
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;

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, 2020 (in thousands):

Operating lease obligations (1)
Purchase obligations (2)

Total

Total

89,872 
144,985 
234,857 

 $

 $

  $

  $

Less than
1 Year

Payments Due by Period
1-3
Years

3-5
Years

  More than 5  
Years

2,399 
68,137 
70,536 

 $

 $

16,608 
76,848 
93,456 

 $

 $

17,619 
— 
17,619 

 $

 $

53,246 
— 
53,246

(1)
(2)

Operating lease obligations represent future lease payments due under our two lease agreements.
Purchase obligations represent noncancelable amounts 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  clinical  CROs,  clinical
investigative sites 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.

91

 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  
  
  
  
 
 
 
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 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.

92

 
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

93

Page

94

96

97

98

99

100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2020 and 2019, 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,  2020,  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, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We  also  have  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board  (United  States)  (PCAOB),  the  Company's
internal  control  over  financial  reporting  as  of  December  31,  2020,  based  on  criteria  established  in  Internal  Control-Integrated  Framework  issued  by  the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 2021 expressed an unqualified
opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements  based  on  our  audits.  We  are  a  public  accounting  firm  registered  with  the  PCAOB  and  are  required  to  be  independent  with  respect  to  the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  financial  statements  are  free  of  material  misstatement,  whether  due  to  error  or  fraud.  Our  audits  included  performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The  critical  audit  matter  communicated  below  is  a  matter  arising  from  the  current  period  audit  of  the  financial  statements  that  was  communicated  or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the 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.

94

 
Accrued contract research and development expenses

Description of the Matter During 2020, the Company incurred $105.5 million of research and development expenses and accrued $4.7 million for contract
research  and  development  expenses  as  of  December  31,  2020.  As  described  in  Note  2  to  the  Financial  Statements,  service
agreements  with  third  party  service  providers  including  contract  development  and  manufacturing  organizations  (“CDMOs”),
clinical  contract  research  organizations  (“CROs”),  and  clinical  investigative  sites  comprise  a  significant  component  of  the
Company’s research and development activities. External costs owed to clinical CROs and CDMOs are accrued and expensed
based  upon  estimates  of  the  proportion  of  work  performed  over  the  term  of  the  individual  clinical  trial  and  manufacturing
activities in accordance with signed agreements. Clinical investigative site accruals are recorded based on estimates of services
received and efforts expended. 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 progress or stage of completion of the services measured by internal personnel.

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  and  internal
clinical  and  manufacturing  personnel.  Determining  the  accrued  amounts  is  based  on  an  evaluation  of  the  unique  terms  and
conditions set in each agreement with the CDMOs, CROs, and clinical investigative sites. 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  
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
March 1, 2021

95

 
 
 
 
 
 
 
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

Operating lease liabilities, net of current portion

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, 2020 and 2019; no
   shares issued and outstanding as of December 31, 2020 and 2019
Common stock, $0.001 par value per share; 200,000 shares
   authorized as of December 31, 2020 and 2019; 53,081 and
   48,668 shares issued and outstanding as of December 31, 2020
   and 2019, respectively

Additional paid-in capital
Accumulated other comprehensive gain
Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to financial statements

96

December 31,

2020

2019

 $

207,177 
451,820   
10,270   
669,267   
8,345   
39,731   
2,275   
719,618    $

 $

13,960 
8,490   
22,450   
42,773   
65,223   

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 

—   

— 

53   
997,298   
8   
(342,964)  
654,395   
719,618    $

48 
685,020 
137 
(189,484)
495,721 
516,894

  $

  $

  $

  $

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
  
 
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
Other expense, net
Net loss
Unrealized gain (loss) on marketable securities
Comprehensive loss

Net loss per common share:

Basic and diluted

Weighted-average number of common shares
   outstanding:

Basic and diluted

2020

Year Ended December 31,
2019

2018

  $

  $

  $

105,533    $
51,524   
157,057   
(157,057)  
4,313   
(736)  
(153,480)  
(129)  
(153,609)   $

61,858 
29,560 
91,418 
(91,418)
6,201 
(155)
(85,372)
152 
(85,220)

 $

 $

33,287 
12,434 
45,721 
(45,721)
2,375 
(192)
(43,538)
(15)
(43,553)

(3.10)

 $

(1.89)

 $

(2.20)

49,492 

45,191 

19,833

See accompanying notes to financial statements

97

 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
   
   
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
  
  
  
  
  
 
 
  
 
 
  
  
  
 
 
  
  
 
 
 
 
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)

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

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 $15,813
Issuance of common stock upon vesting of restricted
   stock units
Unrealized loss on marketable securities
Net loss

Balance as of December 31, 2020

Shares

30,971 
— 
(30,971)    

  Amount
  $

142,969 
— 

(142,969)  

— 
— 
— 
— 
— 
— 
— 
— 
— 
— 
— 

— 
— 
— 
— 
— 
— 
— 
— 

— 

— 
— 
— 
— 

  $

  $

  $

— 
— 
— 
— 
— 
— 
— 
— 
— 
— 
— 

— 
— 
— 
— 
— 
— 
— 
— 

— 

— 
— 
— 
— 

Shares

2,114 
— 
30,972 

8,453 
— 
531 
47 
— 
— 
— 
42,117 
— 
1,250 
74 

5,227 
— 
— 
— 
48,668 
— 
700 
70 

3,506 

137 
— 
— 
53,081 

  Amount  
3 
  $
— 
30 

  $

8 
— 
1 
— 
— 
— 
— 
42 
— 
1 
— 

5 
— 
— 
— 
48 
— 
1 
— 

4 

— 
— 
— 
53 

  $

  $

  $

  $

  $

  $

1,803 
50  
142,939 

138,349 
4,570 
344 
— 
24  
— 
— 
288,079 
15,764 
2,447 
1,190 

377,520 
20  
— 
— 
685,020 
33,446 
5,695 
1,454 

271,683 

— 
— 
— 
997,298 

  $

  $

  $

  $

  $

— 
— 
— 

(60,574)   $
— 
— 

— 
— 
— 
— 
— 
(15)    
— 
(15)   $
— 
— 
— 

— 
— 
152 
— 
137 
— 
— 
— 

  $

— 
— 
— 
— 
— 
— 
(43,538)    
(104,112)   $
— 
— 
— 

— 
— 
— 
(85,372)    
(189,484)   $
— 
— 
— 

(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  
33,446  
5,696  
1,454  

271,687  

— 
(129)    
— 
8 

  $

— 
— 

(153,480)    
(342,964)   $

—  
(129)
(153,480)
654,395  

See accompanying notes to financial statements

98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
     
   
   
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
 
   
   
   
   
   
   
 
   
   
   
 
   
   
   
   
   
   
   
   
 
   
  
  
  
  
   
   
   
 
   
  
  
  
  
   
   
   
 
   
  
  
  
  
   
   
   
 
   
  
  
  
  
   
   
   
 
   
  
  
  
  
   
   
   
 
   
  
  
  
  
   
 
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
  
   
  
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
   
   
   
 
   
   
   
   
   
   
 
   
 
 
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
Depreciation and amortization
Noncash lease expense
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
Operating lease liabilities, net of current portion

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 provided by (used in) investing activities

Cash flows from financing activities

Proceeds from issuance of common stock, net of issuance costs
Proceeds from exercise of stock options, net of repurchases
Proceeds from issuance of common stock under 2018 ESPP
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

Noncash investing and financing items:

Right-of-use assets obtained in exchange for lease obligations
Lessor funded lease incentives included in property and equipment
Property and equipment purchased in accounts payable
Vesting of restricted common stock subject to repurchase

2020

Year Ended December 31,
2019

2018

  $

(153,480)   $

(85,372)   $

(43,538)

33,446 
2,358 
1,545 
794 
— 

(7,601)  
— 
7,644 
900 
470 

(113,924)  

(542,273)  
546,800 

(630)  
3,897 

271,687 
5,696 
1,454 
— 
278,837 

168,810 
40,642 
209,452 

  $

34,750 
304 
353 
— 

  $
  $
  $
  $

15,764 
(2,664)  
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 

 $
 $
 $
 $

4,570 
(1,310)
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  

  $

  $
  $
  $
  $

See accompanying notes to financial statements

99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
  
  
 
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 lirentelimab 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, 2020, the
Company incurred a net loss of $153.5 million and used $113.9 million of cash in operations. As of December 31, 2020, the Company had an accumulated
deficit  of  $343.0  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. 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 $659.0 million of cash, cash equivalents and marketable securities at December 31, 2020. 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

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 research and development expense 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

100

 
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

  $

  $

2020

207,177    $
2,275   
209,452    $

December 31,
2019

38,367 
2,275 
40,642 

 $

 $

2018

33,660 
802 
34,462

Restricted  cash  at  December  31,  2020  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  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 other comprehensive gain. 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.

101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
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  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.

Operating Leases

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”).  As  part  of  this  transition,  the  Company  elected  a  number  of  optional  practical  expedients
made available under the ASC 842 transition guidance including (i) carrying forward the Company’s historical lease classifications, (ii) foregoing of re-
evaluation of historical contracts using ASC 842’s definition of a lease, (iii) foregoing a re-assessment of initial direct costs related to leases that existed
prior to adoption, (iv) combining lease and non-lease components for all classes of assets, 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.

Under ASC 842, the Company accounts for its leases by recording right-of-use assets and lease liabilities on the balance sheets. 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  are  reduced  by  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 recognizes options to extend a lease when it is reasonably certain that it will exercise such extension. The Company
does  not  recognize  options  to  terminate  a  lease  when  it  is  reasonably  certain  that  it  will  not  exercise  such  early  termination  options.  Lease  expense  is
recognized on a straight-line basis over the expected lease term.

Prior  to  the  Company’s  adoption  of  ASC  842,  the  Company  accounted  for  its  leases  in  accordance  with  FASB  ASC  840,  Leases  (“ASC  840”).
Under ASC 840, rent expense is recorded on a straight-line basis over the term of the lease. Differences that exist between cash rent payments and the
recognition of rent expense, such as those resulting from rent abatements or contractual escalations of future lease payments, are recorded as a deferred rent
liability and recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The current portion of the deferred rent liability
is included within accrued expenses and other current liabilities on the Company’s balance sheets with remainder included within operating lease liabilities,
net of current portion. Tenant improvement allowances received are recorded as lease incentive obligations included in accrued expenses and other

102

 
current liabilities and operating lease liabilities, net of current portion on the Company’s balance sheets and amortized to rent expense over the term of the
lease.

Accrued Research and Development Expense

Service  agreements  with  contract  development  and  manufacturing  organizations  (“CDMOs”),  clinical  contract  research  organizations  (“CROs”)
and clinical investigative sites comprise a significant component of the Company’s research and development activities. External costs for these vendors
are recognized as the services are incurred. The Company accrues for expenses resulting from obligations under agreements with its third-parties for which
the  timing  of  payments  does  not  match  the  periods  over  which  the  materials  or  services  are  provided  to  the  Company.  Accruals  are  recorded  based  on
estimates of services received and efforts expended pursuant to agreements established with CDMOs, clinical CROs, clinical investigative sites and other
outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through
analysis with internal personnel and external service providers as to the progress or stage of completion of the services.

The Company makes judgements and estimates in determining the accrual balance in each reporting period. In the event advance payments are
made to a CDMO, clinical CRO, clinical investigative site or other outside service provider, the payments are recorded within prepaid expenses and other
current  assets  and  subsequently  recognized  as  research  and  development  expense  when  the  associated  services  have  been  performed.  As  actual  costs
become known, the Company adjusts its liabilities and assets. Inputs, such as the extent of services received and the duration of services to be performed,
may  vary  from  the  Company’s  estimates,  which  will  result  in  adjustments  to  research  and  development  expense  in  future  periods.  Changes  in  these
estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. The Company’s historical
estimates have not been materially different from actual amounts recorded.

Research and Development Expense

Research  and  development  costs  are  expensed  as  incurred.  Research  and  development  costs  include,  among  others,  consulting  costs,  salaries,
benefits, travel, stock-based compensation, laboratory supplies and other non-capital equipment utilized for in-house research, allocation of facilities and
overhead  costs  and  external  costs  paid  to  third-parties  that  conduct  research  and  development  activities  on  the  Company’s  behalf.  Amounts  incurred  in
connection with license agreements, including milestone payments, are also included in research and development expense.

Advance payments for goods or services to be rendered in the future for use in research and development activities are deferred and included in

prepaid expenses and other current assets. The deferred amounts are expensed as the related goods are delivered or the services are performed.

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

103

 
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.

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, 2020, 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.

104

 
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

2020

Year Ended December 31,
2019

2018

 $

(153,480)   $

(85,372)

 $

(43,538)

 $

49,492   

(3.10)   $

45,191 
(1.89)

 $

19,833 
(2.20)

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):

Options to purchase common stock
Unvested restricted stock units
Unvested restricted common stock
Shares issuable under employee stock purchase plans

Total

Foreign Currency Transactions

2020

Year Ended December 31,
2019

2018

6,616   
1,161   
—   
14   
7,791   

7,148   
542   
—   
31   
7,721   

7,811 
— 
47 
29 
7,887

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  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. ASU
2019-12 also created an exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or
a  gain  from  other  items  (for  example,  other  comprehensive  income).  Under  the  historical  guidance,  in  this  situation,  an  entity  would  have  recorded  an
income tax provision for unrealized gains on available-for-sale securities reported in other comprehensive income, with an offsetting income tax benefit
recorded in continuing operations. Per ASU 2019-12, under the new guidance, an entity would record no income tax provision in the interim period. The
amendments  in  ASU  2019-12  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.

105

 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
    
   
   
 
    
 
  
    
 
  
  
  
  
 
  
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company elected to early adopt ASU 2019-12
effective January 1, 2020 on a prospective basis. As a result of this election, no benefit from income tax was recorded in continuing operations and no tax
provision was recorded in other comprehensive income for the year ended December 31, 2020 related to the Company’s loss from continuing operations
and unrealized gain on available-for-sale securities during the same period. Further, the Company’s adoption had no impact to its effective tax rate.

On January 1, 2020, the Company adopted ASU 2016-13: Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The guidance modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The
amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss”
model  with  an  “expected  loss”  model.  As  a  result  of  adoption,  the  Company  presents  these  financial  assets,  which  includes  its  available-for-sale  debt
securities, at the net amount it expects to collect. The amendment also requires that the Company records credit losses related to its available-for-sale debt
securities as an allowance through net income rather than reducing the carrying amount under the historical, other-than-temporary-impairment model. The
Company’s adoption of ASU 2016-13 did not materially affect the Financial Statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

The Company has reviewed other recently issued accounting pronouncements and concluded they are either not applicable to the business or that

no material effect is expected on the Financial Statements as a result of future adoption.

Impact of Recent Legislation

In  March  2020,  the  Coronavirus  Aid,  Relief  and  Economic  Security  Act  (“the  CARES  Act”)  was  signed  into  law.  The  CARES  Act  includes
provisions relating to several aspects of corporate income taxes. The Company does not currently expect the CARES Act to have a material impact on its
income tax positions; however, it will continue to monitor the provisions of the CARES Act in relation to its operations.

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

Short-term marketable securities

U.S. treasuries

Total short-term marketable securities

Total cash equivalents and short-term
   marketable securities

Level 1

Level 2

Level 3

Total

December 31, 2020

  $

205,408    $
205,408 

451,820 
451,820 

—    $
— 

— 
— 

—    $
— 

— 
— 

205,408 
205,408 

451,820 
451,820 

  $

657,228    $

—    $

—    $

657,228

106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
   
   
   
   
   
 
 
 
  
  
  
 
 
  
  
  
  
  
  
  
 
 
  
  
  
 
 
  
  
  
 
Cash equivalents

Money market funds

Total cash equivalents

Short-term marketable securities

U.S. treasuries

Total short-term marketable securities

Total cash equivalents and short-term
   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

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, 2020 and 2019.

4. Marketable Securities

All marketable securities were considered available-for-sale at December 31, 2020 and 2019. 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

Unrealized
Gains

Unrealized
Losses

Fair
Value

December 31, 2020

  $
  $

451,812    $
451,812    $

26    $
26    $

(18)   $
(18)   $

451,820 
451,820

Amortized
Cost Basis

Unrealized
Gains

Unrealized
Losses

Fair
Value

December 31, 2019

  $
  $

457,397    $
457,397    $

161    $
161    $

(24)   $
(24)   $

457,534 
457,534

The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. As of December
31, 2020 and 2019, the aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months was $91.4 million
and $187.4 million, respectively. All of these securities had remaining maturities of less than one year. The Company has the intent and 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 a credit loss at December 31, 2020 and 2019.

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, 2020, 2019 and 2018, and as a result, there were no material reclassifications out of accumulated other comprehensive gain (loss) for the same periods.

107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
    
 
    
 
  
 
 
  
  
  
 
 
  
  
  
  
  
  
  
 
 
  
  
  
 
 
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
    
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
    
 
    
 
  
 
 
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
Construction-in-progress

Less accumulated depreciation
Property and equipment, net

December 31,

2020

2019

  $

  $

4,236    $
1,784 
4,581 
1,325 
11,926 
(3,581)
8,345    $

4,170 
1,695 
4,581 
— 
10,446 
(2,036)
8,410

Depreciation and amortization expense for the years ended December 31, 2020, 2019 and 2018 was $1.5 million, $1.5 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
Current portion of operating lease liabilities
Other current liabilities

Total

6. Commitments and Contingencies

Operating Leases

December 31,

2020

2019

  $

  $

 $

4,697 
3,214   
492   
87   

8,490 

 $

4,990 
1,608 
410 
90 
7,098

The Company’s lease obligations primarily relate to leased office and laboratory space under noncancelable operating leases. 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 below,
none of its other contracts contain a lease.

2018 Redwood City Lease

In January 2018, the Company entered into an operating lease agreement for approximately 25,000 square feet of office and laboratory space in
Redwood  City,  California  (the  “2018  Redwood  City  Lease”).  The  contractual  term  of  the  2018  Redwood  City  Lease  is  10.75  years  beginning  from  the
substantial  completion  and  delivery  of  the  premises,  which  occurred  in  November  2018,  and  terminating  in  July  2029.  The  2018  Redwood  City  Lease
provides rent abatements and includes a one-time option to extend the lease term for five years. This option to extend the lease term was not determined to
be reasonably certain and therefore has not been included in the Company’s calculation of the associated operating lease liability under ASC 842.

The  2018  Redwood  City  Lease  includes  monthly  base  rent  amounts  escalating  over  the  term  of  the  lease.  In  addition,  the  lessor  provided  for  a
tenant  improvement  allowance  ("TIA")  up  to  $1.4  million,  which  was  fully  utilized.  The  TIA  was  recorded  as  leasehold  improvements,  with  offsetting
adjustments recorded to the associated operating lease right of use asset included on the balance sheets as of December 31, 2020 and 2019.

The Company utilized its incremental borrowing rate to calculate the present value of the lease payments for the 2018 Redwood City Lease based

on information available on January 1, 2019, the adoption date of ASC 842.

108

 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
  
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 San Carlos Lease

In  December  2019,  the  Company  entered  into  an  additional  operating  lease  agreement  for  approximately  98,000  square  feet  of  office  and
laboratory space in San Carlos, California (the “2019 San Carlos Lease”). The contractual term of the 2019 San Carlos Lease is 10.25 years beginning from
the substantial completion and delivery of the premises, which is expected to occur in July 2021 and terminate in September 2031. The 2019 San Carlos
Lease  provides  rent  abatements  and  includes  a  one-time  option  to  extend  the  lease  term  for  five  years.  This  option  to  extend  the  lease  term  was  not
determined to be reasonably certain and therefore has not been included in the Company’s calculation of the associated operating lease liability under ASC
842.

The 2019 San Carlos Lease includes monthly base rent amounts escalating over the term of the lease. In addition, the lessor provided for a TIA up
to $14.7 million, which is expected to be fully utilized. Costs incurred during the year ended December 31, 2020 were recorded to construction-in-progress,
with an offsetting adjustment recorded to the associated operating lease right of use asset included on the balance sheet as of December 31, 2020. The 2019
San Carlos Lease was not reflected on the balance sheet as of December 31, 2019 as the Company had not yet obtained control over the premises.

The Company utilized its incremental borrowing rate to calculate the present value of the lease payments for the 2019 San Carlos Lease based on
information available on November 1, 2020, the lease commencement date for accounting purposes, which was the date the Company was deemed to have
obtained  control  of  the  premises.  Calculation  of  the  operating  lease  liability  also  included  estimated  future  TIA  reimbursements  that  had  not  yet  been
received  as  of  the  lease  commencement  date.  TIA  reimbursements  received  subsequent  to  lease  commencement  date  are  recorded  as  reductions  to  the
operating lease liability.

Classification of Operating Leases

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.

Classification  of  the  Company’s  operating  lease  liabilities  included  in  the  Company’s  balance  sheets  at  December  31,  2020  and  2019  was  as

follows (in thousands):

Operating lease liabilities

Current portion included in accrued expenses and
   other current liabilities
Operating lease liabilities, net of current portion

Total operating lease liabilities

December 31,

2020

2019

  $

  $

492    $

42,773   
43,265    $

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 costs
Variable costs

Total lease costs

Year ended December 31,

2020

2019

$

$

2,087 
364 
2,451 

 $

 $

1,118 
346 
1,464

Variable costs included in the table above represent amounts the Company pays related to property taxes, insurance, maintenance and repair costs.

Lease expense was $2.1 million, $1.1 million and $1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

109

 
 
 
 
 
 
 
 
 
 
 
 
    
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  
 
 
 
Net  cash  paid  for  the  amounts  included  in  the  measurement  of  the  Company’s  operating  lease  liabilities  and  presented  within  cash  used  in

operating activities in the statements of cash flows was $1.0 million and $0.4 million for the years ended December 31, 2020 and 2019, respectively.

Operating Lease Obligations

Future  lease  payments  required  under  operating  leases  included  on  the  Company’s  balance  sheet  at  December  31,  2020  are  as  follows  (in

thousands):

Fiscal Year Ending December 31,
2021
2022
2023
2024
2025
Thereafter

Total future lease payments

Less:

Present value adjustment
Present value of future lease incentives

Operating lease liabilities

  $

  $

2,399 
8,181 
8,427 
8,679 
8,940 
53,246 
89,872 

32,384 
14,223 
43,265

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, 2020, the weighted-average remaining lease term of the Company’s leases was 10.3 years and the weighted-average discount rate used to
determine the operating lease liabilities included on the balance sheet was 8.8%.

As  of  December  31,  2020,  the  Company  has  not  been  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,  2020,  the  Company  had  $145.0  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. Research and development expense associated with the Company’s milestone payments are recognized when such milestone has
been  achieved.  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.

110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
The Company recognized $3.4 million of milestone expense for the year ended December 31, 2020 related to development milestones associated
with the first patient dosed in the Company’s Phase 3 study with lirentelimab. No milestone expense was incurred for the year ended December 31, 2019.
The Company recognized $0.3 million in milestone expense for the year ended December 31, 2018 related to development milestones associated with the
first patient dosed in the Company’s Phase 2 study with lirentelimab. Milestone payments are not creditable against royalties. As of December 31, 2020, the
Company has not incurred any royalty liabilities related to its license agreements, as product sales have not yet commenced.

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 lirentelimab, which was amended in September 30, 2016. Under the
terms of the agreement, the Company has made upfront and milestone payments of $0.7 million through December 31, 2020 and may be required to make
aggregate additional milestone payments of up to $3.6 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  lirentelimab  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  $3.4  million  through
December 31, 2020 and may be required to make aggregate additional milestone payments of up to $38.0 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, 2020.

Legal Contingencies

On  March  10,  2020,  a  putative  securities  class  action  complaint  captioned  Kim  v.  Allakos  et  al.,  No.  20-cv-01720  (N.D.  Cal.)  was  filed  in  the
United States District Court for the Northern District of California against the Company, its Chief Executive Officer, Dr. Robert Alexander, and its former
Chief Financial Officer, Mr. Leo Redmond. The complaint asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated  thereunder  and  seeks  damages  based  on  alleged  material  misrepresentations  and  omissions  concerning  its  Phase  2  clinical
trials  of  lirentelimab.  The  proposed  class  period  is  August  5,  2019,  through  December  17,  2019,  inclusive.  On  August  28,  2020,  the  plaintiff  filed  an
amended complaint, adding as defendants Dr. Adam Tomasi, the Company’s President, Chief Operating Officer and Chief Financial Officer, and Dr. Henrik
Rasmussen,  the  Company’s  Chief  Medical  Officer.  Given  the  early  stage  of  this  litigation  matter,  the  Company  cannot  reasonably  estimate  a  potential
future loss or a range of potential future losses and has not recorded a contingent liability accrual as of December 31, 2020.

111

 
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 53,080,538 shares of common stock issued and outstanding at December 31, 2020. 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,

2020

2019

6,616   
5,271   
1,161   
1,265 
14,313   

7,148 
3,762 
542 
848 
12,300

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, 2020, no dividends on common stock had been declared by the Board of Directors.

Preferred Stock

There were no shares of preferred stock issued and outstanding at December 31, 2020.

8. Stock-Based Compensation

Total stock-based compensation expense recognized is as follows (in thousands):

Research and development
General and administrative

Total

2020

Year Ended December 31,
2019

2018

  $

  $

11,583 
21,863 
33,446 

 $

 $

5,351 
10,413 
15,764 

 $

 $

1,792 
2,778 
4,570

No income tax benefits for stock-based compensation expense have been recognized for the years ended December 31, 2020, 2019 and 2018 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

112

 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
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, 2020, the maximum number of shares that may be added to the 2018 Plan pursuant to the preceding clause is 4,668,032 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.

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, 2019

Granted
Exercised
Forfeited

Balance at December 31, 2020

Options exercisable

Options vested and expected to vest

Options
Outstanding

Weighted-
Average
Exercise
Price

7,148    $
195    $
(700)   $
(27)   $
6,616    $

4,746    $

6,604    $

12.96   
83.64   
8.15   
19.08   
15.53   

9.03   

15.48   

Weighted-
Average
Remaining
Years
8.0

Aggregate
Intrinsic
Value

  $

589,114 

7.1

6.8

7.1

    $

  $

  $

823,532 

621,539 

822,365

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)

2020

Year Ended December 31,
2019

2018

0.50%  
70.78%  
— 
5.95 

1.91%  
67.22%  
— 
6.01 

2.79%
73.47%
— 
6.01

The weighted-average fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $51.59, $28.66 and $11.05 per

share, respectively.

The aggregate fair value of stock options that vested during the years ended December 31, 2020, 2019 and 2018 was $18.0 million, $12.6 million

and $1.8 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, 2020, 2019 and 2018 was $62.2 million, $55.8 million and $ 2.0 million, respectively.

During the years ended December 31, 2020, 2019 and 2018, the Company did not grant any stock options with performance-based or market-based

vesting conditions.

As of December 31, 2020, total unrecognized stock-based compensation expense relating to unvested stock options was $33.9 million. This amount

is expected to be recognized over a weighted-average period of 2.4 years.

113

 
 
 
   
 
 
 
 
 
 
     
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
 
  
 
 
   
   
 
  
 
 
   
   
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
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.

There were no unvested shares of restricted common stock at December 31, 2020 and 2019. The fair value of restricted common stock that vested

during the years ended December 31, 2020, 2019 and 2018 was $0, $20,000 and $24,000, respectively.

Restricted Stock Units

RSU activity under the 2018 Plan is summarized as follows (in thousands, except per share data):

Balance at December 31, 2019

Granted
Vested
Forfeited

Balance at December 31, 2020

Number
of Shares

Weighted-
Average
Grant Date
Fair Value

542    $
762    $
(137)   $
(6)   $
1,161    $

93.67 
106.56 
93.32 
81.85 
102.24

The  weighted-average  fair  value  of  RSUs  granted  during  the  year  ended  December  31,  2020,  2019  and  2018  was  $106.56,  $93.67,and  $0,

respectively.

As of December 31, 2020, total unrecognized stock-based compensation expense relating to unvested RSUs was $113.6 million and the weighted-

average remaining vesting period was 3.6 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, 2020. As of December 31, 2020, the aggregate intrinsic value of
RSUs was $162.5 million.

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.

During the year ended December 31, 2020, 2019 and 2018, stock-based compensation related to the 2018 ESPP was $0.9 million, $0.7 million and

$0.2 million, respectively.

114

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,

2020

2019

2018

0.58%  
61.80%  
— 
1.20 

2.37%  
64.26%  
— 
1.22 

2.42%
65.29%
— 
1.24

As of December 31, 2020, total unrecognized compensation expense relating to shares to be purchased under the 2018 ESPP was $1.1 million over

a weighted-average period of 1.4 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, 2020 and 2019 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,

2020

2019

  $

87,124    $
18,139   
1,368   
5,661   
9,151   

121,443 
(112,680)  
8,763   

360 
8,403 
8,763 

  $

—    $

47,003 
8,644 
1,199 
2,870 
1,798 
61,514 
(59,901)
1,613 

395 
1,218 
1,613 
—

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
$112.7  million  and  $59.9  million  has  been  established  at  December  31,  2020  and  2019,  respectively.  The  change  in  the  valuation  allowance  was  $52.8
million and $31.0 million for the years ended December 31, 2020 and 2019, respectively. The Company has incurred net operating losses (“NOL”) since
inception. As of December 31, 2020, the Company had federal and state NOL carryforwards of $399.9 million and $48.1 million, respectively. Federal
NOL  carryforwards  of  $338.0  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, 2020, the Company had federal and California research and other tax credit carryforwards of
$20.3 million and $5.6 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

115

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
    
 
  
 
 
  
 
 
  
 
 
  
 
 
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, 2020 and 2019 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,

2020

2019

21.0%  
(34.4)%  
0.8%  
5.6%  
6.9%  
0.1%  
—%  

21.0%
(36.4)%
1.1%
4.4%
9.9%
—%
—%

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,

2020

2019

  $

  $

3,545    $
3,387 
6,932    $

1,827 
1,718 
3,545

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, 2020 and 2019, the Company did not recognize accrued interest 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  multiple  state  tax  jurisdictions.  The  federal  and  state  income  tax  returns  from

inception to December 31, 2020 remain subject to examination.

During  the  third  quarter  of  2020,  the  U.S.  Internal  Revenue  Service  (“IRS”)  commenced  an  examination  of  the  Company’s  federal  corporate
income tax return for the year ended December 31, 2018. The Company believes that it has adequately provided for any adjustments that may result from
the  IRS  examination,  however,  the  outcome  of  tax  examinations  cannot  be  predicted  with  certainty.  The  examination  was  not  yet  completed  as  of
December 31, 2020.

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, 2020 and 2019. 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.

116

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
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 January 2018, the Company established 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, 2020, 2019 and 2018, the Company made contributions
to the 401(k) plan of $0.7 million, $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, 2020 and 2019 (in thousands, except per share

data):

Loss from operations
Net loss
Net loss per common share, basic and diluted

Loss from operations
Net loss
Net loss per common share, basic and diluted

Quarter Ended

March 31,
2020

June 30,
2020

September 30,
2020

December 31,
2020

(29,873)   $
(27,824)   $
(0.57)   $

(40,404)   $
(39,292)   $
(0.80)   $

(42,435)   $
(42,086)   $
(0.86)   $

(44,345)
(44,278)
(0.86)

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)

  $
  $
  $

  $
  $
  $

117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our President, Chief Operating Officer and 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
President,  Chief  Operating  Officer  and  Chief  Financial  Officer  concluded  that  the  design  and  operation  of  our  disclosure  controls  and  procedures  were
effective at the reasonable assurance level as of December 31, 2020.

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 controls
over financial reporting were effective as of December 31, 2020.

The  effectiveness  of  our  internal  control  over  financial  reporting  as  of  December  31,  2020  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  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 of the year ended December 31, 2020 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,  2020,  based  on  criteria  established  in  Internal  Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, Allakos Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO
criteria.

We  also  have  audited,  in  accordance  with  the  standards  of  the  Public  Company  Accounting  Oversight  Board  (United  States)  (“PCAOB”),  the  balance
sheets of the Company as of December 31, 2020 and 2019, 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, 2020, and the related notes and our
report dated February 26, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management's 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.

119

 
/s/ Ernst & Young LLP

Redwood City, California
March 1, 2021

120

 
 
Item 9B. Other Information.

None.

121

 
PART III

Item 10. Directors, Executive Officers and Corporate Governance.

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, 2020.

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.

122

 
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

4.1

4.2

10.1+

10.2+

10.3+

10.4+

10.5+

10.6+

10.7+

10.8+

10.9+

  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

4.1

  7/24/2018  

  6/22/2018  

  Amended and Restated Investors’ Rights
Agreement among the Registrant and certain of
its stockholders, dated November 30, 2017.

  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/A   333-225836  

4.2

  7/09/2018  

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

  Separation Agreement 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  

8-K  

10.1

  12/11/2020  

10.10+

  Executive Incentive Compensation Plan.

S-1

  333-225836   10.9+   6/22/2018  

10.11+

  Outside Director Compensation Policy.

  S-1/A   333-225836   10.10+   7/09/2018  

10.12+

  Amended and Restated Outside Director
Compensation Policy.

  10-Q  

  10.2+   5/11/2020  

10.13+

  Change in Control and Severance Policy.

  S-1/A   333-225836   10.11+   7/09/2018  

123

 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14

10.15

10.16#

10.17#

10.18#

10.19#

23.1

31.1

31.2

32.1*

32.2*

  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.

  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.

  Commercial Supply Agreement between the
Registrant and Lonza Sales AG, dated April 7,
2020.

  Commercial Supply Agreement between the
Registrant and Lonza Sales AG, dated December
18, 2020.

  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

document does not appear in the Interactive Data
File because its XBRL tags are embedded within
the Inline XBRL document.

101.SCH   Inline XBRL Taxonomy Extension Schema

Document

101.CAL   Inline XBRL Taxonomy Extension Calculation

Linkbase Document

101.DEF   Inline XBRL Taxonomy Extension Definition

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124

S-1

  333-225836   10.12   6/22/2018  

  10-K  

  10.13   2/25/2020  

  S-1/A   333-225836   10.14#   7/17/2018  

  S-1/A   333-225836   10.15#   7/17/2018  

  10-Q  

  10.1#   5/11/2020  

  X

  X

  X

  X

  X

  X

  X

  X

  X

 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB   Inline XBRL Taxonomy Extension Label

Linkbase Document

101.PRE   Inline XBRL Taxonomy Extension Presentation

Linkbase Document

104

  Cover Page Interactive Data File (formatted in
Inline XBRL)

  X

  X

  X

*
+
#

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.

Item 16. Form 10-K Summary

None.

125

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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: March 1, 2021

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/ Adam Tomasi
Adam Tomasi, Ph.D.

/s/ Daniel Janney
Daniel Janney

/s/ Robert Andreatta
Robert Andreatta

/s/ Natalie Holles
Natalie Holles

/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)

President, Chief Operating Officer and Chief
Financial Officer
  (Principal Financial and Accounting Officer)

  Chair of the Board

  Director

  Director

  Director

  Director

  Director

126

Date

March 1, 2021

March 1, 2021

March 1, 2021

March 1, 2021

March 1, 2021

March 1, 2021

March 1, 2021

March 1, 2021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
***Certain identified information has been omitted from this exhibit because it is both not material and would be competitively
harmful if publicly disclosed.***

Exhibit 10.19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
[Redacted] Commercial Supply Agreement

(the “Agreement”)

by and between

Lonza AG
Münchensteinerstrasse 38
CH-4002 Basel
Switzerland

and

Allakos, Inc.
975 Island Drive, Suite 201
Redwood City, CA 94065
USA

Effective as of 27 November 2020 (the “Effective Date”)

- hereinafter “Lonza” -

- hereinafter “Customer” -

 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents

1

2

3

4

5

6

7

8

9

Definitions and Interpretations

Performance of Services

Project Management

Quality

Insurance

Forecasting, Ordering and Cancellation

Delivery and Acceptance

Price and Payment

Intellectual Property

10 Warranties

11

12

13

14

15

16

Indemnification and Liability

Confidentiality

Term and Termination

Force Majeure

Notices

Miscellaneous

Appendix A – Batch Pricing

Appendix B - Approved Third Parties

Appendix C – Cell Bank Storage Pricing

Appendix D – Additional Capacity Commitments

Page

1

8

11

12

13

13

16

18

19

22

24

26

28

30

30

31

 
 
  
 
 
 
 
 
 
 
 
Recitals

WHEREAS,  Customer  is  engaged  in  the  development,  research  and  sale  of  certain  products  and  requires  assistance  in  the
manufacture of Product;

WHEREAS, Lonza and its Affiliates have expertise in the manufacture of products;

WHEREAS,  Lonza  and  Customer  previously  entered  into  that  certain  BLA  Services  and  Manufacturing  Services  Agreement
dated 1st December 2017 (the “BLA Agreement”) and the 2K Development Agreement (as defined below) to provide services
related to Customer’s AK002 Product;

WHEREAS,  Customer  wishes  to  engage  Lonza  for  Services  relating  to  the  manufacture  of  the  Product  as  described  in  this
Agreement; and

WHEREAS,  Lonza,  and/or  its  Affiliate,  is  prepared  to  perform  such  Services  for  Customer  on  the  terms  and  subject  to  the
conditions set out herein.

NOW, THEREFORE, in consideration of the mutual promises contained herein, and for other good and valuable consideration,
the Parties intending to be legally bound, agree as follows:

1

1.1

Definitions and Interpretations

Definitions.

“1K Commercial Supply Agreement”

“[Redacted] Development Agreement”

“Affiliate”

“Agreement”

“Alternate Manufacturer”

“Applicable Laws”

means  the  1K  Commercial  Supply  Agreement  dated  [Redacted]
between Customer and Lonza Sales AG, Lonza’s Affiliate.

means,  collectively,  [Redacted]  Development  and  Manufacturing
Services  Agreement  entered  into  between  Lonza  and  Customer
[Redacted] and any successor agreement thereof.

means any company, partnership and/or other entity which directly
and/or indirectly Controls, is Controlled by and/or is under common
Control with the relevant Party.  “Control” means the ownership of
more than fifty percent (50%) of the issued share capital and/or the
legal  power  to  direct  and/or  cause  the  direction  of  the  general
management and policies of the relevant Party.

means  this  agreement  incorporating  all  Appendices,  as  amended
from time to time by written agreement of the Parties.

means (i) Customer and each of its Affiliates or (ii) any Third Party
that, [Redacted]

means  all  relevant  United  States,  United  Kingdom  and  European
Union federal, state and local laws, statutes, rules, and regulations
which are applicable to a Party’s activities hereunder,

1

 
 
 
“Approval”

“Approved Territory”

“Average Target Yield”

“Background Intellectual Property”

“Batch”

“Batch Price”

“Binding Order”

“BLA”

“BLA Agreement”

“Campaign”

the  applicable  regulations  and  guidelines  of  any
including 
Governmental  Authority  and  in  respect  of  the  manufacture  of
cGMP  Batches  all  applicable  cGMP  together  with  amendments
thereto.

means a marketing approval granted by a Regulatory Authority of
Product.

means [Redacted].

means  the  expected  and  targeted  Yield  for  the  Process  at  the
Facility [Redacted].

means any Intellectual Property either: (i) owned and/or controlled
by a Party prior to the Effective Date; and/or (ii) developed and/or
acquired  by  a  Party  independently  from  the  performance  of  the
Services hereunder, and, in the case of Lonza, without use and/or
reliance  on  Customer  Materials  and/or  Customer  Information,
  Lonza’s  Background
this  Agreement. 
during 
Intellectual  Property  includes  the  Lonza  Patent  Rights  and  Lonza
Information.

the  Term  of 

means  the  total  Product  obtained  from  one  fermentation  and
associated purification using the Process [Redacted].

means  the  Price  which  is  payable  in  respect  of  Services  with
respect  to  a  Batch,  which  includes  preparation,  manufacture,
quality  control,  analysis  and  release  and  storage,  excluding  only
the  Raw  Materials,  Raw  Materials  Fee,  Cell  Bank  Storage  fees
and additional storage fees pursuant to Clause 7.3.

means  the  binding  commitment  of  both  Parties  in  relation  to  the
Batches  and/or  Services  made  in  accordance  with  Clause  6.1
and/or 6.2.

means  a  Biologics  License  Application  and  amendments  thereto
for  the  Product  filed  pursuant  to  the  requirements  of  the  FDA,  as
defined  in  21  C.F.R.  §  600  et  seq.,  for  FDA  approval  of  the
Product, and any corresponding non-U.S. marketing authorization
application,  registration  and/or  certification,  necessary  to  market
the Product in any country outside the United States.

has the meaning set forth in the Recitals.

means a series of cGMP Batches at the Facility.

2

 
 
“Cancellation Fee”

“Cell Bank”

“Cell Bank Storage”

“Cell Line”

“Certificate of Analysis”

“Certificate of Compliance”

“cGMP”

“cGMP Batches”

“Commencement Date”

“Confidential Information”

has the meaning given in Clause 6.4.

means  Customer’s  cell  bank  and/or  cell  stock  of  a  rodent  or
human cell line in accordance with the Master Batch Record.

means  the  storage  of  Customer’s  Cell  Bank  in  accordance  with
Clause 2.8.

means the cell line known as [Redacted].

means  a  document  prepared  by  Lonza  listing  tests  performed  by
Lonza  and/or  approved  External  Laboratories  pertaining  to  the
cGMP  Batch  meeting  the  Specifications  and  associated  test
results.

means  a  document  prepared  by  Lonza: 
the
manufacturing  date,  unique  Batch  number  and  concentration  of
Product  in  such  Batch;  and  (ii)  certifying  that  such  Batch  was
manufactured  in  accordance  with  the  Master  Batch  Record  and
cGMP, if applicable.

listing 

(i) 

means those laws and regulations applicable in the United States,
United Kingdom and European Union, relating to the manufacture
of  medicinal  products  for  human  use,  including  current  good
manufacturing  practices  as  specified  in  the  ICH  guidelines,
including  ICH  Q7A  “ICH  Good  Manufacturing  Practice  Guide  for
Active  Pharmaceutical  Ingredients”,  ICH  Q10  “Pharmaceuticals
Quality  System”,  US  Federal  Food  Drug  and  Cosmetic  Act  at
21CFR (Chapters 210, 211, 600 and 610) and the Guide to Good
Manufacturing  Practices  for  Medicinal  Products  as  promulgated
under  European  Directive  91/356/EEC.    For  the  avoidance  of
doubt, Lonza’s operational quality standards are defined in internal
cGMP policy documents.

means  any  Batches  which  are  required  under  the  applicable
Binding Order to be manufactured in accordance with cGMP.

means the date of removal of the vial of cells from frozen storage
for the production of a cGMP Batch.

means  Customer  Information  and  Lonza  Information,  as  the
context requires.

“Customer Indemnitees”

has the meaning given in Clause 11.1.

3

 
 
“Customer Information”

“Customer Materials”

“Disclosing Party”

“Dispute”

“Effective Date”

“EMA”

“External Laboratories”

“Facility”

“Failed Batch”

“FDA”

“Force Majeure”

“Forecast”

“Governmental Authority”

“GS”

means  all  technical  and  other  information  that  is  proprietary  to
Customer and/or any Affiliate of Customer and that is maintained
in  confidence  by  Customer  and/or  any  Affiliate  of  Customer  and
that is, from time to time supplied to Lonza including any materials
supplied  by  Customer  to  Lonza  in  accordance  with  the  Master
Batch Record.

means any components of Product, and/or other materials of any
nature provided by Customer.

has the meaning given in Clause 12.1.

has the meaning given in Clause 16.6.

has the meaning set forth in the Recitals.

means the European Medicines Agency, or any successor agency
thereto.

means  any  Third  Party  instructed  by  Lonza  to  undertake  any
Services which Lonza is not able to undertake itself as it does not
form part of its business offering, Customer having been notified of
the  same  as  part  of  the  Services  proposal  and  having  provided
prior written consent to such Third Party and its designation as an
External Laboratory.

means Lonza’s manufacturing facilities in Visp, Switzerland and/or
such other Lonza facility as may be agreed upon by the Parties in
writing.

means  any  cGMP  Batch 
the
that 
Specifications  and/or  is  not  manufactured  in  accordance  with
cGMP and/or the Quality Agreement.

to  conform  with 

fails 

means  the  United  States  Food  and  Drug  Administration,  or  any
successor agency thereto.

has the meaning given in Clause 14.2.

has the meaning given in Clause 6.1.

means  any  Regulatory  Authority  and  any  national,  multi-national,
regional, state and/or local regulatory agency, department, bureau,
and/or  other  governmental  entity  in  the  United  States,  United
Kingdom and/or European Union.

means  the  glutamine  synthetase  expression  system  of  which
Lonza is the proprietor.

4

 
 
“GS Licence”

“ICC”

“Improvements”

“Indemnitor”

“Initial Storage Term”

“Intellectual Property”

means the licence granted by Lonza (and BioWa Inc.) in respect of
the  use  of  GS  and  Potelligent  CHOK1SV  under  that  certain  Non-
Exclusive  License  Agreement  between  Lonza,  Customer  and
BioWa Inc., dated 31st October 2013.

has the meaning given in Clause 16.6.

has the meaning given in Clause 9.7.2.

has the meaning given in Clause 11.3.

has the meaning given in Clause 2.8.1.

means:  (i)  inventions  (whether  or  not  patentable),  patents,  trade
secrets, copyrights, trademarks, trade names and domain names,
rights  in  designs,  rights  in  computer  software,  database  rights,
rights  in  confidential  information  (including  know-how)  and  any
other  intellectual  property  rights,  in  each  case  whether  registered
or unregistered; (ii) all applications (and/or rights to apply) for, and
renewals  and/or  extensions  of,  any  of  the  rights  described  in  the
foregoing  clause  (i);  and  (iii)  all  rights  and  applications  that  are
similar and/or equivalent to the rights and applications described in
the  foregoing  clauses  (i)  and  (ii),  which  exist  now,  and/or  which
come to exist in the future, in any part of the world.

“Joint Steering Committee”

has the meaning given in Clause 3.3.

“Latent Defects”

“Lonza Indemnitees”

“Lonza Information”

“Lonza Know-How”

“Lonza Operating Documents”

has the meaning given in Clause 7.4.1.

has the meaning given in Clause 11.2.

means  all  information  that  is  proprietary  to  Lonza  and/or  any
Affiliate  of  Lonza  and  that  is  maintained  in  confidence  by  Lonza
and/or any Affiliate of Lonza and that is disclosed by Lonza and/or
any Affiliate of Lonza to Customer under and/or in connection with
this Agreement, including any and all Lonza Know-How and trade
secrets.

means  all  technical  and  other  information  relating  directly  or
indirectly  to  the  Process  and/or  the  performance  of  the  Services
known  to  Lonza  and/or  its  Affiliates  from  time  to  time  other  than
Customer Information and information in the public domain.

means  the  corporate  standards,  standard  operating  procedures
and standard manufacturing procedures, in each case, used

5

 
 
“Lonza Patent Rights”

by Lonza for operation and maintenance of the Facility and Lonza
equipment  used  in  the  Process,  which  may  include  electronic
programs  and  files,  protocols,  validation  documentation,  and
supporting documentation, but excluding any of the foregoing that
are unique or specific to the Products.

means  all  patents  and  patent  applications  of  any  kind  throughout
the  world  relating  to  the  Process  which  from  time  to  time  Lonza
and/or  any  Affiliate  of  Lonza  is  the  owner  of  and/or  is  entitled  to
use.

“Lonza Responsibility”

has the meaning given in Clause 7.4.4.

“Manufacturing Regulatory Delay”

“Master Batch Record”

in 

means  any  delay 
in
Customer’s  need  for,  the  Product  as  a  consequence  of  a
Regulatory  Authority  finding,  ruling  and/or  failure  of  Approval
[Redacted].

the  manufacture  of,  and/or  delay 

means  the  document  which  defines  the  manufacturing  methods,
test  methods  and  other  procedures,  directions  and  controls
associated with the manufacture and testing of cGMP Batches.

“New Customer Intellectual Property”

has the meaning given in Clause 9.2.

Property”

“Party”

“Price”

“Process”

“Product”

“Project Plan”

“Quality Agreement”

“New General Application Intellectual

has the meaning given in Clause 9.3.

means each of Lonza and Customer and, together, the “Parties”.

means the price for the Products as specified in Clause 8.1 or for
other Services as set forth in an agreed upon SOW.

its  Affiliates’  platform  process 

the
means  Lonza’s  and 
development  and  production  of  the  Product  from  the  Cell  Line,
including  any  improvements  and/or  modifications  thereto  that  are
owned  and/or  controlled  by  Lonza  and/or  any  Affiliate  of  Lonza
from time to time.

for 

means the proprietary molecule identified by Customer as AK002,
to  be  manufactured  using  the  Process  as  specified  in  the
Specifications and the Master Batch Record.

means  the  Project  Plan  as  attached  to  and  defined  in  the  2K
Development Agreement.

means  the  quality  agreement  entered  into  between  the  Parties
[Redacted] setting out the

6

 
 
“Raw Materials”

“Raw Materials Fee”

“Receiving Party”

“Regulatory Authority”

“Release”

“Resins”

“Rules”

“Separate Agreements”

“Services”

“SOW”

“Specifications”

“Storage Requirements”

“Subcontractor”

responsibilities  of  the  Parties  in  relation  to  quality  as  required  for
compliance with cGMP.

means  all  ingredients,  solvents  and  other  components  of  the
Product required to perform the Process and/or Services set forth
in  the  bill  of  materials  detailing  the  same  (including  Resins  and
membranes but excluding any consumables and/or wearables).

means  the  procurement  and  handling  fee  [Redacted]  of  the
acquisition cost of Raw Materials (including Resins) by Lonza that
is  charged  to  Customer  in  addition  to  the  cost  of  such  Raw
Materials.

has the meaning given in Clause 12.1.

means the FDA, EMA and any other similar regulatory authorities
as may be agreed upon in writing by the Parties.

has the meaning given in Clause 7.1.

means  the  chromatographic  media  to  refine  and/or  purify  the
Products,  as  specified  in  the  Master  Batch  Record  and/or
Specifications.

has the meaning given in Clause 16.6.

means,  collectively, 
the  BLA  Agreement,  2K  Development
Agreement,  20K  Development  Agreement,  and  1K  Commercial
Supply Agreement.

means  all  or  any  part  of  the  services  to  be  performed  by  Lonza
under  this  Agreement  (including  the  manufacture  of  Product  and
as set forth in any SOW).

has the meaning given in Clause 6.2.

means  the  specifications  of  the  Product  agreed  between  the
Parties  which  may  be  amended  from  time  to  time  in  accordance
with this Agreement.

means  the  Cell  Bank  storage  requirements  as  set  out  in  the
Master Batch Record.

means any Third Party that Lonza uses to perform any part of the
Service, 
including  as  a  subcontractor  and/or  delegate,  but
excluding External Laboratories.

7

 
 
“Supply Failure

has the meaning given in Clause 7.5.2.

“Technology Transfer Notice”

has the meaning given in Clause 9.8.2.

“Term”

“Third Party”

“Willful Breach”

“Yield”

1.2

2

2.1

2.2

has the meaning given in Clause 13.1.

means any party other than Customer, Lonza and their respective
Affiliates.

means  a  willful  refusal  to  perform  a  Party’s  obligations  under  this
Agreement, including, without limitation, if Lonza elects to provide
any batch slot reserved or scheduled for Customer in the Binding
Portion of any Forecast to another customer of Lonza.

means  the  amount,  in  kilograms,  of  Product  actually  produced
from a Batch.

Interpretation.  In this Agreement references to the Parties are to the Parties to this Agreement, headings are used for
convenience  only  and  do  not  affect  its  interpretation,  references  to  a  statutory  provision  include  references  to  the
statutory provision as modified or re-enacted or both from time to time and to any subordinate legislation made under
the statutory provision, references to the singular include the plural and vice versa, references to the word “including”
are to be construed without limitation, and neither Party and/or its Affiliates shall be deemed to be acting “on behalf of”
and/or “under the authority of” the other Party.

Performance of Services

Performance.  Customer hereby retains Lonza to manufacture and supply the Product and perform other Services as
set forth in and in accordance with the terms and conditions of this Agreement.  Subject to Clause 2, Lonza shall itself
and  through  its  Affiliates,  diligently  carry  out  the  Services  and  use  commercially  reasonable  efforts  to  perform  all
Services  without  any  material  defect  and  according  to  the  Binding  Orders,  the  Specifications,  the  Master  Batch
Record  and/or  the  applicable  SOW.    Lonza  shall  ensure  that  all  of  the  Services  hereunder  are  performed  at  the
Facility  and/or  at  a  Subcontractor’s  facility  which  has  been  approved  and  audited  by  Lonza,  as  applicable,  unless
Customer has provided its prior written consent to performance thereof at an alternate location.

Personnel  and  Subcontractors.    Lonza  shall  retain  appropriately  qualified  and  trained  personnel  with  the  requisite
knowledge  and  experience  to  perform  the  Services  in  accordance  with  this  Agreement.    Lonza  may  subcontract
and/or  delegate  any  of  its  rights  and/or  obligations  under  this  Agreement  to  perform  the  Services  solely  with
Customer’s prior written approval (such approval not to be unreasonably withheld and/or delayed), provided that such
Subcontractors  are  appropriately  and  fully  qualified  in  all  respects  to  perform  the  applicable  Services,  that  such
Subcontractors are subject to obligations of confidentiality at least as stringent and as protective of Customer as those
obligations of confidence and non-use imposed upon Lonza, and that such Subcontractors are subject to obligations
to  act  diligently  and  in  accordance  with  best  practice  in  respect  of  cGMP  manufacture  as  contained  in  this
Agreement.  [Redacted].

8

 
 
2.3

2.4

2.5

2.6

2.7

cGMP Batches.  Lonza shall manufacture cGMP Batches to meet the Specification; [Redacted] Lonza will not make
any  changes  to  the  Master  Batch  Record,  Specifications,  Process,  Raw  Materials  or  any  other  item  related  to  the
Product(s) or their manufacture without [Redacted] obtaining Customer’s prior written approval.

Supply of Customer Information and Customer Materials.  Customer shall supply to Lonza all Customer Information
and Customer Materials and other information and/or materials that may be reasonably required by Lonza to perform
the Services, in each case as identified in the Master Batch Record, and hereby grants Lonza the non-exclusive right
to use the Cell Line, the Customer Materials and the Customer Information for the purpose of this Agreement.  Lonza
shall not be responsible for any delays arising out of Customer’s failure to provide Lonza such Customer Information,
Customer Materials or other information or materials as set forth in the Master Batch Record, and Customer shall be
responsible  for  all  additional  costs  and  expenses  arising  out  of  such  delay;  provided  that  Lonza  shall  promptly  give
Customer notice if any such failure is preventing and/or delaying Lonza’s performance.  Lonza shall not use the Cell
Line,  Customer  Materials  and/or  Customer  Information  (and/or  any  part  thereof)  for  any  purpose  other  than  the
performance of the Services under this Agreement.

Raw  Materials.    Lonza  shall  procure  all  required  Raw  Materials  as  well  as  consumables.    Customer  shall  be
responsible for payment for all consumables and Raw Materials ordered or irrevocably committed to be procured by
Lonza hereunder for the manufacture of Batches pursuant to Binding Orders.  If agreed by the Parties, upon advance
payment by Customer, Lonza shall purchase and hold a minimum of [Redacted] to serve as safety stock, as well as
[Redacted].    Upon  cancellation  of  any  Batch  pursuant  to  a  Binding  Order  or  termination  of  the  Agreement,  all  such
unused Raw Materials shall be [Redacted].

Use of GS Technology.    Customer  acknowledges  that  the  Cell  Line  uses  GS  and  that  the  GS  Licence  applies  to  in
vivo clinical studies and/or any other commercial use and/or sale of the Product manufactured using the Cell Line.

Known Hazards. Lonza acknowledges that it has received from Customer the Customer Information, together with full
details of any hazards relating to the Cell Line and the Customer Materials, their storage and use.  All property rights
and  Intellectual  Property  rights  in  the  Cell  Line  and/or  the  Customer  Materials  and/or  the  Customer  Information
supplied to Lonza shall remain vested in Customer.

2.8

Cell Bank Storage.

2.8.1

2.8.2

Cell Bank Storage has commenced pursuant to the 2K Development Agreement, and shall continue, unless
otherwise  terminated  in  accordance  with  Clause  2.8.6,  for  [Redacted]  (the  “Initial  Storage  Term”).    Lonza
shall store the Cell Bank in accordance with the Storage Requirements and Lonza shall not transfer the Cell
Bank  to  a  Third  Party  (other  than  an  Affiliate  of  Lonza)  without  Customer’s  prior  written  consent.    Lonza
reserves  the  right  to  perform  testing  of  the  Cell  Bank  which  Lonza  requires  for  QA,  regulatory  or  safety
purposes.

Cell Banks stored at Lonza shall at all times remain Customer’s property (subject always to the terms of any
other agreements or licenses of Customer with Lonza, and subject to any Third-Party Intellectual Property
rights), save that the Cell Bank shall be subject to a lien in respect of any sums owed under any agreement
by Customer to Lonza.

9

 
 
 
 
2.8.3

2.8.4

2.8.5

2.8.6

If  Customer  wishes  to  withdraw  the  Cell  Bank  from  storage,  it  shall  give  Lonza  [Redacted].  prior  written
notice.  Lonza  and  Customer  shall  agree  a  date  for  the  Cell  Bank  to  be  withdrawn.  Customer  shall  be
responsible for arranging (and costs of) collection and shipping. Once the Cell Bank has been withdrawn,
Lonza shall have no further obligations  in  respect  thereof  (provided  that  the  foregoing  shall  not  affect  any
remedies for breach of an obligation prior to such withdrawal by Customer).

Notwithstanding  any  other  provisions  of  this  Agreement,  the  price  of  Cell  Bank  Storage  is  calculated  and
shall  be  payable  on  a  [Redacted]  basis.  Payment  shall  be  made  [Redacted]  prior  to  the  anniversary  of
storage  commencement  during  the  Term.  Customer  shall  not  be  entitled  to  any  refund  in  respect  of  any
partial use of Cell Bank Storage, unless this Agreement is terminated by Customer other than pursuant to
Clause 13.2.1, in which case Lonza shall refund to Customer the unused portion of the fees paid in relation
to  the  period  after  the  effective  date  of  termination.    The  initial  price  for  Cell  Bank  Storage  is  set  out  in
Appendix C hereto and shall be subject to review in accordance with Clause 8.6. If Customer does not pay
for Cell Bank Storage by the due date, Lonza shall not be obliged to continue the Cell Bank Storage and
Customer shall be required within [Redacted] of Lonza’s written notice to arrange collection and shipping of
the Cell Bank, unless Customer cures such payment default within such [Redacted] period, in which case
the Cell Bank Storage shall continue.  For clarity, Cell Banks stored by Lonza at the Facility may be used for
activities under this Agreement, and the 2K Development Agreement, and only one fee is applicable to such
stored Cell Banks.

Lonza shall use reasonable endeavours to protect the Cell Bank from destruction, theft and/or loss during
Cell Bank Storage. Notwithstanding any other provision of this Agreement, risk of loss or damage to the Cell
Bank shall remain with Customer at all times, except that Lonza shall be responsible for loss and/or damage
of  the  Cell  Bank  arising  from  Lonza’s  and/or  its  Affiliate’s  and/or  Subcontractor’s  negligence  and/or
intentional  misconduct.  Notwithstanding  Clause  11.5,  the  total  aggregate  liability  of  Lonza  and/or  its
Affiliates for all claims (whether in contract, tort, negligence, breach of statutory duty, under an indemnity, for
any  strict  liability  and/or  otherwise)  in  connection  with  and/or  arising  out  of  Cell  Bank  Storage  shall  not
exceed  [Redacted]  under  the  all  of  the  Separate  Agreements  and  hereunder.    For  clarity,  the  foregoing
limitation  of  liability  shall  not  apply  with  respect  to  any  unauthorized  transfer  of  the  Cell  Line  to  a  Third
Party.  

Customer may terminate the Cell Bank Storage by [Redacted] written notice to Lonza.  Customer shall not
be entitled to any refunds in respect of any unused element of Cell Bank Storage except to the extent Cell
Bank Storage is terminated by Lonza.  Upon termination of this Agreement and/or Cell Bank Storage and
upon payment of all undisputed sums due to Lonza, Customer shall either arrange for collection of the Cell
Bank  or  instruct  Lonza  to  destroy  it,  in  which  case  Customer  shall  pay  Lonza  the  costs  of  such
destruction.    Lonza  may  terminate  the  Cell  Bank  Storage  solely  upon  termination  of  this  Agreement  by
Lonza or as set forth in Clause 2.8.4.  In the event of termination by Lonza, except when such termination
by Lonza is due to non-payment of undisputed invoices by Customer, [Redacted].

10

 
 
 
 
 
 
3

3.1

3.2

3.3

Project Management

2K Development Agreement and Project Plan.   The  Parties  acknowledge  that  certain  activities  and  tasks  are  being
undertaken  under  the  Project  Plan  (as  amended  in  accordance  with  the  2K  Development  Agreement)  and  the  2K
Development  Agreement  on  and  after  the  Effective  Date.   The  manufacture  of  Batches  under  the  2K  Development
Agreement shall be governed solely by the 2K Development Agreement and not this Agreement.  Certain activities are
also being performed under the other Separate Agreements.

Project Management.  Lonza has appointed a project team responsible for overseeing the Project Plan, and a project
manager  as  the  principal  point  of  contact  with  Customer  pursuant  to  the  2K  Development  Agreement,  and  such
project  team  and  project  manager  shall  continue  to  oversee  the  Services  and  other  activities  pursuant  to  this
Agreement.    The  project  team  shall  have  regular  teleconferences  with  Customer  to  discuss  the  progress  of  the
Services,  the  expectation  of  the  Parties  being  that  these  will  usually  take  place  on  a  weekly  basis  or  as  otherwise
agreed by the Parties.  Lonza may change its project team and project manager from time to time upon written notice
to Customer.  In the event that any dispute cannot be resolved by the project team, such dispute shall be escalated to
the  Joint  Steering  Committee.    Lonza’s  project  team  shall  coordinate  closely  with  the  project  teams  under  the
Separate Agreements.

Joint  Steering  Committee.    The  Parties  have  appointed  a  joint  steering  committee  (“Joint  Steering  Committee”)
pursuant to the 2K Development Agreement.  Such Joint Steering Committee shall continue to perform its applicable
functions in relation to this Agreement.  The Joint Steering Committee shall meet once per calendar quarter, or at such
other  frequency  as  may  be  necessary  and  is  mutually  agreed  by  the  Parties.    Decisions  of  the  Joint  Steering
Committee  shall  be  made  by  consensus,  with  each  Party  having  one  (1)  vote.    In  the  event  that  a  Joint  Steering
Committee  cannot  reach  consensus  with  respect  to  a  particular  matter  within  its  authority,  such  dispute  shall  be
escalated to a senior executive of each of Customer and Lonza who shall confer in good faith on the resolution of the
issue.  Any final decision mutually agreed to by the senior executives shall be reduced to writing and signed by the
Parties  and  shall  then  be  conclusive  and  binding  on  the  Parties.    The  Joint  Steering  Committee  shall  coordinate
closely with the joint steering committees under the Separate Agreements.

The  function  of  the  Joint  Steering  Committee  is  to  ensure  the  ongoing  communication  between  the  Parties  and
discuss  any  issues  arising  under  this  Agreement.    In  addition  to  the  function  described  above,  the  Joint  Steering
Committee shall also take on the following responsibilities:

3.3.1

discuss and seek resolution of issues around management of the Services;

3.3.2

monitor timelines and milestones for the Services;

3.3.3

discuss and recommend any changes to the Services (although such changes will not take effect until they
have been approved in writing by the Parties in accordance with Clause 16.2); and

3.3.4

discuss and seek resolution for any dispute regarding the terms of this Agreement.

11

 
 
 
 
 
 
4

4.1

Quality

Quality  Agreement.    Responsibility  for  quality  assurance  and  quality  control  of  Product  shall  be  allocated  between
Customer and Lonza as set forth in the Quality Agreement.  If there is a conflict between the terms and conditions of
this Agreement and the Quality Agreement, the terms and conditions of this Agreement shall prevail.  Performance by
Lonza  of  all  of  its  obligations  under  the  Quality  Agreement  will  be  considered  covered  by  the  Batch  Price  and  no
additional  consideration  is  payable  by  Customer  unless  otherwise  agreed  between  the  Parties.    For  clarity,  the
foregoing  does  not  require  Lonza  to  provide  regulatory  support  other  than  as  set  forth  in  this  Agreement  and  the
Quality Agreement.

4.2

Inspections and Audits.  Provisions regarding inspections by Governmental Authorities and audits are set out in the
Quality Agreement, and include the following:

4.2.1

4.2.2

4.2.3

4.2.4

4.2.5

Customer  and  its  designated  representatives  shall  have  the  right  to  witness,  inspect  and  audit  the
performance  of  Lonza’s  obligations,  at  the  times,  number  of  occasions  and  for  durations  set  forth  in  the
Quality Agreement and as otherwise agreed by the Parties;

Customer shall have reasonable access to the facilities, data and records of Lonza which are related to this
Agreement  for  the  purpose  of  conducting  such  inspections  and  audits,  and  Lonza  shall  use  reasonable
endeavours  to  ensure  that  all  External  Laboratories  provide  similar  access  to  the  External  Laboratories’
facilities, data and records which are related to this Agreement for such purposes;

Customer will have the sole right to correspond with and submit regulatory applications and other filings to
any  Governmental  Authorities  to  obtain  approvals  to  import,  export,  conduct  clinical  trials  with,  and/or  sell
the  Product,  alone  and/or  in  combination  with  other  products  when  and  as  Customer  may  deem  useful
and/or  necessary.    Accordingly,  except  as  otherwise  required  by  Applicable  Laws  and  Governmental
Authorities’ requirements, Lonza will not correspond directly with any Governmental Authority with respect
to  the  Product  without,  in  each  instance,  first  obtaining  Customer’s  prior  written  consent  (not  to  be
unreasonably withheld);

Lonza  will  permit  any  Governmental  Authorities  to  conduct  inspections  of  Lonza’s  Facilities  as  the
Governmental  Authorities  may  request,  and  will  cooperate  with  the  Regulatory  Authorities  with  respect  to
the inspections and any related matters, in each case related to the Product;

Lonza  shall  notify  Customer  promptly  if  any  Governmental  Authority  schedules  an  inspection  or,  without
scheduling, begins an inspection at a Facility, in each case, with respect to, and/or that would be reasonably
likely to affect, the Product, and allow Customer to be on site during such inspection; and

4.2.6

Customer  shall  have  the  right  to  review  the  specifications,  grades  and  vendors  of  all  Raw  Materials  and
components used under this Agreement to manufacture the Product at the Facility.

4.3

Regulatory  Support  and  Cooperation.    Lonza  shall,  at  the  Price  as  set  forth  in  the  2K  Development  Agreement,
provide  Customer  with  regulatory  support  and  cooperation  related  to  the  Product,  the  Process  and  seeking  and
maintaining Approvals as reasonably requested by Customer from time to time.

12

 
 
 
 
 
 
 
 
4.4

Recalls.  If Customer recalls any Product (voluntarily and/or by order of a Regulatory Authority) and/or is required to
respond to inquiries of Governmental Authorities relating to the Products, Lonza shall provide reasonable assistance
to Customer in connection with the same.  Customer shall pay Lonza for such assistance, unless such recall and/or
inquiry  is  due  to  Lonza’s  fault  and/or  Lonza  is  otherwise  required  to  indemnify  Customer  in  relation  to  such  recall
and/or inquiry pursuant to Clause 11.1.

5

Insurance

Each Party shall, during the Term and for [Redacted] after delivery of the last Product manufactured and/or Services
provided under this Agreement, obtain and maintain at its own cost and expense from a qualified insurance company,
comprehensive general liability insurance including contractual liability coverage and product liability coverage in the
amount of at [Redacted].  Each Party shall provide the respective other Party with a certificate of such insurance upon
reasonable request.

6

6.1

Forecasting, Ordering and Cancellation

Forecasting.    Beginning  on  the  Effective  Date,  and  thereafter  [Redacted],  Customer  will  provide  Lonza  a  rolling
[Redacted]  forecast  of  the  quantity  of  Batches  it  desires  Lonza  to  supply  (a  “Forecast”),  with  the  first  [Redacted]  of
each  such  Forecast  binding  on  each  Party  (such  amounts  forecasted  in  the  first  [Redacted]  of  the  Forecast,  the
“Binding Portion” of a Forecast).  Any Batches which are forecast in the Forecast which are in excess of the Binding
Portion shall not be binding but shall be subject to Lonza’s available capacity and only become binding once accepted
by Lonza.  [Redacted].

6.1.1

Following receipt of a Forecast, Lonza shall notify Customer whether it has capacity available at the Facility
at  the  requested  time  for  the  Batches  set  out  in  the  Forecast  and  the  Parties  shall  promptly  discuss  any
modifications to the Forecast that may be necessary to enable Lonza to accommodate Customer’s request
for such Forecasted Batches, provided however that:

(a)

(b)

any  Batches  set  forth  in  the  Project  Plan  pursuant  to  the  2K  Development  Agreement  or
otherwise  set  forth  in  a  Separate  Agreement  shall  be  manufactured  in  accordance  with  the
schedule set forth in the applicable Separate Agreement; and

If Lonza does not have sufficient capacity to supply quantities of Product to Customer’s Forecasts
Lonza  will  be  obligated  to  provide  notice  thereof  to  Customer  [Redacted]  after  receiving  such
Forecast.  

6.1.2

6.1.3

Once the Parties have agreed on a Forecast, Lonza shall provide Customer with written confirmation of its
acceptance of such agreed-upon Forecast.  The Binding Portion of each Forecast shall become a binding
commitment on both Parties upon acceptance of such Forecast, subject to Lonza’s right to reschedule and
Customer’s right to delay or cancel such Batches described in Clauses 6.3 and 6.4.

Customer will order Batches pursuant to written purchase orders.  Lonza must accept Customer’s purchase
orders for quantities of Batches that are consistent with the terms of this Agreement and that do not exceed
the Binding Portion of agreed upon Forecasts and will use commercially reasonable efforts to accept orders
exceeding such quantities.

6.1.4

[Redacted].

13

 
 
 
 
 
 
 
 
6.2

Additional  Services.    To  the  extent  that  Customer  wishes  during  the  Term  of  this  Agreement  to  instruct  Lonza  to
undertake development and/or other services in relation to the Process and/or the manufacture of Product other than
as expressly set forth in this Agreement, any Binding Order and/or any Separate Agreement, the Parties shall, acting
in good faith and with due expedition, enter into a written amendment or statement of work to this Agreement (each, a
“SOW”)  on  terms  to  be  agreed  between  the  Parties,  documenting  the  additional  services  required,  the  price  to  be
charged  for  such  services  and  any  consequential  revisions  to  the  timescales  for  delivery  of  such services. No  such
SOW will be binding unless and until it is executed by both Parties.  Any changes and/or amendments to each SOW
must also be executed by both Parties.

6.3

Rescheduling.

6.3.1

Lonza shall have the right to:

(a)

(b)

reschedule  the  Commencement  Date  of  any  Batch  or  date  of  commencement  for  any  Services
upon [Redacted] prior written notice to Customer, provided that the rescheduled Commencement
Date  for  such  Batch  or  date  of  commencement  for  such  Services  is  [Redacted]  from  the
Commencement  Date  or  the  original  estimated  Commencement  Date  in  accordance  with  the
applicable Binding Order; and

reschedule  the  Commencement  Date  of  any  Batch  or  date  of  commencement  for  any  Services
upon reasonable prior written notice to Customer, provided that the rescheduled Commencement
Date  or  date  of  commencement  is  [Redacted]  from  the  Commencement  Date  or  date  of
commencement originally estimated in the Project Plan.

If  Lonza  so  reschedules  any  Batch,  Lonza’s  obligation  to  provide  storage  for  such  Batch  without  charge
pursuant to Clause 7.3 shall extend to the later of: (i) [Redacted] after the actual Release of such Batch; or
(ii)  [Redacted]  after  the  date  such  Batch  would  have  been  Released  if  the  Commencement  Date  had  not
been so rescheduled.

6.3.2

If  Customer  requests  to  change  the  Commencement  Date  of  any  Batch,  Lonza  will  make  all  reasonable
attempts to accommodate the request; provided, however, in the event that this change would impact other
projects  scheduled  for  occupancy  in  the  designated  suite  or  suites  and/or  Lonza  is  not  able  to  secure  a
project for the manufacturing space, and for the same dates and duration that would have been occupied by
Customer,  Lonza  shall  provide  Customer  notice  thereof  and  the  proposed  revised  schedule,  and,  to  the
extent  Customer  confirms  in  writing  its  request  to  make  such  change  after  receiving  such  notice,  the
manufacture of Customer’s Batch and/or performance of such Services for Customer may be delayed as set
forth  in  the  revised  schedule  in  Lonza’s  notice.    Any  such  delay  requested  by  Customer  of  more  than
[Redacted] shall be considered a cancellation pursuant to Clause 6.4.

6.4

Cancellation of a Binding Order.  Customer may cancel all or any part of a Binding Order upon written notice to Lonza,
subject to the payment of a cancellation fee as calculated below (the “Cancellation Fee”):

14

 
 
 
 
 
 
6.4.1

6.4.2

6.4.3

In  the  event  that  Customer  provides  written  notice  of  cancellation  to  Lonza  [Redacted]  prior  to  the
Commencement Date of one (1) or more Batch(es), then [Redacted] of the Batch Price of each such Batch
cancelled is payable;

In  the  event  that  Customer  provides  written  notice  of  cancellation  to  Lonza  [Redacted]  prior  to  the
Commencement  Date  of  one  (1)  or  more  Batch,  then  [Redacted]  of  the  Batch  Price  of  each  such  Batch
cancelled is payable; and

In  the  event  that  Customer  provides  written  notice  of  cancellation  to  Lonza  [Redacted]  prior  to  the
Commencement  Date  of  one  (1)  or  more  Batch,  then  [Redacted]  of  the  Batch  Price  of  each  such  Batch
cancelled is payable.  

For  the  avoidance  of  doubt:  (a)  any  Batches  scheduled  to  commence  [Redacted],  after  the  date  of  a  notice  of
Cancellation shall not incur any Cancellation Fee; (b) no cancellation of a Batch pursuant to any amendments to the
Project  Plan  which  the  Parties  may  agree  in  accordance  with  the  2K  Development  Agreement  shall  constitute  a
cancellation and no Cancellation Fee set out in this Clause 2.8 shall apply; (c) no cancellation of a Batch by Customer
as a result of a [Redacted] shall incur any Cancellation Fee; provided that [Redacted].

Payment of a Cancellation Fee. The Cancellation Fee shall be payable [Redacted] of date of an invoice (to the extent
not disputed pursuant to Clause 6.7) which shall be issued by Lonza following receipt by Lonza of Customer’s written
notice of cancellation associated with the cancelled Batch or Services but no earlier than when such amounts would
have been invoiced for such Batch pursuant to Clause 8.3 absent such cancellation.  The Cancellation Fee shall be
reduced by any payments that Customer has already made for the cancelled Batches and/or Services.  In addition to
the  Cancellation  Fee,  Customer  shall  pay  for  all  pass-through  costs  associated  with  the  cancelled  Batch  and/or
Services, including the costs of Raw Materials that Lonza has irrevocably incurred in accordance with a Binding Order
and  the  Raw  Materials  Fee  for  such  Raw  Materials,  in  each  case,  that  Customer  would  have  otherwise  been
responsible for paying and/or reimbursing pursuant to this Agreement if such Batch had been manufactured without
cancellation.

Replacement Project.  Notwithstanding the foregoing, Lonza will use commercially reasonable efforts to secure a new
project  (but  excluding  any  project  for  which,  at  the  time  of  cancellation,  there  is  a  binding  obligation  on  Lonza  to
conduct  or  reserve  capacity)  for  manufacturing  space  and  for  the  same  dates  and  duration  that  would  have  been
occupied  by  Customer;  and  then  in  such  case  the  Cancellation  Fee  for  each  Batch  cancelled  that  is  replaced  by  a
batch of the new project shall be reduced by [Redacted] of the fees associated with such replacement batch.  Lonza
shall use commercially reasonable efforts to identify and secure a new project(s) (but excluding any project for which,
at  the  time  of  cancellation  or  delay,  there  is  a  binding  obligation  on  Lonza  to  conduct  or  reserve  capacity)  to  utilize
resources reserved for cancelled or delayed Services and to the extent such resources were utilized the Cancellation
Fee,  as  applicable,  for  cancelled  and/or  delayed  Services  shall  be  reduced  by  an  amount  [Redacted]  of  the  fees
associated with such alternative utilization of resources.

Disputes.  If Lonza invoices Customer for a Cancellation Fee in accordance with Clause 6.5 and Customer disputes
such  invoice,  the  matter  shall  be  referred  to  the  Joint  Steering  Committee  for  attempted  resolution  with  each  Party
cooperating  to  resolve  such  dispute  and  if  the  Joint  Steering  Committee  does  not  resolve  such  dispute,  upon
Customer’s request, Lonza shall permit an independent Third Party reasonably agreed upon by the Parties to inspect
the books and records of Lonza to verify whether such Cancellation Fee was due, and if so, the amount thereof.

15

6.5

6.6

6.7

 
 
 
 
 
7

7.1

7.2

7.3

Delivery and Acceptance

Delivery.  All Product shall be delivered [Redacted] (as defined by Incoterms® 2010) the Facility (the “Release”).  With
respect  to  any  Customer  Materials,  title  and  risk  of  loss  shall  remain  with  Customer  and  shall  not  transfer  to
Lonza.  Customer shall bear the risk of loss of any Customer Materials provided to Lonza, except Lonza shall bear the
risk  of  loss  through  the  negligence,  neglect  and/or  intentional  misconduct  of  Lonza  and/or  its  Affiliate  and/or
Subcontractor of any Customer Material.  With respect to Product, title and risk of loss shall transfer to Customer upon
Release in accordance with this provision.

Certificates  of  Analysis  and  Compliance.  Lonza  shall  deliver  to  Customer  the  Certificate  of  Analysis,  Certificate  of
Compliance  and  such  other  documentation  as  is  reasonably  required  and/or  requested  by  Customer  to  meet  all
applicable regulatory requirements of the Governmental Authorities not later than the date of Release of such cGMP
Batches; provided that Lonza may, upon notice to Customer, supply certain trade secret information, such as Lonza’s
media and feed formulation, directly to the relevant Governmental Authority instead of supplying it to Customer.

Storage.  Customer shall arrange for shipment and take delivery of Product from the Facility, at Customer’s expense,
within [Redacted] after Release or pay applicable storage costs.  Lonza shall provide storage for Product at no charge
for up to [Redacted]; provided that any additional storage beyond [Redacted] will be subject to storage being made
available at Lonza’s sole discretion and, if so available, will be charged to Customer at Lonza’s then-standard rates
and will be subject to a separate agreement.  In addition to Clause 8.2, Customer shall be responsible for all value
added  tax  (VAT)  and  any  other  applicable  taxes,  levies,  import,  duties  and  fees  of  whatever  nature  imposed  as  a
result of any storage (other than taxes on Lonza’s income, employees and/or property).

7.4

Acceptance/Rejection of Batches.

7.4.1

7.4.2

Promptly following Release of a Batch, Customer shall inspect such Batch and shall have the right to test
such Batch to determine if it is a Failed Batch.  Customer shall notify Lonza in writing of any rejection of a
Batch  based  on  any  claim  that  it  is  a  Failed  Batch  within  [Redacted]  after  Release,  after  which  time  all
unrejected  Batch(es)  shall  be  deemed  accepted.    Notwithstanding  the  foregoing,  if  Customer  and/or  its
designee  first  discovers  that  any  Batch  is  a  Failed  Batch  and  such  failure  would  not  have  been  readily
discoverable from a reasonable testing or review of the Products (collectively, “Latent Defects”), Customer
shall  have  the  continuing  right  to  reject  the  Batch,  provided  it  notifies  Lonza  of  the  Latent  Defect  within
[Redacted] after the discovery of the Latent Defect provided that such Latent Defect is discovered within the
normal shelf-life of the Batch.

For  any  Batch  rejected  by  Customer,  Lonza  shall  promptly,  but  in  any  event  within  thirty  (30)  days  after
notice of rejection is received by Lonza, conduct and complete an initial root cause analysis to determine, or
establish  a  plan  for  determining,  the  causes  of  the  failure  or  non-conformity  of  the  Batch.    If,  pursuant  to
such initial analysis, Lonza reasonably determines a longer period of time is needed to complete the full root
cause  analysis,  Lonza  shall  complete  such  full  analysis  within  a  mutually  agreed  timeframe.    Upon
completion  of  such  full  analysis,  Lonza  shall  provide  Customer  with  a  report  detailing  the  root  causes  of
such  failure  or  non-conformity  of  such  Batch  and  Lonza’s  action  plan  to  remediate  all  issues  identified  in
such report.  Lonza shall give all members

16

 
 
 
 
7.4.3

7.4.4

7.4.5

of the Joint Steering Committee at least monthly reports on Lonza’s execution of any such open action plan.

In  the  event  that  Lonza  believes  that  a  Batch  has  been  incorrectly  rejected  for  failure  to  conform  with  the
Specifications, [Redacted].  Lonza may, at its expense, retain and test the samples of such Batch.  In the
event of a discrepancy between Customer’s and Lonza’s test results such that Lonza’s test results show no
failure or non-conformity to Specifications, or there exists a dispute between the Parties over the extent to
which such failure and/or non-conformity to Specifications is attributable to a given Party, the Parties shall
cause an independent laboratory promptly to review records, test data and perform comparative tests and
analyses  on  samples  of  the  Product  that  allegedly  fails  to  conform  to  Specifications.    Such  independent
laboratory shall be mutually agreed upon by the Parties.  The independent laboratory’s results shall be in
writing and shall be final and binding save for manifest error.  Unless otherwise agreed to by the Parties in
writing,  the  costs  associated  with  such  testing  and  review  shall  be  borne  by  the  Party  against  whom  the
independent laboratory rules.  The Party against whom the independent laboratory rules will be required to
reimburse  the  other  Party  for  shipping,  storage  and  other  similar  out-of-pocket  expenses  incurred  by  the
other Party in connection with such rejected Batch.

Lonza shall, at Customer’s sole discretion, replace or provide a full refund for any Failed Batch, [Redacted]
(collectively “Lonza Responsibility”).  Replacement(s) for Failed Batches shall be made by Lonza as soon as
reasonably possible (after confirmation of Lonza Responsibility if a determination of Lonza Responsibility is
required).    If  Customer  elects  to  have  a  Failed  Batch  replaced,  Customer  shall  pay  for  such  replacement
Batch  and  the  Raw  Materials  used  therein  (and  any  money  Customer  paid  towards  the  Failed  Batch
(including for Raw Materials and any Raw Material Fees) shall be credited to the cost of the replacement
Batch and related Raw Materials used in the replacement Batch).  For clarity, no separate and/or additional
Raw Material Fee shall be payable with respect to Raw Materials used to replace a Failed Batch that is a
Lonza Responsibility and the Batch Price for a replacement of a Failed Batch shall be no greater than the
Batch Price for the Failed Batch.  If any replacement Batch provided as replacement for a Failed Batch also
fails to conform with the Specifications and/or was not manufactured in accordance with cGMP, the Master
Batch  Record  and  the  Quality  Agreement,  then,  at  Customer’s  sole  discretion,  Lonza  shall  either  replace
such Batch or shall refund the amounts paid by Customer for such Batch (including any amounts credited
from the original Failed Batch).

Without  limiting  Clause  11.1,  Customer  acknowledges  and  agrees  that  its  sole  remedy  with  respect  to  a
Failed  Batch  that  is  a  Lonza  Responsibility  is  as  set  forth  in  this  Clause  7.4.5  and  in  furtherance  thereof,
Customer hereby waives all other remedies at law or in equity regarding the foregoing claims. Lonza shall
not  be  responsible  for  the  cost  of  Raw  Materials  or  Customer  Materials  properly  consumed  in  any  Failed
Batch  except  to  the  extent  set  forth  in  this  Clause  7.4.    Upon  Customer’s  request,  Lonza  shall  use
commercially reasonable efforts to schedule for as soon as reasonably possible the manufacture and supply
of a replacement Batch for any Failed Batch that is not a Lonza Responsibility provided that Customer shall
pay for such replacement Batch and the Raw Materials used therein.

7.5

Order Fulfillment

17

 
 
 
 
 
 
7.5.1

7.5.2

If  Lonza  is  unable  to  deliver  to  Customer  any  Batch  ordered  by  Customer  by  its  final  agreed  scheduled
delivery date (i.e., the agreed delivery date set at the time Lonza freezes its production schedule in advance
of  the  applicable  month  in  which  production  will  start),  due  to  a  Failed  Batch  or  otherwise,  Lonza  shall
replace such undelivered Batches as soon as reasonably possible.

If, in any calendar year during the Term, Lonza is unable to deliver to Customer [Redacted] in such calendar
year by their final agreed scheduled delivery dates, this shall be considered a “Supply Failure,” unless such
failure to deliver is due to the fault of Customer.  If Lonza is unable to replace any Batch within [Redacted]
after the Supply Failure first occurred, Customer may, at its option, cancel such Batch and Customer shall
not be subject to any Cancellation Fee in respect of such Batch.  [Redacted].

Price and Payment

Services.  Pricing for the Services provided by Lonza are set out in Appendix A.

Taxes.  Unless otherwise indicated in writing by Lonza, all Prices and charges are exclusive of value added tax (VAT)
and  of  any  other  applicable  taxes,  levies,  import,  duties  and  fees  of  whatever  nature  imposed  by  and/or  under  the
authority of any government and/or public authority and all such charges applicable to the Services (other than taxes
on  Lonza’s  income,  employees  and/or  property)  shall  be  paid  by  Customer.    When  sending  payment  to  Lonza,
Customer shall quote the relevant invoice number in its remittance advice.  If Lonza is required to charge and remit
any such taxes, it shall itemize all such taxes on the applicable invoice sent to Customer.

Invoices  and  Payments.    Lonza  shall  issue  invoices  to  Customer  for  [Redacted]  of  the  Price  for  the  Batches  or
Services  upon  commencement  thereof  and  [Redacted]  upon  Release  of  applicable  Batches  or  completion  of
applicable Services, unless otherwise agreed in the applicable accepted purchase order.  Charges for Raw Materials
and the Raw Materials Fee for each Batch shall be invoiced upon the Release of each Batch.  [Redacted] for Resins
plus the Raw Materials Fee relating to such Resins shall be invoiced upon receipt of applicable Resins by Lonza.  All
invoices are strictly net and payment of undisputed amounts must be made within [Redacted] of date of invoice.

Repeated Late Payments.  If Customer fails to pay an undisputed invoice within [Redacted] after the due date as set
out in Clause 8.3 on [Redacted] occasions, then Lonza shall have the option to change the payment terms such that
[Redacted] of the Price for any stage of work shall be payable on commencement and the price for Raw Materials and
Resins and the Raw Materials Fee shall also be payable [Redacted].

Late  Payments.    If  in  default  of  payment  of  any  undisputed  invoice  on  the  due  date,  interest  shall  accrue  on  any
amount overdue at the lesser of: [Redacted] interest to accrue on a day to day basis until full payment; and, upon any
material  default  of  payment  of  undisputed  invoices,  Lonza  shall,  at  its  sole  discretion,  and  without  prejudice  to  any
other  of  its  accrued  rights,  be  entitled  upon  providing  [Redacted]  notice  to  suspend  the  provision  of  the  Services
and/or  delivery  of  Product  until  all  overdue  undisputed  amounts  have  been  paid  in  full  including  interest  for  late
payments.

8

8.1

8.2

8.3

8.4

8.5

8.6

Price Adjustments.

8.6.1

Not more than once per calendar year and [Redacted] Lonza may adjust the Price as follows: [Redacted]
year.  Lonza must give notice of any such Price increase on or before [Redacted] and such Price increase
will be effective as

18

 
 
 
 
 
8.6.2

8.6.3

to  any  Batches  for  which  the  Commencement  Date  is  on  or  after  January  1  of  the  immediately  following
calendar year.

In  addition  to  the  above,  subject  to  Customer’s  written  consent  (such  consent  not  to  be  unreasonably
withheld), the Price may be changed by Lonza, upon reasonable prior written notice to Customer (providing
reasonable detail in support thereof), to reflect: (i) an increase in variable costs (such as energy and/or Raw
Materials, but specifically excluding labor and property costs) [Redacted] (based on the initial Price or any
previously amended Price and (ii) any material change in [Redacted] that substantially impacts Lonza’s cost
and ability to perform the Services.

Notwithstanding  Clauses  8.6.1  and  8.6.2  above,  if  any  SOW  or  amendment  is  executed  pursuant  to  this
Agreement,  then  the  Price  for  the  Services  set  forth  in  such  SOW  or  amendment  shall  not  increase
[Redacted]  following  the  date  of  such  SOW  or  amendment.    For  clarity,  [Redacted]  of  such  SOW  or
amendment, the Price may be revised in accordance with Clauses 8.6.1 and 8.6.2.

Books and Records.    Lonza  shall,  during  the  Term  and  for  [Redacted]  thereafter,  keep  complete,  true  and  accurate
books  and  records  necessary  for  the  accurate  and  complete  calculation  of  the  amounts  invoiced  for  Services
hereunder  that  are  determined  on  a  time  and  materials  basis  and/or  the  pass-through  of  costs.    Upon  Customer’s
request, Lonza shall promptly provide Customer’s designated, internationally recognized independent accounting firm,
which  accounting  firm  must  be  reasonably  acceptable  to  Lonza,  with  copies  of  such  records,  in  order  that  such
accounting  firm  can  verify  the  applicable  amounts  invoiced  to  Customer  hereunder.   The  accounting  firm  shall  only
share  with  Customer  a  summary  report  on  its  findings,  and  such  report  must  also  be  shared  with  Lonza.    If  the
accounting  firm  identifies  any  discrepancy  between  such  amounts  charged  to  Customer  by  Lonza,  and  the  amount
that should have been charged, Lonza shall promptly pay the amount of any overpayment to Customer, [Redacted]
until repaid to Customer in full.

Yield Price Adjustment.  [Redacted].

Intellectual Property

Background Intellectual Property.  Except as expressly otherwise provided herein, neither Party will, as a result of this
Agreement, acquire any right, title, and/or interest in any Background Intellectual Property of the other Party.

New Customer Intellectual Property.  Subject to Clause 9.3, Customer shall own all right, title, and interest in and to
any and all Intellectual Property that Lonza and its Affiliates, the External Laboratories and/or other contractors and/or
agents  of  Lonza  develops,  conceives,  invents,  first  reduces  to  practice  and/or  makes,  solely  and/or  jointly  with
Customer and/or others, in the performance of the Services to the extent such Intellectual Property is directed to an
improvement  to  the  Product,  Customer  Material,  Cell  Line,  Customer  Information  and/or  Customer  Background
Intellectual  Property,  including  all  Intellectual  Property  that  is  solely  a  direct  derivative  of  and/or  improvement  to  the
Product,  Customer  Material,  Cell  Line,  Customer  Information  and  Customer  Background  Intellectual  Property
(collectively,  the  “New  Customer  Intellectual  Property”).    For  the  avoidance  of  doubt,  “New  Customer  Intellectual
Property” shall include any material, processes and/or other items that solely embody, and/or that solely are claimed
and/or covered by, any of the foregoing Intellectual Property, but excluding any New General Application Intellectual
Property.

19

8.7

8.8

9

9.1

9.2

 
 
 
 
 
9.3

9.4

9.5

9.6

New  General  Application  Intellectual  Property.    Notwithstanding  Clause  9.2  and  subject  to  the  license  granted  in
Clause 9.5, Lonza shall own all right, title and interest in Intellectual Property that Lonza and its Affiliates, the External
Laboratories  and/or  other  contractors  and/or  agents  of  Lonza,  solely  and/or  jointly  with  Customer,  develops,
conceives, invents, and/or first reduces to practice and/or makes in the course of performance of the Services to the
extent such Intellectual Property: (i) is generally applicable to the development and/or manufacture of chemical and/or
biological products and/or product components; and/or (ii) is an improvement of, and/or direct derivative of, any Lonza
Background Intellectual Property, in each case which does not include (and the use of which would not disclose) the
Product, Customer Materials, Customer Information and/or Customer Background Intellectual Property, but excluding
all  Intellectual  Property  that  is  solely  a  direct  derivative  of  and/or  solely  an  improvement  to  the  Product,  Customer
Material, Cell Line, Customer Information and Customer Background Intellectual Property (“New General Application
Intellectual Property”).  For the avoidance of doubt, “New General Application Intellectual Property” shall include any
material, processes and/or other items that solely embody, and/or that solely are  claimed  and/or  covered  by,  any  of
the foregoing Intellectual Property.

Further  Assurances.    Lonza  hereby  assigns  to  Customer  all  of  its  right,  title  and  interest  in  any  New  Customer
Intellectual  Property.    Lonza  shall  execute,  and  shall  require  its  personnel  as  well  as  its  Affiliates,  External
Laboratories and/or other contractors and/or agents and their personnel involved in the performance of the Services to
execute,  any  documents  reasonably  required  to  confirm  Customer’s  ownership  of  the  New  Customer  Intellectual
Property, and any documents required and/or reasonably requested by Customer, but excluding any document that is
Lonza Information, to apply for, maintain and enforce any patent and/or other right in the New Customer Intellectual
Property.

License to New General Applicable Intellectual Property.  Lonza hereby grants to Customer a non-exclusive, world-
wide, fully paid-up, revocable (solely upon Lonza’s termination of this Agreement for Customer’s uncurable material
breach of this Agreement, but if Customer contests the claim of such material breach, the license will not be revoked
unless  and  until  such  uncurable  material  breach  is  determined  to  have  occurred  in  accordance  with  Clause  16.6),
perpetual, transferable license, including the right to grant sublicenses, under the New General Application Intellectual
Property: (a) to research, develop, make, have made, use, sell and import the Product and reasonable modifications,
extensions  and  expansions  of  the  Product  but  no  other  product;  and/or  (b)  solely  as  it  relates  to  the  Product  and
reasonable modifications, extensions and expansions of the Product but no other product, to the extent necessary to
exercise, exploit and/or otherwise fully enjoy Customer’s rights in and to the New Customer Intellectual Property.

License to Perform Services.  Customer hereby grants Lonza a non-exclusive, revocable license to use the Customer
Information,  Customer  Background  Intellectual  Property  and  New  Customer  Intellectual  Property  during  the  Term
solely  for  the  purpose  of  fulfilling  its  obligations  under  this  Agreement.    Except  as  express  set  forth  in  the  prior
sentence,  Lonza  receives  no  license,  right,  title  or  interest  in  or  to  the  Product,  Customer  Information,  Customer
Background  Intellectual  Property  and/or  New  Customer  Intellectual  Property  and  all  such  rights  are  reserved  by
Customer.

9.7

License to the Process and License Back to Improvements.  

9.7.1

Lonza  hereby  grants  Customer  a  non-exclusive,  revocable  (solely  upon  Lonza’s  termination  of  this
Agreement for Customer’s uncurable material

20

 
 
 
breach of this Agreement, but if Customer contests the claim of such material breach, the license will not be
revoked unless and until such uncurable material breach is determined to have occurred in accordance with
Clause 16.6), worldwide  license,  with  the  right  to  grant  sublicenses  to  Alternate  Manufacturers,  under  the
Lonza Information, and Lonza Background Intellectual Property incorporated into the Process to make, have
made,  use,  sell,  offer  for  sale  and  import  the  Product  and  reasonable  modifications,  extensions  and
expansions  of  the  Product,  provided  such  Product  and  reasonable  modifications,  extensions  and
expansions of the Product, but no other product, may only be made within the Approved Territory.

9.7.2

Customer  hereby  grants  to  Lonza  and  its  Affiliates  a  non-exclusive,  worldwide,  royalty  free,  revocable
(solely  upon  Customer’s  termination  of  this  Agreement  for  Lonza’s  uncurable  material  breach  of  this
Agreement, but if Lonza contests the claim of such material breach, the license will not be revoked unless
and until such uncurable material breach is determined to have occurred in accordance with Clause 16.6)
license,  with  the  right  to  grant  and  authorize  sublicenses  to  Third  Parties,  under  Improvements  to  make,
have made, use sell, offer for sale and import products and provide services, whether for itself or any Third
Party.    For  the  purposes  of  the  foregoing,  “Improvements”  means  any  material  enhancement  and/or
improvement made by Customer to the Lonza Information and/or Lonza Background Intellectual Property in
the  conduct  of  the  Process  transferred  to  it  under  this  Agreement  in  accordance  with  Clause  9.8  to  the
extent such enhancement and/or improvement is severable from and does not utilize, disclose and/or reveal
any Customer Background Intellectual Property and/or Customer Information.

9.8

Technology Transfer to Customer or Alternative Manufacturers.

9.8.1

9.8.2

Upon  the  written  request  of  Customer  and  subject  to  the  terms  and  conditions  of  this  Clause  9.8  and
provided that Customer is not in material breach of this Agreement (which material breach is incurable or
has  not  timely  been  cured  by  Customer,  as  the  case  may  be),  and  provided  further  that  Lonza  has  not
terminated this Agreement pursuant to Clause 13.2.2, Customer shall be permitted to transfer the Process
to  itself  and/or  another  Alternate  Manufacturer  for  the  manufacture  of  the  Product  and  reasonable
modifications,  extensions  and  expansions  of  the  Product  but  no  other  product  only  within  the  Approved
Territory.  Unless approved in advance by Lonza in writing, Customer will only undertake such technology
transfer  for  manufacture  of  the  Product  and  reasonable  modifications,  extensions  and  expansions  of  the
Product, but no other product, in the Approved Territory and only by an Alternate Manufacturer.

Customer  shall  provide  written  notice  to  Lonza  in  advance  that  it  wishes  to  exercise  its  rights  under  this
Clause 9.8 (the “Technology Transfer Notice”); the Technology Transfer Notice must be provided [Redacted]
other  than  in  connection  with  termination  and/or  notice  of  termination  of  this  Agreement  pursuant  to  an
incurable  material  breach  by  Lonza  under  Clause  13.2.    The  Technology  Transfer  Notice  shall  provide
reasonable  details  to  Lonza  about  whether  the  proposed  transfer  of  the  Process  is  to  Customer,  to  an
Alternative Manufacturer or to another Third Party.  In the case of a proposed transfer of the Process to a
Third -Party or an Alternative Manufacturer, Customer shall [Redacted], Lonza shall commence performing
its obligations under this Clause 9.8.

21

 
 
 
 
 
 
9.8.3

For  any  transfer  permitted  under  this  Clause  9.8,  Lonza  shall  provide  reasonably  necessary  documents
[Redacted] to complete such technology transfer.   A  document  will  be  considered  “reasonably  necessary”
[Redacted] such document for the manufacture and approval of the Product.

9.8.4

9.8.5

9.8.6

9.8.7

9.8.8

Under no condition shall Customer be permitted to use and/or disclose for any purpose [Redacted].

In the event that Customer requires and/or reasonably requests technical support in relation to the Process
transfer,  then  Lonza  shall  make  such  reasonable  technical  support  available  to  Customer,  with  the
scheduling of such technical support to be mutually agreed upon by the Parties.

Customer  shall  reimburse  Lonza  for  any  costs  and  expenses  incurred  by  Lonza  in  connection  with
producing  the  documents  and  providing  the  support  set  forth  in  Clauses  9.8.3  and  9.8.4,  with  costs  for
Lonza’s internal resources charged on a man day rate based upon Lonza’s then-prevailing standard charge
for technical support; provided that Lonza agrees to provide [Redacted].

As part of the technology transfer, Lonza shall advise Customer of all license from and/or payment to any
Third  Party  that  Lonza  has  received  or  pays  in  connection  with  the  manufacture  of  the  Product,  but
excluding any license or payment applicable to the general operation and maintenance of the Facility and
Lonza equipment that are not unique or specific to the Products.

Lonza shall allow Customer reasonable access to, and rights to [Redacted] to the extent necessary and/or
used  for  the  production  of  Product  by  Lonza  using  some  or  all  of  the  Process  solely  for  purposes  of
[Redacted] for the Product and reasonable modifications, expansions and extensions of the Product, but no
other product.

For  clarity,  the  technology  transfer  process  described  in  this  Clause  9.8  shall  be  instead  of  and  not  in
addition to the technology transfer process described in the BLA Agreement or 2K Development Agreement
for the transfer of the Process for the Product [Redacted].  The foregoing does not limit any amounts due
from Customer to Lonza as set forth in Clauses 9.8.1 through 9.8.7.

10

Warranties

10.1

Lonza Warranties.  Lonza warrants that:

10.1.1

the Services shall be performed in accordance with all Applicable Laws and this Agreement;

10.1.2

upon  Release,  the  Product  in  cGMP  Batches  meets  the  Specifications  and  was  manufactured  in
accordance  with  cGMP,  the  Master  Batch  Record  and  the  Quality  Agreement,  and  title  to  all  Product
provided  to  Customer  will  pass  to  Customer  free  and  clear  of  any  security  interest,  lien  and/or  other
encumbrance;

10.1.3

it and/or its Affiliate holds all necessary permits, approvals, consents and licenses to enable it to perform the
Services  at  the  Facility  and  it  has  the  necessary  corporate  authorizations  to  enter  into  and  perform  this
Agreement;

22

 
 
 
 
 
 
 
 
 
 
 
10.1.4

10.1.5

10.1.6

10.1.7

10.1.8

to  the  best  of  Lonza’s  knowledge  and  belief,  without  having  conducted  a  freedom-to-operate  analysis  on
use  of  the  Customer  Information,  Customer  Background  Intellectual  Property  or  Customer  Materials,  the
conduct and the provision of the Services shall not infringe, misappropriate and/or violate (as the case may
be) any proprietary and/or Intellectual Property rights of any Third Party;

Lonza will notify Customer in writing immediately if it receives and/or is notified of a claim from a Third Party
that  the  use  by  Lonza  (and/or  Customer  or  other  entity  to  which  the  Process  is  transferred  pursuant  to
Clause  9.8)  of  the  Process  and/or  the  Lonza  Know-How  and/or  the  Lonza  Patent  Rights  for  Services
infringes,  misappropriates  and/or  otherwise  violates  any  Intellectual  Property  and/or  industrial  property
rights vested in a Third Party;

Lonza has never been debarred under the Generic Drug Enforcement Act of 1992, 21 U.S.C. Sec. 335a(a)
and/or (b), and/or sanctioned by a Federal Health Care Program (as defined in 42 U.S.C. § 1320 a-7b(f)),
including  the  federal  Medicare  and/or  a  state  Medicaid  program,  and/or  debarred,  suspended,  excluded,
and/or otherwise declared ineligible from any Federal agency and/or program.  In the event that during the
Term  of  this  Agreement,  Lonza  becomes  debarred,  suspended,  excluded,  sanctioned,  and/or  otherwise
declared ineligible; Lonza agrees to immediately notify Customer.  Lonza also agrees that in the event that it
becomes  debarred,  suspended,  excluded,  sanctioned,  and/or  otherwise  declared  ineligible,  it  shall
immediately cease all activities relating to this Agreement;

title to all Product and all New Customer Intellectual Property provided to Customer under this Agreement
shall pass free and clear of any security interest, lien and/or other encumbrance; and

it  shall  perform  all  Services  hereunder  in  a  professional  and  workmanlike  manner,  with  due  care  and  in
accordance with all regulatory requirements and standards and best practices prevailing in the industry, and
it shall perform and document each Service in accordance with the applicable Specifications, Master Batch
Record or SOW;

10.2

Customer Warranties.  Customer warrants that:

10.2.1

10.2.2

10.2.3

Customer has and shall at all times throughout the Term of this Agreement have the right to supply the Cell
Line,  the  Customer  Materials  and  the  Customer  Information  to  Lonza  and  the  necessary  rights  to  license
and/or permit Lonza to use the same for the sole purposes of performing the Services;

to the best of Customer’s knowledge and belief, the use of the Customer Information, Customer Background
Intellectual  Property  or  Customer  Materials  by  Lonza  in  the  course  of  performance  of  Services  shall  not
infringe, misappropriate or violate (as the case may be) any Intellectual Property rights of any Third Party;

Customer will promptly notify Lonza in writing if it receives or is notified of a formal written claim from a Third
Party that Customer Information, Customer Materials and Customer Intellectual Property or that the use by
Lonza  thereof  for  the  provision  of  the  Services  infringes,  misappropriate  or  otherwise  violates  any
Intellectual Property or other rights of any Third Party; and

23

 
 
 
 
 
 
 
 
 
 
10.2.4

Customer has the necessary corporate authorizations to enter into this Agreement.

10.3

DISCLAIMER:  THE WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER
WARRANTIES,  AND  ALL  OTHER  WARRANTIES,  BOTH  EXPRESS  AND 
IMPLIED,  ARE  EXPRESSLY
DISCLAIMED,  INCLUDING  ANY  WARRANTY  OF  MERCHANTABILITY  OR  FITNESS  FOR  A  PARTICULAR
PURPOSE.

10.4

Debarment.

11

11.1

10.4.1

10.4.2

In the event that Customer receives notice from Lonza and/or otherwise becomes aware that a debarment,
suspension,  exclusion,  sanction,  and/or  declaration  of  ineligibility  action  has  been  brought  against  Lonza;
then  Customer  shall  have  the  right  to  terminate  this  Agreement  immediately;  provided  that  if  such  event
shall  occur,  Customer  shall  not  have  such  right  of  termination  if  Lonza  is  disputing  and  defending  such
action and Lonza is otherwise able to perform its services in the manner required under this Agreement.

Lonza  hereby  certifies  that  it  will  not  knowingly  use  in  any  capacity  the  services  of  any  individual,
corporation, partnership and/or association which has been debarred under 21 U.S.C. Sec. 335a(a) or (b),
and/or  listed  in  the  DHHS/OIG  List  of  Excluded  Individuals/Entities  and/or  the  General  Services
Administration’s Listing of Parties Excluded from Federal Procurement and Non-Procurement Programs.

Indemnification and Liability

Indemnification by Lonza.  Subject to Clause 11.5, Lonza shall indemnify Customer, its Affiliates, and their respective
officers,  employees  and  agents  (“Customer  Indemnitees”)  from  and  against  any  loss,  damage,  costs  and  expenses
(including reasonable attorney fees) that Customer Indemnitees may suffer as a result of any Third-Party claim arising
directly out of:

11.1.1

11.1.2

11.1.3

11.1.4

any  breach  of  this  Agreement  and/or  the  Quality  Agreement  by  Lonza,  including  the  warranties  given  by
Lonza in Clause 10.1;

the nonconformity of the Product to the Specifications itself being occasioned solely by reason of a breach
of this Agreement by Lonza and/or the gross negligence and/or intentionally wrongful acts and/or omissions
of Lonza;

the  gross  negligence  and/or  intentionally  wrongful  acts  and/or  omissions  of  Lonza  and/or  any  Lonza
Indemnitee; and/or

any  allegation  that  the  Services  (excluding  solely  as  a  result  of  use  of  Customer  Information,  Customer
Background  Intellectual  Property  and/or  Customer  Materials  supplied  by  and/or  on  behalf  of  Customer)
infringes, misappropriates and/or otherwise violates any Intellectual Property rights of a Third Party;

except in each case to the extent that such claims resulted from the negligence, intentional misconduct and/or breach
of this Agreement and/or the Quality Agreement by any Customer Indemnitees.  

24

 
 
 
 
 
 
 
 
 
Notwithstanding  the  foregoing,  Lonza  shall  have  no  obligations  under  this  Clause  11.1  for  any  liabilities,  expenses,
and/or costs to the extent arising out of and/or relating to claims covered under Clause 11.2.

11.2

Indemnification  by  Customer.    Subject  to  Clause  11.5,  Customer  shall  indemnify  Lonza,  its  Affiliates,  and  their
respective  officers,  employees  and  agents  (“Lonza  Indemnitees”)  from  and  against  any  loss,  damage,  costs  and
expenses (including reasonable attorney fees) that Lonza Indemnitees may suffer as a result of any Third-Party claim
arising directly out of:

11.2.1

11.2.2

11.2.3

11.2.4

11.2.5

any breach of this Agreement and/or the Quality Agreement by Customer, including the warranties given by
Customer in Clause 10.2 above;

any  claims  alleging  that  the  use  of  the  Customer  Information,  Customer  Background  Intellectual  Property
and/or Customer Materials in the course of performance of Services infringes any Intellectual Property rights
of a Third Party;

the manufacture, use, sale, or distribution of the Product by or on behalf of Customer, including any claims
of product liability;

the gross negligence and/or intentionally wrongful acts and/or omissions of Customer and/or any Customer
Indemnitee; or

any  allegation  that  the  use  by  Lonza  of  any  Customer  Information,  Customer  Background  Intellectual
Property  and/or  Customer  Materials  supplied  by  and/or  on  behalf  of  Customer  for  the  purpose  of  this
Agreement  (excluding  solely  as  a  result  of  use  by  and/or  on  behalf  of  Lonza  of  Lonza  Background
Intellectual  Property,  Lonza  Information  and/or  other  material  and/or  information  supplied  by  Lonza)
infringes, misappropriates and/or otherwise violates any Intellectual Property rights of a Third Party;

except,  in  each  case,  to  the  extent  that  such  claims  resulted  from  the  negligence,  intentional  misconduct  and/or
breach of this Agreement and/or the Quality Agreement by any Lonza Indemnitees.

Notwithstanding the foregoing, Customer shall have no obligations under this Clause 11.2 for any liabilities, expenses,
and/or costs to the extent arising out of and/or relating to claims covered under Clause 11.1.

11.3

Indemnification Procedure.  If the Party to be indemnified intends to claim indemnification under this Clause 11, it shall
promptly notify the indemnifying Party (“Indemnitor”) in writing of such claim.  The Indemnitor shall have the right to
control  the  defense  and  settlement  thereof;  provided,  however,  that:  (i)  the  Indemnitor  must  obtain  the  prior  written
consent of the indemnitee (not to be unreasonably withheld) before entering into any settlement of such Third-Party
claim;  (ii)  any  indemnitee  shall  have  the  right  to  retain  its  own  counsel  at  its  own  expense;  and  (iii)  if  the  amount
sought  in  any  Third-Party  claim  (alone  or  in  aggregate  with  all  other  Third-Party  claims)  (collectively,  “Covered
Claims”)  exceeds  the  amounts  remaining  payable  by  the  Indemnitor  pursuant  to  Clause  11.5  or  the  indemnitee
otherwise believes that the total amount payable pursuant to the Covered Claims may exceed the amounts remaining
payable by the Indemnitor pursuant to Clause 11.5, then the Parties shall discuss and use reasonable endeavours to
agree  who  has  conduct  and  control  of  the  Covered  Claims  provided  that  if  the  Parties  are  not  able  to  agree  within
thirty (30) days after the indemnitee provides Indemnitor with notice of its desire to take over control of such

25

 
 
 
 
 
 
 
Covered Claims (or such shorter period as necessary to preserve all of the indemnitee’s rights), indemnitee may, at its
election, retain full control over the such Covered Claims unless the Indemnitor executes a separate agreement with
the indemnitee agreeing that it shall pay all amounts payable in connection with such Covered Claims irrespective of
the limitation of liability in Clause 11.5.  The indemnitee, its employees and agents, shall reasonably cooperate, at the
Indemnitor’s  expense,  with  the  Indemnitor  in  the  investigation  of  any  liability  covered  by  this  Clause  11.    If  the
indemnitee elects to control the defense of any Covered Claim as permitted herein, the Indemnitor, its employees and
agents,  shall  reasonably  cooperate,  at  the  Indemnitor’s  expense,  with  the  indemnitee  in  the  investigation  of  any
liability covered by this Clause 11 with respect to such Covered Claim(s).  The failure to deliver prompt written notice
to the Indemnitor of any claim, to the extent prejudicial to its ability to defend such claim, shall relieve the Indemnitor of
its obligation to the indemnitee under this Clause 11 only to the extent of such prejudice.

DISCLAIMER  OF  CONSEQUENTIAL  DAMAGES.    EXCEPT  FOR  EITHER  PARTY’S  BREACH  OF  CLAUSE  12
HEREOF,  IN  NO  EVENT  SHALL  EITHER  PARTY  BE  LIABLE  TO  THE  OTHER  PARTY  FOR  INCIDENTAL,
INDIRECT,  SPECIAL,  PUNITIVE  OR  CONSEQUENTIAL  DAMAGES,  LOST  PROFITS  OR  LOST  REVENUES
ARISING  FROM  OR  RELATED  TO  THIS  AGREEMENT,  EXCEPT  TO  THE  EXTENT  RESULTING  FROM  FRAUD,
GROSS NEGLIGENCE, WILLFUL BREACH OR INTENTIONAL MISCONDUCT.  THE PARTIES AGREE THAT ANY
AMOUNT  ORDERED  TO  BE  PAID  BY  A  COURT  OF  COMPETENT  JURISDICTION  OR  AGREED  TO  BE  PAID
PURSUANT  TO  A  SETTLEMENT  TO  ANY  THIRD  PARTY  IN  CONNECTION  WITH  ANY  CLAIM  INDEMNIFIED
PURSUANT  TO  CLAUSE  11.1  AND/OR  11.2  WILL  BE  DEEMED  A  DIRECT  DAMAGE  NOT  SUBJECT  TO  THE
ABOVE DISCLAIMER, EVEN IF SUCH DAMAGE IS OTHERWISE CHARACTERIZED IN SUCH CLAIM.

LIMITATION  OF  LIABILITY.    SUBJECT  ALWAYS  TO  CLAUSE  11.4,  EACH  PARTY’S  LIABILITY  UNDER  THIS
AGREEMENT  SHALL  IN  NO  EVENT  EXCEED,  [REDACTED]; EXCEPT  TO  THE  EXTENT  RESULTING  FROM:  (i)
SUCH  PARTY’S  GROSS  NEGLIGENCE,  WILLFUL  BREACH  AND/OR  INTENTIONAL  MISCONDUCT;  (ii)  SUCH
PARTY’S BREACH OF CLAUSE 12 (CONFIDENTIALITY); (iii) MISUSE OF THE OTHER PARTY’S INTELLECTUAL
PROPERTY; AND/OR (iv) CUSTOMER’S OBLIGATION TO PAY FOR SERVICES PURSUANT TO CLAUSE 8.

Additional Exceptions.  Nothing in this Agreement shall exclude and/or limit the liability of either Party for fraud, breach
its obligations in respect of Intellectual Property pursuant to Clause 9 and/or for death and/or personal injury caused
by its negligence and/or for any other liability that may not be limited and/or excluded as a matter of law.

Confidentiality

Confidentiality Obligations.  A Party receiving Confidential Information (the “Receiving Party”) agrees to strictly keep
secret  any  and  all  Confidential  Information  received  during  the  Term  from  and/or  on  behalf  of  the  other  Party  (the
“Disclosing Party”) using at least the same level of measures as it uses to protect its own Confidential Information, but
in any case at least commercially reasonable and customary efforts.  Confidential Information shall include information
disclosed  in  any  form  including  in  writing,  orally,  graphically  and/or  in  electronic  and/or  other  form  to  the  Receiving
Party,  observed  by  the  Receiving  Party  and/or  its  employees,  agents,  consultants,  and/or  representatives,  and/or
otherwise learned by the Receiving Party under this Agreement, which the Receiving Party knows and/or reasonably
should know is confidential and/or proprietary.

11.4

11.5

11.6

12

12.1

26

 
 
12.2

Required  Disclosures.    Notwithstanding  the  foregoing,  Receiving  Party  may  disclose  to  any  courts  and/or  other
authorities  Confidential  Information  which  is  and/or  will  be  required  pursuant  to  applicable  governmental  and/or
administrative and/or public law, rule, regulation and/or order.  In such case the Party that received the Confidential
Information  will,  to  the  extent  legally  permitted,  inform  the  other  Party  promptly  in  writing  and  cooperate  with  the
Disclosing Party in seeking to minimize the extent of Confidential Information which is required to be disclosed to the
courts and/or authorities.

12.3

Exceptions.    The  obligation  to  maintain  confidentiality  under  this  Agreement  does  not  apply  to  Confidential
Information, which:

12.3.1

at the time of disclosure was publicly available;

12.3.2

12.3.3

12.3.4

12.3.5

is and/or becomes publicly available other than as a result of a breach of this Agreement by the Receiving
Party;

as  the  Receiving  Party  can  establish  by  competent  proof,  was  rightfully  in  its  possession  at  the  time  of
disclosure  by  the  Disclosing  Party  without  obligation  of  confidentiality  and  had  not  been  received  from
and/or on behalf of Disclosing Party;  

is supplied  to  a  Party  without  obligation  of  confidentiality  by  a  Third  Party  which  was  not  in  breach  of  an
obligation of confidentiality to Disclosing Party and/or any other Third Party; and/or

is developed by the Receiving Party independently from and without use of the Confidential Information, as
evidenced by contemporaneous written records.

Use  and  Return  of  Confidential  Information.    The  Receiving  Party  will  use  Confidential  Information  only  for  the
purposes  of  this  Agreement  and/or  as  otherwise  permitted  by  this  Agreement  and  will  not  make  any  use  of  the
Confidential  Information  for  its  own  separate  benefit  and/or  the  benefit  of  any  Third  Party  including  with  respect  to
research and/or product development and/or any reverse engineering and/or similar testing; provided that Customer
may  test  any  materials  provided  by  Lonza  including  Product  and  Cell  Lines  as  necessary  for  Customer’s  quality
assurance, quality control or compliance with Applicable Laws.  The Receiving Party agrees to return and/or destroy
promptly  (and  certify  such  destruction)  on  Disclosing  Party’s  request  all  written  and/or  tangible  Confidential
Information  of  the  Disclosing  Party,  except  that  one  copy  of  such  Confidential  Information  may  be  kept  by  the
Receiving Party in its confidential files for record keeping purposes only.

Disclosure  to  Representatives.    Each  Party  will  restrict  the  disclosure  of  Confidential  Information  to  such  officers,
employees, professional advisers, finance-providers, consultants, and representatives of itself and its Affiliates (and/or
in  the  case  of  Customer,  any  Third  Party  it  transfers  the  Process  to  in  accordance  with  this  Agreement)  who  have
been  informed  of  the  confidential  nature  of  the  Confidential  Information  and  who  have  a  need  to  know  such
Confidential 
financing  and/or
acquisition.    Customer  may  disclose  Confidential  Information  of  Lonza  and  its  Affiliates  to  potential  and  actual
acquirers provided such disclosure is limited to the terms of this Agreement and/or work product provided to Customer
by Lonza as a consequence of the provision of the Services.  Prior to disclosure to such persons, the Receiving Party
shall bind its and its Affiliates’ officers, employees, consultants, potential and actual acquirers and representatives to
confidentiality and non-use obligations no less stringent than those

this  Agreement  and/or  an  applicable 

the  purpose  of 

Information 

for 

12.4

12.5

27

 
 
 
 
 
 
 
set forth herein.  The Receiving Party shall notify the Disclosing Party as promptly as practicable of any unauthorized
use and/or disclosure of the Confidential Information.

Responsibility for Representatives.  The Receiving Party shall at all times be fully liable for any and all breaches of the
confidentiality  obligations  in  this  Clause  12.6  by  any  of  its  Affiliates  and/or  the  employees,  consultants  and
representatives of itself and/or its Affiliates.

Equitable Relief.  Each Party hereto expressly agrees that any breach and/or threatened breach of the undertakings of
confidentiality  provided  under  this  Clause  12  by  a  Party  may  cause  irreparable  harm  to  the  other  Party  and  that
monetary damages may not provide a sufficient remedy to the non-breaching Party for any breach and/or threatened
breach.  In the event of any breach and/or threatened breach, then, in addition to all other remedies available at law
and/or  in  equity,  the  non-breaching  Party  shall  be  entitled  to  seek  injunctive  relief  and  any  other  relief  deemed
appropriate by the non-breaching Party.

Term and Termination

Term.  This Agreement shall commence on the Effective Date and, unless terminated earlier as provided herein, shall
remain in full force until [Redacted] after the Effective Date (the “Term”).

12.6

12.7

13

13.1

13.2

Termination.  This Agreement may be terminated as follows:

13.2.1

13.2.2

by Customer for any reason or no reason, with an effective date of termination no earlier than [Redacted]
after the Effective Date, by providing at least [Redacted] advance written notice to Lonza;

by  either  Party  if  the  other  Party  breaches  a  material  provision  of  this  Agreement  and/or  the  Quality
Agreement  and  fails  to  cure  such  breach  to  the  reasonable  satisfaction  of  the  non-breaching  Party
[Redacted] following written notification of such breach from the non-breaching Party to the breaching Party;
provided, however, that such [Redacted] period shall be extended as agreed by the Parties if the identified
breach is incapable of cure [Redacted] and if the breaching Party provides a plan and timeline to cure the
breach,  promptly  commences  efforts  to  cure  the  breach  and  diligently  prosecutes  such  cure  (it  being
understood that this extended period shall be unavailable for any breach regarding non-payment);

Without  limiting  the  generality  of  Clause  13.2.2,  Lonza  shall  be  deemed  to  have  breached  a  material
provision of this Agreement if: [Redacted];

13.2.3

by either Party, immediately, if the other Party becomes adjudicated insolvent, is dissolved and/or liquidated,
makes a general assignment for the benefit of its creditors, and/or files or has filed against it, a petition in
bankruptcy or has a receiver appointed for a substantial part of its assets and such action is not reversed
within ninety (90) days;

13.2.4

by Customer pursuant to Clause 7.5.2 (Uncured Supply Failure);

13.2.5

by Customer pursuant to Clause 10.4.1 (Debarment); or

13.2.6

by Customer pursuant to Clause 14.1 (Force Majeure).

28

 
 
 
 
 
 
 
 
13.3

Consequences of Termination.  In the event of termination:

13.3.1

by  Customer  pursuant  to  Clause  13.2.2  (Material  Breach),  13.2.3  (Insolvency),13.2.4  (Uncured  Supply
Failure), 13.2.5 (Debarment) or 13.2.6 (Force Majeure):

(a)

(b)

(c)

Lonza  shall  be  compensated  for  Services  and  Batches  rendered  up  to  the  date  of  termination,
including in respect of any Product in-process;

Lonza  shall  be  compensated  for  all  pass-through  costs  incurred  through  to  the  date  of
termination,  including  Raw  Materials  costs  and  Raw  Materials  Fees  for  Raw  Materials  used
and/or purchased for use in accordance with Binding Orders; and

if  requested  by  Customer,  Lonza  shall  supply  to  Customer  Batches  in  accordance  with  Binding
Orders placed prior to the effective date of termination, with such supply, including the payment
therefore, to be undertaken in accordance with the terms of this Agreement.

13.3.2

13.3.3

13.3.4

13.3.5

13.3.6

by Customer pursuant to Clause 13.2.1 (Termination for Convenience) or termination by Lonza pursuant to
Clauses  13.2.2  (Material  Breach)  or  13.2.3  (Insolvency),  to  the  extent  that  termination  results  in  the
cancellation  of  any  Services  and/or  Batches,  Customer  shall  pay  to  Lonza  a  Cancellation  Fee  as  per  the
terms of Clause 6.4 [Redacted], the date of termination being taken as the date of notice of cancellation for
the  purposes  of  the  application  of  such  Clause.  For  clarity,  no  other  termination  of  this  Agreement  shall
result in Cancellation Fees being owed;

Customer shall promptly return to Lonza any Lonza Know-How it may have received from Lonza pursuant to
this Agreement, except to the extent that Customer retains the right to use such Lonza Know-How, including
pursuant to Clause 9 and/or the GS Licence, any Separate Agreement and/or any other agreement between
or among the Parties or any of their Affiliates subject to the terms of such agreements;

and/or  expiration  hereunder,  Lonza  shall  promptly  return  to  Customer  all  Customer  Information  and  shall
dispose  of  and/or  return  to  Customer  (at  Customer’s  option  and  expense)  the  Customer  Materials  (and
where supplied by Customer the Cell Line) and any materials therefrom, as directed by Customer;

and/or  expiration  hereunder,  Lonza  shall  promptly  return  to  Customer  all  remaining  Raw  Materials  that
Customer has paid for; and

notwithstanding Clause 6.5, any amounts payable by Customer pursuant to Clauses 13.3.1 or 13.3.2 shall
be due [Redacted] of Customer’s receipt of an undisputed invoice therefor from Lonza.

13.4

Survival.  Expiration or termination of this Agreement for whatever reason shall not affect the accrued rights of either
Lonza and/or Customer arising under and/or out of this Agreement and all provisions which are expressed to survive
the  Agreement  shall  remain  in  full  force  and  effect  including  for  the  avoidance  of  doubt  but  not  by  way  of  limitation
Clauses  5  (Insurance),  6.6  (Replacement  Project),  7  (Delivery  and  Acceptance),  8.7  (Books  and  Records),  9
(Intellectual Property), 10 (Warranties), 11

29

 
 
 
 
 
 
 
 
 
 
 
(Indemnification),  12  (Confidentiality),  13.3  (Consequences  of  Termination),  13.4  (Survival),  15  (Notice)  and  16
(Miscellaneous) (to the extent relevant).

Force Majeure

Excused Performance.    If  Lonza  is  prevented  and/or  delayed  in  the  performance  of  any  of  its  obligations  under  the
Agreement by Force Majeure and gives written notice thereof to Customer specifying the matters constituting Force
Majeure together with such evidence as Lonza reasonably can give and specifying the period for which it is estimated
that  such  prevention  and/or  delay  will  continue,  Lonza  shall  be  excused  from  the  performance  and/or  the  punctual
performance  of  such  obligations  as  the  case  may  be  from  the  date  of  such  notice  for  so  long  as  such  cause  of
prevention  and/or  delay  shall  continue.    Provided  that,  if  such  Force  Majeure  persists  for  a  period  of  [Redacted],
Customer may terminate this Agreement by delivering written notice to the other Party.

COVID-19.  The Parties acknowledge that the COVID-19 virus is currently causing global disruption, and while Lonza
is  not  aware  of  any  event  as  at  the  Effective  Date  that  would  prevent  or  delay  Lonza  in  the  performance  of  the
Services, the Parties acknowledge that there is a risk that a Force Majeure event could arise as a consequence of the
COVID-19 virus.

Definition.    “Force  Majeure”  shall  mean  any  reason  and/or  cause  beyond  Lonza’s  reasonable  control  affecting  the
performance by Lonza of its obligations under the Agreement, including any cause arising from and/or attributable to
acts  of  God,  strike,  labor  troubles,  restrictive  governmental  orders  and/or  decrees,  riots,  insurrection,  war,  terrorists
acts, and/or the inability of Lonza to obtain any required raw material, energy source, equipment and/or transportation.

Lonza  Affiliates  and  Suppliers.    With  regard  to  Lonza,  any  such  event  of  Force  Majeure  affecting  services  and/or
production at its Affiliates and/or suppliers shall be regarded as an event of Force Majeure.

Notices

Notice Addresses.  Any notice or other communication to be given under this Agreement shall be delivered personally
and/or sent by email, or if email is not available, by first class pre-paid post addressed as follows:

14

14.1

14.2

14.3

14.4

15

15.1

15.1.1
15.1.2

[Redacted]
[Redacted]

or to such other destination as either Party hereto may hereafter notify to the other in accordance with the provisions
of this Clause 15.

15.2

Timing of Delivery.  All such notices and/or other communications shall be deemed to have been served as follows:

15.2.1

if delivered personally, at the time of such delivery;

15.2.2

if sent by email, upon confirmation of receipt by the recipient; or

15.2.3

if sent by first class pre-paid post, four (4) business days (Saturdays, Sundays and bank and/or other public
holidays excluded) after being placed in the post.

30

 
 
 
 
 
 
 
 
16

16.1

16.2

16.3

16.4

16.5

16.6

Miscellaneous

Severability.    If  any  provision  hereof  is  or  becomes  at  any  time  illegal,  invalid  and/or  unenforceable  in  any  respect,
neither  the  legality,  validity  nor  enforceability  of  the  remaining  provisions  hereof  shall  in  any  way  be  affected  and/or
impaired thereby.  The Parties hereto undertake to substitute any illegal, invalid and/or unenforceable provision  by  a
provision which is as far as possible commercially equivalent considering the legal interests and the purpose of the
provision.

Amendments.    Modifications  and/or  amendments  of  this  Agreement  must  be  in  writing  and  signed  by  the
Parties.  Lonza shall be entitled to instruct one or more of its Affiliates to perform any of Lonza’s obligations contained
in this Agreement, but Lonza shall remain fully responsible in respect of those obligations.  

Assignment.  Neither Party shall be entitled to assign, transfer, charge and/or in any way make over the benefit and/or
the burden of this Agreement without the prior written consent of the other which consent shall not be unreasonably
withheld and/or delayed, save that either Party shall be entitled without the prior written consent of the other Party to
assign or transfer, this Agreement: (i) to an Affiliate; (ii) to any joint venture company of which Lonza or Customer, as
the case may be, is the beneficial owner of at least fifty percent (50%) of the issued share capital thereof; (iii) to any
company with which that Party may merge or by which that Party is acquired;  or  (iv)  to  any  company  to  which  that
Party may transfer all or substantially all of its assets and undertakings pertaining to this Agreement.  No assignment
shall relieve any Party of responsibility for the performance of any obligation that accrued prior to the effective date of
such assignment.

Publicity.    The  text  of  any  press  release  and/or  other  communication  to  be  published  by  and/or  in  the  media
concerning the subject matter of this Agreement shall require the prior written approval of both Lonza and Customer.

Governing Law.  This Agreement is governed in all respects by the laws of the State of New York without regard to its
conflicts of laws principles.

Dispute  Resolution.    All  dispute,  controversy  and/or  claim  arising  out  of  and/or  in  connection  with  this  Agreement
(each, a “Dispute”) shall be finally settled under the Rules of Arbitration (the “Rules”) of the International Chamber of
Commerce (“ICC”) by three arbitrators appointed in accordance with the Rules, as modified hereby.  Each Party shall
appoint one arbitrator.  The third arbitrator, who shall act as president of the arbitral tribunal, shall be jointly nominated
by the other two arbitrators within 30 days of the confirmation of the second arbitrator.  If the president of the arbitral
tribunal is not nominated within this time period, such arbitrator shall be appointed in accordance with the Rules.  The
seat or place of arbitration shall be in the Borough of Manhattan, New York, New York, USA.  The arbitration shall be
conducted and the award shall be rendered in the English language.  The arbitrators will have no authority to award
any damages prohibited by this Agreement and/or any remedy that could not have been awarded by a state or federal
court located in the in the Borough of Manhattan, New York, New York, USA.  The arbitrators’ decisions and awards
shall  be  provided  in  writing  and  shall  include  the  basis  on  which  they  are  made.    The  award  rendered  by  the
arbitrators  shall  be  final,  non-appealable  and  binding  on  the  Parties  and  may  be  entered  and  enforced  in  any  court
having jurisdiction over the Party against whom the award is being enforced and/or such Party’s assets.  During any
Dispute, each Party agrees to continue to perform its obligations under this Agreement if and until such performance
is excused pursuant to the resolution of such Dispute.  In addition, each Party hereby submits to the non-exclusive
jurisdiction of the state and

31

 
 
federal  courts  located  in  the  Borough  of  Manhattan,  New  York,  New  York,  USA  for  purposes  of  determining  the
arbitrability  of  any  Dispute,  causing  such  Party  to  appear  for  and  participate  in  such  arbitration  and  enforcing  any
award granted by the arbitrators, and each Party hereby submits to such jurisdiction. Notwithstanding the foregoing, if
Lonza commits a Willful Breach, Customer may, at its election, bring and maintain any claim against Lonza for such
Willful Breach against Lonza in any court of competent jurisdiction.

Entire Agreement.  This Agreement contains the entire agreement between the Parties as to the subject matter hereof
and supersedes all prior and contemporaneous agreements with respect to the subject matter hereof, excluding for
clarity  the  Separate  Agreements.  This  Agreement  may  be  executed  in  any  number  of  counterparts,  each  of  which
shall be deemed to be an original, and all of which together shall constitute one and the same document.  Each Party
acknowledges that an original signature and/or a copy thereof transmitted by email and/or by .pdf shall constitute an
original signature for purposes of this Agreement.

Third Party Rights.  The Parties to this Agreement do not intend that any term hereof should be enforceable by virtue
of the Contracts (Rights of Third Parties) Act 1999 by any person who is not a party to this Agreement.

Non-Exclusive  Nature  of  Remedies.    Unless  otherwise  expressly  set  forth  in  this  Agreement,  no  remedies  set  forth
herein  shall  be  considered  an  exclusive  remedy.    Pursuit  or  receipt  of  any  remedies  by  a  Party  for  breach  of  this
Agreement  by  the  other  Party  does  not  constitute  an  election  of  remedies  by  such  Party  to  the  exclusion  of  other
remedies potentially available.

16.7

16.8

16.9

16.10

Successors.    Subject  to  the  restrictions  on  transfer  contained  in  this  Agreement,  this  Agreement  will  enure  to  the
benefit of and be binding on the Parties and their respective successors and permitted assigns.

*  *  *  *  *  *  *

32

 
 
CONFIDENTIAL

IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed by its duly authorized

representative effective as of the date written above.

LONZA AG

By:

By:

Name
Title

Name
Title

ALLAKOS, INC.

By:

Name:
Title:

Page 33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONFIDENTIAL

APPENDIX A
[Redacted]

Page 34

 
 
 
 
 
 
 
 
CONFIDENTIAL

APPENDIX B
[Redacted]

Page 35

 
 
CONFIDENTIAL

APPENDIX C
[Redacted]

Page 36

 
CONFIDENTIAL

APPENDIX D
[Redacted]

Page 37

 
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
(4) Registration Statement (Form S-8 No. 333-236631) pertaining to the 2018 Equity Incentive Plan, and the 2018 Employee Stock Purchase Plan

of our reports dated March 1, 2021, 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, 2020.

Exhibit 23.1

/s/ Ernst & Young LLP

Redwood City, California
March 1, 2021

 
 
 
 
 
 
 
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: March 1, 2021

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, Adam Tomasi, 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: March 1, 2021

By:

/s/ Adam Tomasi
Adam Tomasi, Ph.D.
President, Chief Operating Officer and 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, 2020 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)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.

Date: March 1, 2021

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, 2020 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)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.

Date: March 1, 2021

By:

/s/ Adam Tomasi
Adam Tomasi, Ph.D.
President, Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)