Aptevo Therapeutics Inc.
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIODFROM TO Commission File Number 001-37746 APTEVO THERAPEUTICS INC.(Exact name of Registrant as specified in its Charter) Delaware81-1567056(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)2401 4th Avenue, Suite 1050Seattle, Washington98121(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (206) 838-0500 Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $0.001 par valueThe NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate 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 preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). YES ☒ NO ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “largeaccelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a small reporting company) Small reporting company ☒ As of March 24, 2017 the number of shares of Registrant’s common stock outstanding was 20,918,290. Prior to the separation of Registrant from Emergent BioSolutions Inc. onAugust 1, 2016, the Registrant was a wholly-owned subsidiary of Emergent BioSolutions Inc. Consequently, there were no aggregate market value of common stock held by non-affiliates of the Registrant prior to August 1, 2016. The aggregate market value of common stock held by non-affiliates of the Registrant as of March 24, 2017 was $30.8 million,based upon the closing price of the Registrant’s common stock on the NASDAQ Stock Market LLC.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end ofthe fiscal year covered by this Annual Report on Form 10-K, relating to the Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.  EXPLANATORY NOTE This Annual Report on Form 10-K for the year ended December 31, 2016 includes consolidated financial statements for the years ended December31, 2015 and December 31, 2016. The audited consolidated financial statements for the year ended December 31, 2015 are restated. Aptevo Therapeutics Inc.and its subsidiaries (the Company) has also restated certain unaudited quarterly financial information related to March 31, 2016, and June 30, 2016, and thethree and nine months ended September 30, 2016. Additionally, in part as a result of these restatements, management has concluded that our deferred income tax account controls and procedures werenot effective as of December 31, 2015, and September 30, 2016 following the August 1, 2016 spin-off resulting in a material weakness around these taxcontrols. Subsequent to the date of the spin-off we enhanced our deferred income tax account-related controls to ensure the proper determination of the effecton deferred income tax accounts from certain purchase accounting transactions prior to Aptevo’s spin-off. While these controls are not subject to an audit byour Independent Registered Public Accounting Firm, management has evaluated these controls and concluded that the material weakness has beensufficiently remediated, refer to Item 9A -- Controls and Procedures in this Form 10-K. ii Table of Contents PagePART I Item 1. Business 1Item 1A. Risk Factors 24Item 1B. Unresolved Staff Comments 63Item 2. Properties 63Item 3. Legal Proceedings 64Item 4. Mine Safety Disclosures 64 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 65Item 6. Selected Financial Data 65Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 66Item 7A. Quantitative and Qualitative Disclosures About Market Risk 80Item 8. Financial Statements and Supplementary Data 83Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 111Item 9A. Controls and Procedures 111Item 9B. Other Information 111 PART III Item 10. Directors, Executive Officers and Corporate Governance 112Item 11. Executive Compensation 112Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 112Item 13. Certain Relationships and Related Transactions, and Director Independence 112Item 14. Principal Accountant Fees and Services 112 PART IV Item 15. Exhibits, Financial Statement Schedules 113Item 16. Form 10-K Summary 113 In this Annual Report on Form 10-K, “we,” “our,” “us,” “Aptevo,” and the “Company” refer to Aptevo Therapeutics Inc. and, where appropriate, itsconsolidated subsidiaries. iii PART I Cautionary Note Regarding Forward-Looking Information This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs andassumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-lookingstatements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In somecases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,”“believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words orterms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. Allforward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume noobligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actualevents or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknownrisks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detailunder the heading “Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks anduncertainties.Item 1. Business.OVERVIEWWe are a biotechnology company focused on novel oncology (cancer) and hematology (blood disease) therapeutics to meaningfully improvepatients’ lives. Our core technology is the ADAPTIR™ (modular protein technology) platform. We have four revenue-generating products in the areas ofhematology and infectious diseases, as well as various investigational stage product candidates in immuno-oncology.On August 6, 2015, Emergent BioSolutions Inc., (Emergent or Former Parent), announced a plan to separate into two independent publicly tradedcompanies. To accomplish this separation, Emergent created Aptevo Therapeutics Inc. or Aptevo, to be the parent company for the development-basedbiotechnology business focused on novel oncology and hematology therapeutics. Aptevo was incorporated in Delaware in February 2016 as a wholly ownedsubsidiary of Emergent. To effect the separation, Emergent made a pro rata distribution of Aptevo’s common stock to Emergent’s stockholders on August 1,2016. We are currently trading on the NASDAQ Global Market under the symbol “APVO.”Our pipeline is composed of marketed products for hematology and infectious disease indications and investigational stage candidates based on ourADAPTIR platform, primarily focused on immuno-oncology indications. Our investigational stage product candidates MOR209/ES414 and otlertuzumaband our preclinical candidates, ES210, APVO436, and a proof of concept bispecific immunotherapeutic protein targeting ROR1 are built on our novelADAPTIR platform, which is designed to expand on the utility and effectiveness of therapeutic antibodies. The platform can be used to producemonospecific, bispecific and multispecific immunotherapeutic proteins that specifically bind to one or more targets, which we believe provide structural andfunctional advantages over monoclonal antibodies. The mechanisms of action for MOR209/ES414, ES210, APVO436, otlertuzumab and a proof of conceptbispecific immunotherapeutic protein targeting ROR1 include direct tumor cytotoxicity, antibody-dependent cell-cytotoxicity, redirected T-cellcytotoxicity, or RTCC, and targeted cytokine delivery. The structural differences of ADAPTIR molecules over monoclonal antibodies allow for thedevelopment of other ADAPTIR immunotherapeutics that engage immune effector cells and disease targets in a novel manner to produce unique signalingresponses. We are skilled at product candidate generation, validation and subsequent pre-clinical and clinical development using the ADAPTIR platform. Weintend to progress ADAPTIR molecules from concept to marketed product by way of our protein engineering, pre-clinical development, process developmentand CRO management, cGMP manufacturing oversight and clinical development capabilities. We also expect to have the ability to launch, market andcommercialize these product candidates upon approval and might also use contracted resources to augment our capabilities.1 Our pipeline is composed of marketed products for hematology and infectious disease indications and investigational stage candidates based on ourADAPTIR platform, primarily focused on immuno-oncology indications. Our investigational stage product candidates MOR209/ES414 and otlertuzumaband our preclinical candidates, ES210, APVO436, and a proof of concept bispecific immunotherapeutic protein targeting ROR1 are built on our novelADAPTIR platform, which is designed to expand on the utility and effectiveness of therapeutic antibodies. The platform can be used to producemonospecific, bispecific and multispecific immunotherapeutic proteins that specifically bind to one or more targets, which we believe provide structural andfunctional advantages over monoclonal antibodies. The mechanisms of action for MOR209/ES414, ES210, APVO436, otlertuzumab and a proof of conceptbispecific immunotherapeutic protein targeting ROR1 include direct tumor cytotoxicity, antibody-dependent cell-cytotoxicity, redirected T-cellcytotoxicity, or RTCC, and targeted cytokine delivery. The structural differences of ADAPTIR molecules over monoclonal antibodies allow for thedevelopment of other ADAPTIR immunotherapeutics that engage immune effector cells and disease targets in a novel manner to produce unique signalingresponses. We are skilled at product candidate generation, validation and subsequent pre-clinical and clinical development using the ADAPTIR platform. Weintend to progress ADAPTIR molecules from concept to marketed product by way of our protein engineering, pre-clinical development, process developmentand CRO management, cGMP manufacturing oversight and clinical development capabilities. We also expect to have the ability to launch, market andcommercialize these product candidates upon approval and might also use contracted resources to augment our capabilities.Our marketed products are: •IXINITY® coagulation factor IX (recombinant), indicated in adults and children 12 years of age and older with hemophilia B for control andprevention of bleeding episodes, and management of bleeding during operations; •WinRho® SDF Rho(D) Immune Globulin Intravenous (Human), for treatment of autoimmune platelet disorder, also called immunethrombocytopenic purpura, or ITP, and, separately, for the treatment of hemolytic disease of the newborn, or HDN; •HepaGamB® Hepatitis B Immune Globulin Intravenous (Human), for prevention of Hepatitis-B recurrence following liver transplantation inHBsAg-positive liver transplant patients, and for treatment following exposure to Hepatitis-B; and •VARIZIG® Varicella Zoster Immune Globulin (Human), for treatment following exposure to varicella zoster virus, which causes chickenpox,in high-risk individuals. Our investigational stage product candidates include: •MOR209/ES414, a bispecific immunotherapeutic ADAPTIR protein, currently in Phase 1 clinical development, targeting prostate specificmembrane antigen, or PSMA, an enzyme that is expressed on the surface of prostate cancer cells, and a component of the T-cell receptorcomplex, or TCR complex, expressed on all T-cells. The mechanism of action of MOR209/ES414 is redirected T-cell cytotoxicity, or RTCCagainst tumors expressing PSMA. It is being developed under our collaboration with MorphoSys AG, or MorphoSys, for metastaticcastration-resistant prostate cancer, which is advanced prostate cancer that has spread to other organs and no longer responds to hormoneblocking therapies. •ES210, a bispecific ADAPTIR protein therapeutic that is currently in pre-clinical development for inflammatory bowel disease, includingulcerative colitis, Crohn’s Disease, and other autoimmune and inflammatory diseases. •otlertuzumab, a monospecific ADAPTIR protein therapeutic that is currently in Phase 2 clinical development for chronic lymphocyticleukemia, or CLL. •a proof of concept bispecific immunotherapeutic ADAPTIR protein targeting ROR1, an antigen found on several solid tumors andhematologic, or blood-related, malignancies. One pair of binding domains bind to ROR1 on tumors; the other pair of binding domains bindto CD3 an invariant component of the TCR complex. Initial preclinical data demonstrates RTCC activity in vitro and killing of tumors inanimal models demonstrating that ROR1 can be targeted with an ADAPTIR bispecific.2 •APVO436, a bispecific ADAPTIR protein therapeutic that is currently in pre-clinical development targeting CD123, a cell surface receptorhighly expressed on several hematological malignancies and CD3, a component of the T-cell receptor. Similar to MOR209/ES414 and theROR1 preclinical program, APVO436 utilizes RTCC to initiate killing of tumor cells. Preclinical data on this anti-CD123 ADAPTIRbispecific will be presented at the 2017 annual meeting of the American Association for Cancer Research. These data demonstrate in vitroRTCC activity and in vivo tumor cell killing in animal models of disease, demonstrating that CD123 can be targeted with an ADAPTIRbispecific. •Other therapeutic protein product candidates primarily targeting cancer based on mechanisms of action that modulate the immune system(immuno-oncology based mechanism of action).Our principal executive offices are located at 2401 4th Ave., Suite 1050, Seattle, Washington 98121. Our telephone number is (206) 838-0500. Wemaintain a web site at www.AptevoTherapeutics.com. Our website and the information contained on the website or connected to the website shall not bedeemed to be incorporated into this Form 10-K filing, and you should not rely on any such information in making an investment decision.STRATEGYWe seek to grow our business by, among other things:Advancing our ADAPTIR platform, initially focusing on immunotherapy and the development of novel bispecific proteins for the treatment ofcancer. We focus on product development using our ADAPTIR platform. We are developing the MOR209/ES414 ADAPTIR bispecific program incollaboration with MorphoSys, with the goal of commercializing the product in North America. We plan to generate additional bispecific proteinimmunotherapies for early development, potentially with other collaborative partners, to further validate the potential of the ADAPTIR platform. We intendto favor the development of bispecific candidates that have the potential to demonstrate proof of concept early in development and are differentiated fromother strategies in key oncology indications. We expect to continue to expand the ADAPTIR product pipeline to address areas of unmet medical need.Bispecifics and multispecific ADAPTIR proteins will be generated to target tumors using the immune system or direct cytokine delivery to selective cellpopulations. We believe these product candidates may have utility in oncology, autoimmune disease and other therapeutic areas.Continuing to develop new products. We are committed to new product development. We have expertise in molecular biology, antibody engineeringand the development of protein therapeutics, including cell line development, protein purification, process development and analytical characterization. Webelieve that these core areas of expertise enable the development of therapeutics based on the ADAPTIR platform technology from design, pre-clinicaltesting, and clinical development to preparation of a biologics license application, or BLA.Establishing collaborative partnerships to broaden our pipeline and provide funding for research and development. We intend to continue todevelop and grow our product portfolio through internal research and development as well as through collaborations potentially with other biotechnologyand pharmaceutical companies, academia and non-governmental organizations. Supporting the future growth of our pipeline by maximizing the financial contribution of our hyperimmune products and IXINITY. We intend tocontinue to maximize the financial contribution of our hyperimmune products, WinRho, HepaGam B, VARIZIG and IXINITY for the purpose of funding ourresearch and development efforts. This may require further investments.3 PLATFORM TECHNOLOGY AND PRODUCT PORTFOLIOPlatform TechnologyADAPTIR Platform. The platform can be used to produce monospecific, bispecific and multispecific immunotherapeutic proteins that specificallybind to one or more targets and receptors found on immune cells to mediate tumor killing and improve disease response by modulating the immune cellsdirectly or immune environment. We believe we are well positioned for the development of bispecific therapeutics, which are antibody-based molecules thatare able to bind multiple targets of therapeutic interest, utilizing our innovative ADAPTIR (modular protein technology) platform. This allows us to take anovel approach to cancer immunotherapy.Structurally, ADAPTIR molecules are similar to antibodies; they can exhibit the same biological functions of an antibody, but can be easily modifiedto either eliminate or incorporate new activities, all the while maintaining a similar size, stability and manufacturing advantages of a monoclonal antibody.The ADAPTIR molecules are single-chain polypeptides comprising customized elements including a protein domain that binds to one or more target bindingdomains to a hinged domain and a set of antibody constant domains known as the fragment crystallizable region, or Fc region of a human antibody. Theantibody Fc region can elicit an immune response by binding to the corresponding Fc receptors found on various immune cells such as natural killer (NK)cells, and other cells, including cancer cells to mediate antibody-dependent cell cytotoxicity resulting in killing of the cancer cell. With the ADAPTIRplatform, the Fc region can be modified to enhance or eliminate these functions. Incorporation of the Fc region into the ADAPTIR platform also provides foran extended serum half-life by engaging recycling via the neonatal Fc receptor (FcRn). A long serum half-life could potentially reduce dosing frequency anddose quantity.Multispecific ADAPTIR molecules are similar in structure to monospecific ADAPTIR molecules with the exception that they have two or morecustomized target binding domains on the ends of the Fc region. Multiple targeting domains allow ADAPTIR molecules to bind to two or more targets. Wehave created several bispecific molecules that are able to redirect T-cell cytotoxicity. T-cells are white blood cells that fight infections and tumor cells. RTCCADAPTIR molecules cause T-cells to specifically kill a tumor by binding to a common component (CD3) found on the T-cell and then binding to a specifictumor antigen on a specific tumor, activating a T-cell to kill the tumor. 4 We believe the ADAPTIR platform is a promising platform technology within the rapidly growing field of immuno-oncology therapeutics. Thestructural differences between ADAPTIR molecules and monoclonal antibodies, allow for the development of new immunotherapeutics that engage diseasetargets in a novel manner and produce a unique signaling response. By customizing the binding domains of our ADAPTIR molecules, we are able to select fordesired potency, half-life, toxicity and stability/manufacturability. We have the potential to develop products with mechanisms of action including but notlimited to RTCC and targeted cytokine delivery. We believe the ADAPTIR platform may prove to have advantages over other immunotherapeutics and otherbispecific T-cell engaging technologies. In particular, in pre-clinical studies, we have gathered data indicating that MOR209/ES414 may have high potencyand activity at low doses, a long half-life, and reduced cytokine release. This molecule is able to be produced using standard manufacturing practices. Furtherclinical and preclinical studies may not confirm or establish the anticipated benefits of this platform.We own all ADAPTIR platform intellectual property except that we have a non-exclusive research license with Lonza Sales AG, or Lonza, for certainChinese hamster ovary, or CHO, cell lines, which are cells derived from the ovary of a Chinese hamster. The CHO is often used in the production oftherapeutic proteins, in protein expression and the GS (glutamine synthetase) Gene Expression SystemTM, or GS System. See section entitled “IntellectualProperty” for additional information about the ownership rights to ADAPTIR.Product PortfolioOur marketed products are in the areas of hematology and infectious diseases.Marketed Products Product Indication(s) Regulatory Approvals IXINITY® [coagulation factor IX (recombinant)] Control and prevention of bleeding episodes andfor perioperative management in adults andchildren, 12 years of age and older, with hemophiliaB. United States WinRho® SDF [(Rho(D) Immune Globulin Intravenous (Human)] ITP—immune thrombocytopenic purpura(described further below)HDN—hemolytic disease of the newborn (describedfurther below)Preventing Rho(D) immunization in Rho(D)(-)women.Treating Rho(D)(-) patients after transfusions withincompatible Rho(D)(+) blood or erythrocyte (redblood cell) products. Canada—ITP, HDNUnited States—ITP, HDNPortugal—HDNHong Kong – ITP, HDNSouth Korea – ITP, HDNTurkey – ITP, HDNUruguay – ITP, HDNIraq- ITP, HDNKuwait – ITP, HDN HepaGam B® [Hepatitis B Immune Globulin Intravenous (Human)] Treatment following exposure to hepatitis BPrevention of hepatitis B recurrence following livertransplantation in patients who are positive forhepatitis B surface antigen (a protein found on thesurface of hepatitis B virus and in the blood orserum of hepatitis B infected individuals) United StatesCanadaIsraelKuwaitTurkey5 Product Indication(s) Regulatory Approvals VARIZIG® [Varicella Zoster Immune Globulin (Human)] Treatment following exposure to varicella zostervirus (chickenpox) in high-risk patient groups,including [1] adults or children with compromisedimmune systems, newborns of mothers withvaricella shortly before or after delivery, neonatesand infants less than one year of age, and pregnantwomen (United States); and[2] prevention and reduction of severity in maternalinfections within four days of exposure to varicellazoster virus (Canada). United States—[1]Canada—[2] IXINITY (coagulation factor IX (recombinant)). IXINITY is a third-generation recombinant human coagulation factor IX approved in the UnitedStates for the control and prevention of bleeding episodes and for perioperative management in adults and children 12 years of age or older with hemophiliaB. Hemophilia B, also known as Christmas disease, is a rare, inherited bleeding disorder. The blood of hemophilia B patients has an impaired clotting ability,which results from substantially reduced or missing factor IX activity. Patients with hemophilia B commonly experience joint bleeding with pain andswelling, which can result in irreversible joint damage. They may also experience more serious or life-threatening hemorrhages. People with hemophilia Brequire factor IX injections to restore normal blood coagulation temporarily. Many patients use regular, prophylactic treatment to try to prevent bleedingepisodes, while others use on-demand treatment to control bleeding episodes after they occur. Treatment selection and approach is individualized based onfactors including the patient’s condition and age, factor level severity, bleeding pattern, activity level and individual pharmacokinetic parameters.WinRho SDF Rho(D) Immune Globulin Intravenous (Human). WinRho SDF is made from human plasma and is comprised of purified polyclonalhuman immune globulins that bind to red blood cells that are positive for Rho(D) (also known as Rho(D)(+) red blood cells). WinRho SDF is approved in theUnited States and Canada to treat an autoimmune platelet disorder called ITP, a disease characterized by both platelet destruction mediated byautoantibodies and impaired platelet production. ITP can be either short-lived or chronic and symptoms can vary from mild bruising to serious bleeding suchas gastrointestinal hemorrhage or intracranial hemorrhage. WinRho SDF is also approved in the United States and Canada to prevent Rh immunization inRho(D) negative mothers not previously sensitized to Rho(D) factor. This prevents the development of Rh antibodies in the mother thereby preventinghemolytic disease of the newborn, or HDN, in which the mother’s immune system attacks a Rh-positive newborn’s red blood cells.HepaGam B Hepatitis B Immune Globulin Intravenous (Human). HepaGam B is comprised of purified polyclonal human immune globulins that aredirected to the hepatitis B surface antigen, which is a protein found on the surface of the hepatitis B virus and in the blood or serum of hepatitis B infectedindividuals. In the United States, Canada, Israel, Kuwait and Turkey, HepaGam B has been approved for two indications: for the prevention of hepatitis Breinfection after liver transplantation and for use following exposure to the hepatitis B virus. Hepatitis B is a chronic infection and a major global healthconcern; up to 2.2 million individuals in the United States and an estimated 240 million people worldwide are chronically infected. Chronic infection canlead to cirrhosis, hepatocellular carcinoma, and even death, so prevention of hepatitis B infection is an important public health issue. In addition, prior to theavailability of hepatitis B immune globulin such as HepaGam B and antivirals, liver transplantation was associated with poor survival, HepaGam B is the firsthepatitis B immune globulin product to be licensed in the United States for the liver transplant-related indication.6 VARIZIG Varicella Zoster Immune Globulin Human. VARIZIG is comprised of purified polyclonal human immune globulins directed to thevaricella zoster virus, the virus that causes chickenpox. While most North American adults have developed immunity to chickenpox, certain at-risk patientpopulations may be susceptible to infection. VARIZIG is approved in the United States to reduce the severity of varicella (chickenpox) following exposure inhigh-risk patient groups, including adults and children with compromised immune systems, newborns of mothers with varicella shortly before or afterdelivery, neonates and infants less than one year of age, and pregnant women. VARIZIG has orphan drug exclusivity in the United States through December2019. In Canada, VARIZIG is approved for the prevention and reduction of severity in maternal infections within four days of exposure to varicella zostervirus.Product CandidatesOur pipeline includes investigational stage product candidates in immune-oncology.MOR209/ES414. MOR209/ES414 is a targeted immunotherapeutic protein under development for metastatic castration-resistant prostate cancer,currently in Phase 1 clinical development. MOR209/ES414, a bispecific protein, was constructed using our ADAPTIR platform technology. It activates hostT-cells to specifically kill tumor cells expressing prostate specific membrane antigen, or PSMA, an enzyme that is commonly overexpressed on the surface ofprostate cancer cells. MOR209/ES414 contains two pairs of binding domains, one targeting the CD3 of the TCR complex and one targeting PSMA on tumorcells; these binding domains are linked to opposite ends of an antibody Fc region which extends the serum half-life and enables use of a purification processtypical of antibodies. In pre-clinical studies, MOR209/ES414 has been shown to redirect T-cell cytotoxicity towards prostate cancer cells expressing PSMA.In December 2015, after a joint review of data from the Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients, Aptevo and MorphoSysconcluded that the dosing regimen and administration required adjustment. See the section entitled “Collaborations and Licenses” for additional informationabout our collaboration with MorphoSys to develop MOR209/ES414.ES210. ES210 is an anti-inflammatory molecule engineered using our ADAPTIR platform technology currently in pre-clinical development. It isunder development for the treatment of inflammatory bowel disease, including ulcerative colitis and Crohn’s Disease, and other autoimmune andinflammatory diseases. ES210 is a targeted cytokine therapeutic, specifically, it is designed to deliver a modified form of the anti-inflammatory cytokine, IL-10, to antigen presenting cells, or APCs, that express CD86. APCs are a therapeutic target of interest for an anti-inflammatory therapeutic such as ES210because, as described further below, APCs play a critical role in the immune response. Structurally, ES210 contains a modified form of IL-10, coupled tobinding sites specific for CD86, linked by an antibody Fc region. The mechanism of action results in suppression of T-cell responses through inhibition ofantigen presentation. Antigen presenting cells play a central role in the generation and regulation of immune response and inflammation; therefore,inhibiting their function represents a therapeutic opportunity to suppress immunopathological processes in autoimmune and inflammatory disease. ES210preclinical data demonstrate potent in vitro and in vivo antagonism of T-cell proliferation in human mixed lymphocyte reactions and in a humanized graft-versus-host disease model. Humanized refers to chemically altering animal proteins to resemble natural human amino acid sequences (or the order in whichthey bond). The ES210 ADAPTIR molecule also has potential anti-inflammation applications in rheumatoid arthritis and in the treatment of transplantrejection. As a molecule designed using our ADAPTIR platform technology, the ES210 half-life is extended as demonstrated in preclinical rodent studies.Also, manufacturing benefits are realized because the platform enables use of a purification process that is typically used for making antibodies.otlertuzumab. Otlertuzumab is a monospecific protein therapeutic intended for the treatment of CLL. CLL is a type of cancer that affects the bloodand bone marrow and is caused by B-cells within the blood and bone marrow that abnormally proliferate and die. Otlertuzumab is a humanized anti-CD37monospecific protein therapeutic built using the ADAPTIR platform technology. It specifically binds to CD37, a receptor found on malignant B-cells. Itfunctions like an antibody by direct killing of tumor and also engages natural killer cells, which are lymphocytes of the immune system, and other effectorcells to kill the tumor cell. We believe that otlertuzumab’s novel properties may provide patients with improved therapeutic options and enhanced efficacywhen used in combination with chemotherapy or other targeted therapeutics.7 We completed a Phase 2 clinical trial evaluating the combination of otlertuzumab and bendamustine (a chemotherapy agent) versus bendamustinealone in people with relapsed CLL (Study 16201). In that study the combination of otlertuzumab and bendamustine was superior to bendamustine alone. Thecombination was well tolerated with significantly increased response rate (69% vs. 39%, p=0.003) and prolonged progression free survival rate (15.9 monthsvs. 10.1 months, p=0.0059) over single agent bendamustine treatment. The overall incidence of serious adverse events was similar between the two treatmentcohorts. There was a higher incidence of adverse events of fever, neutropenia (which is a low white blood cell count that could predispose a patient toinfection) and thrombocytopenia (which is a low platelet count that if severe could lead to bleeding) with the combination. The addition of otlertuzumab didnot appear to increase the number of serious adverse events, as there were fewer discontinuations for adverse events with the combination compared tobendamustine alone.We are conducting a Phase 1b study to evaluate the safety and efficacy of otlertuzumab in combination with rituximab, an anti-CD20-directedbiologic that binds to CD20, a receptor found primarily on the surface of immune system B-cells. We amended our Phase 1b single-arm study to includeevaluating otlertuzumab in combination with obinutuzumab in patients with previously untreated CLL (Study 16009). Patients began enrolling in this armof the study mid-2015. Preliminary data showed that the combination was active and generally tolerated. We continue to evaluate opportunities forotlertuzumab as a product candidate in the treatment of CLL.ROR1. We have developed a proof of concept bispecific immunotherapeutic protein that targets ROR1, an antigen found on several solid tumors andhematologic, or blood-related, malignancies and CD3. The proof of concept molecules were created using our ADAPTIR platform; each with one pair ofbinding domains, with one pair binding to ROR1 on tumors and the other pair of binding domains binding to the CD3, a component of the TCR complex. Itsmechanism of action is RTCC against tumors expressing ROR1. Initial preclinical data demonstrate significant RTCC against tumors in preclinical modelsdemonstrating that ROR1 can be targeted with an ADAPTIR bispecific. We are currently developing product candidates targeting ROR1 that will bedesigned for therapeutic uses.APVO436. We have developed APVO436, a preclinical ADAPTIR bispecific immunotherapeutic protein targeting CD123, a cell surface receptorhighly expressed on several hematological malignancies and CD3, a component of the T-cell receptor. Similar to MOR209/ES414 and the ROR1 preclinicalprogram, APVO436 utilizes redirected T-cell cytotoxicity (RTCC) to initiate killing of tumor cells. Preclinical data on this anti-CD123 ADAPTIR bispecificwill be presented at the 2017 annual meeting of the American Association for Cancer Research. These data demonstrate in vitro RTCC activity and in vivotumor cell killing in animal models of disease, demonstrating that CD123 can be targeted with an ADAPTIR bispecific.ADAPTIR Therapeutic Candidates. Multiple additional candidates that are focused on immuno-oncology and based on the ADAPTIR platformtechnology are in different stages of pre-clinical development.Potential adverse events related to our product candidatesExperimental drugs may have a variety of adverse events related to their target, mechanism of action or off target toxicities. Clinical trials areconducted to define the efficacy and safety of a new molecule and this data is reviewed by the FDA prior to FDA approval. The majority of the drugs that weare developing are intended for the treatment of cancer. Because cancer is a serious and life threatening disease, these patients experience a number of seriousadverse events as part of their disease. The risk-benefit ratio for new treatments of cancer is different than other less serious diseases. For example, for thetreatment of hypertension, it is not acceptable for a drug to lower the number of white blood cells that fight infections. However, chemotherapy for thetreatment of cancer frequently lowers the number of white blood cells and infections do occur, which physicians manage in the course of a patient’s cancertreatment. In order to distinguish whether a new drug causes adverse events, a controlled trial is frequently conducted comparing a new drug to anothertherapy.8 In clinical trials to date with otlertuzumab, a variety of adverse events have been reported. The events that have been reported with infusion of thedrug include: infusion reactions, fever, neutropenia and thrombocytopenia. Severe infusion reactions were infrequent. When these reactions are severe theylead to hypotension (low blood pressure) and bronchospasm (difficulty breathing). Neutropenia is a low white blood cell count that could predispose apatient to infection. The neutropenia observed with otlertuzumab was mild to moderate, not prolonged and did not increase the infection rate in a controlledclinical trial. Thrombocytopenia is a low platelet count that if severe could lead to bleeding. The thrombocytopenia observed with otlertuzumab wasinfrequent and not associated with bleeding. Any of these events or others that have not yet been experienced, could lead to adverse events, including deathand severely limit the drug’s use in the market or even its ability to be approved by a regulatory body.MOR209/ES414 is currently being tested in its first clinical trial in humans. Fifteen patients have received the drug. One of the significant seriousadverse events associated with the drug to date is infusion reactions. Infusion reactions are often associated with the infusion of a protein and are expectedwith this drug that activates T-cells. The other serious adverse events that have been reported with infusion of the drug include: fever, fatigue, hypertension,bronchospasm, chills and rigors. The severity of these reactions varied by patient and were managed medically and resolved.As previously noted, in December 2015, after a joint review of data from the Phase 1 dose escalation study of MOR209/ES414 in prostate cancerpatients, Aptevo and MorphoSys concluded that the dosing regimen and administration required adjustment. See section entitled “Collaborations andLicenses” for additional information about our collaboration with MorphoSys to develop MOR209/ES414.Research and DevelopmentWe are engaged in research and development of therapeutics including the product candidates listed above and other new candidates. We incursubstantial expenses for these activities. These expenses generally include the cost of inventing new technologies and products, as well as development workon new product candidates. We pursue partnerships with various third parties and these partnerships and the sales of our approved products partially offsetthese expenditures. Research and development expenses for the years ended December 31, 2016 and 2015 totaled approximately $29.5 million and $37.4million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Research and Development Expense”in this Annual Report on Form 10-K for additional information regarding expenditures related to material research and development activities.DistributionOur products are sold in the United States by our commercial sales force and distributed to end-users through major U.S. distributors and wholesalers,including Cardinal Health, Inc., McKesson Corporation, AmerisourceBergen Corporation and other specialty distributors. In Canada, our products are sold toCanadian Blood Services and Héma-Québec, with Emergent acting as our exclusive Canadian distributor. Outside of North America, our commercial productsare distributed primarily through third-party distributors. All third-party logistics (including, for instance, warehousing, inventory management, andshipping) of final drug product are provided by Emergent out of its facilities in either Winnipeg, Manitoba, Canada or Baltimore, Maryland pursuant to theterms of our Manufacturing Services Agreement.Marketing & SalesWe have biotechnology commercial operations and medical affairs teams with experience in sales, marketing, distribution, reimbursement andmedical support.9 The commercial operations team includes two U.S.-based field sales forces. The hemophilia sales team focuses its selling efforts primarily onhemophilia treatment centers and hematology clinics, while the immunology team concentrates on hematology/oncology and medical oncology clinics,transplant centers and public and private hospitals. Outside of the United States, our products are sold through a network of regional independentdistributors. Orders are filled upon receipt, and we generally have no orders on backlog. The commercial operations team also includes a marketing team withexperience in building pharmaceutical and biological brands across all stages of the product life cycle. Reimbursement support, patientassistance/compassionate use and non-medical customer inquiries are handled by customer service personnel within our commercial operations team.Our medical affairs team includes field-based medical science liaisons, who respond to customer requests for information, establish and maintaincompany relationships with researchers and clinicians, train our product specialists and sales personnel and interface with clinical trial investigators. Ourmedical affairs team also supports customers by providing medical information, drug safety and pharmacovigilance services.CompetitionOur products and product candidates face significant competition. Any product or product candidate that we successfully develop and commercializeis likely to compete with currently marketed products, as well as other novel product candidates that are in development for the same indications.Specifically, the competition with respect to our products and product candidates includes the following: •IXINITY. Currently, IXINITY competes with four recombinant factor IX products that are marketed in North America: Rixubis (Baxalta USInc.), Benefix® (Pfizer Inc.) Idelvion® (CSL Behring) and Alprolix® (Biogen Idec Inc.) recombinant factor IX products. We expect that NovoNordisk Inc. will also launch a factor IX agent in the future. •WinRho SDF. In the United States, the use of WinRho SDF is primarily for the ITP indication. In the United States ITP market, WinRho SDFcompetes with IVIG (several manufacturers), Rhophylac® (CSL Behring, a subsidiary of CSL Limited), Nplate® (Amgen Inc.) and Promacta®(GlaxoSmithKline plc). In Canada, the use of WinRho SDF is primarily for the HDN indication. There are several products in late phaseclinical trials for ITP also expected to enter this category. •HepaGam B. HepaGam B is currently the only intravenous hepatitis B immune globulin licensed for the liver transplantation indication inthe United States and Canada. HepaGam B competes with two products that are marketed in North America: Nabi-HB® (BiotestPharmaceuticals Corporation) and HyperHEP B® S/D (Grifols USA, LLC). Nabi-HB® and HyperHEP B® S/D are both licensed to treat acuteexposure to blood containing hepatitis B surface antigen (post-exposure prophylaxis) and administered via intramuscular injection. The useof anti-viral drugs is also a competitive threat to this product. •VARIZIG. No other currently manufactured competitive product is marketed in the North American markets. •MOR209/ES414. If approved for the treatment of metastatic castration-resistant prostate cancer, we anticipate that MOR209/ES414 wouldcompete with Taxotere® (Sanofi-Aventis U.S. LLC), Jevtana (Sanofi-Aventis U.S. LLC), Zytiga® (Janssen Biotech, Inc.), Xtandi® (AstellasPharma, Inc.), Xofigo® (Bayer HealthCare Pharmaceuticals Inc.), Provenge® (Dendreon Corporation) and potentially other products currentlyunder development. There is a potential that MOR209/ES414 could also be used in combination with these same agents. According to theAmerican Cancer Society, prostate cancer is the most common cancer in men in the United States. Screening, radiation, surgery and hormoneablation therapy have greatly improved the detection and treatment of early stage prostate cancer. New therapies approved recently forpatients with metastatic castration-resistant prostate cancer only improve life expectancy by a few months, and a significant medical needstill exists for these individuals.10 •ES210. If approved, we anticipate that ES210 would compete with products indicated for inflammatory bowel diseases such as ulcerativecolitis, including: HUMIRA® (AbbVie Inc.), Remicade® (Janssen Pharmaceuticals, Inc. of Johnson and Johnson) and Entyvio® (TakedaPharmaceuticals U.S.A., Inc., a subsidiary of Takeda Pharmaceutical Company Limited). Depending on what ES210 is approved for, weanticipate that it could also compete with products indicated for moderate to severe Crohn’s Disease, including: Stelara (JanssenPharmaceuticals, Inc. of Johnson and Johnson) and Xeljanz (Pfizer Inc.). •otlertuzumab. If approved for CLL, we anticipate that otlertuzumab would compete with, or be combined with, other B-cell depletingtherapies, targeted therapies and chemotherapeutics, including: Rituxan® (Genentech, Inc., a member of the Roche Group), Treanda®(Cephalon, a subsidiary of Teva Pharmaceutical Industries Ltd.), Arzerra® (GlaxoSmithKline plc and Genmab A/S), Imbruvica™(Pharmacyclics, Inc. and Johnson and Johnson), Gayzva™ (Genentech USA, Inc., a member of the Roche Group), Zydelig® (Gilead Sciences,Inc.) and VenclextaTM (AbbVie). Nordic Nanovector has a product candidate targeting CD37 in Phase 1 development. In addition,Boehringer Ingelheim GmbH and ImmunoGen, Inc. are in early stage development for monoclonal antibodies directed to CD37. In addition,Boehringer Ingelheim GmbH and ImmunoGen, Inc. are in early stage development for monoclonal antibodies directed to CD37. •ROR1. If approved, we anticipate that the proof of concept bispecific immunotherapeutic protein targeting ROR1 we develop may competewith other ROR1 directed protein therapeutics, including those that block the growth of cancer cells by binding to specific proteins neededfor tumor formation and growth and that are under current clinical and pre-clinical development. We also anticipate that any proof of conceptbispecific immunotherapeutic protein targeting ROR1 may compete with ROR1-directed cellular therapies, such as chimeric antigenreceptor-modified T-cells (T-cells collected from a patient’s own blood and genetically modified to express chimeric antigen receptors thatallow the T-cells to recognize specific tumor cells), also known as CAR-T, that are under current clinical development by MD AndersonCancer Center as well as a separate program under pre-clinical development by Juno Therapeutics, Inc. •APVO436. If approved for AML, we anticipate that APVO436 would compete with other agents targeting CD123 that are in development ifthey are also approved. Bispecifics in development targeting CD123 include: MGD006 (Macrogenics), JNJ-63709178 (Janssen) andXmAb14045 (Xencor). There are at least two CAR-T therapies in development; CART123 (University of Penn.) and CARTCD123 (NCI/Cityof Hope). Other competitive products targeting CD123 are: SGN-CD123A (antibody drug conjugate, Seattle Genetics), SL-401 (antibodyimmunotoxin, Stemline), KHK2833 (monoclonal antibody, Kyowa Hakko Kirin Pharma), and CSL362 (monoclonal antibody, CSL/Janssen).COLLABORATIONS AND LICENSESWe have entered into several significant collaborations and transactions to support our growth. These include the following:Collaboration with MorphoSys AG to develop MOR209/ES414In August 2014, we entered into a collaboration agreement with MorphoSys to co-develop and commercialize our novel oncologyimmunotherapeutic, MOR209/ES414, developed for treatment of metastatic castration-resistant prostate cancer. Under the collaboration agreement, we retaincommercialization rights in the United States and Canada, with a tiered royalty obligation to MorphoSys, ranging from mid-single digit up to 20% of sales.MorphoSys has worldwide commercialization rights excluding the United States and Canada, with a low single digit royalty obligation to us. The royaltyterm is determined on a product-by-product and country-by-country basis and begins on the date at which a substantial amount of cumulative net sales hasbeen reached and ends on the expiration of patents covering such licensed product in such country or twelve years after the initiation of royalty payments ifthere is no such valid claim.11 In December 2015, after a joint review of data from the ongoing Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients, we andMorphoSys concluded that the dosing regimen and administration required adjustment. The decision to adjust development of MOR209/ES414 was notbased on safety aspects but was driven by the high complexity and properties of this first generation ADAPTIR bispecific molecule. Patients receivingweekly doses of MOR209/ES414 developed antibodies against the drug; this is called anti-drug antibodies, or ADA. ADA developed in most patientsincluding those receiving the maximum tolerated dose of drug that could be given safely on a weekly basis. These antibodies bind to the drug, reduced theconcentration of MOR209/ES414 in the blood and thus could potentially reduce its efficacy. We observed no safety issues related to the development ofADA. The cause of these antibodies is unclear but could be due to the weekly administration of the drug. The protocol has been amended to continuousintravenous infusion as a way to administer higher levels of drug and prevent the development of ADA. As a result of the dosing regimen change and theimpact to the overall development timeline and technical risk, we amended our co-development agreement with MorphoSys in December 2015. Under theterms of the amended agreement, MorphoSys’ cost sharing in the years 2016 to 2018 was reduced and future milestone payments payable by MorphoSys tous were reduced to a total of up to $74.0 million. In addition, the amended collaboration agreement changed the total expected funding requirement for us toup to approximately $250 million. The MOR209/ES414 Phase I clinical trial under the amended protocol, providing continuous intravenous infusion as away to administer higher levels of drug and prevent the development of ADA, commenced December 2016.In December 2016, the collaboration agreement was further amended to adjust the allocation of certain manufacturing and development costs andextend MorphoSys’s convenience termination rights. Under the amendment, we will bear 75% of all development costs with respect to MOR209/ES414, andMorphoSys will bear 25% of such costs, during the period from January 1, 2017 through June 30, 2017. During the period from July 1, 2017 throughDecember 31, 2018, we will bear 49% of such development costs and MorphoSys will bear 51%.Beyond January 1, 2019, we will bear 36% and MorphoSyswill bear 64% of such development costs. In addition, the timeframe for a one-time right to terminate the collaboration agreement by MorphoSys has beenextended from December 31, 2016 to June 30, 2017, or within one week following the receipt and discussion of clinical data from the first six patientsenrolled and dosed in the MOR209/ES414 Phase I clinical trial.Product License and Trademark License Agreements with EmergentIn July 2016 in connection with the separation, we entered into a product license agreement with Emergent pursuant to which Emergent granted us aperpetual, exclusive royalty-free, nontransferable worldwide license, under certain licensed intellectual property rights, to research, develop, make, havemade, use, sell, offer to sell and import WinRho SDF, HepaGam B and VARIZIG in their respective indications to support our hyperimmune products. Underthe product license agreement, in the event we cease to use Emergent as a manufacturer of our hyperimmune products, we are only permitted to exercise rightswith respect to Emergent’s human hyperimmune platform manufacturing know-how through a third-party contract manufacturer which has either beenapproved by Emergent (in Emergent’s sole and absolute discretion) or if there has been a manufacturing failure under the Emergent manufacturing servicesagreement. We may terminate our rights under the agreement at any time by providing written notice to Emergent. Emergent may terminate the agreement ifwe breach the agreement and the breach is not cured within a specified period of time or is incapable of cure. Each party may terminate the agreement if theother party experiences certain bankruptcy events.We entered into a trademark license agreement with Emergent pursuant to which Emergent granted us a non-exclusive, royalty-free, worldwide, non-sublicensable license under certain trademarks of Emergent to distribute the physical inventory of packaging and marketing materials assigned to us as partof the distribution, solely to sell, offer to sell and otherwise commercialize the commercial products until such inventory of packaging and marketingmaterials is depleted or, if earlier, the third anniversary of the distribution. We may terminate our rights under the agreement at any time by providing writtennotice to Emergent. Emergent may terminate the agreement if we breach the agreement and the breach is not cured within a specified period of time or isuncurable.12 License with the University of North Carolina to IXINITY intellectual property rightsIn connection with our separation from Emergent, we assumed an exclusive license from the University of North Carolina, or UNC, to make, havemade, use, offer for sale, sell and import factor IX and factor VII(a) therapeutics, including IXINITY, under certain UNC’s patents. We are required to pay a lowsingle digit royalty obligation to UNC under the license. The license agreement expires when the last of the licensed patents expire, on a country-by-countrybasis. The last of the licensed patents expires in or around September 2024. Patent term extension is being sought in the United States, and if granted, the lastpatent to expire in the United States will expire in or around November 2028. UNC may terminate the license if a material breach is not cured forty-five daysafter notice, we become bankrupt or insolvent, or we do not pay a yearly minimum earned royalty (in the mid-five digits). We can terminate the license withsixty days’ notice to UNC.MANUFACTURING AND SUPPORT SERVICESIn connection with our separation, we entered into a manufacturing services agreement with Emergent. Emergent owns facilities with manufacturingand other capabilities located in Winnipeg, Manitoba, Canada, where our hyperimmune specialty plasma products WinRho SDF, HepaGam B and VARIZIGare currently manufactured. Under the agreement, Emergent will continue to manufacture our hyperimmune specialty plasma products. Under this agreement,Emergent also provides third-party logistics services for our hyperimmune specialty plasma products and IXINITY.The manufacturing services agreement with Emergent covers each step in the manufacturing process from raw materials procurement, bulkmanufacturing, filling and finishing, testing, labeling, and packaging of final product, as well as third-party logistics services for delivery of such product toAptevo customers on our behalf. We are reliant exclusively on Emergent for the provision of each of these services as it relates to WinRho SDF, HepaGam Band VARIZIG and as it relates to third-party logistics services for IXINITY. Emergent also serves as a distributor in Canada under the Canadian distributoragreement we entered into with Emergent. Pursuant to this arrangement, Emergent receives product intended for sale in Canada on our behalf and delivers itto our other Canadian distributors: Canadian Blood Services and Hema-Quebec.In addition, Emergent is providing transition services to us and may provide such services for up to two years following the separation. Theseservices cover such functions as regulatory, pharmacovigilance, clinical research and quality assurance under our supervision. Pharmacovigilance refers tothe drug safety evaluation process during clinical trials or after market approval where the effects of therapeutics or medical drugs are monitored to identifyand evaluate adverse reactions.As more fully explained below, we rely primarily on CMC ICOS Biologics, Inc., or CMC, for drug substance manufacture of IXINITY, on Patheon UKLimited for fill-finish services of IXINITY and on Rovi Contract Manufacturing, S.L. for supply of the syringe pre-filled with water for injection packagedwith IXINITY. IXINITY will be delivered to Aptevo customers by Emergent as part of the third-party logistics services it provides to Aptevo under themanufacturing services agreement. For additional information, see the section entitled “Risk Factors—Risks Related to Our Business” in this Annual Reporton Form 10-K, Commercial packaging, packaging component procurement and release, ancillary procurement and distribution for IXINITY will be providedby Emergent and various other parties.Sources and Availability of Raw MaterialsWe rely on Emergent for all supplies and raw materials used in the production of WinRho SDF, HepaGam B and VARIZIG.13 Agreement with CMC Biologics. We rely on CMC, for the manufacture of the substance that becomes the active ingredient (the bulk drug substance)in the production of our IXINITY product. We have an exclusive Commercial Supply (Manufacturing Services) Agreement with CMC pursuant to which,subject to specified exceptions, we are obligated to purchase at least eight batches and CMC is obligated to maintain a maximum capacity for sixteen batchesof IXINITY bulk drug substance per full year. The agreement has a six-year term expiring on June 17, 2017. CMC is obligated to use commerciallyreasonable efforts to perform services in accordance with our forecast and projected delivery dates. In the event there is a supply failure as defined under theagreement, the agreement becomes non-exclusive with respect to 50% of our forecasted demand (or up to the unsupplied quantities until supplyreinstatement).The agreement provides for milestone payments in addition to fees for services. The milestone payments set forth in the agreement have been paid.To the extent an invoice dispute is not resolved within sixty days of our original notice, if we have withheld payment, CMC is entitled to suspend theservices until such time dispute is resolved in accordance with terms of the agreement. In addition to other limitations on damages (e.g. specific toreplacement of defective product), with several exceptions, neither party is liable under the agreement for loss or damage in respect of indirect, special orconsequential damages or losses. With several exceptions, CMC’s aggregate liability to us for any loss or damage suffered by us under the agreement inrespect of services in a calendar year is limited to an amount equal to 1.1 times the total price of the services performed under the agreement subject to amaximum of $30.0 million. Each party may terminate the agreement if the other party fails to pay any amount properly due and payable with ten days ofnotice demanding payment after the expiration of the original payment term or if the other party materially breaches the agreement and fails to remedy anysuch breach capable of remedy during a twenty business day notice period. Each party may terminate the agreement if the other party experiences certainbankruptcy events. This agreement may be terminated by either party in the event of a material breach by the other party; however, termination shall notaffect the accrued rights of either party. We may also terminate our obligations under the agreement with a specified amount of prior notice, if CMC has anymaterial permit or regulatory license permanently revoked preventing the performance of services by CMC, if CMC is subject to certain competitor change ofcontrol events, or where there is a supply failure prior to a supply reinstatement where CMC does not reinstate supply within twelve months of the supplyfailure.Agreement with Patheon UK Limited. Patheon UK Limited, or Patheon, through an affiliate, is currently the sole source third-party manufacturer thatperforms the services of filling the bulk drug substance into vials for our IXINITY product. We have a non-exclusive Manufacturing Services Agreement withPatheon pursuant to which Aptevo is obligated to order, and Patheon agrees to perform, a specified amount of such services on an annual basis. Under theagreement, Patheon also agrees to use commercially reasonable efforts to perform services in excess of such minimum purchase commitments subject to itsavailable capacity. The agreement has an initial three-year term expiring on May 26, 2018, and thereafter renews for successive terms of two years each,unless either party gives the other party at least eighteen months’ notice. We may terminate the agreement on a specified amount of notice if a regulatoryauthority prevents us from importing, exporting, purchasing or selling the product or if we no longer order services for a product due to the product’sdiscontinuance in the market; however, we must still perform any surviving obligations as specified in the agreement. Patheon may terminate the agreementupon six months’ notice if we assign our rights under the agreement to an assignee that, in Patheon’s opinion acting reasonably, is not a credit-worthysubstitute, a Patheon competitor, or an entity with whom Patheon has had prior unsatisfactory business relations. Each party may terminate the agreement ifthe other party breaches the agreement and the breach is not cured within a specified period of time, if the other party experiences certain bankruptcy events,or upon a period of notice if the parties do not agree upon certain pricing adjustments. Except in respect of liability for certain third party claims, breach ofconfidentiality obligations, or replacement of defective product, Patheon’s liability is limited under the agreement to 10% of the revenues for such year toPatheon under the agreement. Patheon’s liability in respect of replacement of defective product is limited to the amount paid by us to Patheon for suchproduct. Except in respect of a breach of confidentiality obligations, neither party is liable to the other under the agreement for any loss of profits or otherdamages of an indirect or consequential nature.14 Agreement with Rovi Contract Manufacturing, S.L. Rovi Contract Manufacturing, S.L., or Rovi, is currently the sole source third-party manufacturerthat supplies the syringe pre-filled with water for injection, that is packaged with and required for reconstitution of our IXINITY product. We have a non-exclusive supply agreement with Rovi pursuant to which Rovi is obligated to use its best efforts to supply the quantity of syringes ordered by us. Theagreement has a five-year term expiring on April 28, 2019, and thereafter renews for successive five-year terms, unless Rovi provides us with written notice ofits intent not to renew at least twenty-four months prior to the expiration of the term or any renewal term. We may terminate the agreement for any reason onat least twelve months’ prior notice. Each party may terminate the agreement if the other party breaches the agreement and the breach is not cured within aspecified period of time. Neither party is liable under the agreement for loss or damage in respect of indirect, special or consequential damages or lossesexcept to the extent such damages are caused by willful misconduct. Each party’s liability under the agreement, annually and in the aggregate, is limited tothree times the amount invoiced by Rovi under the agreement for products during the 12-month period preceding the incident with a maximum limit of sixmillion Euros; provided that in respect of certain third-party claims or costs resulting or arising from defective or infringing products or claims for injunctiverelief, each party’s liability under the agreement, annually and in the aggregate, is limited to six million Euros.INTELLECTUAL PROPERTYWe actively seek intellectual property protection for our products and product candidates. We own or exclusively license patent rights supportingIXINITY, the ADAPTIR platform and pipeline products including MOR209/ES414, ES210, and otlertuzumab. We practice patent life cycle management byfiling patent applications to protect new inventions relating to meaningful improvements to our products and related methods. We primarily seek patentprotection for inventions that support our products and product candidates, but from time to time we seek patent protection for inventions that could, forinstance, support a potential business opportunity or block a competitor from designing around our existing patents.In general, and where possible, we pursue patent protection in countries where we believe there will be a significant market for the correspondingproduct or product candidate. We generally do not seek patent protection in countries where we have reason to believe we would not be able to enforcepatents. For instance, we tend to not file in countries that are frequently listed on the Priority Watch List of the Special 301 Report prepared by the Office ofthe United States Trade Representative, with the exception that we occasionally file patent applications in China, Russia and India. We may also decide totake a narrower filing approach for secondary and improvement type inventions as compared to inventions that are more foundational to our products. We donot seek patent protection in countries which are on the United Nations, or U.N., list of Least Developed Countries.The term of protection for various patents associated with and expected to be associated with our marketed products and product candidates istypically twenty years from the filing date but may vary depending on a variety of factors including the date of filing of the patent application or the date ofpatent issuance and the legal term of patents in the countries in which they are obtained. The protection afforded by a patent varies on a product-by-productbasis and country-to-country basis and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the necessity for terminal disclaimers, the availability of legal remedies in a particular country and the validity and enforceability of thepatents.In some cases, we may decide that the best way to protect our intellectual property is to retain proprietary information as trade secrets andconfidential information rather than to apply for patents, which would involve disclosure of proprietary information to the public. When determining whetherto protect intellectual property as a trade secret, we consider many factors including, for instance, our ability to maintain the trade secret, the likelihood that acompetitor will independently develop the information, our ability to patent protect the intellectual property and the likelihood we would be able to enforcea resulting patent.We are a party to a number of license agreements under which we license patents, patent applications and other intellectual property. Theseagreements impose various commercial diligence and financial payment obligations on us. We expect to continue to enter into these types of licenseagreements in the future.15 ADAPTIR Platform. We protect the ADAPTIR platform technology through a combination of patents and trade secrets. We own all ADAPTIRplatform intellectual property, except that we have a non-exclusive research license with Lonza to certain CHO cell lines, which are cells derived from theovary of a Chinese hamster and often used in biological and medical research and commercially in the production of therapeutic proteins, for use in proteinexpression and the GS System. The GS System is a cell transfection and protein expression system that uses a robust viral promoter and selection viaglutamine metabolism to provide rapid development of high-yielding and stable mammalian cell lines that express transfected proteins of therapeuticinterest. The GS System is well known in the industry, and according to Lonza, is a familiar system that has been used by over 100 global pharmaceutical andbiotechnology companies. Under our Lonza research license, we have an option to take a license to use the GS System to develop and manufacturetherapeutic proteins for our commercial purposes.The intellectual property we own that supports our ADAPTIR platform was generated internally at Emergent or at Trubion Pharmaceuticals, Inc., orTrubion, prior to its acquisition by Emergent in 2010, or at Aptevo following the separation. One patent family which supports use of unique linkers in thehomodimer (a molecule consisting of two identical halves) version of the platform was invented jointly by Trubion and Wyeth Pharmaceuticals, Inc., orWyeth, as part of a collaboration between the two companies. Upon termination of a product license agreement between Wyeth and Trubion, Wyeth assignedthe rights it had in that platform patent family to Trubion. These rights have since transferred to us.In order to differentiate our platform inventions from antibodies and other antibody-like constructs that have been publicly disclosed, many of ourpatents and patent applications are directed to unique aspects or components of our platform such as linkers or binding domains. Our ADAPTIR platform canbe homodimeric or heterodimeric. Although most of our patent families protect both homodimeric and heterodimeric forms of the platform, we also have apatent family that is focused on the heterodimeric form of the platform.We have filed patent applications for the ADAPTIR platform in the United States and in countries and territories, including Australia, Brazil, Canada,China, Egypt, Europe, India, Indonesia, Israel, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa, South Korea, United Arab Emirates andVietnam. We plan to continue to improve our ADAPTIR platform and to file patent applications on those improvements. Our decision as to where to file anynew ADAPTIR improvement inventions will be based in part on the significance of the improvement. If patents issue on the pending ADAPTIR patentapplications, the patent term for those patents are estimated to expire between June 2027 and September 2036.Hyperimmune products, WinRho, HepaGam B and VARIZIG. We rely on the confidential nature of our in-licensed manufacturing know-how aswell as trade secret protection to protect our licensed products to the extent we are able to do so. In connection with our separation from Emergent, wereceived a license from Emergent under certain of its proprietary human hyperimmune platform manufacturing know-how that we may exercise underspecified circumstances. Our WinRho SDF, HepaGam B and VARIZIG products are protected by Emergent’s manufacturing trade secrets. We rely on thisintellectual property to protect our WinRho SDF, HepaGam B and VARIZIG products. We do not have patent protection for WinRho SDF, HepaGam B orVARIZIG.IXINITY (coagulation factor IX (recombinant)). We license patents and patent applications from UNC, which support the manufacture of factor IXand other Vitamin K Dependent Proteins. In addition to the patent assets licensed from UNC, we own a patent portfolio with claims generally directed tofactor IX pharmaceutical compositions, methods of making recombinant factor IX protein, and cell lines producing recombinant factor IX protein. This patentportfolio includes issued patents in Australia, Europe and Japan and pending patent applications in other territories including the United States. If patentsissue on our pending patent applications, the patent term for those patents is estimated to expire between December 2026 and October 2030. The estimatedpatent expirations are subject to change based on patent term adjustments, extensions or terminal disclaimers.MOR209/ES414. We have patents and pending patent applications supporting the MOR209/ES414 product candidate. We have foundationalpatents and patent applications in countries including the United States, Australia, Brazil, Canada, China, Egypt, Europe, Hong Kong, India, Indonesia,Israel, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa, United Arab Emirates and Vietnam. The foundational patents which grant in thispatent family are estimated to expire in April 2032. The estimated patent expirations are subject to change based on patent term adjustments, extensions orterminal disclaimers.16 ES210. We have patents and pending patent applications supporting our ES210 product candidate. We have foundational patents and patentapplications in countries and territories, including the United States., Australia, Brazil, Canada, China, Eurasia, Europe, Hong Kong, India, Japan, Mexico,New Zealand, Singapore, South Africa and South Korea. The foundational patents which grant in this patent family are estimated to expire in October 2029.The estimated patent expirations are subject to change based on patent term adjustments, extensions or terminal disclaimers.otlertuzumab. We have patents and pending patent applications supporting the otlertuzumab product candidate. We have foundational patents andpatent applications in countries and territories, including the United States, Canada, China, Europe, Hong Kong, India, Israel, Japan, Mexico, New Zealand,Russia, South Africa and South Korea. The foundational patents and patent applications which grant in these patent families are estimated to expire betweenJuly 2026 and April 2029. The estimated patent expirations are subject to change based on patent term adjustments, extensions or terminal disclaimers.Corporate Trademarks. Where possible, we pursue registered trademarks for our marketed products in significant markets. In addition, we havepending trademark applications covering APTEVO, a graphic logo, APTEVO THERAPEUTICS, APTEVO BIOTHERAPEUTICS, APTEVO RESEARCH ANDDEVELOPMENT and ADAPTIR.REGULATIONRegulations in the United States and other countries have a significant impact on our product development, manufacturing and marketing activities.Product Development for TherapeuticsPre-clinical Testing. Before beginning testing of any compounds with potential therapeutic value in human subjects in the United States, stringentgovernment requirements for pre-clinical data must be satisfied. Pre-clinical testing includes both in vitro, or in an artificial environment outside of a livingorganism, and in vivo, or within a living organism, laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Weperform pre-clinical testing on all of our product candidates before we initiate any human trials.Investigational New Drug Application. Before clinical testing may begin, the results of pre-clinical testing, together with manufacturing information,analytical data and any other available clinical data or literature, must be submitted to the United States Food and Drug Administration, or FDA, as part of anInvestigational New Drug Application, or IND. The sponsor must also include an initial protocol detailing the first phase of the proposed clinicalinvestigation, together with information regarding the qualifications of the clinical investigators. The pre-clinical data must provide an adequate basis forevaluating both the safety and the scientific rationale for the initial clinical studies in human volunteers. The IND automatically becomes effective 30 daysafter receipt by the FDA, unless the FDA imposes a clinical hold within that 30-day time period.Clinical Trials. Clinical trials involve the administration of the drug to healthy human volunteers or to patients with the target disease or disorderunder the supervision of a qualified physician (also called an investigator) pursuant to an FDA-reviewed protocol. Human clinical trials typically areconducted in three sequential phases, although the phases may overlap with one another. Clinical trials must be conducted under protocols that detail theobjectives of the study, the parameters to be used to monitor safety and the efficacy criteria, if any, to be evaluated. Each protocol must be submitted to theFDA as part of the IND. •Phase 1 clinical trials test for safety, dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacology and, ifpossible, for early evidence regarding efficacy. •Phase 2 clinical trials involve a small sample of individuals with the target disease or disorder and seek to assess the efficacy of the drug forspecific targeted indications to determine dose response and the optimal dose range and to gather additional information relating to safetyand potential adverse effects.17 •Phase 3 clinical trials consist of expanded, large-scale studies of patients with the target disease or disorder to obtain definitive statisticalevidence of the efficacy and safety of the proposed product and dosing regimen. The safety and efficacy data generated from Phase 3 clinicaltrials typically form the basis for FDA approval of the product candidate. •Phase 4 clinical trials, if conducted, are conducted after a product has been approved. These trials can be conducted for a number of purposes,including to collect long-term safety information or to collect additional data about a specific population. As part of a product approval, theFDA may require that certain Phase 4 studies, which are called post-marketing commitment studies, be conducted post-approval.Good Clinical Practice. All of the phases of clinical studies must be conducted in conformance with the FDA’s bioresearch monitoring regulationsand Good Clinical Practices, or GCP, which are ethical and scientific quality standards for conducting, recording and reporting clinical trials to assure thatthe data and reported results are credible and accurate and that the rights, safety and well-being of trial participants are protected. Additionally, anInstitutional Review Board at each site participating in a trial must obtain ongoing approval for conduct of the trial at that site.Marketing Approval—BiologicsBiologics License Application. All data obtained from a comprehensive development program, including research and product development,manufacturing, pre-clinical and clinical trials, labeling and related information are submitted in a biologics license application, or BLA, to the FDA and insimilar regulatory filings with the corresponding agencies in other countries for review and approval. The submission of an application is not a guarantee thatthe FDA will find the application complete and accept it for filing. The FDA may refuse to file the application and request additional information rather thanaccept the application for filing, in which case the application must be resubmitted with the supplemental information. The FDA has two months to review anapplication for its acceptability for filing. Once an application is accepted for filing, the Prescription Drug User Fee Act, or PDUFA, establishes a two-tieredreview system: Standard Review and Priority Review. When conducting Priority Review, the FDA has a goal to review and act on BLA submissions withinsix months from the date of the FDA’s acceptance for filing of the application, rather than the ten-month goal under a Standard Review. The FDA givesPriority Review status to product candidates that provide safe and effective therapies where no satisfactory alternative exists or to a product candidate thatconstitutes a significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease.In addition, under the Pediatric Research Equity Act of 2003, or PREA, BLAs and certain supplements must contain data to assess the safety andefficacy of the product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatricsubpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwiserequired by regulation, PREA does not apply to any drug or biologic for an indication for which orphan designation has been granted.In reviewing a BLA, the FDA may grant approval or deny the application through a complete response letter if it determines the application does notprovide an adequate basis for approval requesting additional information. Even if such additional information and data are submitted, the FDA mayultimately decide that the BLA does not satisfy the criteria for approval. The receipt of regulatory approval often takes many years, involving the expenditureof substantial financial resources. The speed with which approval is granted often depends on a number of factors, including the severity of the disease inquestion, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. The FDA may also impose conditions uponapproval. For example, it may require a Risk Evaluation and Mitigation Strategy, or REMS, for a product. This can include various required elements, such aspublication of a medication guide, patient package insert, a communication plan to educate health care providers of the drug’s risks and/or restrictions ondistribution and use, such as limitations on who may prescribe or dispense the drug. The FDA may also significantly limit the indications approved for agiven product and/or require, as a condition of approval, enhanced labeling, special packaging or labeling, post-approval clinical trials, expedited reportingof certain adverse events, pre-approval of promotional materials or restrictions on direct-to-consumer advertising, any of which could negatively impact thecommercial success of a drug.18 Fast Track Designation. The FDA may designate a product as a fast track drug if it is intended for the treatment of a serious or life-threatening diseaseor condition and demonstrates the potential to address unmet medical needs for this disease or condition. Sponsors granted a fast track designation for a drugare granted more opportunities to interact with the FDA during the approval process and are eligible for FDA review of the application on a rolling basis,before the application has been completed.Breakthrough Therapy. Under the provisions of the Food and Drug Administration Safety and Innovation Act, or FDASIA, the FDA may designate aproduct as a breakthrough therapy if the product is intended, alone or in combination with one or more other products, to treat a serious or life-threateningdisease or condition, and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one ormore clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Products designated as breakthroughtherapies are also eligible for accelerated approval. The FDA must take certain actions, such as holding timely meetings and providing advice, intended toexpedite the development and review of an application for approval of a breakthrough therapy.Orphan Drugs. Under the Orphan Drug Act, an applicant can request the FDA to designate a product as an “orphan drug” in the United States if thedrug is intended to treat an orphan, or rare, disease or condition. A disease or condition is considered orphan if it affects fewer than 200,000 people in theUnited States. Orphan drug designation must be requested before submitting a BLA. Products designated as orphan drugs are eligible for special grantfunding for research and development, FDA assistance with the review of clinical trial protocols, potential tax credits for research, waived filing fees formarketing applications and a seven-year period of market exclusivity after marketing approval. Orphan drug exclusivity (afforded to the first applicant toreceive approval for an orphan designated drug) prevents FDA approval of applications by others for the same drug for the designated orphan disease orcondition. The FDA may approve a subsequent application from another applicant if the FDA determines that the application is for a different drug ordifferent use, or if the FDA determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assurethe availability of sufficient quantities of the drug to meet the public’s need. A grant of an orphan designation is not a guarantee that a product will beapproved. Our product candidate otlertuzumab was granted orphan drug designation for the treatment of CLL by the FDA in November 2011 and receivedorphan medicinal product designation from the European Commission in December 2012 for the treatment of CLL. Orphan designation in Europe qualifies adrug for certain development and commercial incentives, including protocol assistance, access to centralized authorization procedures, reduced fees forregulatory activities, and ten years of market exclusivity after approval.Post-Approval Requirements. Any biologic for which we receive FDA approval will be subject to continuing regulation by the FDA, including,among other things, record keeping requirements, reporting of adverse experiences, providing the FDA with updated safety and efficacy information, productsampling and distribution requirements, current good manufacturing practices, or cGMP, and restrictions on advertising and promotion. Adverse events thatare reported after marketing approval can result in additional limitations being placed on the product’s distribution or use and, potentially, withdrawal orsuspension of the product from the market. In addition, the FDA authority to require post-approval clinical trials and/or safety labeling changes if warranted.In certain circumstances, the FDA may impose a REMS after a product has been approved. Facilities involved in the manufacture and distribution ofapproved products are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspectionsby the FDA for compliance with cGMP and other laws. The FDA also closely monitors advertising and promotional materials we may disseminate for ourproducts for compliance with restrictions on off-label promotion and other laws. We may not promote our products for conditions of use that are not includedin the approved package inserts for our products. Certain additional restrictions on advertising and promotion exist for products that have boxed warnings intheir approved package inserts, such as WinRho SDF.19 Pricing, Coverage and ReimbursementIn the United States and internationally, sales of our products and our ability to generate revenues on such sales are dependent, in significant part, onthe availability and level of reimbursement from third-party payors, including state and federal governments and private insurance plans. Insurers haveimplemented cost-cutting measures and other initiatives to enforce more stringent reimbursement standards and likely will continue to do so in the future.These measures include the establishment of more restrictive formularies and increases in the out-of-pocket obligations of patients for such products. Inaddition, particularly in the United States and increasingly in other countries, we are required to provide discounts and pay rebates to state and federalgovernments and agencies in connection with purchases of our products that are reimbursed by such entities. Various provisions of the Patient Protection andAffordable Care Act (as amended by the Health Care and Education Reconciliation Act), collectively referred to as the Affordable Care Act, increased thelevels of rebates and discounts that we have to provide in connection with sales of such products that are paid for, or reimbursed by, certain state and federalgovernment agencies and programs. It is possible that future legislation in the United States and other jurisdictions could be enacted, which could potentiallyimpact the reimbursement rates for our products and also could further impact the levels of discounts and rebates we are required to pay to state and federalgovernment entities. The most significant governmental reimbursement programs in the United States relevant to our products are described below:Medicare Part B. Medicare Part B covers certain drug products provided in a physician’s office or hospital outpatient setting under a paymentmethodology using “average sales price,” or ASP, information. We are required to provide ASP information to the Centers for Medicare & Medicaid Services,or CMS, on a quarterly basis. Medicare payment rates using an ASP methodology are currently set at ASP plus six percent, although this rate could change infuture years. If we fail to timely or accurately submit ASP, we could be subject to civil monetary penalties and other sanctions. WinRho SDF, HepaGam B,VARIZIG and IXINITY are all eligible to be reimbursed under Medicare Part B.Medicaid Rebate Program. For products to be covered by Medicaid, drug manufacturers must enter into a rebate agreement with the Secretary of HHSon behalf of the states and must regularly submit certain pricing information to CMS. The pricing information submitted, including information about the“average manufacturer price,” or AMP, and “best price” for each of our covered drugs, determines the amount of the rebate we must pay. The total rebate alsoincludes an “additional” rebate, which functions as an “inflation penalty.” The Affordable Care Act increased the amount of the basic rebate and, for some“line extensions,” increased the additional rebate. It also requires manufacturers to pay rebates on utilization by enrollees in managed care organizations. Ifwe fail to timely or accurately submit required pricing information, we could be subject to civil, monetary and other penalties. In addition, the AffordableCare Act changed the definition of AMP to address which manufacturer sales are to be considered, which affected the rebate liability for our products. Sales ofWinRho SDF, HepaGam B, VARIZIG and IXINITY that are reimbursed through Medicaid are subject to the obligations related to this program.340B/PHS Drug Pricing Program. The availability of federal funds to pay for WinRho SDF, HepaGam B, VARIZIG and IXINITY under the Medicaidand Medicare Part B programs requires that we extend discounts under the 340B/Public Health Service, or PHS, drug pricing program. The 340B/PHS drugpricing program requires participating manufacturers to charge no more than a statutorily-defined “ceiling” price to a variety of community health clinics andother covered entities that receive health services grants from the PHS, as well as the outpatient departments of hospitals that serve a disproportionate share ofMedicaid and Medicare beneficiaries. A product’s ceiling price for a quarter reflects its Medicaid AMP from two quarters earlier less its Medicaid rebateamount from two quarters earlier. Therefore, the above-mentioned revisions to the Medicaid rebate formula and AMP definition enacted by the AffordableCare Act could cause the discount produced by the ceiling price to increase. Under the Affordable Care Act, several additional classes of entities were madeeligible for these discounts, increasing the volume of sales for which we must now offer the 340B/PHS discounts.20 Federal Supply Schedule. We make WinRho SDF, HepaGam B, VARIZIG and IXINITY available for purchase by authorized users of the FederalSupply Schedule, or FSS, administered by the Department of Veterans Affairs, or DVA, pursuant to our FSS contract with the DVA. Under the Veterans HealthCare Act of 1992, we are required to offer deeply discounted FSS contract pricing to four federal agencies—the DVA, the Department of Defense, or DoD, theCoast Guard and the PHS (including the Indian Health Service)—for federal funding to be made available for reimbursement of any of our products under theMedicaid program, Medicare Part B and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSSpricing to those four federal agencies must be equal to or less than the “Federal Ceiling Price,” which is, at a minimum, 24% less than the Non-FederalAverage Manufacturer Price for the prior fiscal year.Foreign RegulationCurrently, we maintain a commercial presence in the United States and Canada. In the future, we may further expand our commercial presence toadditional foreign countries and territories. In the European Union, or EU, medicinal products are authorized following a process similarly demanding as theprocess required in the United States. Medicinal products must be authorized in one of two ways, either through the decentralized procedure, which providesfor the mutual recognition procedure of national approval decisions by the competent authorities of the EU Member States or through the centralizedprocedure by the European Commission, which provides for the grant of a single marketing authorization that is valid for all EU member states. Theauthorization process is essentially the same irrespective of which route is used. We are also subject to many of the same continuing post-approvalrequirements in the EU as we are in the United States (e.g., good manufacturing practices). We will be subject to varying preapproval, approval and post-approval regulatory requirements similar to those imposed by the FDA in each foreign country in which we conduct regulated activities.Healthcare Fraud and Abuse and Anti-Corruption LawsWe are subject to various federal and state laws pertaining to health care “fraud and abuse,” including state and federal anti-kickback laws falseclaims laws, and patent privacy and security laws. Anti-kickback laws make it illegal for a drug manufacturer to solicit, offer, receive or pay any remunerationin exchange for, or to induce, or in return for, the referral of business that may be reimbursed by a third party payor (including Medicare and Medicaid),including the purchase, prescribing or recommendation of a particular drug. Due to the breadth of the statutory provisions, it is possible that our practicesmight be challenged under anti-kickback or similar laws. Civil and criminal false claims laws, false statement laws and civil monetary penalty laws prohibit,among other things, anyone from knowingly and willingly presenting, or causing to be presented for payment, to third-party payors (including Medicare andMedicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medicallyunnecessary items or services. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Privacy andsecurity laws, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, create federal criminal and civil liability for executing ascheme to defraud any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up a material fact or making any materiallyfalse statement in connection with the delivery of or payment for healthcare benefits, items or services. Additionally, HIPAA, as amended by the HealthInformation Technology for Economic and Clinical Health, or HITECH, and their respective implementing regulations, impose certain requirements relatingto the privacy, security and transmission of individually identifiable health information.If we violate the healthcare fraud and abuse laws, we could be subject to sanctions, including civil and criminal penalties, damages, fines, exclusionfrom participation in federal healthcare programs such as Medicare and Medicaid, individual imprisonment, integrity obligations, and the curtailment orrestructuring of our operations, any of which could materially adversely affect our ability to operate our business and our financial results. Similar restrictionsare imposed on the promotion and marketing of medicinal products in other countries. Laws (including those governing promotion, marketing and anti-kickback provisions), industry regulations and professional codes of conduct are often strictly enforced. Even in those countries where we are not directlyresponsible for the promotion and marketing of our products, inappropriate activity by our international distribution partners can have implications for us.21 In addition, as part of the Affordable Care Act, the federal government enacted the Physician Payment Sunshine Act. Manufacturers of drugsbiologics and devices that are reimbursed by Medicare, Medicaid or the Children’s Health Insurance Program are required to annually report to CMSpayments and transfers of value made to physicians and teaching hospitals, and ownership or investment interest held by physicians and their familymembers. This information is posted on a public website. Failure to timely and accurately submit required information could subject us to civil penalties.Some local, state and foreign governments have similar laws. Many of these transparency requirements are new and uncertain and the extent to which thelaws will be enforced is not always clear.Our operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits corporations and individualsfrom directly or indirectly paying, offering to pay, or authorizing the payment of anything of value to any foreign government official or employee, or anyforeign political party or political candidate in an attempt to obtain or retain business or to otherwise influence such official, employee, party or candidate inhis or her or its official capacity. We also may be implicated under the FCPA by activities taken on our behalf by our partners, collaborative partners,consultants, distributors, contract research organizations, vendors or other agents and representatives. As a public company, the FCPA also requires us tomake and keep books and records that accurately and fairly reflect all of our transactions and to devise and maintain an adequate system of internalaccounting controls. Our operations are also subject to compliance with the U.K. Bribery Act of 2010, which applies to activities both in the public andprivate sector, Canada’s Corruption of Foreign Public Officials Act and similar laws in other countries where we do business.Health Care ReformA primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposalsduring the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and othermedical products, government control and other changes to the healthcare system in the United States.By way of example, the United States and state governments continue to propose and pass legislation designed to reduce the cost of healthcare. InMarch 2010, the Affordable Care Act, or the ACA, was enacted which, among other things, includes changes to the coverage and payment for products undergovernment health care programs. However, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, thatauthorizes the implementation of legislation that would repeal portions of the ACA. Although the Budget Resolution is not a law, it is widely viewed as thefirst step toward the passage of legislation that would repeal certain aspects of the ACA. Further, on January 20, 2017, President Trump signed an ExecutiveOrder directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation ofany provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers ofpharmaceuticals or medical devices. The first legislative proposal to repeal and replace the ACA was released in March 2017 by the House of Representativestitled, the “America Health Care Act”, or AHCA. The AHCA would, among other changes, eliminate individual and employer mandates, freeze enrollment inMedicaid expansion, eliminate certain taxes such as the “Cadillac” tax on high-cost employer-sponsored health plans, and create refundable tax credits toassist individuals in buying health insurance.22 Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in August 2011, the BudgetControl Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering thelegislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% perfiscal year, which went into effect in April 2013 and will remain 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, further reduced Medicare payments to severalproviders, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recoveroverpayments to providers from three to five years. Furthermore, there has been heightened governmental scrutiny recently over the manner in whichmanufacturers set prices for their marketed products. For example, there have been several recent Congressional inquiries and proposed bills designed to,among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reformgovernment program reimbursement methodologies for drug products.Additionally, on December 13, 2016, the 21st Century Cures Act, or Cures Act, was signed into law, which is designed to modernize and personalizehealthcare, spur innovation and research, and streamline the discovery and development of new therapies through increased federal funding of particularprograms. Among other provisions, the Cures Act reauthorizes the existing priority review voucher program for certain drugs intended to treat rare pediatricdiseases until 2020; creates a new priority review voucher program for drug applications determined to be material national security threat medicalcountermeasure applications; revises the Food, Drug, and Cosmetic Act to streamline review of combination product applications; requires FDA to evaluatethe potential use of “real world evidence” to help support approval of new indications for approved drugs; provides a new “limited population” approvalpathway for antibiotic and antifungal drugs intended to treat serious or life-threatening infections; and authorizes FDA to designate a drug as a “regenerativeadvanced therapy,” thereby making it eligible for certain expedited review and approval designations.We anticipate additional legislative changes in the future, including legislation to repeal and replace certain provisions of the ACA. It remains to beseen, however, precisely what the new legislation will provide, when it will be enacted, and what impact it will have on the availability of healthcare and/orcontaining or lowering the cost of healthcare.Other RegulationOur present and future business has been and will continue to be subject to various other laws and regulations. Various laws, regulations andrecommendations relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement, import,export, use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents used inconnection with our product development, are or may be applicable to our activities.EMPLOYEESAptevo employed 118 full-time persons as of December 31, 2016. The team is comprised of a dedicated group of accomplished professionals whobring a broad range of academic achievements combined with significant industry experience. We believe that our future success will depend in part on ourcontinued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union or covered by collective bargainingagreements. We believe that our relations with our employees are good.23 AVAILABLE INFORMATIONThe Aptevo investor website www.AptevoTherapeutics.com is currently operational. Our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,or the Exchange Act, are available on our website free of charge as soon as reasonably practicable after we electronically file those reports with, or furnishthem to, the Securities and Exchange Commission, or SEC.Also available free of charge on our website, the reports filed with the SEC by our executive officers, directors and ten percent stockholders pursuantto Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. In addition, alldisclosures that are required to be posted by applicable law, the rules of the SEC or the NASDAQ listing standards regarding any amendment to, or waiver of,our code of business conduct and ethics are available free of charge on our website. We have included our website address as an inactive textual referenceonly. The information contained on, or that can be accessed through, our website is not a part of, or incorporated by reference into, this annual report.Item 1A. Risk Factors.You should carefully consider the following risks and other information in this annual report on Form 10-K in evaluating us and our common stock.Any of the following risks could materially and adversely affect Aptevo’s results of operations, financial condition or financial prospects. The risk factorsgenerally have been separated into nine groups: operating risks, commercialization risks, regulatory and compliance risks, product development risks,intellectual property risks, risks related to collaborations, financial risks, risks related to the separation, and risks related to our common stock.RISKS RELATED TO OUR BUSINESSFinancial RisksWe have a history of losses and may not be profitable in the future.Our historical consolidated financial data prior to August 1, 2016 was prepared on a “carve-out” basis from the financial information of Emergent andshows that had we been a standalone company, we would have had a history of losses, and we may be unable to achieve profitability going forward.For the year ended December 31, 2016, we incurred a net loss of $112.4 million and we had an accumulated deficit of $80.7 million as of December31, 2016. For that same period, net cash used in our operating activities was $36.9 million. If we cannot achieve profitability or generate positive cash fromoperating activities, our business operations may be adversely impacted and the trading value of our common stock may decline.We will require additional capital and may be unable to raise capital when needed or on acceptable terms.As of December 31, 2016, we had cash, cash equivalents and marketable securities in the amount of $54.9 million. We will require significantadditional funding to grow our business including to develop additional products, support commercial marketing activities or otherwise provide additionalfinancial flexibility. In addition, we received an additional $20.0 million from Emergent pursuant to the terms of our separation on January 13, 2017. Toenhance long-term financial flexibility, we entered into a credit facility for up to $35.0 million, $20.0 million of which was received on August 4, 2016. Ourfuture capital requirements will depend on many factors, including: •the level, timing and cost of product sales; •the collection of accounts receivable from customers; •the extent to which we invest in products or technologies; •the ability to draw down on the second tranche of $15.0 million on the credit facility24 •the ability to secure partnerships and/or collaborations that generate additional cash; •capital improvements to new or existing facilities; •the payment obligations under our current or any future indebtedness; •the scope, progress, results and costs of our development activities; •the costs of commercialization activities, including product marketing, sales and distribution; •the ongoing costs associated with the separation from Emergent and performance under agreements with Emergent; and •the ongoing costs associated with replicating or outsourcing from other providers’ certain facilities, systems, operational and administrativeinfrastructure, including information technology infrastructure, and personnel, to which we no longer have access after our separation fromEmergent.If our capital resources are insufficient to meet our future capital requirements, we will need to finance our cash needs through bank loans, public orprivate equity or debt offerings, a sale of commercial assets, collaboration and licensing arrangements or other strategic transactions. Public or bank debtfinancing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additionaldebt, making capital expenditures, pursuing acquisition opportunities or declaring dividends. If we raise funds by issuing equity securities, our stockholderswill experience dilution. If we raise funds through collaboration and licensing arrangements with third parties or enter into other strategic transactions, it maybe necessary to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that may not be favorable to us.Current economic conditions may make it difficult to obtain additional financing on attractive terms, or at all. If financing is unavailable or lost, ourbusiness, results of operations, financial condition and financial prospects would be adversely affected and we could be forced to delay, reduce the scope ofor eliminate many of our planned activities.Our business depends on the continued success of our commercial product portfolio.Our commercial portfolio consists of four revenue-generating products, consisting of WinRho SDF, HepaGam B, VARIZIG and IXINITY. We expectrevenues from our product sales to continue to account for a significant portion of our revenue. The commercial success of our marketed products dependsupon: •the continued acceptance by regulators, physicians, patients and other key decision-makers of our products as safe, therapeutic and cost-effective options; •our ability to further develop our products and obtain marketing approval for their use in additional patient populations and the clinical datawe generate to support expansion of the product label; •the ability of Emergent and our other third-party manufacturing partners to provide us with sufficient saleable quantities of our marketedproducts; •the impact of competition from existing competitive products and from competitive products that may be approved in the future; •the continued safety and efficacy of our marketed products; •to what extent and in what amount government and third-party payors cover or reimburse for the costs of our marketed products; and •our success and the success of our third-party distributors in selling and marketing our products, including in countries outside the UnitedStates.25 The failure to maximize the financial contribution of our marketed products could have a material adverse effect on our business, financial condition,results of operations and growth prospects. We may choose to increase the price of our products, and these price adjustments may negatively affect our salesvolumes. In addition, our product sales may fluctuate significantly from quarter to quarter, depending on the number of patients receiving treatment, theavailability of supply to meet the demand for the product, the dosing requirements of treated patients and other factors. If sales of our commercial productswere to decline, we could be required to make an allowance for excess or obsolete inventory, increase our provision for product returns, or we could incurother costs related to operating our business, each of which could negatively impact our results of operations and our financial condition. We are constantlyevaluating commercial and strategic transactions to generate revenue that could include collaborations or a sale of assets in the future.We may not be able to engage in certain corporate transactions.To preserve the tax-free treatment of the distribution related to the separation, together with certain related transactions, we are restricted under thetax matters agreement that we entered into with Emergent, from taking any action that prevents such transactions from being tax-free for U.S. federal incometax purposes. In particular, for a period of two years following the separation, we are restricted from taking certain actions (including restrictions on shareissuances, business combinations, sales of assets, amendments to organizational documents and similar transactions) that could cause the distribution,together with certain related transactions, to fail to qualify as a tax-free transaction for U.S. federal income tax purposes. These restrictions may limit ourability to pursue certain strategic transactions or engage in other transactions that might increase the value of our business, including use of our commonstock to make acquisitions and equity capital market transactions. In addition, under the tax matters agreement, we are required to indemnify Emergentagainst any tax liabilities and related expenses arising from the failure of the distribution, together with certain related transactions, to be tax-free to theextent such failure is attributable to actions, events or transactions relating to our stock, assets or business, including the acquisition of our stock even if wedid not participate in or otherwise facilitate the acquisition. We may not achieve profitability in future periods or on a consistent basis.Our ability to become profitable will be substantially dependent on our product sales revenues and revenues from collaboration and licensingarrangements. Accordingly, our ability to become profitable may be adversely affected as we progress through various stages of ongoing or planned clinicaltrials for our product candidates. We may not be able to achieve profitability. In addition, we have incurred and anticipate incurring significant costsassociated with the separation from Emergent and making substantial expenditures to further develop and commercialize our products and productcandidates. We anticipate needing to generate greater revenue in future periods from our marketed products, our products in development or a sale of certainassets in order to achieve profitability in light of our planned expenditures. If we are unable to generate greater revenue, we may not achieve profitability infuture periods, and may not be able to maintain any profitability we do achieve. If we are unable to generate sufficient revenues, we will not becomeprofitable and may be unable to continue operations without additional funding.The terms of our credit agreement may restrict the operation of our business and limit the cash available for investment in our business operations.On August 4, 2016, we entered into a $35.0 million Credit and Security Agreement, or the Credit Agreement, by and among us and certain oursubsidiaries as borrowers, MidCap Financial Trust, as agent, and the lenders from time to time party thereto. The terms of the Credit Agreement, andborrowings we may make under the Credit Agreement in the future, could have significant adverse consequences for our business, including: •requiring us to dedicate a substantial portion of any cash flow from operations to payment on our debt, which would reduce the amountsavailable to fund other corporate initiatives; •increasing the amount of interest that we have to pay on borrowings under the Credit Agreement if market rates of interest increase;26 •not complying with restrictive covenants restricting, among other things, indebtedness, liens, dividends and other distributions, repaymentof subordinated indebtedness, mergers, dispositions, investments (including licensing), acquisitions, transactions with affiliates andmodification of organizational documents or certain other agreements; •not complying with affirmative covenants including payment, reporting and revenue covenants; and •placing us at a competitive disadvantage compared to our competitors that have less debt, better debt servicing options or stronger debtservicing capacity.We may not have sufficient funds or be able to obtain additional financing to pay the amounts due under any future borrowings under the CreditAgreement. In addition, failure to comply with the covenants, including but not limited to the revenue covenants, under the Credit Agreement could result inan event of default. An event of default could result in the acceleration of amounts due under the Credit Agreement, and we may not be able to obtainadditional financing to make any accelerated payments. Under these circumstances, our lenders could seek to enforce security interests in our assets securingour indebtedness.Our results of operations and liquidity needs could be materially negatively affected by market fluctuations and economic downturns.Our results of operations could be materially negatively affected by general economic conditions, both in the United States and elsewhere around theworld. Continuing concerns over inflation, energy costs, geopolitical issues, and the availability and cost of credit have contributed to increased volatilityand diminished expectations for the economy and the markets going forward. Domestic and international equity markets continue to experience heightenedvolatility and turmoil. These events and the continuing market upheavals may have an adverse effect on us. In the event of a continuing market downturn,our results of operations could be adversely affected by those factors in many ways, including making it more difficult for us to raise funds, if necessary, andour stock price may further decline.Credit and financial market conditions may exacerbate certain risks affecting our business.Sales of our products are made, in part, through direct sales to our customers, which include hospitals, physicians and other health care providers. Asa result of adverse global credit and financial market conditions, our customers may be unable to satisfy their payment obligations for invoiced product salesor may delay payments, which could negatively affect our revenues, income and cash flow. In addition, we rely upon third parties for many aspects of ourbusiness, including our collaboration partners, wholesale distributors for our products, contract clinical trial providers, research organizations, manufacturersand third-party suppliers. Because of the tightening of global credit and the volatility in the financial markets, there may be a delay or disruption in theperformance or satisfaction of commitments to us by these third parties, which could adversely affect our business.The way that we account for our operational and business activities is based on estimates and assumptions that may differ from actual results.The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during thereporting period. On an ongoing basis, our management evaluates its critical estimates and judgments, including, among others: those related to revenuerecognition, including product rebates, chargeback and return accruals; inventory; clinical research costs; business combinations; intangible assets andimpairment; income taxes; stock-based compensation; and contingent consideration. Those critical estimates and assumptions are based on our historicalexperience, future projections, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances,and they form the basis for making judgments about the carrying values and fair values of assets and liabilities that may not be readily apparent from othersources. If actual results differ from these estimates as a result of unexpected conditions or events occurring which cause us to have to reassess ourassumptions, there could be a material adverse impact on our financial results and the performance of our stock.27 We face product liability exposure, which could cause us to incur substantial liabilities and negatively affect our business, financial condition and resultsof operations.The nature of our business exposes us to potential liability inherent in pharmaceutical products, including with respect to the sale of our products,any other products that we successfully develop and the testing of our product candidates in clinical trials. Product liability claims might be made by patientsin clinical trials, consumers, health care providers or pharmaceutical companies or others that sell our products. These claims may be made even with respectto those products that are manufactured in licensed and regulated facilities or otherwise possess regulatory approval for commercial sale or study. We cannotpredict the frequency, outcome or cost to defend any such claims.If we cannot successfully defend ourselves against future claims that our products or product candidates caused injuries, we may incur substantialliabilities. Regardless of merit or eventual outcome, product liability claims may result in: •decreased demand or withdrawal of a product; •adverse publicity and/or injury to our reputation; •withdrawal of clinical trial participants; •costs to defend the related litigation; •substantial monetary awards to trial participants or patients; •loss of revenue; and •an inability to commercialize products that we may develop.The amount of insurance that we currently hold may not be adequate to cover all liabilities that may occur. Further product liability insurance maybe difficult and expensive to obtain. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurancecoverage that will be adequate to satisfy all potential liabilities. Claims or losses in excess of our product liability insurance coverage could have a materialadverse effect on our business, financial condition and results of operations. The cost of defending any products liability litigation or other proceeding, evenif resolved in our favor, could be substantial. Uncertainties resulting from the initiation and continuation of products liability litigation or other proceedingscould have a material adverse effect on our ability to compete in the marketplace. Product liability claims, regardless of merit or eventual outcome, mayabsorb significant management time and result in reputational harm, potential loss of revenue from decreased demand for our products and/or productcandidates, withdrawal of clinical trial participants and potential termination of clinical trial sites or entire clinical programs, and could cause our stock priceto fall.Product recalls may be issued at our discretion or at the discretion of our suppliers, government agencies and other entities that have regulatoryauthority for pharmaceutical sales. Any recall of our products could materially adversely affect our business by rendering us unable to sell that product forsome time and by adversely affecting our reputation. A recall could also result in product liability claims by individuals and third-party payors. In addition,product liability claims could result in an investigation of the safety or efficacy of our products, our manufacturing processes and facilities, or our marketingprograms conducted by the FDA, the EMA, or the competent authorities of the EU Member States. Such investigations could also potentially lead to a recallof our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension, variation, or withdrawal ofapproval. Any such regulatory action by the FDA, the EMA or the competent authorities of the EU Member States could lead to product liability lawsuits aswell.28 We rely significantly on information technology systems and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively or result in data leakage of proprietary and confidential business andemployee information.Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based systems,to support business processes as well as internal and external communications. The size and complexity of our computer systems make them potentiallyvulnerable to interruption, invasion, computer viruses, destruction, malicious intrusion and additional related disruptions, which may result in theimpairment of production and key business processes.In addition, our systems are potentially vulnerable to data security breaches—whether by employee error, malfeasance or other disruption—whichmay expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other intellectual property, or couldlead to the public exposure of personal information, including sensitive personal information, of our employees, clinical trial patients, customers and others.A significant business disruption or a breach in security resulting in misappropriation, theft or sabotage with respect to our proprietary and confidentialbusiness and employee information could result in financial, legal, business or reputational harm to us, any of which could adversely affect our business,financial condition and operating results.Our success is dependent on our continued ability to attract, motivate and retain key personnel, and any failure to attract or retain key personnel maynegatively affect our business.Because of the specialized scientific nature of our business, our ability to develop products and to compete with our current and future competitorslargely depends upon our ability to attract, retain and motivate highly qualified managerial and key scientific and technical personnel. If we are unable toretain the services of one or more of the principal members of senior management, including our Chief Executive Officer, Marvin L. White, our ChiefFinancial Officer, Jeffrey G. Lamothe, and our Chief Medical Officer, Scott C. Stromatt, or other key employees, our ability to implement our businessstrategy could be materially harmed. Our industry has experienced a high rate of turnover of management personnel in recent years. We face intensecompetition for qualified employees from biotechnology companies, research organizations and academic institutions. Attracting, retaining or replacingthese personnel on acceptable terms may be difficult and time-consuming given the high demand in our industry for similar personnel. We believe part ofbeing able to attract, motivate and retain personnel is our ability to offer a competitive compensation package, including equity incentive awards. If wecannot offer a competitive compensation package or otherwise attract and retain the qualified personnel necessary for the continued development of ourbusiness, we may not be able to maintain our operations or grow our business.We are subject to periodic litigation, which could result in losses or unexpected expenditure of time and resources.From time to time, we may be called upon to defend ourselves against lawsuits relating to our business. Any litigation, regardless of its merits, couldresult in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business. Due to the inherentuncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome in any such proceedingscould have an adverse impact on our business, financial condition and results of operations. If our stock price is volatile, we may become involved insecurities class action lawsuits in the future.29 Commercialization RisksOur ability to grow revenues and execute on our long-term strategy depends heavily on our ability to discover, develop, and obtain marketing approval foradditional products or product candidates.In order for us to achieve our long-term business objectives, we will need to successfully discover and/or develop and commercialize additionalproducts or product candidates. Although we have made, and expect to continue to make, significant investments in research and development, we have hadonly a limited number of our internally-discovered product candidates reach the clinical development stage. Drug discovery and development is a complex,time-consuming and expensive process that is fraught with risk and a high rate of failure. Failure to successfully discover and/or develop, obtain marketingapproval for and commercialize additional products and product candidates would likely have a material adverse effect on our ability to grow revenues andimprove our financial condition.We may not be successful in our efforts to use and further develop our ADAPTIR platform.A key element of our strategy is to expand our product pipeline of immunotherapeutic based on our ADAPTIR platform technology. We plan toselect and create RTCC candidates for early development, potentially with other collaborative partners. We expect to continue to develop the platform toaddress unmet medical needs through directed cytokine delivery via monospecifics and bispecifics in areas including oncology, and multispecific moleculesin oncology, autoimmune disease and other therapeutic areas. Our goal is to leverage this technology to make targeted investment in bispecific ADAPTIRtherapeutics. Even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not be suitable for clinicaldevelopment, including as a result of being shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products thatwill receive marketing approval and achieve market acceptance. If we do not successfully develop and commercialize product candidates based on ourADAPTIR platform technology, our ability to obtain product revenues in future periods may be adversely affected, which likely would result in harm to ourfinancial position and our financial prospects and adversely affect our stock price.We face substantial competition.The development and commercialization of new biotechnology products is highly competitive and subject to rapid technological advances. We mayface future competition with respect to our products, our current product candidates and any product candidates we may seek to develop or commercialize inthe future obtained from other companies and governments, universities and other non-profit research organizations. Our competitors may develop productsthat are safer, more effective, more convenient or less costly than any products that we may develop or market, or may obtain marketing approval for theirproducts from the U.S. Food and Drug Administration, or the FDA, or equivalent foreign regulatory bodies more rapidly than we may obtain approval for ourproducts. Our competitors may devote greater resources to market or sell their products, research and development capabilities, adapt more quickly to newtechnologies, scientific advances or patient preferences and needs, initiate or withstand substantial price competition more successfully, or more effectivelynegotiate third-party licensing and collaborative arrangements.We believe that our most significant competitors in the hematology/oncology, inflammation and transplantation markets include: AbbVie Inc.,Affirmed, Amgen Inc., Astellas Pharma Inc., Baxalta US Inc., Bayer AG, Biogen Idec Inc., Boehringer Ingelheim GmbH, CSL Behring, a subsidiary of CSLLimited, Dendron Corp., Genentech Inc. (a subsidiary of F. Hoffmann-La Roche Ltd.), Genmab A/S, Gilead Sciences, Inc., GlaxoSmithKline plc, Grifols USALLC, ImmunoGen, Inc., Janssen BioTech Inc., Johnson & Johnson, Macrogenics, Inc., Novartis International AG, Pfizer Inc., Sanofi-Adventis US LLC,Takeda Pharmaceuticals U.S.A., Inc., Xencor, Inc. and Zymeworks Biopharmaceuticals, Inc. We compete, in the case of our approved and marketed products,and expect to compete, in the cases of our products in development, on the basis of product efficacy, safety, ease of administration, price and economic valuecompared to drugs used in current practice or currently being developed. If we are not successful in demonstrating these attributes, physicians and other keyhealthcare decision makers may choose other products over our products, switch from our products to new products or choose to use our products only inlimited circumstances, which could adversely affect our business, financial condition and results of operations.30 In addition, many of our competitors are able to deploy more personnel to market and sell their products than we do. We currently have a relativelysmall number of sales representatives compared with the number of sales representatives of most other biotechnology companies with marketed products.Each of our sales representatives is responsible for a territory of significant size. The continued growth of our current products and the launch of any futureproducts may require expansion of our sales force and sales support organization internationally, and we may need to commit significant additional funds,management and other resources to the growth of our sales organization. We may not be able to achieve any necessary growth in a timely or cost-effectivemanner or realize a positive return on our investment, and we may not have the financial resources to achieve the necessary growth in a timely manner or atall. We also have to compete with other biotechnology and life sciences companies to recruit, hire, train and retain sales and marketing personnel, andturnover in our sales force and marketing personnel could negatively affect sales of our products. If our specialty sales force and sales organization are notappropriately-sized to adequately promote any current or potential future products, the commercial potential of our current products and any future productsmay be diminished. We compete with a significant number of pharmaceutical and life sciences companies with extensive sales, marketing and promotionalexperience in the hematology/oncology markets, and our failure to compete effectively in this area could negatively affect our sales of our commercialproducts.Our products and product candidates may also compete in the future with new products currently under development by others. Any products that wedevelop are likely to be in a highly competitive market, and many of our competitors may succeed in developing products before we do or in developingproducts that may render our products obsolete or noncompetitive.Our Biologic Products may face risks of competition from biosimilar manufacturers.Competition for IXINITY, WinRho SDF, HepaGam B, and VARIZIG, or our Biologic Products, may be affected by follow-on biologics, orbiosimilars, in the United States and other jurisdictions. Biologics are medical products made from a variety of natural sources (human, animal ormicroorganism) intended to prevent, diagnose or treat diseases and medical conditions.In the United States, biosimilars are biologics that are highly similar to licensed reference biological products, notwithstanding minor differences inclinically inactive components, and for which there are no clinically meaningful differences between the biosimilar and the reference product in terms ofsafety, purity and potency. Regulatory and legislative activity in the United States and other countries may make it easier for our competitors to manufactureand sell biosimilars of our Biologic Products, which might affect our results of operations or commercial viability of our Biologic Products. Under theBiologics Price Competition and Innovation Act of 2010, the FDA cannot approve an application for a biosimilar until the 12-year exclusivity period for thereference product has expired. Thus, if a competitor were to seek regulatory approval for a biosimilar product citing IXINITY as the reference product, suchapproval could not be granted until April 2027.Regulators in the EU review biosimilar products using a similar regulatory process. Our Biologic Products have not received marketing authorizationby the European Medicines Agency, or EMA, and are not sold in Europe.Similarly, if a competitor were to seek regulatory approval for a biosimilar product citing HepaGam B or VARIZIG as the reference product, suchapproval could not be granted until January 2018 and December 2024, respectively. A biosimilar application citing WinRho SDF as the reference productcould be approved at any time. If a biosimilar version of one of our Biologic Products were approved, it could have a material adverse effect on the sales andgross profits of the affected Biologic Product and could adversely affect our business and operating results.31 The commercial success of our products will depend upon the degree of market acceptance by physicians, patients, third-party payors and others in themedical community.The success of our products, including our hyperimmune specialty products, will depend upon, among other things, their acceptance by physicians,patients, third-party payors and other members of the medical community as a therapeutic and cost-effective alternative to competing products andtreatments. If any of our products do not achieve and maintain an adequate level of acceptance, we may not generate material revenues from sales of theseproducts. The degree of market acceptance of our products will depend on a number of factors, including: our ability to provide acceptable evidence of safetyand efficacy; the prevalence and severity of any side effects; availability, relative cost and relative efficacy of alternative and competing treatments; theability to offer our products for sale at competitive prices; our ability to continuously supply the market without interruption; the relative convenience andease of administration; the willingness of the target patient population to try new products and of physicians to prescribe these products; the strength ofmarketing and distribution support; publicity concerning our products or competing products and treatments; and the sufficiency of coverage orreimbursement by third parties.If our products and product candidates do not gain or maintain market acceptance, or do not become widely accepted, by physicians, patients, third-party payors and other members of the medical community, our business, financial condition and operating results could be materially and adverselyaffected.Changes in health care systems and payor reimbursement policies could result in a decline in our potential sales and a reduction in our expected revenuefrom our products.The revenues and profitability of biotechnology companies like ours may be affected by the continuing efforts of government payors, includingMedicare and Medicaid, and other third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreignmarkets, the pricing or profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the United States, there havebeen, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. Recent U.S.legislation, rules and regulations instituted significant changes to the U.S. healthcare system that could have a material adverse effect on our business,financial condition and results of operations. The trend toward managed health care in the United States, as well as the implementation of the PatientProtection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act), collectively referred to as the Affordable Care Act,and the concurrent growth of organizations such as managed care organizations, accountable care organizations and integrated delivery networks, may resultin increased pricing pressures for pharmaceutical products, including any products that may be offered by us in the future. Cost-cutting measures that healthcare providers are instituting, and the implementation of health care reform, could adversely affect our ability to sell any drug products that are successfullydeveloped by us. We cannot predict what effects, if any, this legislation might have on our company and our products as this legislation continues to befurther implemented over the next few years, nor can we predict whether additional legislative or regulatory proposals may be adopted.In the United States and internationally, sales of our products and our ability to generate revenues on such sales are dependent, in significant part, onthe availability and level of reimbursement from third-party payors, including state and federal governments and private insurance plans. Insurers haveimplemented cost-cutting measures and other initiatives to enforce more stringent reimbursement standards and likely will continue to do so in the future.These measures include the establishment of more restrictive formularies and increases in the out-of-pocket obligations of patients for such products. Third-party payors are also increasingly challenging the prices charged for medical products and services. Third-party payors may limit access to biotechnologyproducts through the use of prior authorizations and step therapy. Any reimbursement granted may not be maintained, or limits on reimbursement availablefrom third parties, may reduce the demand for or negatively affect the price and potential profitability of those products. If these payors do not providesufficient coverage and reimbursement for our marketed products or any future drug product we may market, these products may be too costly for general use,and physicians may prescribe them less frequently. Our ability to successfully commercialize our products and product candidates and the demand for ourproducts depends, in part, on the extent to which reimbursement and access is available from such third-party payors.32 In addition, particularly in the United States and increasingly in other countries, we are required to provide discounts and pay rebates to state andfederal governments and agencies in connection with purchases of our products that are reimbursed by such entities. Various provisions of the AffordableCare Act increased the levels of rebates and discounts that we have to provide in connection with sales of such products that are paid for, or reimbursed by,certain state and federal government agencies and programs. It is possible that future legislation and regulatory changes in the United States and otherjurisdictions could be enacted, which could potentially impact the reimbursement rates for our products and also could further impact the levels of discountsand rebates we are required to pay to state and federal government entities.Certain government pricing programs, including Medicare Part B, the Medicaid rebate program, the 340B/PHS drug pricing program and FederalSupply Schedule, affect the revenues that we derive from IXINITY, WinRho SDF, HepaGam B, and VARIZIG. Any future legislation or regulatory actionsaltering these programs or imposing new ones could have an adverse impact on our business. There have been, and we expect there will continue to be, anumber of legislative and regulatory actions and proposals to control and reduce health care costs. These measures may, among other things: negativelyimpact the level of reimbursement for pharmaceutical products; require higher levels of cost-sharing by beneficiaries; change the discounts required to beprovided to government payors and/or providers; extend government discounts to additional government programs and/or providers; or reduce the level ofreimbursement for health care services and other non-drug items. Any such measures could indirectly affect demand for pharmaceutical products because theycan cause payors and providers to apply heightened scrutiny and/or austerity actions to their entire operations, including pharmacy budgets.Our revenues also depend on the availability outside the United States of adequate pricing and reimbursement from third-party payors for our current andfuture drug products, if any.Outside the United States, certain countries, including a number of EU Member States, set prices and reimbursement for pharmaceutical products, ormedicinal products as they are commonly referred to in the EU, with limited participation from the marketing authorization holders. We cannot be sure thatthese prices and reimbursement will be acceptable to us or our collaborative partners. If the regulatory authorities in these foreign jurisdictions set prices orreimbursement that are not commercially attractive for us or our collaborative partners, our revenues from sales, and the potential profitability of our drugproducts, in those countries would be negatively affected. An increasing number of countries are taking initiatives to attempt to reduce large budget deficitsby focusing cost-cutting efforts on pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regionsof the world, but have been most drastic in the EU.An inability to convince hospitals and managed care organizations to include our products on their approved formulary lists, may result in our failure tomeet revenue expectations.Hospitals and managed care organizations establish formularies, which are lists of drugs approved for use in the hospital or under a managed careplan. If a drug is not included on the formulary, the ability of our engagement partners and engagement managers to promote and sell the drug may be limitedor denied. If we fail to secure and maintain formulary inclusion for our products on favorable terms or are significantly delayed in doing so, we may havedifficulty achieving market acceptance of our products and our business, results of operations and financial condition could be materially adversely affected.33 If we are unable to negotiate and maintain satisfactory arrangements with group purchasing organizations our financial condition could be adverselyaffected.Our ability to sell our products, including IXINITY, WinRho SDF, HepaGam B and VARIZIG to hospitals and clinics in the United States depends inpart on our relationships with group purchasing organizations, or GPOs. GPOs negotiate pricing arrangements and contracts, sometimes on an exclusive basis,with medical supply manufacturers and distributors. These negotiated prices are then made available to a GPO’s affiliated hospitals and clinics and othermembers. If we are not one of the providers selected by a GPO, affiliated hospitals, clinics and other members may be less likely to purchase our products, andif the GPO has negotiated a strict sole source, market share compliance or bundling contract for another manufacturer’s products, we may be precluded frommaking sales to members of the GPO for the duration of the contractual arrangement. Our failure to renew contracts with GPOs may cause us to lose marketshare and could have a material adverse effect on our sales, financial condition and results of operations. We cannot assure you that we will be able to renewthese contracts on the current or substantially similar terms. If we are unable to keep our relationships and develop new relationships with GPOs, ourcompetitive position may suffer.We rely on third parties to distribute some of our products and those third parties may not perform.A portion of our revenues from product sales is derived from sales through exclusive distributors in Canada and international markets. As a result, werely on the sales and marketing strength of these distributors and the distribution channels through which they operate for a portion of our revenues. If thirdparties do not successfully carry out their contractual duties, or if there is a delay or interruption in the distribution of our products, it could negativelyimpact our revenues from product sales.The loss of any of our sole source manufacturers, or delays or problems in the manufacture of our products or product candidates, could result in productshortages and loss in revenue or delays in clinical development.We do not have manufacturing capabilities and do not plan to develop such capacity in the foreseeable future. We depend on a limited number ofsole source third-party manufacturers, including Emergent, for each of our products and product candidates. Accordingly, our ability to develop and deliverproducts in a timely and competitive manner depend on our third-party manufacturers being able to continue to meet our ongoing commercial and clinicaltrial needs and perform their contractual obligations. We have a limited ability to control the manufacturing process or costs related to the manufacture of ourproducts. Increases in the prices we pay our manufacturers, interruptions in the supply of raw materials or our products themselves or lapses in quality couldadversely impact our margins, profitability, cash flows and prospects.If, for any reason, Emergent or our other manufacturers do not continue to supply us with our products or product candidates in a timely fashion andin compliance with applicable quality and regulatory requirements, or otherwise fail or refuse to comply with their obligations to us under our manufacturingarrangements, we may not have adequate remedies for any breach of contract, and their failure to supply us could result in a shortage of our products orproduct candidates, which could lead to lost revenue and otherwise adversely affect our business, financial condition, results of operations and growthprospects. In addition, if any of our manufacturers fails or refuses to supply us for any reason, we may be forced to consider entering into additionalmanufacturing arrangements with other third-party manufacturers. In each case, we will incur significant costs and time in obtaining the regulatory approvalsfor these third-party facilities and in taking the necessary steps to prepare these third parties for the manufacture of our products. Because of contractualrestraints and the lead-time necessary to obtain FDA approval of a new manufacturer, replacement of any of these manufacturers may be expensive and timeconsuming and may cause interruptions in our supply of these products to our customers or an inability to manufacture.34 For example, CMC ICOS Biologics, Inc., or CMC, is the exclusive manufacturer of bulk drug substance for our IXINITY product. During 2015, weordered nine manufacturing lots of bulk drug substance from CMC and only one of those lots was successfully manufactured and released in 2015. During2016, we ordered five manufacturing lots of bulk drug substance from CMC and none of these lots satisfied product release specifications. On October 4,2016, we provided a Notice of Interruption in Manufacturing, or Notice, to the FDA, notifying the FDA of a potential interruption in the supply of IXINITY®coagulation factor IX (recombinant) due to the ongoing manufacturing challenges with the manufacturer of the bulk drug. On March 15, 2017, we announcedthe successful manufacture of a recent bulk drug substance batch of IXINITY and we anticipate that the new supply will be available beginning in May 2017,after the completion of routine final drug product (FDP) manufacturing activities. While we do not currently anticipate or foresee a supply shortage or supplyinterruption occurring, any supply shortage or supply interruption of IXINITY would adversely affect its sales and could adversely affect its market position,commercial viability and the trading price of our common stock.Emergent owns the manufacturing know-how necessary for the manufacture of WinRho SDF, HepaGam B and VARIZIG. An inability to manufacturethese products would lead to lost revenue.Emergent owns its human hyperimmune platform manufacturing know-how, which is necessary for the manufacture of WinRho SDF, HepaGam B andVARIZIG. We have entered into a manufacturing services agreement with Emergent with respect to the manufacturing of these products. We also entered intoa product license agreement with Emergent pursuant to which Emergent has granted us an exclusive royalty-free, worldwide license, under certain licensedintellectual property rights, to research, develop, make, have made, use, sell, offer to sell and import WinRho SDF, HepaGam B, and VARIZIG. Under theproduct license agreement, we are only permitted to exercise rights with respect to Emergent’s human hyperimmune platform manufacturing know-howthrough a third-party contract manufacturer, under limited conditions, including a requirement that the manufacturer is bound to protect the manufacturingknow-how, and is either approved by Emergent (in Emergent’s sole and absolute discretion) or, there has been a manufacturing failure under themanufacturing services agreement.Emergent has the right to terminate the product license agreement upon breach by us of any of its terms, including our confidentiality obligationsand other obligations, if such breach is not cured within a specified period of time or is incurable. If the product license agreement is terminated, we will nolonger be able to research, develop, make, have made, use, sell, offer to sell and import WinRho SDF, HepaGam B and VARIZIG, which would lead to lostrevenue and otherwise materially and adversely affect our business, financial condition, results of operations and growth prospects.Manufacturing biologic products, especially in large quantities, is complex and time consuming.IXINITY, WinRho SDF, HepaGam B and VARIZIG and all of our current product candidates are biologics. The products must be made consistentlyand in compliance with a clearly defined manufacturing process. Problems may arise during manufacturing for a variety of reasons, including problems withraw materials, equipment malfunction or replacement and failure to follow specific protocols and procedures. Slight deviations anywhere in themanufacturing process, including obtaining materials, maintaining master seed or cell banks and preventing genetic drift, seed or cell growth, fermentationand contamination including from, among other things, particulates, filtration, filling, labeling, packaging, storage and shipping, and quality control testing,may result in lot failures or manufacturing shut-down, delays in the release of lots, product recalls, spoilage or regulatory action.35 Failure of our third-party manufacturers to successfully manufacture material that conforms to our specifications and the FDA’s or foreign regulatoryauthorities’ strict regulatory requirements, may prevent regulatory approval of those manufacturing facilities.We rely on third parties to manufacture all clinical trial materials for our product candidates, and we will rely on third parties to manufacturecommercial supplies, if any such product candidates are ultimately approved for commercial sale. Our product candidates, including MOR209/ES414,ES210, otlertuzumab, APVO436 and proof of concept bispecific immunotherapeutic protein targeting ROR1, will not be approved for marketing by the FDAor other foreign regulatory authorities unless the FDA or their foreign equivalents also approve the facilities used by our third-party manufacturers to producethem for commercialization. If our third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the FDA’s orforeign regulatory authorities’ strict regulatory requirements, the FDA or their foreign counterparts will not approve their manufacturing facilities, whichwould result in significant delays in obtaining FDA or foreign marketing approvals for our product candidates. In order to successfully develop andcommercialize our product candidates in a timely manner, we and our third-party manufacturers must be able to develop and execute on manufacturingprocesses, and reach agreement on contract terms.We and our third-party manufacturers may not be able to meet these manufacturing process requirements for any of our current product candidates,including MOR209/ES414, ES210, otlertuzumab, and a proof of concept bispecific immunotherapeutic protein that targeting ROR1, all of which havecomplex manufacturing processes, which make meeting these requirements even more challenging. If we are unable to develop manufacturing processes forour clinical product candidates that satisfy these requirements, we will not be able to supply sufficient quantities of test material to conduct our clinical trialsin a timely or cost effective manner, and as a result, our development programs will be delayed, our financial performance will be adversely impacted and wewill be unable to meet our long-term goals.Development and commercialization of our products may be terminated or delayed.Our development and commercialization strategy involves entering into arrangements with corporate and academic collaborators, contract researchorganizations, distributors, third-party manufacturers, licensors, licensees and others to conduct development work, manage or conduct our clinical trials,manufacture our products and market and sell our products outside of the United States and maintaining our existing arrangements with respect to thecommercialization or manufacture of our products. We may not have the expertise or the resources to conduct all of these activities for all products andproduct candidates on our own and, as a result, are particularly dependent on third parties in many areas. Any current or future arrangements for developmentand commercialization may not be successful. If we are not able to establish or maintain agreements relating to our products or our products in development,our results of operations would be materially and adversely affected.Third parties may not perform their contractual obligations as expected. The amount and timing of resources that third parties devote to developing,manufacturing and commercializing our products are not within our control. Our collaborative partners may develop, manufacture or commercialize, eitherindependently or with others, products and services that are similar to or competitive with the products that are the subject of the collaboration with us.Furthermore, our interests may differ from those of third parties that manufacture or commercialize our products. Our collaborative partners may reevaluatetheir priorities from time to time, including following mergers and consolidations, and change the focus of their development, manufacturing orcommercialization efforts. Disagreements that may arise with these third parties could delay or lead to the termination of the development orcommercialization of our product candidates, or result in litigation or arbitration, which would be time consuming and expensive.36 If any third-party that manufactures or supports the development or commercialization of our products breaches or terminates its agreement with us,or fails to commit sufficient resources to our collaboration or conduct its activities in a timely manner, or fails to comply with regulatory requirements, suchbreach, termination or failure could delay or otherwise adversely impact the manufacturing, development or commercialization of our products, our productsin development or any additional products or product candidates that we may develop; require us to seek a new collaborator or undertake unforeseenadditional responsibilities or devote unforeseen additional resources to the manufacturing, development or commercialization of our products; or result inthe termination of the development or commercialization of our products.If we are unable to successfully develop our business infrastructure and operations, our ability to generate future product revenue will be adverselyaffected.To manage our existing and planned future growth, including our ability to support the sales and marketing of our products in the United States andglobally, and the increasing breadth and complexity of our activities, we need to properly invest in personnel, infrastructure, information managementsystems and other operational resources. Developing our business infrastructure and operations may be more difficult, more expensive or take longer than weanticipate. We may also need to revise our strategy for developing the proper infrastructure and operations periodically.We are subject to a number of risks and uncertainties associated with our international activities and operations.We currently have limited operations outside of the United States. However, we have manufacturing, collaboration, clinical trial and otherrelationships outside the United States, and our products are marketed internationally through collaborations. We may seek to grow our internationaloperations significantly over the next several years. Our future results of operations will depend in part on our ability to grow and ultimately maintain ourproduct sales in foreign markets, particularly in Europe. Our foreign operations subject us to additional risks and uncertainties, particularly because we havelimited experience in marketing, servicing and distributing our products or otherwise operating our business outside of the United States and Canada. Theserisks and uncertainties include: political and economic determinations that adversely impact pricing or reimbursement policies; our customers’ ability toobtain reimbursement for procedures using our products in foreign markets; export licensing requirements, political and economic instability, traderestrictions, and changes in tariffs and difficulties in staffing and managing foreign operations; cross border restrictions on the movement of cash funds andrepatriation of earnings; foreign currency fluctuations; longer accounts receivable collection times; reduced protection of intellectual property rights in someforeign countries; the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute; and compliance with foreign orU.S. laws, rules and regulations, including data privacy requirements, labor relations laws, tax laws, anti-competition regulations, anti-bribery/anti-corruptionlaws, including but not limited to the U.S. Foreign Corrupt Practices Act, or FCPA, and the U.K. Bribery Act of 2010, which could subject us to investigationor prosecution under such U.S. or foreign laws.Regulatory and Compliance RisksOur long term success depends, in part, upon our ability to develop, receive regulatory approval for and commercialize our product candidates.Our product candidates and the activities associated with their development, including testing, manufacture, recordkeeping, storage and approval,are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries.Generally, failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have limitedresources for use in preparing, filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third-party contractresearch organizations and consultants to assist us in this process.37 The FDA and other comparable regulatory agencies in foreign countries impose substantial and rigorous requirements for the development,production, marketing authorization and commercial introduction of drug products. These requirements include pre-clinical, laboratory and clinical testingprocedures, sampling activities, clinical trials and other costly and time-consuming procedures. In addition, regulation is not static, and regulatoryauthorities, including the FDA evolve in their staff interpretations and practices and may impose more stringent or different requirements than currently ineffect, which may adversely affect our planned and ongoing drug development and/or our sales and marketing efforts.In the United States, to obtain approval from the FDA to market any of our future biologic products, we will be required to submit a biologics licenseapplication, or BLA, to the FDA. Ordinarily, the FDA requires a sponsor to support a BLA with substantial evidence of the product’s safety, purity andpotency in treating the targeted indication based on data derived from adequate and well-controlled clinical trials, including Phase III safety and efficacytrials conducted in patients with the disease or condition being targeted.The process of obtaining these regulatory approvals is expensive, often takes many years if approval is obtained at all, and can vary substantiallybased upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval process during the development period,changes in or the enactment of additional statutes or regulations, or changes in the regulatory review for a submitted product application may cause delays inthe approval or rejection of an application.The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient tosupport approval and require additional pre-clinical, clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical andclinical testing could delay, limit or prevent regulatory approval of a product candidate.We have a pipeline of clinical and pre-clinical stage product candidates, including: •MOR209/ES414, a bispecific immunotherapeutic ADAPTIR protein, currently in Phase 1, targeting prostate specific membrane antigen, orPSMA, an enzyme that is expressed on the surface of prostate cancer cells and, a component of the TCR complex expressed on all T-cells.The mechanism of action of MOR209/ES414 is RTCC. It is being developed under our collaboration with MorphoSys AG for metastaticcastration-resistant prostate cancer, which is advanced prostate cancer that has spread to other organs and no longer responds to hormoneblocking therapies; •ES210, a bispecific ADAPTIR protein therapeutic that is currently in pre-clinical development for inflammatory bowel disease and otherautoimmune and inflammatory diseases; •otlertuzumab, a monospecific ADAPTIR protein therapeutic currently in Phase 2 clinical development for chronic lymphocytic leukemia, orCLL; •a proof of concept bispecific immunotherapeutic ADAPTIR protein targeting ROR1 (preclinical candidate) are built on our novel ADAPTIRplatform, which is designed to expand on the utility and effectiveness of therapeutic antibodies and an antigen found on solid tumors andhematologic or blood-related, malignancies; •APVO436, a bispecific ADAPTIR protein therapeutic currently in pre-clinical development targeting CD123, a cell surface receptor highlyexpressed on several hematological malignancies and CD3, a component of the T-cell receptor. Similar to MOR209/ES414 and the ROR1preclinical program, APVO436 utilizes redirected RTCC to initiate killing of tumor cells; and •other protein therapeutic product candidates primarily targeting tumor based on mechanisms of action that modulate the immune system(immuno-oncology based mechanism of action).38 Developing and obtaining regulatory approval for product candidates is a lengthy process, often taking a number of years, is uncertain and isexpensive. All of the product candidates that we are developing, or may develop in the future, require research and development, pre-clinical studies,nonclinical testing and clinical trials prior to seeking regulatory approval and commencing commercial sales. In addition, we may need to address a numberof technological challenges in order to complete development of our product candidates. As a result, the development of product candidates may take longerthan anticipated or not be successful at all.Generally, no product can receive FDA approval, marketing authorization from the European Commission or the competent authorities of the EU MemberStates, or approval from comparable regulatory agencies in foreign countries unless data generated in human clinical trials demonstrates both safety andefficacy for each target indication in accordance with such authority’s standards.The large majority of product candidates that begin human clinical trials fail to demonstrate the required safety and efficacy characteristics necessaryfor marketing approval. Failure to demonstrate the safety and efficacy of any of our product candidates for each target indication in clinical trials wouldprevent us from obtaining required approvals from regulatory authorities, which would prevent us from commercializing those product candidates. Negativeor inconclusive results from the clinical trials or adverse medical events during the trials could lead to requirements that trials be repeated or extended, or thatadditional trials be conducted, any of which may not be clinically feasible or financially practicable, that the conduct of trials be suspended, or that aprogram be terminated.Any regulatory approval we ultimately obtain may limit the indicated uses for the product or subject the product to restrictions or post-approvalcommitments that render the product commercially non-viable. Securing regulatory approval requires the submission of extensive non-clinical and clinicaldata, information about product manufacturing processes and inspection of facilities and supporting information to the regulatory authorities for eachtherapeutic indication to establish the product’s safety and efficacy. If we are unable to submit the necessary data and information, for example, because theresults of clinical trials are not favorable, or if the applicable regulatory authority delays reviewing or does not approve our applications, we will be unable toobtain regulatory approval.Delays in obtaining or failure to obtain regulatory approvals may: delay or prevent the successful commercialization of any of the products orproduct candidates in the jurisdiction for which approval is sought; diminish our competitive advantage; and defer or decrease our receipt of revenue.Certain of our products in development have experienced regulatory and/or clinical setbacks in the past. For example, in December 2015, after a jointreview of data from the Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients, Aptevo and MorphoSys concluded that the dosingregimen and administration required adjustment. Patients receiving weekly doses of MOR209/ES414 developed antibodies against the drug; which arecalled anti-drug antibodies, or ADA. ADA developed in most patients including those receiving the maximum tolerated dose of drug that could be givensafely on a weekly basis. These antibodies bind to the drug and reduce the concentration of active MOR209/ES414 in the blood and thus could potentiallyreduce its efficacy. However, we observed no safety issues related to the development of ADA. The cause of these antibodies is unclear but could be due tothe weekly administration of the drug. Hence, the protocol has been amended to continuous intravenous infusion as a way to administer higher levels of drugand prevent the development of ADA. There is no guarantee that this change in administration will enable higher dosing and/or prevent the development ofADA. The procedures to obtain marketing approvals vary among countries and can involve additional clinical trials or other pre-filing requirements. Thetime required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process mayinclude all the risks associated with obtaining FDA approval, or different or additional risks. Regulatory agencies may have varying interpretations of thesame data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions. Accordingly, approval by theFDA does not ensure approval by the regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval bythe FDA or regulatory authorities in other foreign countries. We may not be able to file for regulatory approvals and may not receive necessary approvals tocommercialize our products and products in development in any market on a timely basis, if at all.39 The MOR209/ES414 Phase I clinical trial under the amended protocol, providing continuous intravenous infusion as a way to administer higherlevels of drug and prevent the development of ADA, commenced December 2016. As a result of the required dosing regimen change and the impact to theoverall development timeline and technical risk, our co-development agreement with MorphoSys was restructured. Under the terms of the restructuredagreement, MorphoSys’ cost sharing in the years 2016 to 2018 was reduced and future milestone payments payable by MorphoSys to us were reduced to atotal of up to $74.0 million. As a result of the required change in dosing regimen for MOR209/ES414, the lead RTCC candidate, the termination provisionsunder the MorphoSys collaboration agreement were amended to give MorphoSys a one-time right to terminate the collaboration agreement, without notice,at either the end of 2016 or after review of clinical data from the first six patients enrolled and dosed in the Phase 1 trial. The requirement for furtheradjustments to the dosing regimen or other parts of the program could delay our development timeline or delay or prevent our ability to receive regulatoryapproval for MOR209/ES414. In December 2016, the agreement was modified to adjust the allocation of certain manufacturing and development costs andextend MorphoSys’ convenience termination rights. Under the amendment, the timeframe for a one-time right to terminate the collaboration agreement byMorphoSys has been extended from December 31, 2016 to June 30, 2017, or after review of clinical data from the first six patients enrolled and dosed in theMOR209/ES414 Phase I clinical trial. The procedures to obtain marketing approvals vary among countries and can involve additional clinical trials or other pre-filing requirements. Thetime required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process mayinclude all the risks associated with obtaining FDA approval, or different or additional risks. Regulatory agencies may have varying interpretations of thesame data, and approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions. Accordingly, approval by theFDA does not ensure approval by the regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval bythe FDA or regulatory authorities in other foreign countries. We may not be able to file for regulatory approvals and may not receive necessary approvals tocommercialize our products and products in development in any market on a timely basis, if at all.Biotechnology company stock prices have declined significantly in certain instances where companies have failed to obtain FDA or foreignregulatory authority approval of a product candidate or if the timing of FDA or foreign regulatory authority approval is delayed. If the FDA’s or any foreignregulatory authority’s response to any application for approval is delayed or not favorable for any of our product candidates, our stock price could declinesignificantly.Regulatory approval for any approved product is limited by the FDA to those specific indications and conditions for which clinical safety and efficacyhave been demonstrated, and we may incur significant liability if it is determined that we are promoting the “off-label” use of any of our products.Any regulatory approval is limited to those specific diseases and indications for which a product is deemed to be safe and effective by the FDA. Forexample, the FDA-approved label for IXINITY® is not approved for use in patients younger than twelve years old. In addition to the FDA approval requiredfor new formulations, any new indication for an approved product also requires FDA approval. If we are not able to obtain FDA approval for any desiredfuture indications for our products and product candidates, our ability to effectively market and sell our products may be reduced and our business may beadversely affected.40 While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested inclinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approvedby the FDA. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for some patients in variedcircumstances. Regulatory authorities in the United States generally do not regulate the behavior of physicians in their choice of treatments. Regulatoryauthorities do, however, restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to complywith the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to followFDA rules and guidelines relating to promotion and advertising may cause the FDA to issue warning letters or untitled letters, suspend or withdraw anapproved product from the market, require a recall or institute fines, which could result in the disgorgement of money, operating restrictions, injunctions orcivil or criminal enforcement, any of which could harm our business.Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory authorities allow companies to engage in truthful,non-misleading and non-promotional scientific exchange concerning their products. We engage in medical education activities and communicate withinvestigators and potential investigators regarding our clinical trials. If the FDA or another regulatory or enforcement authority determines that ourcommunications regarding our marketed products are not in compliance with the relevant regulatory requirements and that we have improperly promoted off-label uses, we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions.Our products may face regulatory, legal or commercial challenges even after approval.Any drug or, biologic for which we receive FDA approval, along with the manufacturing processes, post-approval clinical data, labeling, advertisingand promotional activities for such product, will be subject to continuing regulation by the FDA, including, among other things, record keepingrequirements, reporting of adverse experiences, providing the FDA with updated safety and efficacy information, product sampling and distributionrequirements, current good manufacturing practices, or cGMP, and restrictions on advertising and promotion. Adverse events that are reported after marketingapproval can result in additional limitations being placed on the product’s distribution or use and, potentially, withdrawal or suspension of the product fromthe market. In addition, various state laws require that companies that manufacture and/or distribute drug products within the state obtain and maintain amanufacturer or distributor license, as appropriate. Because of the breadth of these laws, it is possible that some of our business activities, or those of ourthird-party manufacturers and distributors, could be subject to challenge under one or more of such laws.In addition, the FDA has post-approval authority to require post-approval clinical trials and/or safety labeling changes if warranted by the appearanceof new safety information. In certain circumstances, the FDA may impose a Risk Evaluation and Mitigation Strategy, or REMS, after a product has beenapproved. Facilities involved in the manufacture and distribution of approved products are required to register their establishments with the FDA and certainstate agencies and are subject to periodic unannounced inspections by the FDA for compliance with cGMP and other laws. The FDA also closely monitorsadvertising and promotional materials we may disseminate for our products for compliance with restrictions on off-label promotion and other laws. We maynot promote our products for conditions of use that are not included in the approved package inserts for our products. Certain additional restrictions onadvertising and promotion exist for products that have so-called boxed warnings in their approved package inserts, such as WinRho® SDF.Failure by Emergent or our other third-party manufacturers to comply with regulatory requirements could adversely affect their ability to supplyproducts or ingredients to us. All facilities and manufacturing techniques used for the manufacture of pharmaceutical products must be operated inconformity with the FDA’s current cGMP requirements. The FDA enforces its cGMP and other requirements through periodic unannounced inspections ofmanufacturing facilities. If, in connection with any future inspection, the FDA finds that any of our third-party manufacturers is not in substantial compliancewith cGMP requirements, or if the FDA is not satisfied with the corrective actions such manufacturer may take, the FDA may undertake certain enforcementactions, including product seizure or withdrawal of the product from the market, imposition of restrictions on the marketing or manufacturing of a productand suspension or withdrawal of regulatory approvals or refusal to approve pending applications or supplements.41 Similar actions may be taken against us should we fail to comply with regulatory requirements, or later discover previously unknown problems withour products. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product maybe marketed or to the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy ofthe product. If we experience any of these post-approval events, our business, financial condition and operating results could be materially and adverselyaffected.If we fail to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we could facesubstantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.As a biotechnology company, even though we do not provide healthcare services or receive payments directly from or bill directly to Medicare,Medicaid or other third-party payors for our products, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’rights are and will be applicable to our business. We are subject to healthcare fraud and abuse and patient privacy regulation by both the federal governmentand the states in which we conduct our business. The laws that may affect our ability to operate include: •the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies and relationships withhealthcare providers or other entities by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly orindirectly, to induce, or in return for, the purchase, prescribing or recommendation of an item or service reimbursable under federally fundedhealthcare programs, such as the Medicare and Medicaid programs; •federal civil and criminal false claims and false statement laws and civil monetary penalty laws, which prohibit, among other things,individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other payorsthat are false or fraudulent or making any materially false statement in connection with the delivery or payment for healthcare benefits, itemsor services; •Health Insurance Portability and Accountability Act of 1996, or HIPAA, which creates federal criminal and civil statutes that prohibitexecuting a scheme to defraud any healthcare benefit program; and Health Information Technology for Economic and Clinical Health, orHITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission ofindividually identifiable health information; •federal physician self-referral laws, such as the Stark law, which prohibit a physician from making a referral to a provider of certain healthservices with which the physician or the physician’s family member has a financial interest, and prohibit submission of a claim forreimbursement pursuant to a prohibited referral; •the Physician Payment Sunshine Act, which imposes disclosure requirements on pharmaceutical manufacturers of payments made tophysicians, healthcare providers and institutions; and •state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health informationin certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicatingcompliance efforts.42 Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-KickbackStatute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Moreover, recent health care reformlegislation has strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal anti-kickbackand criminal health care fraud statutes, so that a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Inaddition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federalAnti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Federal false claims laws prohibit any person fromknowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a falsestatement to get a false claim paid.Recently, several pharmaceutical and other healthcare companies have been prosecuted under the federal false claims laws for allegedly inflatingdrug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedlyproviding free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketingpractices, including off-label promotion, may also violate false claims laws. To the extent that any product we make is sold in a foreign country, we may besubject to similar foreign laws and regulations.Further, there has been a recent trend in the increase of federal and state laws and regulations regarding financial arrangements with physicians. TheAffordable Care Act imposes new requirements to report certain financial arrangements with physicians and others, including reporting any “transfer ofvalue” made or distributed to prescribers and other healthcare providers and reporting any ownership or investment interests held by physicians and theirimmediate family members during each calendar year, subject to federal implementation and enforcement policies.In addition, certain states mandate that we comply with a state code of conduct, adopt a company code of conduct under state criteria, disclosemarketing payments made to physicians, and/or report compliance information to the state authorities. The shifting compliance environment and the need tobuild and maintain robust and expandable systems to comply in multiple jurisdictions with different compliance and reporting requirements increase thepossibility that a pharmaceutical company may violate one or more of the requirements. Any failure to comply with these reporting requirements could resultin significant fines and penalties.The risks of complying with these laws cannot be entirely eliminated. The risk of violation of such laws is also increased because many of them havenot been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us forviolation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attentionfrom the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws mayprove costly. If our past or present operations, or those of our distributors are found to be in violation of any of the laws described above or any othergovernmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion fromparticipation in U.S. federal or state health care programs and the curtailment or restructuring of our operations, any of which could materially adverselyaffect our ability to operate our business and our financial results. Similarly, if healthcare providers, distributors or other entities with whom we do businessare found to be out of compliance with applicable laws and regulations, they may be subject to sanctions, which could also have a negative impact on us.43 If we fail to comply with our obligations under U.S. governmental pricing programs, we could be required to reimburse government programs forunderpayments and could pay penalties, sanctions and fines.On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committeeon Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve atargeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering mandatory reductions in federal spending by as much as $1.1trillion from 2013 through 2021, referred to as sequestration. The Bipartisan Budget Act of 2013 and subsequent legislation provide billions in sequesterrelief, but also extends the 2% reduction in Medicare payments, discussed below through fiscal year 2025. Sequestration-related spending reductions mayhave a significant adverse impact on our business.The issuance of regulations and coverage expansion by various governmental agencies relating to the Medicaid rebate program will continue toincrease our costs and the complexity of compliance and will be time-consuming. Changes to the definition of “average manufacturer price,” or AMP, and theMedicaid rebate amount under the Affordable Care Act and Centers for Medicare & Medicaid Services’, or CMS’s, issuance of final regulations implementingthose changes also has affected and could further affect our 340B “ceiling price” calculations. Because we participate in the Medicaid rebate program, we arerequired to report “average sales price,” or ASP, information to CMS for certain categories of drugs that are paid for under Part B of the Medicare program,including IXINITY, WinRho SDF, HepaGam B and VARIZIG. Future statutory or regulatory changes or CMS binding guidance could affect the ASPcalculations for our products and the resulting Medicare payment rate, and could negatively impact our results of operations.Pricing and rebate calculations vary among products and programs, involve complex calculations and are often subject to interpretation by us,governmental or regulatory agencies and the courts. The Medicaid rebate amount is computed each quarter based on our submission to CMS of our currentAMP and “best price” for the quarter. If we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of thepricing data, we are obligated to resubmit the corrected data for a period not to exceed twelve quarters from the quarter in which the data originally were due.Any such revisions could have the impact of increasing or decreasing our rebate liability for prior quarters, depending on the direction of the revision. Suchrestatements and recalculations increase our costs for complying with the laws and regulations governing the Medicaid rebate program. Price recalculationsalso may affect the “ceiling price” at which we are required to offer our products to certain covered entities, such as safety-net providers, under the 340B/PHSdrug pricing program.In addition to retroactive rebate liability and the potential for 340B program refunds, if we are found to have made a misrepresentation in thereporting of ASP, we are subject to civil monetary penalties in an amount of up to $10,000 for each such price misrepresentation and for each day in whichsuch price misrepresentation was applied. If we are found to have knowingly submitted false AMP or “best price” information to the government, we may beliable for civil monetary penalties in the amount of $100,000 per item of false information. Any refusal of a request for information or knowing provision offalse information in connection with an AMP survey verification also would subject us to $100,000 in civil monetary penalties. In addition, our failure tosubmit monthly/quarterly AMP or “best price” information on a timely basis could result in a civil monetary penalty of $10,000 per day for each day theinformation is late beyond the due date. Such failure also could be grounds for CMS to terminate our Medicaid drug rebate agreement, pursuant to which weparticipate in the Medicaid program. In the event that CMS terminates our rebate agreement, no federal payments would be available under Medicaid orMedicare Part B for our covered outpatient drugs. Governmental agencies may also make changes in program interpretations, requirements or conditions ofparticipation, some of which may have implications for amounts previously estimated or paid. We cannot assure you that our submissions will not be foundby CMS to be incomplete or incorrect.44 In order for our products to be reimbursed by the primary federal governmental programs, we report certain pricing data to the U.S. federalgovernment. Compliance with reporting and other requirements of these federal programs is a pre-condition to: (i) the availability of federal funds to pay forour products under Medicaid and Medicare Part B; and (ii) procurement of our products by the Department of Veterans Affairs, or DVA, and by coveredentities under the 340B/PHS program. The pricing data reported are used as the basis for establishing Federal Supply Schedule, or FSS, and 340B/PHSprogram contract pricing and payment and rebate rates under the Medicare Part B and Medicaid programs, respectively. Pharmaceutical companies have beenprosecuted under federal and state false claims laws for submitting inaccurate and/or incomplete pricing information to the government that resulted inincreased payments made by these programs. The rules governing the calculation of certain reported prices are highly complex. Although we maintain andfollow strict procedures to ensure the maximum possible integrity for our federal pricing calculations, the process for making the required calculationsinvolves some subjective judgments and the risk of errors always exists, which creates the potential for exposure under the false claims laws. If we becomesubject to investigations or other inquiries concerning our compliance with price reporting laws and regulations, and our methodologies for calculatingfederal prices are found to include flaws or to have been incorrectly applied, we could be required to pay or be subject to additional reimbursements,penalties, sanctions or fines, which could have a material adverse effect on our business, financial condition and results of operations.To be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs as well as to be purchased bycertain federal agencies and certain federal grantees, we also must participate in the DVA FSS pricing program. To participate, we are required to enter into anFSS contract with the DVA, under which we must make our innovator “covered drugs” available to the “Big Four” federal agencies—the DVA, the U.S.Department of Defense, or the DoD, the Public Health Service (including the Indian Health Service), and the Coast Guard—at pricing that is capped pursuantto a statutory federal ceiling price, or FCP, formula set forth in Section 603 of the Veterans Health Care Act of 1992, or VHCA. The FCP is based on aweighted average wholesaler price known as the Non-Federal Average Manufacturer Price, or Non-FAMP, which manufacturers are required to report on aquarterly and annual basis to the DVA. Pursuant to the VHCA, knowing provision of false information in connection with a Non-FAMP filing can subject usto penalties of $100,000 for each item of false information. If we overcharge the government in connection with our FSS contract or Section 703 Agreement,whether due to a misstated FCP or otherwise, we are required to disclose the error and refund the difference to the government. The failure to make necessarydisclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act and other laws and regulations. Unexpectedrefunds to the government, and responding to a government investigation or enforcement action, would be expensive and time-consuming, and could have amaterial adverse effect on our business, financial condition, results of operations and growth prospects.The failure to obtain or maintain regulatory approval in international jurisdictions could prevent us from marketing our products abroad and could limitthe growth of our business.We currently sell and intend to continue to sell our products outside the United States. To market our products in the EU and many other foreignjurisdictions, we may need to obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. Approval by the FDAdoes not ensure approval by foreign regulatory authorities. The approval procedures in foreign jurisdictions can vary widely and can involve additionalclinical trials and data review. We and our collaborative partners may not be able to obtain foreign regulatory approvals on a timely basis, if at all, andtherefore we may be unable to commercialize our products internationally. The failure to obtain these approvals could harm our business.45 Our international operations increase our risk of exposure to potential claims of bribery and corruption.As we expand our commercialization activities outside of the United States, we are subject to an increased risk of inadvertently conducting activitiesin a manner that violates the FCPA, the U.K. Bribery Act of 2010, Canada’s Corruption of Foreign Public Officials Act, or other similar foreign laws, whichprohibit corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government official,government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in anofficial capacity. In the course of establishing and expanding our commercial operations and seeking regulatory approvals outside of the United States, wewill need to establish and expand business relationships with various third parties and will interact more frequently with foreign officials, includingregulatory authorities and physicians employed by state-run healthcare institutions who may be deemed to be foreign officials under the FCPA or similarforeign laws. If our business practices outside the United States are found to be in violation of the FCPA or similar foreign laws, we and our seniormanagement may be subject to significant civil and criminal penalties, potential debarment from public procurement and reputational damage, which couldhave a material adverse effect on our business, financial condition, results of operations and growth prospects.Our operations, including our use of hazardous materials, chemicals, bacteria and viruses, require us to comply with regulatory requirements and exposeus to significant potential liabilities.Our operations involve the use of hazardous materials, including chemicals, and may produce dangerous waste products. Accordingly, we, along withthe third parties that conduct clinical trials and manufacture our products and product candidates on our behalf, are subject to federal, state, local and foreignlaws and regulations that govern the use, manufacture, distribution, storage, handling, exposure, disposal and recordkeeping with respect to these materials.We are also subject to a variety of environmental and occupational health and safety laws. Compliance with current or future laws and regulations can requiresignificant costs and we could be subject to substantial fines and penalties in the event of noncompliance. In addition, the risk of contamination or injuryfrom these materials cannot be completely eliminated. In such event, we could be held liable for substantial civil damages or costs associated with thecleanup of hazardous materials.The U.S. federal budget sequestration process may have a significant impact on our business.Sequestration spending reductions may adversely affect the FDA. While user fees can be used in the review of certain regulatory filings, includingNDAs, it is possible that sequestration spending reductions will result in additional backlogs in the approval process that could adversely affect the timing ofFDA review of our regulatory filings for our products and product candidates. Sequestration also includes a 2% reduction in Medicare payments, which couldalso have a significant negative impact on our business. These reductions impact payments to hospitals, physicians, and Medicare managed care andprescription drug plans, under Medicare Parts A, B and D, and the Medicare Advantage program. The significant magnitude of the sequestration paymentreductions places additional financial pressures on Medicare providers, including hospitals with high inpatient Medicare volume, which could force theseproviders to take new measures to address the shortfall in previously-expected reimbursements. It is possible that these measures could result in heightenedscrutiny and/or reduced purchasing of branded pharmaceuticals and any future drug product we may market.46 Our failure to comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, andadversely impact our operating results.EU Member States, Switzerland and other countries have adopted data protection laws and regulations, which impose significant complianceobligations. For example, the EU Data Protection Directive, as implemented into national laws by the EU Member States, imposes strict obligations andrestrictions on the ability to collect, analyze and transfer personal data, including health data from clinical trials and adverse event reporting. Data protectionauthorities from the different EU Member States may interpret the EU Data Protection Directive and national laws differently, which adds to the complexityof processing personal data in the European Union, and guidance on implementation and compliance practices are often updated or otherwise revised. Ourfailure to comply with these laws could lead to government enforcement actions and significant penalties against us, and adversely impact our operatingresults. The revised EU Data Protection Directive adopted in April 2016 may also increase our responsibility and liability in relation to personal data that weprocess, and we may be required to put in place additional mechanisms ensuring compliance with the new EU data protection rules.Product Development RisksOur business depends on our success in developing and commercializing our product candidates. We have invested significant effort and financial resources in the development of our therapeutics and product candidates. In addition to our productsales, our ability to generate revenue is dependent on a number of factors, including the success of our development programs, the interest of commercialentities and non-governmental organizations and others in funding the development of our product candidates, the ability to attract and establish externaldevelopment partnerships and the commercial viability of our developed product candidates. The commercial success of our product candidates will dependon many factors, including accomplishing the following in an economical manner: •successful development and formulation that meets FDA requirements; •successful completion of clinical or non-clinical development, including toxicology studies; •receipt of marketing approvals from the FDA and equivalent foreign regulatory authorities; •establishment of commercial manufacturing and product supply arrangements; •training of a commercial sales force for the product, whether alone or in collaboration with others; •successful registration and maintenance of relevant patent and/or other proprietary protection; and •acceptance of the product by potential government customers, physicians, patients, healthcare payors and others in the medical community.If we are delayed or prevented from developing or commercializing a product candidate in a profitable manner, or if doing so requires us to incursignificant unanticipated costs, our growth could be materially and adversely affected.Clinical trials of product candidates are expensive and time-consuming, and their outcome is uncertain.Before obtaining regulatory approval for the sale of our product candidates, we and our collaborative partners, where applicable, must conductextensive pre-clinical studies and clinical trials to establish proof of concept and demonstrate the safety and efficacy of our product candidates. Pre-clinicaland clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in pre-clinicaltesting and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict finalresults. An unexpected result in one or more of our clinical trials can occur at any stage of testing.47 We may experience unforeseen events or issues during, or as a result of, pre-clinical testing or clinical trials. These issues and events, which coulddelay or prevent our ability to receive regulatory approval for a product candidate, include, among others: •lack of efficacy of product candidates during the trials; •safety issues or inconclusive or incomplete testing, trial or study results; •our inability or the inability of Emergent and our other third-party manufacturers to manufacture sufficient quantities of materials for use intrials; •the unavailability or variability in the number and types of subjects for each study; •government or regulatory restrictions or delays; and •greater than anticipated costs of trials.For example, in December 2015, after a joint review of data from the Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients,Aptevo and MorphoSys concluded that the dosing regimen and administration required adjustment. Patients receiving weekly doses of MOR209/ES414developed ADA. ADA developed in most patients including those receiving the maximum tolerated dose of drug which could be given safely on a weeklybasis. These antibodies bind to the drug and reduce the concentration of active MOR209/ES414 in the blood and thus could potentially reduce its efficacy.However, we observed no safety issues related to the development of ADA. The cause of these antibodies is unclear but could be due to the weeklyadministration of the drug. We and MorphoSys amended to continuous intravenous infusion as a way to administer higher levels of drug and prevent thedevelopment of ADA. There is no guarantee that this change in administration will enable higher dosing and/or prevent the development of ADA. Furtheradverse or inconclusive clinical results could require additional adjustments to the dosing regimen or other parts of the program and could delay or preventour ability to receive regulatory approval for MOR209/ES414.In addition, product candidates that experience success in pre-clinical testing and early-stage clinical trials will not necessarily experience the samesuccess in late-stage clinical trials, which are required for marketing approval. The FDA and other countries’ regulatory authorities will allow us to beginclinical trials under an IND, or similar document in other countries only if we demonstrate in our submission that the potential product candidate will notexpose humans to unreasonable risks and that the compound has pharmacological activity that justifies clinical development. It takes significant time andexpense to generate the requisite data to support an IND or similar document. In many cases, companies spend the time and resources only to discover thatthe data are not sufficient to support an IND or similar document and therefore are unable to enter human clinical trials.Even if we are successful in advancing a product candidate into the clinical development stage, before obtaining regulatory and marketingapprovals, we must demonstrate through extensive human clinical trials that the product candidate is safe and effective for its intended use. Human clinicaltrials must be carried out under protocols that are acceptable to regulatory authorities and to the independent committees responsible for the ethical review ofclinical studies. There may be delays in preparing protocols or receiving approval for them that may delay the start or completion of the clinical trials. This isapplicable both domestically and internationally. Clinical practices vary globally, and there is a lack of harmonization among the guidance provided byvarious regulatory bodies of different regions and countries with respect to the data that is required to receive marketing approval, which makes designingglobal trials increasingly complex.48 Serious adverse events, undesirable side effects or other unexpected properties of our product candidates may be identified that could delay, prevent orcause the withdrawal of regulatory approval, limit the commercial potential, or result in significant negative consequences following marketing approval.Serious adverse events or undesirable side effects caused by, or other unexpected properties of any of our product candidates could cause us orregulatory authorities to interrupt, delay or halt our manufacturing and distribution operations and could result in a more restrictive label, the imposition ofdistribution or use restrictions or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. If any of our productcandidates are associated with serious adverse events or undesirable side effects or have properties that are unexpected, we may need to abandon theirdevelopment or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, lesssevere or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in clinical or earlier stage testing have later beenfound to cause undesirable or unexpected side effects that prevented further development of the compound.For example, as noted above, MOR209/ES414 is currently being tested in its first clinical trial in humans. Fifteen patients have received the drug.One of the significant serious adverse events associated with the drug is infusion reactions. Infusion reactions are often associated with the infusion of aprotein and are expected with this drug that activates T-cells. The events that have been reported with infusion of the drug include: fever, fatigue,hypertension, bronchospasm, chills and rigors. The severity of these reactions varied by patient and were managed medically and resolved. In addition, inDecember 2015, we discovered that patients receiving weekly doses of our product candidate MOR209/ES414 developed ADA during use. This ADA, whichwas not associated with safety issues, developed in most patients including those receiving the maximum tolerated dose of drug which could be given safelyon a weekly basis. Undesirable side effects, such as this, or other unexpected adverse events or properties of any of our candidates, could arise or becomeknown either during clinical development or, if approved, after the approved product has been marketed. If such an event occurs during development, ourtrials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or denyapproval of our other product candidates. If such an event occurs, a number of potentially significant negative consequences may result, including: •regulatory authorities may require additional warnings on the label or impose distribution or use restrictions; •regulatory authorities may require one or more post-market studies; •we may be required to create a medication guide outlining the risks of such side effects for distribution to patients; •we could be sued and held liable for harm caused to patients; and •our reputation may suffer.Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate, or could substantiallyincrease commercialization costs and expenses, which could delay or prevent us from generating revenue from the sale of our products and harm our businessand results of operations.49 We depend on third parties to conduct our clinical and non-clinical trials.We do not have the ability to independently conduct the clinical and non-clinical trials required to obtain regulatory approval for our productcandidates. We depend on third parties, such as independent clinical investigators, contract research organizations and other third-party service providers toconduct the clinical and non-clinical trials of our product candidates and expect to continue to do so. We rely heavily on these third parties for successfulexecution of our clinical and non-clinical trials, but we do not exercise day-to-day control over their activities. Our reliance on these service providers doesnot relieve us of our regulatory responsibilities, including ensuring that our trials are conducted in accordance with the FDA-approved good clinicalpractices, or GCPs, and the plan and protocols contained in the relevant regulatory application. In addition, these organizations may not complete theseactivities on our anticipated or desired timeframe. We also may experience unexpected cost increases that are beyond our control. Problems with thetimeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider,which may prove difficult, costly and result in a delay of our trials. Any delay in or inability to complete our trials could delay or prevent the development,approval and commercialization of our product candidates.If we, contract research organizations or other third parties assisting us or our study sites fail to comply with applicable GCPs, the clinical datagenerated in our clinical trials may be deemed unreliable and the FDA or its non-U.S. counterparts may require us to perform additional clinical trials beforeapproving our marketing applications. We cannot assure you that, upon inspection, the FDA or non-U.S. regulatory agencies will determine that any of ourclinical trials comply with GCPs. In addition, our clinical trials must be conducted with product produced under GCPs and similar regulations outside of theUnited States. Our failure, or the failure of our product manufacturers, to comply with these regulations may require us to repeat or redesign clinical trials,which would increase our development costs and delay or impact the likelihood of regulatory approval.If third parties do not carry out their duties under their agreements with us, if the quality or accuracy of the data they obtain is compromised due tothe failure to adhere to our clinical protocols, including dosing requirements, or regulatory requirements, or if they otherwise fail to comply with clinical trialprotocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet regulatory requirements or ifthese third parties need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be ableto obtain regulatory approval of our product candidates or succeed in our efforts to create approved line extensions for certain of our existing products orgenerate additional useful clinical data in support of these products.In certain cases, government entities conduct studies of our product candidates, and we may seek to rely on these studies in applying for marketingapproval for certain of our product candidates. These government entities have no obligation or commitment to us to conduct or complete any of thesestudies or clinical trials and may choose to discontinue these development efforts at any time.If we are unable to obtain any necessary third-party services on acceptable terms or if these service providers do not successfully carry out theircontractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for our product candidates may be delayed or prevented.We may fail to select or capitalize on the most scientifically, clinically or commercially promising or profitable product candidates.We continue to evaluate our business strategy and, as a result, may modify our strategy in the future. In this regard, we may, from time to time, focusour product development efforts on different product candidates or may delay or halt the development of various product candidates. This could requirechanges in our facilities and our personnel. Any product development changes that we implement may not be successful. In particular, we may fail to select orcapitalize on the most scientifically, clinically or commercially promising or profitable product candidates.Our decisions to allocate our research and development, management and financial resources toward particular product candidates or therapeuticareas may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay orterminate product development programs may also prove to be incorrect and could cause us to miss valuable opportunities.50 If we do not obtain orphan drug exclusivity for our drug products, which do not have patent protection, our competitors may then sell the same drug totreat the same condition.We do not have patent protection for WinRho SDF, HepaGam B or VARIZIG. Because not all of our drugs have patent protection, orphan drugdesignation is particularly important for our products that are eligible for orphan drug designation. VARIZIG is approved in the United States to reduce theseverity of varicella (chickenpox) following exposure in high-risk patient groups, including adults and children with compromised immune systems,newborns of mothers with varicella shortly before or after delivery, neonates and infants less than one year of age, and pregnant women. VARIZIG has orphandrug exclusivity in the United States through December 2019. We plan to rely on this exclusivity period under the orphan drug designation for VARIZIG tomaintain a competitive position. Our product candidate otlertuzumab was granted orphan drug designation by the FDA in November 2011 and receivedorphan medicinal product designation from the European Commission in December 2012 for the treatment of CLL. Orphan drug designation in Europequalifies a drug for certain development and commercial incentives, including protocol assistance, access to centralized authorization procedures, reducedfees for regulatory activities, and ten years of market exclusivity after approval, but exclusivity may be reduced to six years if a drug no longer meets thecriteria for orphan drug designation, including where it is shown that the drug is sufficiently profitable so that market exclusivity is no longer justified .Intellectual Property RisksIf we are unable to protect our intellectual proprietary rights, our business could be harmed.Our commercial success will depend, in large part, on our ability to obtain and maintain protection in the United States and other countries for theintellectual property covering or incorporated into our technology, products and product candidates. Obtaining and maintaining this protection is verycostly. The patentability of technology in the biotechnology field generally is highly uncertain and involves complex legal and scientific questions. Wecannot be certain that our patents and patent applications, including our own and those that we have rights through licenses from third parties, willadequately protect our intellectual property. Our success protecting our intellectual property depends significantly on our ability to: •obtain and maintain U.S. and foreign patents, including defending those patents against adverse claims; •secure patent term extension for the patents covering our approved products; •protect trade secrets; •operate without infringing the proprietary rights of others; and •prevent others from infringing our proprietary rights.We may not be able to obtain additional issued patents relating to our technology or products. Even if issued, patents may inadvertently lapse or bechallenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the duration ofpatent protection we may have for our products. In the past, we have abandoned the prosecution and/or maintenance of patent applications related to patentfamilies in the ordinary course of business. In the future we may choose to abandon such prosecution and/or maintenance in a similar fashion. If these patentrights are later determined to be valuable or necessary to our business, our competitive position may be adversely affected. Changes in patent laws oradministrative patent office rules or changes in interpretations of patent laws in the United States and in other countries may diminish the value of ourintellectual property or narrow the scope of our patent protection, or result in costly defensive measures.51 The cost of litigation to uphold the validity of patents, once obtained, to prevent infringement or to otherwise protect or enforce our proprietaryrights could be substantial and, from time to time, our patents are subject to patent office proceedings. Some of our competitors may be better able to sustainthe costs of complex patent litigation because they may have substantially greater financial resources. Intellectual property lawsuits are expensive andunpredictable and would consume management’s time and attention and other resources, even if the outcome were successful. In addition, there is a risk thata court would decide that our patents are not valid and that we do not have the right to stop the other party from using the inventions covered by orincorporating them. There is also a risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using theinvention(s), including on the grounds that its activities do not infringe the patent. If any of these events were to occur, our business, financial condition andoperating results could be materially and adversely affected.In addition to patent litigation, we may be a party to adversarial proceedings before the Patent Trial and Appeal Board of the US Patent andTrademark Office, or the PTAB. Potential proceedings before the PTAB include inter partes review proceedings, post-grant review proceedings andinterference proceedings. Depending on our level of success at the PTAB, these proceedings could adversely impact our intellectual property rights withrespect to our products and technology.In addition, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available incertain circumstances or weakening the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to thevalue of patents, once obtained, and with regard to our ability to obtain patents in the future. Depending on decisions by the U.S. Congress, the federal courts,and the PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or toenforce our existing patents and patents that we might obtain in the future.Our collaborative partners and licensors may not adequately protect our intellectual property rights. These third parties may have the first right tomaintain or defend intellectual property rights in which we have an interest and, although we may have the right to assume the maintenance and defense ofsuch intellectual property rights if these third parties do not do so, our ability to maintain and defend such intellectual property rights may be compromisedby the acts or omissions of these third parties.Our patents, once obtained, also may not afford us protection against competitors with similar technology. Because patent applications in the UnitedStates and many foreign jurisdictions are typically not published until eighteen months after filing, or in some cases not at all, and because publications ofdiscoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that others have not filed or maintainedpatent applications for technology used by us or covered by our pending patent applications without our being aware of these applications.We also will rely on current and future trademarks to establish and maintain recognized brands. If we fail to acquire and protect such trademarks, ourability to market and sell our products, and therefore our business, financial condition and operating results, could be materially and adversely affected.52 If the outcomes of patent opposition proceedings currently pending in Europe relating to IXINITY are unsuccessful, we may need to identify an additionalfill/finish manufacturer, which could result in significant production delays and additional costs associated with moving our fill/finish manufacturingactivities and identifying another fill/finish manufacturer.A European Patent Opposition is a European Patent Office proceeding that allows for an opponent to challenge the validity of an issued patent. AEuropean Patent Opposition is a proceeding that determines only the validity of a patent and does not determine whether a party infringes a patent. Toinitiate an Opposition at the European Patent Office, an opponent files a notice that it wishes to oppose the patent within a nine-month period following thepublication of the patent grant. After the opponent files the notice, it may be a few years before the merits of the opposition are heard and decided by theEuropean Patent Office Opposition Division and several more years before the Boards of Appeal hears and decides on any appeals. We are currently involvedin three opposition proceedings in Europe relating to factor IX proteins such as IXINITY. We were previously involved in five opposition proceedings inEurope relating to factor IX proteins, but two of the opposition proceedings were decided in our favor and cannot be further appealed. Baxter InternationalInc. (or Baxalta) is or was the sole counter-party in all proceedings. Of the five European Patent Office Proceedings, all have now gone before the EuropeanPatent Office Opposition Division. Of these oppositions, four were decided in our favor (in the name of UNC, our licensor, or Cangene Corporation whenacting as an opponent) and one was decided in favor of Baxalta. Three of these oppositions have been appealed (including one which has now been settled inour favor by the Board of Appeal and can no longer be contested by Baxalta centrally at the European Patent Office), and we expect Baxalta to appeal thefourth. It may be several years before these oppositions go before the Boards of Appeal for a final decision. Depending on the final outcome of theseproceedings, we may be unable to continue to conduct our current IXINITY fill/finish manufacturing activities.Patheon UK Limited, through an affiliate, is currently the sole source third-party manufacturer that provides fill and finish services for our IXINITYproduct, which conducts such activities in Europe. If, as a result of an adverse outcome in these proceedings, we are required to identify an additionalfill/finish manufacturer in another location, we would not be able to do so without significant delay and likely significant additional cost.In addition, depending on the final outcome of these proceedings, we may be unable to sell factor IX products in Europe relating to the subject matterclaimed in the European patents we are opposing.Although we do not have current marketing authorization for IXINITY in Europe, nor do we sell IXINITY in Europe, if these opposition proceedingsare successful, we may never be able to obtain marketing authorization to sell IXINITY in Europe or any other recombinant vitamin K dependent products wemay develop in the future. In addition, if any of the patents we own or exclusively license are invalidated during the opposition process, we may be unable toblock competitors from performing certain activities in Europe currently covered by the patents.International patent protection is particularly uncertain, and if we are involved in additional opposition proceedings in foreign countries, we may have toexpend substantial sums and management resources.Patent and other intellectual property laws outside the United States are even more uncertain than in the United States and are continuallyundergoing review and revisions in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the sameextent as the laws of the United States. For example, certain countries do not grant patent claims that are directed to business methods and processes. Inaddition, we may have to participate in additional opposition proceedings, like the proceedings described above, to determine the validity of our foreignpatents or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts.53 Third parties may choose to file patent infringement claims against us.Our development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or beclaimed to infringe patents and other intellectual property rights of third parties under which we do not hold sufficient licenses or other rights. Third partiesmay be successful in obtaining patent protection for technologies that cover development and commercialization activities in which we are already engaged.These third parties may have substantially greater financial resources than us and could bring claims against us that could cause us to incur substantialexpenses to defend against these claims and, if successful against us, could cause us to pay substantial damages. If a patent infringement or other similar suitwere brought against us, we could be forced to stop or delay development, manufacturing or sales of the product or product candidate that is the subject ofthe suit. Intellectual property litigation in the biotechnology industry is common, and we expect this trend to continue.As a result of patent infringement or other similar claims, or to avoid potential claims, we may choose or be required to seek a license from the thirdparty and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtaina license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could beprevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patentinfringement claims, we are unable to enter into licenses on acceptable terms, if at all, or if an injunction is granted against us, which could harm our businesssignificantly.There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical andbiotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other adversarial proceedingssuch as proceedings before the PTAB and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to ourproducts and technology.Patent litigation and other proceedings may also absorb significant management time. The cost to us of any patent litigation or other proceeding,even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectivelythan we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or otherproceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorbsignificant management time.Our Aptevo trademarks may be opposed which could have a material and adverse effect on our business.We have applications pending that cover the APTEVO, APTEVO THERAPEUTICS, APTEVO BIOTHERAPEUTICS and APTEVO RESEARCH ANDDEVELOPMENT trademarks. We refer to these trademarks as our house marks. If a third party opposes any of these house marks and we are unable to reachsettlement prior to the commencement of an opposition proceeding, we may incur significant expense in the course of participating in the opposition process,which can be expensive and lengthy. Any settlement with a third party may result in our agreeing to be subject to restrictions on our use of the relevant housemark. In addition, if we are unsuccessful in an opposition against a house mark, we would lose the ability to obtain trademark registration for one or moreuses of the relevant mark.The Bristol-Myers Squibb Company, or BMS, has opposed several of our house marks in and outside the United States. At this time, we are indiscussions with BMS regarding our use of our house marks. We and BMS have agreed to delay opposition proceedings to allow the parties to negotiate aresolution. In the event these discussions are not concluded to BMS’s satisfaction, we may lose our ability to obtain trademark registration for one or more ofits house marks both in the United States and in other territories where BMS has opposed or may still oppose the marks, which could have a material andadverse effect on our business.Third party may file trademark infringement claim against us.Defending ourselves against such trademark infringement claims could be costly, time-consuming and distracting to management, and if we areunsuccessful in our defense, we could face an injunction and damages.54 At this time, we received no indication from BMS that it plans to take any legal action against Aptevo, but defending ourselves against such claimcould be costly, time-consuming and distracting to management, and if we are unsuccessful in our defense, we could face an injunction prohibiting us fromusing the Aptevo trademarks and damages, all which could have a material and adverse effect on our business.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology orpharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertentlyor otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against theseclaims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.Failure to comply with our obligations in our intellectual property licenses with third parties, could result in loss of license rights or other damages.We are a party to a number of license agreements and expect to enter into additional license agreements in the future. Our existing licenses impose,and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply withthese obligations, the licensor may have the right to terminate the license in whole or in part, terminate the exclusive nature of the license and/or sue us forbreach, which could cause us to not be able to market any product that is covered by the licensed patents and may be subject to damages.Any such termination or claim, particularly relating to our agreements with respect to IXINITY, WinRho SDF, HepaGam B and VARIZIG could havea material adverse effect on our financial condition, results of operations, liquidity or business. Even if we contest any such termination or claim and areultimately successful, such dispute could lead to delays in the development or commercialization of potential products and result in time-consuming andexpensive litigation or arbitration.If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adverselyaffected.In addition to patented technology, we rely upon unpatented proprietary technology, information processes and know-how. These types of tradesecrets can be difficult to protect. We seek to protect this confidential information, in part, through agreements with our employees, consultants and thirdparties as well as confidentiality policies and audits, although these may not be successful in protecting our trade secrets and confidential information. Theseagreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known,including through a potential cyber security breach, or may be independently developed by competitors. If we are unable to protect the confidentiality of ourproprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which couldadversely impact our business.Our WinRho SDF, HepaGam B and VARIZIG products are protected by Emergent’s manufacturing trade secrets. There are no patents or patentapplications pending that support these hyperimmune products. If Emergent fails to adequately protect the trade secrets supporting these products,competitors may be able to copy our products by reproducing the manufacturing processes.55 Risks Related to CollaborationsWe may not be successful in establishing and maintaining collaborations that leverage our capabilities in pursuit of developing and commercializing ourproduct candidates.For each of our product candidates, including otlertuzumab, we plan to evaluate the merits of entering into collaboration arrangements with thirdparties, including leading biotechnology companies or non-governmental organizations.We expect to selectively pursue collaboration arrangements with third parties that have particular technology, expertise or resources for thedevelopment or commercialization of our product candidates or for accessing particular markets. We face, and will continue to face, significant competitionin seeking appropriate partners for our product candidates. If we are unable to identify partners whose capabilities complement and integrate well with oursand reach collaboration arrangements with such partners on a timely basis, on acceptable terms or at all, or if the arrangements we establish are unproductivefor us, we may fail to meet our business objectives for the particular product candidate. Our ability to enter into such arrangements with respect to products indevelopment that are subject to licenses may be limited by the terms of those licenses.Any collaboration that we enter into may not be successful and the success of our collaboration arrangements will depend heavily on the efforts andactivities of our collaborative partners. It is likely that our collaborative partners will have significant discretion in determining the efforts and resources thatthey will apply to these collaborations.The risks that we are subject to in any of our collaborations include, among others: •our collaborative partners may not commit adequate resources to the development, marketing and distribution of any collaboration products,limiting our potential revenues from these products; •our collaborative partners may experience financial difficulties and may therefore be unable to meet their commitments to us; •our collaborative partners may pursue a competing product candidate developed either independently or in collaboration with others,including our competitors; and •our collaborative partners may terminate our relationship.The failure of any of our future collaboration partners to perform as expected could place us at a competitive disadvantage and adversely affect usfinancially, including delay and increased costs of development, loss of market opportunities, lower than expected revenues and impairment of the value ofthe related product candidate. A loss of Aptevo’s collaboration agreement with MorphoSys would result in a burden of locating a replacement partner underpotentially less favorable terms at an additional cost. Collaborations are a critical part of our business strategy, and any inability on our part to establish andsuccessfully maintain such arrangements on terms favorable to us or to work successfully with our collaborative partners could have an adverse effect on ouroperations and financial performance.Risks Related to the SeparationWe may not realize some or all of the anticipated benefits of the separation from Emergent due to a number of factors.We may not realize some or all of the anticipated strategic, financial or other benefits from the separation from Emergent. We are smaller, lessdiversified and with a narrower business focus than the previously consolidated company, and may be more vulnerable to changing market conditions, whichcould materially and adversely affect our business, financial condition and results of operations. The spin-off transactions presented a number of significantrisks to our internal processes, including the failure to maintain an adequate control environment due to changes to our information technology systems andfinancial reporting processes. We may discover as a result of the separation, a negative impact on the financial condition and results of operations of ourbusiness. There also can be no assurance that the separation will not adversely affect our business.56 Emergent may fail to perform under various transaction agreements that were executed as part of the separation or we may fail to have necessary systemsand services in place when certain of the transaction agreements expire.In connection with the separation, we entered into a separation and distribution agreement and various other agreements with Emergent, including anon-negotiable promissory note, a transition services agreement, a tax matters agreement, an employee matters agreement, a manufacturing servicesagreement, a Canadian distributor agreement, a trademark license agreement and a product license agreement. Certain of these agreements provide for theperformance of services by Emergent for a period of time after the separation. We will rely on Emergent to satisfy its performance obligations under theseagreements. If Emergent is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operationaldifficulties or losses.If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services when the transitionservices or longer-term agreements terminate, we may not be able to operate our business effectively and our results of operations may be adversely affected.We are in the process of creating our own, or engaging third parties to provide, systems and services to replace systems and services Emergent provided to us.We may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from Emergent’s systems to ours.These systems and services may also be more expensive or less efficient than the systems and services Emergent is expected to provide during the transitionperiod.Our accounting and other management systems and resources may not be adequately prepared to meet the ongoing financial reporting and otherrequirements of a standalone publicly-traded company.Prior to our separation from Emergent, our financial results were included within the consolidated results of Emergent. We are now directly subject tosubstantial reporting and other obligations under the Securities Exchange Act of 1934, or Exchange Act. These reporting and other obligations placesignificant demand on our management, administrative and operational resources, including accounting resources. We may not have sufficient time to meetthese obligations by the applicable deadlines.Moreover, to comply with these requirements, we have migrated our systems, including information technology systems, implement additionalfinancial and management controls, reporting systems and procedures. We expect to incur additional annual expenses related to these steps, and thoseexpenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology and proceduresin a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under theExchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business,financial condition, results of operations and cash flows.If we do not continue to develop effective internal controls, we may not be able to accurately report our financial results and our business could be harmed.We and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of and forthe years ended December 31, 2015 and for quarters through September 30, 2016. A material weakness is a deficiency, or combination of control deficiencies,in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected on a timely basis. Specifically, it was determined that a deferred tax liability should have been recordedassociated with the difference between the book basis and the tax basis of the in-process research and development asset that was recorded as a part of anacquisition in 2010. As a result, we were required to restate our previously issued audited financial statements for the year ended December 31, 2015 andunaudited financial information for the quarter ended March 31, 2016, included in the Company’s Registration Statement on Form 10, and unauditedfinancial information for the quarters ended June 30, 2016 and September 30, 2016 included in the Company’s Quarterly Report on Form 10-Q for thequarters ended June 30, 2016 and September 30, 2016.The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually andthe effectiveness of our disclosure controls and procedures quarterly. In particular, beginning in 2018, Section 404 of the Sarbanes-Oxley Act, or Section 404,will require us to perform57 system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registeredpublic accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an emerging growth company, we expectto avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internalcontrol over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an emerging growthcompany. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, thecost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incursubstantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governancepractices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timelymanner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemedto be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatoryauthorities, which would require additional financial and management resources.Investor perceptions of our company may suffer if material weaknesses are found, and this could cause a decline in the market price of our commonstock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could harm our operating results andreputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial resultsand could result in an adverse opinion on our internal controls from our independent registered public accounting firm.In connection with our separation from Emergent, Emergent agreed to indemnify us for certain liabilities. The Emergent indemnity may not be sufficientto hold us harmless from the full amount of liabilities for which Emergent will be allocated responsibility, and Emergent may not be able to satisfy itsindemnification obligations in the future.Pursuant to the separation agreement and certain other agreements with Emergent, Emergent has agreed to indemnify us for certain liabilities, and weagreed to indemnify Emergent for certain liabilities. Indemnities that we may be required to provide Emergent are not subject to any cap, may be significantand could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution. Thirdparties could also seek to hold us responsible for any of the liabilities that Emergent has agreed to retain. Any amounts we are required to pay pursuant tothese indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operatingbusiness. Further, the indemnity from Emergent may not be sufficient to protect us against the full amount of such liabilities, and Emergent may not be ableto fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Emergent any amounts for which we are heldliable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations andfinancial condition.58 If the distribution, together with certain related transactions, does not qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D) ofthe Code, our stockholders could be subject to significant tax liabilities, and, in certain circumstances, we could be required to indemnify Emergent fortaxes and related expenses resulting from the failure of the transaction to so qualify.It is intended that the distribution, together with certain related transactions, will generally be tax-free to Emergent and its stockholders for U.S.federal income tax purposes. Emergent has received a favorable private letter ruling from the IRS regarding certain U.S. federal income tax matters relating tothe distribution and certain related transactions. It was a condition to the distribution that (i) the private letter ruling from the IRS continue to be valid and infull force and effect and (ii) Emergent receive an opinion from WilmerHale LLP, in a form and substance satisfactory to Emergent, substantially to the effectthat, for U.S. federal income tax purposes, the distribution and certain related transactions, taken together, will qualify as a transaction described underSections 355(a) and 368(a)(1)(D) of the Internal Revenue Code, or the Code. The IRS private letter ruling is based upon certain facts and representationssubmitted by Emergent to the IRS. In addition, the opinion from WilmerHale LLP was based upon and rely on, among other things, the IRS private letterruling and certain facts and assumptions, as well as certain representations and covenants of Emergent and Aptevo contained in the tax matters agreement andcertain representations contained in representation letters provided by Emergent, Aptevo and certain stockholders to WilmerHale LLP, includingrepresentations and covenants relating to the past and future conduct of Emergent, Aptevo and such stockholders. If any of these facts, assumptions,representations, or covenants is, or becomes, inaccurate or incomplete, the IRS private letter ruling and/or the opinion of WilmerHale LLP may be invalid andthe conclusions reached therein could be jeopardized. In addition, the IRS private letter ruling only addresses certain limited matters relevant to determiningwhether the distribution, together with certain related transactions, qualifies as a transaction described under Sections 355 and 368(a)(1)(D) of the Code, andthe opinion of WilmerHale LLP represents the judgment of such counsel which is not binding on the IRS or any court. Accordingly, notwithstanding the IRSprivate letter ruling and the opinion of WilmerHale LLP, there can be no assurance that the IRS will not assert that the distribution and/or certain relatedtransactions should be treated as a taxable transaction for U.S. federal income tax purposes or that a court would not sustain such a challenge.If the distribution, together with certain related transactions, does not qualify as a tax-free transaction described under Sections 355 and 368(a)(1)(D)of the Code, for U.S. federal income tax purposes, in general, (i) Emergent would recognize taxable gain on the distribution equal to the amount by which thefair market value of the Aptevo common stock distributed to Emergent stockholders exceeds Emergent’s tax basis in its shares of our common stock and(ii) each Emergent stockholder would be treated as receiving a taxable distribution in an amount equal to the fair market value of the Aptevo common stockreceived by such stockholder.Under the tax matters agreement that we entered into with Emergent, we may be required to indemnify Emergent against any tax liabilities andrelated expenses resulting from the failure of the distribution, together with certain related transactions, to qualify as a transaction described under Sections355 and 368(a)(1)(D) of the Code to the extent that the failure to so qualify is attributable to actions, events or transactions relating to our stock, assets orbusiness, or a breach of the relevant representations or covenants made by us in the tax matters agreement or the IRS private letter ruling or in therepresentation letters provided to WilmerHale LLP.We have incurred and expect to incur both one-time and ongoing material costs and expenses as a result of our separation from Emergent, which couldadversely affect our results of operations.We have incurred and expect to incur both one-time and ongoing costs and expenses as a result of our separation from Emergent. These increasedcosts and expenses may arise from various factors, including financial reporting, costs associated with complying with federal securities laws (includingpotential future compliance with the Sarbanes-Oxley Act of 2002), tax administration, and legal and human resources related functions, and it is possible thatthese costs will be material to our business.59 Certain of our executive officers and/or directors may have actual or potential conflicts of interest because of their previous positions at Emergent.The ownership by our executive officers and/or directors of shares of Emergent common stock, stock options or other equity awards may create, ormay create the appearance of, conflicts of interest. Because of their current or former positions with Emergent, certain of our executive officers and/ordirectors own shares of Emergent common stock, stock options to purchase Emergent common stock or other equity awards. Shares of Emergent commonstock, stock options to purchase Emergent common stock or other equity awards may comprise a significant portion of some of these individuals’ totalpersonal financial assets. Even though our executive officers and/or directors who were previously employees of Emergent have ceased to be employees ofEmergent, some of our executive officers and/or directors will continue to have a financial interest in Emergent common stock, which may create, or maycreate the appearance of, conflicts of interest when these individuals are faced with decisions that could have different implications for Emergent than thedecisions have for us.Risks Related to Our Common StockWe cannot be certain that an active trading market for our common stock will be sustained and our stock price may fluctuate significantly.An active trading market for our common stock may not sustained, nor can we predict the prices at which shares of our common stock may trade inthe future.Our stock price has fluctuated in the past and is likely to be volatile in the future. Since August 1, 2016, the reported sale price of our common stockhas fluctuated between $1.83 and $3.33 per share. The stock market in general, and the market for biotechnology companies in particular, have experiencedextreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may fluctuatesignificantly due to a number of factors, some of which may be beyond our control or unrelated to our operations, including, among others: •changes in earnings estimated by securities analysts or management, or our ability to meet those estimates; •investor perceptions or negative announcements by our customers, competitors or suppliers regarding their own performance; •the success of competitive products or technologies; •the timing, expenses and results of clinical and non-clinical trials of our product candidates; •announcements regarding clinical trial results and product introductions by us or our competitors; •announcements of acquisitions, collaborations, financings or other transactions by us; •public concern as to the safety of our products; •termination or delay of a development program; •the recruitment or departure of key personnel; •actual or anticipated variations in our product revenue and results of operations; •the operating and stock price performance of comparable companies; •general industry conditions and domestic and worldwide financial, economic and political instability; and •the other factors described in this “Risk Factors” section.In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuitsagainst the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and otherresources.60 The restatement of our previously issued financial statements, the misstatements that resulted in such restatement, and the material weakness that has beenidentified in our internal control over financial reporting, could expose us to additional risks that could have a material adverse effect on our business,financial condition, cash flows and results of operations and could cause the market value of our common stock to decline.As discussed in this Annual Report on Form 10-K, we have restated our previously issued audited consolidated financial statements for the yearended December 31, 2015 and the unaudited financial information related to March 31, 2016 and June 30, 2016 and the three and nine months endedSeptember 30, 2016. This restatement, along with the material weakness that has been identified in our internal control over financial reporting, could exposeus to potential claims and additional risks that could have a material adverse effect on our business, financial condition, cash flows and results of operationsand could cause the market value of our common stock to decline. We have implemented actions with respect to our internal controls but to the extent thesesteps are not successful, we could be forced to incur additional time and expense or we may not be able to produce accurate and timely financial results. As aresult of the restatement and the material weakness in our internal controls, we could be subject to shareholder, governmental, or other actions in connectionwith the restatement or related or other matters. Any such proceedings would, regardless of the outcome, consume a significant amount of management’s timeand attention and would result in additional legal, accounting and other costs. If we were not to prevail in any such proceedings, we could be required to paysubstantial damages or settlement costs. In addition, the restatement and related matters could impair our reputation or could lead to a loss of investorconfidence.The public announcement of data from clinical studies or news of any developments related to our product pipeline may cause significant volatility in ourstock price.The announcement of data from clinical studies by us or our collaborative partners or news of any developments related to our key pipeline productsmay cause significant volatility in our stock price. Furthermore, the announcement of any negative or unexpected data or the discontinuation of developmentof any of our key pipeline products, or any delay in our anticipated timelines for filing for regulatory approval, could cause our stock price to declinesignificantly. There can be no assurance that data from clinical studies will support a filing for regulatory approval or even if approved, that any of our keypipeline products will become commercially successful.Your percentage of ownership in Aptevo may be diluted in the future.In the future, your percentage ownership in Aptevo may be diluted because of equity issuances for acquisitions, capital market transactions orotherwise, including equity awards to our directors, officers and employees. Our employees have options to purchase shares of our common stock and wehave issued significant number of restricted stock units that will vest over time. From time to time, we may issue additional options or other stock-basedawards to our employees under our employee benefits plans.In addition, our restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series ofpreferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over ourcommon stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series ofpreferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right toelect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase orredemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.61 Fuad El-Hibri, the chairman of our Board of Directors, has significant influence over us through his substantial beneficial ownership of our commonstock, including an ability to influence the election of the members of our Board of Directors, or delay or prevent a change of control of us.Mr. El-Hibri has the ability to significantly influence the election of the members of our Board of Directors due to his substantial beneficialownership of our common stock. As of December 31, 2016, Mr. El-Hibri was the beneficial owner of approximately 15% of our outstanding common stock.As a result, Mr. El-Hibri could delay or prevent a change of control of us that may be favored by other directors or stockholders and otherwise exercisesubstantial control over all corporate actions requiring board or stockholder approval, including any amendment of our certificate of incorporation or by-laws. The control by Mr. El-Hibri may prevent other stockholders from influencing significant corporate decisions. In addition, Mr. El-Hibri’s significantbeneficial ownership of our shares could present the potential for a conflict of interest.Provisions under Delaware law and in our restated certificate of incorporation and amended and restated by-laws may discourage acquisition proposals,delay a change in control or prevent transactions that stockholders may consider favorable.Certain provisions in our restated certificate of incorporation and amended and restated by-laws, and under Delaware law, may discourage, delay orprevent a merger, acquisition or other changes in control that stockholders may consider favorable, including transactions in which stockholders mightotherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our incumbentdirectors and management.These provisions include: •the classification of our directors; •limitations on the removal of directors; •limitations on filling vacancies on the board; •advance notice requirements for stockholder nominations of candidates for election to the Board of Directors and other proposals; •the inability of stockholders to act by written consent; •the inability of stockholders to call special meetings; and •the ability of our Board of Directors to designate the terms of and issue a new series of preferred stock without stockholder approval.The affirmative vote of holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is requiredto amend or repeal the above provisions of our certificate of incorporation. The affirmative vote of either a majority of the directors present at a meeting ofour Board of Directors or holders of our capital stock representing at least 75% of the voting power of all outstanding stock entitled to vote is required toamend or repeal our by-laws.In addition, Section 203 of the General Corporation Law of Delaware prohibits a corporation from engaging in a business combination with aninterested stockholder, generally a person which, together with its affiliates, owns or within the last three years has owned 15% or more of the corporation’svoting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the businesscombination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of us.62 In addition, under the tax matters agreement, for a period of two years following the separation, we are restricted from taking certain actions(including restrictions on business combinations and share issuances) that could cause the distribution, together with certain related transactions, to fail toqualify as a tax-free transaction for U.S. federal income tax purposes. We would be required to indemnify Emergent for any taxes and related expensesresulting from the failure of the transactions to so qualify to the extent that the failure is attributable to actions, events or transactions relating our stock,assets or business, and this indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.Our by-laws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum viewed by stockholders as morefavorable for disputes with us or our directors, officers or other employees or certain stockholders.Our by-laws provide that the Chancery Court of the State of Delaware will be the sole and exclusive forum for certain legal proceedings, unless weconsent in writing to the selection of an alternative forum. This exclusive forum provision may limit the ability of our stockholders to bring a claim in ajudicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage lawsuits against us or our directorsor officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one ormore of the types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions,which could adversely affect our business, financial condition or results of operations.Because we currently do not expect to pay dividends, investors will benefit from an investment in our common stock only if it appreciates in value.We anticipate that we will retain all our future earnings, if any, to support our operations and our proprietary drug development programs and productcandidates and pursue other opportunities. In addition, our credit facility limits our ability to pay dividends. As a result, we currently do not expect to paydividends for the foreseeable future. Any future determination to pay dividends will be at the sole discretion of our Board of Directors and will depend uponour financial condition, results of operations, capital requirements, restrictions contained in future financing instruments and such other factors as our Boardof Directors deems relevant. We cannot guarantee that we will pay any dividends in the future or continue to pay any dividend if we were to commencepaying dividends. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our stockholders for the foreseeable future.A significant portion of our shares may be sold into the market at any time which could depress our stock priceIf our stockholders sell a substantial number of shares of our common stock in the public market, our market price could decline. In addition, holdersof an aggregate of approximately [three million shares of our common stock] have the right to require us to register these shares of common stock under theSecurities Act of 1933, as amended, under specified circumstances.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.We lease our headquarters office and laboratory space in Seattle, Washington. The Seattle facility is approximately 51,000 square feet. The Seattlelease expires in April 2020. We also lease approximately 5,000 square feet of satellite office space in Berwyn, Pennsylvania. The Berwyn lease expires inMay 2017.63 Item 3. Legal Proceedings.We may from time to time be named as a party to legal claims, actions and complaints, including matters involving employment claims, ourintellectual property or other third party claims. Our management believes that there are currently no claims or actions pending against us, the ultimatedisposition of which could have a material adverse effect on our results of operations, financial condition or cash flows.Item 4. Mine Safety Disclosures.Not applicable.64 PART IIItem 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 Market under the symbol “APVO” since August 1, 2016. Prior to that date, there was nopublic trading market for our common stock. The following table sets forth the high and low intraday sales price per share of our common stock as reportedon The NASDAQ Global Market for the period indicated: Year Ended December 31, 2016 High Low First Quarter n/a n/a Second Quarter n/a n/a Third Quarter $3.33 $2.20 Fourth Quarter $2.83 $1.83Holders of Common Stock and Outstanding Equity AwardsAs of March 24, 2017, there were 17 holders of record of our common stock. The actual number of stockholders is greater than this number of recordholders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.As of February 28, 2017, the Company had options covering 2,515,209 shares of common stock outstanding under the 2016 Stock Incentive Planand the 2016 Converted Stock Incentive Plan (the Plans), unvested RSUs covering 2,030,608 shares of common stock outstanding under the Plans, and20,918,290 shares of common stock outstanding.Dividend PolicyWe have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available fundsand 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 thediscretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cashneeds, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.Recent Sales of Unregistered SecuritiesWe did not sell any unregistered securities during the year ended December 31, 2016.Issuer Purchases of Equity SecuritiesWe did not repurchase any shares of our common stock during the year ended December 31, 2016.Item 6. Selected Financial Data.Not required.65 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.You should read the following discussion and analysis together with the financial statements and the related notes to those statements includedelsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as thoseset forth in the section of this report captioned “Risk Factors” and elsewhere in this report, our actual results may differ materially from those anticipatedin these forward-looking statements. RestatementThe accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatementadjustments made to the previously reported consolidated financial statements that are discussed in Note 2 in the notes to consolidated financial statementsin Item 8 of this Form 10-K. Additionally, in part as a result of these restatements, management has concluded that our deferred income tax account controlsand procedures were not effective as of December 31, 2015, and September 30, 2016 following the August 1, 2016 spin-off resulting in a material weaknessaround these tax controls. Subsequent to the date of the spin-off, we enhanced our deferred income tax account-related internal controls over financialreporting to ensure the proper determination of the effect on deferred income tax accounts from certain purchase accounting transactions prior to Aptevo’sspin-off. While these controls are not subject to an audit by our Independent Registered Public Accounting Firm, management has evaluated these controlsand concluded that the material weakness has been sufficiently remediated, refer to Item 9A -- Controls and Procedures in this Form 10-KOverviewWe are a biotechnology company focused on novel oncology (cancer) and hematology (blood disease) therapeutics to meaningfully improvepatients’ lives. Our core technology is the ADAPTIR™ (modular protein technology) platform. We also have four revenue-generating products in the areas ofhematology and infectious diseases, as well as various investigational stage product candidates in immuno-oncology.In August 2015, Emergent BioSolutions Inc., or Emergent, announced a plan to separate into two independent publicly traded companies, one abiotechnology company focused on novel oncology and hematology therapeutics to meaningfully improve patients’ lives and the other a global specialtylife sciences company focused on providing specialty products for civilian and military populations that address intentional and naturally emerging publichealth threats. To accomplish this separation, Emergent created a new company, Aptevo Therapeutics Inc., or Aptevo, to be the parent company for thedevelopment-based biotechnology business focused on novel oncology and hematology therapeutics. We were incorporated in Delaware in February 2016 asa wholly owned subsidiary of Emergent. To effect the separation, Emergent made a pro rata distribution of Aptevo’s common stock to Emergent’sstockholders on August 1, 2016.In connection with the separation, we received certain assets from Emergent’s biosciences division, including commercial products and developmentprograms, as well as the ADAPTIR platform technology. Certain historical operations that were included by Emergent in its biosciences segment have beenreallocated to Emergent’s continuing operations, and as a result the financial statements and discussion and analysis contained herein differ from Emergent’shistorically reportable biosciences segment.Our historical consolidated financial statements for the periods prior to August 1, 2016 have been prepared on a standalone basis and are derivedfrom Emergent’s consolidated financial statements and accounting records. The consolidated financial statements reflect our financial position, results ofoperations, and cash flows as our business was operated as part of Emergent prior to the separation, in conformity with U.S. Generally Accepted AccountingPrinciples (GAAP).66 The consolidated financial statements include the allocation of certain assets and liabilities that have historically been held at the Emergentcorporate level but which are specifically identifiable or allocable to us. Cash and cash equivalents held by Emergent were not allocated to us unless the cashwas held by an entity that was transferred to us in the distribution. All of our intracompany transactions and accounts for the periods prior to August 1, 2016have been eliminated. Most intercompany transactions between us and Emergent for the periods prior to August 1, 2016 were considered to be effectivelysettled in the consolidated financial statements at the time the transaction was recorded but for those transition related services. The total net effect of thesettlement of these intercompany transactions is reflected in the consolidated statement of cash flows as payment from former parent upon spin-off, net ofreceivable and net transfer from former parent, prior to spin-off as a financing activity and in the consolidated balance sheet as former parent investment insubsidiary.The historical financial statements do not necessarily include all of the expenses that would have been incurred had we been a separate, standaloneentity and may not necessarily reflect our results of operations, financial position and cash flows had we been a standalone company during the periodspresented. Our consolidated financial statements for the periods prior to August 1, 2016 include an allocation of expenses related to certain Emergentcorporate functions, including senior management, legal, human resources, finance, information technology, and quality assurance. These expenses havebeen allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of expenses, headcount, squarefootage, or other measures. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, the allocationsmay not be indicative of the actual expense that would have been incurred had we operated as an independent, publicly traded company for the periodspresented.For the year ended December 31, 2016, we incurred a net loss of $112.4 million and we had an accumulated deficit of $80.7 million as of December31, 2016. For that same period, net cash used in our operating activities was $36.9 million. We expect to experience operating losses and negative cash flowsfrom operations for the foreseeable future. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, suspend oreliminate one or more of research and development programs. We will not generate revenues from our development stage product candidates unless and untilwe or our collaborators successfully complete development and obtain regulatory approval for such product candidates, which we expect will take a numberof years and is subject to significant uncertainty. If we obtain regulatory approval for one of our development stage product candidates, we expect to incursignificant commercialization expenses related to sales, marketing, manufacturing and distribution to the extent that such costs are not paid by collaborators.We do not have sufficient cash to complete the clinical development of any of our development stage product candidates and will require additional fundingin order to complete the development activities required for regulatory approval of such product candidates. Highlights for Year Ended December 31, 2016Commercial Portfolio: •Achieved 30% increase in year-over-year product sales revenue •Continued to expand awareness of IXINITY within the Hemophilia B community following its U.S. launch in mid-2015 •Resolved ongoing bulk drug substance manufacturing challenges and resumed routine manufacturing operations, which the companybelieves will avert a supply interruption of IXINITYPipeline: •Initiated the amendment to a Phase 1 continuous infusion, dose escalation study of MOR209/ES414 to evaluate safety and tolerability inpatients with metastatic castration-resistant prostate cancer •Published positive Phase 2 data from a study of otlertuzumab combined with bendamustine in the British Journal of Haematology showing asignificant increase in median progression free survival, from approximately 10 to 16 months in patients receiving combination therapy67 •Prepared to begin a Phase 1b study of otlertuzumab in combination with ibrutinib in patients with relapsed/refractory chronic lymphocyticleukemia (CLL) •Optimized new preclinical ADAPTIR candidate, APVO436, targeting the cell-surface receptor CD123, which is highly expressed in multiplehematological malignancies •Presented preclinical data at the American Association for Cancer Research annual meeting showing inhibition of tumor growth and animprovement in overall survival in preclinical models of triple negative breast cancer with a ROR1 ADAPTIR bispecific candidateCorporate: •Completed the spin-off from Emergent in August 2016 •Secured $65 million in non-dilutive funding from Emergent to support advancement of Aptevo’s commercial and pipeline programs •Strengthened Aptevo’s financial position securing an additional $35 million in a term-loan financing with MidCap Financial; received thefirst tranche ($20 million) in August 2016Program HighlightsOur pipeline is composed of marketed products for hematology indications and investigational stage candidates based on our ADAPTIRTM (modularprotein technology) platform. Our investigational stage product candidates otlertuzumab, MOR209/ES414, ES210, APVO436 and a proof of conceptbispecific immunotherapeutic protein targeting ROR1 are built on our novel ADAPTIR platform, which is designed to expand on the utility and effectivenessof therapeutic antibodies. The technology can produce monospecific and multispecific immunotherapeutic proteins that specifically bind to one or moretargets, for example, bispecific therapeutic molecules, which may have structural and functional advantages over monoclonal antibodies. The mechanisms ofaction for otlertuzumab, MOR209/ES414, ES210, APVO436 and a proof of concept bispecific immunotherapeutic protein targeting ROR1 include directtumor cytotoxicity, antibody-dependent cell-cytotoxicity, RTCC and targeted cytokine delivery. The structural differences of ADAPTIR molecules overmonoclonal antibodies allow for the development of other ADAPTIR immunotherapeutics that engage immune effector cells and disease targets in a novelmanner to produce unique signaling responses. We are skilled at product candidate generation, validation and subsequent pre-clinical and clinicaldevelopment using the ADAPTIR platform. We have the ability to progress ADAPTIR molecules from concept to marketed product by way of our proteinengineering, pre-clinical development and process development capabilities, cGMP manufacturing oversight and clinical development capabilities. We alsohave the ability to launch, market and commercialize these product candidates upon approval.Our marketed products are: •IXINITY®® coagulation factor IX (recombinant), indicated in adults and children 12 years of age and older with hemophilia B for controland prevention of bleeding episodes, and management of bleeding during operations; •WinRho® SDF Rho(D) Immune Globulin Intravenous (Human), for treatment of autoimmune platelet disorder, also called immunethrombocytopenic purpura, or ITP, and, separately, for the treatment of hemolytic disease of the newborn, or HDN; •HepaGam B® Hepatitis B Immune Globulin Intravenous (Human), for prevention of Hepatitis-B recurrence following liver transplantation inHBsAg-positive liver transplant patients, and for treatment following exposure to Hepatitis-B; and •VARIZIG® Varicella Zoster Immune Globulin (Human), for treatment following exposure to varicella zoster virus, which causes chickenpox,in high-risk individuals.68 Our investigational stage product candidates include: •MOR209/ES414, a bispecific immunotherapeutic ADAPTIR protein, currently in Phase 1, targeting prostate specific membrane antigen, orPSMA, an enzyme that is expressed on the surface of prostate cancer cells and, a component of the TCR complex expressed on all T-cells,RTCC against tumors expressing ROR1. The mechanism of action of MOR209/ES414 is RTCC. It is being developed under ourcollaboration with MorphoSys AG for metastatic castration-resistant prostate cancer, which is advanced prostate cancer that has spread toother organs and no longer responds to hormone blocking therapies. •ES210, a bispecific ADAPTIR protein therapeutic that is currently in pre-clinical development for inflammatory bowel disease and otherautoimmune and inflammatory diseases. •otlertuzumab, a monospecific ADAPTIR protein therapeutic that is currently in Phase 2 clinical development for chronic lymphocyticleukemia, or CLL. •a proof of concept bispecific immunotherapeutic protein targeting ROR1 is an antigen found on several solid tumors and hematologic, orblood-related, malignancies. One pair of binding domains bind to ROR1 on tumors; the other pair of binding domains bind to CD3, aninvariant component of the TCR complex. Initial preclinical data demonstrates RTCC activity in vitro and killing of tumors in animalmodels demonstrating that ROR1 can be targeted with an ADAPTIR bispecific. •APVO436, a bispecific ADAPTIR protein therapeutic currently in pre-clinical development targeting CD123, a cell surface receptor highlyexpressed on several hematological malignancies and CD3, a component of the T-cell receptor. Similar to MOR209/ES414 and the ROR1preclinical program, APVO436 utilizes redirected RTCC to initiate killing of tumor cells. •Other therapeutic protein product candidates primarily targeting cancer based on mechanisms of action that modulate the immune system(immuno-oncology based mechanism of action).Collaboration with MorphoSys AGIn August 2014, we entered into a collaboration agreement, or MorphoSys Agreement, with MorphoSys AG, or MorphoSys, for the joint worldwidedevelopment and commercialization of MOR209/ES414, a targeted immunotherapeutic protein, which activates host T-cell immunity specifically againstcancer cells expressing prostate specific membrane antigen, an antigen commonly overexpressed on prostate cancer cells. MOR209/ES414 was constructedusing our proprietary ADAPTIR™ platform technology.In accordance with the initial terms of the MorphoSys Agreement, we received a nonrefundable $20.0 million upfront payment and could havereceived up to $163.0 million in additional contingent payments, comprised of up to $80.0 million and up to $83.0 million, respectively, due upon theachievement of specified development and regulatory milestones. MorphoSys and Aptevo agreed to jointly fund further development of MOR209/ES414,with us responsible for 36% of the total development costs and MorphoSys responsible for the remainder, with our funding requirement capped at $186.0million. Our development effort includes the performance of non-clinical, clinical, manufacturing and regulatory activities. We retain commercializationrights in the United States and Canada, with a tiered royalty obligation to MorphoSys, ranging from mid-single digit up to 20% of sales. MorphoSys hasworldwide commercialization rights excluding the United States and Canada, with a low single digit royalty obligation to us.In December 2015, after a joint review of data from the ongoing Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients, we andMorphoSys decided to adjust the dosing regimen and administration of MOR209/ES414. Patients receiving weekly doses of MOR209/ES414 developedantibodies against the drug; this is called anti-drug antibodies, or ADA. The cause of these antibodies is unclear but could be due to the weeklyadministration of the drug. Hence, the protocol has been amended to continuous intravenous infusion as a way to administer higher levels of drug andprevent the development of ADA. The MOR209/ES414 Phase I clinical trial under the amended protocol, providing continuous intravenous infusion as away to administer higher levels of drug and prevent the development of ADA, commenced December 2016.69 As a result of the required dosing regimen change and the impact to the overall development timeline and technical risk, our co-developmentagreement with MorphoSys was restructured. In December 2015, we and MorphoSys amended the collaboration agreement to (1) decrease the additionalcontingent payments due to us upon the achievement of specified development and regulatory milestones of up to $32.5 million and up to $41.5 million,respectively, (2) change the total funding requirement cap for us to up to approximately $250 million and (3) change the jointly funded development costallocation. In addition, the termination provisions under the MorphoSys collaboration agreement were amended to give MorphoSys a one-time right toterminate the collaboration agreement, without notice, at either the end of 2016 or after review of clinical data from the first six patients enrolled and dosed inthe Phase 1 trial. The requirement for further adjustments to the dosing regimen or other parts of the program could delay our development timeline or delayor prevent our ability to receive regulatory approval for MOR209/ES414. In December 2016, the collaboration agreement was further amended to adjust theallocation of certain manufacturing and development costs and extend MorphoSys’s convenience termination rights. Under the amendment, the timeframefor a one-time right to terminate the collaboration agreement by MorphoSys has been extended from December 31, 2016 to June 30, 2017, or after review ofclinical data from the first six patients enrolled and dosed in the MOR209/ES414 Phase I clinical trial. We evaluated the MorphoSys Agreement and determined that it was a revenue arrangement with multiple deliverables or performance obligations.We determined there were two units of accounting under the MorphoSys Agreement: (1) the delivered license to further develop and commercializeMOR209/ES414 and (2) undelivered items related to development services. We determined that the license had standalone value as the drug candidate hasbeen (1) developed and is currently Phase 1 clinical trial ready, (2) MorphoSys possesses the knowledge, technology, skills, experience and infrastructurenecessary to complete all further development of the drug through commercialization, and (3) MorphoSys has the right to further sublicense the product. Weallocated the $20.0 million upfront payment to the two units of accounting using the relative selling price method. We determined the estimated selling pricefor the license using the income approach and an appropriate discount rate. The estimated selling price includes unobservable inputs (Level 3), such asestimates of revenues and operating margins; the time and resources needed to complete the development and approval of the product candidate; and the riskrelated to the viability of and potential for alternative treatments. We determined the estimated selling price of the development services unit of accountingbased on the estimated number of full-time equivalent personnel at the contractual rate as defined in the MorphoSys Agreement, whose rates and termsapproximate those of other Emergent or our service related contracts and those observed generally through other collaboration negotiations. The allocationresulted in $15.3 million of the $20.0 million upfront payment being allocated to the license and $4.7 million being allocated to the development services.We determined the license fee unit of accounting was delivered and completed on the date the MorphoSys Agreement was executed and thus recognized$15.3 million of license revenue in August 2014. Revenue related to the development services is recognized as the services are performed with $0.7 millionand $0.2 million, respectively, recognized in the years ended December 31, 2015 and 2014. The current estimated service period for the undelivereddevelopment services under the MorphoSys Agreement is through 2023.Further, we determined that contingent payments for the achievement of the development and regulatory milestones are substantive milestones andwill be accounted for as revenue in the period in which the milestones are achieved. We received a $5.0 million milestone payment from MorphoSysreflecting the initiation of a Phase I clinical study to evaluate the safety, tolerability, and clinical activity of MOR209/ES414 in patients with metastaticcastration-resistant prostate cancer. We recognized this substantive milestone achievement payment as collaborations revenue during the year endedDecember 31, 2015.70 IXINITYIn the acquisition of Cangene Corporation, or Cangene, in February 2014, we acquired the IXINITY product candidate, an IPR&D intangible asset.As part of the purchase price allocation, our management determined that the estimated acquisition date fair value related to the IXINITY IPR&D asset was$8.3 million. The estimated fair value was determined using the income approach, which discounts probability-adjusted future net cash flows to presentvalue. The projected cash flows used in determining the fair value of IXINITY were based on key assumptions, including: estimates of revenues and operatingprofits considering its stage of development on the acquisition date, the time and resources needed to complete the development and approval of the productcandidate, the life of the potential commercialized product and associated risks, including the inherent difficulties and uncertainties in developing a productcandidate such as obtaining marketing approval from the FDA and other regulatory agencies, and risks related to the viability of and potential alternativetreatments in any future target markets.Amounts allocated to acquired IPR&D are capitalized and accounted for as indefinite-lived intangible assets. Upon successful completion of eachproject, we made a separate determination as to the then useful life of the asset and begin amortization. In April 2015, the Food and Drug Administration, orFDA, approved IXINITY for the treatment of Hemophilia B in adults and children. As a result, the $8.3 million IXINITY IPR&D asset was reclassified as adefinite-live intangible asset and is being amortized over ten years. Since April 2015, we have incurred approximately $9 million in research anddevelopment expense related to IXINITY, primarily for clinical trial activities (approximately $4 million) and development and qualification activities(approximately $5 million). The clinical trial activities are associated with: (1) obtaining licensure of IXINITY for pediatric use (children under the age of12); and (2) continued treatment of clinical subjects as part of a post-licensure extension clinical study required by the FDA. The development andqualification expenses are primarily associated with: (1) ongoing non-clinical process development studies related to the optimization of the manufacturingof drug substance (2); continuation of pre-licensure stability study commitments; (3) developing fill/finish capabilities at Emergent’s Baltimore, MDfill/finish contract manufacturing facility.CMC ICOS Biologics, Inc., or CMC, is the exclusive manufacturer of bulk drug substance for our IXINITY® product. During 2015, we ordered ninemanufacturing lots of bulk drug substance from CMC and only one of those lots was successfully manufactured and released in 2015. During 2016, weordered five manufacturing lots of bulk drug substance from CMC and none of these lots satisfied product release specifications. We continue to work withCMC toward the successful release of product. Additionally, Patheon UK Limited, through an affiliate, is currently the sole source fill-finish servicemanufacturer for our IXINITY® product.On October 4, 2016, we provided a Notice of Interruption in Manufacturing, or Notice, to the FDA, notifying the FDA of a potential interruption inthe supply of IXINITY® coagulation factor IX (recombinant) due to the ongoing manufacturing challenges with the manufacturer of the bulk drug. On March15, 2017, we announced the successful manufacture of a recent bulk drug substance batch of IXINITY and we anticipate that the new supply will be availablebeginning in May 2017, after the completion of routine final drug product (FDP) manufacturing activities.While we do not currently anticipate or foresee a supply shortage or supply interruption occurring, any supply shortage interruption of IXINITYwould adversely affect its sales and could adversely affect its market position, commercial viability and the trading price of our common stock.71 Results of OperationsYear Ended December 31, 2016 Compared to Year Ended December 31, 2015RevenueProduct SalesSales by product are shown in the following table: Twelve Months EndedDecember 31, (in thousands) 2016 2015 Change WinRho $14,434 $14,218 $216 HepaGam 8,604 10,345 (1,741)IXINITY 9,796 993 8,803 VARIZIG 3,410 2,311 1,099 Other 10 80 (70)Total $36,254 $27,947 $8,307 Product sales revenue increased by $8.3 million, or 30%, to $36.3 million for the year ended December 31, 2016 from $27.9 million for the yearended December 31, 2015. This increase was primarily related to revenue associated with IXINITY which increased by $8.8 million for the year endedDecember 31, 2016 following IXINITY’s FDA approval in the second quarter of 2015 and an increase in unit sales of our VARIZIG product. Increasedrevenue from these two products however, was offset by a decrease in revenue for HepaGam B as a greater percentage of sales of this product occurredoverseas where the price is lower due to contractual pricing agreements.CollaborationsCollaborations revenue decreased by $5.5 million, or 97%, to $0.2 million for the year ended December 31, 2016 from $5.7 million for the yearended December 31, 2015. Collaboration revenue in 2016 decreased primarily due to recognition and payment of a $5.0 million development milestoneachievement during the third quarter of 2015.Cost of Product SalesThe primary expense we incur to deliver our marketed products to our customers is manufacturing costs consisting of fixed and variable costs.Variable manufacturing costs consist primarily of costs for materials and personnel-related expenses for direct and indirect manufacturing support staff,contract manufacturing and filling operations, and sales-based royalties. Fixed manufacturing costs include facilities, utilities and amortization of intangibleassets. We determine the cost of product sales for products sold during a reporting period based on the average cost per unit.The following table provides information regarding our cost of products sales, including gross margin for the years ended December 31, 2016 and2015: Twelve Months Ended December 31, 2016 2015 Change Revenues: Product sales $36,254 $27,947 $8,307 Contracts, grants and collaborations 180 5,654 (5,474)Total revenues 36,434 33,601 2,833 Costs and expenses: Cost of product sales 24,182 16,933 7,249 Gross profit $12,252 $16,668 $(4,416)Gross margin percent 34% 50% 72 Cost of product sales increased by $7.2 million, or 43%, to $24.2 million for the year ended December 31, 2016 from $16.9 million for the year endedDecember 31, 2015. Gross margin decreased due to the ongoing challenges with the manufacture of our IXINITY product. In 2016, $7.1 million inmanufacturing costs associated with unsuccessful manufacturing of our product were written off and included in cost of product sales. The remaining increasein cost of product sales for the year was primarily due to costs related to increased IXINITY product sales.Research and Development ExpensesWe expense research and development costs as incurred. These expenses consist primary of personnel-related costs, fees to professional serviceproviders for, among other things, analytical testing, independent monitoring or other administration of our clinical trials and obtaining and evaluating datafrom our clinical trials and non-clinical studies, costs of contract manufacturing services for clinical trial material, and costs of materials used in clinical trialsand research and development.We expect our research and development spending will be dependent upon such factors as the results from our clinical trials, the availability ofreimbursement of research and development spending, the number of product candidates under development, the size, structure and duration of any clinicalprograms that we may initiate, and the costs associated with manufacturing our product candidates on a large-scale basis for later stage clinical trials. Theseresearch and development costs may be partially offset by cost-sharing arrangements with collaborative partners, such as our collaboration with MorphoSysAG.Our principal research and development expenses by program for the year ended December 31, 2016 and 2015 are shown in the following table: Twelve Months EndedDecember 31, (in thousands) 2016 2015 Change ADAPTIR related programs (1) $10,749 $7,642 $3,107 ROR1 5,992 2,688 3,304 IXINITY 4,843 16,278 (11,435)MOR209/ES414 4,526 2,406 2,120 otlertuzumab 1,733 3,399 (1,666)Other 1,675 2,313 (638)Total $29,518 $34,726 $(5,208) (1) Other non-disclosed candidates are also included in the ADAPTIR related programs expense.Research and development expenses decreased by $5.2 million, or 15%, to $29.5 million for the year ended December 31, 2016 from $34.7 millionfor the year ended December 31, 2015. This change was primarily comprised of: •an increase in expense for ADAPTIR related programs primarily due to an increase in characterization studies and non-clinical activities; •an increase in ROR1 is primarily due to an increase in lead construct selection and characterization studies; •decrease in expense for our IXINITY product candidate (which was approved by the FDA in April 2015) due to a decrease in manufacturingprocess development activities in 2016 and the timing of clinical trial activities; •an increase in expense for our MOR209/ES414 product candidate primarily due to the timing of manufacturing activities along withdecreased reimbursement from MorphoSys for development activities under our collaboration agreement;73 •a decrease in expense for our otlertuzumab product candidate related to the timing of clinical trial activities; and •the expenses for our other activities, which decreased, were primarily related to centralized research and development activities not otherwiseattributable to specific product candidates or programs.Selling, General and Administrative ExpensesSelling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executive, sales andmarketing, business development, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs nototherwise included in cost of product sales or research and development expenses.For the year ended December 31, 2016 selling, general and administrative expenses decreased by $4.4 million, or 13%, to $38.7 million for 2016from $43.0 million for 2015. This decrease was primarily due to higher costs in 2015 associated with IXINITY sales and marketing and Emergent’s pre-spinoverhead allocation to Aptevo. These were slightly offset by increased initial costs associated with our spin-off activities in 2016.Impairment of Goodwill and Intangible AssetIn 2016 we recorded impairments of approximately $71.0 million of long-term assets, which consisted of $41.8 million of intangible assets and $29.2million of goodwill. Impaired intangible assets consisted of certain of our indefinite-lived in process research and development. For additional informationabout our impairments, see Note 8— Impairment of Intangible Assets, In-Process Research and Development and Goodwill in the notes to consolidatedfinancial statements.Other Income (Expense), NetOther income (expense), net, consists primarily of interest on debt financing. This increase in 2016 compared to 2015 was due to the interest on theloan entered into with MidCap Financial Trust in the last half of 2016.Income TaxesBenefit from income taxes increased by $13.3 million, or 659%, to $15.3 million for the year ended December 31, 2016 from $2.0 million for the yearended December 31, 2015 due to the restatement of our deferred tax liability, (see Note 2 – Restatement). This deferred tax liability was released to benefitfrom income taxes upon the impairment of the related IPR&D asset. Off-Balance Sheet ArrangementsWe did not have any off-balance sheet arrangements at December 31, 2016.Liquidity and Capital ResourcesSources of LiquidityAs of December 31, 2016, we had cash, cash equivalents and short-term investments in the amount of $54.9 million.On August 1, 2016, in connection with the spin-off of the Company from Emergent, we issued 20.2 million shares to Emergent stockholders andrecorded a contribution from Emergent of $71.2 million. This contribution included a one-time payment of $45.0 million, and a working capitalreimbursement for outstanding payments of $1.4 million, which we received in the fourth quarter of 2016, a noncash transfer of an intangible asset of $0.7million, and a net transfer of cash from Emergent of $24.2 million. In addition, we recorded a promissory note to receive $20.0 million from Emergent, whichwe received in the first quarter of 2017.74 In addition, on August 4, 2016, we entered into a $35.0 million Credit and Security Agreement, or the Credit Agreement, with MidCap FinancialTrust. The Credit Agreement provides us with up to $35.0 million of available borrowing capacity composed of two tranches of $20.0 million and $15.0million. The first tranche of $20.0 million was made available to us, and drawn, on the closing date of the Credit Agreement and the second tranche of $15.0million will be available (subject to certain conditions) following the date we: (1) achieve net commercial product revenue of $40.0 million on a trailingtwelve-month basis, and (2) receive payment of the additional $20.0 million in cash committed by Emergent. Emergent’s promise to pay such $20.0 millionin cash was evidenced by a non-negotiable, unsecured promissory note issued to us and was paid in the first quarter of 2017. Once drawn, interest is paidmonthly while principal will be paid on a monthly basis commencing in August 2018. The credit agreement will mature on February 1, 2021. Amounts drawnunder the Credit Agreement accrue interest at a rate of LIBOR plus 7.60% per annum.The Credit Agreement covenants require us and our subsidiaries to maintain increasing minimum net commercial product revenue for each twelve-month period ending on the last day of each calendar quarter. An event of default could result in the acceleration of the amounts owed under the CreditAgreement, and we may not have sufficient funds or be able to obtain additional financing to make any accelerated payments. Under these circumstances, ourlenders could seek to enforce security interests in our assets securing our indebtedness. A decrease in manufacturing development activities in 2016 due to ashortage of IXINITY, resulted in a reduction in revenue, which may result in the violation of the covenants under our Credit Agreement with MidCapFinancial Trust unless the parties agree to a waiver or amendment to the Credit Agreement.Capital RequirementsAptevo expects to incur losses from operations for the foreseeable future primarily due to research and development expenses, including expensesrelated to conducting clinical trials. Aptevo’s future capital requirements will depend on a number of factors, including: •the level, timing and cost of product sales; •the collection of accounts receivable from customers; •the extent to which we invest in products or technologies; •capital improvements to new or existing facilities; •the payment obligations under any future indebtedness; •the scope, progress, results and costs of our development activities; and •the costs of commercialization activities, including product marketing, sales and distribution;We expect our cash, cash equivalents and investments along with the proceeds from our Credit Agreement, will support our operations for at least 12months, based on current operating plans and financial forecasts. Prior to the spin-off, the development-based biosciences business of Emergent was fundedentirely by Emergent.Cash FlowsThe following table provides information regarding our cash flows for the years ended December 31, 2016 and 2015: Twelve months ended December 31, (in thousands) 2016 2015 Net cash provided by (used in): Operating activities (36,862) (48,760)Investing activities (47,394) (1,527)Financing activities 89,295 51,331 Increase in cash and cash equivalents $5,039 $1,044 75 Net cash used in operating activities of $36.9 million for the year ended December 31, 2016 was primarily due to our net loss of $112.4 million,offset by the noncash impairment of goodwill and intangible assets of $71.0 million and the write-down of nonsaleable IXINITY inventory. Net cash used inoperating activities of $48.8 million for the year ended December 31, 2015 was primarily due to our net loss of $59.3 million.Net cash used in investing activities for the periods presented was primarily due to the purchase of short term investment of $44.8 million in 2016and the purchases of property and equipment.Net cash provided by financing activities for the periods presented includes the net proceeds received from entering into the credit facility in Augustof 2016, cash received from Emergent upon the spin off and the net investment from the former parent company to support the operations of Aptevo.Contractual ObligationsOur contractual obligations as of December 31, 2016 were as follows: Payments due by period (in thousands) Total Less than1 year 1 to 3Years 4 to 5Years More than5 years Contractual obligations: Operating lease obligations $5,482 $1,664 $3,264 $554 $— Critical Accounting Policies and Significant Judgements and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historicalexperience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.Revenue RecognitionWe recognize revenue if four basic criteria have been met: (1) there is persuasive evidence of an arrangement, (2) delivery has occurred or serviceshave been rendered, (3) the fee is fixed or determinable, and (4) collectability is reasonably assured. Where the revenue recognition criteria are not met, wedefer the recognition of revenue by recording deferred revenue until such time as all criteria are met.CollaborationsRevenue generating collaborative research and development agreements may contain one or more provisions including licensing, research servicesand milestone deliverables. We analyze multiple element revenue generating arrangements to determine whether the elements can be separated andaccounted for individually as separate units of accounting. An item can generally be considered a separate unit of accounting if both of the following criteriaare met: (1) the delivered item(s) has value to the customer on a standalone basis, and (2) if the arrangement includes a general right of return and delivery,the performance of the undelivered item(s) is considered probable and substantially in our control. Items that cannot be divided into separate units areconsolidated with other units of accounting, as appropriate. Consideration to be received is allocated among the separate units based on each unit’s relativeselling price and is then recognized when the appropriate revenue recognition criteria are met. We deem services to be rendered if no continuing obligationexists on the part of the Company.76 Revenue associated with non-refundable upfront license fees that can be treated as a single unit of accounting is recognized when all ongoingobligations have been delivered. Revenue associated with non-refundable upfront license fees under arrangements where the license fees and research anddevelopment activities cannot be accounted for as separate units of accounting is deferred and recognized as revenue either on a straight-line basis over ourcontinued involvement in the research and development process or based on the proportional performance of our expected future obligations under thecontract.Revenues from the achievement of research and development milestones, if deemed substantive, are recognized as revenue when the milestones areachieved and the milestone payments are due and collectible. Milestones are considered substantive if all of the following conditions are met: (1) themilestone is non-refundable, (2) achievement of the milestone was not reasonably assured at the inception of the arrangement, (3) substantive effort isinvolved to achieve the milestone and (4) the amount of the milestone payment appears reasonable in relation to the effort expended. If not deemedsubstantive, we recognize such milestone as revenue on a percent of completion basis over the remaining expected term of continued involvement in theresearch and development process. Payments received in advance of revenue recognized are recorded as deferred revenue.Research and DevelopmentResearch and development costs are expensed as incurred. Research and development costs primarily consist of internal labor costs, fees paid tooutside service providers and the costs of materials used in clinical trials and research and development. Other research and development expenses includefacility, maintenance and related support expenses.A substantial portion of our pre-clinical studies and all of our clinical studies have been performed by third-party contract research organizations(CRO). We review the activities performed by the CROs each period. For pre-clinical studies, the significant factors used in estimating accruals include thepercentage of work completed to date and contract milestones achieved. For clinical study expenses, the significant factors used in estimating accrualsinclude the number of patients enrolled and percentage of work completed to date. Our estimates are highly dependent upon the timeliness and accuracy ofthe data provided by its CRO’s regarding the status of each program and total program spending and adjustments are made when deemed necessary.Stock-Based CompensationUnder the Financial Accounting Standards Board’s (“FASB”) ASC 718, Compensation—Stock Compensation, we measure and recognizecompensation expense for restricted stock units (“RSUs”), and stock options granted to our employees and directors based on the fair value of the awards onthe date of grant. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model that requires management toapply judgment and make estimates, including: •the expected term of the stock option award, which we calculate using the simplified method, as permitted by the SEC Staff AccountingBulletin No. 110, Share-Based Payment, as we have insufficient historical information regarding our stock options to provide a basis for anestimate; •the expected volatility of our underlying common stock, which we estimate based on the historical volatility of a representative group ofpublicly traded biopharmaceutical companies with similar characteristics to us, and our own historical and implied future volatility; •the risk-free interest rate, which we based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term ofthe options being valued; •the expected dividend yield, which we estimate to be zero based on the fact that we have never paid cash dividends and have no presentintention to pay cash dividends; and •the fair value of our common stock on the date of grant.77 Stock-based compensation expense for RSUs, and stock options is recognized on a straight-line basis over the requisite service period, which isgenerally the vesting period of the respective award. We are required to estimate a forfeiture rate to calculate the stock-based compensation expense for ourawards. Our forfeiture rate is based on an analysis of our actual forfeitures since the adoption of our equity award plan. Since inception our estimatedforfeiture rate has been de minimis. We routinely evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employeeturnover, and expectations of future option exercise behavior.Income TaxesIncome taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributableto differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and researchand development tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in theyear in which those temporary differences are expected to be recovered or settled.Our ability to realize deferred tax assets depends upon future taxable income as well as the limitations discussed below. For financial reportingpurposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will notbe realized prior to expiration. We consider future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances. Ingeneral, if we determine that it is more likely than not to realize more than the recorded amounts of net deferred tax assets in the future, we will reverse all or aportion of the valuation allowance established against its deferred tax assets, resulting in a decrease to the provision for income taxes in the period in whichthe determination is made. Likewise, if we determine that it is not more likely than not to realize all or part of the net deferred tax asset in the future, we willestablish a valuation allowance against deferred tax assets, with an offsetting increase to the provision for income taxes, in the period in which thedetermination is made.Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, we make certain estimates andassumptions, in (1) calculating our income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowance recordedagainst deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertain taxpositions. Our estimates and assumptions may differ significantly from tax benefits ultimately realized.New Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09, Revenue from Contracts withCustomers (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue isreported by companies while also improving comparability in the financial statements of companies reporting using International Financial ReportingStandards or GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers inamounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result inenhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance formultiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date,which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoptionpermitted but not earlier than the original effective date. Accordingly, the updated standard is effective for the Company in the first quarter of fiscal 2018. Wecontinue to evaluate the effect that the standard will have on its consolidated financial statements and related disclosures including the areas of variableconsideration and new disclosure requirements. We currently expect to use the modified retrospective method to adopt this standard.In August 2014, the FASB issued ASU No.2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under thenew guidance, management is required to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certaincircumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter.We adopted this guidance for the year ended December 31, 2016 and management believes that our existing cash and cash equivalents will be sufficient tofund our operations through the first quarter of 2018.78 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a leaseliability and a right-of-use asset for all leases (with the exception of short term leases) at the commencement date. Lessor accounting under ASU 2016-02 islargely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. UnderASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospectivetransition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lesseesand lessors may not apply a full retrospective transition approach. We have not yet selected an implementation date nor have we determined the effect of thestandard on our ongoing financial reporting.In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation ofexcess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement ofcash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption ispermitted. We are currently evaluating the requirements of ASU 2016-09 and have not yet determined the impact on our consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. This standard is effective beginningJanuary 1, 2018, with early adoption permitted. The new standard requires a retrospective transition. We are currently evaluating the requirements of ASU2016-09 and have not yet determined the impact on our consolidated statement of cash flows.79 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Our exposure to market risk is primarily confined to our investment securities. The primary objective of our investment activities is to preserve ourcapital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintaina portfolio of investments in high-credit-quality securities.80 Table of Contents Index to Consolidated Financial Statements Item 8. Financial Statements and Supplementary Data APTEVO THERAPEUTICS INC. Report of Independent Registered Public Accounting Firm 82Financial Statements Consolidated Balance Sheets (Restated) 83Consolidated Statements of Operations 84Consolidated Statements of Comprehensive Loss 85Consolidated Statements of Cash Flows 86Consolidated Statements of Changes in Stockholders Equity 87Notes to Consolidated Financial Statements 88 81 Report of Independent Registered Public Accounting FirmThe Board of Directors and Shareholders of Aptevo Therapeutics Inc.We have audited the accompanying consolidated balance sheets of Aptevo Therapeutics Inc. as of December 31, 2016 and 2015 (as restated) and therelated consolidated statements of operations, comprehensive loss, changes in stockholders equity and cash flows for each of the two years in theperiod ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Wewere not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AptevoTherapeutics Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the two years in theperiod ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.As discussed in Note 2 to the consolidated financial statements, the 2015 financial statements have been restated to correct an error in deferred taxliabilities and corresponding goodwill./s/ Ernst & Young LLPSeattle, WashingtonMarch 31, 201782 Item 8. Financial Statements and Supplementary Data.Aptevo Therapeutics Inc.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts) December 31, 2016 2015(Restated) ASSETS Current assets: Cash and cash equivalents $9,676 $4,637 Restricted cash 400 — Short-term investments 44,849 — Accounts receivable, net 4,284 6,456 Inventories 6,639 20,322 Income tax receivable, net — 1,376 Prepaid expenses and other current assets 5,566 2,343 Total current assets 71,414 35,134 Property and equipment, net 5,910 4,179 In-process research and development — 41,800 Intangible assets, net 14,534 17,441 Goodwill — 29,213 Total assets $91,858 $127,767 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities $11,489 $10,084 Accrued compensation 4,009 3,334 Contingent consideration, current portion — 444 Sales rebates and discounts 3,235 2,238 Deferred revenue, current portion 811 3,843 Total current liabilities 19,544 19,943 Deferred revenue, net of current portion 2,896 3,318 Long-term debt, net 18,383 — Deferred income taxes — 15,817 Other liabilities 469 71 Total liabilities 41,292 39,149 Stockholders' equity: Preferred stock: $0.001 par value; 15,000,000 shares authorized, zero shares issued or outstanding — — Common stock: $0.001 par value; 500,000,000 shares authorized; 20,271,737 and zero shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively 20 — Additional paid-in capital 151,271 — Accumulated other comprehensive income (33) — Contribution receivable from former parent (20,000) — Former parent investment in subsidiary — 320,606 Accumulated deficit (80,692) (231,988)Total stockholders' equity 50,566 88,618 Total liabilities and stockholders' equity $91,858 $127,767 The accompanying notes are an integral part of these consolidated financial statements.83 Aptevo Therapeutics Inc.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share amounts) Year Ended December 31, 2016 2015 Revenues: Product sales $36,254 $27,947 Collaborations 180 5,654 Total revenues 36,434 33,601 Costs and expenses: Cost of product sales 24,182 16,933 Research and development 29,518 34,726 Selling, general and administrative 38,666 43,042 Impairment of goodwill and intangible assets 71,013 — Loss from operations (126,945) (61,100)Other income (expense): Other income (expense), net (810) (237)Total other income (expense), net (810) (237)Loss before income taxes (127,755) (61,337)Benefit from income taxes 15,340 2,020 Net loss (112,415) (59,317) Net loss per share - basic and diluted $(5.55) $(2.93)Shares used to compute net loss per share - basic and diluted 20,239,160 20,229,849 The accompanying notes are an integral part of these consolidated financial statements.84 Aptevo Therapeutics Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(in thousands) Year Ended December 31, 2016 2015 Net loss (112,415) (59,317)Other comprehensive loss: Unrealized losses on available-for-sale investments, net (33) — Total comprehensive loss $(112,448) $(59,317) The accompanying notes are an integral part of these consolidated financial statements.85 Aptevo Therapeutics Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2016 2015 Operating Activities Net loss $(112,415) $(59,317)Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 3,809 1,107 Depreciation and amortization 3,362 2,907 Impairment of goodwill and intangible assets 71,013 — Restricted cash (400) — Income taxes (15,817) (1,361)Provision for allowance for doubtful accounts 200 3,481 Change in fair value of contingent consideration (444) 214 Changes in operating assets and liabilities: Accounts receivable 1,972 3,884 Inventories 13,683 (2,697)Income taxes 1,376 (66)Prepaid expenses and other current assets (3,223) 2,860 Accounts payable, accrued compensation and other liabilities 2,479 (2,384)Sales rebates and discounts 997 (8)Deferred revenue (3,454) 2,620 Net cash used in operating activities (36,862) (48,760)Investing Activities Purchases of property and equipment (2,512) (1,527)Purchases of investments (44,882) — Net cash used in investing activities (47,394) (1,527)Financing Activities Common stock issued upon exercise of stock options 20 — Common stock issued upon vesting of restricted stock units 18 — Proceeds from long-term debt 20,000 — Debt issuance costs (1,962) — Transfer from former parent, prior to spin-off 71,219 52,220 Contingent consideration payments — (889)Net cash provided by financing activities 89,295 51,331 Increase in cash and cash equivalents 5,039 1,044 Cash and cash equivalents at beginning of period 4,637 3,593 Cash and cash equivalents at end of period $9,676 $4,637 Supplemental disclosures: Contribution receivable from former parent $20,000 $— Cash paid for interest $537 $— Cash paid for taxes $162 $— The accompanying notes are an integral part of these consolidated financial statements. 86 Aptevo Therapeutics Inc.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY(in thousands, except share amounts) Former Contribution Accumulated Parent Additional Receivable Other Total Common Stock Investment Paid-In Accumulated from Former Comprehensive Stockholders' Shares Amount in Subsidiary Capital Deficit Parent Loss Equity Balance at December 31, 2014 — $— $— $— $— $— $— $94,608 Net transfers from former parent — — 53,327 — — — — 53,327 Net loss for the period — — — — (59,317) — — (59,317)Balance at December 31, 2015 — $— $320,606 $— $(231,988) $— $— $88,618 Capitalization upon spinoff 20,229,849 20 — — — — — 20 Transfers from former parent — — (288,883) 147,424 231,988 (20,000) — 70,529 Unrealized losses on available- for-sale investments — — — — — — (33) (33)Common stock issued upon exercise of stock options 9,144 — — 20 — — — 20 Common stock issued upon vesting of restricted stock units 32,744 — — 18 — — — 18 Stock-based compensation — — — 3,809 — — — 3,809 Net loss for the period — — (31,723) — (80,692) — — (112,415)Balance at December 31, 2016 $20,271,737 $20 $— $151,271 $(80,692) $(20,000) $(33) $50,566 The accompanying notes are an integral part of these consolidated financial statements. 87 Aptevo Therapeutics Inc.Notes to Consolidated Financial StatementsNote 1. Nature of Business and Significant Accounting PoliciesOrganization and Basis of PresentationAptevo Therapeutics Inc., Aptevo or the Company, is a biotechnology company focused on novel oncology and hematology therapeutics tomeaningfully improve patients’ lives. On August 1, 2016 the Company became an independent publicly traded company through a pro-rata distribution ofAptevo’s common stock to Emergent BioSolutions Inc. (Emergent or Former Parent) stockholders. Each Emergent stockholder of record as of the close ofbusiness on August 1, 2016 received one share of Aptevo common stock for every two shares of Emergent common stock held on the record date. Aptevo’scommon stock began “regular way” trading on the NASDAQ global stock market under the ticker symbol “APVO” on August 1, 2016.In connection with the spin-off, on August 1, 2016, Aptevo and Emergent entered into a separation and distribution agreement as well as variousother related agreements (collectively the Agreements) that govern the separation and the relationships between the parties going forward, including atransition services agreement, a manufacturing services agreement, an employee matters agreement, and a tax matters agreement. Prior to the separation,Aptevo was dependent upon Emergent for all of its working capital and financing requirements.At the closing of the spin-off Aptevo recorded a contribution from Emergent of $71.2 million. This contribution included a one-time payment of$45.0 million, and a working capital reimbursement for outstanding payments of $1.4 million, which we received in the fourth quarter of 2016, a noncashtransfer of an intangible asset of $0.7 million, and a net transfer of cash from Emergent of $24.2 million. Also recorded was a promissory note to receive $20.0million from Emergent, which was received in the first quarter of 2017. In addition, on August 4, 2016, we entered into a $35.0 million Credit and SecurityAgreement, or the Credit Agreement, with MidCap Financial Trust. The Credit Agreement provides us with up to $35.0 million of available borrowingcapacity, which will be available (subject to certain conditions) to us in two tranches of $20.0 million and $15.0 million, respectively, through August 31,2017. See Note 10 — Debt.The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles or GAAP.Prior to August 1, 2016, the consolidated financial statements were prepared on a “carve-out” basis for the purpose of presenting Aptevo’s financialposition, results of operations, and cash flows, and were derived from Emergent’s consolidated financial statements and accounting records. Aptevo did notoperate as a standalone entity in the past and accordingly the selected financial data presented herein is not necessarily indicative of Aptevo’s futureperformance and does not reflect what Aptevo’s performance would have been had Aptevo operated as an independent publicly-traded company prior toAugust 1, 2016. The consolidated financial statements reflect Aptevo’s financial position, results of operations, and cash flows as a separately operatedbusiness in conformity with GAAP post the August 1, 2016 spin-off.Prior to August 1, 2016, the consolidated financial statements included an allocation of certain assets and liabilities that have historically been heldat the Emergent corporate level but which were specifically identifiable or allocable to Aptevo. All Aptevo intracompany transactions and accounts havebeen eliminated. All intercompany transactions between Aptevo and Emergent are considered to be effectively settled in the consolidated financialstatements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the consolidatedstatement of cash flows as a financing activity and in the consolidated balance sheet as a net investment from Emergent. As of August 1, 2016, in connectionwith the separation and distribution, Emergent’s investment in the Company’s business was redesignated as stockholder’s equity and allocated betweencommon stock and additional paid-in capital based on the number of shares issued at the distribution date.88 Prior to August 1, 2016, Aptevo’s consolidated financial statements included an allocation of expenses related to certain Emergent corporatefunctions, including senior management, legal, human resources, finance, information technology, and quality assurance. These expenses were allocated toAptevo based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of expenses, headcount, square footage, or othermeasures. Aptevo considers the expense allocation methodology and results to be reasonable for all periods presented. However, the allocations may not beindicative of the actual expense that would have been incurred had Aptevo operated as an independent, publicly-traded company for the periods presented.Prior to August 1, 2016, the income tax amounts in these consolidated financial statements were calculated based on a separate return methodologyand presented as if Aptevo’s operations were a standalone taxpayer in each of its tax jurisdictions.Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actualresults could differ from these estimates.Principles of ConsolidationThe consolidated financial statements include the accounts of the company and its wholly owned subsidiaries: Aptevo Research and DevelopmentLLC; Aptevo BioTherapeutics, LLC; and Aptevo Europe Limited. All intercompany balances and transactions have been eliminated.The majority of our transactions occur in U.S. dollars, however we do have an agreement with Emergent for sales to two Canadian distributors. Thesesales are translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the balance sheet date.Cash EquivalentsCash equivalents are highly liquid investments with a maturity of 90 days or less at the date of purchase and include time deposits and investmentsin money market funds with commercial banks and financial institutions. In addition, was have restricted cash in the amount of $0.4 million maintained indepository as collateral for corporate credit cards.Short-Term InvestmentsShort-term investments are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, if any, are reported as acomponent of comprehensive loss. Amortization, accretion, interest and dividends, realized gains and losses and declines in value judged to be other-than-temporary are included in other income (expense). The cost of securities sold is based on the specific-identification method. Investments in securities withmaturities of less than one year, or those for which management intends to use the investments to fund current operations, are included in current assets. Weevaluate whether an investment is other-than-temporarily impaired based on the specific facts and circumstances. Factors that are considered in determiningwhether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition ofthe investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment.89 Concentrations of Credit RiskFinancial instruments that potentially subject Aptevo to concentrations of credit risk consist primarily of cash and cash equivalents, certaininvestments and accounts receivable. Aptevo places its cash and cash equivalents with high quality financial institutions and may maintain cash balances inexcess of insured limits. Management believes that the financial risks associated with its cash and cash equivalents are minimal.Accounts ReceivableAptevo records accounts receivable net of an allowance for doubtful accounts based upon its assessment of collectability, and of applicablediscounts. Aptevo performs ongoing credit evaluations of its customers and generally does not require collateral. At December 31, 2016 and December 31,2015, we had an allowance for doubtful accounts balance of $3.3 million and $3.5 million, respectively.InventoriesInventories, including purchased inventories, are stated at the lower of cost or market with cost being determined using a moving average costmethod, which approximates weighted-average cost. Average cost consists primarily of material, labor and manufacturing overhead expenses (includingallocation of fixed production-overhead costs) and includes the services and products of third-party suppliers. Aptevo analyzes its inventory levels quarterlyand writes down, in the applicable period, inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable valueand inventory in excess of expected customer demand. Aptevo also writes off, in the applicable period, the costs related to expired inventory andunsuccessful manufacturing runs.Property and EquipmentProperty and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: Furniture and equipment7-10 yearsSoftware and hardware3-5 years or product lifeLeasehold improvementsLesser of the asset life or the remaining lease term Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gainor loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.In-Process Research and Development and Long-lived AssetsAptevo assesses in process research and development (IPR&D) and long lived assets for impairment on an annual basis or more frequently ifindicators of impairment are present. Aptevo’s annual assessment includes a comparison of the fair value of IPR&D assets to existing carrying value, andrecognizes an impairment when the carrying value is greater than the determined fair value. Aptevo believes that the assumptions used in valuing theintangible and IPR&D assets are reasonable and are based upon its best estimate of likely outcomes of sales and clinical development. The underlyingassumptions and estimates used to value these assets are subject to change in the future, and actual results may differ significantly from the assumptions andestimates. Aptevo has selected October 1 as its annual impairment test date for indefinite-lived intangible assets.Aptevo assesses the recoverability of its long-lived assets or asset groups for which an indicator of impairment exists by determining whether thecarrying value of such assets can be recovered through undiscounted future operating cash flows. If Aptevo concludes that the carrying value will not berecovered, Aptevo measures the amount of such impairment by comparing the fair value to the carrying value of the assets or asset groups. See Note 8 —Impairment of Intangible Assets, In-Process Research and Development and Goodwill.90 GoodwillAptevo assesses the carrying value of goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate thecarrying value of goodwill may not be recoverable. Aptevo utilizes either: (1) a two-step impairment test, which is a quantitative analysis, or (2) a step zerotest, which is a qualitative analysis.A two-step test would first compare Aptevo’s fair value to its carrying value. If the carrying value exceeds its fair value, then the second step of theimpairment test is performed in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, animpairment loss is recognized.We generally base our measurement of fair value on a blended analysis of the present value of future discounted cash flows and market valuationapproach. The discounted cash flows model indicates the fair value based on the present value of the cash flows that we expect to generate in the future. Oursignificant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of ourbusiness; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company tocomparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companieswith comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating incomemultiples in estimating fair value.If Aptevo is not required to do a quantitative analysis, it will evaluate goodwill using the qualitative assessment method, which permits companies toqualitatively assess whether it is more-likely-than-not that the fair value is less than its carrying amount. Aptevo considers developments in its operations, theindustry in which it operates and overall macroeconomic factors that could have affected fair value since the date of the most recent quantitative analysis offair value.The determination of the fair value of is judgmental in nature and involves the use of significant estimates and assumptions. The estimates andassumptions used in calculating fair value include identifying future cash flows, which requires that Aptevo make a number of critical legal, economic,market and business assumptions that reflect best estimates as of the testing date. Aptevo’s assumptions and estimates may differ significantly from actualresults, or circumstances could change that would cause Aptevo to conclude that an impairment now exists or that it previously understated the extent ofimpairment. See Note 8 — Impairment of Intangible Assets, In-Process Research and Development and Goodwill.Contingent ConsiderationAptevo records contingent consideration associated with sales-based royalties at fair value. The fair value model used to calculate this obligation isbased on the income approach (a discounted cash flow model) that has been risk adjusted based on the probability of achievement of net sales andachievement of the milestones. The inputs Aptevo uses for determining the fair value of the contingent consideration associated with sales based royalties areLevel 3 fair value measurements. Aptevo re-evaluates the fair value on a quarterly basis. Changes in the fair value can result from adjustments to the discountrates and updates in the assumed timing of or achievement of net sales. Any future increase in the fair value of the contingent consideration associated withsales based royalties are based on an increased likelihood that the underlying net sales will be achieved.The associated payment or payments which will therefore become due and payable for sales based royalties will result in a charge to cost of productsales in the period in which the increase is determined. Similarly, any future decrease in the fair value of contingent consideration associated with sales basedroyalties will result in a reduction in cost of product sales.91 Fair Value of Financial InstrumentsThe Company measures and records cash equivalents and investment securities considered available-for-sale at fair value in the accompanyingfinancial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principalor most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniquesused to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.The carrying amounts of the Company’s short-term financial instruments, which include cash and cash equivalents, accounts receivable and accountspayable, approximate their fair value due to their short maturities.Sales Rebates and other DiscountsAptevo markets and sells its products through commercial wholesalers (direct customers) who purchase the products at a price referred to as thewholesale acquisition cost (WAC). Additionally, Aptevo may enter into separate agreements with indirect customers to acquire its products for a contractedprice that is less than the product’s WAC. The indirect customers, such as group-purchasing organizations, physician practice-management groups andhospitals, continue to purchase Aptevo’s products from the wholesalers, but at their respective contractual prices. Per its wholesaler agreements, Aptevoguarantees to credit the wholesaler for the difference between the WAC and the indirect customers’ contracted price. This credit is referred to as a chargebackand revenues from product sales are recorded net of estimated chargebacks. Adjustments to the chargeback provisions are made periodically to reflect newfacts and circumstances, therefore historical experience may not be indicative of current and/or future results.All revenues from product sales are also recorded net of applicable allowances for sales and government rebates, special promotional programs, anddiscounts. Management does not believe there to be a legal right of offset related to these allowances and the receivables from wholesalers; accordingly,allowances are classified as a current liability in the accompanying balance sheets These allowances are estimated based on historical payment experience,historical relationship to revenues, estimated customer inventory levels, contract terms, and actual discounts offered. In arriving at these estimates, Aptevofurther utilizes information received from third parties including market data, inventory reports from major wholesalers, historical information and analysis.These estimates are subject to the inherent limitations of estimates that rely on third-party data, as certain third-party information may itself rely on estimatesand reflect other limitations.Debt Issuance CostsAptevo defers costs related to debt issuance and amortize these cost to interest expense over the term of the debt, using the effective interest method.Debt issuance costs are presented in the balance sheet as a reduction of the carrying amount of the debt liability.Revenue RecognitionAptevo recognizes revenue if four basic criteria have been met: (1) there is persuasive evidence of an arrangement, (2) delivery has occurred orservices have been rendered, (3) the fee is fixed or determinable, and (4) collectability is reasonably assured. Where the revenue recognition criteria are notmet, we defer the recognition of revenue by recording deferred revenue until such time as all criteria are met.92 CollaborationsRevenue generating collaborative research and development agreements may contain one or more provisions including licensing, research servicesand milestone deliverables. Aptevo analyzes its multiple element revenue generating arrangements to determine whether the elements can be separated andaccounted for individually as separate units of accounting. An item can generally be considered a separate unit of accounting if both of the following criteriaare met: (1) the delivered item(s) has value to the customer on a standalone basis, and (2) if the arrangement includes a general right of return and delivery,the performance of the undelivered item(s) is considered probable and substantially in the control of Aptevo. Items that cannot be divided into separate unitsare consolidated with other units of accounting, as appropriate. Consideration to be received is allocated among the separate units based on each unit’srelative selling price and is then recognized when the appropriate revenue recognition criteria are met. Aptevo deems services to be rendered if no continuingobligation exists on the part of Aptevo.Revenue associated with non-refundable upfront license fees that can be treated as a single unit of accounting is recognized when all ongoingobligations have been delivered. Revenue associated with non-refundable upfront license fees under arrangements where the license fees and research anddevelopment activities cannot be accounted for as separate units of accounting is deferred and recognized as revenue either on a straight-line basis overAptevo’s continued involvement in the research and development process or based on the proportional performance of Aptevo’s expected future obligationsunder the contract.Revenues from the achievement of research and development milestones, if deemed substantive, are recognized as revenue when the milestones areachieved and the milestone payments are due and collectible. Milestones are considered substantive if all of the following conditions are met: (1) themilestone is non-refundable, (2) achievement of the milestone was not reasonably assured at the inception of the arrangement, (3) substantive effort isinvolved to achieve the milestone and (4) the amount of the milestone payment appears reasonable in relation to the effort expended. If not deemedsubstantive, Aptevo recognizes such milestone as revenue on a percent of completion basis over the remaining expected term of continued involvement inthe research and development process. Payments received in advance of revenue recognized are recorded as deferred revenue.Product SalesThe Company markets and sells its products through commercial wholesalers (direct customers) who purchase the products at a price referred to as thewholesale acquisition cost (WAC). Additionally, the Company may enter into separate agreements with indirect customers to acquire its products for acontracted price that is less than the product’s WAC. The indirect customers, such as group-purchasing organizations, physician practice-management groupsand hospitals, continue to purchase the Company’s products from the wholesalers, but at their respective contractual prices. Per its wholesaler agreements, theCompany guarantees to credit the wholesaler for the difference between the WAC and the indirect customers’ contracted price. This credit is referred to as achargeback and revenues from product sales are recorded net of estimated chargebacks. Adjustments to the chargeback provisions are made periodically toreflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results.All revenues from product sales are also recorded net of applicable allowances for sales and government rebates, special promotional programs, anddiscounts. These allowances are estimated based on historical payment experience, historical relationship to revenues, estimated customer inventory levels,contract terms, and actual discounts offered. In arriving at these estimates, the Company further utilizes information received from third parties includingmarket data, inventory reports from major wholesalers, historical information and analysis. These estimates are subject to the inherent limitations of estimatesthat rely on third-party data, as certain third-party information may itself rely on estimates and reflect other limitations.The Company defers the recognition of revenue from the sales of new product introductions until the commercial wholesalers resell the product tothe healthcare providers. This is due to the inherent uncertainties in estimating normal wholesaler inventory levels of new products in addition to possibleproduct launch incentives such as extended payment terms and expanded return rights that allow the wholesalers to return the product. Once the Companygains enough historical experience to reasonably estimate allowances for chargebacks, rebates and other discounts, revenue from sales and the relatedallowances are recognized upon sale to the wholesaler.93 Research and DevelopmentResearch and development costs are expensed as incurred. Research and development costs primarily consist of internal labor costs, fees paid tooutside service providers and the costs of materials used in clinical trials and research and development. Other research and development expenses includefacility, maintenance and related support expenses.A substantial portion of Aptevo’s pre-clinical studies and all of its clinical studies have been performed by third-party contract research organizations(CRO). The Company reviews the activities performed by the CROs each period. For pre-clinical studies, the significant factors used in estimating accrualsinclude the percentage of work completed to date and contract milestones achieved. For clinical study expenses, the significant factors used in estimatingaccruals include the number of patients enrolled and percentage of work completed to date. The Company’s estimates are highly dependent upon thetimeliness and accuracy of the data provided by its CRO’s regarding the status of each program and total program spending and adjustments are made whendeemed necessary.Selling, General and Administrative ExpensesSelling, general and administrative expenses consist primarily of personnel-related costs and professional fees in support of our executive, sales andmarketing, business development, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs nototherwise included in cost of product sales or research and development expense.Stock-Based CompensationUnder the Financial Accounting Standards Board’s (FASB) ASC 718, Compensation—Stock Compensation, we measure and recognizecompensation expense for restricted stock, restricted stock units (RSUs), and stock options granted to our employees and directors based on the fair value ofthe awards on the date of grant. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model that requiresmanagement to apply judgment and make estimates, including: •the expected term of the stock option award, which we calculate using the simplified method, as permitted by the SEC Staff AccountingBulletin No. 110, Share-Based Payment, as we have insufficient historical information regarding our stock options to provide a basis for anestimate; •the expected volatility of our underlying common stock, which we estimate based on the historical volatility of a representative group ofpublicly traded biopharmaceutical companies with similar characteristics to us, and our own historical and implied future volatility; •the risk-free interest rate, which we based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term ofthe options being valued; •the expected dividend yield, which we estimate to be zero based on the fact that we have never paid cash dividends and have no presentintention to pay cash dividends; and •the fair value of our common stock on the date of grant.Stock-based compensation expense for RSUs is recognized on a straight-line basis over the vesting period of the respective award. Stock-basedcompensation expense for our stock options, both converted and Aptevo granted, is recognized on a straight-line basis over the vesting period of therespective award.We are required to estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate for the convertedRSUs and options is based on an analysis of the actual forfeitures experienced by Emergent. For the RSUs and options issued by Aptevo, we have estimated aforfeiture rate of ten-percent. Since inception our actual forfeiture rate has been de minimis. We routinely evaluate the appropriateness of the forfeiture ratebased on actual forfeiture experience, analysis of employee turnover, and expectations of future option exercise behavior.94 Income TaxesIncome taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributableto differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and researchand development tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in theyear in which those temporary differences are expected to be recovered or settled.Aptevo’s ability to realize deferred tax assets depends upon future taxable income as well as the limitations discussed below. For financial reportingpurposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will notbe realized prior to expiration. Aptevo considers future taxable income and ongoing tax planning strategies in assessing the need for valuation allowances. Ingeneral, if Aptevo determines that it is more likely than not to realize more than the recorded amounts of net deferred tax assets in the future, Aptevo willreverse all or a portion of the valuation allowance established against its deferred tax assets, resulting in a decrease to the provision for income taxes in theperiod in which the determination is made. Likewise, if Aptevo determines that it is not more likely than not to realize all or part of the net deferred tax assetin the future, Aptevo will establish a valuation allowance against deferred tax assets, with an offsetting increase to the provision for income taxes, in theperiod in which the determination is made.Because tax laws are complex and subject to different interpretations, significant judgment is required. As a result, Aptevo makes certain estimatesand assumptions, in (1) calculating Aptevo’s income tax expense, deferred tax assets and deferred tax liabilities, (2) determining any valuation allowancerecorded against deferred tax assets and (3) evaluating the amount of unrecognized tax benefits, as well as the interest and penalties related to such uncertaintax positions. Aptevo’s estimates and assumptions may differ significantly from tax benefits ultimately realized.Segment ReportingThe Company has determined that it operates in a single segment and has one reporting unit: the discovery, development, commercialization andsale of novel oncology and hematology therapeutics.New Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-09, Revenue from Contracts withCustomers (Topic 606), an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue isreported by companies while also improving comparability in the financial statements of companies reporting using International Financial ReportingStandards or GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers inamounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result inenhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance formultiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date,which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoptionpermitted but not earlier than the original effective date. Accordingly, the updated standard is effective for the Company in the first quarter of fiscal 2018.Aptevo is continuing to evaluate the effect that the standard will have on its consolidated financial statements and related disclosures including the areas ofvariable consideration and new disclosure requirements. Aptevo is currently expecting to use the modified retrospective method to adopt this standard.In August 2014, the FASB issued ASU No.2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under thenew guidance, management is required to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certaincircumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter.We adopted this guidance for the year ended December 31, 2016 and management believes that our existing cash and cash equivalents will be sufficient tofund our operations through the first quarter of 2018.95 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a leaseliability and a right-of-use asset for all leases (with the exception of short term leases) at the commencement date. Lessor accounting under ASU 2016-02 islargely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. UnderASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospectivetransition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lesseesand lessors may not apply a full retrospective transition approach. The Company has not yet selected an implementation date nor has it determined the effectof the standard on the Company’s ongoing financial reporting.In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment award transactions including the financial statement presentation ofexcess tax benefits and deficiencies, classification of awards as either equity or liabilities, accounting for forfeitures and classification on the statement ofcash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption ispermitted. Aptevo is currently evaluating the requirements of ASU 2016-09 and have not yet determined the impact on its consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”which clarifies the classification and presentation of eight specific cash flow issues in the statement of cash flows. This standard is effective beginningJanuary 1, 2018, with early adoption permitted. The new standard requires a retrospective transition. Aptevo is currently evaluating the impact of the newstandard on its consolidated financial statements.Note 2. Restatement Restatement Background Our December 31, 2015 financial statements include $41.8 million of intangible assets which resulted from the acquisition of IPR&D programsrelated to TRU-016, a novel CD37-directed therapy for B-cell malignancies, such as chronic lymphocytic leukemia and non-Hodgkin’s lymphoma. Thisamount was deemed to be an indefinite-lived asset, to remain as an indefinite-lived asset on the balance sheet until completion or abandonment of theassociated research and development efforts. Following the spin-off of the Company in August 2016, the Company conducted an internal review of alldeferred tax assets and liabilities acquired and it was determined that a deferred tax liability should have been recorded associated with the differencebetween the book basis and the tax basis of the asset as a part of the acquisition in 2010. The error has no effect on the net assets distributed in the spin-off. Impact of Restatement on Consolidated Balance Sheets The Company has restated its consolidated balance sheet as of December 31, 2015. The restatement resulted in an increase in deferred tax liabilitiesof $15.3 million and a corresponding $15.3 million increase in goodwill. The restatement had no impact on total stockholders’ equity. 96 The impact of the restatement on the Company’s consolidated balance sheets is reflected and quantified for 2015 in the below table. Balance Sheet Impact: (1) (in thousands) December 31,2015(As previously reported) Restatement Adjustment December 31,2015(Restated) Goodwill $13,902 $15,311 $29,213 Total assets 112,456 15,311 127,767 Deferred tax liability 506 15,311 15,817 Total liabilities $23,838 $15,311 $39,149 Total stockholders equity $88,618 $— $88,618 See Note 17 for unaudited information on the impact of this restatement to unaudited interim periods. Note 3. MorphoSys Collaboration AgreementIn August 2014, Aptevo entered into a collaboration agreement with MorphoSys AG (MorphoSys Agreement) for the joint worldwide developmentand commercialization of MOR209/ES414, a targeted immunotherapeutic protein, which activates host T-cell immunity specifically against cancer cellsexpressing prostate specific membrane antigen, an antigen commonly overexpressed on prostate cancer cells. MOR209/ES414 was constructed usingAptevo’s proprietary ADAPTIR™ platform technology.In accordance with the initial terms of the MorphoSys Agreement, Aptevo received a nonrefundable $20.0 million upfront payment and couldreceive up to $163.0 million in additional contingent payments, comprised of up to $80.0 million and up to $83.0 million, respectively, due upon theachievement of specified development and regulatory milestones. MorphoSys and Aptevo jointly agreed to fund further development of MOR209/ES414,with Aptevo responsible for 36% of the total development costs and MorphoSys responsible for the remainder, with Aptevo’s funding requirement capped at$186.0 million. Aptevo’s development effort includes the performance of non-clinical, clinical, manufacturing and regulatory activities. Aptevo retainscommercialization rights in the U.S. and Canada, with a tiered royalty obligation to MorphoSys, ranging from mid-single digit up to 20% of sales.MorphoSys has worldwide commercialization rights excluding the U.S. and Canada, with a low single digit royalty obligation to Aptevo.In December 2015, after a joint review of data from the ongoing Phase 1 dose escalation study of MOR209/ES414 in prostate cancer patients, Aptevoand MorphoSys decided to adjust the dosing regimen and administration of MOR209/ES414. Patients receiving weekly doses of MOR209/ES414 developedantibodies against the drug; this is called anti-drug antibodies, or ADA. ADA developed in most patients including those receiving the maximum tolerateddose of drug which could be given safely on a weekly basis. These antibodies bind to the drug and reduce the concentration of active MOR209/ES414 in theblood and thus could potentially reduce its efficacy. However, no safety issues related to the development of ADA were observed.The cause of these antibodies is unclear but could be due to the weekly administration of the drug. Hence, the protocol was amended to a continuousintravenous infusion as a way to administer higher levels of drug and prevent the development of ADA. The MOR209/ES414 Phase I clinical trial under theamended protocol, providing continuous intravenous infusion as a way to administer higher levels of drug and prevent the development of ADA, commencedDecember 2016.97 As a result of the required dosing regimen change and the impact to the overall development timeline and technical risk, our co-developmentagreement with MorphoSys was restructured. In December 2015, Aptevo and MorphoSys amended the collaboration agreement to decrease the additionalcontingent payments due to Aptevo upon the achievement of specified development and regulatory milestones of up to $32.5 million and up to $41.5million, respectively and change the total funding requirement cap for Aptevo to up to approximately $250.0 million. In December 2016, the collaborationagreement was further amended to adjust the allocation of certain manufacturing and development costs and extend MorphoSys’s convenience terminationrights. Under the amendment, we will bear 75% of all development costs with respect to MOR209/ES414, and MorphoSys will bear 25% of such costs, duringthe period from January 1, 2017 through June 30, 2017. During the period from July 1, 2017 through December 31, 2018, we will bear 49% of suchdevelopment costs and MorphoSys will bear 51%. Beyond January 1, 2019, we will bear 36% and MorphoSys will bear 64% of such development costs. Inaddition, the timeframe for a one-time right to terminate the collaboration agreement by MorphoSys has been extended from December 31, 2016 to June 30,2017, or within one week following the receipt and discussion of clinical data from the first six patients enrolled and dosed in the MOR209/ES414 Phase Iclinical trial.Aptevo evaluated the MorphoSys Agreement and determined that it was a revenue arrangement with multiple deliverables or performanceobligations. Aptevo determined there were two units of accounting under the MorphoSys Agreement: (1) the delivered license to further develop andcommercialize MOR209/ES414, and (2) undelivered items related to development services. Aptevo determined that the license had standalone value as thedrug candidate has been: (1) developed and is currently Phase 1 clinical trial ready, (2) MorphoSys possesses the knowledge, technology, skills, experienceand infrastructure necessary to complete all further development of the drug through commercialization, and (3) MorphoSys has the right to furthersublicense the product. In 2014, Aptevo allocated the $20.0 million upfront payment to the two units of accounting using the relative selling price method.Aptevo determined the estimated selling price for the license using the income approach and an appropriate discount rate. The estimated selling priceincludes unobservable inputs (Level 3), such as estimates of revenues and operating margins; the time and resources needed to complete the developmentand approval of the product candidate; and the risk related to the viability of and potential for alternative treatments. Aptevo determined the estimatedselling price of the development services unit of accounting based on the estimated number of full-time equivalent personnel at the contractual rate asdefined in the MorphoSys Agreement, whose rates and terms approximate those of other Emergent or Aptevo service related contracts and those observedgenerally through other collaboration negotiations. The allocation resulted in $15.3 million of the $20.0 million upfront payment being allocated to thelicense and $4.7 million being allocated to the development services. Aptevo determined the license fee unit of accounting was delivered and completed onthe date the MorphoSys Agreement was executed and thus recognized $15.3 million of license revenue in August 2014. Revenue related to the developmentservices is recognized as the services are performed with $0.1 million and $0.5 million, respectively, recognized in the year ended December 31, 2016 and2015. The current estimated service period for the undelivered development services under the MorphoSys Agreement is through 2023.Further, Aptevo determined that contingent payments for the achievement of the development and regulatory milestones are substantive milestonesand will be accounted for as revenue in the period in which the milestones are achieved. Aptevo received a $5.0 million milestone payment from MorphoSysreflecting the initiation of a Phase I clinical study to evaluate the safety, tolerability, and clinical activity of MOR209/ES414 in patients with metastaticcastration-resistant prostate cancer. Aptevo recognized this substantive milestone achievement payment as research and development revenue during the sixmonths ended June 30, 2015.The MorphoSys Agreement provides for the sharing of development and clinical costs related to MOR209/ES414. In the event Aptevo’s share of thetotal cost incurred for a given quarter exceeds its pro rata limit, Aptevo records a receivable from MorphoSys for the excess and reduces research anddevelopment expense by this amount. For the year ended December 31, 2016 Aptevo recorded a reduction to research and development expense of $0.1million and for the year ended December 31, 2015 Aptevo recorded a reduction to research and development expense of $4.3 million.As of December 31, 2016, the MorphoSys Agreement related accounts receivable balance was $0.0 million and the related total deferred revenuebalance was $3.7 million.98 Note 4. Fair Value MeasurementsThe Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accountingguidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observableinputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whetherthe significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority isgiven to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant marketassumptions. The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant tothe measurement in its entirety. The three levels of the hierarchy are as follows:Level 1— Quoted prices in active markets for identical assets and liabilities;Level 2— Inputs other than quoted prices in active markets that are either directly or indirectly observable; andLevel 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.The Company held no financial assets measured at fair value as of December 31, 2015. The Company’s financial assets measured at fair valueconsisted of the following as of December 31, 2016: December 31, 2016 (in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Money market funds $5,215 $— $— $5,215 Corporate bonds — 9,951 — 9,951 US government and agency debt securities — 34,898 — 34,898 Total assets $5,215 $44,849 $— $50,064 If quoted market prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices of similarinstruments and other significant inputs derived from observable market data obtained from third-party data providers. These investments are included inLevel 2 and consist of debt securities of U.S government agencies and corporate bonds. There were no transfers between Levels 1 and 2 during the twelve-month period ended December 31, 2016.The following table is a reconciliation of the beginning and ending balance of the liabilities (contingent consideration) measured at fair value usingsignificant unobservable inputs (Level 3) during the year ended December 31, 2016. The royalty agreement associated with HepaGam B expired on June 30,2016, and no future royalty payments are expected on sales after that date. (in thousands) Balance at December 31, 2015 $444 Expense included in earnings 19 Settlements (463)Balance at December 31, 2016 $— 99 Note 5. InvestmentsInvestments are classified as available-for-sale securities and are carried at fair value with unrealized temporary holding gains and losses excludedfrom net income or loss and reported in other comprehensive income or loss and also as a net amount in accumulated other comprehensive income or lossuntil realized. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other than temporaryimpairments. The Company determined that the unrealized gains on its marketable securities as of December 31, 2016 were temporary in nature, and theCompany currently does not intend to sell these securities before recovery of their amortized cost basis. All short-term investments are limited to a finalmaturity of less than one year from the reporting date. December 31, 2016 (in thousands) AmortizedCost Gross UnrealizedHolding Gains Gross UnrealizedHolding (Losses) Estimated FairValue Cash equivalents: Money market fund $5,215 $— $— $5,215 Total cash equivalents $5,215 $— $— $5,215 Short-term investments: Corporate bonds $9,959 $1 $(9) $9,951 US government and agency debt securities 34,923 — (25) 34,898 Total short-term investments $44,882 $1 $(34) $44,849 Note 6. InventoriesInventories consist of the following: December 31, December 31, (in thousands) 2016 2015 Raw materials and supplies $260 $6,520 Work-in-process 1,165 4,730 Finished goods 5,214 9,072 Total inventories $6,639 $20,322 CMC ICOS Biologics, Inc., (CMC), is the exclusive manufacturer of bulk drug substance for the IXINITY product. During 2015, we ordered ninemanufacturing lots of bulk drug substance from CMC and only one of those lots was successfully manufactured and released in 2015. On October 4, 2016, weprovided a Notice of Interruption in Manufacturing, or Notice, to the FDA, notifying the FDA of a potential interruption in the supply of IXINITY®coagulation factor IX (recombinant) due to the ongoing manufacturing challenges with the manufacturer of the bulk drug. On March 15, 2017, we announcedthe successful manufacture of a recent bulk drug substance batch of IXINITY and we anticipate that the new supply will be available beginning in May 2017,after the completion of routine final drug product (FDP) manufacturing activities. While we do not currently anticipate or foresee a supply shortage or supplyinterruption occurring, any supply shortage or supply interruption of IXINITY would adversely affect its sales and could adversely affect its market position,commercial viability and the trading price of our common stock.Due to the challenges with the manufacture of our IXINITY product that meets release specifications for the final drug product, we wrote offunsaleable IXINITY inventory that was in the process of being manufactured in the amount of $7.1 million in 2016. This cost is included in cost of productsales.100 Note 7. Property and equipment, net Property, plant and equipment consist of the following: December 31, December 31, (in thousands) 2016 2015 Leasehold improvements $2,265 $2,152 Furniture and equipment 10,283 7,884 Property and equipment, gross 12,548 10,036 Less: Accumulated depreciation (6,638) (5,857)Total property and equipment, net $5,910 $4,179 Note 8. Impairment of Intangible Assets, In-Process Research and Development and GoodwillDuring the period between the spin off date and September 30, 2016, we experienced a significant decline in our stock price. Based on this, weconcluded that a significant potential impairment indicator existed to require us to perform an interim assessment of goodwill and indefinite-lived intangibleassets as of September 30, 2016. We performed an interim first step of our impairment assessment and determined there was a potential impairment ofgoodwill and indefinite-lived intangible assets. Therefore, we performed the impairment assessments of our in-process research and development asset, ourlong-lived assets, and definite-lived assets and goodwill. In our second step of our goodwill impairment assessment we compared the implied fair value ofgoodwill to the book value of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in abusiness combination. That is, the estimated fair value of the business is allocated to all of the assets and liabilities as if the business had been acquired in abusiness combination and the estimated fair value of the business was the purchase price paid. If the carrying amount goodwill exceeds the implied fair value,an impairment loss is recognized in an amount equal to that excess.We measured the fair value of both our indefinite-lived and definite lived intangible assets using accepted valuation techniques. The significantestimates used included our weighted average cost of capital, long-term rate of growth and profitability of our business, and working capital effects. Ourassumptions are based on actual historical performance, expected results after commercial launch of our otlertuzumab product, and implied risk premiumsbased on market prices of our equity and debt as of the assessment date. To validate the reasonableness of the fair values, we reconciled the aggregate fairvalues of the business determined in step one to the enterprise market capitalization. Enterprise market capitalization includes, among other factors, themarket capitalization of our stock and an acquisition premium based on historical data from acquisitions within the same or similar industries. In performingthe reconciliation, we used the market value of our stock price, the stock price on the valuation date and considered such other quantitative and qualitativefactors we considered relevant. This assessment resulted in the recognition in the third quarter of 2016 of a loss on impairment of in process research anddevelopment costs related to our otlertuzumab candidate of approximately $41.8 million and $29.2 million of goodwill.As evidenced by a significant decline in our stock price, we determined that the adverse change in the business climate discussed above was anindicator requiring the testing of our long-lived assets for recoverability and performed this test as of September 30, 2016, prior to completing the tests above.The results of the evaluation indicated that the carrying values of the related assets were recoverable.Note 9. Intangible Assets, Net Intangible assets, net, are comprised of licenses for our suite of commercial products. For the years ended December 31, 2016 and 2015, the Companyrecorded $2.2 million and $3.4 million, respectively, of intangible asset amortization expense. As of December 31, 2016, the weighted average amortizationperiod remaining for intangible assets was 85 months. 101 Future amortization expense as of December 31, 2016 is as follows: (in thousands) 2017 $2,083 2018 2,083 2019 2,083 2020 2,083 2021 and beyond 6,202 Total remaining amortization $14,534 Note 10. DebtCredit FacilityOn August 4, 2016, we entered into a $35.0 million Credit and Security Agreement (the Credit Agreement), with MidCap Financial Trust. The CreditAgreement provides us with up to $35.0 million of available borrowing capacity, available (subject to certain conditions) in two tranches of $20.0 millionand $15.0 million, respectively, through August 31, 2017. The loan repayment will include interest (no principal) through August 2018. Commencing inAugust 2018, the payments will include principal and interest and will be repaid in full on February 1, 2021 (54 months). Amounts drawn under the CreditAgreement bear interest at a rate of LIBOR plus 7.60% per annum. The first tranche of $20.0 million was funded on the closing date of the Credit Agreementwith the second tranche of $15.0 million will be available (subject to certain conditions) following the date Aptevo and its subsidiaries: (1) achieve netcommercial product revenue of $40.0 million on a trailing twelve-month basis, and (2) receive an additional $20.0 million in cash from Emergent.Emergent’s promise to pay this $20.0 million in cash is evidenced by a non-negotiable, unsecured promissory note issued to Aptevo from Emergent whichwas paid in the first quarter of 2017. We paid debt issuance costs of $1.9 million.Five year payments on debt as of December 31, 2016 is as follows: (in thousands) 2017 $1,620 2018 4,908 2019 9,053 2020 8,405 2021 671 Total principal and interest payments $24,657 The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, in each case applicableto us and our subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, dividends and other distributions,repayment of subordinated indebtedness, mergers, dispositions, investments (including licensing), acquisitions, transactions with affiliates and modificationof organizational documents or certain other agreements. The Credit Agreement contains financial covenants that require us and our subsidiaries to maintainincreasing minimum net commercial product revenue for each twelve-month period ending on the last day of each calendar quarter, commencing with thetwelve-month period ending September 30, 2016. The Credit Agreement also includes provision related to events of default and occurrence of materialadverse effect. The occurrence of an event of default could result in the acceleration of the Credit Agreement. There was no event of default under the CreditAgreement as of December 31, 2016.102 The Credit Agreement also includes customary events of default, including, among other things, failure to pay principal or interest due under theCredit Agreement, default of covenants, a cross-default on our or our subsidiary’s material indebtedness, breach of material contracts by us or our subsidiaries,or commencement of liquidation, reorganization or similar relief. This and further obligations under the Credit Agreement are secured by all of our assetsother than: (1) certain voting shares of excluded subsidiaries, (2) any lease, license or other contract where the grant of a security interest would constitute adefault, be prohibited by applicable law, or will require certain third-party consents, and (3) intellectual property (except to the extent necessary to have alien on such intellectual property in order to have a lien on cash and other proceeds arising out of or derived from such intellectual property).The related financing documents contain: (1) a customary agency fee, (2) an exit fee of up to 5.75% of the aggregate principal amount under theCredit Agreement for repayment or prepayment other than scheduled amortization payments and the final payment of principal and (3) a prepayment fee ofup to 4% of the amount prepaid for the first year, decreasing over time, for any amounts prepaid prior to the maturity date, whether voluntary or by reason ofthe occurrence of an event of default or acceleration of the loan, other than certain mandatory prepayments.The obligations of Aptevo and the other borrowers under the Credit Agreement are secured by all of their assets other than (1) certain voting shares ofexcluded subsidiaries of Aptevo, (2) any lease, license or other contract where the grant of a security interest would constitute a default, be prohibited byapplicable law, or will require certain third-party consents and (3) intellectual property of Aptevo (except to the extent necessary to have a lien on suchintellectual property in order to have a lien on cash and other proceeds arising out of or derived from such intellectual property).Note 11. Net Loss per ShareNet loss per share is calculated by dividing the net loss of the Company by the number of weighted shares outstanding on December 31, 2016, andthe number of shares issued during the spin-off for prior periods. Prior to the spin-off, Aptevo did not operate as a separate entity and as a result did not haveany common stock outstanding other than 1,000 shares held by Emergent. The calculation of basic and diluted net loss per share assumes that the 20,229,849ordinary shares issued to Aptevo stockholders in connection with the spin-off were outstanding from the beginning of the periods presented. Diluted earningsper share is calculated using the weighted average number of common shares outstanding plus dilutive common stock equivalents outstanding during theperiod. Common stock equivalents are excluded for the twelve-month periods ended December 31, 2016 and 2015, since the effect is anti-dilutive due to theCompany’s net losses. Common stock equivalents include stock options and unvested RSUs.The following table represents all potentially dilutive shares, which were all anti-dilutive and therefore excluded from the calculation of diluted netloss per share: As of December 31, (in thousands, except for per share amounts) 2016 Outstanding options to purchase common stock 2,069 Unvested RSUs 3,034 At December 31, 2015, no options or RSU’s were outstanding.Note 12. EquityCapitalization Upon Spin-offOn August 1, 2016, in connection with the spin-off of the Company from Emergent, we issued 20.2 million shares to Emergent shareholders andrecorded a contribution from Emergent of $71.2 million. This contribution included a one-time payment of $45.0 million, and a working capitalreimbursement for outstanding payments of $1.4 million, which we received in the fourth quarter of 2016, a noncash transfer of an intangible asset of $0.7million, and a net transfer of cash from Emergent of $24.2 million. In addition, we recorded a promissory note to receive $20.0 million from Emergent, whichwe received in the first quarter of 2017.103 Converted Equity Awards Incentive PlanThe Company had no stock-based compensation plans prior to spin off from Emergent; however certain Aptevo employees participated inEmergent’s stock-based compensation plans (Emergent Plans), which provided for the grants of stock options and restricted stock units (RSUs). The expenseassociated with Aptevo employees who participated in the Emergent Plans was allocated to the Company in the accompanying Statements of Operations forthe associated periods prior to the spin off.In connection with the spin off and the employee matters agreement, the Company adopted the Converted Equity Awards Incentive Plan (theConverted Plan) and outstanding equity awards of Emergent held by Aptevo employees (the Converted Awards) were converted into or replaced with equityawards of Aptevo (the Conversion Awards) under the Converted Plan and were adjusted to maintain the economic value before and after the distribution dateusing the relative fair market value of the Emergent and Aptevo common stock based on the closing prices as of August 1, 2016. There was no significantincremental stock-based compensation expense recorded as a result of the equity award conversion. A total of 1.3 million shares of Aptevo common stockhave been authorized for issuance under the Converted Plan.2016 Stock Incentive PlanOn August 1, 2016, the Company adopted the 2016 Stock Incentive Plan (2016 SIP). A total of 3.1 million shares of Aptevo common stock havebeen authorized for issuance under the 2016 SIP in the form of incentive stock options.Stock options under the 2016 SIP generally vest pro rata over a three-year period and terminate 7 to 10 years from the grant date, though the specificterms of each grant are determined individually. The Company’s executive officers and certain other employees may be awarded options with differentvesting criteria, and options granted to non-employee directors also vest over a three-year period. Option exercise prices for new options granted by theCompany equal the closing price of the Company’s common stock on the NASDAQ Global Market on the date of grant, while options issued as ConversionAwards were priced according to the Converted Plan.RSUs issued under the 2016 SIP or as part of the Converted Plan provide for the issuance of a share of the Company’s common stock at no cost to theholder. RSUs granted to employees under the 2016 SIP generally provide for time-based vesting over an eighteen-month to three-year period, althoughcertain employees may be awarded RSUs with different time-based vesting criteria. Prior to vesting, RSUs granted under the Stock Plan do not have dividendequivalent rights, do not have voting rights and the shares underlying the RSUs are not considered issued or outstanding.The equity compensation awards granted by the Company generally vest only if the employee is employed by the Company (or in the case ofdirectors, the director continues to serve on the Board) on the vesting date.Issuance of SharesWhen options are exercised or RSU’s are converted, it is the Company’s policy to issue new shares.Stock-Based Compensation ExpenseStock-based compensation expense includes amortization of stock options and restricted stock units granted to employees and non-employees andhas been reported in our Consolidated Statements of Operation and Comprehensive Loss as follows: (in thousands) December 31, 2016December 31, 2015 Research and development $2,693 $1,107 General and administrative 1,116 — Total stock-based compensation expense $3,809 $1,107 104 The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards grantedbased on the fair value of the award as of the grant date. The Company recognizes the compensation expense over the vesting period.Stock OptionsAptevo utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted. Set forth below are the assumptions usedin valuing the stock options granted: December 31, 2016 Expected dividend yield 0.00% Expected volatility 75.00% Risk-free interest rate 1.23% Expected average life of options 6 years Management applied an estimated forfeiture rate for the 2016 plan period of 10%.The following is a summary of option activity for the year ended December 31, 2016: Number ofShares Weighted-AverageExercise Price Weighted-AverageRemaining Term AggregateIntrinsicValue Outstanding Aptevo Options at December 31, 2015 — $— $— Aggregate impact of conversion related to spin-off 1,672,177 2.49 127,520 Granted 456,075 2.83 35,306 Exercised (9,144) 2.15 (8,839)Forfeited (33,894) 2.48 (5,369)Outstanding at December 31, 2016 2,085,214 $2.57 6.20 $153,987 Exercisable at December 31, 2016 514,045 $2.25 4.30 $119,169 As of December 31, 2016, we had $1.1 million of unrecognized compensation expense related to options expected to vest over a weighted averageperiod of 2.0 years. The weighted average remaining contractual life of outstanding and exercisable options is 6.1 years.The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing stock price of Aptevo’scommon stock on the last trading day of 2016 and the exercise price, multiplied by the number of in the money options) that would have been received bythe option holders had all the option holders exercised their options on December 31, 2016. The amount of aggregate intrinsic value will change based onthe price of Aptevo’s common stock.Restricted Stock UnitsThe following is a summary of restricted stock activity for the year ended December 31, 2016: Number ofUnits WeightedAverage FairValue per Unit AggregateFair Value Outstanding Aptevo RSU's at December 31, 2015 — $— $— Aggregate impact of conversion related to spin-off 1,223,215 2.76 — Granted 2,115,772 2.94 — Converted (140,882) 2.42 — Forfeited (163,910) 2.90 — Outstanding at December 31, 2016 3,034,195 $2.88 $7,403,435 Expected to Vest 2,801,201 $2.88 $6,834,930 105 As of December 31, 2016, we had $4.6 million of unrecognized compensation expense related to RSU’s expected to vest over a period of 1.3 years.The weighted average remaining contractual life of unvested RSU’s is 3.2 years.The fair value of each RSU has been determined to be the closing trading price of the Company’s common shares on the date of grant as quoted inNASDAQ Global Market.Note 13. 401(k) savings planAptevo has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan covers allemployees. Under the 401(k) Plan, employees may make elective salary deferrals. Aptevo currently provides for matching of qualified deferrals up to 50% of401(k) employee deferral contributions, based on a maximum employee deferral rate of 6% of compensation. During the year ended December 31, 2016 andDecember 31, 2015, Aptevo’s related share of matching contributions was approximately $0.3 million and $0.3 million.Note 14. Leases and ContingenciesThe Company leases laboratory and office facilities, and office equipment under operating lease agreements. The Company recognizes rent expenseunder such arrangements on a straight-line basis over the term of the lease. During the year ended December 31, 2016 and December 31, 2015 total leaseexpense was $1.8 million and $1.8 million, respectively.We are committed to future minimum lease payments under operating lease agreements as follows: Year ending December 31, 2016 (in thousands) 2017 $1,664 2018 1,620 2019 1,644 Thereafter 554 Total $5,482 Note 15. Income TaxesDuring the periods prior to spin-off, the Company did not file separate tax returns as it was included in the tax returns of Emergent entities within therespective tax jurisdictions. The income tax provision included in these financial statements was calculated using a separate return basis, as if the Companywas a separate taxpayer. Under this approach, the Company determines its current taxes, deferred tax assets and liabilities and related tax expense as if it werefiling separate tax returns in each tax jurisdiction.Significant components of the provisions for income taxes attributable to operations consist of the following: Year ended December 31, (in thousands) 2016 2015 Current International $(29) $(660)Total current (29) (660)Deferred Federal (14,630) — State (681) — International — (1,360)Total deferred (15,311) (1,360)Total benefit from income taxes $(15,340) $(2,020) 106 The Company’s net deferred tax asset (liability) consists of the following: December 31, (in thousands) 2016 2015(Restated) Federal losses carryforward $7,237 $90,121 Other tax credits 384 13,026 Scientific research and experimental development credit carryforward — 3,460 State losses carryforward 371 — Intangible assets 17,464 — Stock compensation 1,726 1,167 Foreign deferrals — 17,755 Inventory reserves — 1,716 Fixed assets 160 1,357 Other 3,050 3,910 Deferred tax asset 30,392 132,512 Intangibles — (13,043)Other (575) (797)Deferred tax liability (575) (13,840)Valuation allowance (29,817) (134,489)Net deferred tax liabilities $— $(15,817) For the year ended December 31, 2015, deferred assets and liabilities are a result of the separate return calculation presentation and may not representdeferred assets and liability balances after the distribution. Certain deferred items may not have existed due to utilization by the Emergent group prior to thedistribution, together with certain related transactions, or may hold no future value subsequent to the distribution due to the Company’s future jurisdictionalincome projections. Federal net operating losses and research and development credit carryforwards are examples of deferred items that have been previouslyutilized or will have no future value to the Company as the distribution, together with certain related transactions, did not result in the transfer of losscarryforwards or tax credit carryforwards to the Company. The Company has determined a valuation allowance is required for financial reporting purposesdue to cumulative historic losses on a separate tax return basis as well as the expiration of certain attributes.As of December 31, 2016 and 2015, the Company has recorded federal net operating losses of approximately $20.7 and $257.4 million, respectively,state tax losses of $10.5 million and $0.0, respectively, and tax credits of $0.4 million and $13.2 million, respectively. In addition, the Company has recordedCanadian loss carryforwards of approximately $0.0 and $68.3 million, respectively, and Canadian scientific research and experimental development creditsin the amount of $0.0 and $3.5 million, respectively. On a separate return basis, the US losses and credits would begin to expire in 2037. The state netoperating losses will begin to expire in varying periods. The Emergent group retained the Canadian losses, Canadian tax credits and pre-spin federal lossesand research and development tax credits. Carryforwards of net operating losses are subject to possible limitation, should a change in ownership occur, asdefined by Internal Revenue Code Section 382.The valuation allowance as of December 31, 2016 is primarily related to net operating losses and intangibles. The net change in valuation allowancewas a decrease of $83.3 million.The Company files income tax returns in the US and several state jurisdictions. The 2016 tax filings are open to review by taxing authorities. 107 The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: December 31, (in thousands) 2016 2015 Balance at the beginning of the year $— $— Increases (decreases) related to prior period tax positions 76 — Increases (decreases) related to current period tax positions — — Balance at the end of the year $76 $— We recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, no interest andpenalties have been recognized related to the underpayment of income taxes.The benefit from income taxes differs from the amount of taxes determined by applying the U.S. federal statutory rate to loss before benefit fromincome taxes as a result of the following Year ended December 31, (in thousands) 2016 2015 US $(123,199) $(41,648)International (4,556) (19,689)Loss before benefit from income taxes $(127,755) $(61,337)Federal tax at statutory rates $(44,714) $(21,467)State taxes, net of federal benefit (1,189) 419 Impact of foreign operations (29) 1,828 Change in valuation allowance 9,549 20,563 Separation related adjustment 11,055 — Tax credits (460) (3,898)Unrecognized tax benefits of tax credits 76 — Permanent differences 10,372 535 Benefit from income taxes $(15,340) $(2,020) Note 16. Subsequent Events On January 5, 2017, Aptevo received a $20.0 million payment that had been committed to by Emergent in the form of a promissory note at theclosing of the spin-off. 108 Note 17. Selected Quarterly Financial Data (unaudited) Impact of Restatement As detailed in Note 2, the Company has restated its consolidated balance sheet as of December 31, 2015. Accordingly, the Company has restated itsconsolidated balance sheet as of March 31, 2016 and June 30, 2016. In addition, the Company has restated its statements of operations for the quarterly andnine month periods ended September 30, 2016. The restatement resulted in the recognition of a $15.3 million benefit from income taxes equal to the amountof the deferred tax liability recorded associated with the TRU-016 IPR&D asset when the $41.8 million was impaired. The restatement also resulted in anincrease in the impairment expense recognized in the third quarter of 2016 due to the impairment of all goodwill, by the amount that goodwill would havebeen increased. These two restated captions on the statements of operations have the effect of offsetting each other, resulting in no impact to net loss for thequarter and nine months ended September 30, 2016. The restatement adjustment did not impact the consolidated statement of operations for any periods priorto the third quarter of 2016. The impact of the restatement on the Company’s consolidated balance sheets and statements of operations is reflected and quantified for all interimperiods affected, as applicable, in the below tables. Balance Sheets Impact: (in thousands) March 31,2016(As previouslyreported) RestatementAdjustment March 31,2016(Restated) June 30,2016(As previouslyreported) RestatementAdjustment June 30,2016(Restated) Goodwill $13,902 $15,311 $29,213 $13,902 $15,311 $29,213 Total assets 112,605 15,311 127,916 118,159 15,311 133,470 Deferred tax liability 506 15,311 15,817 506 15,311 15,817 Total liabilities $22,743 $15,311 $38,054 $20,962 $15,311 $36,273 Total stockholders equity $89,862 $— $89,862 $97,197 $— $97,197 Statement of Operations Impact: Three Months Ended Nine Months Ended (in thousands) September 30,2016(As previouslyreported) RestatementAdjustment September 30,2016(Restated) September 30,2016(As previouslyreported) RestatementAdjustment September 30,2016(Restated) Impairment expense $55,702 $15,311 $71,013 $55,702 $15,311 $71,013 Loss from operations (71,254) (15,311) (86,565) (97,081) (15,311) (112,392)Loss before income taxes (71,747) (15,311) (87,058) (97,498) (15,311) (112,809)Benefit from income taxes 6 15,311 15,317 29 15,311 15,340 Net loss $(71,741) $— $(71,741) $(97,469) $— $(97,469)109 The following table sets forth our unaudited quarterly consolidated statement of operations data for the eight quarters ended December 31, 2016: 2016 (in thousands, except per share amounts) March 31, June 30, September 30,(Restated) (1) December 31, Revenue $8,067 $10,193 $9,405 $8,769 Loss from operations (12,982) (12,845) (86,565) (14,553)Loss before income taxes (12,902) (12,849) (87,058) (14,946)Benefit from income taxes 12 11 15,317 — Net loss $(12,890) $(12,838) $(71,741) $(14,946)Net loss per share - basic and diluted $(0.64) $(0.63) $(3.55) $(0.74) 2015 (in thousands, except per share amounts) March 31, June 30, September 30, December 31, Revenue $11,663 $7,090 $6,562 $8,286 Loss from operations (11,102) (18,310) (13,188) (18,500)Loss before income taxes (11,397) (18,328) (13,104) (18,508)Benefit from income taxes 375 612 424 610 Net loss $(11,022) $(17,716) $(12,680) $(17,898)Net loss per share - basic and diluted $(0.54) $(0.88) $(0.63) $(0.88) (1) These amounts reflect a benefit from income taxes after giving effect to the goodwill and deferred tax liability restatement discussed above. The impairment of theCompany’s IPR&D in the quarter ended September 30, 2016 resulted in a benefit from income taxes of $15.3 million related to the reversal of the associated deferred taxliability in that quarter. The Company’s interim financial statements included in Form 10-Q for the quarter ended September 30, 2016 did not reflect this benefit from incometaxes or the increase in impairment of goodwill.110 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Evaluation of Disclosure Controls and ProceduresAs of December 31, 2016, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation ofthe effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d-15(e) of the Exchange Act.Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016, the design and operation of ourdisclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submitunder the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to providereasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding required disclosure.Although the Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reportingor an attestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly publiccompanies, management has identified a material weakness in our internal controls over financial reporting related to the review of certain deferred incometax accounts in connection with the material error correction discussed in Note 2 to the financial statements. As a result of this material weakness,management has concluded that our deferred income tax account controls and procedures were not effective as of December 31, 2015, March 31, 2016, June30, 2016 and September 30, 2016. In establishing the Aptevo finance organization’s year end controls following the August 1, 2016 spin-off from Emergent,we enhanced our deferred income tax account-related controls to ensure the proper determination of the effect on deferred income tax accounts from certainpurchase accounting transactions prior to Aptevo’s spin-off from Emergent. While these controls are not subject to an audit by our independent registeredpublic accounting firm, management has evaluated these controls and concluded that the material weakness has been sufficiently remediated.Item 9B. Other Information.None.111 PART IIIItem 10. Directors, Executives Officers and Corporate Governance.Information required by this item will be contained in our definitive proxy statement to be filed with the SEC on Schedule 14A in connection withour 2017 Annual Meeting of Stockholders (the Proxy Statement), which is expected to be filed not later than 120 days after December 31, 2016, under theheadings “Executive Officers,” “Proposal 1 -Election of Directors,” “Information Regarding the Board of Directors and Corporate Governance,” and “Section16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.Item 11. Executive Compensation.Information required by this item will be contained in the Proxy Statement under the headings “Executive Compensation” and “DirectorCompensation,” and is incorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Information required by this item will be contained in the Proxy Statement under the headings “Security Ownership of Certain Beneficial Owners andManagement” and “Proposal 2 – Approval of the Amendment to the 2016 Stock Incentive Plan” and is incorporated herein by reference.Item 13. Certain Relationships, Related Transactions and Director Independence.Information required by this item will be contained in the Proxy Statement under the headings “Transactions with Related Persons” and “InformationRegarding the Board of Directors and Corporate Governance,” and is incorporated herein by reference.Item 14. Principal Accountant Fees and Services.Information required by this item will be contained in the Proxy Statement under the heading “Proposal 3 – Ratification of the Selection ofIndepend,” and is incorporated herein by reference.112 PART IVItem 15. Exhibits, Financial Statement Schedules. (a)The following documents are filed as part of this report: 1.Consolidated Financial StatementsSee Index to Consolidated Financial Statements at Item 8 herein. 2.Consolidated Financial Statement SchedulesAll schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notesthereto. 3.ExhibitsSee the Exhibit Index immediately following the signature page of this report. (b) Registrants shall file, as exhibits to this form, the exhibits requiredby Item 601 of Regulation S-K (§ 229.601 of this chapter).Item 16. Form 10-K SummaryWe have chosen not to include the summary permitted by this Item 16.113 SIGNATURESPursuant 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 tobe signed on its behalf by the undersigned, thereunto duly authorized. Company Name Date: March 31, 2017 By: /s/ Marvin L. White Marvin L. White President and Chief 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 onbehalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/Marvin L. White President, Chief Executive Officer and Director March 31, 2017Marvin L. White (Principal Executive Officer) /s/Jeffrey G. Lamothe Senior Vice President and Chief Financial Officer March 31, 2017Jeffrey Lamothe (Principal Financial and Accounting Officer) /s/Fuad El-Hibri Chairman of the Board of Directors March 31, 2017Fuad El-Hibri /s/Daniel J. Abdun-Nabi Director March 31, 2017Daniel J. Abdun-Nabi /s/Grady Grant, III Director March 31, 2017Grady Grant, III /s/Zsolt Harsanyi, Ph. D. Director March 31, 2017Zsolt Harsanyi, Ph. D. /s/Barbara Lopez Kunz Director March 31, 2017Barbara Lopez Kunz /s/John E. Niederhuber, M.D. Director March 31, 2017John E. Niederhuber, M.D. 114 Exhibit Index ExhibitNumber DescriptionFormExhibitFiling DateFile No.FiledHerewith2.1 Contribution Agreement, dated July 29, 2016, by and amongEmergent BioSolutions Inc., Aptevo Therapeutics Inc., AptevoResearch and Development LLC and Aptevo BioTherapeutics LLC8-K2.1August 2, 2016001-37746 2.2 Separation and Distribution Agreement, dated July 29, 2016, by andbetween Emergent BioSolutions Inc. and Aptevo Therapeutics Inc.(schedules and exhibits have been omitted pursuant to Item 601(b)(2)of Regulation S-K. Aptevo hereby undertakes to furnish copies of anyof the omitted schedules and exhibits upon request by the Securitiesand Exchange Commission.)8-K2.2August 2, 2016001-37746 3.1 Restated Certificate of Incorporation of Aptevo Therapeutics Inc.8-K3.1August 2, 2016001-37746 3.2 Amended and Restated By-Laws of Aptevo Therapeutics Inc.8-K3.2August 2, 2016001-37746 4.1 Form of Common Stock Certificate104.1June 29, 2016 4.2 Registration Rights Agreement, dated as of August 1, 2016, by andamong Aptevo Therapeutics Inc. and certain of its stockholders8-K4August 2, 2016001-37746 10.1 Promissory Note, dated July 29, 2016, made by EmergentBioSolutions Inc. in favor of Aptevo Therapeutics Inc.8-K10.1August 2, 2016001-37746 10.2 Transition Services Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.2August 2, 2016001-37746 10.3 Tax Matters Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.3August 2, 2016001-37746 10.4 Employee Matters Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc. 8-K10.4August 2, 2016001-37746 10.5 Manufacturing Services Agreement, dated July 29, 2016, by andbetween Emergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.5August 2, 2016001-37746 10.6 Canadian Distributor Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.6August 2, 2016001-37746 10.7 Trademark License Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.7August 2, 2016001-37746 10.8 Product License Agreement, dated July 29, 2016, by and betweenEmergent BioSolutions Inc. and Aptevo Therapeutics Inc.8-K10.8August 2, 2016001-37746 C 10.9 Aptevo Therapeutics Inc. 2016 Stock Incentive Plan8-K10.9August 2, 2016001-37746 C 10.10 Aptevo Therapeutics Inc. Converted Equity Awards Incentive Plan8-K10.10August 2, 2016001-37746 C 10.11 Aptevo Therapeutics Inc. Senior Management Severance Plan8-K10.11August 2, 2016001-37746 C 10.12 Form of Indemnity Agreement for directors and senior officers1010.9April 15, 2016001-37746 115 ExhibitNumber DescriptionFormExhibitFiling DateFile No.FiledHerewith10.13 Fourth and Battery Office Lease, dated as of April 28, 2003, by andbetween Emergent Product Development Seattle, LLC (as successor-in-interest to Trubion Pharmaceuticals, Inc. and Genecraft, Inc.) and SeligReal Estate Holdings Eight L.L.C. , or the Seattle Office Lease1010.12April 15, 2016001-37746 10.14 Seattle Office Lease Amendment, dated December 8, 20041010.13April 15, 2016001-37746 10.15 Seattle Office Lease Amendment, dated February 1, 20061010.14April 15, 2016001-37746 10.16 Seattle Office Lease Amendment, dated February 2, 20071010.15April 15, 2016001-37746 10.17 Seattle Office Lease Amendment, dated June 7, 20101010.16April 15, 2016001-37746 10.18 Seattle Office Lease Amendment, dated December 21, 20101010.17April 15, 2016001-37746 10.19 Seattle Office Lease Amendment, dated July 17, 20121010.18April 15, 2016001-37746 10.20 Seventh Amendment to Seattle Office Lease, dated December 5, 20141010.19April 15, 2016001-37746 †10.21 License and Co-Development Agreement, dated as of August 19, 2014,by and between Emergent Product Development Seattle, LLC andMorphoSys AG, or the MorphoSys Collaboration Agreement1010.20June 29, 2016001-37746 †10.22 First Amendment to MorphoSys Collaboration Agreement, dated June19, 20151010.21April 15, 2016001-37746 †10.23 Second Amendment to MorphoSys Collaboration Agreement, datedDecember 7, 20151010.22April 15, 2016001-37746 10.23 Third Amendment to MorphoSys Collaboration Agreement, datedDecember 12, 20168-K10.1December 15, 2016001-37746 †10.25 Amended and Restated License Agreement, dated as of November 28,2008, by and between Cangene Corporation (as successor-in-interestto Inspiration Biopharmaceuticals, Inc.) and The University of NorthCarolina at Chapel Hill, as amended on June 14, 20121010.23April 15, 2016001-37746 †10.26 CMC Commercial Supply (Manufacturing Services) Agreement, datedJune 17, 2011, between CMC ICOS Biologics, Inc. and AptevoBioTherapeutics LLC (as successor-in-interest to InspirationBiopharmaceuticals, Inc.)1010.24May 31, 2016001-37746 †10.27 Settlement and Amendment, dated November 20, 2012, Concerning aManufacturing Agreement dated December 2, 2005 and a CommercialSupply Agreement dated June 20, 2011 between CMC ICOSBiologics, Inc. and Aptevo BioTherapeutics LLC (as successor-in-interest to Inspiration Biopharmaceuticals, Inc.)1010.25May 31, 2016001-37746 †10.28 Supply Agreement, dated April 29, 2014, between AptevoBioTherapeutics LLC and Rovi Contract Manufacturing, S.L.1010.26May 31, 2016001-37746 †10.29 Manufacturing Services Agreement, dated May 27, 2015, AptevoBioTherapeutics LLC and Patheon UK Limited1010.27May 31, 2016001-37746 116 ExhibitNumber DescriptionFormExhibitFiling DateFile No.FiledHerewith10.30 Credit and Security Agreement, dated August 4, 2016 by and amongAptevo Therapeutics Inc., Aptevo Biotherapeutics LLC, AptevoResearch and Development LLC and MidCap Financial Trust, asagent, and the lenders from time to time party thereto.8-K10.1August 5, 2016001-37746 10.31 Fee Letter dated August 4, 2016 by and among Aptevo TherapeuticsInc., Aptevo Biotherapeutics LLC, Aptevo Research and DevelopmentLLC and MidCap Financial Trust, as agent.8-K10.2August 5, 2016001-37746 10.32 Third Amendment to License and Co-Development Agreement, datedas of December 12, 2016 by and between Aptevo Research andDevelopment LLC and MorphoSys AG.8-K10.1December 15,2016001-37746 21.1 Subsidiaries of Aptevo Therapeutics Inc.1021June 29, 2016001-37746 23.1 Consent of Ernst & Young LLP, Independent Registered PublicAccounting Firm X31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, asAdopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)and 15d-14(a) under the Securities Exchange Act of 1934, as AdoptedPursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X32.1* 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. X32.2* 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. X101.INS XBRL Instance Document X101.SCH XBRL Taxonomy Extension Schema Document X101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X101.DEF XBRL Taxonomy Extension Definition Linkbase Document X101.LAB XBRL Taxonomy Extension Label Linkbase Document X101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X *Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in anysuch filing.†Confidential treatment requested from the Securities and Exchange Commission as to certain portions, which portions have been omitted and filedseparately with the Securities and Exchange Commission.CManagement contract or compensatory plan.117Exhibit 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-333-213108) pertaining to the 2016Stock Incentive Plan and the Converted Equity Awards Incentive Plan of Aptevo Therapeutics Inc. of our report dated March 31,2017, with respect to the consolidated financial statements of Aptevo Therapeutics Inc. included in this Annual Report (Form 10-K)for the year ended December 31, 2016. /s/ Ernst & Young LLPSeattle, WashingtonMarch 31, 2017  EXHIBIT 31.1CERTIFICATIONI, Marvin L. White certify that: 1. I have reviewed this Annual Report on Form 10-K of Aptevo Therapeutics Inc.; 2. 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant'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 theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process, summarize and report financial information, and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. Date: March 31, 2017 By:/s/ Marvin White Marvin White President and Chief Executive Officer  EXHIBIT 31.2CERTIFICATIONI, Jeffrey G. Lamothe, certify that: 1. I have reviewed this Annual Report on Form 10-K of Aptevo Therapeutics Inc.; 2. 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscalquarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant'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 theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant's ability to record, process, summarize and report financial information, and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control overfinancial reporting. Date: March 31, 2017 By:/s/ Jeffrey G. Lamothe Jeffrey G. Lamothe Senior Vice President, Chief Financial Officer, andTreasurer  EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Aptevo Therapeutics Inc. (the “Company”) for the period ended December 31,2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Marvin L. White, ChiefExecutive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report to which this Certification is attached as Exhibit 32.1 fully complies with the requirements of Section 13(a) or 15(d) ofthe 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 ofthe Company. Date: March 31, 2017 By:/s/ Marvin White Marvin White President and Chief Executive Officer “This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commissionand is not to be incorporated by reference into any filing of Aptevo Therapeutics Inc. under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any generalincorporation language contained in such filing.”  EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Aptevo Therapeutics Inc. (the “Company”) for the period ended December 31,2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jeffrey G. Lamothe,Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report to which this Certification is attached as Exhibit 32.2 fully complies with the requirements of Section 13(a) or 15(d) ofthe 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 ofthe Company. Date: March 31, 2017 By:/s/ Jeffrey G. Lamothe Jeffrey G. Lamothe Senior Vice President, Chief Financial Officer, andTreasurer “This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commissionand is not to be incorporated by reference into any filing of _Aptevo Therapeutics Inc. under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any generalincorporation language contained in such filing.” 

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