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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 001-38630
Aridis Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
983 University Avenue, Bldg. B
Los Gatos, California
(Address of principal executive offices)
47-2641188
(I.R.S. Employer
Identification No.)
95032
(Zip Code)
Registrant’s telephone number, including area code: (408) 385-1742
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Name of exchange on which registered
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’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, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐
Non-accelerated filer ☒
Accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 2020 (which is the
last business day of registrant’s most recently completed second fiscal quarter) based upon the closing market price of such stock on the
Nasdaq Capital Market on that date, was approximately $49.6 million. For purposes of this disclosure, shares of common stock held by an
officer, a director and an affiliated shareholder have been excluded in that such persons may be deemed to be “affiliates” as that term is
defined under the Rules and Regulations of the Securities Exchange Act of 1934. This determination of affiliate status is not necessarily
conclusive.
On March 24, 2021, the registrant had 11,227,921 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2021 Annual Meeting of Stockholders are incorporated herein by reference in Part III
of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange
Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.
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Forward-Looking Statements
Part I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A.
Controls and Procedures
Item 9B
Other Information
Part III.
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Part IV.
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”), contains forward-looking statements that
involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All
statements other than statements of historical facts contained in this Annual Report are forward-looking
statements. You can identify forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or
the negative of these terms or other comparable terminology.
Our operations and business prospects are always subject to risks and uncertainties including, among
others:
•
the timing of regulatory submissions;
•
our ability to obtain and maintain regulatory approval of our existing product candidates and any
other product candidates we may develop, and the labeling under any approval we may obtain;
•
approvals for clinical trials may be delayed or withheld by regulatory agencies;
•
preclinical and clinical studies will not be successful or confirm earlier results, meet expectations,
meet regulatory requirements, or meet performance thresholds for commercial success;
•
risks relating to the timing and costs of clinical trials, the timing and costs of other expenses;
•
risks associated with obtaining third-party funding;
•
risks associated with delays, increased costs and funding shortages caused by or resulting from the
COVID-19 pandemic;
•
management and employee operations and execution risks;
•
loss of key personnel;
•
competition;
•
risks related to market acceptance of products;
•
intellectual property risks;
•
assumptions regarding the size of the available market, benefits of our products, product pricing, and
timing of product launches;
•
risks associated with the uncertainty of future financial results;
•
our ability to attract collaborators and partners; and
•
risks associated with our reliance on third-party organizations.
Any forward-looking statements in this Annual Report reflect our current views with respect to future
events or to our future financial performance and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these forward-looking statements.
Factors that may cause actual results to differ materially from current expectations include, among other
things, those listed under Part I, Item 1A. “Risk Factors” and elsewhere in this Annual Report. Given these
uncertainties, you should not place undue reliance on these forward-looking statements. Except as required
by law, we assume no obligation to update or revise these forward-looking statements for any reason, even
if new information becomes available in the future.
This Annual Report also contains estimates, projections and other information concerning our industry,
our business, and the markets for certain diseases, including data regarding the estimated size of those
markets, and the incidence and prevalence of certain medical conditions. Information that is based on
estimates, forecasts, projections, market research or similar methodologies is inherently subject to
uncertainties and actual events or circumstances may differ materially from events and circumstances
reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market
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and other data from reports, research surveys, studies and similar data prepared by market research firms
and other third parties, industry, medical and general publications, government data and similar sources.
Risk Factor Summary
Our business is subject to significant risks and uncertainties that make an investment in us speculative
and risky. Below we summarize what we believe are the principal risk factors but these risks are not the
only ones we face, and you should carefully review and consider the full discussion of our risk factors in the
section titled “Risk Factors”, together with the other information in this Annual Report on Form 10-K. If
any of the following risks actually occurs (or if any of those listed elsewhere in this Annual Report on Form
10-K occur), our business, reputation, financial condition, results of operations, revenue, and future
prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we
currently believe are not material, may become important factors that adversely affect our business.
Risks Relating to Our Financial Position and Need for Additional Capital
We expect to continue to incur increasing net losses for the foreseeable future, and we may never
achieve or maintain profitability.
Our consolidated financial statements include an explanatory paragraph that expresses substantial
doubt about our ability to continue as a going concern, indicating the possibility that we may not be able to
operate in the future.
Available cash resources may be insufficient to provide for our working capital needs beyond the next
twelve months.
We will require substantial additional capital in the future. If additional capital is not available, we
will have to delay, reduce or cease operations.
Risks Relating to Clinical Development and Commercialization of Our Product Candidates
If we fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to
successfully commercialize our product candidates, our business would be harmed and the value of our
securities would decline.
We, or our collaborators, may face delays in completing our clinical trials, and may not be able to
complete them at all.
Our development of a COVID-19 therapeutic candidate is at an early stage and we may not be able to
successfully develop an effective therapeutic to treat COVID-19 in a timely manner to maximize the
commercial market opportunity, if at all.
If we encounter difficulties enrolling patients in our clinical trials, our clinical trials could be delayed
or otherwise adversely affected.
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of
earlier studies and clinical trials may not be predictive of future trial results.
Risks Relating to Manufacturing Activities
We have no experience manufacturing our product candidates at commercial scale, and there can be no
assurance that our product candidates can be manufactured in compliance with regulations at a cost or in
quantities necessary to make them commercially viable. There can be no assurance that any contract
manufacturing facilities will be acceptable for licensure by regulatory authorities or that we can contract to
build acceptable facilities.
Our contract manufacturers are subject to significant regulation with respect to manufacturing of our
products.
We rely on relationships with third-party contract manufacturers and raw material suppliers, which
limits our ability to control the availability of, and manufacturing costs for, our product candidates.
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A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and
adversely affect our business and operations.
Risks Relating to Our Joint Venture Agreement
If our joint venture with Hepalink is not successful or if we fail to realize the benefits we anticipate
from such joint venture, we may not be able to capitalize on the full market potential of our products in
China, Hong Kong, Macau and Taiwan.
Risks Relating to Competitive Factors
We compete in an industry characterized by extensive research and development efforts and rapid
technological progress. New discoveries or commercial developments by our competitors could render our
potential products obsolete or non-competitive.
Our competitors may develop and market products that are less expensive, more effective, safer or
reach the market sooner than our product candidates, which may diminish or eliminate the commercial
success of any products we may commercialize.
Risks Relating to our Reliance on Third Parties
We rely on third parties to conduct our preclinical studies and our clinical trials and to store and
distribute our products for the clinical trials we conduct. If these third parties do not perform as
contractually required or expected, we may not be able to obtain regulatory approval for our product
candidates, or we may be delayed in doing so.
Risks Relating to Regulation of Our Industry
The biopharmaceutical industry is subject to significant regulation and oversight in the United States,
in addition to approval of products for sale and marketing. We may be subject, directly or indirectly, to
federal and state healthcare fraud and abuse laws, transparency, health information privacy and security
laws and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with
such laws, we could face substantial penalties.
Changes in health care reform policies could adversely affect our business.
Risks Relating to Protecting our Intellectual Property
If we are unable to protect our proprietary rights or to defend against infringement claims, we may not
be able to compete effectively or operate profitably.
If we cannot meet requirements under our license and sublicense agreements, we could lose the rights
to our products, which could have a material adverse effect on our business.
Risks Related to Owning our Common Stock
The price of our common stock may fluctuate substantially.
Our 10% or more stockholders and management own a significant percentage of our stock and will be
able to exercise significant influence over matters subject to stockholder approval.
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Unless the context requires otherwise, references to “Aridis,” “Company,” “we,” “us” or “our” refer
to Aridis Pharmaceuticals, Inc., a Delaware corporation and its subsidiaries.
PART I
Item 1. Business
Overview
We are a late-stage biopharmaceutical company focused on the discovery and development of targeted
immunotherapy using fully human monoclonal antibodies, or mAbs, to treat life-threatening infections.
mAbs represent a fundamentally new treatment approach in the infectious disease market and are designed
to overcome key issues associated with current therapies, including drug resistance, short duration of
response, tolerability, negative impact on the human microbiome, and lack of differentiation between
treatment alternatives. Our proprietary product pipeline is comprised of fully human mAbs targeting
specific pathogens associated with life-threatening bacterial and viral infections, primarily hospital-acquired
pneumonia, or HAP, ventilator-associated pneumonia, or VAP, cystic fibrosis, and COVID-19. Three of our
product candidates have exhibited promising preclinical data and clinical data. Our lead product candidate,
AR-301, targets the alpha toxin produced by gram-positive bacteria Staphylococcus aureus, or S. aureus, a
common pathogen associated with HAP and VAP. Current clinical development activities are focused on
AR-301, AR-712, and AR-501.
TM
TM
The majority of candidates from our product pipeline are derived by employing our differentiated
antibody discovery platform called MabIgX and λPEX . This platform is designed to comprehensively
screen the B-cell repertoire and isolate human antibody-producing B-cells from individuals who have either
successfully overcome an infection by a particular pathogen or have been vaccinated against a particular
pathogen. We believe that B-cells from these patients are the ideal source of highly protective and
efficacious mAbs which can been administered safely to other patients. Recently we have announced the
development of a novel antibody discovery and production platform technology called λPEX . This
technology complements and further extends the capabilities of MabIgX to quickly screen large number of
antibody producing B-cells from patients and generation of high mAb producing mammalian production cell
line at a speed not previously attainable. As a result, we can significantly reduce time for antibody
discovery and manufacturing compared to conventional approaches.
TM
Our initial clinical indication for AR-301 is for adjunctive therapeutic treatment with standard of care,
or SOC, antibiotics for HAP and VAP. Mortality and morbidity associated with HAP and VAP in the
intensive care units, or ICUs, remain high despite aggressive treatment with SOC antibiotics. Current SOC
antibiotics used to treat HAP and VAP typically involve a combination of several broad spectrum antibiotics
that are prescribed empirically at the start of treatment. The specific empirical antibiotic regimens that are
prescribed vary widely among physicians, and generally results in modest clinical benefits due to a number
of reasons, including the frequent mismatch of the antibiotics regimen to the etiologic agent and/or infection
by an antibiotic resistant strain. Recently, rapid diagnostic tests have been introduced that allow the
identification of infection-causing agents within hours. These increasingly common tests allow physicians
to prescribe a more appropriate antibiotics regimen, and eventually targeted anti-infectives such as AR-301
and AR-101 earlier in the course of infection. This evidenced-based treatment approach is designed to
remove issues associated with empirical broad-spectrum antibiotics such as inappropriate antibiotic
selection and promotion of antibiotic resistance. In contrast to the lack of differentiation among SOC
antibiotics, mAbs are highly differentiated from SOC antibiotics in mechanism of action, pharmacokinetic
and pharmacodynamic profile, and thus are well suited to complement antibiotics when used together. As an
adjunctive treatment, AR-301 has the potential to improve the effectiveness of SOC antibiotics and cover
antibiotic resistant S. aureus strains, while not competing directly with antibiotics. To emphasize the
benefits of our product candidates as an adjunctive therapy, we design clinical trials based on superiority
endpoints.
HAP and VAP pose serious challenges in the hospital setting, as SOC antibiotics are becoming
inadequate in treating infected patients. There are approximately 3,000,000 cases of pneumonia reported in
the U.S. per year and approximately 628,000 annual cases of HAP and VAP caused by gram negative
bacteria and MRSA (DRG, 2016). These patients are typically at high risk of mortality, which is
compounded by other life-threatening co-morbidities and the rise in antibiotic resistance. Epidemiology
studies estimate that
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the probability of death attributed to S. aureus ranges from 29% to 55% and P. aeruginosa ranges from 24%
to 76%. In addition, pneumonia infections can prolong patient stays in ICUs and the use of mechanical
ventilation, creating a major economic burden on patients, hospital systems and payors. For example, ICU
cost of care for a ventilated pneumonia patient is approximately $10,000 per day in the U.S., and the
duration of ICU stays are typically twice that of a non-ventilated patient (Infection Control and Hospital
Epidemiology. 2010, vol. 31, pp. 509-515). The average cost of care per pneumonia patient is approximately
$41,250 which increases 86% for HAP/VAP patients to approximately $76,730. We estimate that our three
clinical mAb candidates have an addressable market of $25 billion and the potential to address
approximately 325,000 HAP and VAP patients in the U.S.
Our proprietary pipeline is primarily focused on severe lung infections and is comprised of six wholly-
owned product candidates which are highlighted below.
Figure 1
Our Product Pipeline
•
AR-301 is a fully human immunoglobulin 1, or IgG1, mAb targeting the gram-positive bacteria
S. aureus alphatoxin. We are developing AR-301 initially as an adjunctive immunotherapy in
combination with SOC antibiotics to treat acute pneumonia caused by S. aureus infection. We filed
an Investigational New Drug Application, or IND for AR-301 in June 2015. We completed a
randomized, double-blind, placebo-controlled Phase 2a trial in 48 HAP and VAP patients. The trial
met its primary endpoint of tolerability. AR-301 was generally well tolerated with no serious adverse
events, or SAEs, related to the product candidate, and its pharmacokinetic properties were consistent
with that of human IgG1. In addition, the trial showed trends towards benefit in various patient
benefits related endpoints, including improvements in time on ventilator for VAP patients,
microbiological eradication rate, time to microbiological eradication, and overall ICU and hospital
stays for AR-301 plus SOC antibiotics compared to antibiotics alone. We initiated a Phase 3 pivotal
trial in VAP patients in January 2019. AR-301 has been granted Fast-Track designation by the FDA,
orphan drug designation in the EU, and has filed for orphan drug designation in the U.S.
•
AR-101 is a fully human immunoglobulin M, or IgM, mAb targeting the gram-negative bacteria P.
aeruginosa serotype O11. We filed an Investigational Medicinal Product Dossier, or IMPD, with the
EU in October 2004. We have completed a Phase 1 trial in healthy adults and a Phase 2a trial in 27
HAP and VAP patients. In the Phase 2a trial, AR-101 plus SOC antibiotics was generally well
tolerated. The per protocol population demonstrated numeric improvement over standalone
antibiotics across multiple clinical endpoints, including initial clinical resolution rate, time to initial
clinical resolution,
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•
•
•
•
•
•
time on ventilator or in ICU and all-cause mortality was seen. AR-101 has been granted orphan drug
designation in the U.S. and in the EU.
AR-501 (Panaecin) is a broad spectrum small molecule anti-infective we are developing in addition
to our targeted mAb product candidates. This product candidate is currently in a Phase 1/2a clinical
study and is funded by the Cystic Fibrosis Foundation. AR-501 is administered as an inhalable
aerosol to treat lung infections in cystic fibrosis patients. Preclinical studies have shown that mice
infected with P. aeruginosa can be rescued with a single inhalation exposure of aerosolized AR-501.
We filed the IND, application and subsequently initiated a Phase 1/2a trial in December 2018. The
Phase 1 portion of the clinical study in healthy adults has been completed and results were reported
in 2020. We expect to initiate a phase 2a clinical study in cystic fibrosis patients in the first half of
2021. AR-501 has been granted Fast-Track and Qualified Infectious Disease Product (QIDP)
designations by the FDA.
AR-712 is a cocktail of two fully human immunoglobulin 1, or IgG1, mAbs targeting the COVID-19
virus (i.e. SARS-COV-2 coronavirus) receptor binding domain. We are developing AR-712 as an
inhalable aerosol to treat mild to moderate non-hospitalized COVID-19 patients. Preclinical data
showed that the mAbs potently neutralized SARS-CoV-2 wildtype virus and its variants. We are
planning to initiate a Phase 1/2 clinical trial for AR-712 in the second half of 2021.
AR-701 is a cocktail of two fully human immunoglobulin 1, or IgG1, mAbs targeting the COVID-19
virus (i.e. SARS-COV-2 coronavirus) receptor binding domain. AR-701 is intended to treat moderate
to severe hospitalized COVID-19 patients. This candidate is in discovery.
AR-401 is our mAb discovery program aimed at treating infections caused by Acinetobacter
baumannii, a gram-negative bacterium that is increasingly prevalent in blood stream, lung, and skin
infections. We used our MabIgX technology to identify novel targets and select several fully human
mAb candidates that bind to outer membrane proteins of the bacteria. We intend to select a
development candidate for additional preclinical studies.
AR-105 is a fully human IgG1 mAb targeting the gram-negative bacteria P. aeruginosa. This program
is licensed to Shenzhen Hepalink Pharmaceutical Group Co., Ltd. and the Serum Institute of India
Private Limited, with whom we are currently in discussions with on possible further development.
AR-201 is a fully human IgG1 mAb with high affinity for respiratory syncytial virus, or RSV,
glycoprotein F and neutralizes diverse clinical isolates of RSV. In in vivo preclinical studies, AR-201
has shown to be 12-fold more potent than Synagis in a head-to-head comparison study, a currently
marketed drug for pediatric RSV. AR-201 has also been shown to bind to RSV strains that are
resistant to Synagis. This program is licensed exclusively to the Serum Institute of India.
To date, we have raised over $116 million in public and private investments. Furthermore, we have
been able to augment our own financial resources by obtaining approximately $51 million of non-dilutive
awards and grants, including approximately $32 million from the Department of Health and Human
Services, or DHHS, the National Institute of Health, or NIH, and the Biomedical Advanced Research and
Development Authority, or BARDA, and approximately $12 million from the Department of Defense,
PATH/Gates Foundation, the Cystic Fibrosis Foundation and other strategic research and development
collaborations. We believe that our ability to attract significant financial investments and grant funding
underscores the recognized need for new anti-infective products and the strength of our product candidate
portfolio.
We have assembled a senior management team with substantial product development experience and a
successful track record of navigating complex drug development and regulatory pathways. Our management
team has over 175 years of combined drug development experience from proven biopharmaceutical
companies, such as Abgenix, Inc. Aviron, Genentech, Inc., GlaxoSmithKline plc, Celgene Corporation,
MedImmune (AstraZeneca), and Novartis AG among others, and has contributed to the development and
launch of products with multi-billions in annual sales.
Strategy
Our goal is to become a global leader in anti-infective immunotherapy by discovering, developing and
commercializing best-in-class mAbs with the potential to significantly improve upon SOC treatments for
life-threatening infections. Key elements of our strategy are as follows:
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•
•
•
•
•
•
Leverage the favorable regulatory environment in infection diseases to expedite approval pathways for our
product candidates. We intend to closely interact with the FDA, the European Medicines Agency, or
the EMA, and other regulatory agencies to create efficient clinical development plans and expedite
approval pathways for our product candidates. For development outside of the U.S., we will evaluate
potential regional collaborations which may lead to more rapid and cost-effective path to market
compared to a standalone strategy. Consistent with this strategy, we recently announced a licensing
agreement with Serum AMR Products, an affiliate of Serum International BV (SIBV) and the Serum
Institute of India, Ltd. The agreement grants Serum AMR a license to multiple programs from us for
®
certain limited territories and access our MabIgX platform technology for asset identification and
selection. As with our prior out-licensing transaction involving several of our mAb programs to
Shenzhen Hepalink Pharmaceuticals for the China territory, this transaction allows for the
introduction of innovative anti-infective therapies that are effective against antibiotic resistant
infections to a broader area of the world where antimicrobial resistance is particularly high.
Obtain favorable regulatory designations that will fast track our product candidates. Regulatory
designations can provide numerous benefits for our product candidates, including expedited
development pathway and review, market exclusivity, premium pricing and faster product adoption
among others. We plan to obtain QIDP, Fast-track, and Breakthrough Therapy designations for our
existing and future product candidates to enhance their likelihood of approval and commercial
success. To date, we have successfully applied for and received Fast Track Designation for AR-301
and AR-105, orphan drug designation in the U.S. for AR-101 and orphan drug designation in the EU
for AR-301 and AR-101. We have obtained QIDP, and Fast-track designations for AR-501.
Demonstrate pharmacoeconomic benefits of our product candidates. We aim to change the treatment
paradigm of infectious disease by focusing on the pharmacoeconomic benefits of our product
candidates. We utilize superiority clinical trial designs rather than non-inferiority designs typically
used by antibiotics, as positive outcomes from such trials can better demonstrate efficacy and safety
advantages of our product candidates. We target indications where our product candidates may
address drivers of high cost of care in hospital settings, such as time on ventilator, ICU stay and
hospital stay. In addition, we will continue to invest resources in market research to better identify
and quantify pharmacoeconomic benefits of our product candidates.
Implement a targeted commercialization strategy. Our core therapeutic indications can be addressed
with a relatively small, specialized sales organization. As such, we intend to build and operate our
own dedicated sales force to directly market our products in the U.S., to hospitals. For geographies
outside of the U.S., we may seek commercial partners with more regional expertise to maximize the
commercial value of our products.
Employ the advantages of our λPEX and MabIgX antibody discovery platforms as a basis to expand our
product pipeline. We believe our λPEX and MabIgX platforms offer us distinct advantages over our
peers in terms of new product candidate discovery and development. We can screen and identify
functionally optimized B-cells from patients, and manufacture mAbs, faster than traditional
technologies. Our differentiated approach reduces mAb discovery and manufacturing time compared
to traditional technologies. We believe that using our technology, clinical drug supplies can be
manufactured within one year from screening the patient’s blood. We intend to continue to use our
platform technologies to generate new product candidates for bacterial, viral, and other infectious
diseases where mAb immunotherapy has the potential to address deficiencies of current treatment
alternatives.
Continue to pursue grant funding and strategic collaborations. To date, we have been awarded
approximately $51 million in non-dilutive grant funding. We believe that the industry’s need for
novel products, such as our product candidates, makes non-dilutive funding from governmental
agencies and research organizations more accessible. Furthermore, our robust pipeline of wholly-
owned product candidates and highly productive discovery platform offer opportunities for value-
accretive partnerships. We will continue to pursue grant funding and strategic collaborations in
addition to traditional financings.
Market Opportunities
Our mission is to improve the treatment of infectious diseases, particularly the deficiencies of
conventional antibiotics. It is widely recognized that there is a growing problem of antibiotic resistance at a
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time when the pipeline of antibiotics is dwindling and much of the development activity currently ongoing
is devoted to modifications of existing classes of antibiotics. We believe this antibiotic strategy has merely
delayed rather than solved the underlying resistance problem as evidenced by the spread of drug resistant
bacteria, particularly in the hospital settings. The drug resistance and adverse impact on the human
microbiome, particularly the gut microbial flora, brought about by frequent use of broad spectrum
antibiotics increased the need for targeted, narrow spectrum anti-infectives that counteract only the etiologic
bacterial agent. The ability to identify the infection-causing agent has significantly improved in recent years
because of the availability and proliferation of rapid diagnostic tests. These diagnostics have enabled the
identification of pathogen profiles within hours of patient sample collection, thus providing physicians with
the rapid, precise information necessary to make more informed treatment decisions. Given the identity of
the specific pathogen responsible for an infection, we believe the physician is more likely to prescribe a
targeted anti-infective, rather than a broad-spectrum antibiotic. Therefore, we believe that the treatment of
infectious diseases will see a paradigm shift from broad spectrum antibiotic utilization to narrow, targeted
anti-infectives. Such paradigm shift is similar to that observed in oncology starting in the early 2000s, from
broad acting chemotherapies to targeted immune-oncology mAbs. Therefore, we believe that the
opportunity for application of mAbs in infectious diseases is highly attractive.
The current small molecule antibiotics market is crowded, highly competitive, and lacking in product
differentiation. The lack of antibiotic product differentiation is traced to the usage of non-inferiority clinical
trial designs that is common practice for most of the antibiotics that have been marketed to date. No new
class of antibiotic has been introduced to the market within the last two decades, which further heightens the
need for new anti-infectives. In addition to significant market differentiation, mAbs may offer substantially
less market competition, and higher barrier to entry. Unlike antibiotics, mAbs have a more predictable and
attractive safety profile and are designed to kill via an immunological mechanism of action that is different
from the mechanisms of action of all antibiotics and mechanisms of antibiotic resistance. Therefore, so long
as it binds to such bacteria or their toxins, mAbs are likely unaffected by the rise in antibiotic resistant
bacteria and will remain effective against antibiotic resistant bacteria. mAbs also have a dosing frequency of
once or twice a month and may require only a single administration for treatment of hospital acquired
pneumonia. Our mAbs will be used as an adjunct therapy in combination with antibiotics, so they will not
directly compete with antibiotics. By improving the outcome in terms of mortality and reducing the time to
clinical cure and length of hospital and ICU stay, mAbs offer both a medical benefit to the patient and an
economic benefit to the hospital. Our clinical study designs utilize superiority in primary end points, which
will allow for clear demonstration of measurable clinical benefits and product differentiation.
We are initially focused on respiratory infections in the ICU settings, particularly bacterial pneumonia.
In the U.S., there are approximately 628,000 cases of HAP and VAP (DRG 2016). HAP due to methicillin-
resistant Staphylococcus aureus, or MRSA, infections results in substantial loss of life with an annual
worldwide incidence of approximately 200,000 patients (Decision Resources, 2016 data) and mortality rates
as high as 50% depending on the patient population and treatment regimen (Methicillin-Resistant
Staphylococcus Aureus, Decision Resources, 2016). Mechanical Ventilation for VAP patients costs over
$30 billion annually in the U.S. Infections due to MRSA represent a high-value segment of the overall
antibiotics market. According to this report, the worldwide market for existing therapies for MRSA
infections was over $800 million in 2015. The progressively aging population is expected to increase the
number of MRSA infections that result in HAP. Moreover, MRSA infections are associated with
significantly longer hospital stays, repeated hospitalizations and increased healthcare costs. Currently, the
median hospital stay of a patient with VAP is 29 days, and the average length of ICU stay is 19 days. The
median total hospitalization costs for a VAP patient is approximately $198,000. Current SOC antibiotics for
MRSA pneumonia is dominated by five antibiotics: Linezolid, Daptomycin, Vancomycin, Ceftaroline and
Tigecycline, which combined have approximately 90% market share. There is a significant need for new
anti-MRSA agents given the S. aureus resistance rate of 31% to 53%. We believe that the addition of AR-
301 to SOC antibiotics has the potential to improve clinical outcome and could be effective in patients with
MRSA infections.
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US
EU
Japan
Figure 2
Potential Addressable Patient Population of our mAb
AR-301
Potential
Addressable
Patient Population
HAP/VAP
Gram (-)
HAP/VAP/HCAP
AR-101
Potential
Addressable
Patient Population
(approximately)
(approximately)
(approximately)
251,600
53,750
90,000
872,000
666,000
334,000
30,790
40,960
19,800
Pseudomonas infection is caused by strains of bacteria found widely in the environment. P. aeruginosa
is one of the most common gram-negative bacteria that is associated with a number of human infections.
Drugs targeting gram-negative bacteria must cross both the inner and outer membranes of the bacterial cell,
as compared to those directed against gram-positive bacteria, which must only cross one cell membrane. As
a result, gram-negative bacteria tend to be more resistant to antibiotics and the body’s own immune system.
Serious Pseudomonas infections usually occur in people in the hospital and/or with weakened immune
systems. Patients in hospitals, especially those on breathing machines, those with devices such as catheters,
and patients with wounds from surgery or from burns are potentially at risk for serious, life-threatening
infections. Infections of the blood, pneumonia and infections following surgery can lead to severe illness
and death. Pseudomonas infections are generally treated with antibiotics. Unfortunately, in hospitalized
patients, Pseudomonas infections, such as those caused by many other hospital bacteria, are becoming more
difficult to treat because of increasing antibiotic resistance. Multidrug-resistant Pseudomonas can be deadly
for patients in critical care. Figure 3 shows the potential addressable patient population of our three clinical
candidates in the US, Europe and Japan (DRG 2016 epidemiological data). According to the Centers for
Disease Control and Prevention, or CDC, an estimated 51,000 healthcare-associated P. aeruginosa
infections occur in the U.S. each year. More than 6,000, or 13%, of these are multidrug-resistant, leading to
roughly 400 deaths per year. Multidrug-resistant Pseudomonas was given a threat level of “serious threat” in
the CDC’s report in 2013 titled, Antibiotic Resistance Threats in the United States.
Cephalosporin and beta lactamases are the most commonly prescribed first line therapy to treat
P. aeruginosa pneumonia, but these drugs have a resistance rate of approximately 30%. The lack of new
anti-infective agents and the difficulty of developing new anti-infectives to gram-negative pathogens such
as P. aeruginosa has been a public health challenge (Gram Negative Infections, Decision Resources, 2009).
Unfortunately, many of the new anti-infectives currently in development are modifications of existing
antibiotics, which likely will be susceptible to resistance through the same mechanisms as current therapies.
The need is especially acute for P. aeruginosa, which harbors multi-drug resistant plasmids and is the target
of few new drugs under development. As is the case with HAP caused by S. aureus, there is substantial
mortality associated with HAP caused by P. aeruginosa and an annual worldwide incidence of
approximately 450,000 patients (Gram Negative Infections, Decision Resources, 2009). This report
estimated the worldwide market for existing therapies for HAP due to Gram-negative infections to be
$2.0 billion in 2016 and projected it to increase to $3.7 billion by 2026. Additionally, the markets for lung
and blood-born infection such as sepsis are characterized by patients who either have a disruption of the
normal protective barrier to infection or have an underlying chronic disease such as cystic fibrosis, non-
cystic fibrosis bronchiectasis and chronic obstructive pulmonary disease, or COPD, that leaves the lungs
and systemic organs in a weakened state and susceptible to infections by P. aeruginosa.
Cystic Fibrosis with Pseudomonas aeruginosa Infection
There are more than 70,000 patients with cystic fibrosis worldwide. 80% of these patients present with
chronic polymicrobial infections, particularly P. aeruginosa infection. We believe the medical need and
market potential for an anti-infective therapeutic that can be given to cystic fibrosis patients chronically is
substantial. The current market for inhaled antimicrobials for cystic fibrosis, based on recent combined sales
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figures for TOBI (tobramycin) and Cayston (aztreonam), is approximately $600 million worldwide. Existing
therapies such as aminoglycoside antibiotics lead to a temporary improvement in bacterial load, but
ultimately 80% to 95% of cystic fibrosis patients succumb to respiratory failure due to chronic P.
aeruginosa infection and airway inflammation. P. aeruginosa is the most significant pathogen, with the
majority of cystic fibrosis patients becoming chronically infected by the age of 18 years.
COVID-19 pandemic
The ongoing pandemic of coronavirus disease 2019 (COVID-19) is caused by severe acute respiratory
syndrome coronavirus 2 (SARS-CoV-2). Worldwide as of February 2021, more than 111 million cases have
been confirmed, with more than 2.46 million deaths attributed to COVID-19. Symptoms of COVID-19 are
highly variable, ranging from none to life-threatening illness. The virus spreads mainly through the air when
people are near each other. Infection generally lasts for up to two weeks and transmission from an infected
person occurs as they breathe, cough, sneeze, or speak. There are several highly efficacious vaccines that
are marketed in different regions of the world. In terms of antiviral treatment, two monoclonal antibody-
based therapies are available in the US, indicated for early use in cases thought to be at high risk of
progression to severe disease. The antiviral remdesivir is also available as another treatment option.
However, it is not recommended for people needing mechanical ventilation, and is discouraged altogether
by the World Health Organization (WHO) due to limited evidence of its efficacy. Vaccination campaigns are
being implemented across the world, with the expectation that it will require one to two years from now to
reach the peak coverage of COVID-19 vaccination worldwide. At peak vaccination coverage, surveys have
shown that up to a third of the world’s population will remain unvaccinated and approximately an additional
10% of the population who are vaccinated will not be adequately protected. Because SARS-CoV-2 is
expected to remain endemic for years to come, the above population remains at-risk of contracting COVID-
19. Currently, the COVID-19 infection rate in the U.S. is approximately 6% of the population, which
suggests 6% of 98.4 million who are unvaccinated could be infected or approximately 6 million. Therefore,
there is a substantial addressable patient population who will be in need of effective therapeutic
intervention.
Our Product Candidates
mAbs represent a fundamentally new immunologic approach for treating bacterial infections that can
potentially overcome the problems of toxicity and resistance that may occur with traditional antibiotics
when they are used long-term in individual patients and pervasively across patient populations. Our product
portfolio consists of candidates that have novel mechanisms of action that differ from that of traditional
antibiotics and includes five mAb programs, most are discovered using our MabIgX platform technology,
and one broad spectrum small molecule anti-infective.
AR-301
Our lead product candidate, AR-301 is a fully human mAb of IgG1, for the treatment of lung infections
resulting from S. aureus including MRSA strains. We are developing AR-301 as an adjunctive therapy with
SOC antibiotics to treat HAP and VAP, which is in contrast to other mAb programs currently under
development for prevention of HAP and VAP. AR-301 was discovered by screening the B-cell immune
response repertoire generated against S. aureus infection. It has received Fast-Track designation in the U.S.,
Orphan status in the EU and has advanced into a Phase 3 pivotal trial.
We completed a Phase 2a clinical trial with AR-301 plus SOC antibiotics compared to SOC antibiotics
alone to treat HAP and VAP caused by S. aureus. AR-301 is targeted against S. aureus alphatoxin, which is
a toxin produced by most S. aureus strains to cause destruction of human cells and tissues, and in mouse
models is thus effective against S. aureus infections whether or not the bacteria are resistant to conventional
antibiotics. We believe AR-301 has the potential to positively impact the outcome of S. aureus infections in
patients by improving survival rates and/or shortening the duration of overall hospital stays, the length of
time a patient requires mechanical ventilation, or the time a patient spends in the ICU.
We initiated the first of two Phase 3 pivotal trials in VAP patients in January 2019, which is currently
ongoing.
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Background and Mechanism of Action
AR-301 was discovered by screening B-cell lymphocytes from a patient with a confirmed S. aureus
infection. AR-301 binds to alphatoxin with high affinity and prevents its assembly into an active complex,
which prevents alphatoxin-mediated breakdown of cell membranes, or lysis, of erythrocytes, human lung
cells and immune cells such as lymphocytes (see Figure 3 below). This prevention of killing of host cells, in
turn, may protect the patient from further progression of pneumonia disease and systemic infections caused
by S. aureus. During infection and active proliferation, S. aureus is metabolically more virulent, geared
toward higher toxin production than during its more sessile colonization stage. In contrast to other programs
targeting S. aureus colonization, AR-301 targets the active, disease causing infection stage. There is no
commercially available product that specifically neutralizes the pathogenic effects brought about by S.
aureus toxins. We believe that this mechanism of action complements the bacterial killing properties of
many conventional antibiotics, essentially neutralizing the bacterial toxins left behind following antibiotic-
mediated killing. Additional indications for AR-301 may include any S. aureus infection, particularly
surgical site infections, blood stream infections, endocarditis, and skin and soft tissue infections such as
diabetic ulcers and non-healing wounds.
Figure 3
AR-301’s Mechanism of Action
Clinical Development Summary.
We completed a randomized, double-blind, placebo-controlled, active comparator, ascending dose
Phase 2a clinical trial to assess the safety, tolerability, pharmacokinetics, efficacy and pharmacodynamics of
a single intravenous administration of AR-301 plus SOC in patients with severe pneumonia caused by
S. aureus (Francois, B. et al., 2018. Intensive Care Medicine journal, in-press). The SOC regimens were the
physicians’ choice and were based on the individual clinical site’s prescribing practice. Forty-eight patients
were enrolled in the study. Six patients enrolled in the first cohort (1 mg/kg AR-301 plus SOC), eight in the
second cohort (3 mg/kg AR-301 plus SOC), ten in the third cohort (10 mg/kg AR-301 plus SOC) and eight
in the fourth cohort (20 mg/kg AR-301 plus SOC). An additional 16 patients received placebo plus SOC as
an active control. This Phase 2a clinical trial included 31 sites located across Belgium, France, Spain, the
United Kingdom, and the U.S. and was designed primarily to address the safety and pharmacokinetics of
AR-301. The drug was generally well tolerated. In exploratory analysis of the VAP subgroup of 25 patients,
numeric clinical improvement of antibody treated patients over placebo were observed in time to extubation.
Additionally, patients treated with AR-301 exhibited trends toward a higher rate of microbiological
eradication, and reduction in number of hospital or ICU days.
Phase 2a Safety and Pharmacokinetics.
Data from the Phase 2a clinical trial suggest that AR-301 was well tolerated as a treatment for severe
pneumonia due to S. aureus when used as directed and in addition to antibiotics. Few (2.8%) adverse events,
or AEs, and no SAEs were deemed related to AR-301 treatment. A total of 36 SAEs were observed, which
are listed as follows: septic shock (3 patients or approximately 6.3% of patients), anaemia (3 patients),
bacteraemia (2 patients or approximately 4.2% of patients), sepsis (2 patients), acute respiratory failure
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(2 patients), hypoxia (2 patients), pancreatic abscess (1 patient or approximately 2.1% of patients),
pneumonia (1 patient), carbon dioxide increase (1 patient), gamma-glutamyltransferase increase (1 patient),
platelet count increase (1 patient), abnormal prothrombin level (1 patient), duodenal ulcer (1 patient),
epistaxis (1 patient), hypoventilation (1 patient), pleurisy (1 patient), pulmonary embolism (1 patient),
haemodynamic instability (1 patient), hypotension (1 patient), shock haemorrhagic (1 patient), superior vena
cava syndrome (1 patient), vena cava thrombosis (1 patient), cardiac arrest (1 patient), coronary artery
stenosis (1 patient), ventricular tachycardia (1 patient), multi-organ failure (1 patient), pyrexia (1 patient),
hepatic failure (1 patient), hepatocellular injury (1 patient), hypoalbuminaemia (1 patient), malnutrition (1
patient), heparin-induced thrombocytopenia (1 patient), coma (1 patient), peripheral motor neuropathy (1
patient), renal failure acute (1 patient), renal failure chronic (1 patient), renal tubular necrosis (1 patient),
post procedural haemorrhage (1 patient) and subdural haematoma (1 patient). Immunogenicity was observed
in one subject, with no related adverse event. No significant difference in mortality was observed between
groups. There were six deaths in the trial, none of which were deemed related to AR-301. Furthermore, the
overall mortality observed (8.5%) in this small sample size study was very low when compared to historic
published references. The pharmacokinetic, or PK, profile of AR-301 is consistent with that of a human
IgG1mAb, with a plasma half-life of 23 to 31 days and supports a single-dose administration for the
pneumonia indication (Figure 4).
Figure 4
Pharmacokinetics Profile of AR-301
Phase 2a Clinical Efficacy.
We assessed multiple endpoints of clinical improvement including time to extubation. Time intubated
to day 28 showed a decrease in the length of time patients who were treated with AR-301 plus SOC
remained intubated as compared to those receiving placebo and SOC. When the subset of 25 patients with
VAP was assessed, a Kaplan-Meyer analysis of time to extubation showed a separation of the group of
patients treated with AR-301 plus SOC as compared to those treated with placebo plus SOC (see Figure 5).
In the same subgroup of VAP patients, ventilation time was reduced numerically for patients in all four
active dose groups receiving AR-301 plus SOC compared to those receiving placebo plus SOC. In an
exploratory analysis, with all four treated cohorts pooled and compared versus the placebo cohort, statistical
significance was achieved at p<0.01. The lack of dose response could be attributed to high variability
associated with a small sample size, and/or to the high level of circulating AR-301 mAb as compared to
alphatoxin load in infected patients, i.e. even at the lowest dose administered (i.e. one mg/kg) it is estimated
that there is more than ten-fold mAbs than the predicted alphatoxin load.
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Figure 5
Impact Adjunctive AR-301 Treatment on Mechanical Ventilation Time (VAP subgroup)
Ventilation Days in VAP Patients
(Microbiologically confirmed Intend to
Treat population);
p < 0.01 for Placebo vs. AR-301 (pooled)
Lower Probability of Ventilation Requirement for
VAP patients (exploratory analysis)
We also determined microbiological outcomes in the overall study population. Eradication or presumed
eradication (cured of pneumonia) was observed in 25 (78.1%) patients treated with AR-301 plus SOC and
ten (62.5%) of 16 subjects treated with placebo plus SOC. Details of microbiologial outcome by treatment
cohort are provided in Figure 6a and the mean time to eradication of S. aureus bacteria also trended shorter
in AR-301 treated cohorts as compared to the Placebo cohort (Figure 6b)
Figure 6a
Summary of Microbiological Outcome by Dose Level
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Figure 6b
Mean Time to Microbiological Eradication
When clinical cure was assessed based on the sole judgment of the investigator, there was no
statistically significant difference between the groups, and the overall cure rate was high compared to
historic published references. Over the first 28 days of the study, the length of stay in the ICU and in the
hospital, both showed a modest decrease in the AR-301 plus SOC groups as compared to placebo plus SOC-
treated subjects, however, this difference did not reach statistical significance.
Although SOC antibiotics were effective, the results suggest that the addition of AR-301 to SOC
treatment may increase the rate of microbiological eradication, and may reduce time to eradication, time
under mechanical ventilation and overall duration of hospital stay. Time ventilated in the pooled AR-301
treated cohorts (n=20) showed an exploratory p<0.01 reduction in the subset of patients with VAP as
compared to the placebo plus SOC cohort (n=5). A manuscript summarizing this clinical study has been
published in a peer-reviewed journal Intensive Care Medicine (Francois, B., et al.’Safety and tolerability of
a single administration of AR-301, a human monoclonal antibody, in ICU patients with severe pneumonia
caused by Staphylococcus aureus: first-in-human trial’ Intensive Care Medicine. 44(11):1787-1796).
Planned Development Activities
We plan to conduct two pivotal clinical trials in pneumonia patients for regulatory approval in the U.S.
and Europe. We had an end of Phase 2 meeting with the FDA in June 2017 on the two proposed primary
efficacy endpoints, ventilation time and clinical cure, for these two Phase 3 clinical trials. We also submitted
a briefing document and received feedback from the EMA’s Scientific Advice experts in January 2018. We
have reached concurrence with the FDA on a consolidated single primary endpoint, which may include the
components of mortality, ventilation requirements and signs and symptoms of pneumonia and presented
these to the EMA. Per discussions with clinical experts in the field, approximately a 15% or more
improvement of AR-301 plus SOC over placebo plus SOC on these efficacy outcomes is deemed to be
clinically meaningful. The first Phase 3 clinical trial is a randomized, double-blind, placebo-controlled
active comparator AR-301 (20 mg/kg) plus SOC versus placebo plus SOC. We plan to enroll approximately
240 VAP microbiologically evaluable patients at approximately 130 clinical sites in over 20 countries.
Assuming a treatment effect of clinical cure of 85% versus 65% in active drug treated patients would
provide 90% power to demonstrate a statistically significant result. We also reached agreement with the
FDA on the size of the safety database required for approval and we plan to include the following safety
endpoints: immunogenicity, adverse events, and standard safety laboratory tests. We enrolled the first
subject in the first quarter of 2019. The protracted COVID-19 pandemic has continued to cause an impact
on patient enrollment globally and the rate of clinical site activation. Pending the COVID-19 vaccination
coverage and the resolution of the pandemic, we provisionally expect to report an interim data readout in the
second half of 2021, and top-line data in the first half of 2022.
AR-101
AR-101 is a human IgM mAb that we are developing to treat P. aeruginosa, the leading cause of
hospital acquired lung infections. AR-101, which we are initially developing as an adjunct therapy for the
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treatment of HAP and VAP caused by P. aeruginosa serotype O11, binds to the lipopolysaccharide, or LPS,
on the cell surface of P. aeruginosa. Serotype O11 is one of the most prevalent P. aeruginosa serotypes in
HAP and VAP, representing approximately 23% of cases (Lu et al 2014). It is estimated that the addressable
patient population in the U.S., EU and Japan combined is approximately 95,600 patients. AR-101 has been
granted orphan drug designation in the U.S. and in the EU. We intend to incorporate a companion diagnostic
test based on polymerase chain reaction, or PCR, technology that can rapidly identify P. aeruginosa
serotype O11 strains in order to identify those patients most likely to respond to AR-101. We have
completed a Phase 1 safety and tolerability trial of single ascending doses of AR-101 in healthy adults and
an open-label Phase 2a safety and pharmacokinetics trial of up to three single doses of AR-101 in
pneumonia patients. These studies suggested AR-101 to be generally well tolerated in both healthy adults
and HAP and VAP patients. Comparison of the per protocol population (n=13) of the Phase 2a study, which
excluded four patients from the ITT population (n=17) because they did not complete the treatment regimen,
and a contemporaneous control cohort suggested that AR-101 therapy may improve survival, cure rate of
the index pneumonia, and time to cure pneumonia.
Figure 7
AR-101 Mechanism of Action
Background and Mechanism of Action
Upon binding, AR-101 mediates the deposition of the human complement to the surface of
P. aeruginosa bacteria. This antibody-complement complex leads to improved recognition by the host
immune cells, which results in engulfment and killing of the bacteria (Figure 7). AR-101, like IgM
antibodies in general, provides several advantages towards more effective bacterial killing. They possess ten
binding sites rather than two for IgG, and they are 100 to 1,000 times more effective than IgG at binding
and/or activating key enzymes that facilitate the killing of P. aeruginosa. As a result, IgM antibodies are
becoming more prevalent as candidates for drug therapies.
Clinical Development Summary
We have completed two clinical studies of AR-101 to date. We completed a Phase 1 study in healthy
volunteers to assess the safety and pharmacokinetic characteristics of AR-101. This randomized, double-
blind, placebo-controlled study enrolled 32 volunteers in four antibody treatment cohorts at doses of 0.1,
0.4, 1.2 and 4.0 mg/kg as well as placebo cohort. No SAEs were observed, and no subject was discontinued
due to an AE. Reported AEs were mild or moderate in intensity, and all resolved without sequelae, and the
incidence of AEs did not increase with the dose. There was no activation of an immune response against
AR-101. Pharmacokinetic characteristics that were observed were consistent with the characteristics of a
human IgM, with a serum half-life between 70 and 95 hours.
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Subsequently, we completed an open-label Phase 2a study in 18 subjects, which was the first study
performed in the target indication of patients with severe bacterial pneumonia caused by P. aeruginosa
serotype O11. Treatment consisted of three intravenous infusions of 1.2 mg/kg of AR-101 given over two
hours on days one, four and seven for a total dose of 3.6 mg/kg. The 30-day survival rates were 82% and
100% in the intent-to-treat (ITT; 17 subjects) and the per protocol (13 subjects) populations, respectively.
Clinical resolution of pneumonia was observed in 76% of patients in the ITT population and 100% of
patients in the per protocol population. Microbiological resolution was observed in six subjects,
representing 35% of the ITT population and 31% of the per protocol population. The time to resolution of
pneumonia was 14 days and nine days in the ITT and per protocol populations, respectively. The time to
extubation or cessation of ICU management was 22 days in the ITT and 13 days in the per protocol
populations, respectively. Measurements of clinical status improved promptly in parallel with clinical
resolution of disease.
14 SAEs were experienced by six of the subjects. The types of SAEs were: gastrointestinal bleeding (3
patients or approximately 21% of patients), cardiac and respiratory arrest (2 patients or approximately 14%
of patients), multi-organ failure (2 patients), hyperbilirubinemia and cholestasis (1 patient or approximately
7% of patients), neutropenia (1 patient), low count of platelets (1 patient), activated partial thromboplastin
time (1 patient), prolongation (1 patient), septic shock (1 patient); cholestasis (1 patient) and troponin
increase (due to cardiac arrest) (1 patient). An event of cardiorespiratory arrest was judged as probably
related to AR-101 and events of hyperbilirubinemia and cholestasis, although pre-existent, were deemed
possibly related. In both cases, the investigators assessed that a contribution by AR-101 to the adverse event
could not be excluded with certainty but acknowledged other probable causes were acknowledged. The
other SAEs were deemed unrelated.
In parallel, we also conducted a contemporaneous cohort study of the incidence and outcome of HAP
and VAP caused by various P. aeruginosa serotypes in critically ill patients. The data were extracted from
the medical files of the patients selected according to eligibility criteria similar to those of our Phase 2a
study. Cohort patients infected with P. aeruginosa serotype O11 (14 patients in total) had a lower survival
rate, cure rate, and microbiological resolution rate, as well as longer mean times on ventilator and in the
ICU as compared to patients in our Phase 2a clinical trial who received a complete treatment of three 1.2
mg/kg doses of AR-101. A summary of the results of the Phase 2a study and the contemporaneous cohort
study is shown in Figure 8 below.
Figure 8
AR-101 Phase 2 Trial Comparison of Adjunctive (AR-101 + Antibiotics)
to Cohort (Antibiotics Alone) Groups
Mortality (%)
Time to Initial Clinical Resolution of
AR-101 + Antibiotics
Intent-to-Treat
(n=17)
AR-101 + Antibiotics
Per Protocol
(n=13)
Contemporaneous
Cohort
Study Serotype O11
(n=14)
18% (3/17 pts)
0% (0/13 pts)
21% (3/14 pts)
Pneumonia (mean)
14 days ± 10 days SD 9 days ± 2.9 days SD 19 days ± 10 days SD
Initial Clinical Resolution of
Pneumonia (%)
Clinical Resolution of Pneumonia on
76% (13/17 pts)
100% (13/13 pts)
64% (9/14 pts)
Day 30
65% (11/17 pts)
85% (11/13 pts)
57% (8/14 pts)
Microbiological Resolution on Day 30
35% (6/17 pts)
31% (4/13 pts)
14% (2/14 pts)
Time on Ventilator or Time in ICU*
22 days
13 days
21 days
*
Kaplan-Meier time-to-event estimation of the times where 50% of patients had experienced the event.
‘pts’ = patients
Preclinical Summary
AR-101 reacts with a wide range of P. aeruginosa serotype O11 clinical isolates from different
hospitals, indicating broad application against infections with this serotype. AR-101 is also capable of
stimulating
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phagocytic immune cells to ingest P. aeruginosa bacterial cells in a dose dependent manner, thereby killing
the pathogen. Passive immunization with murine mAb recognizing O-polysaccharides in LPS of P.
aeruginosa conferred protection against lethal challenge with live pseudomonas bacteria in several animal
models of pneumonia infections. In preclinical studies, AR-101 was found to demonstrate attenuating
protection against pulmonary infections caused by P. aeruginosa serotype O11 and exhibited a
complementary effect with meropenem, a broad-spectrum antibiotic. Additionally, we had the following
observations in preclinical studies of AR-101. AR-101 protected mice in a dose-dependent manner from P.
aeruginosa infection after a burn-wound challenge. Doses of five μg/mouse (corresponding to about 0.2
mg/kg body weight) conferred 70% to 100% protection from systemic P. aeruginosa challenge.
Administration of decreasing doses resulted in lower survival rates and administration of AR-101 led to
rapid clearance of P. aeruginosa from the lung in mice and was associated with milder lung pathology six
and 24 hours after infection. In addition, AR-101-treated animals had a significantly lower systemic P.
aeruginosa bacterial load compared to control animals that received saline. To mimic the adjunctive use of
AR-101 in humans, AR-101 was administered in combination with meropenem (used clinically to treat
pseudomonal infections) in a modified lung challenge model. When meropenem and AR-101 were
administered in combination, significant reductions in lung weight (a surrogate marker for injection-induced
inflammation), bacterial load and lung inflammation were observed in infected mice compared to each agent
given alone.
AR-501
To complement our suite of targeted antibody product candidates, we are developing AR-501
(gallium(III) citrate) as an anti-infective therapy to manage both chronic lung infections in cystic fibrosis
patients. AR-501 exhibits broad antimicrobial activity against antibiotic resistant gram-negative and gram-
positive bacteria in free-living, or planktonic, and biofilm communities, as well as against non-tuberculosis
mycobacteria and fungi. We believe AR-501’s unique combination of broad spectrum antimicrobial activity
against pathogens, lower propensity to develop resistance than inhaled TOBI (tobramycin) and Cayston
(aztreonam), and less frequent dosing as compared to SOC, make it an ideal candidate for treatment of
chronic polymicrobial infections, such as lung infections in cystic fibrosis patients. AR-501 has been
granted Fast-Track and QIDP designations by the FDA.
To enhance delivery to the lungs and provide a simple method of administration, we are developing
AR-501 as an inhaled formulation that can be administered conveniently with one of several commercially
available liquid nebulization devices. We were awarded a development grant from the Cystic Fibrosis
Foundation for up to approximately $7.5 million to develop an aerosolized formulation of AR-501 to
manage bacterial lung infections in cystic fibrosis patients. We have produced, good manufacturing practice,
or GMP, clinical bulk drug that is ready for use in human clinical trials, and we have completed good
laboratory practice, or GLP, toxicology studies. We believe that the novel characteristics of AR-501, namely
broad spectrum activity, lower propensity to develop resistance, and long half-life, may enable cystic
fibrosis patients to avoid the current need for the intermittent “drug holidays” commonly employed with
SOC drugs such as TOBI (tobramycin). The novel characteristics of AR-501 may also benefit patients with
other infectious lung diseases such as chronic obstructive pulmonary disease, bronchiectasis, and
pneumonia.
Background and Mechanism of Action
AR-501 is a proprietary formulation of gallium(III) citrate. Trivalent ions of the element gallium (Ga)
have biologic activity because Ga(III) chemically mimics the ferric iron ions (Fe(III)) that bacteria and
many other microorganisms require for survival. Bacterial iron-binding proteins imperfectly distinguish
Ga(III) from Fe(III), functionally starving bacteria of iron and poisoning critical Fe(III)-dependent
metabolic pathways. We believe this novel mechanism of action is distinct from those underlying all current
antibiotics.
There is a long history of administering gallium(III) salts to humans. Gallium scans are used as
diagnostic tests to identify areas of inflammation, infection, or cancer in the body, and Ganite, a formulation
of gallium(III) nitrate, was introduced in 2003 as an FDA-approved intravenous treatment for hypercalcemia
secondary to cancer. The anti-infective activity was only recently demonstrated using gallium(III) nitrate in
citrate buffer. Our in vitro tests and in vivo animal studies show that gallium(III) citrate exhibits the same
antimicrobial activity as gallium(III) nitrate in citrate buffer, demonstrating that Ga(III) ion itself, and not
any particular salt form, is responsible for the anti-infective activity.
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Clinical Data Summary
More than 50 published human clinical trials conducted in more than 1,000 cancer patients attest to the
safety of systemic Ga(III) compounds and establish a tolerated dose that greatly exceeds the dose at which
we project AR-501 will be used. Recently an open-label Phase 1 proof-of-concept clinical trial of Ganite
administered intravenously to cystic fibrosis patients showed evidence of an improvement in lung function
and reduction of P. aeruginosa burden in the lungs. Investigators at the University of Washington, or UW,
and the Cystic Fibrosis Foundation conducted the clinical study, and we analyzed patient samples to
determine pharmacokinetics. The aim of the study was to assess the pharmacokinetics, lung distribution, and
safety of intravenous Ga(III) in cystic fibrosis patients. This non-randomized Phase 1 study comprised two
dosing cohorts (cohort one: n=9 patients, cohort two: n=11 patients). Analysis of subjects’ sputum, urine,
and plasma showed persistent Ga(III) levels in sputum up to 28 days after a single dose. Encouragingly, a
number of patients in both cohorts showed significant reduction in sputum P. aeruginosa and an
improvement in steady forced expiratory volume (FEV1) throughout the 28 days. We anticipate that inhaled
AR-501 can result in at least 100-fold higher Ga(III) concentration in the lungs. The UW investigators
continue to develop Ganite as an intravenous treatment for cystic fibrosis associated lung infections and
initiated a randomized, double-blind Phase 2 clinical study in cystic fibrosis patients. This study was
completed in the second half of 2018 and provided clinical evidence of the safety and efficacy of Ga(III) in
cystic fibrosis patients (see Goss, C. et al. The Ignite Study: IV Gallium Nitrate As A Treatment For
Chronic Pseudomonas Aeruginosa Infection In CF. North American Cystic Fibrosis Conference Abstract
number 307, 2018).
Preclinical Data Summary
AR-501 exhibits antimicrobial activity in diverse in vitro and in vivo bacterial infection models. The in
vitro activity of Ga(III) salts extends to many gram-negative and some gram-positive bacteria, non-
tuberculosis mycobacteria, fungi and in vivo activity has been demonstrated against P. aeruginosa when
administered via inhalation and intraperitoneal injection. We showed that persistent exposure of P.
aeruginosa to gallium(III) citrate did not change the minimum inhibitory concentration, or MIC, whereas
parallel studies demonstrated a greater than eight-fold rise in MIC for the antibiotics tobramycin,
vancomycin, or aztreonam. Thus, we believe that for mechanistic reasons, bacteria are less likely to develop
resistance to Ga(III) compounds than to conventional antibiotics. Pharmacokinetic studies of inhaled AR-
501 in mice showed the initial half-life was 0.6 hours and the terminal half-life was 40.0 hours. In
preclinical animal lung infection studies, AR-501 at an inhaled dose as low as 3.7 mg/kg is protective
against a lethal challenge with P. aeruginosa strain PA103.
We tested the local effects of inhaled Ga(III) on lung tissues by examining the acute pulmonary toxicity
of inhaled gallium(III) nitrate formulated in a citrate buffer in mice. We exposed animals to aerosolized
gallium(III) nitrate formulated in a citrate buffer (12.5 mg/mL) for two, four, or six hours in a whole body
exposure chamber. Histopathological evaluation revealed no significant changes in lung tissues.
Inflammation was observed that reached a maximum at four to eight hours post dosing but waned beyond
eight hours. Mice and subsequently dogs that were administered AR-501 by inhalation once per week for
28 days (five administrations), showed unremarkable clinical chemistry findings, and no significant adverse
observations were noted in the lungs or kidneys. The no observed adverse effect level from the GLP
toxicology testing has been established.
Planned Development Activities
The Phase 1 portion of the clinical study in healthy adults has been completed and results were reported
in 2020. The Phase 2a clinical study is initiated. Pending the resolution of the on-going COVID-19
pandemic, we provisionally expect to complete enrollment in the second half or 2021 and top-line data
shortly afterwards.
AR-712
AR-712 is a cocktail of two fully human immunoglobulin G1 (IgG1) lambda mAbs AR-711 and AR-
713, directed at the SARS-CoV-2 spike (S-protein) receptor binding domain (RBD). AR-712 was identified
by screening the blood of COVID-19 convalescent patients. Antibodies directed to the S-protein RBD are
generally thought to be required for blockage of viral binding and host cell entry via the human
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angiotensin converting enzyme 2 (ACE2) receptor, and thus viral neutralizing. RBD is used predominantly
as the target in clinical stage vaccines and antibody candidates, with positive clinical responses, with two
mAbs receiving Emergency Use Authorization (EAU) from the FDA. AR-712 showed broad binding to
SARS-CoV-2 clinical isolates, including recently reported variants of SARS-CoV-2 such as the variants
associated with the UK, South Africa, Brazil and Japan SARS-CoV-2.
Different from other mAb therapies that are under clinical testing, AR-712 is intended to be delivered
via inhalation. AR-711 has been shown to mediate therapeutic treatment benefits and eradication of SARS-
CoV-2 infected animals at a lung deposited dose level that is more than 100-fold lower than the dose
required to achieve similar levels of efficacy when delivered by the parenteral route of administration
(Piepenbrink, et al., Cell Reports Medicine doi: 10.1016/j.xcrm.2021.100218). AR-711 can exhibit evidence
of treatment benefit as low as 0.6 mg/kg of inhaled dose, equivalent to 0.01mg/kg of lung deposited dose
(Figure 9).
Figure 9
Therapeutic treatment with nebulized AR-711 showed eradication of SARS-CoV-2 in the lungs of infected
hamsters at 0.61 mg/kg of inhaled dose (corresponding to 0.6mg/ of lung deposited dose).
There are two key advantages of inhalation delivery of a mAb over standard IV administration. The
first is dosing efficiency and dose sparing as compared to the parenteral routes of administration. With an
efficient nebulization device, up to half the dose or more can be deposited in the lungs, which is the target
organ. In contrast, a recent clinical study showed that when a 1800 mg mAb dose is delivered by IV, the
estimated peak concentration of drug reached in the epithelial lining fluid (ELF) in the lungs (Cmax) was
only 128 µg/mL (Magyarics, et al, 2019), which represents less than 0.2% of the drug administered
(Fröhlich, et al, 2016). The benefit of significant dose sparing provided by inhalation administration will
alleviate supply constraints for the drug, allowing the treatment of significantly more patients from each
mAb production batch and thereby expanding the number of patients that can receive the drug. The second
key advantage of inhalation delivery over parenteral delivery is convenience. Administration by inhalation
does not require a hospital or clinic, and, as with many other inhaled treatments such as those for cystic
fibrosis or asthma, can be performed by the patient themselves in their own home. The convenience of self-
administration in an outpatient setting is designed to lower the barrier to COVID-19 treatment. This can also
reduce the burden on hospital resources, reducing exposure risks to health care workers. These advantages,
combined with increased supply, enables a uniquely positioned mAb treatment in much broader patient
settings.
AR-401
AR-401 is our mAb discovery program aimed at treating infections caused by A. baumannii, which is a
gram-negative pathogen that is rapidly emerging as a serious threat to patients in hospital care. Its high level
of resistance to first-line antibiotic therapies, potential to survive prolonged periods on dry surfaces and
ability to form biofilms rapidly on artificial devices, such as catheters and ventilators, have made it
particularly
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virulent. The clinical impact of A. baumannii infections can have serious adverse consequences with crude
mortality rates reaching 30% in infected ICU patients. Moreover, infection with A. baumannii leads to an
increased length of stay at the ICU of an average of 15 extra days. We intend to develop an anti-A.
baumannii human mAb to address the unmet medical need for new and effective anti-infectives to treat
severe and life-threatening infections caused by this difficult-to-treat bacterium.
We have made significant progress toward the identification of potential anti-microbial targets on
A. baumannii, which we believe will facilitate the development of both active and passive immune-based
therapies. We believe our preliminary target identification work on A. baumannii is among the most
comprehensive to date. We used a proteomic approach to identify bacterial surface proteins that are
accessible to the immune system. We then performed a thorough analysis using multiple bioinformatic tools
that reduced the number of identified proteins to eight outer membrane proteins on A. baumannii. Our
studies showed that active immunization with each protein reduced mortality in a pneumonia model.
Antibodies against these A. baumannii targets were also detected in the majority of A. baumannii infected
patient sera. Polyclonal rabbit immune sera raised against these targets mediated protection in the
Acinetobacter pneumonia mouse model as shown by a reduction of mortality and clinical score.
Of the eight surface proteins identified as potential targets for mAbs, three have been previously
characterized. The five remaining proteins are of unknown function, potentially representing completely
unique and innovative targets. Antibody titers to all eight proteins can be detected in sera of convalescent
patients whereas sera from healthy donors from a regional blood bank have only very low or undetectable
antibody serum titers to these proteins. An initial study demonstrated that the peripheral blood lymphocytes,
or PBL, from patients with a high serum titer can result in hybridoma cell lines that specifically stain
A. baumannii cells. Our planned next step for this program is to select a lead therapeutic mAb and advance
into in vitro potency testing and in vivo assessment of therapeutic efficacy in an A. baumannii challenge
mouse model.
Our MAbIgX and λPEX Fully Human Antibody Discovery Platform
®
TM
Our proprietary MabIgX and λPEX discovery platforms enable us to rapidly screen, identify and
optimize fully human therapeutic mAb product candidates directly from the B-cells of patients. We have
developed a method of selecting rare, potent B-cells isolated either from convalescent individuals who have
successfully survived an infection with the pathogen or healthy individuals who have been actively
immunized with a vaccine against a target pathogen. These B-cells produce antibodies that are highly
relevant for the body’s defense against a particular pathogen and which we believe will be highly protective
mAb therapeutic product candidates. Our mAb product candidates are of completely human origin, which
we believe maximizes the antibodies’ protection and effector functions and minimizes the risk of adverse
reactions.
We believe our MabIgX and λPEX drug discovery platforms, which enable us to rapidly identify and
manufacture naturally occurring fully human antibody product candidates, provides us with the following
competitive advantages:
•
•
•
•
ability to rapidly screen for rare and potent B-cells to produce differentiated mAb product candidates
and expeditiously progress product candidates from target identification to clinical development;
broad applicability to produce immunologically and clinically relevant product candidates across all
relevant immunoglobulin isotypes, including IgG, IgA, IgM and IgE antibodies;
discovery of mAb product candidates with high efficacy due to recognition of epitopes relevant for
humans;
generation of mAb product candidates that are well tolerated and that have the potential for multiple
administrations due to low immunogenicity, or nominal ability to provoke an anti-drug immune
response; and
•
ability to rapidly progress to clinical manufacturing by avoiding the need for time consuming
recombinant antibody engineering processes and production cell lines.
Our technology enables us to overcome one of the major challenges in developing human therapeutic
mAbs, which is the inability to easily select and culture antigen-induced mAb-producing human B-cells and
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to use them to construct continuous mAb-producing cell lines. We have defined the properties of circulating
antigen-specific human B-cells recruited through the immune response to polysaccharide and protein
antigens, and have optimized their enrichment and propagation in culture for the production of fully human
mAbs. After isolation, these highly antigen-specific human B-cells are for large scale manufacturing of our
fully human mAbs.
Our technology enables us to isolate and select the most relevant and most effective human antibodies
for a specific pathogen. Not all pathogens require the same type of immune effector function, and therefore,
our immune system has developed a set of different antibody isotypes with very specific characteristics. For
example, high-affinity IgG antibodies are more efficient at neutralizing viruses and preventing infections
whereas IgM antibodies can more efficiently attack gram-negative bacteria by targeting the bacterial surface
polysaccharides and by activating complement, which leads to a “flagging” of the bacteria, known as
opsonization, and ultimately the destruction of the bacteria by the immune system. It is important to isolate
antibodies of the proper isotype based on the infection targeted and the desired reaction of the human
immune system. Our MabIgX technology enables the isolation of the isotype of an antibody that the human
immune system utilizes to combat a particular pathogen and isolate all different isotypes.
TM
Our λPEX platform technology is also designed to discover new monoclonal antibody products
directly from patients but extends beyond MabIgX’s utility in its B-cell screening capacity, with its ability
to increase mAb productivity from existing mammalian production cell lines, and the involvement of a
novel CHO based production cell line technology that differs from MabIgX’s usage of hybridoma cell line.
APEX allows for the unbiased discovery of new and highly potent antibodies against pathogens and a
methodology to maximize the production/yield of selected antibodies on commercial scale. The platform
technology is comprised of a silicon wafer-based array of nanoliter sized tissue microculture wells that
enable rapid screening of antibody secreting cells, enabling discovery of potent antibodies against targets
such as viruses within one day of a pandemic outbreak. It also features CRISPR (Clustered Regularly
Interspaced Short Palindromic Repeats) gene editing enabled activation of endogenous genetic control
elements that dramatically increase the yield of biotherapeutic drugs from manufacturing production cell
lines, and a proprietary production cell line that is designed to rapidly manufacture multiple monoclonal
antibody therapeutics at approximately half the manufacturing cycle time than current available
manufacturing technologies. We have licensed the CRISPR gene editing technology from the Broad Institute
of MIT and Harvard.
λPEX is expected to facilitate the rapid discovery and production of critical therapies for companies
TM
operating in the biopharmaceutical, biomanufacturing and biosimilar space. A summary of the λPEX
technology suite is shown in Figure 10.
TM
Figure 10
λPEX Technology Suite Comprises Several Related Technologies that Enable Rapid Discovery of mAb
and Scale up Manufacturing
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Intellectual Property
Our success depends, in part, on our ability to obtain, maintain, and enforce patents and other
proprietary protections of our commercially important technologies and product candidates, to operate
without infringing the proprietary rights of others, and to maintain trade secrets or other proprietary know-
how, both in the U.S. and other countries. Our ability to stop third parties from making, using, selling,
offering to sell or importing our products will depend on the extent to which we have rights under valid and
enforceable patents or trade secrets that protect these activities. We seek to protect proprietary technology,
inventions, and improvements that are commercially important to our business by seeking, maintaining, and
defending patent rights, whether developed internally or licensed from third parties.
As of December 31, 2020, our patent estate includes approximately 69 issued patents (approximately
28 of which are in the U.S.) and approximately 28 pending patent applications (approximately six of which
are in the U.S.), which we either own or for which we have an exclusive commercial license (either in its
entirety or within our field of use), as is more fully described below.
AR-301: Anti-Staphylococcus aureus HLA alphatoxin mAb
Our AR-301 patent estate includes a patent family that we own related to AR-301 titled “Human
Monoclonal Antibody against S. aureus derived alphatoxin and its use in treating or preventing abscess
formation” which has a priority date of August 10, 2009. Issued claims include: composition of matter
claims to a human mAb that binds to S. aureus alphatoxin and a cell line producing the antibody. Patents in
this family have been issued in Europe, the U.S., China, Israel, India, Japan, Korea and Russia. National
patent applications are currently pending in Canada and Brazil. Issued patents are expected to expire in
2030, absent any patent term adjustments or extensions. The portfolio is complemented by a patent family
in-licensed from University of Chicago and titled “Methods and Compositions related to Immunizing
Against Staphylococcal Lung Diseases and Conditions.” This patent family includes ten patents, which are
granted in jurisdictions including Australia, China, Europe, Japan, Korea, and the U.S., and six patent
applications that are pending in Brazil, Canada, China, Hong Kong, Japan and the U.S. Patents in this
family are expected to expire in 2028, absent any patent term adjustments or extensions.
AR-101: Anti-Pseudomonas aeruginosa LPS serotype O11 mAb
Our AR-101 patent estate includes a patent family, titled “Human Monoclonal Antibody Specific for
LPS of serotype IATS 011 Pseudomonas aeruginosa,” with issued patents in seven jurisdictions including
Canada, Europe, China, India, Israel, Japan, and the U.S. The issued patents include claims directed to
certain antibodies, variants or Fab fragments thereof, hybridomas producing the antibodies, as well as
nucleic acids encoding the antibodies. In the U.S. issued claims are directed to antibodies with specific
variable region sequences that bind LPS of the P. aeruginosa LPS serotype IATS 011, or with variable
region sequences having 85% identity thereto. Similar claims were granted in Europe, Canada, China,
Israel, India and Japan. Patents in this family are expected to expire in 2026, absent any patent term
adjustments or extensions. Additionally, we own a U.S. patent covering the O6 serotype of P. aeruginosa
LPS titled “Human Monoclonal Antibody Specific for LPS of Serotype IATS O6 Pseudomonas aeruginosa”.
This issued US patent is expected to expire in 2026, absent any patent term adjustments or extensions.
AR-501: Gallium citrate
Our AR-501 patent estate includes three patent families, two of which we own and one of which is in-
licensed from the University of Iowa Research Foundation. These patents are directed to Gallium containing
formulations for anti-infective indications and methods of using the same. These patent families include
granted patents in Australia, Canada, China, Europe, Hong Kong, Japan, Mexico, New Zealand, South
Africa, and the U.S. The in-licensed issued patents are expected to expire in 2024 and the patents that we
own are expected to expire in 2030, absent any patent term adjustments or extensions.
AR-712: Anti-SAR-CoV-2 mAb
Our patent estate for AR-712 includes a patent family titled “Human monoclonal antibodies to SARS-
CoV2 and use thereof “ which has been in-licensed from University of Alabama. The provisional
application was filed in 2020.
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AR-401: Anti-Acinetobacter baumannii mAb
Our patent estate for AR-401 includes a patent family titled “Novel targets of Acinetobacter
baumannii” with priority to 2011. This family includes issued patents in Australia, China, Europe and the
U.S. Patent applications are pending in Canada, China (divisional), Japan (divisional) and the U.S.
(divisional). Claims in these patents and applications include those directed to certain vaccine compositions
and to mAb against outer membrane protein targets. Patents in this family are expected to expire in 2032,
and any patents that may issue from the pending patent applications are expected to expire in 2032, absent
any patent term adjustments or extensions.
AR-105: Anti-Pseudomonas aeruginosa alginate mAb
Our AR-105 patent estate includes two patent families that have been exclusively in-licensed from the
Brigham Women’s Hospital (Harvard University). The first family is titled “P.aeruginosa Mucoid
Exopolysaccharide Specific Binding Peptides” and it is comprised of three issued U.S. patents that are
expected to expire in 2022, absent any patent term adjustments or extensions. The second family is titled
“Methods and compositions relating to mannuronic acid specific binding peptides,” and it comprises one
European patent that is expected to expire in 2025, absent any patent term adjustments or extensions.
Claims in these patents include composition of matter, uses and methods of inducing immune response to
the alginate epitope. We own a pending PCT application that, if nationalized and issued, is expected to
expire in 2037, absent any patent term adjustments or extensions.
AR-201: Anti-Respiratory Syncytial Virus mAb
Our patent estate for AR-201 comprises two U.S. patent and pending patent applications in Canada,
China, Europe and India titled “Human Monoclonal Antibody Specific for the F Protein of Respiratory
Syncytial Virus (RSV).” Claims in the U.S. patents are directed to antibodies with specificity to a region of
RSV F protein, methods of producing certain antibodies and methods of treating or preventing RSV
infections with such antibodies. The U.S. patents are expected to expire in 2034 and — in case of grant-
currently pending patent applications are expected to expire in 2035, absent any patent term adjustments or
extensions.
Complementing the product specific patents is a pharmaceutical processing and formulation technology
related portfolio comprising five patent families of which one was in-licensed. The patent families consist
of nine national patents and patent applications on formulation and delivery technologies. The issued
patents have expected expiration ranges between 2022 and 2030, and the pending patent applications are
expected to expire between 2022 and 2037, absent any patent term adjustments or extensions. Claims in the
patents are directed to formulation, stabilization, and delivery of pharmaceuticals.
We are also actively pursuing additional patent applications in the U.S. and foreign patent jurisdictions
for other preclinical product candidates and methods of use, including additional product candidates for
infectious disease. In addition, we will pursue patent protection whenever it is deemed sufficiently
beneficial for any product or product candidate and related technology we develop and/or acquire in the
future.
The patent positions of biotechnology companies like ours are generally uncertain and involve complex
legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know whether the product
candidates we are developing will gain patent protection or, if patents are issued, whether they will provide
significant proprietary protection or will be challenged, circumvented, invalidated, or found to be
unenforceable. Because patent applications in the U.S. and certain other jurisdictions are maintained in
secrecy for 18 months, and since publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, we cannot be certain of the priority of inventions or filing dates covered by
pending patent applications. Moreover, we may have to participate in post-grant proceedings, interference
proceedings, or third-party ex parte or inter partes reexamination proceedings before the U.S. Patent and
Trademark Office, or in opposition proceedings in a foreign patent office, any of which could result in
substantial cost to us, even if the eventual outcome is favorable to us. There can be no assurance that the
patents, if issued, would be held valid and enforceable by a court of competent jurisdiction. An adverse
outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from
third parties or require us to
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cease using specific compounds or technology. To the extent it is prudent, we intend to bring litigation
against third parties that we believe are infringing one or more of our patents or other intellectual property
rights.
The term of individual patents depends upon the legal term of the patents in the countries in which they
are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a
non-provisional patent application. In the U.S., a patent term may be lengthened by patent term adjustment,
which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in granting
a patent or may be shortened if a patent is terminally disclaimed over another patent. Some of our patents
currently benefit from patent term adjustment and some of our patents that will be issued in the future may
benefit from patent term adjustment.
The patent term of a patent that covers an FDA-approved product may also be eligible for patent term
extension, which permits patent term restoration as compensation for the patent term lost during the FDA
regulatory review process. The Drug Price Competition and Patent Term Restoration Act of 1984, or the
Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration of the patent.
The length of the patent term extension is related to the length of time the product is under regulatory
review. Patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from
the date of product approval and only one patent applicable to an approved product may be extended.
Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent
that covers an approved product. In the future, if and when our product candidates receive FDA approval,
we expect to apply for patent-term extensions on patents covering those products.
To protect our rights to any of our issued patents and proprietary information, we may need to litigate
against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the
scope and validity of those patents or other proprietary rights. These types of proceedings are often costly
and could be very time-consuming to us, and there can be no assurance that the deciding authorities will
rule in our favor. An unfavorable decision could allow third-parties to use our technology without being
required to pay us licensing fees or may compel us to license needed technologies to avoid infringing third-
party patent and proprietary rights. Such a decision could even result in the invalidation or a limitation in
the scope of our patents or forfeiture of the rights associated with our patents or pending patent applications.
We also rely on trade secret protection for our confidential and proprietary information. No assurance
can be given that others will not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can
meaningfully protect our trade secrets. However, we believe that the substantial costs and resources required
to develop technological innovations will help us to protect the competitive advantage of our products.
It is our policy to require our employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors to execute confidentiality agreements upon the commencement of
employment or consulting or collaborative relationships with us. These agreements provide that all
confidential information developed or made known to the individual during the course of the individual’s
relationship with us is to be kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that all inventions conceived by the
individual shall be and are our exclusive property. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of
unauthorized use or disclosure of such information.
Licensing Agreements
University Licensing Agreements
Broad Institute of MIT and Harvard — Non-Exclusive Manufacturing License Agreement
We entered into a non-exclusive manufacturing licensing agreement with the Broad Institute of MIT
and Harvard (the “Broad Institute”) in 2021 to make and manufacture CRISPR Modified Cell Lines,
CRISPR Modified Animals and CRISPR Modified Plants. These license rights permit the non-exclusive
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use of the CRISPR Technology for the creation of and improvement of yield from protein and mAb
production cell lines, which is one of the core components of the λPEX mAb discovery and
manufacturing production technology.
TM
Pursuant to this agreement, we are obligated to pay to the Broad Institute an issue fee of $25,000, an
annual license maintenance fee of $50,000 in 2022, and fees of $100,000 in 2023 and each year thereafter.
Additionally, we are obligated to pay a royalty of a single digit percentage of all service income received
from a customer for the manufacture, sale or transfer of CRISPR modified cell line, CRISPR Modified
Animals and CRISPR Modified Plants or end products, as well as a small royalty (a fraction of a percent) on
end product net sales from use of any commercialized product that contains any small or large molecule
made through the use of a CRISPR modified cell line, CRISPR Modified Animals and CRISPR Modified
Plants. The term of the license agreement continues until all patents and filed patent applications, included
within the licensed Broad Institute patents, have expired or been abandoned.
The UAB Research Foundation — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement with the UAB Research Foundation, or UABRF, a
non-profit corporation, for the AR-712 mAb program, which we entered into in 2020. This agreement
granted us an exclusive, royalty-bearing license for intellectual property entitled human neutralizing
antibodies against SARS-CoV-02/COVID-19. UABRF and Texas Biomedical Research Institute jointly own
all rights, title and interest in the intellectual property. The UABRF license agreement also granted us the
right to sublicense the technology. UABRF retained the non-transferrable right to use such patent rights for
academic and research purposes, and also to certain pre-existing rights of the U.S. government.
The potential development and commercialization milestone payments under the UABRF agreement
total up to approximately $5.5 million. No milestones were met or accrued for as of December 31, 2020. We
are also obligated to pay UABRF single digit percentage royalties on net sales from us and our sublicensee’s
sale of any commercialized licensed product or process, subject to minimum annual amounts starting in
2026. We are obligated to pay UABRF double digit percentage royalties on non-royalty income received
during the term of the license agreement, and payments will be reduced by one half for non-royalty income
received for a combination product as defined in the agreement. We are responsible for all patent protection
expenses.
The term of the license agreement continues until all patents and filed patent applications, included
within the licensed UABRF patents, have expired or been abandoned, or until the agreement is earlier
terminated. We may terminate the license agreement by giving no less than ninety (90) days prior written
notice to UABRF. UABRF has the right to immediately terminate the license agreement upon our uncured
material breach of obligations under the agreement.
The University of Chicago — Exclusive Licensing Agreement
We are party to an exclusive licensing agreement, or the UChicago agreement, with The University of
Chicago, or UChicago for our AR-301 product candidate, which we entered into in 2018. This exclusive
license agreement superseded the co-exclusive license agreement between us and UChicago, which we
entered into in 2017. The UChicago agreement granted to us a worldwide exclusive, royalty-bearing license
under UChicago’s rights in methods relating to certain licensed patents arising from the disclosure entitled,
“Vaccine protection against Staphylococcus aureus pneumonia” regarding the work of Professors Juliane
Bubeck Wardenburg and Loaf Schneewind. The UChicago agreement also granted to us the right to
sublicense. We paid UChicago aggregate exclusivity payments of $150,000 under the terms of the exclusive
license agreement and co-license agreement.
We also are obligated to pay UChicago low single digit percentage royalties on net sales of licensed
products, with a minimum royalty required per year once sales begin and ending when the last-to-expire
patent covering such product expires, in addition to certain other milestone and other payments. The
aggregate milestone payments under the UChicago agreement potentially total up to $1.6 million.
The agreement provides that we have certain obligations to conduct further research and development
and are obligated to utilize reasonable efforts to commercialize the UChicago licensed patent rights as
licensed products.
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The term of the agreement continues until the expiration of the last to expire patents (which is expected
to be in 2031), or until the agreement is earlier terminated. We may terminate the agreement upon 90 days’
prior written notice. Additionally, UChicago will have the right to terminate the agreement upon any of the
following events:
•
We fail to make a payment within 30 days written notice of default;
•
A breach of the agreement occurs that has not been cured in 30 days;
•
We become insolvent, make an assignment for the benefit of creditors, or if a petition for bankruptcy
is filed;
•
We are dissolved or liquidated; and
•
We fail to commence specific clinical trials prior to the fifth (5 ) anniversary of the co-exclusive
agreement.
th
The Brigham and Women’s Hospital, Inc. — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement, or the BWH Agreement, with The Brigham and
Women’s Hospital, Inc., or BWH, a non-profit corporation for our AR-105 product candidate, which we
entered into in 2010. This agreement granted to us an exclusive, royalty-bearing license under its and Beth
Israel Deaconess Medical Center’s, or BIDMC, rights in methods and composition relating to specific
binding peptides to P. aeruginosa mucoid exopolysaccharide to make, use and sell products and processes
for the treatment of pseudomonas infections in humans that are covered by such patent rights worldwide.
The BWH Agreement also granted to us the right to sublicense. BWH and BIDMC retained the non-
transferrable right to use such patent rights for academic and research purposes, and also to certain pre-
existing rights of the U.S. government. We paid BWH $141,600 within one year of execution of the BWH
Agreement.
We are obligated to pay BWH low single digit percentage royalties on net sales from our and our
sublicensee’s sale of any commercialized licensed product or process, with a minimum royalty required per
year once sales begin, and certain other milestone and other payments. We are responsible for diligently
prosecuting and maintaining the licensed patent rights, at our sole cost and expense. The aggregate
milestone payments under the BWH Agreement potentially total up to $860,000.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed BWH patent rights as licensed products or processes.
The term of the agreement continues until all patents and filed patent applications, included within the
licensed BWH patents, have expired (which is expected to be in 2025) or been abandoned, or until the
agreement is earlier terminated. We may terminate the agreement on prior written notice to BWH. We have
the right to terminate the agreement upon 90 days written notice. Additionally, the BWH Agreement will
terminate upon any of the following events:
•
We fail to make a payment within 30 days written notice of default;
•
We fail to maintain the insurance requirements as defined in the BWH Agreement;
•
We become insolvent, make an assignment for the benefit of creditors, or if we file a petition for
bankruptcy;
•
A breach of the agreement occurs that has not been cured in 60 days; and
•
Substantially all of our assets are seized or attached in a final, unappealed or unappealable order in
conjunction with any action brought against it by a third-party creditor, such that we are unable to
perform our continuing obligations thereunder.
The University of Iowa Research Foundation — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement, or the UIRF agreement, with The University of Iowa
Research Foundation, or UIRF, relating to our AR-501 product candidate, which we entered into in 2010.
The agreement granted to us is an exclusive, royalty-bearing license under its rights in methods relating to
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gallium containing compounds for the treatment of infections to make, use and sell products that are
covered by such patent rights worldwide. The UIRF agreement also granted to us the right to sublicense.
UIRF retained the right and ability to grant right to use such patent rights for academic and research
purposes, and also to certain pre-existing rights of the U.S. government including the rights of United States
Department of Veterans Affairs. We paid $25,000 to UIRF in connection with entering into the UIRF
agreement.
We also are obligated to pay UIRF low single digit percentage royalties on net sales from our and our
sublicensee’s sale of any commercialized licensed product or process, and certain other milestone and other
payments. The aggregate milestone payments under the UIRF agreement potentially total up to $712,500.
We are responsible for diligently prosecuting and maintaining the licensed UIRF patent rights, at our sole
cost and expense.
The UIRF agreement provides that we have certain obligations to conduct further research and
development, and are obligated to utilize reasonable efforts to commercialize, either directly or through a
sublicensee, the licensed UIRF patent rights as licensed products or processes.
The term of the agreement continues until the expiration of the last to expire patents (which is expected
to be in 2034), or until the agreement is earlier terminated. We may terminate the agreement on 90 days
prior written notice to UIRF. Each party has the right to terminate the agreement for the other party’s
uncured material breach of obligations under the agreement.
Additionally, the UIRF Agreement will terminate upon any of the following events:
•
We fail to make a payment upon 45 days written notice of default; or
•
We are involved in liquidation or bankruptcy proceedings unless the remaining party agrees not to
terminate.
Brigham Young University — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement, or the BYU Agreement, with Brigham Young
University, or BYU. This agreement granted to us an exclusive, royalty-bearing license under BYU’s rights
in stabilization of biological agents methods relating to human vaccines to make, use and sell products that
are covered by such patent rights worldwide. The agreement also granted to us the right to sublicense. BYU
and the Church of Jesus Christ of Latter-day Saints and the Church Education System retained the right and
ability to use such patent rights for academic and ecclesiastical purposes and also to purchase products
using such patents rights at a discounted price.
We also are obligated to pay BYU low single digit percentage royalties on the Adjusted Gross Sales as
defined in the BYU Agreement, and certain other payments. The aggregate milestone payments under the
BYU Agreement potentially total up to $400,000. BYU is responsible for diligently prosecuting and
maintaining the licensed BYU patent rights and we will reimburse them for one-third of their costs.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed BYU patent rights as licensed products or processes.
The term of the BYU Agreement continues until the expiration of the last to expire patents (which is
expected to be in 2022), or until the agreement is earlier terminated. We may terminate the agreement on
prior written notice to BYU. Each party has the right to terminate the agreement for the other party’s
uncured material breach of obligations under the agreement. Additionally, the BYU Agreement will
terminate upon any of the following events:
•
•
We are placed in the hands of a receiver or make a general assignment for the benefit of creditors,
such that we are unable to perform our obligations under the agreement; or
Substantially all of our assets or our successor-in interest are seized or attached in a final, unappealed
or unappealable order in conjunction with any action brought against us by a third-party creditor,
such that we are unable to perform our continuing obligations hereunder.
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Cystic Fibrosis Foundation Agreement
In December 2016, pursuant to a letter agreement between us and the Cystic Fibrosis Foundation, we
received an award for up to $2.9 million from the Cystic Fibrosis Foundation to advance research on
potential drugs utilizing inhaled gallium citrate anti infective. On November 26, 2018, pursuant to an
amendment to the letter agreement, the Cystic Fibrosis Foundation increased the potential award to up to
approximately $7.5 million. Under the award agreement, the Cystic Fibrosis Foundation will make
payments to us as certain milestones are met. The award agreement also contains a provision whereby if we
spend less on developing a potential drug utilizing inhaled gallium citrate anti infective than we actually
receive under this award agreement, we will be required to return the excess portion of the award to the
Cystic Fibrosis Foundation. No liability related to this excess amount was recorded by us as of
December 31, 2020 and 2019.
In the event that development efforts are successful and we commercialized a drug from these related
development efforts, we may be subject to pay to Cystic Fibrosis Foundation a one-time amount equal to
nine times the awarded amount. Such amount shall be paid in not more than five annual installments.
In the event that we license rights to the product in the field to a third-party, sell the product, or
consummate a change of control transaction prior to the first commercial sale, we shall pay to the Cystic
Fibrosis Foundation an amount equal to fifteen percent (15%) of the amounts received by us and its
shareholders in connection with such disposition up to nine times the actual awarded amount received from
the Cystic Fiborisis Foundation.
In the event that the development efforts are delayed, which result from events within our control, for
more than one hundred eighty (180) consecutive days at any time before we first commercialize the drug
from the related development efforts, the Cystic Fibrosis Foundation may provide an interruption notice to
us. We then have thirty (30) days to respond to such notice. If we do not respond within thirty (30) days, an
interruption license shall be effective. The interruption license to the Cystic Fibrosis Foundation is an
exclusive, worldwide license under the development program technology to manufacture, have
manufactured, license, use, sell, offer to sell, and support the product in the field and includes financial
conditions for both parties.
None of these events have occurred as of December 31, 2020.
Program for Appropriate Technology in Health and PATH Vaccine Solutions
We granted the Program for Appropriate Technology in Health, or PATH, a global non-profit
organization, and the PATH Vaccine Solutions a non-exclusive license, with right to sublicense
formulations, for use with the measles, rotavirus, live-attenuated influenza, pneumococcal and enteric
vaccines only for sale in developing countries.
We have also agreed to provide rotavirus vaccines to public sector purchasers in developing countries
at a preferential price relative to private sector purchasers in developing countries where the rotavirus
vaccine utilizing the enabling formulation technology is offered for sale.
Corporate Licensing Arrangements
Serum Institute of India (via Serum AMR Products)
In July 2019, we entered into an Option Agreement for Exclusive Product and Platform Technology
License (the Option Agreement) with Serum International BV, a company incorporated in the Netherlands
(SIBV). Pursuant to the Option Agreement, SIBV made a fee payment to us in the amount of $5 million.
In September 2019, we entered into a License, Development and Commercialization Agreement (the
License Agreement) with Serum AMR Products, a Netherlands based company (SAMR), which is a wholly
owned subsidiary of SIBV, pursuant to the previous Option Agreement, and received an upfront cash
payment of $10 million (in addition to the $5 million that was initially received upon the parties entering
into the Option Agreement).
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Pursuant to the License Agreement we granted to SAMR the following:
a.
b.
c.
d.
Limited Territory Intellectual Property (IP) Licenses — exclusive licenses to develop, distribute,
market, promote, sell, have sold, offer for sale, import and otherwise commercialize our products
related to AR-301, AR-105, and AR-101 (Aridis Products) in (a) the country of India, and (b) all
other countries of the world except the USA, Canada, EU Territory, UK, China, Australia, South
Korea, Brazil, New Zealand, and Japan (the Limited Territory) for the term of the License
Agreement. For our products AR-105 and AR-101, the countries do not exclude South Korea and
Brazil. These licenses do not include the right to label, package, manufacture or have
manufactured the products; however, we granted to SAMR a separate option for manufacturing
rights related to these products, as discussed below.
Worldwide Territory IP License — an exclusive license to develop, manufacture, make, have
made, distribute, market, promote, sell, have sold, offer for sale, import and otherwise
commercialize the AR-201 product in all countries of the world except China, Hong Kong, Macau
and Taiwan (the Worldwide Territory) during the term of the License Agreement.
Research & Development Option — the right for us to provide research services for the
identification of up to five (5) candidates for SAMR Products including candidate development
and an exclusive license to develop, manufacture, make, have made, distribute, market, promote,
sell, have sold, offer for sale, import and otherwise commercialize these development products in
the Worldwide Territory, during the term of the License Agreement. The five candidates to be
identified and the development plans related to this option were to be agreed upon within
12 months of the License Agreement.
Manufacturing Rights Option — The initial license granted above for the Limited License Products
does not allow for manufacturing. This option provides incremental rights related to the Limited
License Products beyond what is granted as part of the licensing discussed above — i.e., an
exclusive license for use by SAMR to manufacture and supply the Limited License Products for
SAMR’s own use (in the Limited Territory) and to manufacture and supply the Products to us or
our affiliates (for Aridis’s use outside the Limited Territory) at commercially reasonable rates, and
at sufficient capacity as specified in a manufacturing agreement that shall be negotiated and
executed in good faith. The term of the manufacturing agreement shall be twenty (20) years. If a
third-party sublicensee of Aridis Products wishes to have Aridis Product manufactured by itself for
the territory for which it has a license from us, then we shall have the right to buy back the
manufacturing rights by paying to SAMR $5 million.
SAMR agrees to exercise or waive this option by December 31, 2021. However, in order to
exercise the option SAMR must first demonstrate, to our reasonable satisfaction, SAMR’s ability
for manufacturing consistency of Limited License Products in conformance to all regulatory FDA
and EMA requirements. SAMR acknowledges that is must meet expected timelines for the
expected approval date for the first Licensed Product and will need to have completed a ready
production facility within a specified timeline in order to allow sufficient time for demonstration
of capacity and consistency and completion of Quality Agreements.
e.
Development Support Activities — we will share our know-how related to the products in order to
assist SAMR is its efforts to develop, receive regulatory approval for, and manufacture and sale
the licensed products in SAMR’s authorized territories. This will be performed under the direction
of a Joint Steering Committee (JSC) and will follow the development plan approved by the JSC.
As part of these activities each party shall share all relevant clinical data and regulatory
documentation created by it anywhere in the world.
Additionally, in certain circumstances, SAMR and us will agree to commit to negotiate in good faith to
extend the rights granted in the License Agreement to include an exclusive license to make, have made,
import, use and have used, and sell and have sold, certain Aridis Products in the European Union during the
Term. Such an obligation upon us to negotiate such rights is preconditioned upon the demonstration of
certain milestones by SAMR, including its obtaining, under certain funding programs, sufficient financial
support to cover all requisite clinical development and manufacturing development costs, under terms which
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allow distribution of Aridis Products at commercially reasonable prices and without materially hindering
distribution of Aridis Products in any other territories.
Pursuant to the License Agreement, SAMR shall make commercially reasonable efforts to obtain all
regulatory approvals, to have approved for commercialization and sale, and to commercialize and sell
(i) Aridis Products in the Limited Territory, and (ii) SAMR Products and the AR-201 product in the
Worldwide Territory.
In addition to the upfront payments noted above, upon the achievement of certain milestones, SAMR
shall pay us up to $42.5 million in milestone fees related to the products covered in the License Agreement.
SAMR shall also be obligated to pay us royalties ranging from 4% to 6% on net sales of all licensed
products, except for Aridis Products in the European Union, should such be authorized at a later date, which
require payment of 20% royalties on the net sales of those products.
Kenta Biotech Ltd.
We are a party to an asset purchase agreement with Kenta Biotech Ltd., or Kenta, a for profit
corporation duly incorporated in Schlieren (Canton of Zurich, Switzerland). The asset purchase agreement
contains a licensing arrangement based upon the worldwide out-licensing or net sales of certain of Kenta’s
physical assets, contracts and technology. Pursuant to such agreement, we were obligated to pay Kenta a
fixed purchase price, which was fully paid during 2013 and 2014, and are obligated to pay a declining scale
of royalties on gross licensing revenues from either out-licensing of the assets or net sales revenues actually
received by us up to a maximum of $50 million.
The agreement also assigned and transferred certain of Kenta’s physical assets, contracts and
technology to us. The physical assets included all physical assets owned or controlled by Kenta, including
but not limited to cell lines, genes, antibodies, diagnostic assays and related documentation, which were
related to Kenta’s MabIgX technology platform for hybridoma generation and its mAb targeting S. aureus,
P. aeruginosa, A. baumannii and RSV. The technology included all intellectual property, including but not
limited to patents, patent applications, trademarks, knowhow, trade secrets, regulatory filings, clinical trials,
clinical trial information, all supporting documentation and all other related intellectual property which are
related to Kenta’s MabIgX technology platform for hybridoma generation and its mAb targeting S. aureus,
P. aeruginosa, A. baumannii and RSV. The contracts included the contracts and agreements (including all
rights and obligations thereunder), whether oral or written, which Kenta has concluded and which pertain to
the assets. The contracts were primarily related to the ongoing clinical trial of AR-301.
Emergent Product Development Gaithersburg Inc.
We are party to a license agreement, or the Emergent Agreement, with Emergent Product Development
Gaithersburg Inc., or Emergent, which we entered into in 2010. We granted Emergent an exclusive,
perpetual, royalty-bearing license to use certain of our patents and related know how for the prevention or
treatment of infection or illness caused by biodefense pathogens. We also granted a non-exclusive, royalty-
bearing license to use certain of our patents and related know how for the prevention or treatment of
tularemia and viral hemorrhagic fever indications. Both exclusive and non-exclusive licenses grants
Emergent the opportunity to Exploit Licensed Products as defined in the Emergent Agreement in all of the
countries of the world. There are currently no commercialized Exploit Licensed Products using this
technology.
Emergent is obligated to pay us low single digit percentage royalties on net sales from their and their
sublicensee’s sale of any commercialized licensed product, and certain other payments. The aggregate
milestone payments that we are entitled to pursuant to the Emergent Agreement potentially total up to
$2.8 million.
The term of the Emergent Agreement continues until expiration of all royalty obligations or until the
agreement is earlier terminated. Emergent may terminate the agreement upon 60 days prior written notice.
In addition, the Emergent Agreement terminates in the event the parties mutually agree to terminate the
agreement.
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Joint Venture
Joint Venture with Shenzhen Hepalink Pharmaceutical Group Co., Ltd.
We entered into a Joint Venture Contract, as amended, effective August 6, 2018, or the JV Agreement,
with Shenzhen Hepalink Pharmaceutical Group Co., Ltd., a People’s Republic of China company, or
Hepalink, a related party and significant shareholder in the Company, pursuant to which we formed a Joint
Venture company named Shenzhen Arimab BioPharmaceuticals Co., Ltd., or SABC, a People’s Republic of
China Company, to develop, manufacture, import and distribute AR-101, AR-301 and AR-105 in China,
Hong Kong, Macau and Taiwan, collectively, referred to as the Territory. The Joint Venture received
regulatory approval in China and SABC was formed on July 2, 2018.
Hepalink contributed the equivalent of $7.2 million in renminbi, the official currency of the People’s
Republic of China, and owns 51% of the capital of SABC and we contributed (i) $1.0 million in cash and
(ii) a license to AR-101, AR-301 and AR-105 pursuant to an Amended and Restated Technology License
and Collaboration Agreement between us and SABC and we own 49% of the capital of SABC. In addition,
Hepalink will provide SABC with clinical and regulatory personnel services for clinical and regulatory
review, application and filing procedures in the Territory and we will provide clinical and regulatory
personnel services to assist in coordination of the execution of the clinical study in China and also with
CMC personnel services for drug supply and manufacturing planning. Hepalink is obligated to make an
additional equity investment of $10.8 million into SABC in connection with a future financing of SABC
provided that (i) such financing does not occur earlier than January 1, 2019, (ii) top-line clinical results of
the first global AR-301 Phase 3 study are available, (iii) CFDA approval for a Phase 3 clinical trial in China
is granted, (iv) we have not breached the Amended and Restated Technology License and Collaboration
Agreement and (v) the SABC Board has approved such financing. If and to the extent these milestone
events occur and Hepalink contributes additional capital to SABC, our 49% ownership stake in SABC will
be diminished in proportion to such investment. It was agreed by the parties that we shall be reimbursed for
certain legal and contract manufacturing expenses related to the clinical drug supply for a Phase 3 clinical
study of AR-301 and the clinical drug supply for a clinical study of AR-105.
The Board of Directors of SABC consists of five directors, of which Hepalink appoints three members
and we appoint two members. The term of office for each director is for four years. The Chief Executive
Officer and Chief Financial Officer of SABC were approved by unanimous consent of the Board of
Directors of SABC. The term of SABC is 20 years from the date of formation.
The JV Agreement will terminate and SABC will be dissolved in the event that:
•
The term expires and is not extended;
•
The parties decide to terminate the JV Agreement;
•
A party fails to contribute funds for the capital it subscribed for and such failure exceeds six months;
•
•
A party is involved in liquidation or bankruptcy proceedings unless the remaining party agrees not to
terminate;
A party fails to obtain approval of a resolution requiring the unanimous vote of the Board and such
party notifies the other party that such failure will materially adversely affect SABC and cannot be
resolved;
•
A force majeure event prevails for a period in excess of six months;
•
A breach of the agreement occurs and has not been cured in 60 days; or
•
Either we or SABC terminates the Technology License and Collaboration Agreement in accordance
with its terms.
Government Regulation
We operate in a highly regulated industry that is subject to significant federal, state, local and foreign
regulation. Our present and future business has been, and will continue to be, subject to a variety of laws
including, the Federal Food, Drug, and Cosmetic Act, or FDC Act, and the Public Health Service Act,
among others.
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The FDC Act and other federal and state statutes and regulations govern the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products.
As a result of these laws and regulations, product development and product approval processes are very
expensive and time-consuming.
FDA Approval Process
In the United States, pharmaceutical products, including biologics, are subject to extensive regulation
by the FDA. The FDC Act and other federal and state statutes and regulations, govern, among other things,
the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and
marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of
pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a
variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug
applications, or NDAs, or biologic license applications, or BLAs, warning letters, product recalls, product
seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and
criminal prosecution.
Pharmaceutical product development in the United States typically involves preclinical laboratory and
animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may
commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the
drug or biologic for each indication for which FDA approval is sought. Satisfaction of FDA pre-market
approval requirements typically takes many years and the actual time required may vary substantially based
upon the type, complexity and novelty of the product or disease.
Preclinical tests include laboratory evaluation as well as animal trials to assess the characteristics and
potential pharmacology and toxicity of the product. The conduct of the preclinical tests must comply with
federal regulations and requirements including good laboratory practices. The results of preclinical testing
are submitted to the FDA as part of an IND along with other information, including information about
product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical
tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is
submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of
clinical testing in humans. If the FDA has not objected to the IND within this 30-day period, the clinical
trial proposed in the IND may begin.
Clinical trials involve the administration of the investigational drug to healthy volunteers or patients
under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with
federal regulations and good clinical practices, or GCP, as well as under protocols detailing the objectives of
the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each
protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the
FDA as part of the IND.
The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or
impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA
requirements or presents an unacceptable risk to the clinical trial patients. The clinical trial protocol and
informed consent information for patients in clinical trials must also be submitted to an institutional review
board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either
temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other
conditions.
Clinical trials to support NDAs or BLAs, which are applications for marketing approval, are typically
conducted in three sequential Phases, but the Phases may overlap. In Phase 1, the initial introduction of the
investigational drug candidate into healthy human subjects or patients, the investigational drug is tested to
assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses
and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient
population, to determine the effectiveness of the investigational drug for a particular indication or
indications, dosage tolerance and optimum dosage, and identify common adverse effects and safety risks. In
the case of
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product candidates for severe or life-threatening diseases such as pneumonia, the initial human testing is
often conducted in patients rather than in healthy volunteers.
If an investigational drug demonstrates evidence of effectiveness and an acceptable safety profile in
Phase 2 evaluations, Phase 3 clinical trials are undertaken to obtain additional information about clinical
efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to
permit the FDA to evaluate the overall benefit-risk relationship of the investigational drug and to provide
adequate information for its labeling.
After completion of the required clinical testing, an NDA or, in the case of a biologic, a BLA, is
prepared and submitted to the FDA. FDA approval of the marketing application is required before
marketing of the product may begin in the United States. The marketing application must include the results
of all preclinical, clinical and other testing and a compilation of data relating to the product’s pharmacology,
chemistry, manufacture, and controls.
The FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be
accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit
substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The
FDA has agreed to certain performance goals in the review of marketing applications. Most such
applications for non-priority drug products are reviewed within ten months. The review process may be
extended by the FDA for three additional months to consider new information submitted during the review
or clarification regarding information already provided in the submission. The FDA may also refer
applications for novel drug products or drug products that present difficult questions of safety or efficacy to
an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation
and a recommendation as to whether the application should be approved. The FDA is not bound by the
recommendation of an advisory committee, but it generally follows such recommendations. Before
approving a marketing application, the FDA will typically inspect one or more clinical sites to assure
compliance with GCP.
Additionally, the FDA will inspect the facility or the facilities at which the drug product is
manufactured. The FDA will not approve the NDA or, in the case of a biologic, the BLA unless compliance
with cGMPs is satisfactory and the marketing application contains data that provide substantial evidence
that the product is safe and effective in the indication studied. Manufacturers of biologics also must comply
with FDA’s general biological product standards.
After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues an approval letter
or a complete response letter. A complete response letter outlines the deficiencies in the submission and
may require substantial additional testing or information in order for the FDA to reconsider the application.
If and when those deficiencies have been addressed in a resubmission of the marketing application, the FDA
will re-initiate review. If the FDA is satisfied that the deficiencies have been addressed, the agency will
issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months
depending on the type of information included. It is not unusual for the FDA to issue a complete response
letter because it believes that the drug product is not safe enough or effective enough or because it does not
believe that the data submitted are reliable or conclusive.
An approval letter authorizes commercial marketing of the drug product with specific prescribing
information for specific indications. As a condition of approval of the marketing application, the FDA may
require substantial post-approval testing and surveillance to monitor the drug product’s safety or efficacy
and may impose other conditions, including labeling restrictions, which can materially affect the product’s
potential market and profitability. Once granted, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or problems are identified following initial marketing.
Orphan Drug Act in the United States
The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare
diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for
orphan drug designation. Orphan drug designation must be requested before submitting a BLA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the regulatory review and
approval process. If a product that has orphan drug designation subsequently receives the first FDA
approval
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for the disease for which it has such designation, the holder of the approval is entitled to a seven-year
exclusive marketing period in the U.S. for that product except in very limited circumstances. For example, a
drug that the FDA considers to be clinically superior to, or different from, another approved orphan drug,
even though for the same indication, may also obtain approval in the U.S. during the seven-year exclusive
marketing period. In addition, holders of exclusivity for orphan drugs are expected to assure the availability
of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in
the withdrawal of marketing exclusivity for the drug.
QIDP Designation is awarded to antibacterial or antifungal product candidates for human use that are
intended to treat serious or life-threatening infections caused by certain bacterial or fungal pathogens that
are deemed to be a particular threat to public health. QIDP designated products have a five-year market
exclusivity extension and receive priority review for the first application submitted for product approval.
Orphan Designation and Exclusivity in the European Union
Products authorized as “orphan medicinal products” in the EU are entitled to certain exclusivity
benefits. In accordance with Article 3 of Regulation (EC) No. 141/2000 of the European Parliament and of
the Council of 16 December 1999 on orphan medicinal products, a medicinal product may be designated as
an orphan medicinal product if: (1) it is intended for the diagnosis, prevention or treatment of a life-
threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in
10,000 persons in the European Union when the application is made, or (b) the product, without the
incentives derived from orphan medicinal product status, would not generate sufficient return in the
European Union to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention
or treatment of such condition authorized for marketing in the EU, or if such a method exists, the product
will be of significant benefit to those affected by the condition.
An application for orphan drug designation must be submitted before the application for marketing
authorization. Orphan drug designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process.
Products authorized in the EU as orphan medicinal products are entitled to 10 years of market
exclusivity. The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is
established that the product no longer meets the criteria for orphan designation, for example, if the product
is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing
authorization may be granted to a similar product during the 10-year period of market exclusivity for the
same therapeutic indication at any time if:
•
•
•
The second applicant can establish in its application that its product, although similar to the orphan
medicinal product already authorized, is safer, more effective or otherwise clinically superior;
The holder of the marketing authorization for the original orphan medicinal product consents to a
second orphan medicinal product application; or
The holder of the marketing authorization for the original orphan medicinal product cannot supply
enough orphan medicinal product.
Other Regulatory Requirements
Once a NDA or BLA is approved, a product will be subject to certain post-approval requirements. For
instance, the FDA closely regulates the post-approval marketing and promotion of therapeutic products,
including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-
sponsored scientific and educational activities and promotional activities involving the internet.
Biologics may be marketed only for the approved indications and in accordance with the provisions of
the approved labeling. Changes to some of the conditions established in an approved application, including
changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA
approval of a new BLA or BLA supplement, before the change can be implemented. A BLA supplement for
a new indication typically requires clinical data similar to that in the original application, and the FDA uses
the same procedures and actions in reviewing BLA supplements as it does in reviewing BLAs. We cannot
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be certain that the FDA or any other regulatory agency will grant approval for our product candidates for
any other indications or any other product candidate for any indication on a timely basis, if at all.
Adverse event reporting and submission of periodic reports is required following FDA approval of a
BLA. The FDA also may require post-marketing testing, known as Phase 4 testing, risk evaluation and
mitigation strategies, and surveillance to monitor the effects of an approved product or place conditions on
an approval that could restrict the distribution or use of the product. In addition, quality control as well as
product manufacturing, packaging, and labeling procedures must continue to conform to cGMPs after
approval. Manufacturers and certain of their subcontractors are required to register their establishments with
the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA during
which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly,
manufacturers must continue to expend time, money and effort in the areas of production and quality control
to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request
product recalls if a company fails to comply with regulatory standards, if it encounters problems following
initial marketing, or if previously unrecognized problems are subsequently discovered.
Companion Diagnostic Review and Approval
Some of our product candidates currently may rely upon the use of a companion microbial diagnostic
test to select patients who are infected with either S. aureus, P. aeruginosa, or A. baumannii bacteria and in
the future, we may utilize other biomarkers as companion diagnostic tests for our other product candidates.
Approval of our product candidates may require FDA approval of a Premarket Approval Application, or
PMA, for a reproducible, validated diagnostic test to be used with our mAb product candidates.
The PMA process is costly, lengthy, and uncertain, although the PMA review for the microbial tests is
not currently planned to occur concurrently with the development and review of a BLA for our product
candidates. The receipt and timing of PMA approval may have a significant effect on the receipt and timing
of commercial approval for our product candidates. Human diagnostic products are subject to pervasive and
ongoing regulatory obligations, including the submission of medical device reports, adherence to the
Quality Systems Regulation, recordkeeping and product labeling, as enforced by the FDA and comparable
state authorities.
U.S. Foreign Corrupt Practices Act
The U.S. Foreign Corrupt Practices Act, to which we are subject, prohibits corporations and individuals
from engaging in certain activities to obtain or retain business or to influence a person working in an official
capacity. It is illegal to pay, offer to pay or authorize 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 an official capacity.
Federal and State Fraud and Abuse Laws
Healthcare providers, physicians and third-party payors play a primary role in the recommendation and
prescription of drug and biologic product candidates which obtain marketing approval. In addition to FDA
restrictions on marketing of pharmaceutical products, pharmaceutical manufacturers are exposed, directly,
or indirectly, through customers, to broadly applicable fraud and abuse and other healthcare laws and
regulations that may affect the business or financial arrangements and relationships through which a
pharmaceutical manufacturer can market, sell and distribute drug and biologic products. These laws include,
but are not limited to:
The federal Anti-Kickback Statute which prohibits, any person or entity from, among other things,
knowingly and willfully offering, paying, soliciting, or receiving any remuneration, directly or indirectly,
overtly or covertly, in cash or in-kind, to induce or reward either the referring of an individual for, or the
purchasing, leasing, ordering, or arranging for the purchase, lease, or order of any healthcare item or service
reimbursable, in whole or in part, under Medicare, Medicaid, or any other federally financed healthcare
program. The term “remuneration” has been broadly interpreted to include anything of value. This statute
has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and
prescribers, purchasers, and formulary managers on the other hand. Although there are a number of
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statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution, the
exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an
exception or safe harbor.
The federal false claims and civil monetary penalty laws, including the Federal False Claims Act,
which imposes significant penalties and can be enforced by private citizens through civil qui tam actions,
prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, a
false, fictitious or fraudulent claim for payment to the federal government, or knowingly making, using or
causing to be made, a false statement or record material to a false or fraudulent claim to avoid, decrease or
conceal an obligation to pay money to the federal government. In addition, a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the Federal False Claims Act. As a result of a modification made by the Federal Fraud
Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property
presented to the U.S. government. In addition, manufacturers can be held liable under the False Claims Act
even when they do not submit claims directly to government payors if they are deemed to “cause” the
submission of false or fraudulent claims. Criminal prosecution is also possible for making or presenting a
false, fictitious or fraudulent claim to the federal government. Recently, several pharmaceutical and other
healthcare companies have been prosecuted under these laws for allegedly providing free product to
customers with certain expectation that the customers would bill federal programs for the product. Other
companies have been prosecuted for causing false claims to be submitted because of the company’s
marketing of the product for unapproved, and thus non-reimbursable, uses.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, among
other things, imposes criminal liability for executing or attempting to execute a scheme to defraud any
healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or
stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and creates federal criminal laws that prohibit knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statements or
representations, or making or using any false writing or document knowing the same to contain any
materially false, fictitious or fraudulent statement or entry in connection with the delivery of, or payment
for, benefits, items or services.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009, or HITECH, and its implementing regulations, which impose certain requirements relating to the
privacy, security, transmission and breach reporting of individually identifiable health information upon
entities subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers
and their respective business associates that perform services for them that involve individually identifiable
health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make
civil and criminal penalties directly applicable to business associates, and gave state attorneys general new
authority to file civil actions for damages or injunctions in U.S. federal courts to enforce the federal HIPAA
laws and seek attorneys’ fees and costs associated with pursuing federal civil actions.
The federal physician payment transparency requirements, sometimes referred to as the “Physician
Payments Sunshine Act,” and its implementing regulations, which require certain manufacturers of drugs,
devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program (with certain exceptions) to report annually to the United States
Department of Health and Human Services, or HHS, information related to payments or other transfers of
value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors)
and teaching hospitals, as well as ownership and investment interests held by physicians and their
immediate family members.
State and foreign law equivalents of each of the above federal laws, such as anti-kickback and false
claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services
reimbursed by non-governmental third-party payors, including private insurers.
State laws that require pharmaceutical companies to implement compliance programs, comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated
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by the federal government, or to track and report gifts, compensation and other remuneration provided to
physicians and other healthcare providers, state and local laws that require the registration of
pharmaceutical sales representatives, and other federal, state and foreign laws that govern the privacy and
security of health information or personally identifiable information in certain circumstances, including
state health information privacy and data breach notification laws which govern the collection, use,
disclosure, and protection of health-related and other personal information, many of which differ from each
other in significant ways and often are not pre-empted by HIPAA, thus requiring additional compliance
efforts.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some
business activities can be subject to challenge under one or more of such laws. The scope and enforcement
of each of these laws is uncertain and subject to rapid change in the current environment of healthcare
reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement
bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare
providers, which has led to a number of investigations, prosecutions, convictions and settlements in the
healthcare industry.
Ensuring that business arrangements with third parties comply with applicable healthcare laws and
regulations is costly and time consuming. If business operations are found to be in violation of any of the
laws described above or any other applicable governmental regulations a pharmaceutical manufacturer may
be subject to penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement,
individual imprisonment, exclusion from governmental funded healthcare programs, such as Medicare and
Medicaid, contractual damages, reputational harm, diminished profits and future earnings, additional
reporting obligations and oversight if subject to a corporate integrity agreement or other agreement to
resolve allegations of non-compliance with these laws, and curtailment or restructuring of operations, any of
which could adversely affect a pharmaceutical manufacturer’s ability to operate its business and the results
of its operations.
Health care reform measures could adversely affect our business
In the United States and foreign jurisdictions, there have been, and continue to be, a number of
legislative and regulatory changes and proposed changes to the healthcare system that could affect our
future results of operations. In particular, there have been and continue to be a number of initiatives at the
U.S. federal and state levels that seek to reduce healthcare costs. In 2010, the PPACA was enacted, which
includes measures to significantly change the way health care is financed by both governmental and private
insurers. Among the provisions of the PPACA of greatest importance to the pharmaceutical and
biotechnology industry are the following:
•
an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents, apportioned among these entities according to their market share in
certain government healthcare programs;
•
implementation of the federal physician payment transparency requirements, sometimes referred to
as the “Physician Payments Sunshine Act”;
•
a licensure framework for follow-on biologic products;
•
•
•
•
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research;
establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services,
or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid
spending, potentially including prescription drug spending;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug
Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic
drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average
Manufacturer Price, or AMP;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate
Program are calculated for certain drugs and biologics, including our product candidates, that are
inhaled, infused, instilled, implanted or injected;
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•
•
•
extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who
are enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to
offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories
for individuals with income at or below 133% of the federal poverty level, thereby potentially
increasing manufacturers’ Medicaid rebate liability;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be
covered under Medicare Part D; and
•
expansion of the entities eligible for discounts under the Public Health program.
There have been executive, judicial and Congressional challenges to certain aspects of the PPACA. For
example, President Trump signed Executive Orders and other directives designed to delay the
implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for
health insurance mandated by the PPACA. Concurrently, Congress considered legislation to repeal or repeal
and replace all or part of the PPACA. While Congress has not passed comprehensive repeal legislation,
several bills affecting the implementation of certain taxes under the PPACA have been enacted. The Tax
Cuts and Jobs Act of 2017 (the “Tax Act”) included a provision repealing, effective January 1, 2019, the
tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain
qualifying health coverage for all or part of a year. Additionally, the 2020 federal spending package
permanently eliminated, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost
employer-sponsored health coverage and the medical device tax and, effective January 1, 2021, also
eliminated the health insurance tax. Further, the Bipartisan Budget Act of 2018 (the “BBA”) among other
things, amends the PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug
plans, commonly referred to as the “donut hole.” Congress may consider other legislation to repeal or
replace other elements of the PPACA. On December 14, 2018, a Texas U.S. District Court Judge ruled that
the PPACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as
part of the Tax Act. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit
upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case
back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well.
The U.S. Supreme Court is currently reviewing this case, but it is unclear when a decision will be made.
Although the U.S. Supreme Court has not yet ruled on the constitutionality of the PPACA, on January 28,
2021, President Biden issued an executive order to initiate a special enrollment period from February 15,
2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the PPACA
marketplace. The executive order also instructs certain governmental agencies to review and reconsider
their existing policies and rules that limit access to healthcare, including among others, reexamining
Medicaid demonstration projects and waiver programs that include work requirements, and policies that
create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.
It is unclear how the Supreme Court ruling, other such litigation and the healthcare reform measures of the
Biden administration will impact the PPACA and our business.
Many of the details regarding the implementation of the PPACA are yet to be determined, and at this
time, the full effect that the PPACA would have on our business remains unclear. In particular, there is
uncertainty surrounding the applicability of the biosimilars provisions under the PPACA to our product
candidates. The FDA has issued several guidance documents, and withdrawn others, but no implementing
regulations on biosimilars have been adopted. A number of biosimilar applications have been approved over
the past few years. It is not certain that we will receive 12 years of biologics marketing exclusivity for any
of our products. The regulations that are ultimately promulgated and their implementation are likely to have
considerable impact on the way we conduct our business and may require us to change current strategies. A
biosimilar is a biological product that is highly similar to an approved drug notwithstanding minor
differences in clinically inactive components, and for which there are no clinically meaningful differences
between the biological product and the approved drug in terms of the safety, purity, and potency of the
product.
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Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical
pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in
several recent congressional inquiries and proposed and enacted federal and state legislation designed to,
among other things, bring more transparency to product pricing, review the relationship between pricing and
manufacturer patient programs, and reform government program reimbursement methodologies for
products.
In addition, given recent federal and state government initiatives directed at lowering the total cost of
healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of
prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While we cannot
predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and
biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This
could harm our ability to generate revenues. Increases in importation or re-importation of pharmaceutical
products from foreign countries into the United States could put competitive pressure on our ability to
profitably price our products, which, in turn, could adversely affect our business, results of operations,
financial condition and prospects. We might elect not to seek approval for or market our products in foreign
jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we
generate from our product sales. It is also possible that other legislative proposals having similar effects will
be adopted.
Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety
and efficacy can change over time and can be affected by many factors, such as the emergence of new
information, including on other products, changing policies and agency funding, staffing and leadership. We
cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our
business prospects. For example, average review times at the FDA for marketing approval applications can
be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy
changes.
Regulation in the European Union
Biologics are also subject to extensive regulation outside of the U.S. In the EU, for example, there is a
centralized approval procedure that authorizes marketing of a product in all countries of the EU, which
includes most major countries in Europe. If this procedure is not used, approval in one country of the
European Union can be used to obtain approval in another country of the EU under two simplified
application processes, the mutual recognition procedure or the decentralized procedure, both of which rely
on the principle of mutual recognition. After receiving regulatory approval through any of the European
registration procedures, pricing and reimbursement approvals are also required in most countries.
Other Regulations
We are also subject to numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of
hazardous or potentially hazardous substances and biological materials. We may incur significant costs to
comply with such laws and regulations now or in the future.
Reimbursement
Obtaining coverage and reimbursement approval for a product from a government or other third-party
payor is a time-consuming and costly process that can require the provision of supporting scientific, clinical
and cost effectiveness data for the use of drug or biologic products to the payor. There may be significant
delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be
more limited than the purposes for which the product is approved by the FDA or similar regulatory
authorities outside of the United States. Moreover, eligibility for coverage and reimbursement does not
imply that a product will be paid for in all cases or at a rate that covers operating costs, including research,
development, intellectual property, manufacture, sale and distribution expenses. Reimbursement rates may
vary according to the use of the product and the clinical setting in which it is used, may be based on
reimbursement levels already set for lower cost products and may be incorporated into existing payments
for other services. Net prices for products may be reduced by mandatory discounts or rebates required by
government healthcare
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programs or private payors and by any future relaxation of laws that presently restrict imports of product
from countries where they may be sold at lower prices than in the U.S.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved
products. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting
their own reimbursement policies, but also have their own methods and approval process apart from
Medicare coverage and reimbursement determinations. It is difficult to predict what third-party payors will
decide with respect to coverage and reimbursement for new drug and biologic product candidates. An
inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and
private payors for any approved products could have a material adverse effect on a pharmaceutical
manufacturer’s operating results, ability to raise capital needed to commercialize products and overall
financial condition.
Reimbursement may impact the demand for, and/or the price of, any product which obtains marketing
approval. Even if coverage is obtained for a given product by a third-party payor, the resulting
reimbursement payment rates may not be adequate or may require co-payments that patients find
unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their
prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated
with those medications. Patients are unlikely to use products unless coverage is provided and reimbursement
is adequate to cover all or a significant portion of the cost of the products. Therefore, coverage and adequate
reimbursement is critical to new product acceptance. Coverage decisions may depend upon clinical and
economic standards that disfavor new drug products when more established or lower cost therapeutic
alternatives are already available or subsequently become available.
The U.S. government, state legislatures and foreign governmental entities have shown significant
interest in implementing cost containment programs to limit the growth of government-paid healthcare
costs, including price controls, restrictions on reimbursement and coverage and requirements for
substitution of generic products for branded prescription drugs. Adoption of government controls and
measures and tightening of restrictive policies in jurisdictions with existing controls and measures, could
exclude or limit our products from coverage and limit payments for pharmaceuticals.
In addition, it is expected that the increased emphasis on managed care and cost containment measures
in the United States by third-party payors and government authorities will continue and place further
pressure on pharmaceutical pricing and coverage. Coverage policies and third-party reimbursement rates
may change at any time. Even if favorable coverage and reimbursement status is attained for one or more
drug products that gain regulatory approval, less favorable coverage policies and reimbursement rates may
be implemented in the future.
Employees
As of December 31, 2020, we had 33 employees, and engaged several consultants as needed to support
our operations. None of our employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good.
Our Corporate Information
We were formed under the name “Aridis, LLC” in the State of California on April 24, 2003 as a limited
liability company. On August 30, 2004, we changed our name to “Aridis Pharmaceuticals, LLC.” On
May 21, 2014, we converted into a Delaware corporation named “Aridis Pharmaceuticals, Inc.” Our fiscal
year end is December 31. Our principal executive offices have been relocated to 983 University Avenue,
Building B, Los Gatos, California 95032. Our telephone number is (408) 385-1742. Our website address is
www.aridispharma.com. The information contained on, or that can be accessed through, our website is not a
part of this Annual Report.
We have proprietary rights to a number of trademarks used in this prospectus which are important to
®
our business. Solely for convenience, the trademarks and trade names in this prospectus are referred to
without the
and TM symbols, but such references should not be construed as any indicator that their
respective owners will not assert, to the fullest extent under applicable law, their rights thereto. All other
trademarks, trade names and service marks appearing in this prospectus are the property of their respective
owners.
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Item 1A. Risk Factors
You should carefully consider the risks described below, as well as general economic and business risks
and the other information in this Annual Report on Form 10-K. The occurrence of any of the events or
circumstances described below or other adverse events could have a material adverse effect on our
business, results of operations and financial condition and could cause the trading price of our common
stock to decline. Additional risks or uncertainties not presently known to us or that we currently deem
immaterial may also harm our business.
An investment in our common stock involves a high degree of risk. You should give careful
consideration to the following risk factors, in addition to the other information included in this prospectus,
including our consolidated financial statements and related notes, before deciding whether to invest in
shares of our common stock. The occurrence of any of the adverse developments described in the following
risk factors could materially and adversely harm our business, financial condition, results of operations or
prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of
your investment.
Risks Relating to Our Financial Position and Need for Additional Capital
We expect to continue to incur increasing net losses for the foreseeable future, and we may never achieve or
maintain profitability.
We are a clinical-stage biopharmaceutical company with a limited operating history. Investment in
biopharmaceutical product development is highly speculative because it entails substantial upfront capital
expenditures and significant risk that any potential product candidate will fail to demonstrate adequate
effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have
no products approved for commercial sale and have not generated any revenue from product sales to date,
and we continue to incur significant research and development and other expenses related to our ongoing
operations. As a result, we are not profitable and have incurred losses in each period since our inception.
For the year ended December 31, 2020, we reported a net loss of approximately $22.3 million. As of
December 31, 2020, we had an accumulated deficit of $123.1 million.
To become and remain profitable, we or our partners must succeed in developing our product
candidates, obtaining regulatory approval for them, and manufacturing, marketing and selling those
products for which we or our partners may obtain regulatory approval. We or they may not succeed in these
activities, and we may never generate revenue from product sales that is significant enough to achieve
profitability. Because of the numerous risks and uncertainties associated with biopharmaceutical product
development and commercialization, we are unable to accurately predict the timing or amount of future
expenses or when, or if, we will be able to achieve or maintain profitability. Currently, we have no products
approved for commercial sale, and to date we have not generated any product revenue. We have financed
our operations primarily through the sale of equity securities, upfront payments pursuant to collaboration
and license agreements, government grants and capital lease and equipment financing. The size of our future
net losses will depend, in part, on the rate of growth or contraction of our expenses and the level and rate of
growth, if any, of our revenues. Our ability to achieve profitability is dependent on our ability, alone or with
others, to complete the development of our products successfully, obtain the required regulatory approvals,
manufacture and market our proposed products successfully or have such products manufactured and
marketed by others, and gain market acceptance for such products. There can be no assurance as to whether
or when we will achieve profitability.
Our consolidated financial statements include an explanatory paragraph that expresses substantial doubt about our
ability to continue as a going concern, indicating the possibility that we may not be able to operate in the future.
Primarily as a result of our losses incurred to date, our expected continued future losses, and limited
cash balances, we have included disclosure in our consolidated financial statements expressing substantial
doubt about our ability to continue as a going concern. Our ability to continue as a going concern is
contingent upon, among other factors, the sale of the shares of our common stock or obtaining alternate
financing.
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Available cash resources may be insufficient to provide for our working capital needs beyond the next
twelve months.
We expect to continue to incur losses for the foreseeable future and will have to raise additional capital
to fund our planned operations and to meet our long-term business objectives. As a result, there is
substantial doubt about our ability to continue as a going concern unless we are able to successfully raise
additional capital. Until we can generate significant cash from operations, including product and assay
revenues, we expect to continue to fund our operations with the proceeds from offerings of our equity
securities or debt, or transactions involving product development, technology licensing or collaboration. We
can provide no assurances that any sources of a sufficient amount of financing will be available to us on
favorable terms, if at all. Failure to raise additional capital in sufficient amounts would significantly impact
our ability to continue as a going concern. The actual amount of funds that we will need and the timing of
any such investment will be determined by many factors, some of which are beyond our control.
We will require substantial additional capital in the future. If additional capital is not available, we will have to
delay, reduce or cease operations.
Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is
expensive. Development of our product candidates will require substantial additional funds to conduct
research, development and clinical trials necessary to bring such product candidates to market and to
establish manufacturing, marketing and distribution capabilities. We expect our development expenses to
substantially increase in connection with our ongoing activities, particularly as we advance our clinical
programs. Our future capital requirements will depend on many factors, including, among others:
•
•
•
•
the scope, rate of progress, results and costs of our preclinical and non-clinical studies, clinical trials
and other research and development activities;
the scope, rate of progress and costs of our manufacturing development and commercial
manufacturing activities;
the cost, timing and outcomes of regulatory proceedings, including FDA review of any Biologics
License Application, or BLA, or New Drug Application, or NDA, that we file;
payments required with respect to development milestones we achieve under our in-licensing
agreements, including any such payments to University of Chicago, University of Iowa, Brigham and
Women’s Hospital, Inc., Brigham Young University, Public Health Service and Kenta Biotech Ltd.;
•
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
•
the costs associated with commercializing our product candidates, if they receive regulatory
approval;
•
the cost and timing of establishing sales and marketing capabilities;
•
competing technological efforts and market developments;
•
changes in our existing research relationships;
•
our ability to establish collaborative arrangements to the extent necessary;
•
revenues received from any future products;
•
the ability to achieve and receive milestone payments for products licensed to collaborators; and
•
payments received under any future strategic collaborations.
We anticipate that we will continue to generate significant losses for the next several years as we incur
expenses to complete our clinical trial programs for our product candidates, build commercial capabilities,
develop our pipeline and expand our corporate infrastructure. There is a risk of delay or failure at any stage
of developing a product candidate, and the time required and costs involved in successfully accomplishing
our objectives cannot be accurately predicted. Actual drug research and development costs could
substantially exceed budgeted amounts, which could force us to delay, reduce the scope of or eliminate one
or more of our research or development programs. Additionally, if the Cystic Fibrosis Foundation does not
continue to provide funding support, we may not be able to complete the Phase 1/2a clinical trial relating to
AR-501.
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We may never be able to generate a sufficient amount of product revenue to cover our expenses. Until
we do, we expect to seek additional funding through public or private equity or debt financings,
collaborative relationships, license agreements, capital lease transactions or other available financing
transactions. However, there can be no assurance that additional financing will be available on acceptable
terms, if at all, and such financings could be dilutive to existing security holders. Moreover, in the event that
additional funds are obtained through arrangements with collaborators, such arrangements may require us to
relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek
to develop or commercialize ourselves.
If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one
or more of our research or development programs. Our failure to obtain adequate financing when needed
and on acceptable terms would have a material adverse effect on our business, financial condition and
results of operations.
Risks Relating to Clinical Development and Commercialization of Our Product Candidates
If we fail to successfully complete clinical trials, fail to obtain regulatory approval or fail to successfully
commercialize our product candidates, our business would be harmed and the value of our securities would decline.
We must be evaluated in light of the uncertainties and complexities affecting a pre-commercial
biopharmaceutical company. We have not completed clinical development for any of our product candidates.
Our four lead product candidates are AR-301, AR-501 and AR-101, and AR-712. We initiated a Phase 3
pivotal trial of AR-301 in VAP patients, AR-501 is in Phase 1/2a clinical testing and AR-101 is ready for
Phase 2/3 pivotal testing. We are planning to initiate a Phase 1/2 clinical trial for AR-712 in the second half
of 2021. We cannot be assured that our planned clinical development for our product candidates will be
completed in a timely manner, or at all, or that we, or any future partner, will be able to obtain approval for
our product candidates from the FDA or any foreign regulatory authority.
Regulatory agencies, including the FDA must approve our product candidates before they can be
marketed or sold. The approval process is lengthy, requires significant capital expenditures, and is uncertain
as to outcome. Our ability to obtain regulatory approval of any product candidate depends on, among other
things, completion of additional clinical trials, whether our clinical trials demonstrate statistically
significant efficacy with safety issues that do not potentially outweigh the therapeutic benefit of the product
candidates, and whether the regulatory agencies agree that the data from our future clinical trials are
sufficient to support approval for any of our product candidates. The final results of our current and future
clinical trials may not meet FDA or other regulatory agencies’ requirements to approve a product candidate
for marketing, and the regulatory agencies may otherwise determine that our manufacturing processes or
facilities are insufficient to support approval. We, and our current and potential future collaborators, may
need to conduct more clinical trials than we currently anticipate. Even if we do receive FDA or other
regulatory agency approval, we or our collaborators may not be successful in commercializing approved
product candidates. If any of these events occur, our business could be materially harmed and the value of
our securities would decline.
We, or our collaborators, may face delays in completing our clinical trials, and may not be able to complete them at
all.
Clinical trials necessary to support an application for approval to market any of our product candidates
have not been completed. Our, or our collaborators’, current and future clinical trials may be delayed,
unsuccessful, or terminated as a result of many factors, including, but not limited to:
•
•
delays in reaching agreement on trial design and clinical study protocol with investigators and
regulatory authorities in various countries where our clinical trials are being conducted;
governmental or regulatory delays, failure to obtain regulatory approval or changes in regulatory
requirements, policy or guidelines;
•
adding new clinical trial sites;
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•
reaching agreement on acceptable terms with prospective contract research organizations, or CROs,
and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary
significantly among different CROs and trial sites;
•
the actual performance of CROs and clinical trial sites in ensuring the proper and timely conduct of
our clinical trials;
•
developing and validating companion diagnostics on a timely basis;
•
adverse effects experienced by subjects in clinical trials;
•
manufacturing sufficient quantities of product candidates for use in clinical trials;
•
delay or failure in achieving study efficacy endpoints and completing data analysis for a trial;
•
regulators or institutional review boards, or IRBs, may not authorize us to commence a clinical trial;
•
•
•
•
•
•
regulators or IRBs may suspend or terminate clinical research for various reasons, including
noncompliance with regulatory requirements or concerns about patient safety;
we may suspend or terminate our clinical trials if we believe that they expose the participating
patients to unacceptable health risks;
patients may not complete clinical trials due to safety issues, side effects, such as injection site
discomfort, a belief that they are receiving placebo instead of our product candidates, or other
reasons;
patients with serious diseases included in our clinical trials may die or suffer other adverse medical
events for reasons that may not be related to our product candidates;
in those trials where our product candidate is being tested in combination with one or more other
therapies, deaths may occur that may be attributable to the other therapies;
we may have difficulty in maintaining contact with patients after treatment, preventing us from
collecting the data required by our study protocol;
•
product candidates may demonstrate a lack of efficacy during clinical trials;
•
personnel conducting clinical trials may fail to properly administer our product candidates;
•
COVID-19 pandemic may be protracted and cause a significant decline in patient enrollment rate;
and
•
our collaborators may decide not to pursue further clinical trials.
Our estimate that the AR-301 Phase 3 study is a 90% power study is based on an assumed 20% effect
size. If the actual effect size is less than 20%, the probability that we reach statistical significance would be
reduced to a level lower than 90%, which may negatively affect the approval process for AR-301. If the
Cystic Fibrosis Foundation does not continue to provide sufficient level of funding support, we may not be
able to complete the Phase 1/2a clinical trial relating to AR-501.
In addition, we rely on academic institutions, medical institutions, physician practices and CROs to
conduct, supervise or monitor some or all aspects of clinical trials involving our product candidates. We
have less control over the timing and other aspects of these clinical trials than if we conducted the
monitoring and supervision entirely on our own. Third parties may not perform their responsibilities for our
clinical trials on our anticipated schedule or consistent with a clinical trial protocol or applicable
regulations. We also may rely on CROs to perform our data management and analysis. They may not
provide these services as required or in a timely or compliant manner, and we may be held legally
responsible for any or all of their performance failures or inadequacies.
If we or our collaborators experience delays in the completion of, or termination of, any clinical trial of
our product candidates, the commercial prospects of our product candidates will be harmed, and our ability
to generate product revenues from any of these product candidates will be delayed or eliminated. In
addition, any delays in completing our clinical trials will increase our costs, slow our product candidate
development and approval process, and jeopardize our ability to commence product sales and generate
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revenues. Any of these occurrences may harm our business, financial condition and prospects. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may
also lead to the denial of regulatory approval of our product candidates.
Our development of a COVID-19 therapeutic candidate is at an early stage and we may not be able to successfully
develop an effective therapeutic to treat COVID-19 in a timely manner, if at all.
Various government entities, including the U.S. government, are offering incentives, grants, and
contracts to encourage additional investment by commercial organizations into preventative and therapeutic
agents against COVID-19, and this may have the effect of increasing the number of competitors and/or
providing advantages to known competitors. We are aware of a substantial number of companies,
individuals and institutions working to develop a treatment for COVID-19, many of which have
substantially greater financial, scientific, and other resources than us, and another party may be successful
in producing an effective treatment against COVID-19 before we do. The rapid expansion of development
programs directed at COVID-19 may also generate a scarcity of manufacturing capacity among contract
research organizations that provide cGMP materials for development and commercialization of
biopharmaceutical products.
We are committing financial resources to the development of a monoclonal antibody treatment for
COVID-19, which may cause delays in or otherwise negatively impact our other development programs. In
addition, our management and scientific teams have dedicated substantial efforts to our COVID-19
therapeutic development. As of the date of this report, we have 33 employees, which may make us more
reliant on our individual employees and on outside contractors than companies with a greater number of
employees. If we fail to attract and retain management and scientific personnel, we may be unable to
successfully produce, develop and commercialize our therapeutic candidates.
In addition, any success in preclinical testing we might observe for our COVID-19 therapeutic
candidate may not be predictive of the results of later-stage human clinical trials. Factors such as safety,
efficacy and adverse events can emerge at any time in clinical testing and have the potential to have adverse
consequences for our ability to proceed with clinical trials. Other factors such as the emergence of new
SARS-CoV-2 mutant virus variants rendering a reduction or complete loss of binding or neutralization by
the mAbs, manufacturing challenges, availability of raw materials, and slow-downs in the global supply
chain may delay or prevent us from receiving regulatory approval of our therapeutic candidate or, if we do
receive regulatory approval, prevent a successful product launch. We may not be successful in developing a
therapeutics, or another party may be successful in producing a more efficacious vaccine or other treatment
for COVID-19.
If we encounter difficulties enrolling patients in our clinical trials, our clinical trials could be delayed or otherwise
adversely affected.
Clinical trials for our product candidates require us to identify and enroll a large number of patients
with the disease under investigation. We may not be able to enroll a sufficient number of patients with
required or desired characteristics to conduct our clinical trials in a timely manner, if at all. Patient
enrollment is affected by factors including, but not limited to:
•
severity of the disease under investigation;
•
design of the trial protocol;
•
the size and nature of the patient population;
•
eligibility criteria for the study in question;
•
lack of a sufficient number of patients who meet the enrollment criteria for our clinical trials;
•
delays in characterizing a patient’s infection to allow us to select a product candidate, which may
lead patients to seek to enroll in other clinical trials or seek alternative treatments;
•
perceived risks and benefits of the product candidate under study;
•
availability of competing therapies and clinical trials;
•
efforts to facilitate timely enrollment in clinical trials;
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•
clinical trial sites being overtaxed by treating COVID-19 patients;
•
scheduling conflicts with participating clinicians;
•
patient referral practices of physicians;
•
the ability to monitor patients adequately during and after treatment; and
•
proximity and availability of clinical trial sites for prospective patients.
The COVID-19 pandemic continues to impact on clinical trial enrollment worldwide. We have
experienced slower enrollment of patients in our clinical trials due to the pace in which clinical sites were
being initiated for enrollment and may experience similar difficulties in the future. In addition, AR-301 and
AR-101 have been granted orphan drug designation for the treatment of P. aeruginosa and S. aureus in the
EU, respectively, and the low prevalence of such diseases relative to the total population may make it harder
to identify patients to enroll. If we have difficulty enrolling a sufficient number or diversity of patients to
conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials,
either of which would have an adverse effect on our business.
Our product candidates are based on a novel technology, which may raise development issues we may not be able to
resolve, regulatory issues that could delay or prevent approval, or personnel issues that may keep us from being able
to develop our product candidates.
Our product candidates are based on our mAb technology and gallium-based anti-infective platforms.
There can be no assurance that development problems related to our novel technologies will not arise in the
future that will cause significant delays or that we will not able to resolve.
Regulatory approval of novel product candidates such as ours can be more expensive and take longer
®
than for other, more well-known or extensively studied pharmaceutical or biopharmaceutical product
candidates due to our and regulatory agencies’ lack of experience with them. We believe three mAbs have
been approved by the FDA to date, and two other mAbs have received Emergency Use Authorization (for
COVID-19 treatment). The approved mAbs are Synagis which stimulates the immune system to target a
viral infection, Anthim which treats inhalational anthrax in combination with appropriate antibiotics, and
ZINPLAVA to reduce recurrence of Clostridium difficile infections. The novelty of our platform may
lengthen the regulatory review process, require us to conduct additional studies or clinical trials, increase
our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval
and commercialization of our product candidates or lead to significant post-approval limitations or
restrictions. For example, the FDA could require additional studies that may be difficult or impossible to
perform.
®
®
The novel nature of our product candidates also means that fewer people are trained in or experienced
with product candidates of this type, which may make it difficult to find, hire and retain capable personnel,
particularly for research, development, commercialization and manufacturing positions. For example, study
personnel may administer the wrong version of our product candidates or assign study therapy to the wrong
treatment group, resulting in potential disqualification of subjects from data analysis. These factors could
potentially cause a trial to fail for a reason unrelated to the efficacy of our product candidates. If we are
unable to hire and retain the necessary personnel, the rate and success at which we can develop and
commercialize product candidates will be limited. Any such events would increase our costs and could
delay or prevent our ability to commercialize our product candidates, which could adversely impact our
business, financial condition and results of operations.
If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or
experience significant delays in doing so, we may not realize the full commercial potential of our product
candidates.
We intend to use rapid diagnostic tests of patients’ respiratory samples to target our mAb product
candidates to those patients we believe are infected with the bacterial agents which our mAb will act
against. However, currently there is no commercially available companion diagnostic for AR-101 and AR-
401. Therefore, there is a risk that a companion diagnostic for these products are not developed or
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available to support product launch. The FDA and similar regulatory authorities outside the United States
regulate companion diagnostics. Companion diagnostics require separate or coordinated regulatory approval
prior to commercialization of the therapeutic product. Changes to applicable regulations could delay our
development programs or delay or prevent eventual marketing approval for our product candidates that may
have otherwise been approved.
The FDA’s evolving position on the topic of companion diagnostics could affect our clinical
development programs that utilize companion diagnostics. In particular, the FDA may limit our ability to
use retrospective data, otherwise disagree with our approaches to trial design, biomarker qualification,
clinical and analytical validity, and clinical utility, or make us repeat aspects of a trial or initiate new trials.
Assays that can be used as companion diagnostics are commercially available, but in some cases such
as for AR-101, they do not yet have regulatory approval for use as companion diagnostic. We have limited
experience in the development of diagnostics and may not be successful in developing necessary diagnostics
to pair with those product candidates that require a companion diagnostic.
Given our limited experience in developing diagnostics, we expect to rely in part on third parties for
their design and manufacture. If we, or any third parties that we engage to assist us, are unable to
successfully develop companion diagnostics for our product candidates that require such diagnostics, or
experience delays in doing so, the development of our product candidates may be adversely affected, our
product candidates may not receive marketing approval and we may not realize the full commercial
potential of any products that receive marketing approval. As a result, our business could be materially
harmed.
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies
and clinical trials may not be predictive of future trial results.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently
uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies
and early clinical trials of our product candidates may not be predictive of the design or results of later-stage
clinical trials. The results regarding initial tolerability and clinical activity generated to date in clinical trials
for our AR-301 and AR-101 product candidates in HAP and VAP patients do not ensure that later clinical
trials will demonstrate similar results. While we have observed in exploratory analysis statistically
significant improvements in the outcomes of some of our clinical trials, many of the improvements we have
seen have not reached statistical significance. Statistical significance is a statistical term that means that an
effect is unlikely to have occurred by chance. In order to be approved by the FDA, European Medicines
Agency, or other drug approving authorities, product candidates must demonstrate that their effect on
patients’ diseases in the trial is statistically significant and clinically meaningful. Product candidates in later
stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed
through preclinical studies and initial clinical trials. Early clinical trials frequently enroll patient populations
that are different from the patient populations in later trials, resulting in different outcomes in later clinical
trials from those in earlier stage clinical trials. In addition, adverse events may not occur in early clinical
trials and only emerge in larger, late-stage clinical trials or after commercialization. Companies in the
biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of
efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials. If later stage
clinical trials do not demonstrate efficacy and safety of our product candidates, we will not be able to
market them and our business will be materially harmed.
We may seek a breakthrough therapy designation for our existing and future product candidates, but we might not
receive such designation, and even if we do, such designation may not lead to a faster development or regulatory
review or approval process.
We may seek a breakthrough therapy designation for our existing and future product candidates;
however, we cannot assure you our product candidates will meet the criteria for that designation. A
breakthrough therapy is defined as a therapy that is intended, alone or in combination with one or more
other therapies, to treat a serious condition, and preliminary clinical evidence indicates that the therapy may
demonstrate substantial improvement over existing therapies on one or more clinically significant
endpoints, such as substantial treatment effects observed early in clinical development. For therapies and
biologics that have been designated as breakthrough therapies, interaction and communication between the
FDA and
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the sponsor of the trial can help to identify the most efficient path for clinical development while
minimizing the number of patients placed in ineffective control regimens. Therapies designated as
breakthrough therapies by the FDA may also be eligible for priority review if supported by clinical data at
the time the new drug application is submitted to the FDA.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we
believe that one of our product candidates meets the criteria for designation as a breakthrough therapy, the
FDA may disagree and instead determine not to make such designation. Even if we receive breakthrough
therapy designation, the receipt of such designation for a product candidate may not result in a faster
development or regulatory review or approval process compared to drugs considered for approval under
conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or
more of our product candidates qualify as breakthrough therapies, the FDA may later decide that the product
candidate no longer meets the conditions for qualification or decide that the time period for FDA review or
approval will not be shortened.
Designation of our product candidates as qualified infectious disease products is not assured and, in any event, even
if granted, may not actually lead to a faster development or regulatory review, and would not assure FDA approval
of our product candidates.
We may seek designation of our existing and future product candidates as QIDP. A QIDP is an
antibacterial or antifungal drug intended to treat serious or life- threatening infections, including those
caused by an antibacterial or antifungal resistant pathogen, including novel or emerging infectious
pathogens or certain “qualifying pathogens.” A product designated as a QIDP for a particular indication will
also be granted priority review by the FDA and can qualify for fast track status. Upon the approval of an
NDA for a drug product designated by the FDA as a QIDP, the product is granted a period of five years of
regulatory exclusivity that is in addition to any other period of regulatory exclusivity for which the product
is eligible. The FDA has broad discretion whether or not to grant these designations, so even if we believe a
particular product candidate is eligible for such designation or status, the FDA could decide not to grant it.
Moreover, even if we do receive such a designation, we may not experience a faster development process,
review or approval compared to conventional FDA procedures and there is no assurance that our product
candidate, even if determined to be a QIDP, will be approved by the FDA.
Regulatory authorities may not approve our product candidates even if they meet safety and efficacy endpoints in
clinical trials.
The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable
but typically takes many years following the commencement of clinical trials and depends upon numerous
factors, including the substantial discretion of regulatory authorities. In addition, approval policies,
regulations, or the type and amount of clinical data necessary to gain approval may change during the
course of a product candidate’s clinical development and may vary among jurisdictions. We have
discussions with and obtain guidance from regulatory authorities regarding certain aspects of our clinical
development activities. These discussions are not binding commitments on the part of regulatory authorities.
Under certain circumstances, regulatory authorities may revise or retract previous guidance during the
course of our clinical activities or after the completion of our clinical trials. A regulatory authority may also
disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product
for commercial sale or otherwise deny approval of that product. Prior to regulatory approval, a regulatory
authority may elect to obtain advice from outside experts regarding scientific issues and/or marketing
applications under a regulatory authority review. In the United States, these outside experts are convened
through the FDA’s Advisory Committee process, which would report to the FDA and make
recommendations that may differ from the views of the FDA. Should an Advisory Committee be convened,
it would be expected to lengthen the time for obtaining regulatory approval, if such approval is obtained at
all.
The FDA and foreign regulatory agencies may delay, limit or deny marketing approval for many
reasons, including, but not limited to:
•
a product candidate may not be considered safe or effective;
•
our manufacturing processes or facilities may not meet the applicable requirements;
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•
•
•
changes in the agencies’ approval policies or adoption of new regulations may require additional
work on our part, for example, the FDA may require us to change or expand the endpoints in our
clinical trials;
different divisions of the FDA are reviewing different product candidates and those divisions may
have different requirements for approval; and
changes in regulatory law, FDA or foreign regulatory agency organization, or personnel may result in
different requirements for approval than anticipated.
Our product candidates may not be approved even if they achieve their endpoints in clinical trials.
Regulatory agencies, including the FDA, or their advisors may disagree with our trial design and our
interpretations of data from preclinical studies and clinical trials. Regulatory agencies also may approve a
product candidate for fewer or more limited indications than requested or may grant approval subject to the
performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims
that are necessary or desirable for the successful commercialization of our product candidates. We have not
obtained regulatory approval for any product candidate, and it is possible that none of our existing product
candidates or any product candidates we may seek to develop in the future will ever obtain regulatory
approval.
Any delay in or failure to receive or maintain approval for any of our product candidates could prevent
us from ever generating revenues or achieving profitability.
We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with
regulatory requirements, the results are negative or inconclusive, or the trials are not well designed.
Clinical trials must be conducted in accordance with FDA regulations governing clinical studies, or
other applicable foreign government guidelines, and are subject to oversight by the FDA, other foreign
governmental agencies and IRBs/Ethic Committees at the medical institutions where the clinical trials are
conducted. In addition, clinical trials must be conducted with product candidates produced under current
Good Manufacturing Practices, or cGMP, and may require large numbers of test subjects. Clinical trials may
be suspended by the FDA, other foreign governmental agencies or us for various reasons, including, but not
limited to:
•
deficiencies in the conduct of the clinical trials, including failure to conduct the clinical trial in
accordance with regulatory requirements or clinical protocols;
•
deficiencies in the clinical trial operations or trial sites;
•
the product candidate may have unforeseen adverse side effects;
•
•
the time required to determine whether the product candidate is effective may be longer than
expected;
deaths or other adverse events arising during a clinical trial due to medical problems that may not be
related to clinical trial treatments;
•
the product candidate may not appear to be more effective than current therapies;
•
the quality or stability of the product candidate may fall below acceptable standards; and
•
insufficient quantities of the product candidate might be available to complete the trials.
In addition, changes in regulatory requirements and guidance may occur and we may need to amend
clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial
protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a
clinical trial. Due to these and other factors, our product candidates could take longer to gain regulatory
approval than we expect or we may never gain approval for any product candidates, which could reduce or
eliminate our revenue by delaying or terminating the commercialization of our product candidates.
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A Fast Track product designation or other designation to facilitate product candidate development may not lead to
faster development or regulatory review or approval process, and it does not increase the likelihood that our product
candidates will receive marketing approval.
We have received a Fast Track product designation for AR-301 and AR-101 and we may seek Fast
Track designation for other of our current or future product candidates. Receipt of a designation to facilitate
product candidate development is within the discretion of the FDA. Accordingly, even if we believe one of
our product candidates meets the criteria for a designation, the FDA may disagree. In any event, the receipt
of such a designation for a product candidate may not result in a faster development process, review, or
approval compared to drugs considered for approval under conventional FDA procedures and does not
assure ultimate marketing approval by the FDA. In addition, the FDA may later decide that the products no
longer meet the designation conditions.
We may not be able to maintain orphan drug marketing exclusivity for our AR-101 and AR-301 product candidates
in the United States and/or the European Union, and orphan drug marketing exclusivity may not be available for
any of our other product candidates.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug or biologic intended
to treat a rare disease or condition (with a population of less than 200,000), which is defined as one
occurring in a patient population of fewer than 200,000 in the United States, or a patient population greater
than 200,000 in the U.S. where there is no reasonable expectation that the cost of developing the drug or
biologic will be recovered from sales in the United States. In the EU, following the opinion of the EMA’s
Committee for Orphan Medicinal Products, the European Commission grants orphan drug designation to a
product if (1) it is intended for the diagnosis, prevention or treatment of a life-threatening or chronically
debilitating condition; (2) either (a) such condition affects no more than five in 10,000 persons in the EU
when the application is made, or (b) the product, without the incentives derived from orphan medicinal
product status, would not generate sufficient return in the EU to justify investment; and (3) there exists no
satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the
EU, or if such a method exists, the product will be of significant benefit to those affected by the condition.
Generally, if a drug with an orphan drug designation subsequently receives the first marketing approval
for the indication for which it has such designation, the drug is entitled to a period of marketing exclusivity,
which precludes the FDA or the European Commission and the competent authorities in the EU Member
States from approving another marketing application for the same drug (or similar medicinal product in the
European Union) for that time period, except in limited circumstances. The applicable period is seven years
in the U.S. and 10 years in the EU. The EU exclusivity period can be reduced to six years if a drug no
longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable that market
exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA determines that the
request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity
of the drug to meet the needs of patients with the rare disease or condition.
We have been granted orphan drug designation for our AR-101 and AR-301 drug candidates in the
European Union, as well as orphan drug designation for our AR-101 drug candidate in the U.S. Although
we may apply for orphan drug designation for other product candidates, we may develop in both the U.S.
and EU, applicable regulatory authorities may not grant us this designation. In addition, even if such status
is obtained for any other product candidate that we may develop, that exclusivity may not effectively protect
the candidate from competition because other drugs, such as those with different active ingredients or
molecular structures, can be approved for the same condition. Furthermore, even after an orphan drug is
approved, the FDA can subsequently approve another drug for the same condition if the FDA concludes that
the later drug is clinically superior, in that it is shown to be safer, more effective or makes a major
contribution to patient care. In the EU, a marketing authorization may be granted to a similar product during
the 10-year period of market exclusivity for the same therapeutic indication at any time if:
•
•
the second applicant can establish in its application that its product, although similar to the orphan
medicinal product already authorized, is safer, more effective or otherwise clinically superior;
the holder of the marketing authorization for the original orphan medicinal product consents to a
second orphan medicinal product application; or
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•
the holder of the marketing authorization for the original orphan medicinal product cannot supply
enough orphan medicinal product.
Any inability to secure orphan drug designation or to maintain the exclusivity benefits of this
designation could have an adverse impact on our ability to develop and commercialize our product
candidates, depending on the extent to which we would be protected by other patents and regulatory
exclusivities, and may adversely affect our business, prospects, financial condition and results of operations.
Any product candidate for which we, or our collaborators, obtain marketing approval could be subject to restrictions
or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements
or if we experience unanticipated problems with our products, when and if any of them are approved.
Any product candidate that we, or our collaborators, obtain marketing approval for, along with the
manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for
such product, will be subject to continuing requirements of the FDA and other regulatory authorities. These
requirements include submissions of safety and other post-marketing information, reports, facility
registration and product listing requirements, cGMP requirements relating to quality control, quality
assurance and corresponding maintenance of records and documents, requirements regarding the
distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate
is granted, the approval may be subject to limitations on the indicated uses for which the product may be
marketed or to conditions of approval or contain requirements for costly post-marketing testing and
surveillance to monitor the safety or efficacy of the product. The FDA closely regulates the post-approval
marketing and promotion of drugs to ensure drugs are marketed only for the approved indications and in
accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on
manufacturers’ communications regarding off-label use. If we market our products outside of their approved
indications, we will be subject to enforcement action for off-label marketing.
In addition, later discovery of previously unknown problems with these products, manufacturers or
manufacturing processes, or failure to comply with regulatory requirements, may yield various results,
including, but not limited to:
•
restrictions on such products, manufacturers or manufacturing processes;
•
restrictions on the labeling or marketing of a product;
•
restrictions on product distribution or use;
•
requirements to conduct post-marketing clinical trials;
•
warning or untitled letters;
•
withdrawal of the products from the market;
•
refusal to approve pending applications or supplements to approved applications that we submit;
•
recall of products, fines, restitution or disgorgement of profits or revenue;
•
suspension or withdrawal of marketing approvals;
•
refusal to permit the import or export of our products;
•
product seizure; and
•
injunctions or the imposition of civil or criminal penalties.
The FDA’s policies may change and additional government regulations may be enacted that could
prevent, limit or delay regulatory approval of our product candidates. If we, or our collaborators, are slow or
unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if
we, or our collaborators, are not able to maintain regulatory compliance, any marketing approval that was
obtained could be lost, which would adversely affect our business, prospects and ability to achieve or
sustain profitability.
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If we, or our collaborators, are unable to comply with foreign regulatory requirements or obtain foreign regulatory
approvals, our ability to develop foreign markets for our products could be impaired.
Sales of our products outside the U.S. will be subject to foreign regulatory requirements governing
clinical trials, marketing approval, manufacturing, product licensing, pricing and reimbursement. These
regulatory requirements vary greatly from country to country. As a result, the time required to obtain
approvals outside the U.S. may differ from that required to obtain FDA approval and we may not be able to
obtain foreign regulatory approvals on a timely basis or at all. Approval by the FDA does not ensure
approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does
not ensure approval by regulatory authorities in other countries or by the FDA and foreign regulatory
authorities could require additional testing. Failure to comply with these regulatory requirements or obtain
required approvals could impair our ability to develop foreign markets for our products.
We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws,
and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to
compete in domestic and international markets. We can face criminal liability and other serious consequences for
violations, which can harm our business.
We are subject to export control and import laws and regulations, including the U.S. Export
Administration Regulations, U.S. Customs regulations, various economic and trade sanctions regulations
administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, the U.S. Foreign
Corrupt Practices Act of 1977, as amended, or FCPA, the U.S. domestic bribery statute contained in 18
U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and other state and national anti-bribery and
anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are
interpreted broadly and prohibit companies and their employees, agents, contractors, and other collaborators
from authorizing, promising, offering, or providing, directly or indirectly, improper payments or anything
else of value to recipients in the public or private sector. We may engage third parties for clinical trials
outside of the United States, to sell our products abroad once we enter a commercialization phase, and/or to
obtain necessary permits, licenses, patent registrations, and other regulatory approvals. We have direct or
indirect interactions with officials and employees of government agencies or government-affiliated
hospitals, universities, and other organizations. We can be held liable for the corrupt or other illegal
activities of our employees, agents, contractors, and other collaborators, even if we do not explicitly
authorize or have actual knowledge of such activities. Any violations of the laws and regulations described
above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or
import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm,
and other consequences.
Developing product candidates in combination with other therapies may lead to unforeseen side effects or failures in
our clinical trials.
We, and our collaborators, are studying our product candidates in clinical trials in combination with
approved therapies, including antibiotics, and we anticipate that if any product candidates are approved for
marketing, they will be approved to be used only in combination with other therapies. Our development
programs and planned studies carry all the risks inherent in drug development activities, including the risk
that they will fail to demonstrate meaningful efficacy or acceptable safety. In addition, our development
programs are subject to additional regulatory, commercial, manufacturing and other risks because of the use
of other therapies in combination with our product candidates. For example, the other therapies may lead to
toxicities that are improperly attributed to our product candidates or the combination of our product
candidates with other therapies may result in toxicities that the product candidate or other therapy does not
produce when used alone. The other therapies we are using in combination with our product candidates may
be removed from the market or become prohibitively expensive and thus be unavailable for testing or
commercial use with any of our approved products. Testing product candidates in combination with other
therapies may increase the risk of significant adverse effects or test failures. The timing, outcome and cost
of developing products to be used in combination with other therapies is difficult to predict and dependent
on a number of factors that are outside our reasonable control. If any safety or toxicity issues arise in these
clinical trials or with any approved products, or if the other therapies are removed from the market, the
products may not be approved, which could prevent us from ever generating revenues or achieving
profitability.
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We will need to develop or acquire additional manufacturing and distribution capabilities, or outsource the same to
third parties, in order to commercialize any product candidates that obtain marketing approval, and we may
encounter unexpected costs or difficulties in doing so.
If we independently develop and commercialize one or more of our product candidates, we will need to
invest in acquiring or building additional capabilities and effectively manage our operations and facilities to
successfully pursue and complete future research, development and commercialization efforts. We will
require additional investment and validation process development in order to qualify our commercial-scale
manufacturing process to manufacture clinical trial materials and commercial material if any of our products
are approved for marketing. This investment and validation process development may be expensive and
time-consuming. We will require additional personnel with experience in commercial-scale manufacturing,
managing of large-scale information technology systems and managing a large-scale distribution system. We
will need to add personnel and expand our capabilities, which may strain our existing managerial,
operational, regulatory compliance, financial and other resources. To do this effectively, we must:
•
recruit, hire, train, manage and motivate a growing employee base;
•
accurately forecast demand for our products;
•
assemble and manage the supply chain to ensure our ability to meet demand; and
•
expand existing operational, manufacturing, financial and management information systems.
We may seek FDA approval for our production process and facilities simultaneously with seeking
approval for sale of our product candidates. Should we not complete the development of adequate
manufacturing and distribution capabilities, including manufacturing capacity, or fail to receive timely
approval of our manufacturing process and facilities, our ability to supply clinical trial materials for planned
clinical trials or supply products following regulatory approval for sale could be delayed, which would
further delay our clinical trials or the period of time when we would be able to generate revenues from the
sale of such products, if we are even able to obtain approval or generate revenues at all.
Additionally, we may decide to outsource some or all of our manufacturing activities to a third-party
commercial manufacturing organization, or CMO. Under any agreement with a CMO, we would have less
control over the timing and quality of manufacturing than if we were to perform such manufacturing
ourselves. A CMO would be manufacturing other pharmaceutical products in the same facilities as our
product candidates, increasing the risk of cross product contamination. Further, there is no guarantee that
any CMO will continue ongoing operations, causing potential delays in product supply, reduced revenues
and other liabilities for us.
Any such events would increase our costs and could delay or prevent our ability to commercialize our
product candidates, which could adversely impact our business, financial condition and results of
operations.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their
regulatory approval, limit the commercial profile of an approved label, or result in significant negative
consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could cause us, our collaborators, or
regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label, the
delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities, or
litigation by injured patients, if any. To date, patients treated with AR-301 and AR-101 have experienced
AEs related to the study drug, some of which have been serious. Regarding AR-301, few (2.8%) adverse
events, or AEs, were deemed related, and no serious adverse events, or SAEs, were deemed to be related to
AR-301 treatment. There were six deaths in the trial, none of which were deemed related to AR-301.
Regarding AR-101, 12 SAEs were experienced by five subjects. An event of cardiorespiratory arrest was
judged as probably related to AR-101 and events of hyperbilirubinemia and cholestasis, although pre-
existent, were deemed possibly related. In both cases, the causality assessment by the investigators
accounted for the fact that a contribution by AR-101 to the AE could not be excluded with certainty
although other probable causes were acknowledged. The other SAEs were deemed unrelated. The AR-712
mAbs may exhibit a reduction or complete loss of efficacy due to the emergence of new SARS-CoV-2
mutant virus variants.
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Because our product candidates are intended to assist the immune system, our clinical trials could
reveal an unacceptable severity and prevalence of side effects, including, but not limited to, adverse immune
responses that lead to previously unobserved complications. As a result of any side effects, our clinical trials
could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order us
to cease further development, or deny approval, of our product candidates for any or all targeted indications.
The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete
the trial or result in potential product liability claims. Any of these occurrences may harm our business,
financial condition and prospects significantly.
Additionally, if one or more of our product candidates receives marketing approval, and we, our
collaborators, or others later identify undesirable side effects caused by such products, a number of
potentially significant negative consequences could result, including, but not limited to:
•
•
•
•
•
regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the label;
we may be required to create a medication guide outlining the risks of such side effects for
distribution to patients;
we may be sued and held liable for harm caused to patients; and
our reputation may suffer.
In addition, we cannot assure you that the bacteria which our mAbs target will not in the future develop
a resistance to our mAbs.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular
product candidate, if approved, and could significantly harm our business, results of operations and
prospects.
If we cannot conduct the non-clinical testing required by regulatory authorities to demonstrate an acceptable
toxicity profile for our product candidates in non-clinical studies, we will not be able to initiate or continue clinical
trials or obtain approval for our product candidates.
In order to move a product candidate into human clinical trials, we must first demonstrate an acceptable
toxicity profile in preclinical testing. Furthermore, in order to obtain approval, we must also demonstrate
safety in various non-clinical tests. We may not have conducted or may not conduct the types of non-clinical
testing required by regulatory authorities, or future non-clinical tests may indicate that our product
candidates are not safe for use. Preclinical and non-clinical testing is expensive, time-consuming and has an
uncertain outcome. In addition, success in initial non-clinical testing does not ensure that later non-clinical
testing will be successful. We may experience numerous unforeseen events during, or as a result of, the non-
clinical testing process, which could delay or prevent our ability to develop or commercialize our product
candidates, including, but not limited to:
•
•
•
•
•
our preclinical and non-clinical testing may produce inconclusive or negative safety results, which
may require us to conduct additional non-clinical testing or to abandon product candidates;
our product candidates may have unfavorable pharmacology or toxicity characteristics;
our product candidates may cause undesirable side effects such as negative immune responses that
lead to complications;
our enrolled patients may have allergies that lead to complications after treatment; and
the FDA or other regulatory authorities may determine that additional safety testing is required.
Any such events would increase our costs and could delay or prevent our ability to commercialize our
product candidates, which could adversely impact our business, financial condition and results of
operations.
Because we have multiple product candidates in our clinical pipeline and are considering a variety of target
indications, we may expend our limited resources to pursue a particular product candidate or indication and fail to
capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood
of success.
Because we have limited financial and managerial resources, we must focus our research and
development efforts on those product candidates and specific indications that we believe are the most
promising. As a
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result, we may forego or delay our pursuit of opportunities with other product candidates or other
indications that later prove to have greater commercial potential. Our resource allocation decisions may
cause us to fail to capitalize on viable commercial products or profitable market opportunities. We may in
the future spend our resources on other research programs and product candidates for specific indications
that ultimately do not yield any commercially viable products. Furthermore, if we do not accurately evaluate
the commercial potential or target market for a particular product candidate, we may relinquish valuable
rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in
which it would have been more advantageous for us to retain sole development and commercialization
rights.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and
market our product candidates, we may not be successful in commercializing our product candidates if and when
they are approved.
We do not have a sales and marketing infrastructure or any experience in the sales, marketing or
distribution of pharmaceutical products. We may seek additional third-party collaborators for the
commercialization of our other product candidates. In the future, we may choose to build a focused sales
and marketing infrastructure to market or co-promote some of our product candidates if and when they are
approved, which would be expensive and time-consuming. Alternatively, we may elect to outsource these
functions to third parties. Either approach carries significant risks. For example, recruiting and training a
sales force is expensive and time-consuming and, if done improperly, could delay a product launch and
result in limited sales. If the commercial launch of a product candidate for which we recruit a sales force
and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely
or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would
be lost if we cannot retain or reposition our sales and marketing personnel. Outsourcing sales and marketing
capabilities will depend on our ability to enter into and maintain agreements with other companies having
sales, marketing and distribution capabilities, the ability of such companies to successfully market and sell
our product candidates, and our ability to enter into such agreements on terms favorable to us.
Factors that may inhibit our efforts to commercialize our products on our own include, but are not
limited to:
•
our inability to recruit, manage and retain adequate numbers of effective sales and marketing
personnel;
•
the inability of marketing personnel to develop effective marketing materials;
•
•
•
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to
prescribe any future products;
the lack of complementary products to be offered by sales personnel, which may put us at a
competitive disadvantage relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing
organization.
Entry into agreements with third parties to sell and market our product candidates will subject us to a
number of risks, including, but not limited to, the following:
•
we may be required to relinquish important rights to our products or product candidates;
•
we may not be able to control the amount and timing of resources that our distributors or
collaborators may devote to the commercialization of our product candidates;
•
distributors or collaborators may experience financial difficulties;
•
•
our distributors or collaborators may not devote sufficient time to the marketing and sales of our
products; and
business combinations or significant changes in a collaborator’s business strategy may adversely
affect a collaborator’s willingness or ability to complete its obligations under any arrangement.
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The availability and amount of reimbursement for our product candidates, if approved, and the manner in which
government and private payors may reimburse for any potential products, are uncertain.
Obtaining coverage and reimbursement approval for a product from a government or other third-party
payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical
and cost effectiveness data for the use of our products to the payor. There may be significant delays in
obtaining such coverage and reimbursement for newly approved products, and coverage may be more
limited than the purposes for which the product is approved by the FDA or similar regulatory authorities
outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a
product will be paid for in all cases or at a rate that covers our costs, including research, development,
intellectual property, manufacture, sale and distribution expenses. Reimbursement rates may vary according
to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels
already set for lower cost products and may be incorporated into existing payments for other services. Net
prices for products may be reduced by mandatory discounts or rebates required by government healthcare
programs or private payors and by any future relaxation of laws that presently restrict imports of product
from countries where they may be sold at lower prices than in the United States.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved
products. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting
their own reimbursement policies, but also have their own methods and approval process apart from
Medicare coverage and reimbursement determinations. It is difficult to predict at this time what third-party
payors will decide with respect to the coverage and reimbursement for our product candidates. Our inability
to promptly obtain coverage and adequate reimbursement rates from both government-funded and private
payors for any approved products that we develop could have a material adverse effect on our operating
results, our ability to raise capital needed to commercialize products and our overall financial condition.
Reimbursement may impact the demand for, and/or the price of, any product for which we obtain
marketing approval. Assuming we obtain coverage for a given product by a third-party payor, the resulting
reimbursement payment rates may not be adequate or may require co-payments that patients find
unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their
prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated
with those medications. Patients are unlikely to use our products unless coverage is provided and
reimbursement is adequate to cover all or a significant portion of the cost of our products. Therefore,
coverage and adequate reimbursement is critical to new product acceptance. Coverage decisions may
depend upon clinical and economic standards that disfavor new drug products when more established or
lower cost therapeutic alternatives are already available or subsequently become available.
The U.S. government, state legislatures and foreign governmental entities have shown significant
interest in implementing cost containment programs to limit the growth of government-paid healthcare
costs, including price controls, restrictions on reimbursement and coverage and requirements for
substitution of generic products for branded prescription drugs. Adoption of government controls and
measures and tightening of restrictive policies in jurisdictions with existing controls and measures, could
exclude or limit our products from coverage and limit payments for pharmaceuticals.
In addition, we expect that the increased emphasis on managed care and cost containment measures in
the U.S. by third-party payors and government authorities to continue and will place pressure on
pharmaceutical pricing and coverage. Coverage policies and third-party reimbursement rates may change at
any time. Even if favorable coverage and reimbursement status is attained for one or more drug products for
which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be
implemented in the future.
Failure to attract and retain key personnel could impede our ability to develop our products and to obtain new
collaborations or other sources of funding.
Because of the specialized scientific nature of our business and the novel properties of our antibody
platform, our success is highly dependent upon our ability to attract and retain qualified scientific and
technical personnel, consultants and advisors. We depend greatly on our founders Dr. Vu Truong, our Chief
Executive Officer, Chief Scientific Officer and a Director, and Dr. Eric Patzer, our Executive Chairman.
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We will also need to recruit a significant number of additional personnel in order to achieve our operating
goals and financial reporting obligations. In order to pursue our product development and marketing and
sales plans, we will need to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing, government regulation, manufacturing,
marketing and sales, which may strain our existing managerial, operational, regulatory compliance,
financial and other resources. We also rely on consultants and advisors to assist in formulating our research
and development strategy and adhering to complex regulatory requirements. We face competition for
qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other
research institutions. There can be no assurance that we will be able to attract and retain such individuals on
acceptable terms, if at all. The failure to attract and retain qualified personnel, consultants and advisors
could have a material adverse effect on our business, financial condition and results of operations.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on
product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we focus on research programs and
product candidates for the indications that we believe are the most scientifically and commercially
promising. Our resource allocation decisions may cause us to fail to capitalize on viable scientific or
commercial products or profitable market opportunities. In addition, we may spend valuable time and
managerial and financial resources on research programs and product candidates for specific indications that
ultimately do not yield any scientifically or commercially viable products. If we do not accurately evaluate
the scientific and commercial potential or target market for a particular product candidate, we may
relinquish valuable rights to that product candidate through collaboration, licensing or other royalty
arrangements in situations where it would have been more advantageous for us to retain sole rights to
development and commercialization.
Risks Relating to Manufacturing Activities
We have no experience manufacturing our product candidates at commercial scale, and there can be no assurance
that our product candidates can be manufactured in compliance with regulations at a cost or in quantities necessary
to make them commercially viable. There can be no assurance that any contract manufacturing facilities will be
acceptable for licensure by regulatory authorities or that we can contract to build acceptable facilities.
We have no experience in commercial-scale manufacturing of mAbs. We may develop our
manufacturing capacity in part by building manufacturing facilities. This activity would require substantial
additional funds and we would need to hire and train significant numbers of qualified employees to staff
these facilities. We may not be able to develop commercial-scale manufacturing facilities that are adequate
to produce materials for additional later-stage clinical trials or commercial use. We currently rely on CMOs
for bulk product manufacturing and sterile fill and finish of our products, and these contractors currently
manufacture our product candidates at a scale that is not adequate for commercial supply. Failure to find and
maintain satisfactory commercial-scale manufacturing contractors could impair our ability to supply product
for clinical and commercial needs. Additionally, we may decide to outsource some or all of our bulk product
manufacturing activities to a third-party CMO. Failure of any of these contractors to maintain compliance
with cGMPs and other regulatory and legal requirements could result in government actions that would limit
or eliminate clinical trial and commercial product supply. Under any agreement with a CMO, we would
have less control over the timing and quality of manufacturing than if we were performing such
manufacturing ourselves. A CMO would be manufacturing other pharmaceutical products in the same
facilities as our product candidates, increasing the risk of cross product contamination. Further, there is no
guarantee that any CMO will continue ongoing operations, causing potential delays in product supply,
reduced revenues and other liabilities for us.
The equipment and facilities employed in the manufacture of pharmaceuticals are subject to stringent
qualification requirements by regulatory agencies, including validation of equipment, systems and
processes. We may be subject to lengthy delays and expense in conducting validation studies, if we can
meet the requirements at all.
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If we are unable to manufacture or contract for a sufficient supply of our product candidates on
acceptable terms, or if we encounter delays or difficulties in our manufacturing processes or our
relationships with other manufacturers, our preclinical and clinical testing schedule would be delayed. This
in turn would delay the submission of product candidates for regulatory approval and thereby delay the
market introduction and subsequent sales of any products that receive regulatory approval, which would
have a material adverse effect on our business, financial condition and results of operations. Furthermore,
we or our contract manufacturers must supply all necessary documentation in support of our regulatory
approval applications on a timely basis and must adhere to cGMP regulations enforced by the FDA and
other regulatory bodies through their facilities inspection programs. If these facilities cannot pass a pre-
approval plant inspection, the approval by the FDA or other regulatory bodies of the products will not be
granted. If the FDA or a comparable foreign regulatory authority does not approve our facilities and
processes for the manufacture of our product candidates or if they withdraw any such approval in the future,
we may need to correct the issues or find alternative manufacturing facilities, which would significantly
impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.
Our contract manufacturers are subject to significant regulation with respect to manufacturing of our products.
All entities involved in the preparation of a product candidate for clinical trials or commercial sale,
including our contract manufacturing organizations used for bulk product manufacturing and filling and
finishing of our bulk product, are subject to extensive regulation. Components of a finished product
approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with
cGMP. These regulations govern manufacturing processes and procedures, including record keeping, and the
implementation and operation of quality systems to control and assure the quality of investigational
products and products approved for sale. The facilities and quality systems of some or all of our third-party
contractors must pass a pre-approval inspection for compliance with the applicable regulations as a
condition of any regulatory approval of our product candidates. In addition, the regulatory authorities may,
at any time, audit or inspect a manufacturing facility involved with the preparation of our product
candidates or the associated quality systems for compliance with the regulations applicable to the activities
being conducted. The regulatory authorities also may, at any time following approval of a product for sale,
audit the manufacturing facilities of our third-party contractors or raw material suppliers. If any such
inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product
specifications or applicable regulations occurs independent of such an inspection or audit, the relevant
regulatory authority may require remedial measures that may be costly and time-consuming to implement
and that may include the temporary or permanent suspension of a clinical trial or commercial sales or the
temporary or permanent closure of a facility. Our third-party contractors or raw material suppliers may
refuse to implement remedial measures required by regulatory authorities. Any failure to comply with
applicable manufacturing regulations or failure to implement required remedial measures imposed upon
third parties with whom we contract could materially harm our business.
We rely on relationships with third-party contract manufacturers and raw material suppliers, which limits our
ability to control the availability of, and manufacturing costs for, our product candidates.
Problems with any of our contract manufacturers’ or raw material suppliers’ facilities or processes,
could prevent or delay the production of adequate supplies of finished products. This could delay clinical
trials or delay and reduce commercial sales and materially harm our business. Any prolonged delay or
interruption in the operations of our collaborators’ facilities or contract manufacturers’ facilities could result
in cancellation of shipments, loss of components in the process of being manufactured or a shortfall in
availability of a product candidate or products. A number of factors could cause interruptions, including, but
not limited to:
•
the inability of a supplier to provide raw materials;
•
equipment malfunctions or failures at the facilities of our collaborators or suppliers;
•
employee absenteeism as a result of coronavirus outbreaks;
•
high process failure rates;
•
damage to facilities due to natural or man-made disasters;
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•
•
•
•
changes in regulatory requirements or standards that require modifications to our or our
collaborators’ and suppliers’ manufacturing processes;
action by regulatory authorities or by us that results in the halting or slowdown of production of
components or finished product at our facilities or the facilities of our collaborators or suppliers;
problems that delay or prevent manufacturing technology transfer to another facility, contract
manufacturer or collaborator with subsequent delay or inability to start up a commercial facility;
a contract manufacturer or supplier going out of business, undergoing a capacity shortfall or
otherwise failing to produce product as contractually required;
•
employee or contractor misconduct or negligence; and
•
shipping delays, losses or interruptions; and other similar factors.
Because manufacturing processes are complex and are subject to a lengthy regulatory approval process,
alternative qualified production capacity and sufficiently trained or qualified personnel may not be available
on a timely or cost-effective basis or at all. Difficulties or delays in our contract manufacturers’ production
of drug substances could delay our clinical trials, increase our costs, damage our reputation, and cause us to
lose revenue and market share if we are unable to timely meet market demand for any products that are
approved for sale.
The manufacturing process for our product candidates has several components that are sourced from a
single manufacturer. If we utilize an alternative manufacturer or alternative component, we may be required
to demonstrate comparability of the drug product before releasing the product for clinical use and we may
not be to find an alternative supplier. For example, the stoppers used to seal the vials of our products are
made by a single supplier using a proprietary formula and process. Any change to the stopper would require
us to carry out lengthy studies to verify that our product remains stable with the replacement stopper. The
loss of any of our current suppliers could result in manufacturing delays for the component substitution, and
we may need to accept changes in terms or price from our existing supplier in order to avoid such delays.
Further, if our contract manufacturers are not in compliance with regulatory requirements at any stage,
including post-marketing approval, we may be fined, forced to remove a product from the market and/or
experience other adverse consequences, including delays, which could materially harm our business.
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect
our business and operations.
The outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to
multiple countries, including the United States and several European countries. On March 11, 2020, the
World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the
United States and global economies and may affect our operations and those of third parties on which we
rely, including by causing disruptions in the supply of our product candidates and the conduct of current and
future clinical trials. In addition, the COVID-19 pandemic may affect the operations of the FDA and other
health authorities, which could result in delays of reviews and approvals, including with respect to our
product candidates. The evolving COVID-19 pandemic is also likely to directly or indirectly impact the
pace of enrollment in our Phase 3 pivotal trial for AR-301 and our Phase 1 clinical trial for AR-501 for at
least the next several months and possibly longer as patients may avoid or may not be able to travel to
healthcare facilities and physicians’ offices unless due to a health emergency. Such facilities and offices
may also be required to focus limited resources on non-clinical trial matters, including treatment of COVID-
19 patients, and may not be available, in whole or in part, for clinical trial services related to AR-301 and
AR-501 or our other product candidates. Additionally, while the potential economic impact brought by, and
the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19
pandemic on the global financial markets may reduce our ability to access capital, which could negatively
impact our short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly
uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our
business, financing or clinical trial activities or on healthcare systems or the global economy as a whole.
However, these effects could have a material impact on our liquidity, capital resources, operations and
business and those of the third parties on which we rely.
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Business disruptions could seriously harm future revenue and financial condition and increase our costs and
expenses.
Our operations, and those of our third-party manufacturers, CROs and other contractors and
consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages,
floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or
man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence
of any of these business disruptions could seriously harm our operations and financial condition and
increase our costs and expenses.
Our corporate headquarters are located in Los Gatos, California, an area prone to wildfires and
earthquakes. These and other natural disasters could severely disrupt our operations, and have a material
adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster,
power outage or other event occurred that prevented us from using all or a significant portion of our
headquarters, that damaged critical infrastructure, such as the manufacturing facilities of our third-party
contract manufacturers, or that otherwise disrupted operations, it may be difficult or, in certain cases,
impossible for us to continue our business for a substantial period of time. Any disaster recovery and
business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar
event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and
business continuity plans, which, could have a material adverse effect on our business.
Any disruption in production or inability to produce or ship adequate quantities to meet our needs,
whether as a result of a natural disaster or other causes (such as the recent outbreak of the coronavirus),
could impair our ability to operate our business on a day-to-day basis and to continue our research and
development of our product candidates. In addition, we are exposed to the possibility of product supply
disruption and increased costs in the event of changes in the policies of the United States government,
political unrest or unstable economic conditions. Any recall of the manufacturing lots or similar action
regarding our API used in clinical trials could delay the trials or detract from the integrity of the trial data
and its potential use in future regulatory filings. In addition, manufacturing interruptions or failure to
comply with regulatory requirements by any of these manufacturers could significantly delay clinical
development of potential products and reduce third-party or clinical researcher interest and support of
proposed trials. These interruptions or failures could also impede commercialization of our product
candidate and impair our competitive position.
We use and generate hazardous materials in our business and must comply with environmental laws and
regulations, which can be expensive.
Our research, development and manufacturing involve the controlled use of hazardous materials,
chemicals, various active microorganisms and volatile organic compounds, and we may incur significant
costs as a result of the need to comply with numerous laws and regulations. For example, as a
pharmacologically-active material, any residual impurities in process-waste streams must be disposed of as
hazardous waste. We are subject to laws and regulations enforced by the FDA, the Drug Enforcement
Agency, foreign health authorities and other regulatory requirements, including the Occupational Safety and
Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other
current and potential federal, state, local and foreign laws and regulations governing the use, manufacture,
storage, handling and disposal of our products, materials used to develop and manufacture our product
candidates, and resulting waste products. Although we believe that our safety procedures for handling and
disposing of such materials, and for killing any unused microorganisms before disposing of them, comply
with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an accident, we could be held
liable for any damages that result and any such liability could exceed our resources.
During the course of the product life cycle we will make process changes to scale up manufacturing to commercial
manufacture or transfer the production to alternate sites or contract manufacturers. Our ability to successfully
implement these changes will depend on our ability to demonstrate, to the satisfaction of the FDA and other
regulatory agencies that the product made by the new process or at the new site is comparable to the original
product.
In the event that manufacturing process changes are necessary for the further development of a product
candidate, we may not be able to reach agreement with regulatory agencies on the criteria for
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demonstrating comparability to the original product, which would require us to repeat clinical studies
performed with the original product. This could result in lengthy delays in implementing the new process or
site and consequent delays in regulatory approval and commercial sales of product derived from the new
process. If we reach agreement with regulatory agencies on the criteria for establishing comparability, we
may not be able to meet these criteria or may suffer lengthy delays in meeting these criteria. This may result
in significant lost sales due to inability to meet commercial demand with the original product. Furthermore,
studies to demonstrate comparability, or any other studies on the new process or site such as validation
studies, may uncover findings that result in regulatory agencies delaying or refusing to approve the new
process or site.
Risks Relating to Our Joint Venture Agreement
If our joint venture with Hepalink is not successful or if we fail to realize the benefits we anticipate from such joint
venture, we may not be able to capitalize on the full market potential of our products in China, Hong Kong, Macau
and Taiwan.
We entered into a Joint Venture Contract, as amended effective August 6, 2018, or the JV Agreement,
with Shenzhen Hepalink Pharmaceutical Group Co., Ltd., a People’s Republic of China company, or
Hepalink, a related party and significant shareholder in the Company, pursuant to which we formed a Joint
Venture company named Shenzhen Arimab BioPharmaceuticals Co., Ltd., or SABC, a People’s Republic of
China Company, develop, manufacture, import and distribute AR-101, AR-301 and AR-105 in China, Hong
Kong, Macau and Taiwan, collectively, referred to as the Territory. The Joint Venture received regulatory
approval in China and SABC was formed on July 2, 2018.
Hepalink contributed the equivalent of $7.2 million in renminbi, the official currency of the People’s
Republic of China, and owns 51% of the capital of SABC and we contributed (i) $1.0 million in cash and
(ii) a license to AR-101, AR-301 and AR-105 pursuant to an Amended and Restated Technology License
and Collaboration Agreement between us and SABC and we own 49% of the capital of SABC. It was agreed
by the parties that we shall be reimbursed for certain legal and contract manufacturing expenses related to
the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a clinical
study of AR-105. In addition, Hepalink will provide SABC with clinical and regulatory personnel services
for clinical and regulatory review, application and filing procedures in the Territory and we will provide
clinical and regulatory personnel services to assist in coordination of the execution of the clinical study in
China and also with CMC personnel services for drug supply and manufacturing planning. Hepalink is
obligated to make an additional equity investment of $10.8 million into SABC in connection with a future
financing of SABC provided that (i) such financing does not occur earlier than January 1, 2019, (ii) top-line
clinical results of the first global AR-301 Phase 3 study are available, (iii) CFDA approval for a Phase 3
clinical trial in China is granted, (iv) we have not breached the Amended and Restated Technology License
and Collaboration Agreement and (v) the SABC Board has approved such financing. If and to the extent
these milestone events occur and Hepalink contributes additional capital to SABC, our 49% ownership stake
in SABC will be diminished in proportion to such investment.
While SABC is obligated to use its commercially best efforts to commercialize our products and
product candidates in the Territory, we have limited contractual rights to direct its activities. Hepalink has
the majority of the voting equity in SABC and has the right to designate three of five board seats. Therefore,
Hepalink may have a greater influence in the commercialization efforts and other operations of SABC. In
general, our joint venture with Hepalink subjects us to a number of related risks including that:
•
•
•
SABC may not commit sufficient resources to the marketing and distribution of our products in the
Territory;
SABC may infringe the intellectual property rights of third parties, which may expose us to litigation
and other potential liability;
our obligation to contribute $1.0 million in cash to SABC, as long as we remain a shareholder of
SABC, may not be transferred back to us or converted into USD and thus, may only be used for
goods and services in China;
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•
•
disputes may arise among SABC, Hepalink and us that result in the delay or termination of the
commercialization of our products or product candidates or that result in costly litigation or
arbitration that diverts management attention and resources; and
SABC may not provide us with timely and accurate information regarding commercialization status
or results, which could adversely impact our ability to manage our own commercialization efforts,
accurately forecast financial results or provide timely information to our shareholders regarding our
commercialization efforts in the Territory.
While we believe that our board representation, voting rights and other contractual rights with respect
to SABC serve to mitigate some of these risks, we may have disagreements with the other directors and
Hepalink that could impair our ability to influence SABC to act in a manner that we believe is in the best
interests of our company. Upon the completion of certain milestone events, Hepalink will become obligated
to acquire additional shares of SABC, the proceeds of which would be received by SABC in exchange for
newly issued shares. We may not be able to access the funds for our own operations.
The laws of the People’s Republic of China, which govern SABC’s management and operations, may
not offer the same protections afforded to minority stockholders under the Delaware General Corporation
Law. Consequently, SABC may make business decisions that are not in our best interests as minority equity
holders.
Risks Relating to Competitive Factors
We compete in an industry characterized by extensive research and development efforts and rapid technological
progress. New discoveries or commercial developments by our competitors could render our potential products
obsolete or non-competitive.
New developments occur and are expected to continue to occur at a rapid pace in our industry, and
there can be no assurance that discoveries or commercial developments by our competitors will not render
some or all of our potential products obsolete or non-competitive, which could have a material adverse
effect on our business, financial condition and results of operations. New data from commercial and
clinical-stage products continue to emerge and it is possible that these data may alter current standards of
care, completely precluding us from further developing our product candidates or preventing us from getting
them approved by regulatory agencies. Further, it is possible that we may initiate a clinical trial or trials for
our product candidates, only to find that data from competing products make it impossible for us to
complete enrollment in these trials, resulting in our inability to file for marketing approval with regulatory
agencies. Even if these products are approved for marketing in a particular indication or indications, they
may have limited sales due to particularly intense competition in these markets.
We expect to compete with fully integrated and well-established pharmaceutical and biotechnology
companies in the near- and long-term. Most of these companies have substantially greater financial,
research and development, manufacturing and marketing experience and resources than we do and represent
substantial long-term competition for us. Such companies may succeed in discovering and developing
pharmaceutical products more rapidly than we do or pharmaceutical products that are safer, more effective
or less costly than any that we may develop. Such companies also may be more successful than we are in
manufacturing, sales and marketing. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and established biotechnology
companies. Academic institutions, governmental agencies and other public and private research
organizations also conduct clinical trials, seek patent protection and establish collaborative arrangements for
the development of product candidates.
We expect competition among products will be based on product efficacy and safety, the timing and
scope of regulatory approvals, availability of supply, marketing and sales capabilities, reimbursement
coverage, price and patent position. There can be no assurance that our competitors will not develop safer
and more effective products, commercialize products earlier than we do, or obtain patent protection or
intellectual property rights that limit our ability to commercialize our products.
There can be no assurance that our issued patents or pending patent applications, if issued, will not be
challenged, invalidated or circumvented or that the rights granted thereunder will provide us with
proprietary protection or a competitive advantage.
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Our competitors may develop and market products that are less expensive, more effective, safer or reach the market
sooner than our product candidates, which may diminish or eliminate the commercial success of any products we
may commercialize.
The biopharmaceutical industry is highly competitive. There are many public and private
biopharmaceutical companies, public and private universities and research organizations actively engaged in
the discovery and research and development of products for infectious disease. Several companies are
developing mAbs to treat infections, including Merck & Co., AstraZeneca, and Alopexx Enterprises, LLC.
There is no assurance, however, that another company will not discover how to successfully develop
these antibodies for competing indications.
Among current antimicrobial therapies, antibiotics, particularly those administered by inhalation, can
be competitors to our products especially Panaecin for lung infections. TOBI, an inhaled antibiotic
(tobramycin) has the longest treatment history, although Cayston (inhaled aztreonam) was recently approved
for lung infections in cystic fibrosis patients. There are antibiotics being developed for gram-positive or
gram-negative bacterial infections that could impact the use of standard of care antibiotics in hospitals.
These therapies could impact both the clinical results and use of our products being developed for hospital
acquired pneumonia.
Many of our competitors, either alone or with their strategic collaborators, have substantially greater
financial, technical and human resources than we do and significantly greater experience in the discovery
and development of drugs, obtaining FDA and other regulatory approvals, and the commercialization of
those products. Accordingly, our competitors may be more successful in obtaining approval for drugs and
achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more
effectively marketed and sold, than any drug we may commercialize and may render our product candidates
obsolete or non-competitive before we can recover the significant expenses of developing and
commercializing any of our product candidates. We anticipate that we will face intense and increasing
competition as new drugs enter the market and advanced technologies become available.
We also compete with other clinical-stage companies and institutions for clinical trial participants,
which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial
participants could adversely affect our ability to bring a product to market prior to our competitors. Further,
research and discoveries by others may result in breakthroughs that render our product candidates obsolete
even before they begin to generate any revenue.
In addition, our competitors may obtain patent protection or FDA approval and commercialize products
more rapidly than we do, which may impact future sales of any of our product candidates that receive
marketing approval. If the FDA approves the commercial sale of any of our product candidates, we will also
be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have
limited or no experience. We expect competition among products will be based on product efficacy and
safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capabilities,
product price, reimbursement coverage by government and private third-party payors, and patent position.
Our profitability and financial position will suffer if our products receive regulatory approval but cannot
compete effectively in the marketplace.
If any of our product candidates are approved and commercialized, we may face competition from
biosimilars. The route to market for biosimilars was established with the passage of the Patient Protection
and Affordable Care Act, or PPACA, in March 2010, providing 12 years of marketing exclusivity for
reference products and an additional six months of exclusivity if pediatric studies are conducted. In the EU,
the EMA has issued guidelines for approving products through an abbreviated pathway, and biosimilars
have been approved. If a biosimilar version of one of our potential products were approved in the U.S. or
EU, it could have a negative effect on sales and gross profits of the potential product and our financial
condition.
Even if we achieve market acceptance for our products, we may experience downward pricing pressure on the price
of our drugs because of generic and biosimilar competition and social pressure to lower the cost of drugs.
Several of the FDA approved products for infectious diseases face patent expiration in the next
several years. As a result, generic versions and biosimilars of these drugs and biologicals may become
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available. We expect to face competition from these products, including price-based competition. Pressure
from government and private reimbursement groups, plus patient awareness and other social activist groups
to reduce drug prices may also put downward pressure on the prices of drugs, including our product
candidates, if they are commercialized. Also, if a biosimilar to any of our product candidates is approved by
regulatory agencies, there will be significant pricing pressure on our products, causing us or our
collaborators to reduce the sales price of our products.
Our product candidates may not be accepted in the marketplace; therefore, we may not be able to generate
significant revenue, if any.
Even if our product candidates are approved for sale, physicians and the medical community may not
ultimately use them or may use them only in applications more restricted than we expect. Our product
candidates, if successfully developed, will compete with a number of traditional products, including
antibiotics, and immunotherapies manufactured and marketed by major pharmaceutical and other
biotechnology companies. Our product candidates will also compete with new products currently under
development by such companies and others. Physicians will prescribe a product only if they determine,
based on experience, clinical data, side effect profiles, reimbursement for their patients and other factors,
that it is beneficial as compared to other products currently in use. Furthermore, physicians have been
prescribing traditional antibiotics for decades and may be resistant to switching to new, less established
therapies. Many other factors influence the adoption of new products, including marketing and distribution
restrictions, course of treatment, adverse publicity, product pricing, the views of thought leaders in the
medical community and reimbursement by government and private third-party payors.
Risks Relating to our Reliance on Third Parties
We rely on third parties to conduct our preclinical studies and our clinical trials and to store and distribute our
products for the clinical trials we conduct. If these third parties do not perform as contractually required or
expected, we may not be able to obtain regulatory approval for our product candidates, or we may be delayed in
doing so.
We often rely on third parties, such as CROs, medical institutions, academic institutions, clinical
investigators and contract laboratories, to conduct our preclinical studies and clinical trials. We are
responsible for confirming that our preclinical studies are conducted in accordance with applicable
regulations and that each of our clinical trials is conducted in accordance with its general investigational
plan and protocol. The FDA requires us to comply with Good Laboratory Practice for conducting and
recording the results of our preclinical studies and Good Clinical Practices, or GCP, for conducting,
monitoring, recording and reporting the results of clinical trials, to ensure that data and reported results are
accurate and that the clinical trial participants are adequately protected. Our reliance on third parties does
not relieve us of these responsibilities. If the third parties conducting our clinical trials do not perform their
contractual duties or obligations, do not meet expected deadlines, fail to comply with GCP, do not adhere to
our clinical trial protocols or otherwise fail to generate reliable clinical data, we may need to enter into new
arrangements with alternative third parties and our clinical trials may be more costly than expected or
budgeted, extended, delayed or terminated or may need to be repeated, and we may not be able to obtain
regulatory approval for or commercialize the product candidate being tested in such trials.
Our CROs are not our employees, and we are therefore unable to directly monitor whether or not they
devote sufficient time and resources to our clinical and preclinical programs. These CROs may also have
relationships with other commercial entities, including our competitors, for whom they may also be
conducting clinical trials or other product development activities that could harm our competitive position.
If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected
deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may
be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or
successfully commercialize, our therapeutic candidates. If any such event were to occur, our financial
results and the commercial prospects for our therapeutic candidates would be harmed, our costs could
increase, and our ability to generate revenues could be delayed.
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If any of our relationships with these third-party CROs terminate, we may not be able to enter into
arrangements with alternative CROs or to do so on commercially reasonable terms. Further, switching or
adding additional CROs involves additional costs and requires management time and focus. In addition,
there is a natural transition period when a new CRO commences work. As a result, delays occur, which
could materially impact our ability to meet our desired clinical development timelines. Though we carefully
manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or
delays in the future or that these delays or challenges will not have a material adverse impact on our
business, financial condition and prospects.
In addition, our future clinical trials will require a sufficient number of test subjects to evaluate the
safety and effectiveness of our therapeutic candidates. Accordingly, if our CROs fail to comply with these
regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical
trials, which would delay the regulatory approval process.
We also rely on other third parties to store and distribute our products for the clinical trials that we
conduct. Any performance failure on the part of our distributors could delay clinical development or
marketing approval of our therapeutic candidates or commercialization of our products, if approved,
producing additional losses and depriving us of potential product revenue.
We may explore new strategic collaborations that may never materialize or may fail.
We may, in the future, periodically explore a variety of new strategic collaborations in an effort to gain
access to additional product candidates or resources. At the current time, we cannot predict what form such
a strategic collaboration might take. We are likely to face significant competition in seeking appropriate
strategic collaborators, and these strategic collaborations can be complicated and time-consuming to
negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at
all. We are unable to predict when, if ever, we will enter into any additional strategic collaborations because
of the numerous risks and uncertainties associated with establishing strategic collaborations.
Risks Relating to our Exposure to Litigation
We are exposed to potential product liability or similar claims, and insurance against these claims may not be
available to us at a reasonable rate in the future.
Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and
marketing of human therapeutic products. Clinical trials involve the testing of product candidates on human
subjects or volunteers under a research plan and carry a risk of liability for personal injury or death to
patients due to unforeseen adverse side effects, improper administration of the product candidate, or other
factors. Many of these patients are already seriously ill and are therefore particularly vulnerable to further
illness or death.
We believe we have adequate levels of clinical trial liability insurance for our domestic and
international clinical trials. However, there can be no assurance that we will be able to maintain such
insurance or that the amount of such insurance will be adequate to cover claims. We could be materially and
adversely affected if we were required to pay damages or incur defense costs in connection with a claim
outside the scope of indemnity or insurance coverage, if the indemnity is not performed or enforced in
accordance with its terms, or if our liability exceeds the amount of applicable insurance. In addition, there
can be no assurance that insurance will continue to be available on terms acceptable to us, if at all, or that if
obtained, the insurance coverage will be sufficient to cover any potential claims or liabilities. Similar risks
would exist upon the commercialization or marketing of any products by us or our collaborators.
Regardless of their merit or eventual outcome, product liability claims may result in:
•
decreased demand for our product;
•
injury to our reputation and significant negative media attention;
•
withdrawal of clinical trial volunteers;
•
costs of litigation;
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•
distraction of management; and
•
substantial monetary awards to plaintiffs.
Should any of these events occur, it could have a material adverse effect on our business and financial
condition.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-
party claims against us and may reduce the amount of money available to the Company.
Our certificate of incorporation provides that we will indemnify our directors to the fullest extent
permitted by Delaware law.
In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide
that:
•
•
•
we may, in our discretion, indemnify other officers, employees and agents in those circumstances
where indemnification is permitted by applicable law;
we are required to advance expenses, as incurred, to our directors and executive officers in
connection with defending a proceeding, except that such directors or executive officers shall
undertake to repay such advances if it is ultimately determined that such person is not entitled to
indemnification;
we will not be obligated pursuant to our bylaws to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such person unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was authorized by our
Board of Directors, (iii) such indemnification is provided by us, in our sole discretion, pursuant to
the powers vested in the corporation under applicable law or (iv) such indemnification is required to
be made pursuant to our amended and restated bylaws;
•
the rights conferred in our bylaws are not exclusive, and we are authorized to enter into
indemnification agreements with our directors, officers, employees and agents and to obtain
insurance to indemnify such persons; and
•
we may not retroactively amend our bylaw provisions to reduce our indemnification obligations to
directors, officers, employees and agents.
As a result, if we are required to indemnify one or more of our directors or executive officers, it may
reduce our available funds to satisfy successful third-party claims against us, may reduce the amount of
money available to us and may have a material adverse effect on our business and financial condition.
Risks Relating to Regulation of Our Industry
The biopharmaceutical industry is subject to significant regulation and oversight in the United States, in addition to
approval of products for sale and marketing. We may be subject, directly or indirectly, to federal and state healthcare
fraud and abuse laws, transparency, health information privacy and security laws and other healthcare laws and
regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial
penalties.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation
and prescription of any future product candidates we may develop and any product candidates for which we
obtain marketing approval. In addition to FDA restrictions on marketing of biopharmaceutical products, we
are exposed, directly, or indirectly, through our customers, to broadly applicable fraud and abuse and other
healthcare laws and regulations that may affect the business or financial arrangements and relationships
through which we would market, sell and distribute our products. The laws that may affect our ability to
operate include, but are not limited to:
The federal Anti-Kickback Statute which prohibits any person or entity from, among other things,
knowingly and willfully offering, paying, soliciting or receiving any remuneration, directly or indirectly,
overtly or covertly, in cash or in-kind, to induce or reward either the referring of an individual for, or the
purchasing, leasing, ordering or arranging for the purchase, lease or order of any health care item or service
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reimbursable, in whole or in part, under Medicare, Medicaid or any other federally financed healthcare
program. The term “remuneration” has been broadly interpreted to include anything of value. This statute
has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and
prescribers, purchasers and formulary managers on the other hand. Although there are a number of statutory
exceptions and regulatory safe harbors protecting certain common activities from prosecution, the
exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce
prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an
exception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection
from federal Anti-Kickback Statute liability.
The federal false claims and civil monetary penalty laws, including the Federal False Claims Act,
which imposes significant penalties and can be enforced by private citizens through civil qui tam actions,
prohibits any person or entity from, among other things, knowingly presenting, or causing to be presented, a
false, fictitious or fraudulent claim for payment to the federal government, or knowingly making, using or
causing to be made, a false statement or record material to a false or fraudulent claim to avoid, decrease or
conceal an obligation to pay money to the federal government. In addition, a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the Federal False Claims Act. As a result of a modification made by the Fraud
Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property
presented to the U.S. government. Further, manufacturers can be held liable under the False Claims Act
even when they do not submit claims directly to government payors if they are deemed to “cause” the
submission of false or fraudulent claims. Criminal prosecution is also possible for making or presenting a
false, fictitious or fraudulent claim to the federal government. Several pharmaceutical and other health care
companies have been prosecuted under these laws for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the product. Other companies have been
prosecuted for causing false claims to be submitted because of marketing of the product for unapproved, and
thus non-reimbursable, uses.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, among
other things, imposes criminal liability for executing or attempting to execute a scheme to defraud any
healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or
stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare
offense, and creates federal criminal laws that prohibit knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statements or
representations, or making or using any false writing or document knowing the same to contain any
materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for
healthcare benefits, items or services.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009, or HITECH, and its implementing regulations, which impose certain requirements relating to the
privacy, security, transmission and breach reporting of individually identifiable health information upon
entities subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers
and their respective business associates that perform services for them that involve individually identifiable
health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make
civil and criminal penalties directly applicable to business associates, and gave state attorneys general new
authority to file civil actions for damages or injunctions in U.S. federal courts to enforce the federal HIPAA
laws and seek attorneys’ fees and costs associated with pursuing federal civil actions.
The federal physician payment transparency requirements, sometimes referred to as the “Physician
Payments Sunshine Act,” and its implementing regulations, which require certain manufacturers of drugs,
devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program (with certain exceptions) to report annually to the United States
Department of Health and Human Services, or HHS, information related to payments or other transfers of
value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors)
and teaching hospitals, as well as ownership and investment interests held by physicians and their
immediate family members.
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State and foreign law equivalents of each of the above federal laws, such as anti-kickback and false
claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services
reimbursed by non-governmental third-party payors, including private insurers.
State laws that require pharmaceutical companies to implement compliance programs, comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government, or to track and report gifts, compensation and other remuneration
provided to physicians and other healthcare providers, state and local laws that require the registration of
pharmaceutical sales representatives, and other federal, state and foreign laws that govern the privacy and
security of health information or personally identifiable information in certain circumstances, including
state health information privacy and data breach notification laws which govern the collection, use,
disclosure, and protection of health-related and other personal information, many of which differ from each
other in significant ways and often are not pre-empted by HIPAA, thus requiring additional compliance
efforts.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of
our business activities could be subject to challenge under one or more of these laws. The scope and
enforcement of each of these laws is uncertain and subject to rapid change in the current environment of
healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state
enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and
healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry.
Ensuring that our business arrangements with third parties comply with applicable healthcare laws and
regulations will likely be costly and time consuming. If our operations are found to be in violation of any of
the laws described above or any other governmental regulations that apply to us, we may be subject to
penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, individual
imprisonment, exclusion from governmental funded healthcare programs, such as Medicare and Medicaid,
contractual damages, reputational harm, diminished profits and future earnings, additional reporting
obligations and oversight if we become subject to a corporate integrity agreement or other agreement to
resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our results of
operations.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory
standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could
include intentional failures to comply with FDA regulations, provide accurate information to the FDA,
comply with manufacturing standards we have established, comply with federal and state health-care fraud
and abuse laws and regulations, report financial information or data accurately or disclose unauthorized
activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are
subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other
abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting,
marketing and promotion, sales commission, customer incentive programs and other business arrangements.
Employee misconduct could also involve the improper use of information obtained in the course of clinical
trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible
to identify and deter employee misconduct, and the precautions we take to detect and prevent misconduct
may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with
such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business and results of
operations, including the imposition of significant civil, criminal, and administrative penalties, damages,
fines, disgorgement, individual imprisonment, exclusion from governmental funded healthcare programs,
such as Medicare and Medicaid, contractual damages, reputational harm, diminished profits and future
earnings, additional reporting obligations and oversight if subject to a corporate integrity agreement or other
agreement to resolve allegations of non-compliance with these laws.
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Health care reform measures could adversely affect our business.
In the United States and foreign jurisdictions, there have been, and continue to be, a number of
legislative and regulatory changes and proposed changes to the healthcare system that could affect our
future results of operations. In particular, there have been and continue to be a number of initiatives at the
U.S. federal and state levels that seek to reduce healthcare costs. In 2010, the PPACA was enacted, which
includes measures to significantly change the way health care is financed by both governmental and private
insurers. Among the provisions of the PPACA of greatest importance to the pharmaceutical and
biotechnology industry are the following:
•
an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription
drugs and biologic agents, apportioned among these entities according to their market share in
certain government healthcare programs;
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implementation of the federal physician payment transparency requirements, sometimes referred to
as the “Physician Payments Sunshine Act”;
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a licensure framework for follow-on biologic products;
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a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct
comparative clinical effectiveness research, along with funding for such research;
establishment of a Center for Medicare Innovation at the Centers for Medicare & Medicaid Services,
or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid
spending, potentially including prescription drug spending;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug
Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic
drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average
Manufacturer Price, or AMP;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate
Program are calculated for certain drugs and biologics, including our product candidates, that are
inhaled, infused, instilled, implanted or injected;
extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who
are enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to
offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories
for individuals with income at or below 133% of the federal poverty level, thereby potentially
increasing manufacturers’ Medicaid rebate liability;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer
70% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries
during their coverage gap period, as a condition for the manufacturers’ outpatient drugs to be
covered under Medicare Part D; and
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expansion of the entities eligible for discounts under the Public Health program.
There have been executive, judicial and Congressional challenges to certain aspects of the PPACA. For
example, President Trump signed Executive Orders and other directives designed to delay the
implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for
health insurance mandated by the PPACA. Concurrently, Congress considered legislation to repeal or repeal
and replace all or part of the PPACA. While Congress has not passed comprehensive repeal legislation,
several bills affecting the implementation of certain taxes under the PPACA have been enacted. The Tax
Cuts and Jobs Act of 2017 (the “Tax Act”) included a provision repealing, effective January 1, 2019, the
tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain
qualifying health coverage for all or part of a year. Additionally, the 2020 federal spending package
permanently eliminated, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost
employer-sponsored health coverage and the medical device tax and, effective January 1, 2021, also
eliminated the health insurance tax. Further, the Bipartisan Budget Act of 2018 (the “BBA”) among other
things, amends the
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PPACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly
referred to as the “donut hole.” Congress may consider other legislation to repeal or replace other elements
of the PPACA. On December 14, 2018, a Texas U.S. District Court Judge ruled that the PPACA is
unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the
Tax Act. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the
District Court ruling that the individual mandate was unconstitutional and remanded the case back to the
District Court to determine whether the remaining provisions of the PPACA are invalid as well. The U.S.
Supreme Court is currently reviewing this case, but it is unclear when a decision will be made. Although the
U.S. Supreme Court has not yet ruled on the constitutionality of the PPACA, on January 28, 2021, President
Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through
May 15, 2021 for purposes of obtaining health insurance coverage through the PPACA marketplace. The
executive order also instructs certain governmental agencies to review and reconsider their existing policies
and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration
projects and waiver programs that include work requirements, and policies that create unnecessary barriers
to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the
Supreme Court ruling, other such litigation and the healthcare reform measures of the Biden administration
will impact the PPACA and our business.
Many of the details regarding the implementation of the PPACA are yet to be determined, and at this
time, the full effect that the PPACA would have on our business remains unclear. In particular, there is
uncertainty surrounding the applicability of the biosimilars provisions under the PPACA to our product
candidates. The FDA has issued several guidance documents, and withdrawn others, but no implementing
regulations on biosimilars have been adopted. A number of biosimilar applications have been approved over
the past few years. It is not certain that we will receive 12 years of biologics marketing exclusivity for any
of our products. The regulations that are ultimately promulgated and their implementation are likely to have
considerable impact on the way we conduct our business and may require us to change current strategies. A
biosimilar is a biological product that is highly similar to an approved drug notwithstanding minor
differences in clinically inactive components, and for which there are no clinically meaningful differences
between the biological product and the approved drug in terms of the safety, purity, and potency of the
product.
Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical
pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in
several recent congressional inquiries and proposed and enacted federal and state legislation designed to,
among other things, bring more transparency to product pricing, review the relationship between pricing and
manufacturer patient programs, and reform government program reimbursement methodologies for
products.
In addition, given recent federal and state government initiatives directed at lowering the total cost of
healthcare, Congress and state legislatures will likely continue to focus on healthcare reform, the cost of
prescription drugs and biologics and the reform of the Medicare and Medicaid programs. While we cannot
predict the full outcome of any such legislation, it may result in decreased reimbursement for drugs and
biologics, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This
could harm our ability to generate revenues. Increases in importation or re-importation of pharmaceutical
products from foreign countries into the United States could put competitive pressure on our ability to
profitably price our products, which, in turn, could adversely affect our business, results of operations,
financial condition and prospects. We might elect not to seek approval for or market our products in foreign
jurisdictions in order to minimize the risk of re-importation, which could also reduce the revenue we
generate from our product sales. It is also possible that other legislative proposals having similar effects will
be adopted.
Furthermore, regulatory authorities’ assessment of the data and results required to demonstrate safety
and efficacy can change over time and can be affected by many factors, such as the emergence of new
information, including on other products, changing policies and agency funding, staffing and leadership. We
cannot be sure whether future changes to the regulatory environment will be favorable or unfavorable to our
business prospects. For example, average review times at the FDA for marketing approval applications can
be affected by a variety of factors, including budget and funding levels and statutory, regulatory and policy
changes.
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Risks Relating to Protecting our Intellectual Property
If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to
compete effectively or operate profitably.
Our success will depend, in part, on our ability to obtain patents, operate without infringing the
proprietary rights of others and maintain trade secrets or other proprietary know-how, both in the United
States and other countries. Patent matters in the biotechnology and pharmaceutical industries can be highly
uncertain, can involve changes in laws or regulations, and involve complex legal and factual questions.
Accordingly, the issuance, validity, breadth and enforceability of our patents and the existence of potentially
blocking patent rights of others cannot be predicted with any degree of certainty, either in the United States
or in other countries.
Obtaining, maintaining, and enforcing patents is expensive and time-consuming, and we may not be
able to file and prosecute all necessary or desirable patent applications, or maintain, enforce and/or license
patents that may issue based on our patent applications, at a reasonable cost or in a timely manner. It is also
possible that we will fail to identify patentable aspects of our research and development results before it is
too late to obtain patent protection. Moreover, in some circumstances, we may not have the right to control
the preparation, filing and prosecution of patent applications, or to maintain the patents, covering
technology that we license from or license to third parties and are reliant on our licensors or licensees.
Further, although we enter into non-disclosure and confidentiality agreements with parties who have access
to patentable aspects of our research and development output, such as our employees, corporate
collaborators, outside scientific collaborators, contract research organizations, contract manufacturers,
consultants, advisors and other third parties, any of these parties may breach these agreements and disclose
such results before a patent application is filed, thereby jeopardizing our ability to seek patent protection.
There can be no assurance that we will discover or develop patentable products or processes or that
patents will issue from any of the currently pending patent applications or that claims granted on issued
patents will be sufficient to protect our technologies, processes, or adequately cover the actual products we
may actually sell. Potential competitors or other researchers in the field may have filed patent applications,
been issued patents, published articles or otherwise created prior art that could restrict or block our efforts
to obtain additional patents or act as obstacles to our pending patent applications. There also can be no
assurance that our issued patents or pending patent applications, if issued, will not be challenged,
invalidated, rendered unenforceable or not infringed, or that the rights granted thereunder will provide us
with proprietary protection or competitive advantages. We may not be aware of all third-party intellectual
property rights potentially relating to our product candidates or their intended uses, and as a result the
impact of such third-party intellectual property rights upon the patentability of our own patents and patent
applications, as well as the impact of such third-party intellectual property upon our freedom to operate, is
highly uncertain. Patent applications in the U.S. and other jurisdictions are typically not published until
18 months after filing or, in some cases, not at all. Therefore, we cannot know with certainty whether we
were the first to make the inventions claimed in our patents or pending patent applications, or that we were
the first to file for patent protection of such inventions. As a result, the issuance, scope, validity,
enforceability and commercial value of our patent rights are highly uncertain. Our patents or pending patent
applications may be challenged in the courts or patent offices in the U.S. and abroad. For example, we may
be subject to a third-party pre-issuance submission of prior art to the U.S. Patent and Trademark Office, or
become involved in post-grant review procedures, oppositions, derivations, reexaminations, inter partes
review or interference proceedings, in the U.S. or elsewhere, challenging our patent rights or the patent
rights of others. An adverse determination in any such challenges may result in loss of exclusivity or in
patent claims being narrowed, invalidated, or held unenforceable, in whole or in part, which could limit our
ability to stop others from using or commercializing similar or identical technology and products, or limit
the duration of the patent protection of our technology and products. In addition, given the amount of time
required for the development, testing and regulatory review of new product candidates, patents protecting
such candidates might expire before or shortly after such candidates are commercialized. The patent
position of biopharmaceutical companies generally is highly uncertain, involves complex legal and factual
questions and has in recent years been the subject of much litigation, resulting in court decisions, including
Supreme Court decisions, that have increased uncertainties as to the ability to enforce patent rights in the
future. In addition, the laws of foreign countries may not protect our rights to the same extent as the laws of
the
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U.S., or vice versa. Our patent rights also depend on our compliance with technology and patent licenses
upon which our patent rights are based and upon the validity of assignments of patent rights from
consultants and other inventors that were, or are, not employed by us.
In addition, competitors may manufacture and sell our potential products in those foreign countries
where we have not filed for patent protection or where patent protection may be unavailable, not obtainable
or ultimately not enforceable or meaningful. In addition, even where patent protection is obtained, third-
party competitors may challenge our patent claims in the various patent offices, for example via opposition
in the European Patent Office or reexamination or interference proceedings in the United States Patent and
Trademark Office, or USPTO, or find ways to design around our patents by producing competitive non-
infringing alternative products. The ability of such competitors to sell such products in the United States or
in foreign countries where we have obtained patents is usually governed by the patent laws of the countries
in which the product is sold.
We will incur significant ongoing expenses in maintaining our patent portfolio in addition to
maintaining other registered intellectual property such as trademarks and copyrights. Maintaining registered
intellectual property such as patents and trademarks requires timely filing certain maintenance documents
and paying certain maintenance fees, the failure of which could result in abandonment or cancellation of
such registered intellectual property. Should we lack the funds to maintain our patent portfolio or other
registered intellectual property, or to enforce our rights against infringers, we could be adversely impacted.
Even if we succeed in enforcing one of our patents against a third-party in a claim of infringement, any such
action could divert the time and attention of management and impair our ability to access additional capital
and/or cost us significant funds.
If we cannot meet requirements under our license and sublicense agreements, we could lose the rights to our
products, which could have a material adverse effect on our business.
We depend on licensing and sublicensing agreements with third parties such as the University of
Chicago, University of Iowa, Brigham and Women’s Hospital, Inc., Brigham Young University, Public
Health Service and Kenta Biotech Ltd to maintain the intellectual property rights to certain of our product
candidates. These agreements require us to make payments and satisfy performance obligations in order to
maintain our rights under these agreements. All of these agreements last either throughout the life of the
patents that are the subject of the agreements, or with respect to other licensed technology, for a number
of years after the first commercial sale of the relevant product. If we fail to comply with the obligations
under our license agreements or use the intellectual property licensed to us in an unauthorized manner, we
may be required to pay damages and our licensors may have the right to terminate the license. If our license
agreements are terminated, we may not be able to develop, manufacture, market or sell the products covered
by our agreements and those being tested or approved in combination with such products. Such an
occurrence could materially adversely affect the value of the product candidate being developed under any
such agreement and any other product candidates being developed or tested in combination.
In addition, we are responsible for the cost of filing and prosecuting certain patent applications and
maintaining certain issued patents licensed to us. If we do not meet our obligations under our license
agreements in a timely manner, or use the intellectual property licensed to us in an unauthorized manner, we
could be required to pay damages and we could lose the rights to our proprietary technology if our licensor
terminated the license. If our license agreements are terminated, we may not be able to develop,
manufacture, market or sell the products covered by our agreements and any being tested or approved in
combination with such products. Such an occurrence could have a material adverse effect on our business,
results of operations and financial condition.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because
intellectual property rights have limitations, and may not adequately protect our business, or permit us to
maintain our competitive advantage. The following examples are illustrative:
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others may be able to make compounds that are similar to our product candidates but that are not
covered by the claims of the patents that we own or have exclusively licensed;
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we or our licensors or strategic collaborators might not have been the first to make the inventions
covered by the issued patent or pending patent application that we own or have exclusively licensed;
we or our licensors or strategic collaborators might not have been the first to file patent applications
covering certain of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our
technologies without infringing our intellectual property rights;
•
it is possible that our pending patent applications will not lead to issued patents;
•
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issued patents that we own or have exclusively licensed may not provide us with any competitive
advantages, or may be held invalid or unenforceable, as a result of legal challenges by our
competitors;
our competitors might conduct research and development activities in countries where we do not
have patent rights and then use the information learned from such activities to develop competitive
products for sale in our major commercial markets;
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we may not develop additional proprietary technologies that are patentable; and
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the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and
prospects.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents.
Changes in either the patent laws or interpretation of the patent laws in the United States and Ex-US
could increase the uncertainties and costs. Recent patent reform legislation in the United States and other
countries, including the Leahy-Smith America Invents Act, or the Leahy-Smith Act, signed into law in the
United States on September 16, 2011, could increase those uncertainties and costs surrounding the
prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-
Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect
the way patent applications are prosecuted, redefine prior art and provide more efficient and cost-effective
avenues for competitors to challenge the validity of patents. These include allowing third-party submission
of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a
patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and
derivation proceedings. After March 2013, under the Leahy-Smith Act, the United States transitioned to a
first inventor to file system in which, assuming that the other statutory requirements are met, the first
inventor to file a patent application will be entitled to the patent on an invention regardless of whether a
third-party was the first to invent the claimed invention. However, the Leahy-Smith Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents, all of which could have a material
adverse effect on our business, financial condition, results of operations and prospects.
The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of
patent protection available in certain circumstances or weakening the rights of patent owners in certain
situations. Depending on future actions by the U.S. Congress, the U.S. courts, the USPTO and the relevant
law-making bodies in other countries, the laws and regulations governing patents could change in
unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents
and patents that we might obtain in the future.
We may be subject to litigation with respect to the ownership and use of intellectual property that will be costly to
defend or pursue and uncertain in its outcome.
Our success also will depend, in part, on our refraining from infringing patents or otherwise violating
intellectual property owned or controlled by others. There is a substantial amount of intellectual property
litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened
with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our
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products candidates, including interference proceedings before the U.S. Patent and Trademark Office.
Pharmaceutical companies, biotechnology companies, universities, research institutions and others may
have filed patent applications or have received, or may obtain, issued patents in the United States or
elsewhere relating to aspects of our technology, and it may not always be clear to industry participants,
including us, which patents cover various types of products or methods of use. The coverage of patents is
subject to interpretation by the courts, and the interpretation is not always uniform. Third parties may allege
that we have infringed or misappropriated their intellectual property. If we were sued for patent
infringement, we would need to demonstrate that our product candidates, products or methods either do not
infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and
we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving
invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity
enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs
and the time and attention of our management and scientific personnel could be diverted in pursuing these
proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient
resources to bring these actions to a successful conclusion.
Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is
unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to
divert significant resources from our core business, including distracting our technical and management
personnel from their normal responsibilities. In addition, there could be public announcements of the results
of hearings, motions or other interim proceedings or developments and if securities analysts or investors
perceive these results to be negative, it could have a substantial adverse effect on the market price of our
common stock. Such litigation or proceedings could substantially increase our operating losses and reduce
the resources available for development activities or any future sales, marketing or distribution activities.
We may not have sufficient financial or other resources to adequately conduct such litigation or
proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources and more mature and developed
intellectual property portfolios.
If we are found to infringe a third-party’s intellectual property rights, we could be forced, including by
court order, to cease developing, manufacturing or commercializing the infringing product candidate or
product. Alternatively, we may be required to obtain a license from such third-party in order to use the
infringing technology and continue developing, manufacturing or marketing the infringing product
candidate. However, we may not be able to obtain any required license on commercially reasonable terms or
at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors
access to the same technologies licensed to us. In addition, we could be found liable for monetary damages,
including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. A finding
of infringement could prevent us from commercializing our product candidates or force us to cease some of
our business operations, which could materially harm our business. Claims that we have misappropriated the
confidential information or trade secrets of third parties could have a similar negative impact on our
business.
It is uncertain whether the issuance of any third-party patents will require us to alter our products or
processes, obtain licenses, if such licenses are available on commercially reasonable terms, or cease certain
activities completely. Some third-party applications or patents may conflict with our issued patents or
pending applications. Any such conflict could result in a significant reduction of the scope or value of our
issued or licensed patents.
In addition, if patents issued to other companies contain blocking, dominating or conflicting claims and
such claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or
to develop or obtain alternative non-infringing technology and cease practicing those activities, including
potentially manufacturing or selling any products deemed to infringe those patents. If any licenses are
required, there can be no assurance that we will be able to obtain any such licenses on commercially
favorable terms, if at all, and if these licenses are not obtained, we might be prevented from pursuing the
development and commercialization of certain of our potential products. Our failure to obtain a license to
any technology that we may require to commercialize our products on favorable terms may have a material
adverse impact on our business, financial condition and results of operations.
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Litigation, which could result in substantial costs to us (even if determined in our favor), may also be
necessary to enforce any patents issued or licensed to us or to determine the scope and validity of the
proprietary rights of others, or to defend against any accusations from third parties that our products or
activities are infringing their intellectual property rights. The FDA has only recently published draft
guidance documents for implementation of the Biologics Price Competition and Innovation Act, or BPCIA
under the PPACA, related to the development of follow-on biologics (biosimilars), and detailed guidance for
patent litigation procedures under this act has not yet been provided. If another company files for approval
to market a competing follow-on biologic, and/or if such approval is given to such a company, we may be
required to promptly initiate patent litigation to prevent the marketing of such biosimilar version of our
product prior to the normal expiration of the patent. There can be no assurance that our issued or licensed
patents would be held valid by a court of competent jurisdiction or that any follow-on biologic would be
found to infringe our patents.
In addition, if our competitors file or have filed patent applications in the United States that claim
technology also claimed by us, we may have to participate in interference proceedings to determine priority
of invention. These proceedings, if initiated by the USPTO, could result in substantial costs to us, even if
the eventual outcome is favorable to us. Such proceedings can be lengthy, are costly to defend and involve
complex questions of law and fact, the outcomes of which are difficult to predict. Moreover, we may have to
participate in post-grant proceedings or third-party ex parte or inter partes reexamination proceedings under
the USPTO. An adverse outcome with respect to a third-party claim or in an interference proceeding could
subject us to significant liabilities, require us to license disputed rights from third parties, or require us to
cease using such technology, any of which could have a material adverse effect on our business, financial
condition and results of operations.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be
expensive, time consuming and unsuccessful.
Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be expensive
and time consuming and divert the time and attention of our management and scientific personnel. Any
claims we assert against perceived infringers could provoke these parties to assert counterclaims against us
alleging that we infringe their patents, in addition to counterclaims asserting that our patents are invalid or
unenforceable, or both. In any patent infringement proceeding, there is a risk that a court will decide that a
patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the
other party from using the invention at issue. There is also a risk that, even if the validity of such patents is
upheld, the court will construe the patent’s claims narrowly or decide that we do not have the right to stop
the other party from using the invention at issue on the grounds that our patent claims do not cover the
invention. An adverse outcome in a litigation or proceeding involving our patents could limit our ability to
assert our patents against those parties or other competitors and may curtail or preclude our ability to
exclude third parties from making and selling similar or competitive products. Any of these occurrences
could adversely affect our competitive business position, business prospects and financial condition.
Similarly, if we assert trademark infringement claims, a court may determine that the marks we have
asserted are invalid or unenforceable, or that the party against whom we have asserted trademark
infringement has superior rights to the marks in question. In this case, we could ultimately be forced to
cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further
infringing activity and instead award only monetary damages, which may or may not be an adequate
remedy. Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential information could be
compromised by disclosure during litigation. There could also be public announcements of the results of
hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive
these results to be negative, it could have a material adverse effect on the price of shares of our common
stock. Moreover, there can be no assurance that we will have sufficient financial or other resources to file
and pursue such infringement claims, which typically last for years before they are concluded. Even if we
ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of
our management and scientific personnel could outweigh any benefit we receive as a result of the
proceedings.
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We may rely on trade secret and proprietary know-how which can be difficult to trace and enforce and, if we are
unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
We also rely on trade secrets to protect technology, especially where patent protection is not believed to
be appropriate or obtainable or where patents have not issued. For example, our manufacturing process
involves a number of trade secret steps, processes, and conditions. Trade secrets and know-how can be
difficult to protect. We attempt to protect our proprietary technology and processes, in part, with
confidentiality agreements and assignment of invention agreements with our employees and confidentiality
agreements with our consultants and certain contractors. Despite these efforts, any of these parties may
breach the agreements and disclose our proprietary information, including our trade secrets, and we may not
be able to obtain adequate remedies for such breaches. Any disclosure, either intentional or unintentional,
by our employees, the employees of third parties with whom we share our facilities or third-party
consultants and vendors that we engage to perform research, clinical studies or manufacturing activities, or
misappropriation by third parties (such as through a cybersecurity breach) of our trade secrets or proprietary
information could enable competitors to duplicate or surpass our technological achievements, thus eroding
our competitive position in our market.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult,
expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and
outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets
were to be lawfully obtained or independently developed by a competitor or other third-party, we would
have no right to prevent them from using that technology or information to compete with us. If any of our
trade secrets were to be disclosed to or independently developed by a competitor or other third-party, our
competitive position would be harmed.
There can be no assurance that these agreements are valid and enforceable, will not be breached, that
we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known
or be independently discovered by competitors. We may fail in certain circumstances to obtain the necessary
confidentiality agreements or assignment of invention agreements, or their scope or term may not be
sufficiently broad to protect our interests or transfer adequate rights to us.
If our trade secrets or other intellectual property become known to our competitors, it could result in a
material adverse effect on our business, financial condition and results of operations. To the extent that we
or our consultants or research collaborators use intellectual property owned by others in work for us,
disputes may also arise as to the rights to related or resulting know-how and inventions.
The patent protection and patent prosecution for some of our product candidates is dependent or may be dependent
in the future on third parties.
While we normally seek and gain the right to fully prosecute the patents relating to our product
candidates, there may be times when platform technology patents or product-specific patents that relate to
our product candidates are controlled by our licensors. In addition, our licensors and/or licensees may have
back-up rights to prosecute patent applications in the event that we do not do so or choose not to do so, and
our licensees may have the right to assume patent prosecution rights after certain milestones are reached. If
any of our licensing collaborators fails to appropriately prosecute and maintain patent protection for patents
covering any of our product candidates, our ability to develop and commercialize those product candidates
may be adversely affected and we may not be able to prevent competitors from making, using and selling
competing products.
We may not be able to protect our intellectual property rights throughout the world.
Patents are of national or regional effect, and filing, prosecuting and defending patents on all of our
product candidates throughout the world would be prohibitively expensive. As such, we may not be able to
prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other jurisdictions. Further,
the legal systems of certain countries, particularly certain developing countries, do not favor the
enforcement of patents and other intellectual property protection, particularly those relating to
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pharmaceuticals or biologics, which could make it difficult for us to stop the infringement of our patents or
marketing of competing products in violation of our proprietary rights generally. In addition, certain
developing countries, including China and India, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to third parties. In those countries, we and our licensors may have
limited remedies if patents are infringed or if we or our licensors are compelled to grant a license to a third-
party, which could materially diminish the value of those patents. This could limit our potential revenue
opportunities. Accordingly, our efforts to enforce our intellectual property rights around the world may be
inadequate to obtain a significant commercial advantage from the intellectual property that we develop or
license.
Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate
amount of time.
Patent rights are of limited duration. Given the amount of time required for the development, testing
and regulatory review of new product candidates, patents protecting such candidates might expire before or
shortly after such product candidates are commercialized. Even if patents covering our product candidates
are obtained, once the patent life has expired for a product, we may be open to competition from biosimilar
or generic products. A patent term extension based on regulatory delay may be available in the U.S.
However, only a single patent can be extended for each marketing approval, and any patent can be extended
only once, for a single product. Moreover, the scope of protection during the period of the patent term
extension does not extend to the full scope of the claim, but instead only to the scope of the product as
approved. Laws governing analogous patent term extensions in foreign jurisdictions vary widely, as do laws
governing the ability to obtain multiple patents from a single patent family. Additionally, we may not
receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of
relevant patents or otherwise fail to satisfy applicable requirements. If we are unable to obtain patent term
extension or restoration, or the term of any such extension is less than we request, the period during which
we will have the right to exclusively market our product will be shortened and our competitors may obtain
approval of competing products following our patent expiration, and our revenue could be reduced, possibly
materially.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their
intellectual property, or claiming ownership of what we regard as our own intellectual property.
Some of our employees and our licensors’ employees, including our senior management, were
previously employed at universities or at other biotechnology or pharmaceutical companies, including our
competitors or potential competitors. Some of these employees may have executed proprietary rights, non-
disclosure and non-competition agreements, or similar agreements, in connection with such previous
employment. Although we try to ensure that our employees do not use the proprietary information or know-
how of others in their work for us, we may be subject to claims that we or these employees have used or
disclosed intellectual property, including trade secrets or other proprietary information, of any such third-
party. Litigation may be necessary to defend against such claims. If we fail in defending any such claims, in
addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or
sustain damages. Such intellectual property rights could be awarded to a third-party, and we could be
required to obtain a license from such third-party to commercialize our technology or products. Such a
license may not be available on commercially reasonable terms or at all. Even if we are successful in
defending against such claims, litigation could result in substantial costs and be a distraction to
management.
In addition, while we typically require our employees, consultants and contractors who may be
involved in the development of intellectual property to execute agreements assigning such intellectual
property to us, we may be unsuccessful in executing such an agreement with each party who in fact
develops intellectual property that we regard as our own, which may result in claims by or against us related
to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in
addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are
successful in prosecuting or defending against such claims, litigation could result in substantial costs and be
a distraction to our senior management and scientific personnel.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document
submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent
protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent
agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental
patent agencies require compliance with a number of procedural, documentary, fee payment and other
similar provisions during the patent application process. While an inadvertent lapse can in many cases be
cured by payment of a late fee or by other means in accordance with the applicable rules, there are
situations in which noncompliance can result in abandonment or lapse of the patent or patent application,
resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that
could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure
to respond to official actions within prescribed time limits, non-payment of fees and failure to properly
legalize and submit formal documents. If we fail to maintain the patents and patent applications covering
our product candidates, our competitive position would be adversely affected.
Risks Related to Owning our Common Stock
The price of our common stock may fluctuate substantially.
You should consider an investment in our common stock to be risky, and you should invest in our
common stock only if you can withstand a significant loss and wide fluctuations in the market value of your
investment. Some factors that may cause the market price of our common stock to fluctuate, in addition to
the other risks mentioned in this “Risk Factors” section, are:
•
sale of our common stock by our stockholders, executives, and directors;
•
volatility and limitations in trading volumes of our shares of common stock;
•
•
our ability to obtain financings to conduct and complete research and development activities
including, but not limited to, our human clinical trials, and other business activities;
our announcements or our competitors’announcements regarding new products or services,
enhancements, significant contracts, acquisitions or strategic investments;
•
failures to meet external expectations or management guidance;
•
clinical trial progress and outcomes;
•
changes in our capital structure or dividend policy;
•
our cash position and substantial doubt about our ability to continue as a going concern;
•
announcements and events surrounding financing efforts, including debt and equity securities;
•
our inability to enter into new markets or develop new products;
•
reputational issues;
•
•
announcements of acquisitions, partnerships, collaborations, joint ventures, new products, capital
commitments, or other events by us or our competitors;
changes in general economic, political and market conditions in any of the regions in which we
conduct our business;
•
changes in industry conditions or perceptions;
•
changes in valuations of similar companies or groups of companies;
•
analyst research reports, recommendation and changes in recommendations, price targets, and
withdrawals of coverage;
•
departures and additions of key personnel;
•
disputes and litigations related to contractual obligations;
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•
changes in applicable laws, rules, regulations, or accounting practices and other dynamics;
•
catastrophic weather and/or global disease outbreaks, such as the recent COVID-19 pandemic; and or
•
other events or factors, many of which may be out of our control.
In addition, if the market for stocks in our industry or industries related to our industry, or the stock
market in general, experiences a loss of investor confidence, the trading price of our common stock could
decline for reasons unrelated to our business, financial condition and results of operations. If any of the
foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if
unsuccessful, could be costly to defend and a distraction to management.
The stock market in general has recently experienced relatively large price and volume fluctuations,
particularly in response to the COVID-19 outbreak. In particular, the market prices of securities of smaller
biotechnology and medical device companies have experienced dramatic fluctuations that often have been
unrelated or disproportionate to the operating results of these companies. Continued market fluctuations
could result in extreme volatility in the price of our common stock, which could cause a decline in the value
of our common stock. In addition, price volatility may increase if the trading volume of our common stock
remains limited or declines
Our 10% or more stockholders and management own a significant percentage of our stock and will be able to
exercise significant influence over matters subject to stockholder approval.
As of December 31, 2020, our executive officers, directors and 10% or more stockholders, together
with their respective affiliates, beneficially owned approximately 29.1% of our outstanding securities.
Accordingly, this group of security holders will be able to exert a significant degree of influence over our
management and affairs and over matters requiring security holder approval, including the election of our
Board of Directors, future issuances of our securities, declaration of dividends and approval of other
significant corporate transactions. This concentration of ownership could have the effect of delaying or
preventing a change-of-control of the Company or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market
value of our securities. In addition, this significant concentration of share ownership may adversely affect
the trading price for our common stock if investors perceive disadvantages in owning stock in a company
with such concentrated ownership.
Our ability to use our net operating loss carry-forwards and certain other tax attributes is limited by Sections 382
and 383 of the Internal Revenue Code.
Net operating loss carryforwards allow companies to use past year net operating losses to offset against
future years’ profits, if any, to reduce future tax liabilities. Sections 382 and 383 of the Internal Revenue
Code of 1986 limit a corporation’s ability to utilize its net operating loss carryforwards and certain other tax
attributes (including research credits) to offset any future taxable income or tax if the corporation
experiences a cumulative ownership change of more than 50% over any rolling three year period. State net
operating loss carryforwards (and certain other tax attributes) may be similarly limited. An ownership
change can therefore result in significantly greater tax liabilities than a corporation would incur in the
absence of such a change and any increased liabilities could adversely affect the corporation’s business,
results of operations, financial condition and cash flow.
Ownership changes may occur in the future as a result of additional equity offerings or events over
which we will have little or no control, including purchases and sales of our equity by our five percent
security holders, the emergence of new five percent security holders, redemptions of our securities or
certain changes in the ownership of any of our five percent security holders.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act,” or TCJA, that
significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things,
includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of
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interest, allows for the expensing of capital expenditures, a reduction to the maximum deduction allowed for
net operating losses generated in tax years after December 31, 2017, and puts into effect the migration from
a “worldwide” system of taxation to a partially territorial system. We do not expect tax reform to have a
material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax
assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be
recognized in our tax expense in the year of enactment. Further, any eligibility we may have or may
someday have for tax credits associated with the qualified clinical testing expenses arising out of the
development of orphan drugs will be reduced to 25% as a result of the TCJA; thus, our net taxable income
may be affected. We continue to examine the impact this tax reform legislation may have on our business.
The impact of this tax reform on holders of our common stock is uncertain and could be adverse. This
annual report on Form 10-K does not discuss any such tax legislation or the manner in which it might affect
purchasers of our common stock. We urge our stockholders, to consult with their legal and tax advisors with
respect to such legislation and the potential tax consequences of investing in our common stock.
Future sales and issuances of our common stock or rights to purchase common stock pursuant to our equity
incentive plan could result in additional dilution of the percentage ownership of our stockholders and could cause
our share price to fall.
We expect that significant additional capital will be needed in the future to continue our planned
operations, including expanding research and development, funding clinical trials, purchasing of capital
equipment, hiring new personnel, commercializing our products, and continuing activities as an operating
public company. To the extent we raise additional capital by issuing equity securities, our stockholders may
experience substantial dilution. We may sell common stock, convertible securities or other equity securities
in one or more transactions at prices and in a manner, we determine from time to time. If we sell common
stock, convertible securities or other equity securities in more than one transaction, investors may be
materially diluted by subsequent sales. Such sales may also result in material dilution to our existing
stockholders, and new investors could gain rights superior to our existing stockholders.
We do not intend to pay cash dividends on our shares of common stock so any returns will be limited to the value of
our shares.
We currently anticipate that we will retain future earnings for the development, operation and
expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable
future. Any return to stockholders will therefore be limited to the increase, if any, of our share price.
We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements
applicable to emerging growth companies, which could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012,
or the JOBS Act, and we intend to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies”
including not being required to comply with the auditor attestation requirements of Section 404(b) of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote
on executive compensation and stockholder approval of any golden parachute payments not previously
approved. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for
complying with new or revised accounting standards. In other words, an “emerging growth company” can
delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We are electing to delay such adoption of new or revised accounting standards, and as a result,
we may not comply with new or revised accounting standards on the relevant dates on which adoption of
such standards is required for non-emerging growth companies. As a result of such election, our
consolidated financial statements may not be comparable to the financial statements of other public
companies. We cannot predict if investors will find our common stock less attractive because we may rely
on these exemptions. If some investors find our common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may be more volatile. We may take
advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will
remain an “emerging
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growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross
revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the
date of the completion of our initial public offering; (iii) the date on which we have issued more than
$1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to
be a large accelerated filer under the rules of the Securities and Exchange Commission.
Because we have elected to defer compliance with new or revised accounting standards, our financial statement
disclosure may not be comparable to similar companies.
We have elected to use the extended transition period for complying with new or revised accounting
standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised
accounting standards that have different effective dates for public and private companies until those
standards apply to private companies. As a result of our election, our consolidated financial statements may
not be comparable to companies that comply with public company effective dates.
Because of this extended transition period, we may be less attractive to investors and it may be difficult
for us to raise additional capital as and when we need it. Investors may be unable to compare our business
with other companies in our industry if they believe that our financial accounting is not as transparent as
other companies in our industry. If we are unable to raise additional capital as and when we need it, our
financial condition and results of operations may be materially and adversely affected.
We may be at risk of securities class action litigation.
We may be at risk of securities class action litigation. This risk is especially relevant for us due to our
dependence on positive clinical trial outcomes and regulatory approvals of each of our product candidates.
In the past, biotechnology and pharmaceutical companies have experienced significant stock price volatility,
particularly when associated with binary events such as clinical trials and product approvals. If we face such
litigation, it could result in substantial costs and a diversion of management’s attention and resources, which
could harm our business and results in a decline in the market price of our common stock.
Our management will be required to devote substantial time to compliance initiatives.
As a public company, we incur significant legal, accounting, and other expenses that we did not incur
as a newly formed entity. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC
and The Nasdaq Capital Market, have imposed various new requirements on public companies, including
requiring establishment and maintenance of effective disclosure and financial controls and changes in
corporate governance practices. Our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more time consuming and costly. We
expect these rules and regulations to make it more difficult and more expensive for us to obtain director and
officer liability insurance and we may be required to incur substantial costs to maintain the same or similar
coverage.
Our common stock may be delisted if we fail to comply with continued listing standards.
If we fail to meet any of the continued listing standards of The Nasdaq Capital Market, our common
stock could be delisted from The Nasdaq Capital Market. These continued listing standards include
specifically enumerated criteria, such as:
•
a $1.00 minimum closing bid price;
•
stockholders’ equity of $2.5 million;
•
500,000 shares of publicly-held common stock with a market value of at least $1 million;
•
300 round-lot stockholders; and
•
compliance with Nasdaq’s corporate governance requirements, as well as additional or more
stringent criteria that may be applied in the exercise of Nasdaq’s discretionary authority.
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If we fail to comply with Nasdaq’s continued listing standards, we may be delisted and our common
stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board or OTCQX
market, and then only if one or more registered broker-dealer market makers comply with quotation
requirements. In addition, delisting of our common stock could depress our stock price, substantially limit
liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable
to us, or at all. Finally, delisting of our common stock could result in our common stock becoming a “penny
stock” under the Exchange Act.
Upon our dissolution, you may not recoup all or any portion of your investment.
In the event of a liquidation, dissolution or winding-up of us, whether voluntary or involuntary, the
proceeds and/or our assets may not be sufficient to repay the aggregate investment you purchased in our
company. In this event, you could lose some or all of your investment.
If we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our
stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with the rules under the Sarbanes-Oxley Act, related to disclosure controls and
procedures, or if we discover additional material weaknesses and other deficiencies in our internal control
and accounting procedures, our stock price could decline significantly and raising capital could be more
difficult. Moreover, effective internal controls are necessary for us to produce reliable financial reports and
are important in helping prevent financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose confidence in our reported
financial information, and the trading price of our common stock could drop significantly. We previously
identified a material weakness in our internal control over financial reporting, which was subsequently
remedied. We cannot be certain that additional material weaknesses or significant deficiencies in our
internal controls will not be discovered in the future.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters are currently located in Los Gatos, California, where we occupy
approximately 15,129 gross square feet of office and laboratory space under a lease that will expire in
January 2026 with a three-year renewal option.
Item 3. Legal Proceedings
A complaint was filed on February 18, 2020 in the New York State Supreme Court against us by an
investor who invested in our company’s preferred stock in July 2017 which was prior to our initial public
offering in August 2018. The complaint alleges, among other things, that we breached our contract and
fiduciary duty, by not issuing additional securities to the investor as a result of our initial public offering.
The plaintiff is asking for approximately $277,000 in compensatory damages. The parties are currently in
fact discovery. We believe that all of the claims in the complaint are without merit and intend to defend
vigorously against them.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
On August 14, 2018, our common stock began trading on the Nasdaq Capital Market under the symbol
“ARDS”. Prior to that time, there was no public market for our common stock.
Stockholders
As of March 24, 2021, there were 85 stockholders of record of our common stock. The actual number
of holders of our common stock is greater than this number of record holders, and includes stockholders
who are beneficial owners, but whose shares are held in street name by brokers or held by other nominees.
Dividend Policy
We have never paid or declared any cash dividends on our common stock, and we do not anticipate
paying any cash dividends on our common stock in the foreseeable future. We intend to retain all available
funds and any future earnings to fund the development and expansion of our business. Any future
determination to pay dividends will be at the discretion of our board of directors and will depend upon a
number of factors, including our results of operations, financial condition, future prospects, contractual
restrictions, restrictions imposed by applicable law and other factors that our board of directors deems
relevant.
Equity Compensation Plans
The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated
herein by reference to Item 11 of Part III of this Annual Report.
Item 6. Selected Financial Data
Not applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’s DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report. This discussion and analysis and
other parts of this Annual Report contain forward-looking statements based upon current beliefs, plans and
expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans,
objectives, expectations, intentions and projections. Our actual results and the timing of selected events
could differ materially from those anticipated in these forward-looking statements as a result of several
factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report. You should
carefully read the “Risk Factors” section of this Annual Report to gain an understanding of the important
factors that could cause actual results to differ materially from our forward-looking statements. Please also
see the section entitled “Cautionary Note Concerning Forward-Looking Statements.” All amounts in this
report are in U.S. dollars, unless otherwise noted.
Overview
We are a late-stage biopharmaceutical company focused on the discovery and development of novel
anti-infectives. A significant focus of ours is on targeted immunotherapy using fully human monoclonal
antibodies, or mAbs, to treat life-threatening infections. mAbs represent an innovative treatment approach
that harnesses the human immune system to fight infections and are designed to overcome the deficiencies
associated with current therapies, such as rise in drug resistance, short duration of response, limited
tolerability, negative impact on the human microbiome, and lack of differentiation among the treatment
alternatives. The majority of our product candidates are derived by employing our differentiated antibody
discovery platforms. Our proprietary product pipeline comprises fully human mAbs targeting specific
pathogens associated with life-threatening bacterial infections, primarily nosocomial pneumonia, and viral
infections such as COVID-19.
Recently we announced the development of a novel antibody discovery and production platform
technology called λPEX™. This technology complements and further extends the capabilities of MabIgX®
to quickly screen large number of antibody-producing B-cells from patients and generation of high mAb-
producing mammalian production cell line at a speed not previously attainable. As a result, we can
significantly reduce time for antibody discovery and manufacturing compared to conventional approaches.
This technology is being applied to the development of COVID-19 mAbs. We also announced initiation of
research and development activities of our monoclonal antibody programs for COVID-19 called AR-712
and AR-701.
In October 2020 and February 2021, we announced the development of a highly neutralizing
monoclonal antibody cocktail (AR-712), discovered from convalescent COVID-19 patients, that
successfully eliminated all detectable SARS-CoV-2 virus in infected animals at substantially lower doses
than parenterally administered (injected) COVID-19 mAbs. The cocktail broadly bind and neutralize SAR-
COV-2 virus and the mutant ‘E484K’ variant that is associated with the UK, South Africa, Brazil, and Japan
strains. The potency of AR-712 and its direct delivery to the lungs by inhaled administration may facilitate
broader treatment coverage and dose sparing not achievable by parenteral administration. A clinical
Phase 1/2 study is expected to be launched in the second half of 2021.
Our lead product candidate, AR-301 has exhibited promising preclinical data and clinical data from a
Phase 1/2a clinical study in patients. AR-301 targets the alpha toxin produced by gram-positive bacteria
Staphylococcus aureus, or S. aureus, a common pathogen associated with HAP and VAP. In contrast to other
programs targeting S. aureus toxins, we are developing AR-301 as a treatment of pneumonia, rather than
prevention of S. aureus colonized patients from progression to pneumonia. In January 2019, we initiated a
Phase 3 pivotal trial evaluating AR-301 for the treatment of HAP and VAP. The on-going COVID-19
pandemic has caused an impact on patient enrollment globally and the rate of clinical site activation.
Pending on the rate of resolution of the on-going COVID-19 pandemic, we provisionally expect to report an
interim futility analysis in the second half of 2021. Currently enrollment completion and top-line data are
projected to occur in the first half of 2022.
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To complement and diversify our portfolio of targeted mAbs, we are developing a broad spectrum
small molecule non-antibiotic anti-infective agent gallium citrate (AR-501). AR-501 is being developed in
collaboration with the Cystic Fibrosis Foundation (“CFF”) as a chronic inhaled therapy to treat lung
infections in cystic fibrosis patients. In 2018, AR-501 was granted Orphan Drug, Fast Track and Qualified
Infectious Disease Product (“QIDP”) designations by the Food and Drug Administration (“FDA”). During
the third quarter of 2019, the European Medicines Agency (“EMA”) granted the program Orphan Drug
Designation. We initiated a Phase 1/2a clinical trial in December 2018 of the inhalable formulation of
gallium citrate, which is being evaluated for the treatment of chronic lung infections associated with cystic
fibrosis. In June 2020, we announced positive results from the Phase 1 portion of our Phase 1/2a clinical
trial of AR-501 in which healthy subjects were enrolled. The Safety Monitoring Committee (“SMC’) and
Data Safety Monitoring Board (“DSMB”) from the Cystic Fibrosis Foundation supported that the study
proceed at all dose levels to the Phase 2a portion of the Phase 1/2a trial in adult subjects with cystic fibrosis
(“CF”). The on-going COVID-19 pandemic has caused an impact on the rate of clinical site activation. We
provisionally expect to complete enrollment of the Phase 2a portion with cystic fibrosis subjects in the
second half of 2021 with top-line data available shortly afterward.
In September 2020, we announced that we reached an agreement with the FDA to simplify our AR-501
Phase 2 trial design for the treatment of chronic lung infections associated with CF. We proposed, and the
FDA agreed, to streamline AR-501’s forthcoming Phase 2a clinical trial in CF patients, by removing the
single ascending dose (“SAD”) portion of the study and only conducting a multiple ascending dose
(“MAD”) regimen. Furthermore, the FDA also concurred with our proposal to expand the originally planned
Phase 2a protocol design into a Phase 2a/2b study. This Phase 2a/2b design will enable seamless and
efficient advancement of the study from Phase 2a into Phase 2b using the same clinical study protocol. The
data from the Phase 2a will inform the dose selection and sample size expansion to achieve statistical
significance in efficacy in Phase 2b.
To date, we have devoted substantially all of our resources to research and development efforts relating
to our therapeutic candidates, including conducting clinical trials and developing manufacturing
capabilities, in-licensing related intellectual property, protecting our intellectual property and providing
general and administrative support for these operations. We have generated revenue from our payments
under our collaboration strategic research and development contracts and federal awards and grants, as well
as awards and grants from not-for-profit entities and fee for service to third-party entities. Since our
inception, we have funded our operations primarily through these sources and the issuance of common
stock, convertible preferred stock, and debt securities. Current clinical development activities are focused
on AR-301, AR712 and AR-501. Our expenses and resulting cash burn during the years ended
December 31, 2020 and 2019, were largely due to costs associated with the Phase 3 study of AR-301 for the
treatment of VAP caused by the S. aureus bacteria, preclinical development of AR-712 COVID-19 mAb,
and the Phase 1/2 study of AR-501 for the treatment of chronic lung infections associated with cystic
fibrosis.
Financial Overview
We have incurred losses since our inception. Our net losses were approximately $22.3 million and
$29.7 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 we
had approximately $8.2 million of cash and cash equivalents and had an accumulated deficit of
approximately $123.1 million. Substantially, all of our net losses have resulted from costs incurred in
connection with our research and development programs, clinical trials, intellectual property matters,
strengthening our manufacturing capabilities, and from general and administrative costs associated with our
operations.
We have not yet achieved commercialization of our products and have a cumulative net loss from our
operations. We will continue to incur net losses for the foreseeable future. Our consolidated financial
statements have been prepared assuming that we will continue as a going concern. We will require
additional capital to meet our long-term operating requirements. We expect to raise additional capital
through the sale of equity and/or debt securities. Historically, our principal sources of cash have included
proceeds from grant funding, fees for services performed, issuances of convertible debt and the sale of our
preferred stock. Our principal uses of cash have included cash used in operations. We expect that the
principal uses of cash in the future will be for continuing operations, funding of research and development
including our clinical trials and general working capital requirements.
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We anticipate that our expenses will increase substantially if and as we:
•
continue enrollment in our ongoing clinical trials;
•
initiate new clinical trials;
•
seek to identify, assess, acquire and develop other products, therapeutic candidates and technologies;
•
•
•
seek regulatory and marketing approvals in multiple jurisdictions for our therapeutic candidates that
successfully complete clinical studies;
establish collaborations with third parties for the development and commercialization of our products
and therapeutic candidates;
make milestone or other payments under our agreements, pursuant to which we have licensed or
acquired rights to intellectual property and technology;
•
seek to maintain, protect, and expand our intellectual property portfolio;
•
seek to attract and retain skilled personnel;
•
•
incur the administrative costs associated with being a public company and related costs of
compliance;
create additional infrastructure to support our operations as a commercial stage public company and
our planned future commercialization efforts;
•
experience any delays or encounter issues with any of the above; and
•
experience protracted COVID-19 related delays.
We expect to continue to incur significant expenses and increasing losses for at least the next
several years. Accordingly, we anticipate that we will need to raise additional capital in order to obtain
regulatory approval for, and the commercialization of, our therapeutic candidates. Until such time that we
can generate meaningful revenue from product sales, if ever, we expect to finance our operating activities
through public or private equity or debt financings, government or other third-party funding and other
collaborations, strategic alliances and licensing arrangements or a combination of these approaches. If we
are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or
discontinue one or more of our research or development programs or the commercialization of any approved
therapies or products or be unable to expand our operations or otherwise capitalize on our business
opportunities, as desired, which could adversely affect our business, financial condition and results of
operations.
SIBV License Agreement
In July 2019, we entered into an option agreement with Serum International B.V. (“SIBV”), an affiliate
of Serum Institute of India Private Limited, which granted SIBV the option to license multiple programs
from us and access our MabIgX® platform technology for asset identification and selection. We received an
upfront cash payment of $5 million upon execution of this option agreement. In connection with the option
agreement, SIBV made an equity investment whereby we issued 801,820 shares of our restricted common
stock in a private placement to SIBV for total gross proceeds of $10 million.
In September 2019, we entered into a License, Development and Commercialization Agreement (the
“License Agreement”) with Serum AMR Products (“SAMR”). Pursuant to the License Agreement, we
received upfront payments totaling $15 million, of which $5 million was received in July 2019 through the
option agreement referred to above, and may receive milestone payments and royalty-based payments from
SAMR if certain milestones and sales levels as defined in the License Agreement are met.
Given the equity investment by SIBV was negotiated in conjunction with the option agreement, which
resulted in the execution of the License Agreement, all arrangements were evaluated as a single agreement
and amounts were allocated to the elements of the arrangement based on their fair value. We allocated the
proceeds received from the sale of the restricted common stock and upfront payment from the License
Agreement, net of issuance and contract costs, of approximately $22.5 million accordingly:
•
we recorded approximately $5.0 million, which represented the fair value of the restricted common
stock issued of $5.4 million, net of $441,000 of issuance costs, to stockholders’ equity within our
consolidated balance sheet;
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•
•
we recorded approximately $19.6 million to deferred revenue based on the $15 million from upfront
payments under the License Agreement and approximately $4.6 million from the equity allocation;
and
we capitalized approximately $2.1 million to contract costs, which consists of approximately
$376,000 issuance costs from the equity allocation and approximately $1.7 million in other direct
costs to obtain the License Agreement.
In accordance with ASC 606, we determined that no performance obligations were satisfied through
December 31, 2020, and therefore, no revenue related to the License Agreement was recognized for
the years ended December 31, 2020 and 2019.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based
on our consolidated financial statements, which we have prepared in accordance with generally accepted
accounting principles in the United States, or GAAP.
The preparation of our consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported expenses during the reported
periods. We evaluate these estimates and judgments on an ongoing basis. Such estimates include those
related to the evaluation of our ability to continue as a going concern, our best estimate of standalone selling
price of revenue deliverables, useful live of long lived assets, classification of deferred revenue, income
taxes, assumptions used in the Black Scholes Merton (“BSM”) model to calculate the fair value of stock
based compensation, deferred tax asset valuation allowances, and preclinical study and clinical trial
accruals. We base our estimates on historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results
may differ from these estimates under different assumptions or conditions.
We define our critical accounting policies as those accounting principles generally accepted in the
United States that require us to make subjective estimates and judgments about matters that are uncertain
and are likely to have a material impact on our financial condition and results of operations as well as the
specific manner in which we apply those principles. Our critical accounting policies are primarily revenue
recognition and research and development expenses and related accruals. We believe the significant
accounting policies used in the preparation of our consolidated financial statements are as follows:
Revenue Recognition
We recognize revenue based on Accounting Standards Codification (“ASC”) 606, Revenue from
Contracts with Customers (“ASC 606”), which applies to all contracts with customers, except for contracts
that are within the scope of other standards, such as leases, insurance, collaboration arrangements and
financial instruments.
To determine revenue recognition for arrangements that we determine are within the scope of ASC 606,
we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the
performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over
time, as the entity satisfies performance obligations. We only apply the five-step model to contracts when it
is probable that we will collect the consideration it is entitled to in exchange for the goods or services we
transfer to the customer. At contract inception, once the contract is determined to be within the scope of
ASC 606, we assess the goods or services promised within each contract, determine those that are
performance obligations, and assess whether each promised good or service is distinct. We then recognize as
revenue the amount of the transaction price that is allocated to the respective performance obligation when
(or as) the performance obligation is satisfied.
As part of the accounting for customer arrangements, we must use judgment to determine: a) the
number of performance obligations based on the determination under step (ii) above; b) the transaction
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price under step (iii) above; and c) the standalone selling price for each performance obligation identified in
the contract for the allocation of the transaction price in step (iv) above. We use judgment to determine
whether milestones or other variable consideration should be included in the transaction price.
The transaction price is allocated to each performance obligation on a relative standalone selling price
basis. In developing the standalone price for a performance obligation, we consider applicable market
conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the
agreement with the customer and estimated costs. We recognize revenue as or when the performance
obligations under the contract are satisfied. We receive payments from our customers based on payment
schedules established in each contract. We record any amounts received prior to satisfying the revenue
recognition criteria as deferred revenue on the consolidated balance sheet. Amounts recognized as revenue,
but not yet received or invoiced are recorded within other receivables on the consolidated balance sheet.
Amounts are recorded as other receivables on the consolidated balance sheet when our right to consideration
is unconditional. We do not assess whether a contract has a significant financing component if the
expectation at contract inception is such that the period between payment by the customer and the transfer
of a majority of the promised goods or services to the customer will be one year or less.
Under the Development Program Letter Agreement with CFF (the “CFF Agreement”), entered into in
December 2016 and amended in November 2018 to support funding for the development of our Inhaled
Gallium Citrate Anti-Infective program, we recognized revenue of approximately $1.0 million for
both years ended December 31, 2020 and 2019. We expect that any revenue we generate for the foreseeable
future will fluctuate from period to period as a result of the timing of when performance obligations and
variable consideration criteria under the contract are satisfied.
Research and Development Expenses
We recognize research and development expenses to operations as they are incurred. Our research and
development expenses consist primarily of:
•
•
salaries and related overhead expenses, which include stock-based compensation and benefits for
personnel in research and development functions;
fees paid to consultants and contract research organizations, or CROs, including in connection with
our preclinical studies and clinical trials and other related clinical trial fees, such as for investigator
grants, patient screening, laboratory work, clinical trial material management and statistical
compilation and analyses;
•
costs related to acquiring and manufacturing clinical trial materials;
•
costs related to compliance with regulatory requirements; and
•
payments related to licensed products and technologies.
Costs for certain development activities are recognized based on an evaluation of the progress to
completion of specific tasks using information and data provided to us by our vendors and clinical sites.
Nonrefundable advance payments for goods or services to be received in future periods for use in research
and development activities are deferred and capitalized. The capitalized amounts are then expensed as the
related goods are delivered or when the services are performed.
We plan to increase our research and development expenses for the foreseeable future as we continue to
develop our therapeutic programs, and subject to the availability of additional funding, further advance the
development of our therapeutic candidates for additional indications and begin to conduct clinical trials.
The process of conducting the necessary clinical research to obtain regulatory approval is costly and
time-consuming, and the successful development of our therapeutic candidates is highly uncertain. As a
result, we are unable to determine the duration and completion costs of our research and development
projects or when and to what extent we will generate revenue from the commercialization and sale of any of
our therapeutic candidates.
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General and Administrative Expenses
General and administrative expenses consist primarily of costs related to executive, finance, corporate
development and administrative support functions, including stock-based compensation expenses and
benefits for personnel in general and administrative functions. Other significant, general and administrative
expenses include rent, accounting and legal services, obtaining and maintaining patents or other intellectual
property rights, the cost of various consultants, occupancy costs, insurance premiums and information
systems costs.
We expect that our general and administrative expenses will increase as we continue to operate as a
public company, continue to conduct our clinical trials and prepare for commercialization. We believe that
these increases will likely include increased costs for director and officer liability insurance, costs related to
the hiring of additional personnel to support product commercialization efforts and increased fees for
outside consultants, attorneys and accountants. We also expect to incur increased costs to comply with
corporate governance, internal controls, investor relations and disclosures, and similar requirements
applicable to public companies.
Interest Income, Net
Interest income, net consists primarily of interest earned on our cash balances, partially offset by
interest expense resulting from our PPP Loan.
Stock-Based Compensation
We recognize compensation expense for all stock-based awards based on the grant-date estimated fair
values, which we determine using the BSM option pricing model, on a straight-line basis over the requisite
service period for the award. We account for forfeitures as they occur.
The BSM option pricing model incorporates various highly sensitive assumptions, including the fair
value of our common stock, expected volatility, expected term and risk-free interest rates. The weighted
average expected life of options was calculated using the simplified method as prescribed by the SEC’s
Staff Accounting Bulletin, Topic 14 (“SAB Topic 14”). This decision was based on the lack of relevant
historical data due to our limited historical experience. In addition, due to our limited historical data, the
estimated volatility also reflects the application of SAB Topic 14, incorporating the historical volatility of
comparable companies whose stock prices are publicly available. The risk-free interest rate for the periods
within the expected term of the option is based on the U.S. Treasury yield in effect at the time of grant. The
dividend yield was zero, as we have never declared or paid dividends and have no plans to do so in the
foreseeable future.
Income Taxes
We account for income taxes under the liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts
expected to be realized. For the years ended December 31, 2020 and 2019, no income tax expense or benefit
was recognized, primarily due to a full valuation allowance recorded against the net deferred tax asset
We assess all material positions taken in any income tax return, including all significant uncertain
positions, in all tax years that are still subject to assessment or challenge by the relevant taxing authorities.
Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and
is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be reassessed, and
we determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the
amount of the recognized benefit is still appropriate. The recognition and measurement of tax benefits
requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit
might change as new information becomes available.
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Going Concern
We assess and determine our ability to continue as a going concern under the provisions of ASC 205-
40, Presentation of Financial Statements — Going Concern, which requires us to evaluate whether there are
conditions or events that raise substantial doubt about our ability to continue as a going concern within one
year after the date that our annual and interim consolidated financial statements are issued. Certain
additional financial statement disclosures are required if such conditions or events are identified. If and
when an entity’s liquidation becomes imminent, financial statements should be prepared under the
liquidation basis of accounting.
Determining the extent, if any, to which conditions or events raise substantial doubt about our ability to
continue as a going concern, or the extent to which mitigating plans sufficiently alleviate any such
substantial doubt, as well as whether or not liquidation is imminent, requires significant judgment by us. We
have determined that there is substantial doubt about our ability to continue as a going concern for at least
the one-year period following our consolidated financial statements issuance date, which have been
prepared assuming that we will continue as a going concern. We have not made any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from the possible inability of us to continue as a going concern.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations for the years ended December 31, 2020 and
2019 (in thousands):
Revenue:
Grant revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income, net
Share of loss from equity method investment
Net loss
Year Ended
December 31,
2020
2019
Change $
$ 1,000
$ 1,022
$
(22
)
16,956
6,445
23,401
24,083
6,026
30,109
)
(7,127
419
(6,708
)
(22,401
)
(29,087
)
6,686
77
(9
)
357
(951
)
)
(280
942
$(22,333
)
$(29,681
)
$ 7,348
Grant Revenue. Grant revenue remained fairly constant at approximately $1.0 million for both years
ended December 31, 2020 and 2019 related to the recognition of revenue for milestones achieved under the
award from the CFF during 2020 and 2019.
Research and Development Expenses. Research and development expenses decreased by
approximately $7.1 million from $24.1 million for year ended December 31, 2019 to $17.0 million for the
year ended December 31, 2020 due primarily to:
•
a decrease of approximately $5.4 million in spending on clinical trial activities and drug
manufacturing expenses for the Phase 2 study of our AR-105 program that was terminated during
2019;
•
a decrease of approximately $1.2 million in drug manufacturing expenses for the Phase 3 study of
our AR-301 program;
•
a decrease of approximately $400,000 in spending on other research and development activities;
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•
a decrease of approximately $200,000 in personnel, consulting and other related costs; and
•
a decrease of approximately $200,000 in spending on clinical trial activities for the Phase 1/2a study
of our AR-501 program because the Phase 1 portion of the study ended in the second quarter of
2020.
These decreases were partially offset by:
•
an increase of approximately $300,000 in spending on research and development activities for our
COVID-19 programs.
General and Administrative Expenses. General and administrative expenses increased by
approximately $419,000 from $6.0 million for the year ended December 31, 2019 to $6.4 million for the
year ended December 31, 2020 due primarily to increases in directors’ and officers’ related liabilities
insurance expense, professional service fees, and rent expense due to the Company entering into a new
facility lease during the fourth quarter of 2020. These increases were partially offset by a decrease in patent
related fees and Delaware franchise taxes.
Interest Income, Net. Interest income, net decreased by approximately $280,000 from $357,000 for the
year ended December 31, 2019 to $77,000 for the year ended December 31, 2020. The decrease is primarily
due to lower interest rates and a lower average cash balance during 2020 as compared to 2019.
Share of Loss in Equity Method Investment. Loss from equity method investment decreased by
approximately $942,000 from $951,000 for the year ended December 31, 2019 to $9,000 for the year ended
December 31, 2020 as our share of loss from our minority interest calculated under the equity method was
limited to the reduction of the net book value of the investment to zero as of March 31,2020.
Liquidity, Capital Resources and Going Concern
As of December 31, 2020 we had approximately $8.2 million of cash and cash equivalents and had an
accumulated deficit of approximately $123.1 million.
In July 2019, we issued and sold 801,820 shares of restricted common stock in a private placement to
SIBV, and received total gross proceeds of $10 million, and after deducting commissions and offering costs
of approximately $816,000, the net proceeds were approximately $9.2 million. In addition, we received an
upfront cash payment of $5 million upon the execution of an option agreement with SIBV and received an
upfront payment of $10 million in October 2019 in connection with a License Agreement we executed in
September 2019 with SAMR, and after deducting commissions of approximately $1.2 million, the net
proceeds were approximately $13.8 million.
In September 2019, we entered into a Common Stock Sales Agreement (the “ATM Agreement”) with
Cantor Fitzgerald & Co. (“Cantor”) under which we may offer and sell, from time to time, at our sole
discretion, shares of common stock having an aggregate offering price of up to $25.0 million through Cantor
as our sales agent. We will pay Cantor a commission of up to three percent (3.0%) of the gross sales
proceeds of any common stock sold through Cantor under the ATM Agreement, and also provided Cantor
with customary indemnification rights. Our registration statement on Form S-3 contemplated under the
ATM Agreement was declared effective by the SEC on September 5, 2019. As a result of the limitations of
General Instruction I.B.6 of Form S-3, and in accordance with the terms of the ATM Agreement, we filed a
prospectus supplement on May 14, 2020 that registered the offer and sale of shares of our common stock
having an aggregate offering price of up to $22.0 million from time to time through Cantor. As of
December 31, 2020, we have sold 7,883 shares of common stock under the ATM Agreement for gross
proceeds of approximately $64,000, and after deducting commissions, net proceeds were approximately
$62,000.
In May 2020, we received a loan in the form of a note, from Silicon Valley Bank (“SVB”) in the
aggregate amount of approximately $715,000 (the “Loan”), pursuant to the Paycheck Protection Program
(the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average
monthly payroll expenses of the qualifying business. The loans and accrued interest may be forgiven as long
as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities,
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and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates
employees or reduces salaries during the covered period. The Loan is payable over two years at an interest
rate of 1% per annum, with an estimated deferral of payments until mid-2021. We are required to pay
principal and interest on the Loan in equal monthly installments estimated to begin mid-2021 and the
outstanding interest balance accrued during the deferral period is to be paid on the maturity date, which is
May 1, 2022. We believe in good faith that we met the loan forgiveness eligibility requirements of the PPP
Loan. Our Loan forgiveness application was submitted to the Small Business Administration (“SBA”) in
October 2020 and we expect to meet the forgiveness criteria. Since the forgiveness of the Loan is outside of
our control, we have accounted for our PPP Loan as debt. If the PPP Loan is ultimately forgiven and we are
legally released from being the Loan’s primary obligor, the extinguishment of the liability will be
recognized in our consolidated statement of operations as an extinguishment of debt gain.
In October 2020, we entered into a Securities Purchase Agreement (the “October 2020 Purchase
Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which we agreed to offer,
issue and sell to the Purchasers, (i) in a registered direct offering, an aggregate of 1,134,470 shares (the
“Shares”) of common stock, par value $0.0001 per share (“Common Stock”) and (ii) in a concurrent private
placement, Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and
collectively, with the Series A Warrants, the “Warrants”) to purchase up to an aggregate 567,234 shares (the
“Warrant Shares”) of Common Stock, for aggregate gross proceeds to us of approximately $8.5 million,
before deducting estimated offering expenses payable by us. We agreed to pay Arcadia Securities, LLC a fee
equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering to
certain of the investors. In addition, we agreed to pay Cantor Fitzgerald & Co. a fee equal to 3.5% of the
aggregate purchase price of the shares of its common stock sold in the offering.
The combined purchase price for each Share, together with one Series A Warrant and one Series B
Warrant, was $7.4925. The Series A Warrants have an exercise price of $7.43 per share, are exercisable
six months from the date of issuance, and expire three and a half years from the date they become
exercisable. The Series B Warrants have an exercise price of $9.00 per share, are exercisable six months
from the date of issuance, and expire three and a half years from the date they become exercisable. In
addition, the Series B Warrants are redeemable by us at $0.01 per share upon the price of our common stock
closing at $9.00 or more over five (5) consecutive trading days. The exercise price of the Warrants and
Warrant Shares are subject to adjustment in the event of any stock dividends and splits, reverse stock split,
recapitalization, reorganization or similar transaction, as described in the Series A Warrants and Series B
Warrants, respectively.
In March 2021, we entered into a Securities Purchase Agreement with certain institutional and
individual investors, pursuant to which we agreed to offer, issue and sell to these investors, in a registered
direct offering, an aggregate of 1,037,405 shares of our Common Stock for aggregate gross proceeds to us
of approximately $7.0 million, before deducting estimated offering expenses payable by us.
In addition, in March 2021 we issued 124,789 shares of unregistered Common Stock to the Purchasers
in our October 2020 offering pursuant to the anti-dilutive provisions of the October 2020 Purchase
Agreement.
We have had recurring losses from operations since inception and negative cash flows from operating
activities during the years ended December 31, 2020 and 2019. We anticipate that we will continue to
generate operating losses and use cash in operations through the foreseeable future. Management plans to
finance operations through equity or debt financings or other capital sources, including potential
collaborations or other strategic transactions. There can be no assurances that, in the event that we require
additional financing, such financing will be available on terms which are favorable to us, or at all. If we are
unable to raise additional funding to meet our working capital needs in the future, we will be forced to delay
or reduce the scope of our research programs and/or limit or cease our operations. We believe that our
current available cash and cash equivalents, along with the additional cash received in March 2021 from an
equity offering and a license agreement, will not be sufficient to fund our planned expenditures and meet
our obligations for at least the one-year period following our consolidated financial statements issuance
date. There is substantial doubt about our ability to continue as a going concern unless we are able to
successfully raise additional capital.
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Cash Flows
Our net cash flow from operating, investing and financing activities for the periods below were as
follows (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Cash Flows from Operating Activities.
Year Ended
December ,
2020
2019
(unaudited)
(unaudited)
)
)
$(20,476
(367
8,678
)
)
$(8,159
(174
4,993
$(12,165
)
$(3,340
)
Net cash used in operating activities was approximately $20.5 million for the year ended December 31,
2020, which was primarily due to our net loss of approximately $22.3 million, an increase of approximately
$488,000 related to capitalized contract costs, resulting from the SAMR License Agreement entered into in
2019, a decrease of approximately $756,000 in accrued liabilities and other, a decrease of approximately
$83,000 in accounts payables, and an increase of approximately $144,000 in other receivables. The cash
used in operating activities was partially offset by a decrease of approximately $808,000 in prepaid
expenses and a decrease of approximately $46,000 in other assets, and the non-cash charges of
approximately $2.1 million related to stock-based compensation and approximately $337,000 in
depreciation and amortization.
Net cash used in operating activities was approximately $8.2 million for the year ended December 31,
2019, which was primarily due to our net loss of approximately $29.7 million, an increase of approximately
$1.6 million in capitalized contract costs, resulting from the SAMR License Agreement, an increase of
approximately $1.4 million in prepaid expenses, and a decrease of approximately $469,000 in accounts
payable. The cash used in operating activities was partially offset by an increase of approximately
$19.6 million in deferred revenue, resulting from the SAMR License Agreement, a decrease of
approximately $1.7 million in accounts receivable, a decrease of approximately $438,000 in other assets,
and the non-cash charges of approximately $2.0 million related to stock-based compensation, approximately
$951,000 from the loss on our equity method investment, and approximately $338,000 in depreciation and
amortization.
Cash Flows from Investing Activities.
Cash used in investing activities of approximately $367,000 during the years ended December 31,
2020, was due to the purchase of equipment, primarily for diagnostic use in clinical trials, and
improvements to our new leased facility in December 2020.
Net cash used in investing activities of approximately $174,000 for the year ended December 31, 2019
was due to the purchase of equipment, primarily for diagnostic use in clinical trials.
Cash Flows from Financing Activities.
Net cash provided by financing activities of approximately $8.7 million during the year ended
December 31, 2020 was due to net proceeds received from a registered direct offering of our common stock
and a concurrent private placement of common stock warrants of approximately $7.9 million, proceeds
received from the PPP Loan of approximately $715,000, net proceeds received from our ATM Agreement of
approximately $62,000, and net proceeds received from stock option exercises of approximately $14,000.
Net cash provided by financing activities of approximately $5.0 million during the year ended
December 31, 2019 was due to net proceeds received from a private placement of our restricted common
stock of approximately $5.0 million, and net proceeds received from stock option exercises of
approximately $35,000.
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Future Funding Requirements
To date, we have generated revenue from grants and contract services performed and funding from the
issuance of convertible preferred stock and common stock sales. We do not know when, or if, we will
generate any revenue from our development stage therapeutic programs. We do not expect to generate any
revenue from sales of our therapeutic candidates unless and until we obtain regulatory approval. At the same
time, we expect our expenses to increase in connection with our ongoing development activities,
particularly as we continue the research, development and clinical trials of, and seek regulatory approval
for, our therapeutic candidates. We expect to incur additional costs associated with operating as a public
company. In addition, subject to obtaining regulatory approval of any of our therapeutic candidates, we
expect to incur significant commercialization expenses for product sales, marketing, manufacturing and
distribution. We anticipate that we will need additional funding in connection with our continuing
operations.
Our future funding requirements will depend on many factors, including:
•
the progress, costs, results and timing of our clinical trials;
•
FDA acceptance, if any, of our therapies for infectious diseases and for other potential indications;
•
the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
•
the number and characteristics of product candidates that we pursue, including our product
candidates in preclinical development;
•
the ability of our product candidates to progress through clinical development successfully;
•
our need to expand our research and development activities;
•
•
the costs of acquiring, licensing or investing in businesses, products, product candidates and
technologies;
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including
the amount and timing of any payments we may be required to make, or that we may receive, in
connection with the licensing, filing, prosecution, defense and enforcement of any patents or other
intellectual property rights;
•
the effect of the COVID-19 pandemic on our business and operations;
•
our need and ability to hire additional management and scientific, medical and administrative
personnel;
•
the effect of competing technological and market developments; and
•
our need to implement additional internal systems and infrastructure, including financial and
reporting systems.
Until such time that we can generate meaningful revenue from the sales of approved therapies and
products, if ever, we expect to finance our operating activities through public or private equity or debt
financings, government or other third-party funding, and other collaborations, strategic alliances and
licensing arrangements or a combination of these approaches. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, the ownership interests of our common
stockholders will be diluted, and the terms of these securities may include liquidation or other preferences
that adversely affect the rights of our common stockholders. Debt financing, if available, may involve
agreements that include conversion discounts or covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise
additional funds through government or other third-party funding, marketing and distribution arrangements
or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue streams, research programs or product
candidates or to grant licenses on terms that may not be favorable to us.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet
arrangements as defined under the rules of the SEC.
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JOBS Act Accounting Election
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies. We
are choosing to take advantage of this provision and, as a result, we will adopt the extended transition
period available under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth
company or (ii) affirmatively and irrevocably opt out of the extended transition period provided under the
JOBS Act.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements applicable to us is included in the notes to
our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual
Report. An index of those financial statements is found in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer
(our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s (the “SEC’s”) rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Management’s Annual Report on Internal Controls Over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on criteria established in “Internal Control — Integrated Framework (2013)”
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In connection with the audit of our consolidated financial statements for the year ended December 31,
2020, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the
period covered by this Annual Report on Form 10-K, our internal control over financial reporting was
effective as of December 31, 2020.
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We intend to review and evaluate the design and effectiveness of our disclosure controls and
procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to
ensure that our management has timely access to material information that could affect our business. While
we believe the present design of our disclosure controls and procedures is effective to achieve our goal,
future events affecting our business may cause us to modify our disclosure controls and procedures.
An attestation report of our independent registered public accounting firm will not be required to attest
to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth
company.
Changes in Internal Control over Financial Reporting
In connection with the audit of our financial statements for the years ended December 31, 2019, we had
a material weakness in our internal controls resulting from our finance department not being able to process
and account for complex, non-routine transactions in a timely manner. Our efforts to remediate the
identified material weakness included the hiring of additional senior accounting staff and financial
consultants during 2020. With the hiring of these individuals we have implemented controls to strengthen
our finance department which we believe enabled us to be able to process and account for complex, non-
routine transactions in a timely manner. We completed the remediation of this material weakness during
2020.
No other change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) occurred during the year ended December 31, 2020 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting other than
as described above.
Item 9B. Other Information
None.
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference to the information that will
be contained in our definitive proxy statement related to the 2021 Annual Meeting of Stockholders (the
“Proxy Statement”), which we intend to file with the SEC within 120 days of the end of our fiscal year
pursuant to General Instruction G(3) of Form 10-K.
Item 11.
Executive Compensation
The information required by this Item is incorporated herein by reference to the information that will
be contained in our Proxy Statement, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to the information that will
be contained in our Proxy Statement, which we intend to file with SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the information that will
be contained in our Proxy Statement, which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
Item 14.
Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the information that will
be contained in our Proxy Statement which we intend to file with the SEC within 120 days of the end of our
fiscal year pursuant to General Instruction G(3) of Form 10-K.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
(1)
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedules:
F-2
F-3
F-4
F-5
F-6
F-7
All financial statement schedules have been omitted because they are not applicable, not required or the
information required is shown in the consolidated financial statements or the notes thereto.
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(3)
Exhibits.
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
4.1
10.1@
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
Certificate of Incorporation of the Registrant, as amended (filed with the Registrant’s
Amendment No. 2 to its Registration Statement on Form S-1 (file no. 333-226232), filed with
the SEC on August 8, 2018 and incorporated herein by reference)
Amended and Restated Certificate of Incorporation of the Registrant (filed with the
Registrant’s Amendment No. 1 to its Registration Statement on Form S-1 (file no. 333-
226232), filed with the SEC on August 6, 2018 and incorporated herein by reference)
Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of
Series A Convertible Preferred Stock of the Registrant, as amended (filed with the
Registrant’s Amendment No. 2 to its Registration Statement on Form S-1 (file no. 333-
226232), filed with the SEC on August 8, 2018 and incorporated herein by reference)
Bylaws of the Registrant (filed with the Registrant’s Registration Statement on Form S-1 (file
no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by reference)
Certificate of Correction to Amended and Restated Certificate of Incorporation (filed with the
Registrant’s Amendment No. 2 to its Registration Statement on Form S-1 (file no. 333-
226232), filed with the SEC on August 8, 2018 and incorporated herein by reference)
Description of the Registrant’s Securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 (filed with the Registrant’s Annual Report on Form 10-K on April 8,
2020 and incorporated herein by reference)
Aridis Pharmaceuticals, Inc. 2014 Equity Incentive Plan (filed with the Registrant’s
Registration Statement on Form S-1 (file no. 333-226232), filed with the SEC on July 18,
2018 and incorporated herein by reference)
Exclusive and Non-Exclusive Patent License Agreement between the Registrant and the
Public Health Service, dated July 11, 2005 (filed with the Registrant’s Registration Statement
on Form S-1 (file no. 333-226232), filed with the SEC on July 18, 2018 and incorporated
herein by reference)
License and Option Agreement by and between the Registrant and Brigham Young University,
dated July 29, 2005 (filed with the Registrant’s Registration Statement on Form S-1 (file
no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by reference)
License Agreement by and between the Registrant and The University of Iowa Research
Foundation, dated October 22, 2010 (filed with the Registrant’s Registration Statement on
Form S-1 (file no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein
by reference)
First Amendment to License Agreement, by and between the Registrant and The University of
Iowa Research Foundation, dated January 10, 2017 (filed with the Registrant’s Registration
Statement on Form S-1 (file no. 333-226232), filed with the SEC on July 18, 2018 and
incorporated herein by reference)
Exclusive Patent License Agreement by and between the Registrant and The Brigham and
Women’s Hospital, Inc., dated November 16, 2010 (filed with the Registrant’s Registration
Statement on Form S-1 (file no. 333-226232), filed with the SEC on July 18, 2018 and
incorporated herein by reference)
First Amendment to Exclusive Patent License Agreement, by and between the Registrant and
The Brigham and Women’s Hospital, Inc., dated February 18, 2016 (filed with the
Registrant’s Registration Statement on Form S-1 (file no. 333-226232), filed with the SEC on
July 18, 2018 and incorporated herein by reference)
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Exhibit No.
10.8#
10.9#
10.10#
10.11#
10.12#
10.13
10.14
10.15
10.16
10.17
10.18#
10.19†
10.20
Description
Asset Purchase Agreement between the Registrant and Kenta Biotech Ltd., dated May 10,
2013 (filed with the Registrant’s Registration Statement on Form S-1 (file no. 333-226232),
filed with the SEC on July 18, 2018 and incorporated herein by reference)
Formulation Development Agreement between the Registrant and PATH Vaccine Solutions,
dated June 1, 2007. (filed with the Registrant’s Registration Statement on Form S-1 (file
no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by reference)
Agreement between the Registrant and the Cystic Fibrosis Foundation Therapeutics, Inc.,
dated December 30, 2016. (filed with the Registrant’s Registration Statement on Form S-1
(file no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by
reference)
Co-exclusive License Agreement between The University of Chicago and the Registrant,
dated June 13, 2017. (filed with the Registrant’s Registration Statement on Form S-1 (file
no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by reference)
License Agreement by and between the Registrant and Emergent Product Development
Gaithersburg, Inc., dated January 6, 2010. (filed with the Registrant’s Registration Statement
on Form S-1 (file no. 333-226232), filed with the SEC on July 18, 2018 and incorporated
herein by reference)
Joint Venture Contract in respect of Shenzhen Arimab BioPharmaceutical Co., Ltd., by and
between Shenzhen Hepalink Pharmaceutical Group Co. and the Registrant, dated February 11,
2018. (filed with the Registrant’s Registration Statement on Form S-1 (file no. 333-226232),
filed with the SEC on July 18, 2018 and incorporated herein by reference)
Technology License and Collaboration Agreement, by and between Shenzhen Arimab
BioPharmaceutical Co., Ltd. and the Registrant, dated July 2, 2018. (filed with the
Registrant’s Registration Statement on Form S-1 (file no. 333-226232), filed with the SEC on
July 18, 2018 and incorporated herein by reference)
License and Option Agreement, by and between Brigham Young University and the
Registrant, dated July 29, 2005 (filed with the Registrant’s Registration Statement on Form S-
1 (file no. 333-226232), filed with the SEC on July 18, 2018 and incorporated herein by
reference)
Amendment to the Joint Venture Contract in respect of Shenzhen Arimab BioPharmaceutical
Co., Ltd., by and between Shenzhen Hepalink Pharmaceutical Group Co. and the Company,
effective August 6, 2018 (filed with the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2018 and incorporated herein by reference)
Amended and Restated Technology License and Collaboration Agreement, by and between
Shenzhen Arimab BioPharmaceutical Co., Ltd. and the Company, effective August 6, 2018
(filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2018 and incorporated herein by reference)
Amendment No. 1 to the Agreement between the Registrant and the Cystic Fibrosis
Foundation Therapeutics, Inc., effective November 26, 2018 (filed with the Registrant’s
Annual Report on Form 10-K/A on June 12, 2019 and incorporated herein by reference)
Option Agreement for Exclusive Product and Platform Technology License between Aridis
Pharmaceuticals, Inc. and Serum International BV, dated July 16, 2019 (filed with the
Registrant’s Current Report on Form 8-K on July 30, 2019 and on Form 8-K/A on August 12,
2019 and incorporated herein by reference)
Stock Subscription Agreement between Aridis Pharmaceuticals, Inc. and Serum International
BV, dated July 19, 2019 (filed with the Registrant’s Current Report on Form 8-K on July 30,
2019 and on Form 8-K/A on August 12, 2019 and incorporated herein by reference)
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Exhibit No.
10.21†
10.22
10.23
10.24
10.25
10.26
10.27
Description
License, Development and Commercialization Agreement between Aridis Pharmaceuticals
Inc. and Serum AMR Products, entered into as of September 27, 2019 (filed with the
Registrant’s Current Report on Form 8-K on October 2, 2019 and incorporated herein by
reference)
Aridis Pharmaceuticals, Inc. 2014 Amended and Restated 2014 Equity Incentive Plan (filed
with the Registrant’s Proxy Statement as Appendix A on April 17,2020 and incorporated
herein by reference).
Promissory Note between the Registrant and Silicon Valley Bank dated May 1, 2020 (filed
with the Registrant’s Current Report on Form 8-K on May 5, 2020 and incorporated herein by
reference).
Form of Securities Purchase Agreement, dated October 13, 2020, by and between Aridis
Pharmaceuticals, Inc. and the Purchasers (filed with the Registrant’s Current Report on
Form 8-K on October 14, 2020 and incorporated herein by reference).
Form of Series A Warrant (filed with the Registrant’s Current Report on Form 8-K on
October 14, 2020 and incorporated herein by reference).
Form of Series B Warrant (filed with the Registrant’s Current Report on Form 8-K on
October 14, 2020 and incorporated herein by reference).
Office Lease dated October 14, 2020 by and between Aridis Pharmaceuticals, Inc. and
Boccardo Corporation (filed with the Registrant’s Current Report on Form 8-K on
October 20, 2020 and incorporated herein by reference).
10.28†
Exclusive License Agreement dated September 10, 2020 by and between Aridis
Pharmaceuticals, Inc. and UAB Research Foundation (filed with the Registrant’s Quarterly
Report on Form 10-Q on November 23, 2020 and incorporated herein by reference).
10.29
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*
32.2*
Form of Securities Purchase Agreement dated March 15, 2021 by and between Aridis
Pharmaceuticals, Inc. and the Purchasers (filed with the Registrant’s Current Report on
Form 8-K on March 15, 2021 and incorporated herein by reference).
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Power of Attorney (included on signature page)
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
100
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Exhibit No.
Description
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith
@
Indicates a management contract or any compensatory plan, contract or arrangement
#
†
Confidential treatment has been granted for portions omitted from this exhibit (indicated by asterisks)
and those portions have been separately filed with the Securities and Exchange Commission.
Pursuant to Item 601(b)(10) of Regulation S-K, certain confidential portions of this exhibit were
omitted by means of making such portions with an asterisk because the identified confidential portions
(i) are not material and (ii) would be competitively harmful if publicly disclosed.
Item 16.
Form 10-K Summary
Not applicable
101
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 30, 2021
By:
/s/ VU TRUONG
Aridis Pharmaceuticals, Inc.
Vu Truong
Chief Executive Officer, Chief Scientific Officer
and
Director (Principal Executive Officer)
By:
/s/ MICHAEL A.NAZAK
Michael A. Nazak
Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Vu Truong, as his or her true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratify and confirming all that said attorney-in-fact
and agent or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ ERIC PATZER
Executive Chairman and Director
March 30, 2021
Eric Patzer
/s/ VU TRUONG
Vu Truong
/s/ MICHAEL A.NAZAK
Michael A. Nazak
Chief Executive Officer, Chief Scientific
Officer and Director (Principal Executive
Officer)
March 30, 2021
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 30, 2021
/s/ ROBERT R. RUFFOLO
Director
Robert R. Ruffolo
/s/ CRAIG GIBBS
Director
Craig Gibbs
/s/ JOHN HAMILTON
Director
John Hamilton
/s/ SUSAN WINDHAM-BANNISTER
Director
Susan Windham-Bannister
102
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
ARIDIS PHARMACEUTICALS, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
F-2
F-3
F-4
F-5
F-6
F-7
F-1
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Aridis Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aridis Pharmaceuticals, Inc.
(“Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations,
changes in convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the
two years in the period ended December 31, 2020, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring
losses and cash shortfalls from operations and is dependent on future financings and revenue streams to
fund operations. These conditions raise substantial doubt about its ability to continue as a going concern.
Management’s plans regarding these matters is also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 30, 2021
F-2
TABLE OF CONTENTS
Aridis Pharmaceuticals, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Other receivables
Contract costs
Prepaid expenses
Total current assets
Property and equipment, net
Intangible assets, net
Restricted cash
Contract costs, non-current
Equity method investment
Other assets
Total assets
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Note payable
Other liabilities
Total current liabilities
Deferred revenue, non-current
Note payable, non-current
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity (deficit):
Preferred stock (par value $0.0001; 60,000,000 shares authorized;
zero shares issued and outstanding as of December 31, 2020 and
December 31, 2019, respectively)
Common stock (par value $0.0001; 100,000,000 shares authorized;
shares issued and outstanding: 10,065,727 and 8,918,461 as of
December 31, 2020 and December 31, 2019, respectively)
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities and stockholders’ equity (deficit)
December 31,
2020
December 31,
2019
$
8,232
368
1,973
2,182
$ 20,897
413
1,537
2,990
12,755
25,837
1,258
27
500
90
—
487
1,006
32
—
526
9
557
$ 15,117
$ 27,967
$
1,886
1,330
18,748
439
37
22,440
854
276
228
$
1,755
2,974
14,602
—
—
19,331
5,000
—
—
23,798
24,331
—
1
—
1
114,420
104,404
(123,102
)
(100,769
)
(8,681
)
3,636
$ 15,117
$ 27,967
See accompanying notes to the consolidated financial statements.
F-3
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Aridis Pharmaceuticals, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Revenue:
Grant revenue
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income, net
Share of loss from equity method investment
Net loss
Weighted-average common shares outstanding used in
computing net loss, basic and diluted
Net loss per share, basic and diluted
Year Ended
December 31,
2020
2019
$
1,000
$
1,022
16,956
6,445
23,401
24,083
6,026
30,109
(22,401
)
(29,087
)
77
(9
)
357
(951
)
$ (22,333
)
$ (29,681
)
9,168,744
8,458,277
$
(2.44
)
$
(3.51
)
See accompanying notes to the consolidated financial statements.
F-4
TABLE OF CONTENTS
Aridis Pharmaceuticals, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(In thousands, except share amounts)
Preferred Stock
Common Stock
Shares
Amount
Shares
Dollars
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity (Deficit)
Balances at December 31, 2018
— $ — 8,104,757
$ 1
$ 97,401
$ (71,088
)
$ 26,314
Issuance of common stock in private
placement, net of issuance costs
Exercise of stock options
Stock-based compensation
Net loss
—
—
—
—
—
—
—
—
801,820
11,884
—
—
—
—
—
—
4,958
35
2,010
—
—
—
—
(29,681
)
4,958
35
2,010
(29,681
)
Balances as of December 31, 2019
— $ — 8,918,461
$ 1
$104,404
$(100,769
)
$ 3,636
Issuance of common stock in registered direct
offering, net of issuance costs
Issuance of common stock warrants in a
private placement, net of issuance costs
Issuance of common stock in ATM offering,
net of issuance costs
Exercise of stock options
Stock-based compensation
Net loss
—
—
—
—
—
—
— 1,134,470
—
—
—
—
—
—
7,883
4,913
—
—
—
—
—
—
—
—
5,807
2,005
62
14
2,128
—
—
—
—
—
—
(22,333
)
5,807
2,005
62
14
2,128
(22,333
)
Balances as of December 31, 2020
— $ — 10,065,727
$ 1
$ 114,420
$(123,102
)
$ (8,681
)
See accompanying notes to the consolidated financial statements.
F-5
TABLE OF CONTENTS
Aridis Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation expense
Share of loss from equity method investment
Changes in operating assets and liabilities:
Accounts receivable
Other receivables
Prepaid expenses
Contract costs
Other assets
Accounts payable
Accrued liabilities and other
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net
Proceeds from note payable
Proceeds from stock option exercises
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash, cash equivalents and restricted cash at:
Beginning of period
End of period
Supplemental cash flow disclosures:
Cash paid for taxes
Supplemental noncash investing and financing activities:
Property and equipment additions
Stock issuance costs
Year Ended
December 31,
2020
2019
$(22,333
)
$(29,681
)
337
2,128
9
—
(144
808
(488
46
(83
)
)
)
(756
)
338
2,010
951
1,660
25
(1,433
(1,576
438
(469
)
)
)
(2
)
—
19,580
(20,476
)
(8,159
)
(367
)
(367
)
(174
)
(174
)
7,949
4,958
715
14
—
35
8,678
4,993
(12,165
)
(3,340
)
20,897
24,237
$ 8,732
$ 20,897
$
$
$
2
230
51
$
$
$
2
13
488
See accompanying notes to the consolidated financial statements.
F-6
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Aridis Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Organization
Aridis Pharmaceuticals, Inc. (the “Company” or “we” or “our” or “us”) was established as a California
limited liability corporation in 2003. The Company converted to a Delaware C corporation on May 21,
2014. Our principal place of business is in Los Gatos, California. We are a late-stage biopharmaceutical
company focused on developing new breakthrough therapies for infectious diseases and addressing the
growing problem of antibiotic resistance. The Company has a deep, diversified portfolio of clinical and pre-
clinical stage non-antibiotic anti-infective product candidates that are complimented by a fully human
monoclonal antibody discovery platform technology. The Company’s suite of anti-infective monoclonal
antibodies offers opportunities to profoundly alter the current trajectory of increasing antibiotic resistance
and improve the health outcome of many of the most serious life-threatening infections particularly in
hospital settings.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with the United
States generally accepted accounting principles, or GAAP. The consolidated financial statements include the
accounts of the Company and its two wholly-owned subsidiaries, Aridis Biopharmaceuticals, LLC and
Aridis Pharmaceuticals, C.V. All intercompany balances and transactions have been eliminated in
consolidation. The Company operates in one segment. Management uses one measurement of profitability
and does not segregate its business for internal reporting.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
These reclassifications had no effect on previously reported net loss, stockholders’ equity (deficit) or cash
flow activities.
COVID-19
The COVID-19 outbreak in the United States has caused business disruption. The extent of the impact
of COVID-19 on the Company’s operational and financial performance will depend on certain
developments, including the duration and spread of the outbreak, and impact on the Company’s clinical
trials, employees and vendors, all of which are uncertain and cannot be predicted. At this point, the extent to
which COVID-19 may impact the Company’s financial condition or results of operations is uncertain.
Going Concern
The Company had recurring losses from operations since inception and negative cash flows from
operating activities during the years ended December 31, 2020 and 2019. Management expects to incur
additional operating losses and negative cash flows from operations in the foreseeable future as the
Company continues its product development programs. In March 2021, the Company received gross
proceeds of $7.0 million from an equity offering and received $500,000 from a license agreement (see Note
14).
The Company’s research and development expenses and resulting cash burn during the year ended
December 31, 2020, were largely due to costs associated with the Phase 3 study of AR-301 for the treatment
of ventilator associated pneumonia (“VAP”) caused by the Staphylococcus aureus bacteria and the Phase 1/2
study of AR-501 for the treatment of chronic lung infections associated with cystic fibrosis. Current clinical
development activities are focused on AR-301, AR-501 and AR-712. We expect our expenses to continue to
increase in connection with our ongoing development activities, particularly as we continue the research,
development and clinical trials of, and seek regulatory approval for, our therapeutic candidates.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The
COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s
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operations and those of third parties on which the Company relies, including by causing disruptions in the
supply of the product candidates and the conduct of current and future clinical trials. Additionally, as the
duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic
on the global financial markets may reduce our ability to access capital, which could negatively impact the
Company’s short-term and long-term liquidity. These effects could have a material impact on the
Company’s liquidity, capital resources, operations and business and those of the third parties on which the
Company relies.
The Company plans to fund its losses from operations through current cash on hand and future debt and
equity financings which we may obtain through one or more public or private equity offerings, debt
financings, government or other third-party funding, strategic alliances and licensing or collaboration
arrangements. The Company may be unable to secure additional financing or other sources of funding on
acceptable terms, or at all. If the Company is unable to obtain funding, the Company could be forced to
delay, reduce or eliminate its research and development programs or future commercialization efforts, which
could adversely affect its future business prospects and its ability to continue as a going concern. The
Company believes that its current available cash and cash equivalents, including cash received in
March 2021 from an equity offering and a license agreement, will not be sufficient to fund its planned
expenditures and meet the Company’s obligations for at least the one-year period following its consolidated
financial statement issuance date.
The accompanying consolidated financial statements have been prepared on a going concern basis that
contemplates the realization of assets and discharge of liabilities in their normal course of business. There is
substantial doubt about the Company’s ability to continue as a going concern for one year after the date that
these consolidated financial statements are issued. These consolidated financial statements do not include
any adjustments that might be necessary from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the reported amounts of expenses
during the reporting period. Such estimates include those related to the evaluation of our ability to continue
as a going concern, best estimate of standalone selling price of revenue deliverables, useful life of long-
lived assets, classification of deferred revenue, income taxes, assumptions used in the Black-Scholes-
Merton (“BSM”) model to calculate the fair value of stock-based compensation, deferred tax asset valuation
allowances, and preclinical study and clinical trial accruals. Actual results could differ from those estimates.
Concentrations
Credit Risk
The Company’s cash and cash equivalents are maintained at financial institutions in the United States
of America. Deposits held by these institutions may exceed the amount of insurance provided on such
deposits.
Customer Risk
For the years ended December 31, 2020 and 2019, one customer accounted for 100% of total revenue.
This customer is located in the United States. As of December 31, 2020 and 2019, there were no accounts
receivable.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist primarily of checking account and
money market fund account balances.
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The following table provides a reconciliation of cash, cash equivalents and restricted cash within the
consolidated balance sheets which, in aggregate, represent the amount reported in the consolidated
statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
Year Ended
December 31,
2020
2019
$8,232
500
$20,897
—
$8,732
$20,897
Restricted cash consists of deposits for a letter of credit that the Company has provided to secure its
obligations under its facility lease.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company
considers the credit worthiness of its customers but does not require collateral in advance of a sale. The
Company evaluates collectability and maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio when necessary. The allowance is based on the Company’s best
estimate of the amount of losses in the Company’s existing accounts receivable, which is based on customer
creditworthiness, facts and circumstances specific to outstanding balances, and payment terms. Account
balances are charged off against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. As of December 31, 2020 and 2019, there were no allowances
for doubtful accounts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of the assets, generally between
three and five years for lab equipment and computer equipment and software, and over the shorter of the
lease term or useful life for leasehold improvements. Maintenance and repairs are charged to expense as
incurred, and costs of improvements are capitalized. When assets are retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the consolidated balance sheet and any resulting gain
or loss is reflected in the consolidated statement of operations in the period realized.
Intangible Assets
Intangible assets are recorded at cost and amortized over the estimated useful life of the asset.
Intangible assets consist of licenses with various institutions whereby the Company has rights to use
intangible property obtained from such institutions.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by
comparison of the carrying amount to the future undiscounted net cash flows which the assets are expected
to generate. If such assets are considered to be impaired, the impairment is measured by the excess of the
carrying amount of the assets over fair value less the costs to sell the assets, generally determined using the
projected discounted future net cash flows arising from the asset. There have been no such impairments of
long-lived assets as of December 31, 2020 and 2019.
Revenue Recognition
The Company recognizes revenue based on Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers (“ASC 606”), which applies to all contracts with customers, except for
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contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements
and financial instruments. See Note 6 for details of the development and license agreements.
To determine revenue recognition for arrangements that the Company determines are within the scope
of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in
time, or over time, as the entity satisfies performance obligations. The Company only applies the five-step
model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for
the goods or services it transfers to the customer. At contract inception, once the contract is determined to
be within the scope of ASC 606, the Company assesses the goods or services promised within each contract,
determines those that are performance obligations, and assesses whether each promised good or service is
distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the
respective performance obligation when (or as) the performance obligation is satisfied.
As part of the accounting for customer arrangements, the Company must use judgment to determine: a)
the number of performance obligations based on the determination under step (ii) above; b) the transaction
price under step (iii) above; and c) the standalone selling price for each performance obligation identified in
the contract for the allocation of the transaction price in step (iv) above. The Company uses judgment to
determine whether milestones or other variable consideration should be included in the transaction price.
The transaction price is allocated to each performance obligation on a relative standalone selling price
basis. In developing the standalone price for a performance obligation, the Company considers applicable
market conditions and relevant entity-specific factors, including factors that were contemplated in
negotiating the agreement with the customer and estimated costs. The Company recognizes revenue as or
when the performance obligations under the contract are satisfied. The Company receives payments from its
customers based on payment schedules established in each contract. The Company records any amounts
received prior to satisfying the revenue recognition criteria as deferred revenue on its consolidated balance
sheets. Amounts recognized as revenue, but not yet received or invoiced are recorded within other
receivables on the consolidated balance sheet. Amounts are recorded as other receivables on the
consolidated balance sheet when our right to consideration is unconditional. The Company does not assess
whether a contract has a significant financing component if the expectation at contract inception is such that
the period between payment by the customer and the transfer of a majority of the promised goods or
services to the customer will be one year or less.
Contract Assets
The incremental costs of obtaining a contract under ASC 606 (i.e. costs that would not have been
incurred if the contract had not been obtained) are recognized as an asset in the Company’s consolidated
balance sheets if the Company expects to recover them (see Note 6). Capitalized costs will be amortized to
the respective expenses using a systematic basis that mirrors the pattern in which the Company transfers
control of the goods and service to the customer. At each reporting date, the Company determines whether
or not the capitalized costs to obtain a contract are impaired by comparing the carrying amount of the asset
to the remaining amount of consideration that the Company received and expects to receive less the costs
that relate to providing services under the relevant contract. For the years ended December 31, 2020 and
2019, there was no amortization of the contract assets and there have been no impairments as of
December 31, 2020.
Deferred Revenue
Amounts received prior to satisfying the above revenue recognition criteria, or in which the Company
has an unconditional right to payment, are recorded as deferred revenue in the Company’s consolidated
balance sheets. The Company has estimated the classification between current and noncurrent deferred
revenue related to the respective license agreement within its consolidated balance sheets at December 31,
2020 and 2019 (see Note 6).
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Research and Development
Research and development costs are expensed to operations as incurred. Our research and development
expenses consist primarily of:
•
•
salaries and related overhead expenses, which include stock-based compensation and benefits for
personnel in research and development functions;
fees paid to consultants and contract research organizations, or CROs, including in connection with
our preclinical studies and clinical trials and other related clinical trial fees, such as for investigator
grants, patient screening, laboratory work, clinical trial material management and statistical
compilation and analyses;
•
costs related to acquiring and manufacturing clinical trial materials;
•
costs related to compliance with regulatory requirements; and
•
payments related to licensed products and technologies.
Costs for certain development activities are recognized based on an evaluation of the progress to
completion of specific tasks using information and data provided to us by our vendors and clinical sites.
Nonrefundable advance payments for goods or services to be received in future periods for use in research
and development activities are deferred and capitalized. The capitalized amounts are then expensed as the
related goods are delivered or when the services are performed.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based awards based on the grant-date
estimated fair values, which the Company determines using the BSM option pricing model, on a straight-
line basis over the requisite service period for the award. The Company accounts for forfeitures as they
occur.
The BSM option pricing model incorporates various highly sensitive assumptions, including the fair
value of our common stock, expected volatility, expected term and risk-free interest rates. The weighted
average expected life of options was calculated using the simplified method as prescribed by the SEC’s
Staff Accounting Bulletin, Topic 14 (“SAB Topic 14”). This decision was based on the lack of relevant
historical data due to our limited historical experience. In addition, due to our limited historical data, the
estimated volatility also reflects the application of SAB Topic 14, incorporating the historical volatility of
comparable companies whose stock prices are publicly available. The risk-free interest rate for the periods
within the expected term of the option is based on the U.S. Treasury yield in effect at the time of grant. The
dividend yield was zero, as we have never declared or paid dividends and have no plans to do so in the
foreseeable future.
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax
assets and liabilities are determined based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
The Company assesses all material positions taken in any income tax return, including all significant
uncertain positions, in all tax years that are still subject to assessment or challenge by the relevant taxing
authorities. Assessing an uncertain tax position begins with the initial determination of the position’s
sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement. At each balance sheet date, unresolved uncertain tax positions must be
reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion
have changed and (ii) the amount of the recognized benefit is still appropriate. The recognition and
measurement of tax benefits requires significant judgment. Judgments concerning the recognition and
measurement of a tax benefit might change as new information becomes available.
Comprehensive Loss
The Company has no items of comprehensive income or loss other than net loss.
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Loss Per Share
Basic loss per share is calculated by dividing net loss for the period by the weighted-average number of
common shares outstanding during the period, without consideration for potentially dilutive securities.
Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common
shares and potentially dilutive securities outstanding for the period.
For the years ended December 31, 2020 and 2019, there is no difference in the number of shares used
to compute basic and diluted net loss per share due to the Company’s net loss position. The following tables
presents the computation of the basic and diluted net loss per share (in thousands, except share and per share
data):
Numerator:
Net loss (basic and diluted)
Denominator:
Weighted-average shares of common stock (basic and diluted)
Basic and diluted net loss per share
Year Ended
December 31,
2020
2019
$ (22,333
)
$ (29,681
)
9,168,744
8,458,277
$
(2.44
)
$
(3.51
)
The following potentially dilutive securities were excluded from the computation of diluted net loss per
share for the periods presented because including them would have been antidilutive:
Stock options to purchase common stock
Common stock warrants
Year Ended
December 31,
2020
2019
1,550,956
2,052,128
1,380,312
1,733,322
3,603,084
3,113,634
JOBS Act Accounting Election
The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies. We
are choosing to take advantage of this provision and, as a result, we will adopt the extended transition
period available under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth
company or (ii) affirmatively and irrevocably opt out of the extended transition period provided under the
JOBS Act.
Recently Issued Accounting Pronouncements not yet adopted as of December 31, 2020
Accounting Standards Update 2016-02 and 2018-11
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). In July 2018, the FASB issued
ASU 2018-10, Codification Improvements to ASC 842, Leases, which provides clarification to ASU 2016-
02. These ASUs (collectively, the new lease standard) require an entity to recognize a lease liability and a
right-of-use asset on the consolidated balance sheet for leases with lease terms of more than twelve months.
Lessor accounting is largely unchanged, while lessees will no longer be provided with a source of off-
balance sheet financing. Initial guidance required the adoption of the new lease standard using the modified
retrospective transition method. In July 2018, the FASB issued ASU 2018-11, Leases (ASC 842) — Targeted
Improvements, which allows entities to elect an optional transition method where entities may continue to
apply the existing lease guidance during the comparative periods and apply the new lease requirements
through a cumulative effect adjustment in the period of adoptions rather than in the earliest period
presented. In March 2019, FASB issued ASU 2019-01, Codification improvements, which provides
clarification on implementation issued associated with adopting ASU 2016-02. ASU 2019-01 enhances the
guidance in
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ASC 842 surrounding the fair value of underlying assets for lessors, presentation of sales-type and direct
financing leases on the consolidated statement of cash flows, and transition guidance surrounding
accounting changes and error corrections.
This guidance was effective for public business entities for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. In November 2019, the FASB deferred the
effective date for adopting the leasing standard updates for private companies, not-for-profit organizations,
and smaller reporting companies. In June 2020, the FASB issued additional deferral guidance that defers the
effective date of the leasing standard updates for one year for entities in the “all other” category and public
not-for-profit entities that have not yet issued financial statements adopting the standard. The deferrals of
the standard are intended to provide relief to nonpublic companies and not-for-profit entities that have had
their implementation efforts delayed by the COVID-19 pandemic.
As a result of the Company having elected the extended transition period for complying with new or
revised accounting standards pursuant to Section 107(b) of the JOBS Act, the new leasing standard updates
would be effective for the Company for the year ended December 31, 2022, and all interim periods within
the year ended December 31, 2023. Early adoption is permitted. While the Company continues to review its
current accounting policies and practices to identify potential differences that would result from applying
the new guidance, the Company expects that its non-cancellable operating lease commitments with a term of
more than twelve months will be subject to the new guidance and recognized as right-of-use assets and
operating lease liabilities on the Company’s consolidated balance sheets upon adoption. The Company
expects to elect transitional practical expedients such that the Company will not need to reassess whether
contracts are leases and will retain lease classification and initial direct costs for leases existing prior to the
adoption of the new lease standard.
Accounting Standards Update 2016-13
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (ASC 326)”,
which is intended to provide financial statement users with more useful information about expected credit
losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the
existing incurred loss impairment methodology with a methodology that requires consideration of a broader
range of reasonable and supportable forward-looking information to estimate all expected credit losses. For
public business entities, ASU 2016-13 is effective for fiscal years and interim periods within those years
beginning after December 15, 2020. As a result of the Company having elected the extended transition
period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act,
ASU 2016-13 is effective for the Company for the fiscal year ending on December 31, 2022, and all interim
periods within. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 to
have a material impact on the Company’s consolidated financial statements and disclosures.
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes (ASC
740)”, which removes certain exceptions to the general principles in Topic 740 and improves consistent
application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing
guidance. For public entities, the ASU 2019-12 is effective for fiscal years and interim periods within
those years beginning after December 15, 2020. As a result of the Company having elected the extended
transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the
JOBS Act, ASU 2019-12 is effective for the Company for the fiscal year ending on December 31, 2022, and
all interim periods within. Early adoption is permitted. The Company is currently evaluating the impact of
this guidance on its consolidated financial statements.
3. Fair Value Disclosure
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to
transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of unobservable inputs.
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The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value
measurements as follows:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2
Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted
prices in markets that are not active, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the related assets or liabilities; and
Level 3
Unobservable inputs that are supported by little or no market activity for the related assets or
liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The carrying value of the Company’s cash
and cash equivalents, prepaid expenses and other current assets, other assets, accounts payable, accrued
liabilities, and note payable approximate fair value due to the short-term nature of these items.
4. Balance Sheet Components
Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
Lab equipment
Computer equipment and software
Construction in progress
Total property and equipment
Less: Accumulated depreciation
Property and equipment, net
December 31,
2020
December 31,
2019
$ 2,200
25
188
2,413
(1,155
)
$1,804
25
—
1,829
(823
)
$ 1,258
$1,006
Depreciation expense was approximately $332,000 for both years ended December 31, 2020 and 2019.
In October 2020, the Company entered into a new lease agreement for its new headquarters facility in
Los Gatos, California (see Note 13). The Company moved into the new facility in December 2020 and
recorded approximately $188,000 in construction in progress related to leasehold improvements made by
the Company related to the new facility.
Intangible Assets, net
Intangible assets, net consist of the following (in thousands):
Licenses
Less: Accumulated amortization
Intangible assets, net
December 31,
2020
December 31,
2019
$ 81
(54
)
$ 27
$ 81
(49
)
$ 32
Amortization expense was approximately $5,000 and $6,000 for the years ended December 31, 2020
and 2019, respectively.
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The estimated acquired intangible amortization expense for the next five fiscal years is as follows (in
thousands):
Year ending December 31,
2021
2022
2023
2024
2025 and thereafter
Total
Licenses
$ 5
5
5
5
7
$27
University Licensing Agreements
The University of Chicago — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement with The University of Chicago (UOC), a non-profit
university. This agreement granted to us an exclusive, royalty-bearing license for staph alpha toxin
technology. The UOC agreement also granted to us the right to sublicense. UOC retained the non-
transferrable right to use such patent rights for academic and research purposes, and also to certain pre-
existing rights of the U.S. government. We paid upfront fees upon the execution of the agreement and are
obligated to pay an annual maintenance fee. We also are obligated to pay UOC low single digit percentage
royalties on net sales from our and our sublicensee’s sale of any commercialized licensed product or
process, and certain other payments, subject to a minimum amount. The aggregate milestone payments
under the UOC agreement potentially total up to $1.6 million. No milestones were met or accrued for during
2019. A $100,000 milestone was accrued for at December 31, 2020. We are responsible for our pro rata
share of patent expenses.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed UOC patent rights as licensed products or processes.
The term of the agreement continues until all patents and filed patent applications, included within the
licensed UOC patents, have expired or been abandoned, or until the agreement is earlier terminated. We may
terminate the agreement on prior written notice to UOC. Each party has the right to terminate the agreement
for the other party’s uncured material breach of obligations under the agreement.
The Brigham and Women’s Hospital, Inc. — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement with The Brigham and Women’s Hospital, Inc.
(BWH), a non-profit corporation. This agreement granted to us an exclusive, royalty-bearing license under
its and Beth Israel Deaconess Medical Center’s (BIDMC) rights in methods and composition relating to
specific binding peptides to P. aeruginosa mucoid exopolysaccharide to make, use and sell products and
processes for the treatment of pseudomonas infections in humans that are covered by such patent rights. The
BWH agreement also granted to us the right to sublicense. BWH and BIDMC retained the non-transferrable
right to use such patent rights for academic and research purposes, and also to certain pre-existing rights of
the U.S. government. We also are obligated to pay BWH low single digit percentage royalties on net sales
from our and our sublicensee’s sale of any commercialized licensed product or process, and certain other
payments. The aggregate milestone payments under the BHW agreement potentially total up to $860,000.
No milestones were met or accrued for during 2020 or 2019. We are responsible for diligently prosecuting
and maintaining the licensed patent rights, at our sole cost and expense.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed BWH patent rights as licensed products or processes.
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The term of the agreement continues until all patents and filed patent applications, included within the
licensed BWH patents, have expired or been abandoned, or until the agreement is earlier terminated. We
may terminate the agreement on prior written notice to BWH. Each party has the right to terminate the
agreement for the other party’s uncured material breach of obligations under the agreement.
The University of Iowa Research Foundation — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement with The University of Iowa Research Foundation
(UIRF). The UIRF agreement granted to us an exclusive, royalty-bearing license under its rights in methods
relating to gallium containing compounds for the treatment of infections to make, use and sell products that
are covered by such patent rights. The UIRF agreement also granted to us the right to sublicense. UIRF
retained the right and ability to grant right to use such patent rights for academic and research purposes, and
also to certain pre-existing rights of the U.S. government including the United States Department of
Veterans Affairs. We also are obligated to pay UIRF low single digit percentage royalties on net sales from
our and our sublicensee’s sale of any commercialized licensed product or process, and certain other
payments. The aggregate milestone payments under the UIRF agreement potentially total up to $712,500.
No milestones were met or accrued for during 2020 or 2019. We are responsible for diligently prosecuting
and maintaining the licensed UIRF patent rights, at our sole cost and expense.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed UIRF patent rights as licensed products or processes.
The term of the agreement continues until the expiration of the last to expire patents, included within
the licensed UIRF patents, or until the agreement is earlier terminated. We may terminate the agreement on
prior written notice to UIRF. Each party has the right to terminate the agreement for the other party’s
uncured material breach of obligations under the agreement.
Brigham Young University — Exclusive Patent License Agreement
We are party to an exclusive licensing agreement with Brigham Young University (BYU). This
agreement granted to us an exclusive, royalty-bearing license under its rights in stabilization of biological
agents methods relating to human vaccines to make, use and sell products that are covered by such patent
rights. The agreement also granted to us the right to sublicense. BYU and the Church of Jesus Christ of
Latter-day Saints and the Church Education System retained the right and ability to use such patent rights
for academic and ecclesiastical purposes and also to purchase products using such patents rights at a
discounted price. We also are obligated to pay BYU low single digit percentage royalties on net sales from
our and our sublicensee’s sale of any commercialized licensed product, and certain other payments. The
aggregate milestone payments under the BYU agreement potentially total up to $400,000. No milestones
were met or accrued for during 2020 or 2019. BYU is responsible for diligently prosecuting and maintaining
the licensed BYU patent rights and we reimburse them for one-third of their costs.
The agreement provides that we have certain obligations to conduct further research and development,
and are obligated to utilize reasonable efforts to commercialize, either directly or through a sublicensee, the
licensed BYU patent rights as licensed products or processes.
The term of this agreement continues until the expiration of the last to expire patents, included within
the licensed BYU patents, or until the agreement is earlier terminated. We may terminate the agreement on
prior written notice to BYU. Each party has the right to terminate the agreement for the other party’s
uncured material breach of obligations under the agreement.
The UAB Research Foundation — Exclusive Patent License Agreement
In September 2020, the Company entered into an exclusive licensing agreement with the UAB
Research Foundation (“UABRF”), a non-profit corporation. This agreement granted the Company an
exclusive, royalty-bearing license for intellectual property entitled human neutralizing antibodies against
SARS-CoV-02/COVID-19. UABRF and Texas Biomedical Research Institute (“Texas Biomed”) jointly own
all rights, title and interest in the intellectual property. The UABRF license agreement also granted to the
Company
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the right to sublicense the technology. UABRF retained the non-transferrable right to use such patent rights
for academic and research purposes, and also to certain pre-existing rights of the U.S. government.
The Company has agreed to provide at least $50,000 in research funding to each of the lead inventor’s
research programs. This funding was supplied under research agreements between the Company, UABRF
and Texas Biomed, and the intellectual property resulting from such research shall be included under this
exclusive license agreement. The potential development and commercialization milestone payments under
the UABRF agreement total up to approximately $5.5 million. No milestones were met or accrued for as of
December 31, 2020. The Company is also obligated to pay UABRF single digit percentage royalties on net
sales from us and our sublicensee’s sale of any commercialized licensed product or process, subject to
minimum annual amounts starting in 2026. The Company is obligated to pay UABRF double
digit percentage royalties on non-royalty income received during the term of the license agreement, and
payments will be reduced by one half for non-royalty income received for a combination product as defined
in the agreement. No milestones were met or accrued for during 2020. The Company is responsible for all
patent protection expenses.
The term of the license agreement continues until all patents and filed patent applications, included
within the licensed UABRF patents, have expired, or been abandoned, or until the agreement is earlier
terminated. The Company may terminate the license agreement by giving no less than ninety (90) days prior
written notice to UABRF. UABRF has the right to immediately terminate the license agreement upon the
Company’s uncured material breach of obligations under the agreement.
Non-Profit Licensing Agreements
Program for Appropriate Technology in Health and PATH Vaccine Solutions
We granted the Program for Appropriate Technology in Health (PATH), a global non-profit
organization, and the PATH Vaccine Solutions a non-exclusive license, with right to sublicense
formulations, for use with the measles, rotavirus, live-attenuated influenza, pneumococcal and enteric
vaccines only for sale in developing countries.
We have also agreed to provide rotavirus vaccines to public sector purchasers in developing countries
at a preferential price relative to private sector purchasers in developing countries where the rotavirus
vaccine utilizing the enabling formulation technology is offered for sale.
Corporate Licensing Agreements
Kenta Biotech Ltd.
We are party to an asset purchase agreement with Kenta Biotech Ltd. (Kenta), a for profit corporation
(Aktiengesellschaft) duly incorporated in Schlieren (Canton of Zurich, Switzerland), registered under the
identification number CH-035.3.035.876-2. The agreement assigned and transferred certain of Kenta’s
physical assets, contracts and technology to us. The physical assets included all physical assets owned or
controlled by Kenta, including but not limited to cell lines, genes, antibodies, diagnostic assays and related
documentation, which were related to Kenta’s MabIgX technology platform for hybridoma generation and
its mAb targeting S. aureus, P. aeruginosa, A. baumannii and RSV. The technology included all intellectual
property, including but not limited to patents, patent applications, trademarks, knowhow, trade secrets,
regulatory filings, clinical trials, clinical trial information, all supporting documentation and all other
related intellectual property which are related to Kenta’s MabIgX technology platform for hybridoma
generation and its mAb targeting S. aureus, P. aeruginosa, A. baumannii and RSV. The contracts included
the contracts and agreements (including all rights and obligations thereunder), whether oral or written,
which Kenta has concluded and which pertain to the assets. The contracts were primarily related to the
ongoing clinical trial of AR 301.
We were obligated to pay Kenta a fixed purchase price, which was fully paid during 2013 and 2014,
and a declining scale of low double digit to low single digit percentage royalties on gross licensing revenues
from either our licensing of the assets or net sales revenues actually received by us up to a maximum of
$50 million.
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As of December 31, 2020, no royalty obligation was due to Kenta. As of December 31, 2019, the
Company accrued approximately $488,000 due to Kenta for a royalty obligation resulting from the license
agreement entered into in September 2019 (see Note 6) which was paid in January 2020.
Emergent Product Development Gaithersburg Inc.
We are party to a license agreement with Emergent Product Development Gaithersburg Inc.
(Emergent). We granted Emergent an exclusive, perpetual, royalty-bearing license to use certain of our
patents and related know how for the prevention or treatment of infection or illness caused by biodefense
pathogens. We also granted a non-exclusive, royalty-bearing license to use certain of our patents and related
know how for the prevention or treatment of tularemia and viral hemorrhagic fever indications.
Emergent is obligated to pay us low single digit percentage royalties on net sales from their and their
sublicensee’s sale of any commercialized licensed product, and certain other payments. The aggregate
milestone payments that the Company could receive under the Emergent agreement amount to $2.8 million.
The Company is not aware of Emergent achieving any milestones under the agreement and has not received
any milestone payments. The Company has certain diligence obligations to conduct further research and
development, and to exploit licensed products.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Research and development services
Payroll related expenses
Professional services and other
Accrued liabilities
5. Equity Method Investment
December 31,
2020
December 31,
2019
$ 872
279
179
$1,330
$2,709
150
115
$2,974
On February 11, 2018, the Company entered into a joint venture agreement (the “JV Agreement”) with
Shenzhen Hepalink Pharmaceutical Group Co., Ltd., a related party, principal shareholder of the Company,
and a Chinese entity (“Hepalink”), to develop and commercialize products for infectious diseases. Under the
terms of the JV Agreement, the Company contributed $1.0 million and the license of its technology relating
to the Company’s AR-101 and AR-301 product candidates for use in the joint venture company named
Shenzhen Arimab BioPharmaceuticals Co., Ltd. (the “JV Entity”) in the territories of the Republic of China,
Hong Kong, Macau and Taiwan (the “Territory”) and initially owns 49% of the JV Entity. On July 2, 2018,
the JV Entity received final approval from the government of the Peoples Republic of China. It was agreed
by the parties that the Company shall be reimbursed for certain legal and contract manufacturing expenses
related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the clinical drug supply for a
clinical study of AR-105 (see Note 12).
On August 6, 2018, the Company entered into an amendment to the JV Agreement with Hepalink
whereby the Company agreed to additionally contribute an exclusive, revocable, and royalty-free right and
license to its AR-105 product candidate in the Territory. Pursuant to the JV Agreement and the amendment,
Hepalink initially owns 51% of the JV Entity and is obligated to contribute the equivalent of $7.2 million to
the JV Entity. Additionally, Hepalink is obligated to make an additional equity investment of $10.8 million
or more at the time of the JV Entity’s first future financing.
The Company evaluated the accounting for the JV Agreement entered into noting that it did not meet
the accounting definition of a joint venture and instead meets the definition of a variable interest entity. The
Company concluded that it is not the primary beneficiary of the JV Entity and therefore is not required to
consolidate the entity. This conclusion was based on the fact that the equity-at-risk is insufficient to support
operations without additional investment and that the Company does not hold decision-making power over
activities that significantly impact the JV Entity’s operations. The Company accounted for its
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investment in the JV Entity as an equity method investment. The Company recorded the equity method
investment at $1.0 million which represents the Company’s contribution into the JV Entity. The Company’s
license contributed to the JV Entity was recorded at its carryover basis of $0.
For the years ended December 31, 2020 and 2019, the Company recognized approximately $9,000 and
$951,000 in losses from the operations of the JV Entity, respectively. As of December 31, 2020 and 2019,
the Company’s equity method investment in the JV Entity was approximately $0 and $9,000, respectively.
6. Collaboration, Development and License Agreements
Cystic Fibrosis Foundation Development Agreement
In December 2016, the Company received an award from the Cystic Fibrosis Foundation (“CFF”),
which was executed under the Development Program Letter Agreement (the “CFF Agreement”), for
approximately $2.9 million. Under the CFF Agreement, CFF made an upfront payment of $200,000 and will
make milestone payments to the Company as certain milestones defined in the agreement are met. The
milestones relate to pre-clinical and clinical research activities. The agreement also specifies that we are
obligated to cumulatively spend on the development program at least an equal amount that the Company
receives from the CFF. In the event that we do not spend as much as we received under the agreement, we
are obligated to return any overage to the CFF. In November 2018, the CFF increased the award to
approximately $7.5 million.
Immaterial Error in Accounting for Cystic Fibrosis Foundation Development Agreement
After receiving a comment letter from the SEC in connection with its review of the Company’s Form
10-K for the Fiscal Year Ended December 31, 2019, the Company conducted a review of its accounting for
the CFF Agreement and determined that it did not appropriately apply ASC 606 to the CFF Agreement as of
the adoption date of January 1, 2019 (the “Adoption Date”) and thereafter through September 30, 2020, with
such determination being subject to further SEC comment.
Originally, the Company determined that the clinical research activities associated with all the
milestones under the CFF Agreement were considered a single performance obligation. Hence, the entire
estimated transaction price was allocated to this single performance obligation and recognized as revenue by
measuring progress using the input method (cost-to-cost) that was based on total estimated costs to achieve
all milestones included in the total project, limited by the variable consideration attributed to the probable
completion of certain milestones as defined in the CFF Agreement.
After further review, as of the Adoption Date, the Company identified the following promises with
regards to the clinical research activities that represent an initial contract of: a) Phase 1 single ascending
dose (“SAD”) clinical trial, which consists of the satisfied development-based milestones and one
development-based milestone in progress which was accounted for as a single performance obligation; and
contingent promises of: b) Phase 1 multiple ascending dose (MAD) clinical trial, which consists of one
development-based milestone that had not yet been started, and c) Phase 2a clinical trial, which consists of
four development-based milestones that had not yet been started. Of these promises, the Phase 1 SAD
clinical trial was determined to be a distinct performance obligation as of the Adoption Date. For the
clinical research activities related to the Phase 1 MAD clinical trial and the Phase 2a clinical trial that had
not yet been started, the Company was contingently obligated to perform these clinical research activities
only after the previous milestones, which achievement was uncertain, had been met.
The clinical research activities related to the Phase 1 MAD clinical trial and the Phase 2a clinical trial
that had not been started were evaluated to determine if they should be considered variable consideration or
contingent promises akin to optional purchases under ASC 606. The Company concluded that these two
promises that have not been started are contingent promises because there is substantive uncertainty about
the contingent event occurring (i.e. milestones being achieved) and the contingent event requires additional
distinct services and incremental payments from the CFF. The Company determined that these contingent
promises did not provide the CFF with any material rights. The Phase 1 MAD clinical trial and the Phase 2a
clinical trial will be accounted for as separate contracts at the time the Company is obligated to perform the
underlying clinical research activities.
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The Company determined that the consideration for the Phase 1 SAD clinical trial contract included
several development-based milestones which had been achieved as of the Adoption Date totaling
approximately $1.7 million and the one development-based milestone in progress as of the Adoption Date of
$1.0 million became probable during the quarter ended March 31, 2019. Prior to March 31, 2019, the
amount of the one development-based milestone in progress as of the Adoption Date could not be included
in the transaction price as it was contingent on successful completion of Phase 1 SAD clinical trial, and it
was not probable that significant reversal of cumulative revenue recognized would not occur if this
milestone were included in the transaction price.
The Company determined the consideration for the Phase 1 MAD clinical trial contract included one
development-based milestone of $1.0 million which became probable of achievement and was achieved
during the quarter ended June 30, 2020. Prior to June 30, 2020, the amount of the one development-based
milestone could not be included in the transaction price for this contract as it was contingent on successful
completion of the Phase 1 MAD clinical trial, and it was not probable that a significant reversal of
cumulative revenue recognized would not occur if this milestone were included in the transaction price.
The Company determined as of December 31, 2020, the transaction price for the Phase 2a clinical trial
contract was zero as none of the four development-based milestones which consideration totals
approximately $3.8 million could be included in the transaction price, as it was not probable that significant
reversal of cumulative revenue recognized would not occur if these milestones were included.
The milestones under the CFF Agreement are development-based milestones related to pre-clinical and
clinical research activities and the realization of or recognition of revenue associated with the milestones as
determined by the completion of the milestones and, if applicable, review and approval of the achievement
by the CFF. Each development-based milestone payment has specific criteria that needs to be met, some
examples of which include, the completion of certain study activities and approval to move to the next
activity. At every reporting period, the Company evaluates the individual facts and circumstances of the
development-based milestone to assess whether the revenue attributable to the development-based milestone
in progress should be constrained. The constraint assessment by the Company includes an analysis of the
key judgements and considerations used for each milestone which include, but are not limited to, the nature
and amount of work to be performed, if the work is subject to the approval of the CFF, clinical data and
uncertainty with regards to the results of the clinical studies, and the probability of successful clinical
studies. The constraint will be removed once the Company achieves the development-based milestone or has
determined that there is probable completion of the development-based milestone, and it has also concluded
that it is not probable that revenue recognized attributable to the development-based milestone will result in
a significant reversal of revenue in the future.
The Company determined that the clinical research activities under the CFF Agreement should be
recognized over time by calculating the amount of revenue to recognize in any given period by
accumulating the total related costs incurred for the respective clinical research activities related to that
distinct performance obligation using the input method (cost-to-cost) and applies that percentage of
completion to the transaction price at each reporting period. The Company believes this method best depicts
the transfer of control to the customer, which occurs as the costs related to the clinical research activities are
incurred.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality
(“SAB 99”), the Company has determined that the impact of inappropriately applying ASC 606 to the CFF
Agreement was not material to its previously issued annual audited and unaudited condensed consolidated
financial statements, and accordingly, no prior period financial statements have been restated. The
approximate amount of unrecorded deferred revenue associated with this error was approximately $334,000
and $250,000 at the Adoption Date and March 31, 2019, respectively. As of June 30, 2019, the unrecorded
deferred revenue amount related to the error was zero.
For the year ended December 31, 2020, the Company recognized $1.0 million in revenue from the CFF
Agreement, mainly due to the achievement in 2020 of one development-based milestone related to the
Phase 1 MAD clinical trial. For the year ended December 31, 2019, the Company recognized approximately
$1.0 million in revenue from the CFF Agreement primarily due to the achievement in 2019 of one
development-based milestone related to the Phase 1 SAD clinical trial that was in progress as of the
Adoption Date.
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Serum License Agreement
In July 2019, the Company and Serum International B.V. (“SIBV”), an affiliate of Serum Institute of
India Private Limited, entered into an option agreement which granted SIBV the option to license multiple
programs from the Company and access the Company’s MabIgX® platform technology for asset
identification and selection. The Company received an upfront cash payment of $5 million upon execution
of this option agreement. In connection with the option agreement, SIBV made an equity investment
whereby the Company issued 801,820 shares of its restricted common stock in a private placement to SIBV
for total gross proceeds of $10 million. As a result of this transaction, SIBV and its affiliates, are considered
related parties to the Company.
In September 2019, the Company and Serum AMR Products (“SAMR”), a party under common
ownership of SIBV, entered into a License, Development and Commercialization Agreement (the “License
Agreement”). Pursuant to the License Agreement, the Company granted to SAMR exclusive licenses, and
rights to sublicense, certain patent rights and technology related know-how to the Company’s products AR-
301, AR-105, AR-101 (i.e. exclusive rights to, among other things, develop, distribute, market, promote,
sell, import and otherwise commercialize) in (a) the country of India, and (b) all other countries of the world
except the USA, Canada, EU Territory, UK, China, Australia, South Korea, Brazil, New Zealand, and Japan
(products AR-105 and AR-101 countries do not exclude South Korea and Brazil) (the “Limited Territory”);
and AR-201 (i.e. exclusive rights to, among other things, develop, manufacture, make, distribute, market,
promote, sell, import and otherwise commercialize) in all countries of the world except China, Hong Kong,
Macau and Taiwan (the “Worldwide Territory”) (the “licenses and know-how”). Further, the License
Agreement grants SAMR an option for the Company to provide research services using its MabIgX®
platform technology for the identification of up to five (5) candidates including product development of
these identified candidates and an exclusive license to develop, manufacture, make, distribute, market,
promote, sell, import and otherwise commercialize these development products in the Worldwide Territory
(the “research and development option”).
Pursuant to the License Agreement, the Company will provide development support related to the
licensed products above in order to assist SAMR in its efforts to develop, receive regulatory approval, and
manufacture and sell the licensed products in SAMR’s authorized territories which will be performed under
the direction of a Joint Steering Committee (“JSC”) which the Company will participate in (collectively
“development support services”).
In addition, under the License Agreement, SAMR was granted an exclusive manufacturing license
option as the initial license granted above for AR-301, AR-105 and AR-101 does not allow for
manufacturing. This manufacturing option provides incremental rights related to these products beyond
what is granted as part of the licensing discussed above (the “manufacturing rights option”). If this option is
exercised, after SAMR has met certain requirements to exercise the option as defined in the License
Agreement, it would provide for an exclusive license for use by SAMR to manufacture and supply the
products for SAMR’s own use in the Limited Territory and to manufacture and supply these products to the
Company, or their affiliates, for the Company’s use outside the Limited Territory. Should SAMR exercise
the development and research option or the manufacturing rights option discussed above, SAMR and the
Company shall negotiate in good faith the economic terms around these arrangements. If a third-party
sublicensee of AR-301, AR-105 and AR-101 wishes to manufacture these products by itself for the territory
for which it has a license from the Company, then the Company shall have the right to buy back the
manufacturing rights for all territories outside of the Limited Territory by paying to SAMR $5 million.
Under the License Agreement, the Company received upfront payments totaling $15 million, of which
$5 million was received in July 2019 through the option agreement referred to above. The Company is also
entitled to additional payments from SAMR of up to $42.5 million, conditioned upon the achievement of
specified milestones related to completion of certain trials and regulatory approvals as defined in the
License Agreement. Further, the Company may receive additional royalty-based payments from SAMR if
certain sales levels on licensed products are achieved as defined in the License Agreement.
Given the equity investment by SIBV was negotiated in conjunction with the option agreement, which
resulted in the execution of the License Agreement, all arrangements were evaluated as a single agreement
and amounts were allocated to the elements of the arrangement based on their fair value. See Note 9. The
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Company allocated the proceeds received from the sale of the restricted common stock and upfront payment
from the License Agreement, net of issuance and contract costs, of approximately $22.5 million
accordingly:
•
•
•
the Company recorded approximately $5.0 million, which represented the fair value of the restricted
common stock issued of $5.4 million, net of $441,000 of issuance costs, to stockholders’ equity
within the Company’s consolidated balance sheet as of December 31, 2019;
the Company recorded approximately $19.6 million to deferred revenue based on the $15 million
from upfront payments under the License Agreement and approximately $4.6 million from the equity
allocation; and
the Company capitalized approximately $2.1 million to contract costs, which consists of
approximately $376,000 issuance costs from the equity allocation and approximately $1.7 million in
other direct costs to obtain the License Agreement.
The License Agreement is determined to be within the scope of ASC 606, as the transaction represents
a contract with a customer where the participants function in a customer/vendor relationship and are not
exposed equally to the risks and rewards of the activities contemplated under the License Agreement. Using
the concepts of ASC 606, the Company identified the following performance obligations under the License
Agreement: 1) the transfer of licenses of the intellectual property for AR-301, AR-101, AR-105 and AR-
201, inclusive of the related technology know-how conveyance (referred to as the license and know-how
above); and 2) the Company to deliver ongoing development support services related to the licensed
products and the Company’s participation in the JSC (referred to as the development support services
above); and identified the following material promises under the License Agreement: 3) SAMR was granted
a research and development option of up to five identified product candidates for the Company to perform
including specific development services (the research and development option referred to above); and 4)
SAMR was granted an exclusive manufacturing license option which would provide for incremental
manufacturing rights related to AR-301, AR-105 and AR-101 beyond what is granted in the License
Agreement (the manufacturing rights option referred to above). The Company concluded that the
performance obligations and material promises identified are separate and distinct from each other.
The ongoing development support services promised will not significantly change the intellectual
property underlying the licenses. Further, the Company believes that SAMR can benefit from the license
and know-how either on its own or together with other resources that are readily available, has the ability to
sublicense these licensed products and these licenses are separately identifiable from the other promises in
the License Agreement.
The development support services, the research and development option, and the manufacturing rights
option are not integrated or dependent upon each other and are provided by the Company separately from
each other. The Company determined that the intellectual property licensed under the License Agreement
represents functional intellectual property and it has significant standalone functionality and therefore
should be recognized at a point in time as opposed to over time.
The on-going development support services are to be transferred ratably over the period that the
Company expects to assist SAMR in its efforts around the licensed products in SAMR’s authorized
territories. These development support services will begin with the formation and first formal meeting of the
JSC.
To allocate the transaction price among the performance obligations and the material promises, the
Company estimated the standalone selling prices (“SSP”) for each. For the licenses and knowhow related to
AR-301, AR-105, AR-101 and the manufacturing rights option, the SSP was estimated using the income
approach based on assumptions regarding SAMR’s future revenues from the licensed intellectual property,
projected costs of research and development, manufacturing and commercialization expenses, as well as the
discount rate, the development timeline, and probabilities of technical and regulatory success. To estimate
the SSP of AR-201, due to this product is in a pre-clinical stage, development support services, and the
research and development option, the Company used a cost-plus margin approach which included the actual
costs the Company has incurred for the product technology through the date of the License Agreement and
estimating the costs the Company expects to incur and applying a margin, if necessary. The Company
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believes that a change in the assumptions used to determine its best estimate of SSP for the performance
obligations and material promises would not have a significant effect on the allocation of consideration
received to the performance obligations and material promises.
Under ASC 606 an option to acquire additional goods or services gives rise to a material promise if the
option provides a material right to the customer. The research and development option allows SAMR to
receive additional services from the Company, for cost reimbursement. In addition to the cost
reimbursement, the Company could potentially receive milestone and royalty payments depending on the
ultimate success of the research and development activities. Furthermore, a portion of the upfront fee
incentivizes SAMR to exercise the options. The manufacturing rights option grants an additional license to
SAMR for no additional consideration after it has met the requirements to exercise the option. The
Company considers this license valuable and would expect to be compensated accordingly in a standalone
transaction. Furthermore, the Company’s valuation of these options indicate they had significant value on
the agreement date. The Company determined that the above described research and development option
and manufacturing rights options do constitute material rights to the customer.
The Company is also entitled to additional payments from SAMR of up to $42.5 million, conditioned
upon the achievement of specified milestones related to the completion of certain trials and regulatory
approvals as defined in the License Agreement. Further, SAMR will pay the Company royalty payments
ranging between 4% to 6% on net sales of licensed products, except for AR-301, AR-105 and AR-101
products in the EU, should such be authorized at a later date, which would require payment of 20% royalties
on the net sales of those products, as defined in the License Agreement. The Company concluded that these
milestones and royalty payments each contain a significant uncertainty associated with a future event. As
such, these milestone and royalty payments are constrained at contract inception and are not included in the
transaction price as the Company could not conclude that it is probable a significant reversal in the amount
of cumulative revenue recognized will not occur surrounding these payments. At the end of each reporting
period, the Company will update its assessment of whether the milestone and royalty payments are
constrained by considering both the likelihood and magnitude of the potential revenue reversal. At
December 31, 2019, the Company performed an assessment and determined that these milestone and royalty
payments are constrained.
The Company determined that the transaction price under the License Agreement was $19.6 million,
consisting of the $15 million from upfront payments under the License Agreement and approximately
$4.6 million from the equity allocation as noted above, which was allocated among the performance
obligations and material promises based on their respective related SSP. The Company allocated the
$19.6 million transaction price to the following: approximately $14.5 million to the licenses and know-how;
approximately $79,000 to the development support services; approximately $892,000 to the research and
development option; and approximately $4.1 million to the manufacturing rights option.
The Company determined that the intellectual property licensed under the License Agreement
represents functional intellectual property and it has significant standalone functionality and therefore
should be recognized at a point in time upon satisfying the performance obligations. The Company will
satisfy the performance obligations upon transfer of the licenses and know-how to SAMR, and expects to
satisfy these performance obligations by June 30, 2021.
The Company determined that no performance obligations or material promises were satisfied as of
December 31, 2020, and therefore, no revenue related to the License Agreement was recognized for
the years ended December 31, 2020 and 2019. The Company has recorded contract liabilities resulting from
the License Agreement of approximately $18.7 million and $14.6 million to deferred revenue, current, and
approximately $854,000 and $5.0 million to deferred revenue, noncurrent, on its consolidated balance sheets
at December 31, 2020 and 2019, respectively. The Company capitalized a contract asset resulting from the
License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License
Agreement on its consolidated balance sheets, of which approximately $2.0 million and $1.5 million is
classified as current, and approximately $90,000 and $526,000 is classified as noncurrent, as of
December 31, 2020 and 2019, respectively.
7. Paycheck Protection Program Loan
The Company applied for and received a loan, which is in the form of a note dated May 1, 2020, from
Silicon Valley Bank (“SVB”) in the aggregate amount of approximately $715,000 (the “Loan”), pursuant to
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the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief
and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to
2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest
may be forgiven as long as the borrower uses the loan proceeds for eligible purposes, including payroll,
benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced
if the borrower terminates employees or reduces salaries during the covered period.
The Loan is payable over two years at an interest rate of 1% per annum, with an estimated deferral of
payments until mid-2021. The Company is required to pay principal and interest on the Loan in equal
monthly installments estimated to begin in mid-2021 and the outstanding interest balance accrued during the
deferral period is to be paid on the maturity date, which is May 1, 2022. The Loan may be prepaid by the
Company at any time prior to maturity with no prepayment penalties. The Loan contains events of default
(as defined in the PPP Loan agreement), in which the occurrence could result in the acceleration of all
amounts due under the Loan. As of December 31, 2020, there were no events of default under the PPP Loan.
The Company believes in good faith that it met the loan forgiveness eligibility requirements of the PPP
Loan. The Company’s Loan forgiveness application was submitted to the Small Business Administration
(“SBA”) in October 2020 and the Company expects to meet the forgiveness criteria. Since the forgiveness
of the Loan is outside the Company’s control, the Company has accounted for its PPP Loan as debt. If the
PPP Loan is ultimately forgiven and the Company is legally released from being the Loan’s primary obligor,
the extinguishment of the liability will be recognized in the Company’s consolidated statement of operations
as an extinguishment of debt gain.
At December 31, 2020, the Company recognized the entire amount of the PPP Loan proceeds of
approximately $715,000 as a note payable, approximately $439,000 as current and $276,000 as noncurrent,
in its condensed consolidated balance sheets. For the year ended December 31, 2020, the Company
recognized approximately $5,000 in interest expense in its consolidated statements of operations.
Future payments on the Loan as of December 31, 2020, if the Loan is not forgiven, are as follows (in
thousands):
Year ending December 31,
2021
2022
Total minimum payments
Less amount representing interest
Loan, gross
8. Warrants
Common Stock Warrant Expense
442
284
726
(11
)
$715
In November 2015, an engagement letter was effectuated with the Company’s former Vice Chairman of
the Board of Directors. Under the terms of the engagement, upon being appointed the Company’s Vice
Chairman and the closing of a minimum of $25 million in gross proceeds from sales of its Series A
convertible preferred stock under a private placement memorandum, the Vice Chairman would receive
234,860 common stock warrants. On December 12, 2016, both of the aforementioned conditions had been
met and the Company issued 234,860 common stock warrants at an exercise price of $14.50 per share.
The fair value of the warrants was determined using a Monte Carlo simulation method which calculates
the estimated value based on running numerous simulations and analyzing the various outcomes. The total
fair value of the award was approximately $661,000 and was being amortized over a five-year vesting
period. On August 13, 2019, this board member was not up for re-election at the annual shareholder’s
meeting, therefore the vesting of the common stock warrants ceased on August 13, 2019 resulting in the
cancellation of 109,601 unvested warrants. For the year ended December 31, 2019, the Company recorded
stock-based compensation expense of approximately $82,000 related to these warrants. For the year ended
December 31, 2020, the Company did not record any stock-based compensation expense related to these
warrants.
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Warrants Issued in Private Placement
In October 2020, the Company entered into a Securities Purchase Agreement (the “October 2020
Purchase Agreement”) in which the Company agreed to offer, issue and sell (i) in a registered direct
offering, an aggregate of 1,134,470 shares (the “Shares”) of common stock, par value $0.0001 per share
(“Common Stock”) and (ii) in a concurrent private placement, Series A warrants (the “Series A Warrants”)
and Series B warrants (the “Series B Warrants” and collectively, with the Series A Warrants, the “Warrants”)
to purchase up to an aggregate 567,234 shares (the “Warrant Shares”) of common stock, for aggregate gross
proceeds to the Company of approximately $8.5 million, and after deducting commissions and offering
costs, net proceeds were approximately $7.8 million (See Note 9).
The combined purchase price for each Share, together with one Series A Warrant and one Series B
Warrant, is $7.4925. The Series A Warrants have an exercise price of $7.43 per share, are exercisable
six months from the date of issuance, and expire three and a half years from the date they become
exercisable. The Series B Warrants have an exercise price of $9.00 per share, are exercisable six months
from the date of issuance, and expire three and a half years from the date they become exercisable. In
addition, the Series B Warrants are redeemable by the Company at $0.01 per share upon the price of the
Company’s common stock closing at $9.00 or more over five (5) consecutive trading days. The exercise
price of the Warrants and Warrant Shares are subject to adjustment in the event of any stock dividends and
splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Series A
Warrants and Series B Warrants. Each of the Series A Warrants and the Series B Warrants may be exercised
on a “cashless” basis under certain circumstances set forth in the Warrants.
The Company measured the fair value of the Common Stock Shares based on the Company’s closing
stock price on the date the October 2020 Purchase Agreement was entered into and the fair value of the
Warrant Shares was based upon a Black-Scholes valuation. The Black-Scholes valuation used the following
assumptions: expected term of four years, expected volatility of 104%, risk-free interest rate of 0.25%, and
dividend yield of 0%. The Company used the relative fair value method to allocate the net proceeds
received from the sale of the Common Stock Shares and the Warrants Shares of approximately $7.8 million.
The Company recorded approximately $5.8 million and $2.0 million, which represented the relative fair
value of the Common Stock Shares and Warrant Shares, respectively, to stockholders’ equity (deficit) within
the Company’s consolidated balance sheet.
9. Common Stock
As of December 31, 2020, the Company had reserved the following common stock for future issuance:
Shares reserved for exercise of outstanding warrants to purchase common stock
Shares reserved for exercise of outstanding options to purchase common stock
Shares reserved for issuance of future options
Total
Private Placement
2,052,128
1,550,956
584,161
4,187,245
In July 2019, the Company and SIBV, entered into an option agreement which granted SIBV the option
to license multiple programs from the Company and access the Company’s MabIgX® platform technology
for asset identification and selection. In connection with the option agreement, SIBV made an equity
investment whereby the Company issued 801,820 shares of its restricted common stock to SIBV in a private
placement for total gross proceeds of $10 million, and after deducting commissions and offering costs of
approximately $816,000, the net proceeds were approximately $9.2 million. Under the arrangement, the
Company did not register the common stock purchased by SIBV with the Securities and Exchange
Commission and has no contractual obligation to register the shares. Therefore, the common stock is subject
to restrictions on transfer, including but not limited to a minimum holding period of at least six months. In
September 2019, the Company entered into a License Agreement with SAMR, a wholly owned subsidiary of
SIBV. See Note 6 for details of the License Agreement.
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Given the equity investment by SIBV was negotiated with the option agreement, which then resulted in
the execution of the License Agreement, all arrangements were evaluated as a single agreement and
amounts were allocated to the elements of the arrangement based on their fair value. The Company
measured the fair value of the restricted common stock issued to SIBV based upon a Black-Scholes
valuation to measure the lack of marketability discount. The Black-Scholes valuation used the following
assumptions: expected term of one year, expected volatility of 84%, risk-free interest rate of 1.94%, and
dividend yield of 0%. The Company allocated the net proceeds received from the sale of the restricted
common stock and upfront payment from the License Agreement of approximately $22.5 million (see Note
6 for details of allocation). The Company recorded approximately $5.0 million, which represented the fair
value of the restricted common stock issued of $5.4 million, net of $441,000 of issuance costs, to
stockholders’ equity within the Company’s consolidated balance sheet.
ATM Agreement
In September 2019, the Company entered into a Common Stock Sales Agreement (the “ATM
Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) under which the Company may offer and sell, from
time to time, at its sole discretion, shares of common stock having an aggregate offering price of up to
$25.0 million through Cantor as our sales agent. The Company’s registration statement on Form S-3
contemplated under the ATM Agreement was declared effective by the SEC on September 5, 2019. The
registration statement on Form S-3 includes a base prospectus covering the offering of up to $100 million in
aggregate shares of securities as defined within the prospectus and a prospectus supplement of up to a
maximum aggregate offering of $25 million in common stock in accordance with the ATM Agreement.
Cantor may sell common stock under the ATM Agreement by any method permitted by law deemed to
be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended (the
“Securities Act”), including without limitation sales made by means of ordinary brokers’ transactions on the
Nasdaq Global Market or otherwise at market prices prevailing at the time of sale, in block transactions, or
as otherwise directed by the Company. Cantor will use commercially reasonable efforts to sell the common
stock from time to time, based upon instructions from the Company (including any price, time or size limits
or other customary parameters or conditions the Company may impose). The Company will pay Cantor a
commission of up to three percent (3.0%) of the gross sales proceeds of any common stock sold through
Cantor under the ATM Agreement, and also has provided Cantor with customary indemnification rights. The
Company is not obligated to make any sales of common stock under the ATM Agreement. The offering of
shares of common stock pursuant to the ATM Agreement will terminate upon the earlier of (i) the sale of all
common stock subject to the ATM Agreement, or (ii) termination of the ATM Agreement in accordance with
its terms.
As a result of the limitations of General Instruction I.B.6 of Form S-3, and in accordance with the terms
of the ATM Agreement, the Company filed a prospectus supplement on May 14, 2020 that registered the
offer and sale of shares of its common stock having an aggregate offering price of up to $22.0 million from
time to time through Cantor. As of December 31, 2020, the Company had sold 7,883 shares of common
stock under the ATM Agreement for gross proceeds of approximately $64,000, and after deducting
commissions, net proceeds were approximately $62,000. As of December 31, 2019, the Company had not
sold any shares of common stock under the ATM Agreement.
Securities Purchase Agreement
In October 2020, the Company entered into the October 2020 Purchase Agreement with certain
institutional investors (the “Purchasers”), pursuant to which the Company agreed to offer, issue and sell to
the Purchasers, (i) in a registered direct offering, an aggregate of 1,134,470 shares of common stock, par
value $0.0001 per share and (ii) in a concurrent private placement, Series A warrants and Series B warrants
to purchase up to an aggregate 567,234 shares of Common Stock, for aggregate gross proceeds to the
Company of approximately $8.5 million, and after deducting commissions and offering costs, net proceeds
were approximately $7.8 million (see Note 8). In October 2020, the Company paid Arcadia Securities, LLC
a fee equal to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering to
certain of the investors. In addition, in October 2020, the Company paid Cantor Fitzgerald & Co. a fee equal
to 3.5% of the aggregate purchase price of the shares of its common stock sold in the offering.
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10. Stock-Based Compensation
Equity Incentive Plan
In May 2014, the Company adopted and the shareholders approved the 2014 Equity Incentive Plan (the
2014 Plan). Under the 2014 Plan, 233,722 shares of the Company’s common stock were initially reserved
for the issuance of stock options to employees, directors, and consultants, under terms and provisions
established by the Board of Directors. Under the terms of the 2014 Plan, options may be granted at an
exercise price not less than fair market value. For employees holding more than 10% of the voting rights of
all classes of stock, the exercise prices for incentive stock options may not be less than 110% of fair market
value, as determined by the Board of Directors. The terms of options granted under the 2014 Plan may not
exceed ten years.
In addition, the 2014 Plan contains an “evergreen” provision allowing for an annual increase in the
number of shares of our common stock available for issuance under the 2014 Plan on the first day of each
fiscal year beginning in fiscal year 2015. The annual increase in the number of shares shall be equal to the
greater of:
•
77,908 shares of our common stock; or
•
such number of shares as is equal to the number of shares sufficient to cause the option pool to equal
20% of the issued and outstanding common stock of the Company, provided, however, that if on any
calculation date the number of shares equal to 20% of the total issued and outstanding shares of
common stock is less than the number of shares of common stock available for issuance under the
2014 Plan, no change will be made to the aggregate number of shares of common stock issuable
under the 2014 Plan for that year (such that the aggregate number of shares of common stock
available for issuance under the 2014 Plan will never decrease).
In June 2020, the adoption of an amendment to the 2014 Plan to eliminate the evergreen provision and
set the number of shares of common stock reserved for issuance thereunder to 2,183,692 shares was
approved by the Company’s stockholders. The additional shares reserved in the below stock option activity
table includes 162,736 shares reserved pursuant to the evergreen provision and 400,000 shares reserved
pursuant to the amendment to the 2014 Plan.
Stock Options
The number of shares, terms, and vesting periods are determined by the Company’s Board of Directors
or a committee thereof on an option by option basis. Options generally vest ratably over service periods of
up to four years and expire ten years from the date of grant.
Stock option activity for the year ended December 31, 2020 is represented in the following table:
Balances at December 31, 2019
Additional shares reserved
Options granted
Options exercised
Options cancelled
Balances at December 31, 2020
F-27
Options Outstanding
Shares
Available
for Grant
196,982
562,736
(207,155
—
31,598
)
Number of
Shares
1,380,312
—
207,155
(4,913
(31,598
)
)
584,161
1,550,956
Weighted-
Average
Exercise Price
$10.06
—
5.89
2.89
14.65
$ 9.43
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Additional information related to the status of options as of December 31, 2020 is summarized as
follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term (Years)
Number of
Options
Options outstanding
Options vested and exercisable
1,550,956
959,576
$ 9.43
$10.08
7.38
6.68
Aggregate
Intrinsic Value
(in thousands)
$649,681
$563,191
The Company estimated the fair value of options using the BSM option valuation model. The fair value
of options is being amortized on a straight-line basis over the requisite service period of the awards. The fair
value of the options granted during the years ended December 31, 2020 and 2019 were estimated using the
following assumptions:
Expected term (in years)
Expected volatility
Risk-free interest-rate
Dividend yield
Year Ended
December 31,
2020
2019
6.00
84% – 100%
6.25
79% – 95%
0.38% – 1.73% 1.59% – 2.67%
0%
0%
During the years ended December 31, 2020 and 2019, the Company granted options to purchase
207,155 and 620,457 shares with a weighted-average grant date fair value of $4.72 and $5.91 per share,
respectively.
There were 4,913 and 11,884 options exercised during the years ended December 31, 2020 and 2019,
respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2020
and 2019 was approximately $17,000 and $51,000, respectively.
Stock-Based Compensation
The following table presents stock-based compensation expense related to stock options (in thousands):
Research and development
General and administrative
Total
Twelve Months Ended
December 31,
2020
2019
$ 590
1,538
$ 662
1,266
$2,128
$1,928
As of December 31, 2020, total unrecognized stock-based compensation expenses related to unvested
stock options was approximately $3.5 million, which is expected to be recognized on a straight-line basis
over a weighted-average period of approximately 2.08 years.
11. Income Taxes
The Company has accumulated net losses since inception and has not recorded an income tax provision
or benefit during the years ended December 31, 2020 and December 31, 2019.
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A reconciliation between the statutory U.S. federal rate and the Company’s effective tax rate is as
follows (in thousands):
Federal income tax at statutory rate
State income tax, net of federal benefit
Foreign tax differential
State rate change
Permanent differences
Tax credits
Fin 48 reserve
Other
Valuation allowance change
Years Ended December 31,
2020
2019
)
$(4,690
)
(36
1,906
287
1,088
)
(649
162
(92
2,024
)
)
)
$(6,233
(1,293
2,346
—
394
)
(976
244
840
4,678
$ — $ —
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets (in thousands) are as follows:
Net operating loss carryforwards
Accruals and reserves
Stock based compensation
Research and development credits
Deferred revenue
Depreciation and amortization
Total
Valuation allowance
Net deferred tax assets
Years Ended December 31,
2020
2019
$ 14,793
39
1,153
2,021
1,338
(9
)
19,335
)
(19,335
$ 14,519
341
951
1,534
—
(34
)
17,311
(17,311
)
$
— $
—
A reconciliation of the beginning and ending amount of the Company’s liability for uncertain tax
positions (in thousands) is as follows:
Balance at the beginning of the year
Increase based on current year tax positions
Decrease for prior year tax positions
Balance at the end of the year
Years Ended December 31,
2020
$534
171
—
$705
2019
$ 486
254
(206
)
$ 534
Due to the existence of the valuation allowance, future changes in the Company’s liability for uncertain
tax positions will not impact the Company’s effective tax rate. The Company does not anticipate that there
will be a substantial change in its liability for uncertain tax positions in the next twelve months.
Tax Legislation subjects a U.S. shareholder to tax on Global Intangible Low-Taxed Income (“GILTI”)
earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global
Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either
recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to
provide
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for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company
has elected to account for GILTI in the year the tax is incurred. The Company has a GILTI inclusion of
$4.2 million in 2020.
Based on the available objective evidence, management believes it is more-likely-than-not that the
deferred tax assets were not fully realizable as of December 31, 2020 and 2019. Accordingly, the Company
has established a full valuation allowance against its deferred tax assets. The net change in the valuation
allowance for the years ended December 31, 2020 and 2019 was approximately $2.0 million and
$4.7 million, respectively.
At December 31, 2020, the Company had federal net operating loss carryforwards of approximately
$19.5 million that begin to expire in 2034. The Company also has federal net operating losses of
approximately $33.1 million that arose after the 2017 tax year and will carryforward indefinitely. The
Company has state net operating loss carryforwards of approximately $53.6 million that will begin to expire
in 2034. At December 31, 2020, the Company has research credit carryforwards of approximately
$2.2 million and approximately $607,000 for federal and California state income tax purposes, respectively.
The federal credits begin to expire in 2034 and the state credits can be carried forward indefinitely.
Under the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net
operating loss and research tax credit carryforwards to offset taxable income may be limited based on
cumulative changes in ownership. The Company has not completed an analysis to determine whether any
such limitations have been triggered as of December 31, 2020. The Company has no income tax affect due
to the recognition of a full valuation allowance on the expected tax benefits of future loss carry forwards
based on uncertainty surrounding realization of such assets. Any annual limitation may result in the
expiration of net operating losses and credits before utilization. The Company may continue to experience
ownership changes in the future as a result of the Company’s future expected equity financings and
subsequent shifts in its stock ownership, some of which may be outside of its control.
The Company is subject to taxation in the United States, California, the Netherlands and China. The
Company remains subject to possible examination by tax authorities in these jurisdictions for tax years
dating back to 2014. The Company became subject to taxation in Maryland and North Carolina starting tax
year 2020. The Company does not have any pending tax examinations.
12. Related Parties
Joint Venture
On February 11, 2018, the Company entered into a Joint Venture (“JV”) Agreement with Hepalink
which is a related party and principal shareholder in the Company, pursuant to which the Company formed a
JV Entity for developing and commercializing products for infectious diseases in the greater China
territories. It was agreed by the parties that the Company shall be reimbursed for certain legal and contract
manufacturing expenses related to the clinical drug supply for a Phase 3 clinical study of AR-301 and the
clinical drug supply for a clinical study of AR-105. For the years ended December 31, 2020 and 2019, the
Company recorded approximately $188,000 and $1.5 million, respectively, as a reduction to operating
expenses in the consolidated statements of operations for amounts reimbursed to the Company by the JV
Entity under this arrangement. As of December 31, 2020 and 2019, the Company recorded approximately
$3,000 and $152,000, respectively, in other receivables on the consolidated balance sheets for amounts
owed to the Company by the JV Entity under this arrangement and the Company expects the amounts to be
collectable and as a result, no reserve for uncollectability was established.
Serum International B.V.
In July 2019, the Company issued 801,820 shares of its restricted common stock in a private placement
to Serum International B.V. (“SIBV”), an affiliate of Serum Institute of India Private Limited, for total gross
proceeds of $10 million (see Note 9). As a result of this transaction, SIBV and its affiliates, are considered
related parties to the Company. In September 2019, the Company and Serum AMR Products (“SAMR”), a
party under common ownership of SIBV, entered into a License, Development and Commercialization
Agreement (the “ License Agreement”)(see Note 6).
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The Company determined that no performance obligations were satisfied as of December 31, 2020 and
2019. Therefore, no revenue related to the License Agreement was recognized during the years ended
December 31, 2020 and 2019. The Company has recorded contract liabilities resulting from the License
Agreement of approximately $18.7 million and $14.6 million to deferred revenue, current, and
approximately $854,000 and $5.0 million to deferred revenue, noncurrent, on its consolidated balance sheets
at December 31, 2020 and 2019, respectively. The Company capitalized a contract asset resulting from the
License Agreement of approximately $2.1 million related to the incremental costs of obtaining the License
Agreement on its consolidated balance sheets, of which approximately $2.0 million and $1.5 million is
classified as current, and approximately $90,000 and $526,000 is classified as noncurrent, as of
December 31, 2020 and 2019, respectively.
13. Commitments and Contingencies
Facility Lease
The Company leased office and lab space in San Jose, California under an operating lease arrangement
which terminated in December 2020.
In October 2020, the Company entered into a new lease agreement (the “Lease Agreement”) with
Boccardo Corporation (the “Landlord”) pursuant to which the Company leased approximately 15,129 square
feet of office and laboratory space in Los Gatos, California. In December 2020, the Company moved into
the new facility which serves as the Company’s corporate headquarters. The lease represents additional
space for the Company’s headquarters as compared to its prior lease. The lease commenced in
December 2020 and has an approximate five year term with a three year renewal option. Rental payments by
the Company commence on February 1, 2021. In connection with the Lease Agreement, the Company was
required to deliver a security deposit in the form of a letter of credit of $500,000 to the Landlord.
The future minimum lease payments for the new facility as of December 31, 2020 are as follows (in
thousands):
Year ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
$ 542
610
628
646
666
57
$3,149
Rent expense was approximately $529,000 and $341,000 for the years ended December 31, 2020 and
2019, respectively.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a
variety of representations and warranties and provide for general indemnifications. The Company’s
exposure under these agreements is unknown because it involves claims that may be made against the
Company in the future but have not yet been made. To date, the Company has not paid any claims or been
required to defend any action related to its indemnification obligations. However, the Company may incur
charges in the future as a result of these indemnification obligations.
License Agreements
The Company has entered into various collaboration and licensing agreements that provide it with
access to certain technology and patent rights. Under the terms of the agreements, the Company may be
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required to make milestone payments upon achievement of certain development and regulatory activities.
See further disclosure related to these agreements in Note 4.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course
of its business activities. The Company accrues a liability for such matters when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. As of December 31, 2020
and 2019, no accruals have been made related to commitments and contingencies.
From time to time, the Company may be involved in various legal proceedings, claims and litigation
arising in the ordinary course of business. See below Legal Proceedings for legal complaints filed during the
year ended December 31, 2020. As of December 31, 2019, there were no pending legal proceedings.
Legal Proceedings
A complaint was filed in February 2020 in the New York State Supreme Court against the Company by
an investor who invested in the Company’s preferred stock in July 2017 prior to the Company’s IPO in
August 2018. The complaint alleges, among other things, that the Company breached its contract and
fiduciary duty, by not issuing additional securities to the investor as a result of the Company’s IPO. The
plaintiff is asking for approximately $277,000 in compensatory damages. The parties are currently in fact
discovery. The Company believes that the claims in this complaint are without merit and intends to defend
vigorously against them.
Grant Income
The Company receives various grants that are subject to audit by the grantors or their representatives.
Such audits could result in requests for reimbursement for expenditures disallowed under the terms of the
grant; however, management believes that these disallowances, if any, would be immaterial.
Cystic Fibrosis Foundation Agreement
In December 2016, the Company received an award for up to $2.9 million from the CFF to advance
research on potential drugs utilizing inhaled gallium citrate anti-infective. In November 2018, the CFF
increased the award to $7.5 million. Under the award agreement, the CFF will make payments to the
Company as certain milestones are met. The award agreement also contains a provision whereby if the
Company spends less on developing a potential drug utilizing inhaled gallium citrate anti-infective than the
Company actually receives under this award agreement, the Company will be required to return the excess
portion of the award to the CFF. At the end of any reporting period, if the Company determines that the
cumulative amount spent on this program is less than the cumulative cash received from the CFF, the
Company will record the excess amount received as a liability. No liability related to this excess amount
was recorded by the Company as of December 31, 2020 and 2019.
In the event that development efforts are successful and the Company commercializes a drug from
these related development efforts, the Company will be subject to paying to CFF a one-time amount over
time equal to nine times the actual net award received from CFF. Such amount shall be paid in not more
than five annual installments, as follows: within ninety days of the end of the calendar year in which the
first commercial sale occurs, and within ninety days of the end of each subsequent calendar year until the
net amount received from CFF is repaid. The Company shall pay 15% of net sales for that calendar year up
to the amount of the net award received from CFF (except that in the fifth installment, if any, the Company
shall pay the remaining unpaid portion of the net award received from CFF).
In the event that the Company licenses rights to the product in the field to a third-party, sells the
product, or consummates a change of control transaction prior to the first commercial sale, the Company
shall pay to CFF an amount equal to 15% of the amounts received by the Company and its shareholders in
connection with such disposition (whether paid upfront or in accordance with subsequent milestones and
whether paid in cash or property) up to nine times the actual net award received from CFF. The payment
shall be made within sixty days after the closing of such a transaction.
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In the event that the development efforts are delayed, which result from events within the Company’s
control, for more than one hundred eighty (180) consecutive days at any time before the first
commercialization of the drug from the related development efforts, the CFF may provide an interruption
notice to the Company, or in lieu of the interruption license, pay to the CFF an amount greater than two
times the award received plus interest up to the time of such election. The Company then has thirty (30)
days to respond to such notice. If the Company does not respond within thirty (30) days, an interruption
license shall be effective. The interruption license to the CFF is an exclusive, worldwide license under the
development program technology to manufacture, have manufactured, license, use, sell, offer to sell, and
support the product in the field and includes financial conditions for both parties.
None of these events have occurred as of December 31, 2020.
14. Subsequent Events
Licensing Agreement
The Company entered into a non-exclusive manufacturing licensing agreement with the Broad Institute
of MIT and Harvard (the “Broad Institute”) in 2021 to make and manufacture CRISPR Modified Cell Lines,
CRISPR Modified Animals and CRISPR Modified Plants. These license rights permit the non-exclusive use
of the CRISPR Technology for the creation of and improvement of yield from protein and mAb production
cell lines, which is one of the core components of the λPEX mAb discovery and manufacturing
production technology.
TM
Pursuant to this agreement, the Company is obligated to pay to the Broad Institute an issue fee of
$25,000, an annual license maintenance fee of $50,000 in 2022, and fees of $100,000 in 2023 and each year
thereafter. Additionally, the Company is obligated to pay a royalty of a single digit percentage of all service
income received from a customer for the manufacture, sale or transfer of CRISPR modified cell line,
CRISPR Modified Animals and CRISPR Modified Plants or end products, as well as a small royalty (a
fraction of a percent) on end product net sales from use of any commercialized product that contains any
small or large molecule made through the use of a CRISPR modified cell line, CRISPR Modified Animals
and CRISPR Modified Plants. The term of the license agreement continues until all patents and filed patent
applications, included within the licensed Broad Institute patents, have expired or been abandoned.
Licensing and Product Discovery Agreement
The Company entered into an out-licensing and product discovery agreement with Kermode
Biotechnologies, Inc. (“Kermode”). Kermode works on vaccines and mAbs for zoonotic viruses, which are
animal viruses that have the ability to infect humans. Under the terms of this agreement, the activities of
each party and the products discovered using the Company’s λPEX platform are structured as follow:
Kermode will fund for one year the discovery of product candidates for African Swine Fever Virus (ASFV)
based on its novel treatment strategy, with an option for swine influenza virus (SIV) and retains exclusive
rights to mAbs and vaccines for veterinary uses discovered in the collaboration; and the Company to grant a
non-exclusive license of its λPEX technology and apply the λPEX technology platform to discover
vaccines and mAbs to ASFV and the Company exclusively retains rights to any products for human uses
discovered in the collaboration. Pursuant to the agreement, the Company received $500,000 in March 2021
from Kermode upon agreement by both parties of a statement of work.
TM
TM
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Securities Purchase Agreement
In March 2021, the Company entered into a Securities Purchase Agreement with certain institutional
and individual investors, pursuant to which the Company agreed to offer, issue and sell to these investors, in
a registered direct offering, an aggregate of 1,037,405 shares of the Company’s Common Stock for
aggregate gross proceeds to the Company of approximately $7.0 million, before deducting estimated
offering expenses payable by the Company.
In addition, in March 2021 the Company issued 124,789 shares of unregistered Common Stock to the
Purchasers in the Company’s October 2020 offering pursuant to the anti-dilutive provisions of the
October 2020 Purchase Agreement (see Note 8 and 9).
F-33
List of Subsidiaries of Aridis Pharmaceuticals, Inc.:
Name
Aridis Biopharmaceuticals LLC
Aridis Pharmaceuticals C.V.
Exhibit 21.1
Jurisdiction of Incorporation/Formation
Delaware
Netherlands
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements:
Exhibit 23.1
1.
No. 333-240131 on Form S-8
2.
No. 333-237611 on Form S-8
3.
No. 333-233603 on Form S-8
4.
No. 333-233601 on Form S-3
of our report dated March 30, 2021, relating to the consolidated financial statements of Aridis
Pharmaceuticals, Inc. (which report includes an explanatory paragraph relating to the to the uncertainty of
the Company’s ability to continue as a going concern), included in this Annual Report on Form 10-K for the
year ended December 31, 2020.
/s/ Mayer Hoffman McCann P.C.
San Diego, California
March 30, 2021
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Vu Truong, Ph.D., certify that:
1. I have reviewed this Annual Report on Form 10-K of Aridis Pharmaceuticals, 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 the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2021
By:
/s/ VU TRUONG
Vu Truong, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael A. Nazak, certify that:
1. I have reviewed this Annual Report on Form 10-K of Aridis Pharmaceuticals, 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 the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the consolidated financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 30, 2021
By:
/s/ MICHAEL A.NAZAK
Michael A. Nazak
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Aridis Pharmaceuticals, Inc. (the “Company”)
for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned, Vu Truong, Chief Executive Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to the best of his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 30, 2021
By:
/s/ VU TRUONG
Vu Truong, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Aridis Pharmaceuticals, Inc. (the “Company”)
for the period ended December 31, 2020 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned, Michael A. Nazak, Chief Financial Officer of the Company, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to the best of his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 30, 2021
By:
/s/ MICHAEL A.NAZAK
Michael A. Nazak
Chief Financial Officer
(Principal Financial Officer)