Assembly Biosciences, Inc. Annual Report 2016

FY2016 Annual Report · Assembly Biosciences, Inc.
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ANNUAL 
REPORT 
2016

DEAR FELLOW  
SHAREHOLDERS

BUILDING OUT OUR WORLD-CLASS TEAM

Of particular importance in 2016 was the expansion of our 

senior management team, scientific team and capabilities.  

During 2016, we recruited and hired approximately 30 new full 

time staff, primarily focused in R&D, which brings our overall 

headcount to approximately 70. We are proud of the high 

quality of these hires, from our entry-level researchers to the 

2016 WAS AN IMPORTANT YEAR FOR ASSEMBLY BIOSCIENCES. 

experienced and accomplished individuals who are leading our 

WE ADVANCED BOTH OUR HBV-CURE AND MICROBIOME 

PROGRAMS SIGNIFICANTLY, POSITIONED THE COMPANY FOR 

LONG-TERM GROWTH, AND CONTINUED OUR COMMITMENT 

TO DEVELOP INNOVATIVE NEW THERAPIES FOR PATIENTS IN 

NEED. 

First, we largely completed the process of building what we 

believe to be one of the strongest teams in the industry for our 

two core programs – curative therapies for the treatment of 

programs. These include our Chief Scientific Officer for HBV, Dr. 

Richard J. Colonno, an expert in both antiviral drug discovery 

and development including the discovery and ultimate approval 

of Baraclude™ (entecevir) for HBV and approximately six other 

approved antiviral drugs.  Rich heads up our deep bench of 

scientists advancing both our clinical and preclinical pipeline of 

HBV candidates.  We were also fortunate to bring on Dr. Miguel 

S. Barbosa, who came on board as Chief Scientific Officer of 

Assembly’s Microbiome program. Miguel, who has been a part 

of the discovery and approval of multiple biotechnology drugs 

hepatitis B virus (HBV) infection and our innovative Microbiome 

and was instrumental in establishing a pioneering microbiome 

program. 

Second, we became a clinical-stage company, with initiation and 

successful completion of a Phase 1a clinical trial for our lead HBV 

candidate, ABI-H0731, and we are advancing our Microbiome 

program toward its first clinical initiation as well. 

initiative at Johnson & Johnson, is now leading what we believe to 

be one of the strongest microbiome R&D teams in the field. 

SUCCESSFULLY ADVANCING OUR HBV PROGRAM 
INTO CLINICAL TRIALS

OUR HBV PROGRAM AIMS TO INCREASE THE VERY LOW CURE 

RATES CURRENTLY POSSIBLE FOR THIS LIVER DAMAGING 

Third, the clinical and commercial potential of our Microbiome 

DISEASE THAT AFFLICTS AN ESTIMATED 240 MILLION PEOPLE 

program received a major vote of confidence when we announced 

WORLDWIDE.

our global collaboration with Allergan plc. (NYSE: AGN).  The 

collaboration is designed for us to co-develop and potentially 

co-promote biotherapeutics for certain gastrointestinal (GI) 

diseases, and the structure of the collaboration is financially and 

strategically beneficial for Assembly in a way that provides both 

near term and long term value opportunities. 

During the year, we further advanced and refined our operations, 

consolidated our headquarter operations just outside Indianapolis 

and increased our R&D presence in San Francisco, a rich source 

of biotechnology and drug development talent. We believe this 

configuration will help us to maintain focus while growing and 

managing our R&D programs efficiently and effectively.

Our 2016 achievements provide a solid foundation for our 

expected progress this year. We are particularly focused on 

advancing   our HBV studies with ABI-H731 through a Phase 

1b/2a trial and a Phase 1b microbiome trial in patients with 

recurrent Clostridium difficile infection (rCDI) while continuing to 

Our oral, direct-acting antivirals known as Core protein Allosteric 

Modifiers (CpAMs), target the viral Core protein and aim to reduce 

the amount of viral cccDNA, which is difficult to eliminate and 

is believed to be responsible for the maintenance of ongoing 

infection in chronic HBV patients. 

We advanced our CpAM program on a number of fronts in 2016 

to create a rich pipeline of assets.  We increased our scientific 

understanding of how these molecules inhibit cccDNA generation, 

while identifying and profiling promising drug candidates with 

the potential to rapidly advance into clinical development. Since 

CpAMs bind and interfere with Core protein activities at multiple 

stages in the viral lifecycle, they may have the potential to work 

in combination with other therapeutic approaches, including 

enhanced antiviral activity when combined with current standard 

of care therapy. We were pleased that our Phase 1a trial of our 

first clinical candidate ABI-H0731 was completed on time and 

produced positive safety and pharmacokinetic results - setting the 

stage for advancement into a Phase 1b/2a study in HBV patients, 

the initial phase of which we expect to complete later this 

year. We also anticipate nominating and advancing a second-

advance each portfolio of future clinical candidates in our HBV 

generation CpAM candidate in 2017.

and Microbiome programs. 

ASSEMBLY’S MICROBIOME PROGRAM:  
A HIGH PROFILE “DEBUT” 

Harnessing the human microbiome to develop new medicines is 

one of the most exciting frontiers of modern medicine. Assembly’s 

Microbiome program is based on a fully integrated platform 

with several distinctive features. First, we employ a proprietary 

approach to bacterial strain selection intended to treat disease 

pathology.  We then apply biopharmaceutical principles to 

achieve cGMP manufacture of the pure strains used in our 

therapeutics. We believe our proprietary GEMICEL® targeted 

delivery technology will enable Assembly to deliver live biologic 

and conventional therapies to targeted regions of the colon where 

they are most likely to be effective, in an oral capsule form. We 

also anticipate that clinical and regulatory development will be 

facilitated by our focus on using commensal organisms derived 

from healthy human microbiome.  

OUR STRATEGY TAKES A TWO-PRONGED APPROACH TO 

EXPLORE THE BROAD THERAPEUTIC POTENTIAL OF THE 

MICROBIOME – 1) WE INTEND TO DEVELOP SOME INDICATIONS 

ON OUR OWN AND 2) WE WILL AIM TO PARTNER OTHER 

INDICATIONS. 

In January 2017, we announced a major collaboration with 

Allergan – one of the leading GI companies in the world. 

The agreement gives Allergan rights to 4 of our microbiome 

candidates for GI indications, targeting ulcerative colitis (UC), 

Crohn’s Disease (CD), and Irritable bowel syndromes associated 

with diarrhea, constipation, and mixed (IBS-d, c, & m). Assembly 

retains rights to  other therapeutic applications. We received $50 

million upfront from Allergan and are eligible for development and 

commercial milestone payments with a potential value of more 

than $2.8 billion and royalties.  The collaboration also provides 

for joint development and a cost share through proof of concept 

(POC) of 1/3 us and 2/3 Allergan, and then Allergan takes 100% 

of the development costs post POC.  Another key strategic 

component was to keep limited co-promotion rights in the US and 

China.  

We view this agreement as a key validation of the strength and 

potential of our Microbiome program and anticipate we will 

establish other Microbiome partnerships going forward. In the 

second half of 2017, we plan to advance our own Microbiome 

program with the initiation of a Phase 1b trial of ABI-M101 for the 

treatment of rCDI, a common and debilitating hospital acquired 

infection that has been shown to respond to microbiome-based 

treatment. In addition, we will continue to assess potential new 

indications for Assembly’s microbiome pipeline and aim to initiate 

preclinical efforts in additional indications.

PATIENTS:  WHY WE DO WHAT WE DO 

Underpinning everything that we do is our commitment to the 

patients we hope to serve with innovative therapies for serious 

diseases that are poorly treated today.  I am very proud of the 

great strides towards achieving this goal that the Assembly team 

made in the past year, and I am honored to lead this talented 

group of people who continually impress with their intelligence, 

perseverance, creativity and dedication to getting the job done. 

We appreciate the continued support of our shareholders who 

make it all possible.

We look forward to reporting on our progress over the course of 

this year, and welcome your questions and comments, which can 

be sent via the Investor Contact section on the Investors Relations 

page at the Assembly website. 

In closing, I would like to sincerely thank you for your trust and 

support over this past year, and I also want to acknowledge the 

invaluable input and strategic guidance of our Board of Directors.

Sincerely,

Derek A. Small

Derek A. Small
President and CEO
Assembly Biosciences, Inc.

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

(cid:2)

□

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the ﬁscal year ended December 31, 2016
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: 001-35005

ASSEMBLY BIOSCIENCES, INC.

(Exact name of registrant speciﬁed in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

2834
(Primary Standard Industrial
Classiﬁcation Code Number)
11711 N. Meridian Street, Suite 310
Carmel, Indiana 46032
(Address of Principal Executive Offices)

20-8729264
(I.R.S. Employer
Identiﬁcation No.)

Registrant’s telephone number, including area code: (317) 210-9311

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of Each Class

Name of Exchange on which Registered

Common Stock, $0.001 Par Value

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 (cid:4) No (cid:2)
Indicate by check mark if the registrant is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Exchange

Act. Yes (cid:4) No (cid:2)

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 (cid:2) No (cid:4)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such ﬁles). Yes (cid:2) No (cid:4)

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. (cid:2)

Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, or a smaller reporting company. See deﬁnitions

of ‘‘large accelerated ﬁler,’’ ‘‘accelerated ﬁler’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated ﬁler □
Non-accelerated ﬁler □
Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Exchange Act). Yes (cid:4) No (cid:2)
The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2016, was approximately

Accelerated ﬁler (cid:2)
Smaller reporting company □

$87.8 million. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq
Capital Market on June 30, 2016. For purposes of making this calculation only, the registrant has deﬁned affiliates as including only
(i) directors, (ii) executive officers, and (iii) certain shareholders that hold greater than 10% of the voting stock of the registrant, in each
case, as of June 30, 2016. Shares of common stock held by other persons, including certain other holders of more than 10% of the
registrant’s outstanding common stock, have not been excluded from the above calculation in that such persons are not deemed to be
affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 24, 2017, there were 17,265,920 shares of the registrant’s common stock, $0.001 par value, outstanding.

Part III of this Annual Report on Form 10-K incorporates information by reference to portions of the deﬁnitive proxy statement for the

Company’s Annual Meeting of Stockholders to be held in 2017, to be ﬁled within 120 days of the registrant’s ﬁscal year ended
December 31, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

ASSEMBLY BIOSCIENCES, INC.

TABLE OF CONTENTS

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1.

Business

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1A.

Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 2.

Item 3.

Item 4.

Properties

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 5.

Item 6.

Item 7.

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
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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.

Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 12.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15.

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 16.

Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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65

Financial Statements

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-1

i

References to Assembly Biosciences, Inc.

Throughout this Annual Report on Form 10-K, the ‘‘Company,’’ ‘‘Assembly,’’ ‘‘we,’’ ‘‘us,’’ and ‘‘our,’’

except where the context requires otherwise, refer to Assembly Biosciences, Inc. and its consolidated
subsidiaries, and ‘‘our board of directors’’ refers to the board of directors of Assembly Biosciences, Inc.

Forward Looking Information

This Annual Report on Form 10-K contains ‘‘forward-looking statements’’ within the meaning of
Section 27A of the Securities Act of 1933, as amended (the ‘‘Securities Act’’) and Section 21E of the
Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Such forward-looking statements involve
substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this
Annual Report on Form 10-K, including statements regarding our strategy, future operations, future ﬁnancial
position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking
statements. The words ‘‘anticipate,’’ ‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘plan,’’ ‘‘predict,’’
‘‘project,’’ ‘‘target,’’ ‘‘potential,’’ ‘‘will,’’ ‘‘would,’’ ‘‘could,’’ ‘‘should,’’ ‘‘continue’’ and similar expressions are
intended to identify forward-looking statements, although not all forward-looking statements contain these
identifying words.

The forward-looking statements in this Annual Report on Form 10-K include, among other things,

statements about:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

the initiation, timing, progress and results of pre-clinical studies and clinical trials, and our research
and development programs;

the clinical and therapeutic potential of our product candidates;

our unproven approach to therapeutic intervention;

our plans to develop and commercialize our product candidates;

the potential beneﬁts of our existing collaborations and our ability to establish and maintain
collaborations, including with Allergan Pharmaceuticals International Limited;

our ability to obtain additional funding;

the timing or likelihood of regulatory ﬁlings and approvals for our product candidates;

the implementation of our business model, strategic plans for our business, product candidates and
technology;

our commercialization, marketing and manufacturing capabilities and strategy;

the rate and degree of market acceptance and clinical utility of our products;

our ability to retain and recruit key personnel;

our ability to manage growth;

our competitive position;

our intellectual property position;

developments and projections relating to our competitors and our industry; and

our estimates regarding expenses, future revenue, capital requirements and needs for additional
ﬁnancing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking

statements, and you should not place undue reliance on our forward-looking statements. Actual results or
events could differ materially from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important factors in the cautionary statements included in this Annual
Report on Form 10-K, particularly in the ‘‘Risk Factors’’ section, that could cause actual results or events to
differ materially from the forward-looking statements that we make.

ii

You should read this Annual Report on Form 10-K and the documents that we have ﬁled as exhibits to

this Annual Report on Form 10-K completely and with the understanding that our actual future results may be
materially different from what we expect. We do not assume any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law.

iii

PART I

Item 1. Business

Overview

We are a clinical stage biotechnology company advancing two innovative platform programs: a new class

of oral therapeutics for the treatment of hepatitis B virus (HBV) infection and novel class of oral synthetic
live biotherapeutics, which are designed to restore health to a dysbiotic microbiome. The company’s HBV-cure
program is aimed at increasing the current low cure rate for patients with HBV and is pursuing multiple drug
candidates that inhibit multiple steps of the HBV lifecycle. Assembly has discovered several novel core
protein Allosteric Modulators (CpAMs), which are small molecules that directly target and allosterically
modulate the HBV core (HBc) protein. The lead product candidate from this program, ABI-H0731 has
completed a Phase 1a human clinical trial, with the Phase 1b/2a portion of the clinical trial expected to
commence in the second quarter of 2017. The company’s Microbiome program consists of a fully integrated
platform that includes a disease targeted strain identiﬁcation and selection process, methods for strain isolation
and growth under current Good Manufacturing Practice, or cGMP, conditions, and a patent pending delivery
system, that we call GEMICEL(cid:5), which allows for targeted oral delivery of live biologic and conventional
therapies to the lower gastrointestinal, or GI tract. The lead product candidate from this platform, ABI-M101,
is in development for the treatment of clostridium diffıcile infections (CDI). Using its microbiome platform,
the company is developing additional product candidates.

Business Strategy

Assembly is currently focused on enhancing the health and well-being of patients with hard-to-treat

infectious diseases, such as chronic HBV and illnesses associated with a dysbiotic microbiome. This
commitment drives our efforts to forge a new and differentiated path to treating these conditions, inspired by
the needs of millions of affected patients. We are pursuing a portfolio of novel CpAMs with potential to
substantially increase the cure rates of treated HBV patients and a novel class of oral synthetic live
biotherapeutics designed to correct or repair a dysbiotic microbiome. Both of these conditions include
substantial numbers of patients for whom current therapies may successfully suppress disease, but offer only
low rates of cure. We intend to progress our HBV-cure and Microbiome programs using a variety of strategic
arrangements, which may include collaborations, licenses, partnerships and other types of business
arrangements. In January 2017, we entered into a Research, Development, Collaboration and License
Agreement (the ‘‘Collaboration Agreement’’) with Allergan Pharmaceuticals International Limited
(‘‘Allergan’’) to develop and commercialize select microbiome gastrointestinal disease therapies. Pursuant to
the terms of the Collaboration Agreement, in connection with the closing of the transaction on February 10,
2017, we received from Allergan an upfront payment of $50 million. Additionally, we are eligible to receive
up to approximately $630 million in development milestone payments and up to approximately $2.15 billion
in commercial milestone payments contingent upon the successful development and commercialization of
licensed compounds for up to six different indications. We are also eligible to receive tiered royalties at rates
ranging from the mid-single digits to the mid-teens based on net sales.

HBV-Cure Program

Prevent
Virus Replication

Inhibit
cccDNA Formation

CURE

Eliminate
[or Silence] Existing cccDNA

The goal of our HBV-cure program is to substantially increase clinical cure rates for those chronically

infected with HBV, a pathogen that infects approximately 240 million people worldwide and is associated

1

with an estimated 680,000 deaths each year. Our HBV-cure research team is working on discovering and
developing multiple CpAMs with the potential to inhibit the functional activities of the HBV core protein
(HBc), at multiple points in the viral lifecycle.

HBc is involved in several steps of the HBV lifecycle and is essential for HBV’s continued regeneration

and prolonged survival. Modulation of HBc with Assembly’s CpAMs has demonstrated preclinical proof of
principle. In multiple cell-based models, CpAMs have been observed to selectively reduce viral load, which is
the amount of infectious viral particles released from infected cells, and generation of closed circular covalent
DNA (cccDNA), a special DNA moiety that resides in the cell nucleus of HBV-infected cells and is associated
with viral persistence and chronic infection. The goal is to eradicate the infection with an orally-administered
regimen. We believe that Assembly is well positioned to execute on this strategy, with a scientiﬁc team that
has over 30 years of combined experience working on treatments for HBV.

Background

Hepatitis B virus (HBV) is a chronic infectious disease of the liver. It is a leading global cause of
chronic liver disease and liver transplants. The World Health Organization estimates that nearly 240 million
people worldwide, or approximately 6% of the world’s population, are infected with HBV. An estimated
680,000 people die annually from HBV-related liver disease. The Centers for Disease Control and Prevention
(CDC) has reported that an estimated two million people in the United States have been infected with HBV,
and the World Health Organization has reported that approximately 90 million people in China have chronic
HBV. HBV is a global epidemic infecting more people than hepatitis C virus and HIV infections combined.
A relatively small proportion of HBV patients currently receive treatment. Further, less than 10% of treated
patients exhibit sustained response off therapy and the clinical cure rate is estimated to be only 3 to 5%.
Despite the low rate of treatment and clinical cure, the current worldwide market for HBV therapies is
estimated to be $3.2 billion. If new therapies can improve cure rates, we believe the market could grow
substantially due to an increase in the number of HBV patients expected to seek the new therapies.

Current Treatments

Current therapeutic options for HBV include:

•

•

Direct Acting Antiviral medications (Nucelos(t)ide analogs). Several antiviral medications —
including lamivudine (Epivir(cid:5)), adefovir (Hepsera(cid:5)), telbivudine (Tyzeka(cid:5)), tenofovir disoproxil
fumarate and entecavir (Baraclude(cid:5)) — effectively reduce circulating virus levels by inhibiting
reverse transcription. Chronic therapy with these agents can result in reduced liver inﬂammation and
ﬁbrosis. Unfortunately, these are rarely curative, even after years of therapy, and viral replication
resumes when therapy is stopped.
Pegylated Interferon alfa (PegIFN-α). This synthetic version of a substance produced by the
body to ﬁght infection is used mainly for young people with hepatitis B who do not want to undergo
long-term treatment or who might want to become pregnant within a few years. It is administered by
injection. Cure rates are low and side effects may be severe, including ﬂu-like symptoms and
depression.

Our HBV Focus: Leveraging HBV Core Protein to Achieve a Clinical Cure using Core Protein Allosteric
Modulators (CpAMs)

HBV is a DNA-virus that establishes a reservoir of cccDNA in the nucleus of infected cells that sustains

infection in the liver. No current oral therapies target cccDNA activity directly, and thus molecules that can
modulate cccDNA are highly sought in the HBV ﬁeld. A key focus of our HBV-cure effort is targeting the
HBc, a highly conserved viral structural protein that has no human homologue and is involved in numerous
aspects of the HBV lifecycle, including the generation of the viral cccDNA. Assembly has discovered multiple
novel series of CpAMs, which are small molecules that directly target and allosterically modulate HBc
functions. Our HBV pipeline therefore offers the potential for both ﬁrst in class and best in class opportunities
for developing agents that target at least two of the three critical steps involved in the cccDNA viral lifecycle.
We believe that our approach of targeting viral cccDNA generation through inhibition of HBc functions
provides a promising foundation for substantially improving clinical cure rates for HBV.

2

A well accepted benchmark for therapeutic agents aiming to decrease cccDNA levels is the use of several

key viral antigens as surrogate markers in primary human hepatocyte cells and patients. On this basis, our
CpAMs have shown preclinical proof of principle. In a variety of cell culture models, CpAMs have
demonstrated the ability to reduce production of viral HBV DNA levels and known surrogate markers for
cccDNA — HBV E antigen (HBeAg) and HBV S antigen (HBsAg) and pre-genomic RNA (pgRNA).
Sustained decreases in levels of HBsAg is considered a strong predictor of functional cure in patients and is a
key marker for clinical development.

Our clinical strategy encompasses testing CpAMs as a monotherapy, as required by regulatory agencies,
to demonstrate their antiviral activity. Thereafter, all subsequent clinical trials in patients are anticipated to be
in combination with other classes of HBV therapies. We have completed nonclinical studies on our lead HBV
product candidate, ABI-H0731, and initiated a combined Phase 1a/1b trial in November 2016. In
February 2017, we completed the Phase 1a dose ranging portion of the trial, in which we assessed the safety,
tolerability and pharmacokinetics of ABI-H0731 at trial sites in New Zealand in 48 healthy volunteers. In the
clinical trial, single ascending doses between 100-1,000 mg per day were evaluated and both 800 mg once
daily as well as 800 mg twice daily were evaluated in 7 day multiple dose cohorts. ABI-H0731 was reported
to be well tolerated at all doses. No serious adverse events, no clinically signiﬁcant adverse events, no
withdrawals due to adverse events nor clinically signiﬁcant changes in vital signs or ECG ﬁndings were
observed. Treatment emergent laboratory abnormalities were transient, minor and/or deemed not clinically
signiﬁcant. Treatment related adverse events deemed by the clinical investigator to be possibly or probably
related to the study drug included rash and headache, which were reported to be mild and transient and only
observed at the highest doses. ABI-H0731 was observed to be well absorbed and associated with plasma
concentrations that we believe will be sufficient to suppress viral replication and cccDNA generation. We
believe that pharmacokinetic data from the Phase 1a portion of the trial exhibits dose-dependent increases in
plasma exposure levels and a half-life supporting the potential for once daily dosing. We intend to report the
results of the Phase 1a portion of the trial at a scientiﬁc conference later in 2017. We plan to amend the trial
protocol in order to characterize the next portion of the trial as a Phase 1b/2a clinical trial, and initiate that
portion of the trial at sites outside the United States in the second quarter of 2017. We expect that the
Phase 1b/2a portion of the trial will assess the safety, tolerability and pharmacokinetics, as well as preliminary
antiviral efficacy, of ABI-H0731 in patients with chronic HBV infection and will evaluate ABI-H0731 as
monotherapy and in combination with other approved therapies during 28 days of dosing. We expect
longer-term Phase 2 clinical trials to initiate in 2018, which will assess the impact of combination regimens
with other classes of therapy on antiviral activity, surrogate markers of cccDNA and potential cure rates.

Our CpAM program provides opportunities to create a pipeline encompassing multiple generations of
antiviral drugs. We plan to select an additional product candidate for development in the second half of 2017
and to advance additional CpAMs into clinical development in 2018. We also have research programs
assessing other novel targets for HBV that are complementary to our programs focusing on core protein.

Our current intention is to focus our development and, if approved, commercialization efforts for our

HBV program outside of the United States.

License Agreement and Intellectual Property

On September 3, 2013, we entered into an exclusive license agreement (the ‘‘IURTC License

Agreement’’) with Indiana University Research and Technology Corporation (‘‘IURTC’’) to acquire the rights
to develop and commercialize products associated with multiple patent applications covering aspects of our
HBV program held by IURTC. The licensed intellectual property includes platform patent applications
covering aspects of HBc, our novel mechanisms of action, methods of treatment and the novel drug
development assays our team is creating. As part of this agreement, we are obligated to make milestone
payments based upon the successful accomplishment of clinical and regulatory milestones. The aggregate
amount of all performance milestone payments under the IURTC License Agreement, should all performance
milestones through development be met, is $825,000. As of December 31, 2016, no performance milestone
payments have been made. The Company anticipates that the ﬁrst performance milestone payment will be
made to IURTC in 2017. Under the IURTC License Agreement, we are also obligated to pay IURTC royalty
payments based on net sales of the licensed technology ranging from 0.5% to 1.75%.

3

In addition, the IURTC License Agreement requires an annual diligence maintenance fee as follows:

2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 through the year in which ﬁrst commercial sale occurs . . . . . . . . . . . . . . . . .
Year following ﬁrst commercial sale and all subsequent years . . . . . . . . . . . . . . . .

$ 25,000
$ 50,000
$ 75,000
$100,000

Milestone payments received by IURTC in 2017 will be fully creditable against the 2017 diligence

maintenance fee.

Under the IURTC License Agreement, we also may grant sublicenses to third parties and receive
revenues from these sublicenses, a portion of which will be paid to IURTC. Pursuant to this agreement, we
must provide IURTC with a development plan, update this plan annually and achieve certain commercial
goals. We have also agreed to indemnify IURTC against certain actions and claims in connection with the
agreement or the use of any of the licensed patent rights.

The IURTC License Agreement may be terminated by us, with or without cause, upon 90 days advance

written notice, by IURTC upon our material breach with 60 days advance written notice or by IURTC, in
certain cases, upon our insolvency or bankruptcy immediately upon written notice.

We have one pending U.S. patent application, and related worldwide patent applications, and one pending

PCT patent application, directed to ABI-H0731, all of which are co-owned with Indiana University and
licensed to us. We also have a pending provisional application directed to formulations of ABI-H0731 which
is owned by us. In addition, we have two pending PCT applications, co-owned with Indiana University, and
four provisional patent applications, owned by us, directed to compounds related to ABI-H0731.

Microbiome Program Platform

Background

Our Microbiome program is based on the targeted delivery of novel microbiome-based therapies in a

patent pending oral formulation, called Gemicel(cid:5), which applies our novel coating and encapsulation
technology allowing for targeted delivery of complex agents to select regions of the gastrointestinal, or GI,
tract. Using this proprietary delivery platform, we aim to deliver selected combinations of monoculture strains
of beneﬁcial bacteria in novel ‘‘synthetic formats’’ to the GI tract. Our ﬁrst indication is recurrent CDI, and
we plan to leverage our microbiome program into multiple other areas of high relevance to gut microbiome
disorders including other infectious disease and GI disorders, indications in oncology, diabetes, obesity, other
metabolic disorders, and central nervous system, or CNS, disorders.

Our approach builds upon experience reported in the literature of successfully treating CDI and other
disease indications with fecal material transplants, or FMT, and seeks to provide a potentially curative therapy
using a ‘‘drug like’’ approach that delivers targeted and speciﬁc microbiome therapies in an oral capsule.

4

In recent years, there has been increasing scientiﬁc evidence suggesting the therapeutic potential of the
human microbiome — the billions of microbes living in and on people — to impact health and disease. The
ﬁrst target indication for our microbiome program is CDI, the most common nosocomial, or hospital acquired,
infection, which has become a signiﬁcant medical problem in hospitals and long-term care facilities as it
becomes increasingly resistant to common antibiotics. CDI is estimated to afflict more than 450,000 people
each year in the United States alone. It is a serious illness resulting from infection of the inner lining of the
colon by C. diffıcile bacteria, which produce toxins that cause inﬂammation, severe diarrhea and, in the most
serious cases, death. Certain subpopulations, such as older patients, transplant patients, patients taking
concomitant antibiotics and cancer patients, are at a higher risk of contracting CDI. Patients typically develop
CDI from the use of broad-spectrum antibiotics that disrupt normal gastrointestinal (gut) ﬂora, thus allowing
C. diffıcile bacteria to ﬂourish unchecked and produce toxins. Infection is common because C. diffıcile is a
spore-forming bacterium. Spores released into the hospital environment by patients with active disease can
survive for months on dry surfaces in hospital rooms such as beds and doors. It also spreads when spores
from other patients are transmitted on the hands and clothing of healthcare workers.

Current Treatments for CDI

Current therapeutic options for CDI include ﬁdaxomicin, oral vancomycin and the off-label use of

metronidazole. However, approximately 20% of patients initially treated with these drugs either fail to respond
or do not achieve a sustained response. About 50% of initially non-responsive patients fail to achieve a
sustained response from second and third line treatment. Because of the difficulties in achieving a sustained
response to treatment, we estimate that, in the U.S. alone, there are more than 400,000 treatments per year
for CDI.

Microbiome Therapies May Represent an Effective New Treatment Option for CDI

There has been considerable experience reported in the literature of successfully treating CDI with FMT

from healthy individuals. FMT is believed to act by restoring a healthy balance of microbes in the gut.
Despite its clinical efficacy, broad acceptance of FMT has been problematic, in part, because of the possibility
of unknown and potentially damaging constituents in human derived materials. Other options to provide the
beneﬁts of FMT in a product form, rather than through FMT procedures, have been sought. Preliminary CDI
studies using selected bacterial strains or bacterial spores from processed FMT have been promising. These
reports have demonstrated a signiﬁcant and growing precedent of successful cures in patients who had failed
all prior treatment, and provide a path to potentially curative therapy using a targeted and speciﬁc microbiome
therapy-one that can achieve the therapeutic beneﬁts of FMT but in a form that is more predictable, safe and
drug-like.

Proof-of-concept for this approach was demonstrated using a preparation of fecal material from normal

donors that contained only bacterial spores. In a U.S. Phase 1b study, a single oral dose of spores
administered in multiple capsules produced a 90% sustained response in 30 CDI patients who had experienced
three or more laboratory conﬁrmed CDI episodes in the previous 12 months. In another small study, a
selection of 32 speciﬁc viral strains achieved a sustained response in two elderly patients with chronic
refractory CDI.

The concept has also been validated in animal studies. Recent publications have demonstrated that
administering a few strains of bacteria may be sufficient to have a curative effect in mouse models of CDI,
and one study suggested that a single strain can be effective. In addition, testable mechanisms of how
commensal bacteria may inhibit the growth and persistence of C. diffıcile have been reported or postulated.

Our CDI program is based on the premise that an oral capsule containing a mix of speciﬁc spore and
non-spore forming vegetative bacteria grown in monoculture and manufactured under pharmaceutical-like
GMP conditions (in effect a ‘synthetic’ live biologic product), has the potential to provide the therapeutic
beneﬁts of FMT therapy in a form that is economically viable and scalable for use in ﬁrst line, as well as in
second and third line treatment. In contrast, the commercial and clinical provision of whole or processed feces
would require the provision of, or the puriﬁcation and/or extraction from, human donor material, and as such
is unlikely to be considered feasible except for a relatively small number of refractory CDI patients who have
failed antibiotic treatment at least three times or who have had two or more episodes of severe CDI.

5

However, the development of a ‘synthetic’ live biologic product for the treatment of CDI, while

promising, presents several basic challenges. These challenges include, but are not limited to the selection of
effective bacterial strains, effective and reliable oral delivery, and efficient scale up and manufacture of the
selected strains.

We have taken various actions and invested in processes to address these challenges. We believe that our
ongoing bacterial discovery program enhances the probability that we will identify strains with the potential to
be effective in humans. This program involves collaboration with leading academic medical centers with
relevant expertise, and includes proprietary methods of identifying commensal bacteria associated with clinical
beneﬁt in CDI patients receiving FMT. The approach includes bioinformatic assessment of relevant data from
resolved patients, and the isolation, culture, and screening of promising strains.

To address the challenge of delivery, we in-licensed a delivery technology we call Gemicel(cid:5). Gemicel(cid:5) is

a novel coating and encapsulation technology that allows controlled delivery of an oral formulation
speciﬁcally designated to achieve targeted pulsed release to selected portions of the GI tract by leveraging
differences in their pH environments.

We have observed that our licensed coating technology, which can be applied at body temperature ranges

under aerobic or anaerobic conditions, is not associated with any loss of a wide range of viable
microorganisms. We have also observed in vitro that, under conditions commonly accepted as representing
conditions in each section of the GI tract lumen, the formulation can deliver its contents to the targeted sites.
In a clinical scintigraphy study of Gemicel in healthy volunteers conducted in 2015, which was sponsored by
us, it was observed that Gemicel can release a bolus of therapeutic payload at speciﬁc locations in the lower
GI tract, including the ileum and ascending colon, two locations especially relevant for the treatment of
C. diffıcile pathogens. The data were generated in three clinical cohorts that used radioisotope-based
scintigraphy to precisely image the drug delivery properties of Gemicel.

The Assembly team has considerable experience in industrial scale production of bacteria under
pharmaceutical GMP requirements, and there are several commercial scale vendors we have identiﬁed to
facilitate this activity. However certain bacteria can be very difficult to freeze-dry (lyophilize) for
encapsulation, and some can be very difficult to grow at a large scale. We believe that it is feasible to mitigate
clinical, regulatory and manufacturing risk by carefully selecting strains for clinical development that have
shown preliminary signs of efficacy in our nonclinical assessments, that do not carry antibiotic resistance or
virulence genes, and that can be lyophilized and grown at scale under standard anaerobic and/or aerobic
conditions as required.

We plan to complete our IND enabling studies of ABI-M101, our lead microbiome product candidate, in
2017 and initiate a Phase 1b clinical trial in the second half of 2017 in CDI patients who have relapsed after
two or three standard antibiotic regimens. We will explore various regimens for further clinical development
in these initial studies.

We are actively applying our microbiome-based therapeutic platform to select new drug candidates
targeting GI disorders, namely inﬂammatory bowel diseases and irritable bowel syndrome, in partnership with
Allergan. We intend to further leverage our discovery program and formulation technology to pursue other
microbiome-related indications such as metabolic diseases, oncology, CNS and liver disease, as new data
becomes available clarifying the relationship of the gut microbiome to these conditions.

Collaboration Agreement, License Agreement and Intellectual Property

Allergan

On January 6, 2017, we entered into the Collaboration Agreement with Allergan to develop and
commercialize select microbiome gastrointestinal programs. Pursuant to the Collaboration Agreement, we
granted Allergan an exclusive worldwide license for rights to preclinical compounds ABI-M201 and
ABI-M301, targeting ulcerative colitis (UC) and Crohn’s disease (CD), respectively, as well as two additional
compounds to be identiﬁed by us for irritable bowel syndromes (IBS).

Under the Collaboration Agreement, we and Allergan will collaborate on research and development

activities with respect to the licensed compounds in accordance with a mutually agreed upon research and
development plan.

6

Pursuant to the terms of the Collaboration Agreement, in connection with the closing of the transaction

on February 10, 2017, we received from Allergan an upfront payment of $50 million. Additionally, we are
eligible to receive up to approximately $630 million in development milestone payments and up to
approximately $2.15 billion in commercial milestone payments contingent upon the successful development
and commercialization of licensed compounds for up to six different indications. We are also eligible to
receive tiered royalties at rates ranging from the mid-single digits to the mid-teens based on net sales. We and
Allergan have agreed to share development costs up to an aggregate of $75 million through proof-of-concept
(‘‘POC’’) studies on a 1⁄3, 2⁄3 basis, respectively, and Allergan has agreed to assume all post-POC development
costs. In the event any pre-POC development costs exceed $75 million in the aggregate, we may elect either
(a) to fund 1⁄3 of such costs in excess of $75 million or (b) to allow Allergan to deduct from future
development milestone payments 1⁄3 of the development costs funded by Allergan in excess of $75 million
plus a premium of 25%. We have an option to co-promote the licensed programs in the United States and
China, subject to certain conditions set forth in the Collaboration Agreement.

Allergan may terminate the Collaboration Agreement for convenience at any time upon either 90 days’

(prior to the initiation of the ﬁrst POC trial of a licensed product) or 120 days’ (after the initiation of the ﬁrst
POC trial of a licensed product), as applicable, advance written notice to us. The Collaboration Agreement
also contains customary provisions for termination by either party, including in the event of breach of the
Collaboration Agreement, subject to cure.

Therabiome

On November 8, 2013, we entered into a License and Collaboration Agreement with Therabiome, LLC,
for all intellectual property and know-how owned or controlled by Therabiome relating to the oral delivery of
pharmaceutical drugs to speciﬁc sites in the intestine, using a pH sensitive release platform technology. Under
the agreement, Therabiome granted us the exclusive worldwide license, with rights to sublicense, to develop
the intellectual property for commercialization (a) in the use of bacteria, viruses, proteins, and small
molecules by oral delivery using the licensed intellectual property in (i) gastro-intestinal dysbiosis, including
but not limited to C. diffıcile associated diseases, irritable bowel syndrome-constipation, irritable bowel
syndrome-diarrhea, inﬂammatory bowel disease, metabolic syndrome, type 2 diabetes, obesity and
hypertension, (ii) auto-immune disorders and autism, including but not limited to as controlled by bacteria or
virus, and (iii) orally delivered vaccines, including viral and bacterial, and (b) any oral delivery of small
molecules using the licensed intellectual property. We will be solely responsible for all research and
development activities with respect to any product we develop under the license.

For the license, we paid Therabiome an upfront non-refundable license fee of $300,000. In

September 2014, we paid Therabiome $100,000 upon the occurrence of the ﬁrst proof of principle for a
bacteria strain. We will be required to pay an additional $100,000 upon the occurrence of the proof of
principle for a virus. We must pay Therabiome clinical and regulatory milestones for each product or therapy
advanced from the platform, for U.S. regulatory milestones, depending on whether the milestone occurs before
the ﬁling of the ﬁrst new drug application, or NDA, for a product or after the ﬁrst, second or third NDA
ﬁlings, as follows:

Regulatory and Clinical Milestones
Upon the ﬁling of an IND with the FDA: . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
First dose ﬁrst patient − Phase I Clinical Trial
. . . . . . . . . . . . . . . . .
First dose ﬁrst patient − Phase II Clinical Trial
First dose ﬁrst patient − Phase III Clinical Trial
. . . . . . . . . . . . . . . . .
Upon ﬁling of an NDA or BLA with the FDA . . . . . . . . . . . . . . . . . .
Upon marketing approval by the FDA . . . . . . . . . . . . . . . . . . . . . . .
Upon approval of a supplemental NDA (sNDA) for a new Indication,

$100,000 − $130,000
$250,000 − $325,000
$500,000 − $650,000
$750,000 − $975,000
$1,000,000 − $1,300,000
$3,000,000

in the U.S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,000,000

We also must pay Therabiome lesser amounts for foreign regulatory milestones, which vary by country

and region, and which depend on whether the milestone occurs before the ﬁling of the ﬁrst NDA ﬁling or
after the ﬁrst, second or third NDA ﬁlings. These payments will be: one-third of the U.S. milestones paid
upon a foreign equivalent of an investigational new drug application, or IND and marketing approval for each

7

product in the European Union or Japan; 10% of the U.S. milestones paid upon a foreign equivalent of an
IND and marketing approval for each product in China; 10% of the U.S. milestone paid upon marketing
approval for each product in India and Brazil; and 1% of the U.S. milestone paid upon marketing approval for
each product in all other countries. We also must pay Therabiome royalties on annual net product sales in the
low to mid-single digit percentages plus, once annual net sales exceed two speciﬁed thresholds, a one-time
cash payment upon reaching each threshold. Pursuant to this agreement, we and Therabiome have agreed to
indemnify one another against certain claims in connection with the agreement.

This agreement may be terminated by us, with or without cause, upon 90 days prior written notice, by

either party upon the other party’s material breach with 180 days prior written notice or by either party upon
the other party’s challenge of the validity or enforceability or any issued patent within the licensed intellectual
property with 90 days prior written notice. Additionally, either party may terminate the agreement upon an
event of bankruptcy with respect to the other party.

In addition to the pending U.S. application and related foreign pending patent applications directed to the

delivery mechanism licensed to us from Therabiome, we own two pending provisional patent applications
related to our ABI-M101 product candidate. We also own the Gemicel(cid:5) trademark covering the delivery
mechanism we have licensed from Therabiome.

Government Regulation

Government authorities in the U.S., at the federal, state and local level, and in other countries extensively

regulate, among other things, the research, development, testing, manufacture, including any manufacturing
changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing,
post-approval monitoring and reporting, import and export of pharmaceutical and biological products, such
as those we are developing.

U.S. drug approval process

In the U.S, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and
implementing regulations, and biological products under both the FDCA and the Public Health Service Act, or
PHSA, and implementing regulations. The process of obtaining regulatory approvals and the subsequent
compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure
of substantial time and ﬁnancial resources. Failure to comply with the applicable U.S. requirements at any
time during the product development process, approval process or after approval, may subject an applicant to
a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending applications,
withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and untitled letters,
product recalls, product seizures, total or partial suspension of production or distribution injunctions, ﬁnes,
refusals of government contracts, restitution, disgorgement of proﬁts or civil or criminal penalties.

The process required by the FDA before a drug or biological product may be marketed in the

U.S. generally involves the following:

•

•

•

•

•

completion of nonclinical laboratory tests, animal studies and formulation studies in compliance with
the FDA’s good laboratory practice, or GLP, regulations;

submission to the FDA of an investigational new drug application, or IND, which must become
effective before human clinical trials may begin;

approval by an independent institutional review board, or IRB, at each clinical site before each trial
may be initiated;

performance of adequate and well-controlled human clinical trials in accordance with good clinical
practices, or GCP, to establish the safety and efficacy of the proposed drug or biological product for
each indication;

submission to the FDA of a new drug application, or NDA, or a biologics license application,
or BLA;

8

•

•

satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the
product is produced to assess compliance with current good manufacturing practices, or cGMP,
requirements and to assure that the facilities, methods and controls are adequate to preserve the
product’s identity, strength, quality and purity; and

FDA review and approval of the NDA or BLA.

Nonclinical Studies and IND

Nonclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro

and animal studies to assess the potential for adverse events and in some cases to establish a rationale for
therapeutic use. The conduct of nonclinical studies is subject to federal regulations and requirements,
including GLP regulations for safety/toxicology studies. An IND sponsor must submit the results of the
nonclinical tests, together with manufacturing information, analytical data, any available clinical data or
literature and plans for clinical studies, among other things, to the FDA as part of an Investigational New
Drug application (IND). Some long-term nonclinical testing, such as animal tests of reproductive adverse
events and carcinogenicity, may continue after the IND is submitted. For some products, FDA may waive the
need for certain nonclinical tests. An IND automatically becomes effective 30 days after receipt by the FDA,
unless before that time the FDA raises concerns or questions related to one or more proposed clinical trials
and places the trial on clinical hold. If an IND or clinical study is placed on clinical hold, the IND sponsor
and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission
of an IND may not result in the FDA allowing clinical trials to commence.

Clinical trials

Clinical trials involve the administration of the investigational new drug or biological product to human

subjects under the supervision of qualiﬁed investigators in accordance with GCP requirements, which include,
among other things, the requirement that all research subjects provide their informed consent in writing before
their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing,
among other things, the objectives of the study, the parameters to be used in monitoring safety, and the
effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol
amendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution
participating in the clinical trial must review and approve the plan for any clinical trial before it commences at
that institution, and the IRB must conduct continuing review. The IRB must review and approve, among other
things, the study protocol and informed consent information to be provided to study subjects. An IRB must
operate in compliance with FDA regulations. Information about certain clinical trials must be submitted within
speciﬁc timeframes to the National Institutes of Health for public dissemination at www.clinicaltrials.gov.

Human clinical trials are typically conducted in three sequential phases, which may overlap or be

combined:

•

•

•

Phase 1: The drug or biological product is initially introduced into healthy human subjects or
patients with the target disease or condition and tested for safety, dosage tolerance, absorption,
metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness.

Phase 2: The drug or biological product is administered to a limited patient population to identify
possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for
speciﬁc targeted diseases and to determine dosage tolerance and optimal dosage.

Phase 3: The drug or biological product is administered to an expanded patient population in
adequate and well-controlled clinical trials to generate sufficient data to statistically conﬁrm the
efficacy and safety of the product for approval, to establish the overall risk-beneﬁt proﬁle of the
product and to provide adequate information for the labeling of the product.

Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA.

Additionally, IND safety reports must be submitted for serious and unexpected suspected adverse reactions,
ﬁndings from animal or in vitro testing or other studies that suggest a signiﬁcant risk to humans, and any
clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol
or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully
within any speciﬁed period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a

9

clinical trial at any time on various grounds, including a ﬁnding that the research subjects are being exposed
to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its
institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug
or biological product has been associated with unexpected serious harm to patients.

Marketing approval

Assuming successful completion of the required clinical testing, the results of the nonclinical studies and
clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and
proposed labeling, among other things, are submitted to the FDA as part of an NDA or BLA requesting
approval to market the product for one or more indications. Under federal law, the submission of most NDAs
and BLAs is additionally subject to a substantial application user fee, currently approximately $2 million and
the sponsor of an approved NDA or BLA is also subject to annual product and establishment user fees,
currently set at $97,750 per product and $512,200 per establishment for ﬁscal year 2017. These fees are
typically adjusted annually.

The FDA conducts a preliminary review of all NDAs and BLAs within the ﬁrst 60 days after submission

before accepting them for ﬁling to determine whether they are sufficiently complete to permit substantive
review. The FDA may request additional information rather than accept an NDA or BLA for ﬁling. In this
event, the application must be resubmitted with the additional information. The resubmitted application is also
subject to review before the FDA accepts it for ﬁling. Once the submission is accepted for ﬁling, the FDA
begins an in-depth substantive review. The FDA has agreed to speciﬁed performance goals in the review of
NDAs and BLAs. Under these goals, the FDA has committed to review most original applications for
non-priority products within 10 months, and most original applications for priority review products, that is,
drugs and biological products that the FDA determines represent a signiﬁcant improvement over existing
therapy, within six months. For NDAs for novel products and all BLAs, the 10 and 6-month time periods runs
from the ﬁling date; for all other original applications, the 10 and 6-month time periods run from the
submission date. The review process may be extended by the FDA for three additional months to consider
certain information or clariﬁcation regarding information already provided in the submission. Despite these
review goals, it is not uncommon for FDA review of an NDA or BLA to extend beyond the goal date. The
FDA may also refer applications for novel drugs or 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 recommendations of an advisory committee, but it considers such recommendations carefully when
making decisions.

Before approving an NDA or BLA, the FDA typically will inspect the facility or facilities where the
product is manufactured. The FDA will not approve an application unless it determines that the manufacturing
processes and facilities are in compliance with cGMP requirements and adequate to assure consistent
production of the product within required speciﬁcations. In addition, before approving an NDA or BLA, the
FDA will typically inspect one or more clinical sites to assure compliance with GCP and integrity of the
clinical data submitted.

The testing and approval process requires substantial time, effort and ﬁnancial resources, and some trials

may take many years to complete. Data obtained from clinical activities are not always conclusive and may be
susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may
not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our
efforts to develop our product candidates and secure necessary governmental approvals, which could delay or
preclude us from marketing our products.

After the FDA’s evaluation of the NDA or BLA and inspection of the manufacturing facilities, the FDA

may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing
of the drug or biological product with speciﬁc prescribing information for speciﬁc indications. A complete
response letter generally 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 to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue an
approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on

10

the type of information included. Even with submission of this additional information, the FDA ultimately
may decide that the application does not satisfy the regulatory criteria for approval and refuse to approve the
NDA or BLA. Even if the FDA approves a product, it may limit the approved indications for use for the
product, require that contraindications, warnings or precautions be included in the product labeling, require
that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety after
approval, require testing and surveillance programs to monitor the product after commercialization, or impose
other conditions, including distribution and use restrictions or other risk management mechanisms, including
Risk Evaluation and Mitigation Strategies, or REMs, which can materially affect the potential market and
proﬁtability of the product or impose new labeling, testing or distribution and use requirements. The FDA may
prevent or limit further marketing of a product based on the results of post-market studies or surveillance
programs. After approval, some types of changes to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA
review and approval.

Fast track designation

The FDA is required to facilitate and expedite the development and review of drugs and biological

products that are intended for the treatment of a serious or life-threatening disease or condition for which
there is no effective treatment and which demonstrate the potential to address unmet medical needs for the
disease or condition. Under the fast track program, the sponsor of a new product candidate may request the
FDA to designate the product for a speciﬁc indication as a fast track product concurrent with or after the ﬁling
of the IND for the product candidate. The FDA must determine if the product candidate qualiﬁes for fast track
designation within 60 calendar days after receipt of the sponsor’s request.

In addition to other beneﬁts, such as the ability to use surrogate endpoints and have greater interactions

with the FDA, the FDA may initiate review of sections of a fast track product’s NDA or BLA before the
application is complete. This rolling review is available if the applicant provides and the FDA approves a
schedule for the submission of the remaining information and the applicant pays applicable user fees.
However, the FDA’s time period goal for reviewing a fast track application does not begin until the last
section of the NDA or BLA is submitted. In addition, the fast track designation may be withdrawn by the
FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial
process.

Priority review

Under FDA policies, a product candidate may be eligible for priority review, a review generally within a
six-month time frame from the time a complete application is received or ﬁled. Products generally are eligible
for priority review if they are intended for treatment of a serious or life-threatening disease or condition and
provide a signiﬁcant improvement in safety or effectiveness compared to marketed products in the treatment,
diagnosis or prevention of a serious disease or condition. A fast track designated product candidate would
ordinarily meet the FDA’s criteria for priority review.

Accelerated approval

Under the FDA’s accelerated approval regulations, the FDA may approve a drug or biological product for

a serious or life-threatening illness that provides meaningful therapeutic beneﬁt to patients over existing
treatments based upon a surrogate endpoint that is reasonably likely to predict clinical beneﬁt or on a clinical
endpoint that can be measured earlier than irreversible morbidity or mortality (IMM). In clinical trials, a
surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes
for a direct measurement of how a patient feels, functions or survives. Surrogate endpoints can often be
measured more easily or more rapidly than clinical endpoints. A product candidate approved on this basis is
subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or
post-approval clinical trials to conﬁrm the effect on the clinical endpoint. Failure to conduct required
post-approval studies, or conﬁrm a clinical beneﬁt during post-marketing studies, would allow the FDA to
withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates
approved under accelerated regulations are subject to prior review by the FDA.

11

Breakthrough therapy designation

Under the provisions of the new Food and Drug Administration Safety and Innovation Act, or FDASIA,

enacted in 2012, a sponsor can request designation of a product candidate as a ‘‘breakthrough therapy.’’
A breakthrough therapy is deﬁned as a drug or biological product that is intended, alone or in combination
with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary
clinical evidence indicates that the drug or biological product may demonstrate substantial improvement over
existing therapies on one or more clinically signiﬁcant endpoints, such as substantial treatment effects
observed early in clinical development. Drugs and biological products designated as breakthrough therapies
also may be eligible for priority review. The FDA must take certain actions, such as holding timely meetings
and providing advice, intended to expedite the development and review of an application for approval of a
breakthrough therapy. Even if a product qualiﬁes for one or more of these programs, the FDA may later
decide that the product no longer meets the conditions for qualiﬁcation or decide that the time period for FDA
review or approval will not be shortened.

Qualiﬁed Infectious Disease Products

Under the provisions of FDASIA, a sponsor can request designation of a product candidate as a qualiﬁed

infectious disease product (QIDP). A QIDP is an antibacterial or antifungal drug for human use intended to
treat serious or life threatening infections, including those caused by (1) an antibacterial or antifungal resistant
pathogen, including novel or emerging infectious pathogens; or (2) qualifying pathogens listed by the FDA.
Examples include (A) resistant gram positive pathogens, including methicillin-resistant Staphylococcus aureus,
vancomycin resistant Staphylococcus aureus, and vancomycin-resistant enterococcus; (B) multi-drug resistant
gram negative bacteria, including Acinetobacter, Klebsiella, Pseudomonas, and E. coli species; (C) multi-drug
resistant tuberculosis; and (D) Clostridium difficile. A drug that receives QIDP designation is eligible under
the statute for fast track designation and priority review and an additional 5 years of market exclusivity added
to certain existing exclusivity periods. The FDA must determine if the product candidate qualiﬁes as a QIDP
within 60 calendar days after receipt of the sponsor’s request.

Orphan drugs

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs or biological products

intended to treat a rare disease or condition, which is generally deﬁned as a disease or condition that affects
fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an
NDA or BLA. After the FDA grants orphan drug designation, the identity of the product and its potential
orphan use are disclosed publicly by the FDA. Orphan drug designation does not shorten the duration of the
regulatory review and approval process. The ﬁrst NDA or BLA applicant to receive FDA approval for a
particular active moiety to treat a particular disease with FDA orphan drug designation is entitled to a
seven-year exclusive marketing period in the U.S. for that product and indication. During the seven-year
exclusivity period, the FDA may not approve any other applications to market the same drug or biological
product for the same orphan indication, except in limited circumstances, such as a showing of clinical
superiority to the product with orphan drug exclusivity. A drug or biological product will be considered
clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care.
Orphan drug exclusivity does not prevent the FDA from approving a different drug or biological product for
the same orphan disease or condition, or the same drug or biological product for a different disease or
condition. Among the other beneﬁts of orphan drug designation are tax credits for certain research and a
waiver of the NDA/BLA application user fee.

Pediatric information

Under the Pediatric Research Equity Act of 2003, as amended, an NDA, BLA or supplement to an NDA
or BLA for drug or biological products with certain novel features (e.g. new active ingredient new indication)
must contain data that are adequate to assess the safety and effectiveness of the drug or biological product for
the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for
each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative
or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after
approval of the product for use in adults, or full or partial waivers from the pediatric data requirements.
A sponsor of a new drug or biological product subject to the above pediatric testing requirements also is

12

required to submit to the FDA a pediatric study plan generally 60 days after an end-of-Phase 2 meeting with
the agency. Unless otherwise required by regulation, the pediatric data requirements do not apply to products
with orphan drug designation.

Combination products

The FDA regulates combinations of products that cross FDA centers, such as drug, biologic or medical

device components that are physically, chemically or otherwise combined into a single entity, as a
combination product. The FDA center with primary jurisdiction for the combination product will take the lead
in the premarket review of the product, with the other center consulting or collaborating with the lead center.

The FDA’s Office of Combination Products, or OCP, determines which center will have primary
jurisdiction for the combination product based on the combination product’s ‘‘primary mode of action.’’
A mode of action is the means by which a product achieves an intended therapeutic effect or action. The
primary mode of action is the mode of action that provides the most important therapeutic action of the
combination product, or the mode of action expected to make the greatest contribution to the overall intended
therapeutic effects of the combination product.

Often it is difficult for the OCP to determine with reasonable certainty the most important therapeutic

action of the combination product. In those difficult cases, the OCP will consider consistency with other
combination products raising similar types of safety and effectiveness questions, or which center has the most
expertise to evaluate the most signiﬁcant safety and effectiveness questions raised by the combination product.

A sponsor may use a voluntary formal process, known as a Request for Designation, when the product

classiﬁcation is unclear or in dispute, to obtain a binding decision as to which center will regulate the
combination product. If the sponsor objects to that decision, it may request that the agency reconsider that
decision.

Other regulatory requirements

Any drug or biological product manufactured or distributed by us pursuant to FDA approvals will be

subject to pervasive and continuing regulation by the FDA, including, among other things, requirements
relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and
reporting of adverse experiences with the product. After approval, most changes to the approved product, such
as adding new indications or other labeling claims, are subject to prior FDA review and approval.

The FDA may impose a number of post-approval requirements, including REMs, as a condition of
approval of an NDA or BLA. For example, the FDA may require post-marketing testing, including Phase 4
clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after
commercialization.

In addition, drug manufacturers and other entities involved in the manufacture and distribution of
approved drugs are required to register their establishments with the FDA and state agencies, and are subject
to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP
requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA
approval before being implemented. FDA regulations also require investigation and correction of any
deviations from cGMP and impose reporting and documentation requirements upon us and any third-party
manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money
and effort in the areas of production and quality control to maintain cGMP compliance.

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory

requirements and standards is not maintained or if problems occur after the product reaches the market. Later
discovery of previously unknown problems with a product, including adverse events of unanticipated severity
or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result
in revisions to the approved labeling to add new safety information, imposition of post-market studies or
clinical trials to assess new safety risks or imposition of distribution or other restrictions under a REM
program. Other potential consequences include, among other things:

•

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product
from the market or product recalls;

13

•

•

•

•

ﬁnes, warning letters or holds on post-approval clinical trials;

refusal of the FDA to approve pending applications or supplements to approved applications, or
suspension or revocation of product approvals;

product seizure or detention, or refusal to permit the import or export of products; or

consent decrees, injunctions or the imposition of civil or criminal penalties.

The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on
the market. Drugs and biological products generally may be promoted only for the approved indications and
in accordance with the provisions of the approved labeling. The FDA and other agencies actively enforce the
laws and regulations prohibiting the promotion of off label uses, and a company that is found to have
improperly promoted off label uses may be subject to signiﬁcant liability.

Additional provisions

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and

federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in
recent years. These laws include anti-kickback statutes and false claims statutes. The federal anti-kickback
statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving
remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or
order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally ﬁnanced
healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of
the anti-kickback statute are punishable by imprisonment, criminal ﬁnes, civil monetary penalties and
exclusion from participation in federal healthcare programs. Although there are a number of statutory
exemptions and regulatory safe harbors protecting certain common activities from prosecution or other
regulatory sanctions, the exemptions 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 exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a

false claim for payment to the federal government, or knowingly making, or causing to be made, a false
statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have
been prosecuted under these laws for allegedly inﬂating drug prices they report to pricing services, which in
turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly
providing free product to customers with the expectation that the customers would bill federal programs for
the product. In addition, certain marketing practices, including off-label promotion, may also violate false
claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law
and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs,
or, in several states, apply regardless of the payor.

Physician Drug Samples

As part of the sales and marketing process, pharmaceutical companies frequently provide samples of
approved drugs to physicians. The Prescription Drug Marketing Act, or the PDMA, imposes requirements and
limitations upon the provision of drug samples to physicians, as well as prohibits states from licensing
distributors of prescription drugs unless the state licensing program meets certain federal guidelines that
include minimum standards for storage, handling and record keeping. In addition, the PDMA sets forth civil
and criminal penalties for violations.

Foreign Regulation

In order to market any product outside of the U.S., we would need to comply with numerous and varying

regulatory requirements of other countries regarding safety and efficacy and governing, among other things,
clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not we
obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable
regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product

14

in those countries. The approval process varies from country to country and can involve additional product
testing and additional administrative review periods. The time required to obtain approval in other countries
might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one
country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval
in one country may negatively impact the regulatory process in others.

New Legislation and Regulations

From time to time, legislation is drafted, introduced and passed in Congress that could signiﬁcantly
change the statutory provisions governing the testing, approval, manufacturing and marketing of products
regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or
interpreted by the agency in ways that may signiﬁcantly affect our business and our products. It is impossible
to predict whether further legislative changes will be enacted or whether FDA regulations, guidance, policies
or interpretations changed or what the effect of such changes, if any, may be.

Pharmaceutical Coverage, Pricing and Reimbursement

Signiﬁcant uncertainty exists as to the coverage and reimbursement status of any drug products for which

we may obtain regulatory approval. Sales of any of our product candidates, if approved, will depend, in part,
on the extent to which the costs of the products will be covered by third-party payors, including government
health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations.
The process for determining whether a payor will provide coverage for a drug product may be separate from
the process for setting the price or reimbursement rate that the payor will pay for the drug product once
coverage is approved. Third-party payors may limit coverage to speciﬁc drug products on an approved list, or
formulary, which might not include all of the approved drugs for a particular indication.

In order to secure coverage and reimbursement for any product that might be approved for sale, we may

need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and
cost-effectiveness of the product, in addition to the trials required to obtain FDA or other comparable
regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective.
A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate
will be approved. Third-party reimbursement may not be sufficient to enable us to maintain price levels high
enough to realize an appropriate return on our investment in product development.

The containment of healthcare costs has become a priority of federal, state and foreign governments, and
the prices of drugs have been a focus in this effort. Third-party payors are increasingly challenging the prices
charged for medical products and services and examining the medical necessity and cost-effectiveness of
medical products and services, in addition to their safety and efficacy. If these third-party payors do not
consider our products to be cost-effective compared to other available therapies, they may not cover our
products after approval as a beneﬁt under their plans or, if they do, the level of payment may not be sufficient
to allow us to sell our products at a proﬁt. The U.S. government, state legislatures and foreign governments
have shown signiﬁcant interest in implementing cost containment programs to limit the growth of
government-paid health care costs, including price controls, restrictions on reimbursement and requirements
for substitution of generic products for branded prescription drugs. Adoption of such controls and measures,
and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments
for pharmaceuticals such as the drug candidates that we are developing and could adversely affect our net
revenue and results.

Pricing and reimbursement schemes vary widely from country to country. Some countries provide that

drug products may be marketed only after a reimbursement price has been agreed. Some countries may
require the completion of additional studies that compare the cost-effectiveness of a particular product
candidate to currently available therapies. For example, the European Union provides options for its member
states to restrict the range of drug products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. European Union member states
may approve a speciﬁc price for a drug product or may instead adopt a system of direct or indirect controls
on the proﬁtability of us placing the drug product on the market. Other member states allow companies to ﬁx
their own prices for drug products, but monitor and control company proﬁts. The downward pressure on
health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly

15

high barriers are being erected to the entry of new products. In addition, in some countries, cross-border
imports from low-priced markets exert competitive pressure that may reduce pricing within a country. There
can be no assurance that any country that has price controls or reimbursement limitations for drug products
will allow favorable reimbursement and pricing arrangements for any of our products.

The marketability of any products for which we may receive regulatory approval for commercial sale
may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In
addition, an increasing emphasis on managed care in the U.S. has increased and we expect will continue to
increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing
regulation may change at any time. In particular, the Patient Protection and Affordable Care Act was enacted
in the U.S. in March 2010 and contains provisions that may reduce the proﬁtability of drug products,
including, for example, increased rebates for drugs sold to Medicaid programs, extension of Medicaid rebates
to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneﬁciaries and annual
fees based on pharmaceutical companies’ share of sales to federal health care programs. Even if favorable
coverage and reimbursement status is attained for one or more products for which we receive regulatory
approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Competition

The pharmaceutical and biotechnology industry is very competitive and the development and
commercialization of new drugs and biologics is inﬂuenced by rapid technological developments and
innovation. We face competition from several companies developing and commercializing products that will
be competitive with our drug candidates, including large pharmaceutical and smaller biotechnology companies.
Additionally, new entrants may potentially enter the market. For our HBV cure program, potential competitors
include Johnson & Johnson, Roche, Bristol Myers Squibb Co., GlaxoSmithKline PLC, Gilead Sciences Inc.,
and Arbutus Biopharma Corp., among others. Additionally, we may face competition from currently available
treatments for HBV. For CDI, our microbiome program’s ﬁrst indication, our competitors include Seres
Therapeutics, Inc. and Merck & Co, Inc. For our microbiome program more generally, our competitors
include Johnson & Johnson, Novartis International AG, Abbvie Inc., Takeda, Merck & Co., Bristol Myers
Squibb Co., and Pﬁzer Inc. Some of the competitive development programs from these companies may be
based on scientiﬁc approaches that are similar to our approach, and others may be based on entirely different
approaches. Potential competitors also include academic institutions, government agencies and other public
and private research organizations that conduct research, seek patent protection and establish collaborative
arrangements for research, development, manufacturing and commercialization of products similar to ours or
that otherwise target indications that we are pursuing.

Manufacturing

We do not currently own or operate any manufacturing facilities. We currently rely on third parties for

the manufacture of our product candidates for non-clinical and clinical testing. We currently have no plans to
establish any manufacturing facilities for products for our HBV-Cure program. As we advance our
Microbiome programs through clinical development and potential commercialization, however, we expect to
establish our own manufacturing capabilities for drug substance and drug product for our Microbiome
program.

Financial Information

We have not derived any revenue from product sales to date as we currently have no products approved

for sale.

Research and Development Expense

Our research and development expenses, excluding stock-based compensation expense, were

approximately $30.1 million for ﬁscal year 2016, of which $20.0 million was expended on the HBV program
and $10.0 million was expended on our Microbiome Program.

Our research and development expenses, excluding stock-based compensation expense, were

approximately $15.1 million for ﬁscal year 2015, of which $10.8 million was expended on the HBV program
and $4.3 million was expended on our Microbiome program, offset by $6,621 credit due to termination of the
VEN 307 study in 2014.

16

Our research and development expenses, excluding stock-based compensation expense, were

approximately $8.0 million for ﬁscal year 2014, of which $2.5 million was expended on the HBV program,
$1.6 million was expended on our Microbiome program and $3.9 million was expended on a former product
candidate Diltiazem (VEN 307).

Employees

As of February 24, 2017, we had 69 employees, 4 temporary contractors and various consultants and

multiple research contract research organizations with whom we have contracted.

Corporate History

We were incorporated in Delaware in October 2005 under the name South Island Biosciences, Inc.
(which was changed to Ventrus Biosciences, Inc. in April 2007). On July 11, 2014, we merged with Assembly
Pharmaceuticals, Inc., a private company (the ‘‘Merger’’). In connection with the Merger, we changed our
name from Ventrus Biosciences, Inc. to Assembly Biosciences, Inc.

Corporate Information

Our principal executive office is at 11711 N. Meridian Street, Suite 310, Carmel, Indiana 46032. Our

telephone number is (317) 210-9311.

Available Information

Our website address is www.assemblybio.com. We routinely post, or have posted, important information

for investors on our website in the ‘‘Investor Relations’’ section. We use this website as a means of disclosing
material information in compliance with our disclosure obligations under Regulation FD. Accordingly,
investors should monitor the ‘‘Investor Relations’’ section of our website, in addition to following our press
releases, SEC ﬁlings, presentations and webcasts. We make available free of charge through our website our
press releases, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and all amendments to those reports as soon as reasonably practicable after electronically ﬁled with or
furnished to the Securities and Exchange Commission.

The information contained on our website is not a part of, and should not be construed as being

incorporated by reference, into this report.

The reports ﬁled with the SEC by us and by our officers, directors and signiﬁcant shareholders are
available for review on the SEC’s website at www.sec.gov. You may also read and copy materials that we ﬁled
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Information about Segments and Geographic Areas

In accordance with The Financial Accounting Standards Board (FASB) Accounting Standards

Codiﬁcation, or ASC, Topic 280, Segment Reporting, we have determined that we operate as one operating
segment. Decisions regarding our overall operating performance and allocation of our resources are assessed
on a consolidated basis. Our operations and assets are predominantly located in the United States.

17

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results

could differ materially from those discussed in this report. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere in this report and in any
documents incorporated in this report by reference.

You should carefully consider the following risk factors, together with all other information in this report,
including our ﬁnancial statements and notes thereto, and in our other ﬁlings with the Securities and Exchange
Commission. If any of the following risks, or other risks not presently known to us or that we currently believe
to not be signiﬁcant, develop into actual events, then our business, ﬁnancial condition, results of operations or
prospects could be materially adversely affected. If that happens, the market price of our common stock could
decline, and stockholders may lose all or part of their investment.

Risks Related to Our Business

We have no approved products and currently are dependent on the success of our HBV and Microbiome
programs.

To date, we have no approved product on the market and have generated no product revenues. Our
prospects are substantially dependent on our ability to develop and commercialize our HBV and microbiome
therapies. Unless and until we receive approval from the FDA or other regulatory authorities for our product
candidates, we cannot sell our product candidates and will not have product revenues. We will have to fund
all of our operations and capital expenditures from cash on hand, any future securities offerings or debt
ﬁnancings and any fees we may generate from out-licensing, collaborations or other strategic arrangements. If
we are unable to develop and commercialize any product candidates from our HBV-Cure and Microbiome
programs, we will be unable to generate any product revenues, and our business, ﬁnancial condition and
results of operations will be signiﬁcantly harmed.

In addition, all of our product candidates are in an early stage of development and their risk of failure is
high. The data supporting our drug discovery and pre-clinical and clinical development programs are derived
from either laboratory or pre-clinical studies. We cannot predict when or if any one of our product candidates
will prove effective or safe in humans or will receive regulatory approval. The scientiﬁc evidence to support
the feasibility of our product candidates is limited, and many companies, some with more resources than we
have, are and may be developing competitive product candidates. For these and other reasons, our drug
discovery and development may not be successful and we may not generate viable products or revenue.

We depend entirely on the success of product candidates from our HBV program, which has one product
candidate in early clinical development, and our microbiome programs, which has one product candidate in
late pre-clinical development. We cannot be certain that we will be able to obtain regulatory approval for,
or successfully commercialize, product candidates from either of our current programs or any other
product candidates we may subsequently identify.

ABI-H0731 and ABI-M101 are our lead product candidates for our HBV-cure and Microbiome program,
respectively. We have completed the Phase 1a portion of a Phase 1a/1b clinical trial for ABI-H0731, our novel
oral agent for the treatment of chronic HBV. We anticipate initiating the Phase 1b portion of the trial in the
second quarter of 2017. Our lead microbiome biotherapeutic product candidate, ABI-M101, is in late
nonclinical development and we plan to initiate a Phase 1b clinical trial of ABI-M101 in CDI patients who
have relapsed after two or three standard antibiotic regimens in the second half of 2017. It may be years
before the larger, pivotal trials necessary to support regulatory approval of our product candidates are initiated,
if ever. The clinical trials of our product candidates are, and the manufacturing and marketing of our product
candidates will be, subject to extensive and rigorous review and regulation by numerous government
authorities in the U.S. and in other countries where we intend to test and, if approved, market any product
candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must
successfully meet a number of critical developmental milestones, including:

•

•

developing dosages that will be tolerated, safe and effective;

reaching agreement with the FDA or comparable foreign regulatory authorities regarding the scope,
design and data necessary to support regulatory approval for the product candidate;

18

•

•

•

•

demonstrating through clinical trials that the product candidate is safe and effective in patients for
the intended indication;

determining the appropriate delivery mechanism;

demonstrating that the product candidate formulation will be stable for commercially reasonable time
periods; and

completing the development and scale-up to permit manufacture of our product candidates in
quantities sufficient to execute on our clinical development plans and, eventually, in commercial
quantities and at acceptable prices.

The time necessary to achieve these developmental milestones for any individual product candidate is
long and uncertain, and we may not successfully complete these milestones for our HBV and microbiome
therapies or any other product candidates that we may develop. We have not yet completed and may never
complete the development of any product. If we are unable to complete clinical development of our HBV or
microbiome therapies, or any other product candidates that we may identify, we will be unable to generate
revenue or build a sustainable or proﬁtable business.

Nonclinical studies may not be representative of disease behavior in clinical trials. The outcomes of
nonclinical testing and clinical trials are uncertain and results of earlier nonclinical studies and clinical
trials may not be predictive of future clinical trial results.

The results of nonclinical studies may not be representative of disease behavior in a clinical setting and

thus may not be predictive of the outcomes of our clinical trials. In addition, the results of nonclinical studies
and early clinical trials of product candidates may not be predictive of the results of later-stage clinical trials
and the results of any study or trial for any of our product candidates may not be as positive as the results for
any prior studies or trials, if at all.

Nonclinical studies and clinical testing are expensive, can take many years to complete and their outcome

is highly uncertain. Failure can occur at any time during the nonclinical study and clinical trial processes due
to inadequate performance of a drug candidate or inadequate adherence by patients or investigators to clinical
trial protocols. Further, clinical trials might not provide statistically signiﬁcant data supporting a product
candidate’s safety and effectiveness to meet the requisite regulatory approvals. In addition, there is a high
failure rate for drugs and biologics proceeding through clinical trials. Our failure to replicate earlier positive
results in later-stage clinical trials or otherwise demonstrate the required characteristics to support marketing
approval for any of our product candidates would substantially harm our business, prospects, ﬁnancial
condition and results of operations. Any failure to achieve favorable results in clinical development would
materially harm our business, ﬁnancial condition and results of operations.

Nonclinical and clinical testing required for our product candidates is expensive and time-consuming, and
may result in delays or may fail to demonstrate safety and efficacy for desired indications.

In order to obtain FDA approval to market a new drug product, we must demonstrate safety and
effectiveness in humans. To meet these requirements, we must conduct extensive nonclinical testing and
sufficient adequate and well-controlled clinical trials. Conducting clinical trials is a lengthy, time consuming,
and expensive process. The length of time might vary substantially according to the type, complexity, novelty,
and intended use of the product candidate, and often can be several years or more per trial. Delays associated
with product candidates for which we are directly conducting nonclinical studies or clinical trials might cause
us to incur additional operating expenses. The commencement and rate of completion of clinical trials might
be delayed by many factors, including, for example:

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•

delays in reaching agreement with regulatory authorities on ﬁnal trial design;

delays in reaching agreement on acceptable terms with prospective contract research organizations
and clinical trial sites;

the lack of effectiveness during clinical trials;

the emergence of unforeseen safety issues;

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•

•

inability to manufacture sufficient quantities of qualiﬁed materials under cGMP for use in clinical
trials;

slower than expected rates of patient recruitment;

failure to recruit a sufficient number of patients;

delays in having patients complete participation in a trial or return for post-treatment follow-up;

delays caused by patients dropping out of a trial due to product side effects, disease progression or
other reasons;

clinical sites dropping out of a trial to the detriment of enrollment;

modiﬁcation of clinical trial protocols;

delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial
materials;

occurrence of adverse events associated with the product candidate that are viewed to outweigh its
potential beneﬁts;

changes in regulatory requirements for clinical trials;

delays, suspension, or termination of clinical trials by the institutional review board or ethics
committee responsible for overseeing the study at a particular study site; and

government, institutional review board, ethics committee, or other regulatory delays or clinical holds
requiring suspension or termination of the trials.

We have used and intend to continue to rely on one or more contract research organizations, or CROs, to

conduct our nonclinical studies and clinical trials. We are highly dependent on these CROs to conduct our
studies and trials in accordance with the requirements of the FDA and good clinical and scientiﬁc practice. In
the event the CROs fail to perform their duties in such a fashion, we may not be able to complete our clinical
trials and may fail to obtain regulatory approval for any of our product candidates.

The failure of nonclinical studies and clinical trials to demonstrate safety and effectiveness for the desired

indications could harm the development of that product candidate and other product candidates. This failure
could cause us to abandon a product candidate and could delay development of other product candidates. Any
delay in, or termination of, our nonclinical studies or clinical trials would delay the ﬁling of our New Drug
Applications, or NDAs, or Biologics License Applications, or BLAs, with the FDA and, ultimately, our ability
to commercialize our product candidates and generate product revenues. Any change in, or termination of, our
clinical trials could materially harm our business, ﬁnancial condition, and results of operation.

Any product candidates that we may discover and develop 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.

Many product candidates that initially showed promise in early stage testing have later been found to
cause side effects that prevented their further development. Undesirable side effects caused by any product
candidates that we may discover or develop, or safety, tolerability or toxicity issues that may occur in our
nonclinical studies, clinical trials or in the future, could cause us or regulatory authorities to interrupt, restrict,
delay, or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory
approval by the FDA or other comparable foreign authorities. 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, prospects, ﬁnancial condition and results of operations.

We have a limited operating history and a history of operating losses, and expect to incur signiﬁcant
additional operating losses.

We were established in October 2005, began active operations in the spring of 2007, terminated programs

related to three prior product candidates, then merged with Assembly Pharmaceuticals, Inc., a private
company, in July 2014. We have only a limited operating history since the merger. Therefore, there is limited

20

historical ﬁnancial information upon which to base an evaluation of our performance. Our prospects must be
considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies
in their early stages of operations. We, and Assembly Pharmaceuticals prior to our merger, have generated
losses since we began operations and, as of December 31, 2015 and December 31, 2016, the combined
company had an accumulated deﬁcit of approximately $164.0 million and $208.2 million, respectively, and
net losses of $23.8 million, $28.5 million and $44.2 million for the years ended December 31, 2014, 2015
and 2016, respectively. These net losses have had, and will continue to have, an adverse effect on our
stockholders’ equity and working capital. We expect to incur substantial additional losses over the next
several years as we continue to pursue our research, development, nonclinical studies and clinical trial
activities. Further, since our initial public offering, we have incurred and will continue to incur as a public
company signiﬁcant additional legal, accounting and other expenses to which we were not subject to as
a private company, including expenses related to our efforts in complying with the requirements of
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 and other public company disclosure and corporate governance requirements and
responding to requests of government regulators. The amount of future losses and when, if ever, we will
achieve proﬁtability are uncertain and will depend, in part, on the rate of increase in our expenses, our ability
to generate revenues and our ability to raise additional capital. We have no products that have generated any
commercial revenue, do not expect to generate revenues from the commercial sale of products unless and until
our HBV or microbiome therapies or any other product candidate is approved by the FDA for sale, and we
might never generate revenues from the sale of products.

We are not currently proﬁtable and might never become proﬁtable.

We have a history of losses and expect to incur signiﬁcant operating and capital expenditures and
resultant substantial losses and negative operating cash ﬂow for the next several years, and beyond if we do
not successfully launch and commercialize any product candidates from our HBV or microbiome programs.
We might never achieve or maintain proﬁtability. We anticipate that our expenses will continue to be
substantial in the foreseeable future as we:

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advance ABI-H0731 through clinical development for HBV and initiate and conduct clinical trials of
our microbiome product candidate;

continue to undertake research and development to identify potential additional product candidates;

seek regulatory approvals for our product candidates; and

pursue our intellectual property strategy.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we
are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to
achieve proﬁtability. In addition, our expenses could increase if we are required by the FDA or comparable
foreign regulatory authorities to perform studies or trials in addition to those currently expected, or if there are
any delays in completing our clinical trials or the development of any of our product candidates.

As a result, we will need to generate signiﬁcant revenues in order to achieve and maintain proﬁtability.

Our ability to generate revenue and achieve proﬁtability will depend on, among other things:

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successful completion of research, nonclinical studies and clinical trials for our product candidates;

obtaining necessary regulatory approvals from the FDA and international regulatory agencies for our
product candidates;

establishing manufacturing, sales, and marketing arrangements with third parties for any approved
products; and

raising sufficient funds to ﬁnance our activities, if and when needed.

We might not succeed at any of these undertakings. If we are unsuccessful at some or all of these
undertakings, our business, prospects, and results of operations might be materially adversely affected.

21

We are an early stage company and might not be able to commercialize any product candidates.

We are an early stage company and have not demonstrated our ability to perform the functions necessary

for the successful commercialization of any product candidates. The successful commercialization of any
product candidates will require us to perform a variety of functions, including:

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continuing to undertake research and development and nonclinical studies and clinical trials;

participating in regulatory approval processes;

formulating and manufacturing products; and

conducting sales, marketing and distribution activities.

Our failure to successfully commercialize our product candidates would negatively impact the value of

our company and could impair our ability to raise capital, expand our business, diversify our research and
development pipeline, market our product candidates, if approved, or continue our operations.

Our development of product candidates is subject to risks and delays.

Our development of our product candidates is subject to the risks of failure and delay inherent in the

development of new pharmaceutical products and products based on new technologies, including:

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•

delays in product development, nonclinical and clinical testing;

unplanned expenditures in product development, nonclinical and clinical testing;

failure of a product candidate to demonstrate acceptable safety and efficacy;

failure to receive regulatory approvals;

emergence of superior or equivalent products;

inability to manufacture and sell on our own, or through any others, product candidates on a
commercial scale or at a ﬁnancially viable cost; and

failure to achieve market acceptance.

Because of these risks, our research and development efforts might not result in any commercially viable
products. If we do not successfully complete a signiﬁcant portion of these development efforts, obtain required
regulatory approvals, and have commercial success with any approved products, our business, ﬁnancial
condition and results of operations will be materially harmed.

There are substantial risks inherent in attempting to commercialize new drugs, and, as a result, we may not
be able to successfully develop products for commercial use.

Our HBV therapy research and development efforts involve therapeutics based on modulating forms of

HBV core proteins with Core Protein Allosteric Modulators, or CpAMs, which is a clinically unproven
mechanism of action. The development of our CpAM technology is in the early stages, and the commercial
feasibility and acceptance of our CpAM technology are unknown. Similarly, the technology for our
microbiome therapy is in nonclinical development and our GEMICEL, dual targeted release drug formulation,
is novel and not yet shown to successfully deliver live bacteria in patients.

Scientiﬁc research and development requires signiﬁcant amounts of capital and takes a long time to reach

commercial viability, if it can be achieved at all. To date, our research and development projects have not
produced commercially viable drugs, and may never do so. During the research and development process, we
may experience technological barriers that we may be unable to overcome. Further, certain underlying
premises in our development programs are not fully proven. More speciﬁcally, the theory that CpAMs can
selectively lower cccDNA and viral antigen levels in HBV patients and achieve a functional cure is unproven.
Thus, even if CpAM technology is successful at targeting the HBV core protein and reducing cccDNA levels
in HBV patients, it may not result in a commercially viable drug if there is not a corresponding medical
beneﬁt related to the underlying HBV infection. Similarly, with respect to our microbiome program, the ability
to effectively and reliably deliver bacteria to the GI tract is unproven, and, even if it can be proven, it may be

22

difficult or impossible to provide the treatment economically. Because of these uncertainties, it is possible that
no commercial products will be successfully developed. If we are unable to successfully develop commercial
products, we will be unable to generate revenue or build a sustainable or proﬁtable business.

We will need additional ﬁnancing to complete the development of any product candidate and fund our
activities in the future.

We anticipate that we will incur operating losses for the next several years as we continue to develop

our HBV therapy and our microbiome platform as well as initiate any development of any other product
candidates and will require substantial funds during that time to support our operations. We expect that
our current resources will provide us with sufficient capital to fund our operations for at least the next
twelve months. However, we might consume our available capital before that time if, for example, we are not
efficient in managing our resources or if we encounter unforeseen costs, delays or other issues or if regulatory
requirements change. If that happens, we may need additional ﬁnancing to continue the development of our
HBV therapy and our microbiome program. Thereafter, we will need additional capital to fund our operations
in the future. However, there is no assurance that we will be successful in raising any necessary additional
capital on terms that are acceptable to us, or at all. If such event or other unforeseen circumstances occurred
and we were unable to raise capital, we could be forced to discontinue product development, sacriﬁce
attractive business opportunities, cease operations entirely and sell or otherwise transfer all or substantially all
of our remaining assets.

Our product candidates face signiﬁcant development and regulatory hurdles prior to marketing which could
delay or prevent licensing, sales and/or milestone revenue.

Before we or any commercial partners obtain the approvals necessary to sell any of our product
candidate, we must show through pre-clinical studies and human testing in clinical trials that each potential
product is safe and effective. The rates at which we complete our scientiﬁc studies and clinical trials depend
on many factors, including, but are not limited to, our ability to obtain adequate supplies of the products to be
tested and patient enrollment. Patient enrollment is a function of many factors, including the size of the
patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial and other
potential drug candidates being studied. Delays in patient enrollment for our trials may result in increased
costs and longer development times. In addition, we will need additional ﬁnancing to develop our product
candidates, which we might seek and receive from third party commercial partners. Further, we currently do
not have the infrastructure to manufacture, market and sell our product candidates. If we partner with one or
more third party entities, those commercial partners may demand and receive rights to control product
development and commercialization. As a result, these commercial partners may conduct these programs and
activities more slowly or in a different manner than expected. If any of these events were to occur, the
development of any product candidate could be signiﬁcantly delayed, more expensive or less lucrative to us
than anticipated, any of which would have a signiﬁcant adverse effect on our business.

We are substantially dependent on our collaboration agreement with Allergan, which may be terminated or
may not be successful due to a number of factors, which could have a material adverse effect on our
business and operating results.

We have entered into the Collaboration Agreement with Allergan for the development and

commercialization of select microbiome gastrointestinal programs in ulcerative colitis, Crohn’s disease and
irritable bowel syndromes. Our collaboration with Allergan may be terminated, or may not be successful, due
to a number of factors. In particular, Allergan may terminate the Collaboration Agreement for convenience at
any time upon either 90 days’ (prior to the initiation of the ﬁrst POC trial of a licensed product) or 120 days’
(after the initiation of the ﬁrst POC trial of a licensed product), as applicable, advance written notice to us.
The Collaboration Agreement also contains customary provisions for termination by either party, including in
the event of breach of the Collaboration Agreement, subject to cure. In addition, if we are unable to identify
product candidates for the licensed indications or we are unable to protect our products by obtaining and
defending patents, the collaboration could fail. If the collaboration is unsuccessful for these or other reasons,
or is otherwise terminated for any reason, we may not receive all or any of the research program funding,
milestone payments or royalties under the agreement. Any of the foregoing could result in a material adverse
effect on our business, results of operations and prospects and would likely cause our stock price to decline.

23

We are dependent on a license relationship for each of our HBV therapy and our microbiome program.

Our license agreement with Indiana University Research and Technology Corporation, or IURTC, from

whom we have licensed our HBV therapy, requires us to make milestone payments based upon the successful
accomplishment of clinical and regulatory milestones related to our HBV therapy. The aggregate amount of all
performance milestone payments under the IURTC License Agreement, should all performance milestones
through development be met, is $825,000. As of December 31, 2016, no performance milestone payments
have been made. We also are obligated to pay IURTC royalty payments based on net sales of the licensed
technology. We are also obligated to pay diligence maintenance fees ($25,000 − $100,000) each year to the
extent that the royalty, sublicensing, and milestone payments to IURTC are less than the diligence
maintenance fee for that year. Our license with Therabiome, LLC, from whom we have licensed our
microbiome program, also requires us to pay regulatory and clinical milestones as well as royalty payments to
Therabiome. If we breach any of these obligations, we could lose our rights to the targeted delivery
mechanism of our microbiome program. If we fail to comply with similar obligations to any other licensor, it
would have the right to terminate the license, in which event we would not be able to commercialize drug
candidates or technologies that were covered by the license. Also, the milestone and other payments associated
with licenses will make it less proﬁtable for us to develop our drug candidates than if we owned the
technology ourselves.

Corporate and academic collaborators might take actions to delay, prevent, or undermine the success of our
product candidates.

Our operating and ﬁnancial strategy for the development, nonclinical and clinical testing, manufacture,

and commercialization of drug candidates heavily depends on collaborating with corporations, academic
institutions, licensors, licensees, and other parties. However, there can be no assurance that we will
successfully establish these collaborations. In addition, should a collaboration be terminated, replacement
collaborators might not be available on attractive terms, or at all. The activities of any collaborator will not be
within our control and might not be within our power to inﬂuence. There can be no assurance that any
collaborator will perform its obligations to our satisfaction or at all, that we will derive any revenue or proﬁts
from these collaborations, or that any collaborator will not compete with us. If any collaboration is not
successful, we might require substantially greater capital to undertake development and marketing of our
proposed products and might not be able to develop and market these products effectively, if at all. In
addition, a lack of development and marketing collaborations might lead to signiﬁcant delays in introducing
proposed products into certain markets and/or reduced sales of proposed products in such markets.

We rely on data provided by our collaborators and others that has not been independently veriﬁed and
could prove to be false, misleading, or incomplete.

We rely on third-party vendors, scientists, and collaborators to provide us with signiﬁcant data and other

information related to our projects, nonclinical studies and clinical trials, and our business. If these third
parties provide inaccurate, misleading, or incomplete data, our business, prospects, and results of operations
could be materially adversely affected.

Research, development and commercialization goals may not be achieved in the time frames that we
publicly estimate, which could have an adverse impact on our business and could cause our stock price to
decline.

We set goals, and make public statements regarding our expectations, regarding the timing of certain
accomplishments, developments and milestones under our research and development programs. The actual
timing of these events can vary signiﬁcantly due to a number of factors, including, without limitation, the
amount of time, effort and resources committed to our programs by us and any collaborators and the
uncertainties inherent in the clinical development and regulatory approval process. As a result, there can be no
assurance that we or any collaborators will initiate or complete clinical development activities, make
regulatory submissions or receive regulatory approvals as planned or that we or any collaborators will be able
to adhere to our current schedule for the achievement of key milestones under any of our programs. If we or
any collaborators fail to achieve one or more of the milestones as planned, our business could be materially
adversely affected and the price of our common stock could decline.

24

Unforeseen safety issues could hinder the development of our product candidates and their adoption, if
approved.

Safety issues could arise during development of our product candidates, which might delay testing or
prevent further development entirely. Unforeseen safety issues could emerge in any future study or trial of our
HBV or microbiome product candidates, which could severely hamper the likelihood of FDA or other
regulatory approval of any such product candidate. If any of these events were to occur, the development of
any product candidate could be signiﬁcantly delayed and become more expensive than anticipated, and could
lead us to abandon our development efforts entirely, any of which would have a signiﬁcant adverse effect on
our business.

If a product is approved, any limitation on use that might be necessary due to safety issues, such as

labeling warnings or distributions and use restrictions under a REMS, could hinder its adoption in the
marketplace. In addition, if any product is approved, it could be used against any instructions that we publish
that limit its use, which could subject us to litigation.

We lack suitable facilities for certain nonclinical and clinical testing and expect to rely on third parties to
conduct some of our research and nonclinical testing and our clinical trials and those third parties may not
perform satisfactorily, including failing to meet deadlines for the completion of such research, testing or
trials.

We do not have sufficient facilities to conduct all of our anticipated nonclinical and clinical testing. As a
result, we expect to contract with third parties to conduct most of our nonclinical and clinical testing required
for regulatory approval for our product candidates. We will be reliant on the services of third parties to
conduct studies on our behalf. If we are unable to retain or continue with third parties for these purposes on
acceptable terms, we may be unable to successfully develop our product candidates. In addition, any failures
by third parties to adequately perform their responsibilities may delay the submission of our product
candidates for regulatory approval, which would impair our ﬁnancial condition and business prospects.

Our reliance on these third parties for research and development activities also reduces our control over

these activities but will not relieve us of our responsibilities. For example, we are responsible for ensuring that
each of our studies is conducted in accordance with the applicable protocol, legal and regulatory requirements
and scientiﬁc standards, and our reliance on third parties does not relieve us of our regulatory responsibilities.
Furthermore, these third parties may also have relationships with other entities, some of which may be our
competitors. In addition, these third parties are not our employees, and except for remedies available to us
under our agreements with such third parties, we cannot control whether or not they devote sufficient time and
resources to our clinical and nonclinical programs. If these third parties do not successfully carry out their
contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or
accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our research, nonclinical studies or clinical trials may be
extended, delayed or terminated and we may not be able to obtain, or may be delayed in obtaining, regulatory
approvals for our product candidates. As a result, our results of operations and business prospects would be
harmed, our costs could increase and our ability to generate revenues could be delayed.

We will need to either establish our own clinical and commercial manufacturing capabilities or rely on
third parties to formulate and manufacture our product candidates.

We currently do not have our own manufacturing facilities and rely on third-party manufacturers to
supply the quantities of ABI-H0731 used in our Phase 1 clinical trials and drug substance and drug product
for ABI-M101. Although we intend to establish our own manufacturing capabilities for our microbiome drug
substance and drug products, we currently lack the physical plant to formulate and manufacture our own
product candidates for use in our planned clinical trials. In addition, if any product candidate we might
develop or acquire in the future receives FDA or other regulatory approval, we will need to either
manufacture commercial quantities of the product on our own or rely on one or more third-party contractors
to manufacture our products. The establishment of internal manufacturing capabilities is difficult and costly,
and we may not be successful in doing so. If, for any reason, we are unable to establish our own
manufacturing capabilities and we are unable to rely on any third-party sources we have identiﬁed to

25

manufacture our product candidates, either for clinical trials or, at some future date, for commercial quantities,
then we would need to identify and contract with additional or replacement third-party manufacturers to
manufacture compounds, drug substance and drug products for nonclinical, clinical and commercial purposes.
We might not be successful in identifying additional or replacement third-party manufacturers, or in
negotiating acceptable terms with any that we do identify. If we are unable to establish and maintain
manufacturing capacity either on our own or through third parties, the development and sales of our products
and our ﬁnancial performance will be materially and adversely affected.

In addition, before we or any of our collaborators can begin to commercially manufacture our product
candidates, each manufacturing facility and process is subject to regulatory review. Manufacturing of drugs for
clinical and commercial purposes must comply with the FDA’s cGMPs, and applicable non-U.S. regulatory
requirements. The cGMP requirements govern quality control and documentation policies and procedures.
Complying with cGMP and non-U.S. regulatory requirements will require that we expend time, money, and
effort in production, recordkeeping, and quality control to assure that the product meets applicable
speciﬁcations and other requirements. Any manufacturing facility must also pass a pre-approval inspection
prior to FDA approval. Failure to pass a pre-approval inspection might signiﬁcantly delay FDA approval of
our product candidates. If we or any of our future collaborators fails to comply with these requirements with
respect to the manufacture of any of our product candidates, regulatory action could limit the jurisdictions in
which we are permitted to sell our products, if approved. As a result, our business, ﬁnancial condition, and
results of operations might be materially harmed.

We are exposed to the following risks with respect to the manufacture of our product candidates:

•

If we are unable to establish our own manufacturing capabilities, we will need to identify
manufacturers for commercial supply on acceptable terms, which we may not be able to do because
the number of potential manufacturers is limited and the FDA must approve any new or replacement
contractor. This approval would generally require compliance inspections. In addition, a new
manufacturer would have to be educated in, or develop substantially equivalent processes for,
production of our products after receipt of FDA approval, if any.

• We or any third-party manufacturers with whom we contract might be unable to formulate and

manufacture our product candidates in the volume and of the quality required to meet our clinical
and, if approved, commercial needs.

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Any third-party manufacturers with whom we contract might not perform as agreed or might not
remain in the contract manufacturing business for the time required to supply our clinical trials or to
successfully produce, store and distribute our products.

One or more of any third-party manufacturers with whom we contract could be foreign, which
increases the risk of shipping delays and adds the risk of import restrictions.

Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and
corresponding state agencies to ensure strict compliance with cGMP and other government
regulations and corresponding foreign requirements. Any internal manufacturing facilities we
establish may fail to comply, and we would not have complete control over any third-party
manufacturers’ compliance, with these regulations and requirements.

• We may be required to obtain additional intellectual property rights from third parties in order to

manufacture our product candidates, and if any third-party manufacturer makes improvements in the
manufacturing process for our product candidates, we might not own, or might have to share, the
intellectual property rights to the innovation with our licensors.

• We may be required to share our trade secrets and know-how with third parties, thereby risking the

misappropriation or disclosure of our intellectual property by or to third parties.

•

If we contract with third-party manufacturers, we might compete with other companies for access to
these manufacturers’ facilities and might be subject to manufacturing delays if the manufacturers
give other clients higher priority than us.

26

Each of these risks could delay our development efforts, nonclinical studies and clinical trials or the

approval, if any, of our product candidates by the FDA or the commercialization of our product candidates
and could result in higher costs or deprive us of potential product revenues. As a result, our business, ﬁnancial
condition, and results of operations might be materially harmed.

If we cannot compete successfully for market share against other drug companies, we might not achieve
sufficient product revenues and our business will suffer.

If our product candidates receive FDA approval, they will compete with a number of existing and future

drugs and therapies developed, manufactured and marketed by others. Existing or future competing drugs
might provide greater therapeutic convenience or clinical or other beneﬁts for a speciﬁc indication than our
product candidates, or might offer comparable performance at a lower cost. If our product candidates fail to
capture and maintain market share, we might not achieve sufficient product revenues and our business will
suffer.

We might compete against fully integrated pharmaceutical companies and smaller companies that are
collaborating with larger pharmaceutical companies, academic institutions, government agencies and other
public and private research organizations. Many of these competitors, either alone or together with their
collaborative partners, operate larger research and development programs or have substantially greater
ﬁnancial resources than we do, as well as signiﬁcantly greater experience in:

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developing drugs;

undertaking nonclinical testing and human clinical trials;

obtaining FDA and other regulatory approvals of drugs;

formulating and manufacturing drugs; and

launching, marketing and selling drugs.

We may not have or be able to obtain the same resources and experience as our competitors. If we are

unable to perform these tasks effectively and efficiently, our results of operations might be materially
adversely affected.

Developments by competitors might render our product candidates or technologies obsolete or
non-competitive.

The pharmaceutical and biotechnology industries are intensely competitive. In addition, the clinical and

commercial landscape for HBV, CDI, UC, IBS and IBD is rapidly changing; we expect new data from
commercial and clinical-stage products to continue to emerge. We will compete with organizations that have
existing treatments and that are or will be developing treatments for the indications that our product
candidates target. If our competitors develop effective treatments for HBV, CDI, UC, IBS or IBD or any other
indication or ﬁeld we might pursue, and successfully commercialize those treatments, our business and
prospects might be materially harmed, due to intense competition in these markets.

If we are not able to develop collaborative marketing relationships with licensees or partners, or create
effective internal sales, marketing, and distribution capability, we might be unable to market our products
successfully.

To market our product candidates, if approved, we will have to establish our own marketing and sales

force or out-license our product candidates to, or collaborate with, larger ﬁrms with experience in marketing
and selling pharmaceutical products. There can be no assurance that we will be able to successfully establish
our own marketing capabilities or establish marketing, sales, or distribution relationships with third parties;
that such relationships, if established, will be successful; or that we will be successful in gaining market
acceptance for our product candidates. To the extent that we enter into any marketing, sales, or distribution
arrangements with third parties, our product revenues will be lower than if we marketed and sold our products
directly, and any revenues we receive will depend upon the efforts of such third parties. If we are unable to
establish such third-party sales and marketing relationships, or choose not to do so, we will have to establish
our own in-house capabilities. We, as a company, have no experience in marketing or selling pharmaceutical

27

products and currently have no sales, marketing, or distribution infrastructure. To market any of our products
directly, we would need to develop a marketing, sales, and distribution force that both has technical expertise
and the ability to support a distribution capability. To establish our own marketing, sales, and distribution
capacity would signiﬁcantly increase our costs, and require substantial additional capital. In addition, there is
intense competition for proﬁcient sales and marketing personnel, and we might not be able to attract
individuals who have the qualiﬁcations necessary to market, sell, and distribute our products. There can be no
assurance that we will be able to establish internal marketing, sales, or distribution capabilities.

The commercial success of our product candidates will depend upon the degree of market acceptance by
physicians, patients, third-party payers and others in the medical community.

The commercial success of our products, if approved for marketing, will depend in part on the medical

community, patients and third-party payers accepting our product candidates as effective and safe. If these
products do not achieve an adequate level of acceptance, we may not generate signiﬁcant product revenue and
may not become proﬁtable. The degree of market acceptance of our products, if approved for marketing, will
depend on a number of factors, including:

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the actual or perceived safety and efficacy of the products, and advantages over alternative
treatments;

the pricing and cost-effectiveness of our products relative to competing products or therapies;

the labeling of any approved product;

the prevalence and severity of any side effects, including any limitations or warnings contained in a
product’s approved labeling;

the emergence, and timing of market introduction, of competitive products;

the effectiveness of marketing and distribution efforts by us and our licensees and distributors, if
any; and

the availability of third-party insurance coverage or governmental reimbursement.

Even if a potential product displays a favorable efficacy and safety proﬁle in nonclinical studies and

clinical trials, market acceptance of the product will not be known until after it is launched. Any failure to
achieve market acceptance for our product candidates will harm our business, results and ﬁnancial condition.

If we lose key management or scientiﬁc personnel, cannot recruit qualiﬁed employees, directors, officers, or
other signiﬁcant personnel or experience increases in our compensation costs, our business might
materially suffer.

We are highly dependent on the services of our Chief Executive Officer and President, Derek Small, our
Chief Scientiﬁc Officer, Dr. Richard Colonno, our Chief Scientiﬁc Officer — Microbiome, Miguel S. Barbosa,
Ph.D, our Chief Medical Officer and Vice President of Research and Development, Dr. Uri Lopatin, our Chief
Development Officer, Thomas E. Rollins, and our Chief Financial Officer and Chief Operating Officer, David
J. Barrett. Our employment agreements with Mr. Small, Dr. Lopatin, Dr. Colonno, Dr. Barbosa, Mr. Rollins
and Mr. Barrett do not ensure their retention. This is also true for our other management team members, both
present and future.

Furthermore, our future success also depends, in part, on our ability to identify, hire, and retain additional
management team members as our operations grow. We expect to experience intense competition for qualiﬁed
personnel and might be unable to attract and retain the personnel necessary for the development of our
business. Finally, we do not currently maintain, nor do we intend to obtain in the future, ‘‘key man’’ life
insurance that would compensate us in the event of the death or disability of any of the members of our
management team.

The failure by us to retain, attract and motivate executives and other key employees could have a

material adverse impact on our business, ﬁnancial condition and results of operations.

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If we are unable to hire additional qualiﬁed personnel, our ability to grow our business might be harmed.

As of February 24, 2017, we had 69 employees, 4 temporary contractors and various consultants and
multiple contract research organizations with whom we have contracted. We will need to hire or contract with
additional qualiﬁed personnel with expertise in clinical research and testing, formulation and manufacturing
and sales and marketing to commercialize our HBV drug candidates and our microbiome biotherapeutics or
any other product candidate we may seek to develop. We compete for qualiﬁed individuals with numerous
biopharmaceutical companies, universities and other research institutions. Competition for these individuals is
intense, and we cannot be certain that our search for such personnel will be successful. Attracting and
retaining qualiﬁed personnel will be critical to our success.

We might not successfully manage our growth.

Our success will depend upon the expansion of our operations and the effective management of our
growth, which will place a signiﬁcant strain on our current and future management and other administrative
and operational resources. To manage this growth, we may need to expand our facilities, augment our
operational, ﬁnancial and management systems and hire and train additional qualiﬁed personnel. If we are
unable to manage our growth effectively, our business would be harmed.

We might seek to develop our business through acquisitions of or investment in new or complementary
businesses, products or technologies, and the failure to manage these acquisitions or investments, or the
failure to integrate them with our existing business, could have a material adverse effect on us.

We might consider opportunities to acquire or invest in other technologies, products and businesses that

might enhance our capabilities or complement our current product candidates. Potential and completed
acquisitions and strategic investments involve numerous risks, including potential problems or issues
associated with the following:

•

•

•

•

•

•

assimilating the purchased technologies, products or business operations;

maintaining uniform standards, procedures, controls and policies;

unanticipated costs associated with the acquisition or investment;

diversion of our management’s attention from our preexisting business;

maintaining or obtaining the necessary regulatory approvals or complying with regulatory
requirements; and

adverse effects on existing business operations.

We have no current commitments with respect to any acquisition or investment in other technologies or
businesses. We do not know if we will identify suitable acquisitions, whether we will be able to successfully
complete any acquisitions, or whether we will be able to successfully integrate any acquired product,
technology or business into our business or retain key personnel, suppliers or collaborators.

Our ability to successfully develop our business through acquisitions would depend on our ability to
identify, negotiate, complete and integrate suitable target businesses or technologies and obtain any necessary
ﬁnancing. These efforts could be expensive and time consuming and might disrupt our ongoing operations. If
we are unable to efficiently integrate any acquired business, technology or product into our business, our
business and ﬁnancial condition might be adversely affected.

Risks Related to Our Regulatory and Legal Environment

We are subject to extensive and costly government regulation.

Product candidates employing our technology are subject to extensive and rigorous domestic government
regulation including regulation by the FDA, the Centers for Medicare and Medicaid Services, other divisions
of the U.S. Department of Health and Human Services, the U.S. Department of Justice, state and local
governments, and their respective foreign equivalents. The FDA regulates the research, development,
nonclinical and clinical testing, manufacture, safety, effectiveness, record-keeping, reporting, labeling, storage,

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approval, advertising, promotion, sale, distribution, import, and export of pharmaceutical and biological
products. If products employing our technologies are marketed abroad, they will also be subject to extensive
regulation by foreign governments, whether or not they have obtained FDA approval for a given product and
its uses. Such foreign regulation might be equally or more demanding than corresponding U.S. regulation.

Government regulation substantially increases the cost and risk of researching, developing,
manufacturing, and selling our product candidates. The regulatory review and approval process, which
includes nonclinical testing and clinical trials of each product candidate, is lengthy, expensive, and uncertain.
We or our collaborators must obtain and maintain regulatory authorization to conduct clinical trials and
approval for each product we intend to market, and the manufacturing facilities used for the products must be
inspected and meet legal requirements. Securing regulatory approval requires submitting extensive nonclinical
and clinical data and other supporting information for each proposed therapeutic indication in order to
establish the product’s safety and efficacy for each intended use. The development and approval process might
take many years, requires substantial resources, and might never lead to the approval of a product.

Even if we are able to obtain regulatory approval for a particular product, the approval might limit the
intended medical uses for the product, limit our ability to promote, sell, and distribute the product, require that
we conduct costly post-marketing surveillance, and/or require that we conduct ongoing post-marketing studies.
Material changes to an approved product, such as, for example, manufacturing changes or revised labeling,
might require further regulatory review and approval. Once obtained, any approvals might be withdrawn,
including, for example, if there is a later discovery of previously unknown problems with the product, such as
a previously unknown safety issue.

If we, our collaborators, or our contract manufacturers fail to comply with applicable regulatory
requirements at any stage during the regulatory process, such noncompliance could result in, among other
things, delays in the approval of applications or supplements to approved applications; refusal by a regulatory
authority, including the FDA, to review pending market approval applications or supplements to approved
applications; untitled letters or warning letters; ﬁnes; import and export restrictions; product recalls or
seizures; injunctions; total or partial suspension of production; civil penalties; withdrawals of previously
approved marketing applications; recommendations by the FDA or other regulatory authorities against
governmental contracts; and/or criminal prosecutions.

We might not obtain the necessary U.S. or worldwide regulatory approvals to commercialize any product
candidate.

We cannot assure you that we will receive the approvals necessary to commercialize for sale any of our

product candidates, or any product candidate we acquire or develop in the future. We will need FDA approval
to commercialize our product candidates in the U.S. and approvals from the FDA-equivalent regulatory
authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. In order to
obtain FDA approval of any product candidate, we must submit to the FDA an NDA or BLA demonstrating
that the product candidate is safe for humans and effective for its intended use (for biological products, this
standard is referred to as safe, pure and potent). This demonstration requires signiﬁcant research, nonclinical
studies, and clinical trials. Satisfaction of the FDA’s regulatory requirements typically takes many years,
depends upon the type, complexity and novelty of the product candidate and requires substantial resources for
research, development and testing. We cannot predict whether our research and clinical approaches will result
in drugs or biological products that the FDA considers safe for humans and effective for their indicated uses.
The FDA has substantial discretion in the approval process and might require us to conduct additional
nonclinical and clinical testing, perform post-marketing studies or otherwise limit or impose conditions on any
approval we obtain.

The approval process might also be delayed by changes in government regulation, future legislation or

administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in
obtaining regulatory approvals might:

•

•

•

delay commercialization of, and our ability to derive product revenues from, our product candidates;

impose costly procedures on us; and

diminish any competitive advantages that we might otherwise enjoy.

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Even if we comply with all FDA requests, the FDA might ultimately reject one or more of our NDAs or

BLAs. We cannot be sure that we will ever obtain regulatory approval for our product candidates. Failure to
obtain FDA approval of our product candidates will severely undermine our business by leaving us without a
saleable product, and therefore without any source of revenues, until another product candidate could be
developed or obtained. There is no guarantee that we will ever be able to develop an existing, or acquire
another, product candidate.

In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we

can commercialize any product candidates. The risks associated with foreign regulatory approval processes are
similar to the risks associated with the FDA approval procedures described above. We cannot assure you that
we will receive the approvals necessary to commercialize our product candidates for sale outside the U.S.

Even if approved, our product candidates will be subject to extensive post-approval regulation.

Once a product candidate is approved, numerous post-approval requirements apply. Among other things,

the holder of an approved NDA is subject to ongoing FDA oversight monitoring and reporting obligations,
including obligations to monitor and report adverse events and instances of the failure of a product to meet
the speciﬁcations in the NDA. Application holders must submit new or supplemental applications and obtain
FDA approval for changes to the approved product, product labeling, or manufacturing process, depending on
the nature of the change. Application holders also must submit advertising and other promotional material to
the FDA and report on ongoing clinical trials. The FDA also has the authority to require changes in the
labeling of approved drug products and to require post-marketing studies. The FDA can also impose
distribution and use restrictions under a Risk Evaluation and Mitigation Strategy, or REMS.

Advertising and promotional materials must comply with FDA rules in addition to other applicable
federal and state laws. The distribution of product samples to physicians must comply with the requirements
of the Prescription Drug Marketing Act. Manufacturing facilities remain subject to FDA inspection and must
continue to adhere to the FDA’s cGMP requirements. Sales, marketing, and scientiﬁc/educational grant
programs, among other activities, must comply with the anti-fraud and abuse provisions of the Social Security
Act, the False Claims Act, and similar state laws, each as amended. Pricing and rebate programs must comply
with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veteran’s
Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal
Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these
activities are also potentially subject to federal and state consumer protection and unfair competition laws.

Depending on the circumstances, failure to meet these post-approval requirements can result in criminal

prosecution, ﬁnes, injunctions, recall or seizure of products, total or partial suspension of production, denial or
withdrawal of pre-marketing product approvals, or refusal to allow us to enter into supply contracts, including
government contracts. In addition, even if we comply with FDA and other requirements, new information
regarding the safety or effectiveness of a product could lead the FDA to modify or withdraw product approval.

Even if we are able to commercialize any product candidates, those products may become subject to
unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which
would harm our business.

The regulations that govern marketing approvals, pricing and reimbursement for new medicines vary
widely from country to country. In the U.S., recently enacted legislation may signiﬁcantly change the approval
requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some
countries require approval of the sale price of a medicine before it can be marketed. In many countries, the
pricing review period begins after marketing or product licensing approval is granted. In some foreign
markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after
initial approval is granted. As a result, we might obtain marketing approval for a medicine in a particular
country, but then be subject to price regulations that delay our commercial launch of the medicine, possibly
for lengthy time periods, and negatively impact the revenues we are able to generate from the sale of the
medicine in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one
or more product candidates, even if our product candidates obtain marketing approval.

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Our ability to commercialize any medicines successfully also will depend in part on the extent to which

reimbursement for these medicines and related treatments will be available from government health
administration authorities, private health insurers and other organizations. Government authorities and third
party payors, such as private health insurers and health maintenance organizations, decide which medications
they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and
elsewhere is cost containment. Government authorities and third party payors have attempted to control costs
by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party
payors are requiring that drug companies provide them with predetermined discounts from list prices and are
challenging the prices charged for medical products. We cannot be sure that reimbursement will be available
for any product candidate that we commercialize and, if reimbursement is available, the level of
reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which
we obtain marketing approval. If reimbursement is not available or is available only to limited levels, we may
not be able to successfully commercialize any product candidate for which we obtain marketing approval.

There may be signiﬁcant delays in obtaining reimbursement for newly approved medicines, and coverage
may be more limited than the purposes for which the medicine is approved by the FDA or similar regulatory
authorities outside the U.S. Moreover, eligibility for reimbursement does not imply that any medicine will be
paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and
distribution. Interim reimbursement levels for new medicines, if applicable, may also not be sufficient to cover
our costs and may not be made permanent. Reimbursement rates may vary according to the use of the
medicine and the clinical setting in which it is used, may be based on reimbursement levels already set for
lower cost medicines and may be incorporated into existing payments for other services. Net prices for
medicines 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 medicines from countries
where they may be sold at lower prices than in the U.S. Third party payors often rely upon Medicare
coverage policy and payment limitations in setting their own reimbursement policies. Our inability to
promptly obtain coverage and proﬁtable payment rates from both government-funded and private payors for
any approved product candidates that we develop could have a material adverse effect on our operating
results, our ability to raise capital needed to commercialize product candidates and our overall ﬁnancial
condition.

In the U.S. and in other countries, there have been and we expect there will continue to be a number of

legislative and regulatory proposals to change the healthcare system in ways that could signiﬁcantly affect our
business. International, federal and state lawmakers regularly propose and, at times, enact legislation that
would result in signiﬁcant changes to the healthcare system, some of which are intended to contain or reduce
the costs of medical products and services. The U.S. government and other governments have shown
signiﬁcant interest in pursuing healthcare reform, as evidenced by the Patient Protection and Affordable
Care Act and its amendment, the Health Care and Education Reconciliation Act, or the ACA. Such
government-adopted reform measures may adversely impact the pricing of healthcare products and services in
the U.S. or internationally and the amount of reimbursement available from governmental agencies or other
third-party payors. The current administration supports a repeal of the ACA and an Executive Order has been
signed commanding federal agencies to try to waive or delay requirements of the ACA that impose economic
or regulatory burdens on states, families, the health-care industry and others. The Executive Order also
declares that the administration will seek the ‘‘prompt repeal’’ of the law and that the government should
prepare to ‘‘afford the States more ﬂexibility and control to create a more free and open healthcare market.’’
At this time, the immediate impact of the Executive Order is not clear. In addition, other legislative changes
have been proposed and adopted since the ACA was enacted. These new laws may result in additional
reductions in Medicare and other healthcare funding. In addition, in some foreign jurisdictions, there have
been a number of legislative and regulatory proposals to change the healthcare system in ways that could
affect our ability to sell our products proﬁtably. The continuing efforts of U.S. and other governments,
insurance companies, managed care organizations and other payors of healthcare services to contain or reduce
healthcare costs may adversely affect our ability to set satisfactory prices for our products, to generate
revenues, and to achieve and maintain proﬁtability.

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If we fail to maintain an effective system of disclosure controls and internal control over ﬁnancial
reporting, our ability to produce timely and accurate ﬁnancial statements or comply with applicable
regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange, the

Sarbanes-Oxley Act and the listing standards of NASDAQ, the exchange on which our common stock is
listed. We expect that the requirements of these rules and regulations will continue to increase our legal,
accounting and ﬁnancial compliance costs, make some activities more difficult, time consuming and costly and
place signiﬁcant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and

procedures and internal control over ﬁnancial reporting. We are continuing to reﬁne our disclosure controls
and other procedures that are designed to ensure that the information that we are required to disclose in the
reports that we will ﬁle with the SEC is properly recorded, processed, summarized and reported within the
time periods speciﬁed in SEC rules and forms. We are also continuing to improve our internal control over
ﬁnancial reporting. We have expended, and anticipate that we will continue to expend, signiﬁcant resources in
order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control
over ﬁnancial reporting.

Our current controls and any new controls that we develop in the future may become inadequate because
of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control
over ﬁnancial reporting may be discovered in the future. Any failure to develop or maintain effective controls,
or any difficulties encountered in their implementation or improvement, could harm our operating results or
cause us to fail to meet our reporting obligations and may result in a restatement of our ﬁnancial statements
for prior periods. Any failure to implement and maintain effective internal control over ﬁnancial reporting
could also adversely affect the results of management reports and independent registered public accounting
ﬁrm audits of our internal control over ﬁnancial reporting that we will be required to include in our periodic
reports that will be ﬁled with the SEC. If we were to have ineffective disclosure controls and procedures or
internal control over ﬁnancial reporting, our investors could lose conﬁdence in our reported ﬁnancial and other
information, which would likely have a negative effect on the market price of our common stock.

We face the risk of product liability claims and might not be able to obtain insurance.

Our business exposes us to the risk of product liability claims that are inherent in the development of

drugs and biotherapeutics. If the use of one or more of our or our collaborators’ product candidates or
approved drugs, if any, harms people, we might be subject to costly and damaging product liability claims
brought against us by clinical trial participants, consumers, health care providers, pharmaceutical companies
or others selling our products. Our inability to obtain sufficient product liability insurance at an acceptable
cost to protect against potential product liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop. We expect to obtain clinical trial insurance for our product candidates
prior to beginning clinical trials. We cannot predict all of the possible harms or side effects that might result
and, therefore, the amount of insurance coverage we obtain, if any, in the future might not be adequate to
cover all liabilities we might incur. We intend to expand our insurance coverage to include product liability
insurance covering the sale of commercial products if we obtain marketing approval for our drug candidates in
development, but we might be unable to obtain commercially reasonable product liability insurance for any
products approved for marketing. If we are unable to obtain insurance at an acceptable cost or otherwise
protect against potential product liability claims, we will be exposed to signiﬁcant liabilities, which might
materially and adversely affect our business and ﬁnancial position. If we are sued for any injury allegedly
caused by our or our collaborators’ products, our liability could exceed our total assets and our ability to pay
the liability. Any successful product liability claims or series of claims brought against us would decrease our
cash and could cause the value of our common stock to decrease.

We might be exposed to liability claims associated with the use of hazardous materials and chemicals.

Our research, development and manufacturing activities and/or those of our third-party contractors might

involve the controlled use of hazardous materials and chemicals. Although we will strive to have our safety
procedures, and those of our contractors, for using, storing, handling and disposing of these materials comply

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with federal, state and local laws and regulations, we cannot completely eliminate the risk of accidental injury
or contamination from these materials. In the event of such an accident, we could be held liable for any
resulting damages, and any liability could materially adversely affect our business, ﬁnancial condition and
results of operations. In addition, the federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of hazardous or radioactive materials and waste products might
require us to incur substantial compliance costs that could materially adversely affect our business, ﬁnancial
condition and results of operations. We currently do not carry hazardous materials liability insurance. We
intend to obtain such insurance in the future if necessary, but cannot give assurance that we could obtain such
coverage.

Our employees may engage in misconduct or other improper activities, including noncompliance with
regulatory standards and requirements, which could result in signiﬁcant liability for us and harm our
reputation.

We are exposed to the risk of employee fraud or other misconduct, including intentional failure to:

•

•

•

•

•

•

comply with FDA regulations or similar regulations of comparable foreign regulatory authorities;

provide accurate information to the FDA or comparable foreign regulatory authorities;

comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and
regulations established and enforced by comparable foreign regulatory authorities;

comply with United States Foreign Corrupt Practices Act, or FCPA, the U.K. anti-bribery laws and
other anti-bribery laws;

report ﬁnancial information or data accurately; or

disclose unauthorized activities to us.

Employee misconduct could also involve the improper use of information obtained in the course of
clinical trials, which could result in regulatory sanctions, delays in clinical trials, or serious harm to our
reputation. We have adopted a code of conduct for our directors, officers and employees (the ‘‘Code of
Conduct’’), but it is not always possible to identify and deter employee misconduct. The precautions we take
to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses
or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to
be in compliance with such laws 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 harm our business, results of
operations, ﬁnancial condition and cash ﬂows, including through the imposition of signiﬁcant ﬁnes or other
sanctions.

We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control,
sanctions, and other trade laws and regulations (collectively, ‘‘Trade Laws’’). We can face serious
consequences for violations.

Among other matters, Trade Laws prohibit companies and their employees, agents, clinical research

organizations, legal counsel, accountants, consultants, contractors, and other partners from authorizing,
promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or
anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result
in substantial criminal ﬁnes and civil penalties, imprisonment, the loss of trade privileges, debarment, tax
reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have
direct or indirect interactions with officials and employees of government agencies or government-affiliated
hospitals, universities, and other organizations. We also expect our non-U.S. activities to increase in time. We
engage third parties for clinical trials and/or to obtain necessary permits, licenses, patent registrations, and
other regulatory approvals. We can be held liable for the corrupt or other illegal activities of our personnel,
agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities.

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We are establishing international operations and conducting clinical trials outside of the U.S. and a
number of risks associated with international operations could materially and adversely affect our business.

We expect to be subject to a number of risks related with our international operations, many of which

may be beyond our control. These risks include:

•

•

•

•

•

•

•

•

•

•

•

different regulatory requirements for drug approvals in foreign countries;

different standards of care in various countries that could complicate the evaluation of our product
candidates;

different U.S. and foreign drug import and export rules;

different reimbursement systems and different competitive drugs indicated to treat the indication for
which our product candidates are being developed;

reduced protection for intellectual property rights in certain countries;

unexpected changes in tariffs, trade barriers and regulatory requirements;

compliance with the FCPA, and other anti-corruption and anti-bribery laws;

compliance with tax, employment, immigration and labor laws for employees living or traveling
abroad;

foreign taxes, including withholding of payroll taxes;

foreign currency ﬂuctuations, which could result in increased operating expenses and reduced
revenues, and other obligations incident to doing business in another country; and

business interruptions resulting from geopolitical actions, including war and terrorism, or natural
disasters.

Risks Related to Our Intellectual Property

Our business depends on protecting our intellectual property.

If we and our licensors IURTC and Therabiome do not obtain protection for our respective intellectual
property rights, our competitors might be able to take advantage of our research and development efforts to
develop competing drugs. Our success, competitive position and future revenues, if any, depend in part on our
ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods,
processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights of third parties.

We seek to protect our proprietary position by ﬁling patent applications in the U.S. and abroad related to
our novel technologies and chemical and biological compositions that are important to our business. To date,
although our licensors have ﬁled patent applications, we do not own or have any rights to any issued patents
that cover any of our product candidates, and we cannot be certain that we will secure any rights to any
issued patents with claims that cover any of our proprietary product candidates and technologies. The patent
prosecution process is expensive and time-consuming and we may not be able to ﬁle and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that
we will fail to identify patentable aspects of our research and development output before it is too late to
obtain patent protection.

The patent process also is subject to numerous risks and uncertainties, and there can be no assurance that

we will be successful in protecting our products by obtaining and defending patents. These risks and
uncertainties include the following:

•

Any patent rights, if obtained, might be challenged, invalidated, or circumvented, or otherwise might
not provide any competitive advantage;

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•

•

•

Our competitors, many of which have substantially greater resources than we do and many of which
might make signiﬁcant investments in competing technologies, might seek, or might already have
obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our
potential products either in the U.S. or in international markets;

As a matter of public policy regarding worldwide health concerns, there might be signiﬁcant
pressure on the U.S. government and other international governmental bodies to limit the scope of
patent protection both inside and outside the U.S. for disease treatments that prove successful; and

Countries other than the U.S. might have patent laws that provide less protection than those
governing U.S. courts, allowing foreign competitors the ability to exploit these laws to create,
develop, and market competing products.

In addition, the U.S. Patent and Trademark Office and patent offices in other jurisdictions have often
required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited
or narrowed substantially to cover only the speciﬁc innovations exempliﬁed in the patent application, thereby
limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to
obtain patents, the patents might be substantially narrower than anticipated.

Patent and other intellectual property protection is crucial to the success of our business and prospects,

and there is a substantial risk that such protections, if obtained, will prove inadequate. Our business and
prospects will be harmed if we fail to obtain these protections or they prove insufficient.

If we fail to comply with our obligations under our license agreements, we could lose rights to our product
candidates or key technologies.

We have obtained rights to develop, market and sell some of our product candidates through intellectual

property license agreements with third parties, including IURTC and Therabiome. These license agreements
impose various diligence, milestone payment, royalty and other obligations on us. If we fail to comply with
our obligations under our license agreements, we could lose some or all of our rights to develop, market and
sell products covered by these licenses, and our ability to form collaborations or partnerships may be
impaired. In addition, disputes may arise under our license agreements with third parties, which could prevent
or impair our ability to maintain our current licensing arrangements on acceptable terms and to develop and
commercialize the affected product candidates.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other
intellectual property rights.

If we choose to go to court to stop another party from using the inventions claimed in any patents we
obtain, that individual or company has the right to ask the court to rule that such patents are invalid or should
not be enforced against that third party. These lawsuits are expensive and would consume time and resources
and divert the attention of managerial and scientiﬁc personnel even if we were successful in stopping the
infringement of such patents. There is a risk that the court will decide that such patents are not valid and that
we do not have the right to stop the other party from using the inventions. There is also the risk that, even if
the validity of such patents is upheld, the court will refuse to stop the other party on the ground that such
other party’s activities do not infringe our rights to such patents. If we were not successful in defending our
intellectual property, our competitors could develop and market products based on our discoveries, which may
reduce demand for our products.

We rely on trade secret protections through conﬁdentiality agreements with our employees, customers and
other parties, and the breach of these agreements could adversely affect our business and prospects.

We rely on trade secrets and proprietary know-how, which we seek to protect, in part, through

conﬁdentiality, invention, and non-disclosure agreements with our employees, scientiﬁc advisors, consultants,
collaborators, suppliers, and other parties. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach or that our trade secrets will not
otherwise become known to or independently developed by our competitors. If any of these events occurs, or
we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may
be greatly reduced.

36

If our employees, or consultants breach their conﬁdentiality obligations, to be able to enforce these
conﬁdentiality provisions, we would need to know of the breach and have sufficient funds to enforce the
provisions. We cannot assure you that we would know of or be able to afford enforcement of any breach. In
addition, such provisions are subject to state law and interpretation by courts, which could limit the scope and
duration of these provisions. Any limitation on or non-enforcement of these conﬁdentiality provisions could
have an adverse effect on our business.

We may infringe the intellectual property rights of others, which may prevent or delay our product
development efforts and stop us from commercializing or increase the costs of commercializing our product
candidates.

Our success will depend in part on our ability to operate without infringing the proprietary rights of third
parties. Our competitors may have ﬁled, and may in the future ﬁle, patent applications covering products and
technologies similar to ours. Any such patent application may have priority over our patent applications,
which could further require us to obtain rights from third parties to issued patents covering such products and
technologies. We cannot guarantee that the manufacture, use or marketing of any product candidates that we
develop will not infringe third-party patents.

A third party may claim that we are using inventions covered by the third party’s patent rights and may
go to court to stop us from engaging in our normal operations and activities, including making or selling our
product candidates. Patent litigation is costly and time consuming. We may not have sufficient resources to
address these actions, and such actions could affect our results of operations and divert the attention of
managerial and scientiﬁc personnel.

If a patent infringement suit were brought against us, we may be forced to stop or delay developing,

manufacturing, or selling potential products that are claimed to infringe a third party’s intellectual property,
unless that third party grants us rights to use its intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in order to continue development, manufacture or sale
of our products. If we are unable to obtain a license or develop or obtain non-infringing technology, or if we
fail to defend an infringement action successfully, or if we are found to have infringed a valid patent, we may
incur substantial monetary damages, encounter signiﬁcant delays in bringing our product candidates to market
and be precluded from manufacturing or selling our product candidates, any of which could harm our business
signiﬁcantly.

If our efforts to protect our proprietary technologies are not adequate, we may not be able to compete
effectively in our market.

We rely upon a combination of patents, trade secret protection and contractual arrangements to protect

the intellectual property related to our technologies. We will only be able to protect our products and
proprietary information and technology by preventing unauthorized use by third parties to the extent that our
patents, trade secrets, and contractual position allow us to do so. Any disclosure to or misappropriation by
third parties of our trade secrets or conﬁdential information could compromise our competitive position.
Moreover, we may in the future be involved in legal or administrative proceedings involving our intellectual
property initiated by third parties, and which proceedings can result in signiﬁcant costs and commitment of
management time and attention. As our product candidates continue in development, third parties may attempt
to challenge the validity and enforceability of our patents and proprietary information and technologies.

We may in the future be involved in initiating legal or administrative proceedings involving the product
candidates and intellectual property of our competitors. These proceedings can result in signiﬁcant costs and
commitment of management time and attention, and there can be no assurance that our efforts would be
successful in preventing or limiting the ability of our competitors to market competing products.

Composition-of-matter patents relating to the API are generally considered to be the strongest form of

intellectual property protection for pharmaceutical products, as such patents provide protection not limited to
any one method of use. Method-of-use patents protect the use of a product for the speciﬁed method(s), and
do not prevent a competitor from making and marketing a product that is identical to our product for an
indication that is outside the scope of the patented method. We rely on a combination of these and other

37

types of patents to protect our product candidates, and there can be no assurance that our intellectual property
will create and sustain the competitive position of our product candidates.

Biotechnology and pharmaceutical product patents involve highly complex legal and scientiﬁc questions

and can be uncertain. Any patent applications that we own or license may fail to result in issued patents.
Even if patents do successfully issue from our applications, third parties may challenge their validity or
enforceability, which may result in such patents being narrowed, invalidated, or held unenforceable. Even if
our patents and patent applications are not challenged by third parties, those patents and patent applications
may not prevent others from designing around our claims and may not otherwise adequately protect our
product candidates. If the breadth or strength of protection provided by the patents and patent applications we
hold with respect to our product candidates is threatened, competitors with signiﬁcantly greater resources
could threaten our ability to commercialize our product candidates. Discoveries are generally published in the
scientiﬁc literature well after their actual development, and patent applications in the U.S. and other countries
are typically not published until 18 months after ﬁling, and in some cases are never published. Therefore, we
cannot be certain that we or our licensors were the ﬁrst to make the inventions claimed in our owned and
licensed patents or patent applications, or that we or our licensors were the ﬁrst to ﬁle for patent protection
covering such inventions. Subject to meeting other requirements for patentability, for U.S. patent applications
ﬁled prior to March 16, 2013, the ﬁrst to invent the claimed invention is entitled to receive patent protection
for that invention while, outside the U.S., the ﬁrst to ﬁle a patent application encompassing the invention
is entitled to patent protection for the invention. The U.S. moved to a ‘‘ﬁrst to ﬁle’’ system under the
Leahy-Smith America Invents Act (‘‘AIA’’), effective March 16, 2013. The effects of this change and other
elements of the AIA are currently unclear, as the U.S. Patent and Trademark Office (‘‘USPTO’’), is still
implementing associated regulations, and the applicability of the AIA and associated regulations to our patents
and patent applications have not been fully determined. This new system also includes new procedures for
challenging issued patents and pending patent applications, which creates additional uncertainty. We may
become involved in opposition or interference proceedings challenging our patents and patent applications or
the patents and patent applications of others, and the outcome of any such proceedings are highly uncertain.
An unfavorable outcome in any such proceedings could reduce the scope of, or invalidate, our patent rights,
allow third parties to commercialize our technology and compete directly with us, or result in our inability to
manufacture, develop or commercialize our product candidates without infringing the patent rights of others.

In addition to the protection afforded by patents, we seek to rely on trade secret protection and

conﬁdentiality agreements to protect proprietary know-how, information, or technology that is not covered by
our patents. Although our agreements require all of our employees to assign their inventions to us, and we
require all of our employees, consultants, advisors and any third parties who have access to our trade
secrets, proprietary know-how and other conﬁdential information and technology to enter into appropriate
conﬁdentiality agreements, we cannot be certain that our trade secrets, proprietary know-how and other
conﬁdential information and technology will not be subject to unauthorized disclosure or that our competitors
will not otherwise gain access to or independently develop substantially equivalent trade secrets, proprietary
know-how and other information and technology. Furthermore, the laws of some foreign countries, in
particular, China, where we anticipate increasing our activity and commercializing our product candidates, do
not protect proprietary rights to the same extent or in the same manner as the laws of the U.S. As a result, we
may encounter signiﬁcant problems in protecting and defending our intellectual property globally. If we are
unable to prevent unauthorized disclosure of our intellectual property related to our product candidates and
technology to third parties, we may not be able to establish or maintain a competitive advantage in our
market, which could materially adversely affect our business and operations.

Our reliance on third parties and agreements with collaboration partners requires us to share our trade
secrets, which increases the possibility that a competitor may discover them or that our trade secrets will be
misappropriated or disclosed.

Our reliance on third party contractors to develop and manufacture our product candidates is based upon

agreements that limit the rights of the third parties to use or disclose our conﬁdential information, including
our trade secrets and know-how. Despite the contractual provisions, the need to share trade secrets and other
conﬁdential information increases the risk that such trade secrets and information are disclosed or used, even
if unintentionally, in violation of these agreements. In the highly competitive markets in which our product

38

candidates are expected to compete, protecting our trade secrets, including our strategies for addressing
competing products, is imperative, and any unauthorized use or disclosure could impair our competitive
position and may have a material adverse effect on our business and operations.

In addition, our collaboration partners is larger, more complex organizations than ours, and the risk of
inadvertent disclosure of our proprietary information may be increased despite their internal procedures and
contractual obligations in place with our collaboration partner. Despite our efforts to protect our trade secrets
and other conﬁdential information, a competitor’s discovery of such trade secrets and information could
impair our competitive position and have an adverse impact on our business.

We are developing an extensive worldwide patent portfolio. The cost of maintaining our patent protection is
high and maintaining our patent protection requires continuous review and compliance in order to
maintain worldwide patent protection. We may not be able to effectively maintain our intellectual property
position throughout the major markets of the world.

The USPTO and foreign patent authorities require maintenance fees and payments as well as continued

compliance with a number of procedural and documentary requirements. Noncompliance may result in
abandonment or lapse of the subject patent or patent application, resulting in partial or complete loss of patent
rights in the relevant jurisdiction. Non-compliance may result in reduced royalty payments for lack of patent
coverage in a particular jurisdiction from our collaboration partners or may result in competition, either of
which could have a material adverse effect on our business.

We have made, and will continue to make, certain strategic decisions in balancing costs and the potential

protection afforded by the patent laws of certain countries. As a result, we may not be able to prevent third
parties from practicing our inventions in all countries throughout the world, or from selling or importing
products made using our inventions in and into the U.S. or other countries. Third parties may use our
technologies in territories in which we have not obtained patent protection to develop their own products and,
further, may infringe our patents in territories which provide inadequate enforcement mechanisms, even if we
have patent protection. Such third party products may compete with our product candidates, and our patents or
other intellectual property rights may not be effective or sufficient to prevent them from competing.

The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of
the U.S., and we may encounter signiﬁcant problems in securing and defending our intellectual property
rights outside the U.S.

Many companies have encountered signiﬁcant problems in protecting and defending intellectual property

rights in certain countries. The legal systems of certain countries, particularly certain developing countries
such as China, do not always favor the enforcement of patents, trade secrets, and other intellectual property
rights, particularly those relating to pharmaceutical and biotechnology products, which could make it difficult
for us to stop infringement of our patents, misappropriation of our trade secrets, or marketing of competing
products in violation of our proprietary rights. In China, our intended establishment of signiﬁcant operations
will depend in substantial part on our ability to effectively enforce our intellectual property rights in that
country. Proceedings to enforce our intellectual property rights in foreign countries could result in substantial
costs and divert our efforts and attention from other aspects of our business, and could put our patents in these
territories at risk of being invalidated or interpreted narrowly, or our patent applications at risk of not being
granted, and could provoke third parties to assert claims against us. We may not prevail in all legal or other
proceedings that we may initiate and, if we were to prevail, the damages or other remedies awarded, if any,
may not be commercially meaningful. 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.

39

Intellectual property rights do not address all potential threats to any competitive advantage we may have.

The degree of future protection afforded by our intellectual property rights is uncertain because
intellectual property rights have limitations, and intellectual property rights may not adequately protect our
business or permit us to maintain our competitive advantage. The following examples are illustrative:

•

Others may be able to make compounds that are the same as or similar to our current or future
product candidates but that are not covered by the claims of the patents that we own or have
exclusively licensed.

• We or any of our licensors or strategic partners 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 any of our licensors or strategic partners 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.

The prosecution of our pending patent applications may not result in granted patents.

Granted 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.

Patent protection on our product candidates may expire before we are able to develop and
commercialize the product, or before we are able to recover our investment in the product.

Our competitors might conduct research and development activities in the U.S. and other countries
that provide a safe harbor from patent infringement claims for such activities, as well as in countries
in which we do not have patent rights, and may then use the information learned from such
activities to develop competitive products for sale in markets where we intend to market our product
candidates.

The existence of counterfeit pharmaceutical products in pharmaceutical markets may damage our brand
and reputation and have a material adverse effect on our business, operations and prospects.

Counterfeit products, including counterfeit pharmaceutical products, are a signiﬁcant problem, particularly
in China. Counterfeit pharmaceuticals are products sold or used for research under the same or similar names,
or similar mechanism of action or product class, but which are sold without proper licenses or approvals. Such
products may be used for indications or purposes that are not recommended or approved or for which there is
no data or inadequate data with regard to safety or efficacy. Such products divert sales from genuine products,
often are of lower cost, often are of lower quality (having different ingredients or formulations, for example),
and have the potential to damage the reputation for quality and effectiveness of the genuine product. If
counterfeit pharmaceuticals illegally sold or used for research result in adverse events or side effects to
consumers, we may be associated with any negative publicity resulting from such incidents. Consumers may
buy counterfeit pharmaceuticals that are in direct competition with our pharmaceuticals, which could have an
adverse impact on our revenues, business and results of operations. In addition, the use of counterfeit products
could be used in non-clinical or clinical studies, or could otherwise produce undesirable side effects or adverse
events that may be attributed to our products as well, which could cause us or regulatory authorities to
interrupt, delay or halt clinical trials and could result in the delay or denial of regulatory approval by the
FDA or other regulatory authorities and potential product liability claims. With respect to China, although the
government has recently been increasingly active in policing counterfeit pharmaceuticals, there is not yet an
effective counterfeit pharmaceutical regulation control and enforcement system in China. As a result, we may
not be able to prevent third parties from selling or purporting to sell our products in China. The proliferation
of counterfeit pharmaceuticals has grown in recent years and may continue to grow in the future. The
existence of and any increase in the sales and production of counterfeit pharmaceuticals, or the technological
capabilities of counterfeiters, could negatively impact our revenues, brand reputation, business and results of
operations.

40

Risks Related to Our Common Stock

We might not be able to maintain the listing of our common stock on The NASDAQ Capital Market.

Our common stock is listed on The NASDAQ Capital Market under the symbol ‘‘ASMB.’’ We might

not be able to maintain the listing standards of that exchange. If we fail to maintain the listing requirements,
our common stock might trade on the OTC Bulletin Board or in the ‘‘pink sheets’’ maintained by Pink
OTC Markets, Inc. These alternative markets are generally considered to be markets that are less efficient and
less broad than The NASDAQ Capital Market. A delisting of our common stock from The NASDAQ Capital
Market and our inability to list the stock on another national securities exchange could negatively impact us
by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors
willing to hold or acquire our common stock, which could negatively impact our ability to raise equity
ﬁnancing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities,
thereby preventing us from accessing the public capital markets and (iv) impairing our ability to provide
equity incentives to our employees.

The price of our common stock might ﬂuctuate signiﬁcantly, and you could lose all or part of your
investment.

Since we went public on December 22, 2010 and through February 24, 2017, the closing price of our
common stock has ﬂuctuated between $4.30 and $105.30 (after giving effect to the 1-for-5 reverse stock split
effected on July 11, 2014). Continued volatility in the market price of our common stock might prevent a
stockholder from being able to sell shares of our common stock at or above the price paid for such shares.
The trading price of our common stock might be volatile and subject to wide price ﬂuctuations in response to
various factors, including:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

the progress, results and timing of our clinical trials and nonclinical studies and other studies
involving our product candidates;

success or failure of our product candidates;

the receipt or loss of required regulatory approvals for our product candidates;

availability of capital;

future issuances by us of our common stock or securities exercisable for or convertible into common
stock;

sale of shares of our common stock by our signiﬁcant stockholders or members of our management;

additions or departures of key personnel;

investor perceptions of us and the pharmaceutical industry;

issuance of new or changed securities analysts’ reports or recommendations, or the announcement of
any changes to our credit rating;

introduction of new products or announcements of signiﬁcant contracts, acquisitions or capital
commitments by us or our competitors;

threatened or actual litigation and government investigations;

legislative, political or regulatory developments;

the overall performance of the equity markets;

actual or anticipated ﬂuctuations in our quarterly ﬁnancial and operating results;

general economic conditions;

changes in interest rates; and

changes in accounting standards, policies, guidance, interpretations or principles.

41

These and other factors might cause the market price of our common stock to ﬂuctuate substantially,

which might limit or prevent investors from readily selling their shares of our common stock and might
otherwise negatively affect the liquidity of our common stock. In addition, in recent years, the stock market
has experienced signiﬁcant price and volume ﬂuctuations. This volatility has had a signiﬁcant impact on the
market price of securities issued by many companies across many industries. The changes frequently appear to
occur without regard to the operating performance of the affected companies. Accordingly, the price of our
common stock could ﬂuctuate based upon factors that have little or nothing to do with our company, and
these ﬂuctuations could materially reduce our share price.

Our principal stockholders and management own a signiﬁcant percentage of our stock and will be able to
exert signiﬁcant control over matters subject to stockholder approval.

At February 24, 2017, our executive officers, directors and one of our founders beneﬁcially owned

approximately 17.1% of our outstanding voting common stock, and this group together with other
stockholders holding beneﬁcially 5% of more of our outstanding voting common stock, owned approximately
60.0% of our outstanding voting common stock Therefore, these stockholders, if acting together, have the
ability to inﬂuence us through their ownership position. These stockholders may be able to determine the
outcome of certain signiﬁcant matters requiring stockholder approval. For example, these stockholders may be
able to control elections of directors, amendments of our organizational documents, or approval of any merger,
sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition
proposals or offers for our common stock that you may feel are in your best interest as one of our
stockholders.

Our ability to use our net operating loss and credit carryforwards to offset future taxable income may be
subject to certain limitations.

At December 31, 2016, the Company had potentially utilizable gross Federal net operating loss
carryforwards of approximately $146.5 million, State net operating loss carry-forwards of approximately
$174.0 million and research and development credit carry forward of approximately $4.0 million, all of which
expire between 2027 and 2036. Our ability to utilize our net operating loss and credit carryforwards is
dependent upon our ability to generate taxable income in future periods and may be limited due to restrictions
imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a
change in ownership.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, a corporation that
undergoes an ‘‘ownership change,’’ is subject to limitations on its ability to use its pre-change net operating
loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its
post-change income or taxes. For these purposes, an ownership change generally occurs where the equity
ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s
stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a
three year period (calculate on a rolling basis). We may have experienced such ownership changes in the past,
and we may experience ownership changes in the future, some of which are outside the Company’s control.
These ownership changes may subject our existing net operating losses or credits to substantial limitations
under Sections 382 and 383. Accordingly, we may not be able to utilize a material portion of our net
operating losses or credits. Limitations on our ability to utilize our net operating losses to offset U.S. federal
taxable income could potentially result in increased future tax liability to us. In addition, at the state level,
there may be periods during which the use of net operating lossess is suspended or otherwise limited, which
could accelerate or permanently increase state taxes owed.

Because U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual

limitation may effectively provide a cap on the cumulative amount of pre-ownership change losses, including
certain recognized built-in losses that may be utilized. Such pre-ownership change losses in excess of the cap
may be lost. In addition, if an ownership change were to occur, it is possible that the limitations imposed on
our ability to use pre-ownership change losses and certain recognized built-in losses could cause a net increase
in our U.S. federal income tax liability and require U.S. federal income taxes to be paid earlier than otherwise

42

would be paid if such limitations were not in effect. Further, if for ﬁnancial reporting purposes the amount or
value of these deferred tax assets is reduced, such reduction would have a negative impact on the book value
of our common stock.

We do not intend to pay dividends for the foreseeable future and our stock may not appreciate in value.

We currently intend to retain our future earnings, if any, to ﬁnance the operation and growth of our
business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an
investment in shares of our common stock will depend upon any future appreciation in its value. There is no
guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders
have purchased their shares will be able to be maintained.

The requirements of being a public company add to our operating costs and might strain our resources and
distract our management.

As a public company, we face increased legal, accounting, administrative and other costs and expenses
not faced by private companies. We are subject to the reporting requirements of the Securities Exchange Act
of 1934, which requires that we ﬁle annual, quarterly and current reports with respect to our business and
ﬁnancial condition, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, and The
NASDAQ Capital Market, each of which imposes additional reporting and other obligations on public
companies. These rules and regulations increase our legal and ﬁnancial compliance costs and make some
activities more time-consuming and costly, although we are currently unable to estimate these costs with any
degree of certainty. Complying with these requirements might divert management’s attention from other
business concerns, which could have a material adverse effect on our prospects, business, and ﬁnancial
condition.

Additionally, the expenses incurred by public companies generally for reporting and corporate governance

purposes have been increasing. These increased costs will require us to divert a signiﬁcant amount of money
that we could otherwise use to develop our product candidates or otherwise expand our business. If we are
unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock,
ﬁnes, sanctions and other regulatory action and potentially civil litigation.

Several provisions of the Delaware General Corporation Law and our Amended and Restated Certiﬁcate of
Incorporation and Bylaws could discourage, delay or prevent a merger or acquisition, which could
adversely affect the market price of our securities.

Several provisions of the Delaware General Corporation Law and our Amended and Restated Certiﬁcate
of Incorporation and Bylaws could discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable, and the market price of our securities could be reduced as a result. These provisions may
include:

•

•

•

•

prohibiting us from engaging in a ‘‘business combination’’ with an ‘‘interested stockholder’’ for a
period of three years after the date of the transaction in which the person became an interested
stockholder unless certain provisions are met;

prohibiting cumulative voting in the election of directors;

limiting the persons who may call special meetings of stockholders; and

establishing advance notice requirements for nominations for election to our board of directors or for
proposing matters that can be acted on by stockholders at stockholder meetings.

If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or
ﬁnancial analysts publish about us or our business. Currently, two ﬁnancial analysts publish reports about us
and our business. We do not control these or any other analysts. Furthermore, there are many large,
well-established, publicly traded companies active in our industry and market, which may mean that it is less
likely that we will receive widespread analyst coverage. If any of the analysts who cover us downgrade our
stock, our stock price would likely decline rapidly. If these analysts cease coverage of our company, we could
lose visibility in the market, which in turn could cause our stock price to decline.

43

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease office space for corporate and administrative functions in Carmel, IN under a lease agreement

with a monthly lease payment of approximately $5,958 that expires in June 2021. The leased location in
Carmel, IN support both the HBV-cure and Microbiome programs.

The Company leases office and laboratory space in San Francisco, CA under a sublease that expires in

December 2017 unless we request a six month extension by October 2, 2017. The leased location in San
Francisco, CA supports both the HBV-cure and Microbiome programs. Research activities for the HBV-Cure
program are also being conducted at laboratory space leased from Indiana University at Bloomington, IN that
expires in December 2017, but will automatically renew for successive one year periods unless either party
delivers notice of termination 180 days prior to the expiration date. Research activities for the Microbiome
program are also being conducted at office and laboratory space leased from the University of Florida
Research Foundation in Alachua, FL that expires in May 2017.

We believe these leased facilities are adequate for our current needs and that additional space will be

available in the future on commercially reasonable terms as needed.

Item 3. Legal Proceedings

We are not a party to any material legal proceedings at this time. From time to time, we may be subject
to various legal proceedings and claims that arise in the ordinary course of our business activities. Although
the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any
claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate
be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation
can have an adverse effect on us because of defense and settlement costs, diversion of management resources
and other factors.

Item 4. Mine Safety Disclosures

Not applicable.

44

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Market Information for Common Stock

Our common stock is traded under the symbol ‘‘ASMB’’ and is quoted on the NASDAQ Capital Market.

The following table sets forth the high and low sales prices for shares of our common stock, as reported
by NASDAQ for the periods indicated (after giving effect to the 1-for-5 reverse stock split effected on
July 11, 2014).

First quarter
. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Second quarter
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . .

2016

2015

High
$ 7.50
$ 6.67
$ 8.30
$14.50

Low
$4.33
$4.60
$5.15
$7.25

High
$17.00
$20.50
$19.91
$11.49

Low
$ 7.25
$12.08
$ 9.22
$ 7.22

On February 24, 2017, the closing price for the common stock as reported on the NASDAQ Capital

Market was $21.06.

Holders of Record

As of February 24, 2017, there were 101 stockholders of record, which excludes stockholders whose

shares were held in nominee or street name by brokers.

Dividends

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future.

We expect to retain our future earnings, if any, for use in the operation and expansion of our business.

45

Comparative Stock Performance Graph

The information included under the heading ‘‘Comparative Stock Performance Graph’’ in this Item 5 of

Part II of this Form 10-K shall not be deemed to be ‘‘soliciting material’’ or subject to Regulation 14A or
14C, shall not be deemed ‘‘ﬁled’’ for purposes of Section 18 of the Exchange Act, or otherwise subject to the
liabilities of that section, nor shall it be deemed incorporated by reference in any ﬁling under the Securities
Act or the Exchange Act.

Set forth below is a graph comparing the total cumulative returns of our common stock, the NASDAQ

Composite Index and the NASDAQ Biotechnology Index. The graph assumes $100 was invested in our
common stock and each of the indices on December 31, 2011 and that all dividends, if any, are reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Assembly Biosciences, Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index

$350

$300

$250

$200

$150

$100

$50

$0

12/31/2011

12/31/2012

12/31/2013

12/31/2014

12/31/2015

12/31/2016

NASDAQ COMPOSITE

ASSENBLY BIOSCIENCES, INC.

NASDAQ BIOTECHNOLOGY

*

$100 invested on December 31, 2011 in stock or index, including reinvestment of dividends.

. . .
Assembly Biosciences, Inc.
NASDAQ Composite . . . . . . .
NASDAQ Biotechnology . . . .

12/31/2011
100.00
100.00
100.00

12/31/2012
26.97
115.91
132.14

12/31/2013
47.69
160.32
218.74

12/31/2014
19.63
181.80
292.72

12/31/2015
18.75
192.21
326.51

12/31/2016
30.34
206.63
256.60

46

Equity Compensation Plans

The following table sets forth the indicated information as of December 31, 2016 with respect to our

equity compensation plans.

Plan Category
Equity compensation plans approved by our

stockholders:
. . . . . . . . . .
2014 Stock Incentive Plan (*)
2010 Equity Incentive Plan . . . . . . . . . . . .
Options assumed in Assembly

Number of
securities to be
issued upon
exercise of
outstanding
options, warrants,
and rights
(a)

3,132,641
702,959

Pharmaceuticals Merger . . . . . . . . . . . . .

621,651

Equity compensation plans not approved by our

stockholders:
Consultant Warrants . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

16,909
4,474,160

Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reﬂected in
column (a))
(c)

966,571
—

—

—
966,571

Weighted average
exercise price of
outstanding
options, warrants,
and rights
(b)

$ 7.76
$ 7.98

$ 2.22

$30.81

(*) 2014 Stock Incentive Plan shares available includes 32,501 shares of common stock forfeited under the

2010 Equity Incentive Plan on or after June 2, 2016.

Our equity compensation plans consist of the Amended and Restated 2014 Stock Incentive Plan, or 2014

Plan, and 2010 Equity Incentive Plan, or 2010 Plan, which were approved by our stockholders. Effective on
June 2, 2016, the 2010 Plan was frozen and no further grants will be made under the 2010 Plan. Shares that
are forfeited under the 2010 Plan on or after June 2, 2016 will become available for issuance under the
2014 Plan.

Our outstanding equity compensation arrangements that have not been approved by our stockholders

consist of warrants to purchase shares of our common stock issued to two consultants.

Shelf Registration

On December 30, 2015, we ﬁled a registration statement on Form S-3 with the SEC using a ‘‘shelf’’
registration process, ﬁle number 333-208806, which became effective January 19, 2016. Under this shelf
registration process, we may from time to time sell any combination of the securities described in the
registration statement in one or more offerings for an aggregate offering price of up to $150,000,000. The
amount to be registered under the shelf registration consists of up to $150,000,000 of an indeterminate amount
of common stock, preferred stock, debt securities, warrants and/or units. There is also being registered under
the shelf registration a currently indeterminate number of (i) shares of common stock or other securities of
ours as may be issued upon conversion of, or in exchange for, convertible or exchangeable debt securities
and/or preferred stock registered under the registration statement, or (ii) shares of preferred stock, common
stock, debt securities or units as may be issued upon exercise of warrants registered by the registration
statement, as the case may be. We have not issued any securities under this registration statement.

Recent Sales of Unregistered Securities

There were no unregistered sales of equity securities in 2016.

47

Item 6. Selected Financial Data

The following selected Balance Sheet data for the years ended December 31, 2016 and 2015 and the

Statement of Operations data for the years ended December 31, 2016, 2015 and 2014 should be read in
conjunction with Part II, Item 7 ‘‘Management’s Discussion and Analysis of Financial Condition and Results
of Operations’’ and in conjunction with the consolidated ﬁnancial statements, related notes and other ﬁnancial
information included elsewhere in this Annual Report. The selected consolidated results of operation data for
the years ended December 31, 2013 and 2012 and the balance sheet data for the years ended December 31,
2014, 2013 and 2012 have been derived from audited ﬁnancial statements not included herein. Our historical
results are not necessarily indicative of the results to be expected in the future.

(In thousands)
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . .

Statement of Operations Data:
Operating expenses . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . .
Realized loss from marketable securities . . .
Loss before income taxes . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss recognized in accumulated

2016

2015

December 31,
2014

2013

2012

$ 98,119
79,878

$133,744
118,742

$ 71,225
58,571

$ 27,132
24,494

$ 20,556
17,810

$ 45,278
(45,278)
1,539
(1,140)
(44,879)
617
$(44,262)

$ 29,656
(29,656)
1,229
(27)
(28,454)
—
$ (28,454)

$ 23,956
(23,956)
167
—
(23,789)
—
$(23,789)

$ 19,605
(19,605)
201
—
(19,404)
—
$(19,404)

$ 24,855
(24,855)
65
—
(24,790)
—
$(24,790)

other comprehensive loss before
reclassiﬁcation, net of tax beneﬁt

. . . . . .

(482)

(849)

Reclassiﬁcation adjustment of unrealized
loss included in net loss, net of tax
expense . . . . . . . . . . . . . . . . . . . . . . .

Loss per Shares Data:

703

27

—

—

—

—

—

—

Basic and dilutive loss per share data . . .

$

(2.57)

$

(1.81)

$

(3.40)

$

(5.00)

$

(9.74)

The increase in total assets from approximately $27.1 million as of December 31, 2013 to approximately
$71.2 million as of December 31, 2014 was primarily due to the merger with Assembly Pharmaceuticals, Inc.
in July 2014 and a capital raise of $15.0 million in net proceeds on October 6, 2014. The increase in total
assets from approximately $71.2 million as of December 31, 2014 to approximately $118.7 million as of
December 31, 2015 was primarily due to a capital raise of approximately $81.0 million in net proceeds to us.
We did not engage in any ﬁnancing activities in 2016; accordingly, total assets as of December 31, 2016
declined to approximately $98.0 million. Since 2013, our operating expenses have increased primarily due to
increases in research and development activities. See, Part II, Item 7 ‘‘Management’s Discussion and Analysis
of Financial Condition and Results of Operations’’ for a discussion on results of operations and ﬁnancing
activities since 2014.

48

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

The following discussion of our ﬁnancial condition and results of operations should be read in
conjunction with our consolidated ﬁnancial statements and the related notes thereto and other ﬁnancial
information appearing elsewhere in this Form 10-K. The following discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those expressed
or implied in any forward-looking statements as a result of various factors, including those set forth in this
Form 10-K under ‘‘Item 1A. Risk Factors.’’

Overview

We are a biotechnology company advancing two innovative platform programs: a new class of oral
therapeutics for the treatment of hepatitis B virus (HBV) infection and novel class of oral synthetic live
biotherapeutics, which are designed to restore health to a dysbiotic microbiome. The company’s HBV-cure
program is aimed at increasing the current low cure rate for patients with HBV and is pursuing multiple drug
candidates that inhibit multiple steps of the HBV lifecycle. Assembly has discovered several novel core
protein Allosteric Modulators (CpAMs), which are small molecules that directly target and allosterically
modulate HBc protein. The lead product candidate from this platform, ABI-H0731, has completed a Phase 1a
human clinical trial, with the Phase 1b/2a portion of the trial expected to commence in the second quarter of
2017. The company’s Microbiome program consists of a fully integrated platform that includes a disease
targeted strain identiﬁcation and selection process, methods for strain isolation and growth under cGMP
conditions, and a patent pending delivery system, that we call GEMICEL(cid:5), which allows for targeted oral
delivery of live biologic and conventional therapies to the lower gastrointestinal, or GI tract. The lead product
candidate from this platform, ABI-M101 is in development for the treatment of clostridium diffıcile infections
(CDI). Using its microbiome platform, the Company is developing additional product candidates.

On July 11, 2014, Assembly Biosciences merged with a private company Assembly Pharmaceuticals, Inc.

(the Merger). The Merger resulted in a shift in strategic focus, the addition of a new lead drug development
program, and changes in personnel. In connection with the Merger, our Board of Directors and stockholders
approved a 1-for-5 reverse stock split of our common stock. The reverse stock split became effective on
July 11, 2014. All share and per share amounts in the consolidated ﬁnancial statements and notes thereto have
been retroactively adjusted for all periods presented to give effect to this reverses stock split, including
reclassifying an amount equal to the reduction in par value of common stock to the additional paid-in capital.
In connection with the Merger, the shares of common stock issued and outstanding of Assembly
Pharmaceuticals, Inc. were converted into an aggregate of 4,008,848 shares of our common stock. Also
pursuant to the terms of the Merger, the outstanding options to purchase shares of Assembly Pharmaceuticals,
Inc.’s common stock were assumed by us and became exercisable for an aggregate of 621,651 shares of our
common stock. Effective upon the consummation of the Merger, Assembly Acquisition, Inc., our wholly
owned subsidiary, Merger Sub was merged with and into Assembly Pharmaceuticals, Inc., with Assembly
Pharmaceuticals, Inc. being the surviving entity and becoming our wholly owned subsidiary.

We accounted for the acquisition of Assembly Pharmaceuticals, Inc. as a business combination under
Accounting Standards Codiﬁcation (ASC) 805 with Ventrus Biosciences, Inc. as the accounting acquirer. We
determined Ventrus Biosciences, Inc. was the accounting acquirer in accordance with ASC 805-10-25-5 as
Ventrus Biosciences, Inc. gained control of Assembly Pharmaceuticals, Inc. upon completion of the Merger. To
make this determination, we considered factors as indicated in ASC 805-10-55, including which entity issued
equity interest to effect the combination, board of directors’ composition, shareholder ownership, voting
control, restrictions on shareholder voting rights, anticipated management positions and the relative size of the
two companies.

We have not derived any revenue from product sales to date as we currently have no approved products.

Our clinical strategy for the HBV product candidates encompasses testing CpAMs as a monotherapy, as
required by regulatory agencies, to demonstrate their antiviral activity. Thereafter, all subsequent clinical trials
in patients are anticipated to be in combination with other classes of HBV therapies. We completed
nonclinical studies on our lead HBV product candidate, ABI-H0731, and initiated a combined Phase 1a/1b
trial in November 2016. In February 2017, we completed the Phase 1a dose ranging portion of the trial, in
which we assessed the safety, tolerability and pharmacokinetics of ABI-H0731 at trial sites in New Zealand in

49

48 healthy volunteers. We plan to amend the trial protocol in order to characterize the next portion of the trial
as a Phase 1b/2a clinical trial and initiate that portion of the trial at sites outside the United States in the
second quarter of 2017. We expect that the Phase 1b/2a portion of the trial will assess the safety, tolerability
and pharmacokinetics, as well as preliminary antiviral efficacy, of ABI-H0731 in patients with chronic HBV
infection and will evaluate ABI-H0731 as monotherapy and in combination with other approved therapies
during 28 days of dosing. We expect longer-term Phase 2 clinical trials to initiate in 2018, which will assess
the impact of combination regimens with other classes of therapy on antiviral activity, surrogate markers of
cccDNA and potential cure rates. We plan to complete our IND enabling studies of ABI-M101, our lead
microbiome product candidate, in 2017 and initiate a Phase 1b in the second half of 2017 in CDI patients who
have relapsed after two or three standard antibiotic regimens. Once a product has been developed, it will need
to be approved for sale by the U.S. Food and Drug Administration (FDA) or applicable foreign regulatory
agency before it can be commercialized. Since inception, our operations have been ﬁnanced primarily through
the sale of equity securities, the proceeds from the exercise of warrants and stock options and issuance of
debt. We have incurred losses from operations and negative cash ﬂows from operating activities since
inception and expect to continue to incur substantial losses for the next several years as we continue our
product development efforts. Management believes we currently have sufficient funds to meet our operational
requirements for at least the next twelve months. If we cannot generate signiﬁcant cash from our operations,
we intend to obtain any additional funding we require through strategic relationships, public or private equity
or debt ﬁnancings, grants or other arrangements. We cannot assure such funding will be available on
reasonable terms, if at all.

We currently have administrative offices in Carmel, Indiana and we lease office and laboratory space in

San Francisco, California under a sublease that expires in December 2017. The leased location in San
Francisco, California supports both the HBV-Cure cure and Microbiome programs. Research activities for the
HBV-cure program are also being conducted at laboratory space leased from Indiana University at
Bloomington, IN that expires in December 2017. Research activities for the Microbiome program are also
being conducted at office and laboratory space leased from the University of Florida Research Foundation in
Alachua, FL that expires in May 2017. Research activities for the HBV program are also being conducted at
Indiana University at Bloomington, under the direction of Adam Zlotnick, PhD, Assembly co-founder and
head of our HBV Scientiﬁc Advisory Board.

Since Assembly’s inception, we have had no revenue from product sales, and have funded our operations

principally through debt ﬁnancings prior to our initial public offering in 2010 and through equity ﬁnancings
since then. Our operations to date have been primarily limited to organizing and staffing our company,
licensing our product candidates, discovering and developing our product candidates, establishing initial
manufacturing capabilities for our product candidates, maintaining and improving our patent portfolio and
raising capital. We have generated signiﬁcant losses to date, and we expect to continue to generate losses as
we continue to develop our product candidates. As of December 31, 2016, we had an accumulated deﬁcit of
approximately $208.2 million. Because we do not generate revenue from any of our product candidates, our
losses will continue as we further develop and seek regulatory approval for, and commercialize, our product
candidates. As a result, our operating losses are likely to be substantial over the next several years as we
continue the development of our product candidates and thereafter if none is approved or successfully
launched. We are unable to predict the extent of any future losses or when we will become proﬁtable, if at all.

Financial Operations Overview

Research and Development Expense

Research and development expenses consist primarily of costs incurred for our research activities,
including our drug discovery efforts, target validation, lead optimization and the development of our product
candidates, which include:

•

•

employee-related expenses including salaries, beneﬁts, and stock-based compensation expense;

expenses incurred under agreements with third parties, including contract research organizations, or
CROs, that conduct research and development, nonclinical and clinical activities on our behalf and
the cost of consultants;

50

•

•

the cost of lab supplies and acquiring, developing, and manufacturing nonclinical study materials;
and

facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and
maintenance of facilities, insurance, and other operating costs.

Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or

services to be received in the future for use in research and development activities are deferred and
capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are
performed.

We use our employee and infrastructure resources across multiple research and development programs,

and we allocate internal employee-related and infrastructure costs, as well as certain third party costs, to each
of our programs based on the personnel resources allocated to such program. Our research and development
expenses, by major program, are outlined in the table below:

HBV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Microbiome . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diltiazem . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

2016
$20,024,898
10,015,153
—
27,748
3,025,178
$33,092,977

Year Ended December 31,
2015
$10,810,517
4,296,309
(6,621)
—
3,257,732
$18,357,937

2014
$ 2,536,378
1,559,136
3,913,887
—
2,707,336
$10,716,737

Diltiazem was a prior product candidate that the Company is no longer developing. Since the Merger in

July 2014, the HBV platform and Microbiome platform are the sole focus of our company.

The successful discovery and development of our product candidates is highly uncertain. As such, at this
time, we cannot reasonably estimate, or know the nature, timing and estimated costs, of the efforts that will be
necessary to complete the remainder of their development. We are also unable to predict when, if ever,
material net cash inﬂows will commence from our product candidates. This is due to the numerous risks and
uncertainties associated with developing medicines, including the uncertainty of:

•

•

•

•

•

•

•

•

the timing, progress and success of our Phase 1 clinical development of ABI-H0731 and our
nonclinical and planned clinical development activities for other product candidates we may identify
in each of the HBV and microbiome programs;

establishing an appropriate safety proﬁle with IND-enabling toxicology studies sufficient to advance
additional product candidates into clinical development;

successful enrollment in, and completion of, clinical trials;

receipt of marketing approvals from applicable regulatory authorities;

establishing internal commercial manufacturing capabilities or making arrangements with third-party
manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our
product candidates;

launching commercial sales of the products, if and when approved, whether alone or in collaboration
with others; and

maintaining a continued acceptable safety proﬁle of the products following approval and wide use.

A change in the outcome of any of these variables with respect to the development of any of our product

candidates would signiﬁcantly change the costs and timing associated with the development of that product
candidate.

51

Research and development activities are central to our business model. Product candidates in later stages

of clinical development generally have higher development costs than those in earlier stages of clinical
development, primarily due to the increased size and duration of later-stage clinical trials. We expect research
and development costs to increase signiﬁcantly for the foreseeable future as our product candidate
development programs progress. However, we do not believe that it is possible at this time to accurately
project total program-speciﬁc expenses through commercialization. There are numerous factors associated with
the successful commercialization of any of our product candidates, including future trial design and various
regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage
of development. Additionally, future commercial and regulatory factors beyond our control will impact our
clinical development programs and plans.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other related costs, including
stock-based compensation, for personnel in executive, ﬁnance, accounting, business development, legal and
human resources functions. Other signiﬁcant costs include facility costs not otherwise included in research and
development expenses, legal fees relating to patent and corporate matters and fees for accounting and
consulting services.

We anticipate that our general and administrative expenses will increase in the future to support
continued research and development activities, potential commercialization of our product candidates and
increased costs of operating as a public company. These increases will likely include increased costs related to
the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other
expenses. Additionally, we anticipate increased costs associated with being a public company including
expenses related to services associated with maintaining compliance with exchange listing and SEC
requirements, insurance, and investor relations costs.

Interest income

Interest income consists of interest earned on our cash and cash equivalents and available-for-sale

securities.

Critical Accounting Policies and Signiﬁcant Judgments and Estimates

Our management’s discussion and analysis of our ﬁnancial condition and results of operations are based

on our consolidated ﬁnancial statements, which we have prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated ﬁnancial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the ﬁnancial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and
judgments, including those described in greater detail below. 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. Actual results may differ from these estimates under different assumptions or conditions.

While our signiﬁcant accounting policies are described in more detail in the notes to our consolidated
ﬁnancial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following
accounting policies are the most critical to aid you in fully understanding and evaluating our ﬁnancial
condition and results of operations.

Marketable Securities

We have designated marketable securities as of December 31, 2016 as available-for-sale securities and
measure these securities at their respective fair values. Marketable securities are classiﬁed as short-term or
long-term based on the maturity date and their availability to meet current operating requirements. Marketable
securities that mature in one year or less are classiﬁed as short-term available-for-sale securities and are
reported as a component of current assets. Marketable securities that are not considered available for use in
current operations are classiﬁed as long-term available-for-sale securities and are reported as a component of
long-term assets.

52

Securities that are classiﬁed as available-for-sale are measured at fair value with temporary unrealized

gains and losses reported in other comprehensive loss, and as a component of stockholders’ equity until their
disposition. We review all available-for-sale securities at each period end to determine if they remain
available-for-sale based on then current intent and ability to sell the security if it is required to do so. The cost
of securities sold is based on the speciﬁc identiﬁcation method.

Marketable securities are subject to a periodic impairment review. We may recognize an impairment

charge when a decline in the fair value of investments below the cost basis is determined to be
other-than-temporary. There were no marketable securities deemed to be impaired as of December 31, 2016
or 2015.

Goodwill and Other Intangible Assets

Goodwill is the excess of purchase price over the fair value of identiﬁed net assets of businesses
acquired. Our intangible assets with an indeﬁnite life are related to in-process research and development
(‘‘IPR&D’’) programs acquired in the Merger, as we expect future research and development on these
programs to provide us with substantial beneﬁt for a period that extends beyond the foreseeable horizon.
Intangible assets with indeﬁnite useful lives are measured at their respective fair values as of the acquisition
date. We do not amortize goodwill and intangible assets with indeﬁnite useful lives. Intangible assets related
to IPR&D projects are considered to be indeﬁnite lived until the completion or abandonment of the associated
R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval
to market a product is obtained, the associated assets would be deemed ﬁnite lived and would then be
amortized based on their respective estimated useful lives at that point in time.

We review goodwill and indeﬁnite-lived intangible assets at least annually for possible impairment.
Goodwill and indeﬁnite-lived intangible assets are reviewed for possible impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the fair value of the reporting
unit or the indeﬁnite-lived intangible assets below their carrying values. We test goodwill and indeﬁnite-lived
intangible assets each year on October 1. We review the carrying value of goodwill utilizing a market value
approach which was based upon the closing price of our stock price as of the beginning of the 4th quarter. As
of October 1, 2016 and 2015, the fair value of our reporting unit was in excess of carrying value for all
scenarios that were tested and goodwill was not deemed to be impaired.

On October 1, 2016, we performed a qualitative assessment of IPR&D. As of October 1, 2015, we
utilized a discounted probable future cash ﬂow model to value acquired IPR&D. Signiﬁcant assumptions used
in the model include the period in which material net cash inﬂows are expected to commence, anticipated
material changes from historical pricing, margins and expense levels and an appropriate risk adjusted discount
rate applied to the estimated cash ﬂows. As of October 1, 2016 and 2015, IPR&D was not deemed to be
impaired.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated ﬁnancial statements, we are required to estimate our

accrued expenses. This process involves reviewing quotations and contracts, identifying services that have
been performed on our behalf and estimating the level of service performed and the associated cost incurred
for the service when we have not yet been invoiced or otherwise notiﬁed of the actual cost. The majority of
our service providers invoice us monthly in arrears for services performed or when contractual milestones are
met. We make estimates of our accrued expenses as of each balance sheet date in our ﬁnancial statements
based on facts and circumstances known to us at that time.

Impairment of Long-lived Assets

We monitor the carrying value of long-lived assets for potential impairment and test the recoverability of

such assets whenever events or changes in circumstances indicate that the carrying amounts may not be
recoverable. If a change in circumstance occurs, we perform a test of recoverability by comparing the carrying
value of the asset or asset group to its undiscounted expected future cash ﬂows. If cash ﬂows cannot be
separately and independently identiﬁed for a single asset, we will determine whether impairment has occurred
for the group of assets for which we can identify the projected cash ﬂows. If the carrying values are in excess
of undiscounted expected future cash ﬂows, we measure any impairment by comparing the fair value of the

53

asset or asset group to its carrying value. There were no indicators of impairment of long-lived assets during
the years ended December 31, 2016 and 2015.

Fair Value Measurements

We follow accounting guidance on fair value measurements for ﬁnancial instruments measured on a
recurring basis, as well as for certain assets and liabilities that are initially recorded at their estimated fair
values. Fair value is deﬁned as the exit price, or the amount that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. We
use the following three-level hierarchy that maximizes the use of observable inputs and minimizes the use of
unobservable inputs to value our ﬁnancial instruments:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.

Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the
marketplace.

Level 3: Signiﬁcant unobservable inputs which are supported by little or no market activity and that are
ﬁnancial instruments whose values are determined using pricing models, discounted cash ﬂow
methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires signiﬁcant judgment or estimation.

Financial instruments measured at fair value are classiﬁed in their entirety based on the lowest level of

input that is signiﬁcant to the fair value measurement. Our assessment of the signiﬁcance of a particular input
to the fair value measurement in its entirety requires us to make judgments and consider factors speciﬁc to the
asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect
on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not
be indicative of the amount that we or holders of the instruments could realize in a current market exchange.

The carrying amounts of cash equivalents and marketable securities approximate their fair value based

upon quoted market prices. Certain of our ﬁnancial instruments are not measured at fair value on a recurring
basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature,
such as cash, accounts receivable, accounts payable and accrued expenses.

Stock-Based Compensation

We apply the fair value recognition provisions of Financial Accounting Standards Board (FASB)

ASC Topic 718, Compensation-Stock Compensation, which we refer to as ASC 718, to account for
stock-based compensation. We recognize stock-based compensation expense related to stock options granted to
employees and directors for their services on the Board of Directors based on the estimated fair value of each
stock option on the date of grant, net of estimated forfeitures, using the Black-Scholes option-pricing model.
The grant date fair value of awards subject to service-based vesting, net of estimated forfeitures, is recognized
on a straight-line basis over the requisite service period, which is generally the vesting period of the
respective awards. In accordance with the ASC 718, stock options subject to both performance- and
service-based vesting conditions are recognized using an accelerated recognition model if achievement of the
performance requirements is considered to be probable.

We account for stock options granted to non-employees, which primarily consist of consultants and

members of our scientiﬁc advisory board, using the fair value method. Stock options granted to
non-employees are subject to periodic revaluation over their vesting terms and stock-based compensation
expense is recognized using an accelerated recognition model.

We use the Black-Scholes option pricing model to estimate the fair value of stock option awards using

various assumptions that require management to apply judgment and make estimates, including:

•

the expected term of the stock option award, which we calculate using the simpliﬁed method, as
prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107,
Share-Based Payment, as we have insufficient historical information regarding our stock options to
provide a basis for an estimate;

54

•

•

•

•

the expected volatility of the underlying common stock, which we estimate based on the standard
deviation of our underlying stock price’s daily logarithmic returns since December 17, 2010, and
then weighted after the historical volatility of a representative group of publicly traded
biopharmaceutical companies with similar characteristics to us, including development candidates in
earlier stages of drug development and areas of therapeutic focus;

the risk-free interest rate, which we based on the yield curve of U.S. Treasury securities with periods
commensurate with the expected term of the options being valued;

the expected dividend yield, which we estimate to be zero based on the fact that we have never paid
cash dividends and have no present intention to pay cash dividends; and

the fair value of our common stock on the date of grant.

If factors change and different assumptions are used, our stock-based compensation expense could be

materially different in the future.

In addition to the assumptions used in our Black-Scholes option-pricing model, the amount of stock
option expense we recognize in our consolidated statements of operations and comprehensive loss includes an
estimate of stock option forfeitures. Under ASC 718, we are required to estimate the level of forfeitures
expected to occur and record compensation expense only for those awards that we ultimately expect will vest.
Due to the lack of historical forfeiture activity, we expect to estimate our forfeiture rate based on data from
our representative group of companies. Changes in the estimated forfeiture rate can have a signiﬁcant impact
on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the
period the forfeiture estimate is changed. For example, if a revised forfeiture rate is higher than the previously
estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation
expense recognized in the consolidated ﬁnancial statements. If a revised forfeiture rate is lower than the
previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based
compensation expense recognized in our consolidated ﬁnancial statements.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of

structured ﬁnance, special purpose entities or variable interest entities.

Contractual Obligations

We have contractual and commercial obligations under our operating leases and other obligations related
to research and development activities, purchase commitments and licenses. The following table summarizes
our future contractual obligations and commercial commitments at December 31, 2016.

Operating leases
. . . . . . . . . . . . .
R&D and purchase commitments . .
. . . . . . . . . . .
License obligations
Total contractual obligations . . . .

Payments Due By Period

Less than
1 year
$1,900,556
4,139,322
400,000
$6,439,878

1 − 3 years
$1,163,105
183,184
75,000
$1,421,289

3 − 5 years
$166,366
—
150,000
$316,366

More than
5 years
$—
—
—
$—

Total
$3,230,027
4,322,506
625,000
$8,177,533

In general, milestone and royalty payments associated with certain license agreements (other than
contingent performance milestone payments anticipated to be paid in 2017) have not been included in the
above table of contractual obligations as we cannot reasonably estimate if or when they will occur. The
milestone payments included in the table of contractual obligations above are payments we believe are
reasonably likely to occur during the indicated time periods. Excluded from future R&D and purchase
commitments is our portion of the potential future shared research and development expenses under the
Collaboration Agreement with Allergan of up to $25 million. Further, we anticipate that our operating lease
obligations will be higher than projected as we renew existing real estate leases that expire in 2017 and enter
into new or expanded real estate leases.

55

Results of Operations

General

To date, we have not generated any revenues from operations and, at December 31, 2016, we had an

accumulated deﬁcit of approximately $208.2 million primarily as a result of research and development
expenses, purchases of in-process research and development and general and administrative expenses. While
we may in the future generate revenue from a variety of sources, including license fees, milestone payments,
research and development payments in connection with strategic partnerships and/or product sales, our product
candidates are at an early stage of development and may never be successfully developed or commercialized.
Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and
there can be no assurance that we will ever generate signiﬁcant revenues.

Comparison of the Years Ended December 31, 2016 and December 31, 2015

Research and Development Expense

Research and development expense, excluding stock-based compensation expense, was approximately
$30.1 million for the year ended December 31, 2016, an increase of approximately $15.0 million or 99.1%,
from approximately $15.1 million for the same period in 2015. The net increase in research and development
expenses was primarily due to an increase of $9.2 million in research expenses for our HBV program which
was started in July 2014, and an increase of approximately $5.7 million for nonclinical development of our
Microbiome program.

Stock-based compensation expense was approximately $3.0 million for the year ended December 31,
2016, a decrease of approximately $0.3 million, or 7.1%, from approximately $3.3 million for the year ended
December 31, 2015.

General and Administrative Expense

General and administrative expense, excluding stock-based compensation expense, was approximately
$10.2 million for the year ended December 31, 2016, an increase of approximately $3.5 million, or 52.5%,
from approximately $6.7 million for the same period in 2015. The net increase in general and administrative
expenses was primarily due to an increase of approximately $0.8 million of compensation and bonus expenses
related to new employees hired in 2016, $0.8 million in consulting expenses, $0.5 million in professional
expenses, $0.5 million in legal expenses, $0.4 million in travel expenses, $0.3 million in tax expenses and
$0.1 million in board fees classiﬁed as operating expense.

Stock-based compensation expense was approximately $2.0 million for the year ended December 31,
2016, a decrease of approximately $2.6 million, or 56.5%, from approximately $4.6 million for the year ended
December 31, 2015.

Interest and Other Income

Interest and other income was approximately $1.5 million for the year ended December 31, 2016
compared to approximately $1.2 million for the same period in 2015. Interest income for the years ended
December 31, 2016 and 2015 was primarily related to interest income on marketable securities — corporation
bonds.

Income Tax Beneﬁt

The Company maintains a valuation allowance on deferred tax assets due to the uncertainty regarding the

ability to utilize these deferred tax assets in the future. The deferred tax liability was recorded in connection
with the acquisition of Assembly Pharmaceuticals in 2014 and relates to the difference between the carrying
amount of in-process research and development for ﬁnancial statement purposes relative to the amount used
for income tax purposes. The deferred tax liability was $11.1 and $11.6 million as of December 31, 2016 and
2015, respectively.

56

Comparison of the Years Ended December 31, 2015 and December 31, 2014

Research and Development Expense

Research and development expense was approximately $18.4 million for the year ended December 31,
2015, an increase of $7.6 million, or 71.3%, from $10.7 million for the same period in 2014. The net increase
in research and development expenses was primarily due to an increase of $8.3 million in research expenses
for our HBV program which was started in July 2014, an increase of $2.7 million for nonclinical development
of our Microbiome program, additional stock-based compensation of approximately $550,000 due to new
options granted to employees and nonemployees, and offset by a decrease of $3.9 million in expenses due to
termination of the VEN 307 study in the second quarter of 2014.

General and Administrative Expense

General and administrative expense was approximately $11.3 million for the year ended December 31,

2015, a decrease of $1.9 million, or 14.7%, from $13.2 million for the same period in 2014. The primary
reason was a decrease of stock-based compensation expense of $3.3 million due to the decrease of fair value
of stock options granted to employees in 2015, offset by an increase of $1.4 million in general and
administrative expenses related to compensation and beneﬁts, severance payments payable over twelve months
to our former chief executive officer, bonuses, professional fees and corporate taxes.

Interest and Other Income

There was no interest expense in 2015 or 2014. Interest and other income was approximately

$1.2 million for the year ended December 31, 2015 compared to approximately $167,000 for the same period
in 2014. Interest income for the year ended December 31, 2015 was primarily related to interest income on
marketable securities — corporation bonds.

Liquidity and Capital Resources

As a result of our signiﬁcant research and development expenditures and the lack of any FDA-approved
products to generate product sales revenue, we have not been proﬁtable and have generated operating losses
since we were incorporated in October 2005. We have funded our operations through December 31, 2016
principally with debt prior to our initial public offering, and thereafter with equity ﬁnancing, raising an
aggregate of $192.5 million in net proceeds from public offerings and private placements from inception to
December 31, 2016. Additionally, in February 2017, we received a $50.0 million upfront payment in
connection with the closing of the Collaboration Agreement with Allergan.

In January 2014, we sold an aggregate of 92,472 shares of common stock under the amended
at-the-market common equity sales program, resulting in net proceeds of approximately $1.8 million.

On October 6, 2014, we sold to various institutional investors an aggregate of 1,959,000 shares of
common stock in a registered direct offering. The purchase price paid by the investors was $8.04 per share
and an aggregate of approximately $15.0 million in net proceeds were received. In connection with the
offering, we entered into a placement agent agreement with William Blair & Company, L.L.C., who acted as
sole placement agent in the offering, and pursuant to which we paid a placement agent fee equal to 5.0% of
the gross proceeds of the offering.

On March 19, 2015, we sold to various investors an aggregate of 5,555,555 shares of common stock in a
public offering. The purchase price paid by investors was $13.50 per share and an aggregate of $70.4 million
(net of underwriting discounts and commissions and offering expenses) was received. In addition, we granted
the underwriters a 30-day option to purchase up to an additional 833,333 shares of common stock.

On April 6, 2015, the underwriters exercised in full their option to purchase an additional 833,333 shares

of common stock at the public offering price of $13.50 per share. Proceeds from the sale of shares on the
exercise of the underwriters’ option (net of underwriting discounts and commissions) were approximately
$10.6 million.

57

Cash Flows for the Three Years Ended December 31, 2016, 2015 and 2014

Operating activities
. . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Net increase (decrease) in cash and cash equivalents. .

Net Cash Used in Operating Activities

2016
$(34,881,655)
36,196,574
152,640
$ 1,467,559

Year Ended December 31,
2015
$(18,697,334)
(64,855,510)
81,569,257
$ (1,983,587)

2014
$(14,973,502)
277,401
16,725,946
$ 2,029,845

Net cash used in operating activities was approximately $34.9 million for the year ended December 31,
2016 and funded our research and development program build out and general and administrative expenses.
Net cash used in continuing operations for the year ended December 31, 2016 was primarily driven by an
approximately $44.3 million net loss and $0.6 million deferred income tax beneﬁt, and offset by
approximately $5.0 million non-cash expense recorded for the stock-based compensation, an approximately
$3.8 million increase in cash from changes in operating assets and liabilities and $1.1 million realized loss
from marketable securities.

Net cash used in operating activities was approximately $18.7 million for the year ended December 31,
2015 and funded our research and development program build out and general and administrative expenses.
Net cash used in continuing operations for the year ended December 31, 2015 was primarily driven by an
approximately $28.5 million net loss and offset by approximately $7.9 million non-cash expense recorded for
the stock-based compensation, plus an approximately $1.8 million increase in cash from changes in operating
assets and liabilities.

Net cash used in continuing operations for the year ended December 31, 2014 was approximately
$15.0 million and was primarily driven by a $23.8 million net loss and a $2.5 million decrease in cash from
changes in operating assets and liabilities, and offset by the $10.6 million non-cash expense recorded for
stock-based compensation and $0.7 million non-cash expense recorded for the issuance of warrants for
services.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities from continuing operations for the year ended December 31,

2016 was approximately $36.2 million primarily due to the purchase of approximately $8.0 million of
marketable securities and offset by a $44.3 million redemption of marketable securities during the year.

Net cash used in investing activities from continuing operations for the year ended December 31, 2015

was approximately $64.9 million primarily due to the purchase of approximately $69.8 million of marketable
securities and offset by a $5.0 million redemption of marketable securities during the year.

Net cash provided by investing activities from continuing operations for the year ended December 31,
2014 was approximately $0.3 million primarily from cash acquired in a business combination of $0.5 million,
offset by the purchase of $0.1 million of ﬁxed assets and the collection of $0.1 million of security deposits.

Net Cash Provided by Financing Activities

Net cash ﬂows provided by ﬁnancing activities from continuing operations in the year ended

December 31, 2016 was approximately $153,000 from the exercise of stock options to purchase 21,200 shares
of common stock.

Net cash ﬂows provided by ﬁnancing activities from continuing operations in the year ended

December 31, 2015 was primarily generated by the net proceeds of approximately $81.0 million from our
public offering of 6,388,888 shares of common stock, including 833,333 shares of common stock purchased
by the underwriters, and approximately $554,000 from the exercise of stock options to purchase 76,422 shares
of common stock.

Net cash provided by ﬁnancing activities during the year ended December 31, 2014 consisted of net

proceeds of $16.7 million from the sale of 2,051,472 shares of common stock.

58

Funding Requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue
the research, development and clinical trials of our product candidates. Furthermore, we expect to continue to
incur additional costs associated with operating as a public company. Accordingly, we will need to obtain
substantial additional funding in connection with our continuing operations. If we are unable to raise capital
when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and
development programs or future commercialization efforts.

We monitor our cash needs and the status of the capital markets on a continuous basis. From time to
time, we opportunistically raise capital and have done so numerous times since our initial public offering by
issuing equity securities, most recently in March and April 2015. We expect to continue to raise capital when
and as needed and at the time and in the manner most advantageous to us.

We expect that our existing cash, cash equivalents and marketable securities, will enable us to fund our
operating expenses and capital expenditure requirements for at least the next twelve months. Our future capital
requirements will depend on many factors, including:

•

•

•

•

•

•

the scope, progress, results and costs of our ongoing drug discovery, nonclinical development,
laboratory testing and clinical trials of our product candidates and any additional clinical trials we
may conduct in the future;

the extent to which we further acquire or in-license other medicines and technologies;

our ability to manufacture, and to contract with third parties to manufacture, adequate supplies of
our product candidates for our clinical trial and any eventual commercialization;

the costs, timing and outcome of regulatory review of our product candidates;

the costs of preparing, ﬁling and prosecuting patent applications, maintaining and enforcing our
intellectual property rights and defending intellectual property-related claims; and

our ability to establish and maintain collaborations on favorable terms, if at all.

Identifying potential product candidates and conducting nonclinical testing and clinical trials is a

time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the
necessary data or results required to obtain marketing approval and achieve product sales. In addition, our
product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will
be derived from sales of medicines that we do not expect to be commercially available for many years, if at
all. Accordingly, we will need to continue to rely on additional ﬁnancing to achieve our business objectives.
Adequate additional ﬁnancing may not be available to us on acceptable terms, or at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to ﬁnance our cash

needs through a combination of equity offerings, debt ﬁnancings, collaborations, strategic alliances and
licensing arrangements. We do not have any committed external source of funds. To the extent that we raise
additional capital through the sale of equity or convertible debt securities, the ownership interest of our
stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that
adversely affect the rights of our common stockholders. Debt ﬁnancing, if available, may involve agreements
that include covenants limiting or restricting our ability to take speciﬁc actions, such as incurring additional
debt, making capital expenditures or declaring dividends.

If we raise funds through additional collaborations, 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. If we are unable
to raise additional funds through equity or debt ﬁnancings when needed, we may be required to delay, limit,
reduce or terminate our product development or future commercialization efforts or grant rights to develop and
market product candidates that we would otherwise prefer to develop and market ourselves.

59

Recent Accounting Pronouncements

See Note 2 of notes to the consolidated ﬁnancial statements for a discussion of recent accounting

standards and pronouncements.

Cautionary Statement

We operate in a highly competitive environment that involves a number of risks, some of which are

beyond our control. The following statement highlights some of these risks. For more detail, see
‘‘Item 1A. Risk Factors.’’

Statements contained in this Form 10-K that are not historical facts, are or might constitute

forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe the expectations reﬂected in such forward-looking statements are based on
reasonable assumptions, our expectations might not be attained. Forward-looking statements involve known
and unknown risks that could cause actual results to differ materially from expected results. Factors that could
cause actual results to differ materially from our expectations expressed in the report include, among others:
risks related to the costs, timing, regulatory review and results of our nonclinical studies and clinical trials;
our ability to obtain FDA approval of our product candidates; our anticipated capital expenditures, our
estimates regarding our capital requirements, and our need for future capital; our liquidity and working capital
requirements; our expectations regarding our revenues, expenses and other results of operations; the
unpredictability of the size of the markets for, and market acceptance of, any of our products; our ability to
sell any approved products and the price we are able realize; our ability to establish and maintain
collaborations on favorable terms; our ability to obtain future funding on acceptable terms; our ability to hire
and retain necessary employees and to staff our operations appropriately; our ability to compete in our
industry and innovation by our competitors; our ability to stay abreast of and comply with new or modiﬁed
laws and regulations that currently apply or become applicable to our business; estimates and estimate
methodologies used in preparing our ﬁnancial statements; the future trading prices of our common stock and
the impact of securities analysts’ reports on these prices; and the risks set out in our ﬁlings with the SEC.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the

general level of U.S. interest rates.

We do not believe that our cash and equivalents have signiﬁcant risk of default or illiquidity. Under our
current investment policies, we invest our cash and cash equivalents in money market funds which invest in
short-term U.S. Treasury securities with insigniﬁcant rates of return. While we believe our cash and
equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our
investments will not be subject to adverse changes in market value. In addition, we maintain signiﬁcant
amounts of cash and equivalents at one or more ﬁnancial institutions that are in excess of federally insured
limits.

Inﬂation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe

that inﬂation has had a material effect on our results of operations during 2016 or 2015.

Item 8. Financial Statements and Supplementary Data

The ﬁnancial statements required to be ﬁled pursuant to this Item 8 are appended to this report. An index

of those ﬁnancial statements is found on page F-1.

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

We maintain a system of disclosure controls and procedures, as deﬁned in Rule 13a-15(e) promulgated

under the Securities and Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), which is designed to
provide reasonable assurance that information, which is required to be disclosed in our reports ﬁled pursuant

60

to the Exchange Act, is accumulated and communicated to management in a timely manner. At the end of
ﬁscal year ending December 31, 2016, we carried out an evaluation, under the supervision, and with the
participation of, our management, including our Chief Executive Officer and our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures for the ﬁscal year ending as of December 31, 2016
were effective at reasonable assurance levels.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial

reporting, as such term is deﬁned in Exchange Act Rule 13a-15(f). Our internal control over ﬁnancial
reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published ﬁnancial statements. A control system, no matter how well
designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the control
system are met. Because of these inherent limitations, management does not expect that our internal controls
over ﬁnancial reporting will prevent all error and all fraud. Under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over ﬁnancial reporting based on the framework in
Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated
Framework, our management concluded that our internal control over ﬁnancial reporting was effective as of
December 31, 2016.

Our independent registered public accounting ﬁrm, Ernst & Young LLP, has audited the ﬁnancial

statements included in this Form 10-K and has issued an unqualiﬁed opinion on the effectiveness of our
internal control over ﬁnancial reporting as of December 31, 2016. The report of Ernst & Young LLP is
included with the ﬁnancial statements appended to this Form 10-K pursuant to Item 8.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over ﬁnancial reporting in the fourth quarter of 2016 that
materially affected, or are reasonably likely to materially affect, our internal control over ﬁnancial reporting.

Item 9B. Other Information

Not applicable.

61

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Except as set forth below, the information required by this item will be contained in our deﬁnitive proxy

statement to be ﬁled with the SEC in connection with the Annual Meeting of Stockholders within 120 days
after the conclusion of our ﬁscal year ended December 31, 2016, or the Proxy Statement, and is incorporated
in this Annual Report on Form 10-K by reference.

Code of Ethics

Our Board has adopted a Code of Ethics for our principal executive officer and all senior ﬁnancial
officers and a Code of Conduct applicable to all of our employees and our directors. Both Codes are available
under the Investor Relations-Corporate Governance section of our website at www.assemblybio.com. If we
make any substantive amendments to, or grant any waivers from, the Code of Ethics for our principal
executive officer, principal ﬁnancial officer, principal accounting officer, controller or persons performing
similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our
website or in a current report on Form 8-K.

Section 16(a) Beneﬁcial Ownership Reporting Compliance

Pursuant to Section 16(a) of the Securities Exchange Act, our directors and executive officers are required

to ﬁle reports with the SEC indicating their holdings of and transactions in our equity securities. To our
knowledge, based solely on our review of the copies of such reports furnished to us and written
representations that our officers, directors and holders of more than 10% of our common stock complied with
all applicable ﬁling requirements during the ﬁscal year ended December 31, 2016.

ITEM 11. Executive Compensation

The information required by this item will be contained in the Proxy Statement and is incorporated in

this Annual Report on Form 10-K by reference.

ITEM 12. Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder
Matters

Except for the table regarding equity compensation plans, which is included in Part II Item 5 of this
Annual Report on Form 10-K, the information required by this item will be contained in the Proxy Statement
and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 13. Certain Relationships and Related Party Transactions, and Director Independence

The information required by this item will be contained in the Proxy Statement and is incorporated in

this Annual Report on Form 10-K by reference.

ITEM 14. Principal Accounting Fees and Services

The information required by this item will be contained in the Proxy Statement and is incorporated in

this Annual Report on Form 10-K by reference.

62

Item 15. Exhibits, Financial Statement Schedules

(a) Exhibits. The following exhibits are ﬁled as part of this registration statement:

Exhibit
Number

1.1

3.1

3.2

3.3

3.4

4.1
10.1

10.2*

10.3#

10.4#

10.5#

10.6*

10.7#

Description of Document

Underwriting Agreement, dated
March 19, 2015, by and Assembly
Biosciences, Inc. and Credit Suisse
Securities (USA) LLC and William
Blair & Company, LLC, as
representatives of the several
underwriters named therein.

Amended and Restated Certiﬁcate of
Incorporation dated November 11, 2010.

Certiﬁcate of Amendment of the Third
Amended and Restated Certiﬁcate of
Incorporation, dated July 11, 2014.

Amended and Restated Bylaws dated
July 12, 2010.

Certiﬁcate of Designation of Series A
Non-Voting Convertible Preferred Stock
of Ventrus Biosciences, Inc. ﬁled on
January 30, 2013.

Specimen of Common Stock Certiﬁcate.
Employment Agreement dated
January 15, 2014 and effective
December 22, 2013, by and between
Ventrus Biosciences, Inc. and David J.
Barrett.
License and Collaboration Agreement
dated November 8, 2013, by and
between Ventrus Biosciences, Inc. and
Therabiome, LLC.
Employment Agreement, dated July 11,
2014, between Ventrus Biosciences, Inc.
and Derek A. Small.
Employment Agreement, dated July 11,
2014, between Ventrus Biosciences, Inc.
and Uri A. Lopatin.
Employment Agreement, dated July 11,
2014, between Ventrus Biosciences, Inc.
and Lee D. Arnold

Exclusive License Agreement dated
September 3, 2013 by and between The
Indiana University Research and
Technology Corporation and Assembly
Pharmaceuticals, Inc.
Assembly Biosciences, Inc. Amended
and Restated 2014 Stock Incentive Plan

63

Registrant’s
Form

Dated

8-K

03/19/2015

Exhibit
No.

1.6

Filed
Herewith

S-1/A

11/16/2010

8-K

7/10/2014

3.1

3.1

S-1

8-K

S-3
8-K

07/20/2010

3.2

01/30/2013

4.14

12/30/2015
01/16/2014

4.1
10.21

10-K

03/31/2014

10.22

8-K

07/14/2014

10.24

8-K

07/14/2014

10.25

8-K

07/14/2014

10.26

10-Q

11/17/2014

10.29

8-K

6/6/2016

10.1

Registrant’s
Form

Dated

10-Q

11/9/2016

Exhibit
No.

10.1

Filed
Herewith

8-K

12/9/2016

10.1

S-1/A

10/4/2010

10.14

X

X

X

X

X

X

X

X

X

X

Exhibit
Number
10.8#

10.9#

10.10#
10.11#

10.12#

21

23.1

23.2

24

31.1

31.2

32.1

32.2

Description of Document

Employment Agreement, dated
December 17, 2015 and effective
January 5, 2016, between Assembly
Biosciences, Inc. and Richard
Colonno, Ph.D.
Separation Agreement dated
December 7, 2016 between Assembly
Biosciences, Inc. and Dr. Lee D. Arnold
2010 Equity Incentive Plan
Employment Agreement, dated
September 14, 2016 and effective
September 26, 2016, between
Assembly Biosciences, Inc. and
Miguel Barbosa, Ph.D.
Employment Offer Letter dated
January 9, 2016 between Assembly
Biosciences, Inc. and Thomas E. Rollins

List of Subsidiaries of Assembly
Biosciences, Inc.

Consent of Ernst & Young LLP,
Independent Registered Public
Accounting Firm.
Consent of EisnerAmper LLP,
Independent Registered Public
Accounting Firm.
Power of Attorney (included on
signature page)

Certiﬁcation of the Chief Executive
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certiﬁcation of the Chief Financial
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certiﬁcation of the Chief 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 the Chief 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.

64

Exhibit
Number

Description of Document

Registrant’s
Form

Dated

Exhibit
No.

Filed
Herewith

101.CAL XBRL Taxonomy Extension Calculation

Linkbase Document.

101.DEF

XBRL Taxonomy Extension Deﬁnitions
Linkbase Document.

101.LAB

101.PRE

XBRL Taxonomy Extension Label
Linkbase Document.

XBRL Taxonomy Extension
Presentation Linkbase Document.

*

#

Certain information in this exhibit has been omitted and ﬁled separately with the Securities and Exchange
Commission pursuant to a conﬁdential treatment request.
Represents management compensatory plan, contract or arrangement.

Item 16. Form 10-K Summary.

None

65

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant caused this report

to be signed on its behalf by the undersigned, thereunto duly authorized.

ASSEMBLY BIOSCIENCES, INC.

Date: March 1, 2017

By: /s/ Derek Small

Name: Derek Small
Title: President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Derek Small and David J. Barrett, jointly and severally, his or her attorneys-in-fact,
each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this
report, and to ﬁle the same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and conﬁrming all that each of said attorneys-in-fact,
or his or her substitute or substitutes may 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 by the

following persons on behalf of the registrant in the capacities and on the dates indicated.

Date

March 1, 2017

March 1, 2017

March 1, 2017

March 1, 2017

March 1, 2017

March 1, 2017

March 1, 2017

March 1, 2017

Signature

Title

/s/ Derek Small
Derek Small

/s/ David J. Barrett
David J. Barrett

/s/ Anthony E. Altig
Anthony E. Altig

/s/ Mark Auerbach
Mark Auerbach

/s/ Richard DiMarchi
Richard DiMarchi

/s/ Myron Z. Holubiak
Myron Z. Holubiak

/s/ Alan J. Lewis
Alan J. Lewis

/s/ William Ringo
William Ringo

President, Chief Executive Officer and Director
(Principal Executive Officer)

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

Director

Director

Director

Director

Director

Director

66

ASSEMBLY BIOSCIENCES, INC.

FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

. . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31,
2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31,

2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 . .

Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-5

F-6

F-7

F-8

F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Assembly Biosciences, Inc.

We have audited the accompanying consolidated balance sheets of Assembly Biosciences, Inc. and
Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ equity and cash ﬂows for each of the two years in the period
ended December 31, 2016. These ﬁnancial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these ﬁnancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An
audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as
well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated ﬁnancial position of Assembly Biosciences, Inc. and Subsidiaries at December 31, 2016 and
2015, and the consolidated results of their operations and their cash ﬂows for each of the two years in the
period ended December 31, 2016 in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Assembly Biosciences, Inc. and Subsidiaries’ internal control over ﬁnancial reporting as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
March 1, 2017 expressed an unqualiﬁed opinion thereon.

/s/ Ernst & Young LLP

Stamford, Connecticut
March 1, 2017

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Assembly Biosciences, Inc.

We have audited Assembly Biosciences, Inc. and Subsidiaries’ internal control over ﬁnancial reporting as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
Assembly Biosciences Inc.’s management is responsible for maintaining effective internal control over
ﬁnancial reporting, and for its assessment of the effectiveness of internal control over ﬁnancial reporting
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over ﬁnancial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over ﬁnancial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over ﬁnancial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance
regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over ﬁnancial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁnancial
statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, Assembly Biosciences, Inc. and Subsidiaries maintained, in all material respects, effective
internal control over ﬁnancial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Assembly Biosciences, Inc. and Subsidiaries as of
December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss,
changes in stockholders’ equity and cash ﬂows for each of the two years in the period ended December 31,
2016 of Assembly Biosciences, Inc. and Subsidiaries and our report dated March 1, 2017 expressed an
unqualiﬁed opinion thereon.

/s/ Ernst & Young LLP

Stamford, Connecticut
March 1, 2017

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Assembly Biosciences, Inc.

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity, and
cash ﬂows of Assembly Biosciences, Inc. and subsidiary (the ‘‘Company’’) for the year ended December 31,
2014. The ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these ﬁnancial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the ﬁnancial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over ﬁnancial reporting. Our audit
included consideration of internal control over ﬁnancial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, 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. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial
statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by
management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the
consolidated results of operations and cash ﬂows of Assembly Biosciences, Inc. and subsidiary for the year
ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of
America.

/s/ EisnerAmper LLP

New York, New York
March 12, 2015

F-4

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31,

2016

2015

ASSETS

Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 28,575,085
24,388,403
611,176
53,574,664

$ 27,107,526
40,556,652
704,287
68,368,465

Long-term assets

Marketable securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
Security deposits
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,435,753
214,687
255,366
29,000,000
12,638,136
44,543,942
$ 98,118,606

23,392,129
148,609
197,158
29,000,000
12,638,136
65,376,032
$ 133,744,497

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,368,131
4,752,823
7,120,954

$

1,363,698
2,039,204
3,402,902

Long-term liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities
Total long-term liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,119,651
11,119,651
18,240,605

11,600,000
11,600,000
15,002,902

Commitments and contingencies

Stockholders’ equity

Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares
issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common stock, $0.001 par value; 50,000,000 shares authorized;
17,246,754 and 17,225,662 shares issued and outstanding as of
December 31, 2016 and December 31, 2015, respectively . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . .
Accumulated deﬁcit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . .

—

—

17,247
288,688,990
(600,769)
(208,227,467)
79,878,001
$ 98,118,606

17,226
283,511,859
(821,585)
(163,965,905)
118,741,595
$ 133,744,497

The accompanying notes are an integral part of these consolidated ﬁnancial statements

F-5

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

2016

Year Ended December 31,
2015

2014

Operating expenses:

Research and development . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . .

$ 33,092,977
12,185,484
45,278,461
(45,278,461)

$ 18,357,937
11,297,693
29,655,630
(29,655,630)

$ 10,716,737
13,239,715
23,956,452
(23,956,452)

Other income (expenses)

Interest and other income
Realized loss from marketable securities

. . . . . . . . . . . . . . . . . . .
. . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes
. . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,539,088
(1,139,861)
399,227
(44,879,234)
617,672
$(44,261,562)

1,228,830
(27,033)
1,201,797
(28,453,833)
—
$(28,453,833)

167,653
—
167,653
(23,788,799)
—
$(23,788,799)

Other comprehensive (loss) income, net of tax

Unrealized loss recognized in accumulated other

comprehensive loss before reclassiﬁcation, net of
tax beneﬁt of $299,741, $0 and $0, respectively . .
Reclassiﬁcation adjustment of unrealized loss included
in net loss, net of tax expense of $437,064, $0 and
$0, respectively . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . . . . . . . . .
Weighted average common shares outstanding, basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comprehensive loss

(481,981)

(848,618)

—

702,797
$(44,040,746)

27,033
$(29,275,418)

—
$(23,788,799)

$

(2.57)

$

(1.81)

$

(3.40)

17,226,245

15,702,646

6,998,875

The accompanying notes are an integral part of these consolidated ﬁnancial statements

F-6

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Preferred Stock
Shares Amount

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Common Stock
Issuable

Accumulated
Other
Comprehensive
Loss

Accumulated
Deﬁcit

Total
Stockholders’
Equity

Balance as of December 31,

2013 . . . . . . . . . . . . .

44,000

$ 44

4,146,779

$ 4,147

$135,844,320

$ 368,750

$

Proceeds from common stock

sold, net of costs

. . . . . .
Issuance of common stock for
business combination . . . .

Issuance of common stock in
exchange for restricted
stock units . . . . . . . . . .
Conversion of preferred stock
to common stock . . . . . . .

Fair value of options

assumed . . . . . . . . . . .

Issuance of warrants for

services . . . . . . . . . . . .
Stock-based compensation . . .
Net loss . . . . . . . . . . . . .
Balance as of December 31,

2014 . . . . . . . . . . . . .

Proceeds from common stock
sold, net of underwriters’
discounts and cost . . . . . .
Exercise of stock options . . .
Cashless exercise of

warrants . . . . . . . . . . . .
Stock-based compensation . . .
Change in unrealized loss on

marketable securities. . . . .
Net loss . . . . . . . . . . . . .
Balance as of December 31,

2015 . . . . . . . . . . . . .
Exercise of stock options . . .
Stock-based compensation . . .
Change in unrealized loss on

marketable securities, net of
income tax expense of
$137,323 . . . . . . . . . . .

Cancellation of common

stock . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . .
Balance as of December 31,

2016 . . . . . . . . . . . . .

—

—

—

— 2,051,472

2,051

16,723,895

— 4,008,808

4,009

29,060,139

—

—

—

25,000

368,725

(368,750)

(44,000)

(44)

440,000

—

—
—
—

—

—
—
—

—

—
—
—

25

440

—

—
—
—

(396)

758,948

679,447
10,637,494
—

— $ — 10,672,059

$10,672

$194,072,572

$

—
—

—
—

—
—

— 6,388,888
76,422
—

6,389
77

81,008,600
554,191

—
—

—
—

88,293
—

—
—

88
—

—
—

(88)
7,876,584

—
—

— $ — 17,225,662
21,200
—
—
—

—
—

$17,226
21
—

$283,511,859
152,619
5,024,512

$

—

—
—

—

—
—

—

(108)
—

—

—
—

—

—
—

— $ — 17,246,754

$17,247

$288,688,990

$

—

—

—

—

—

—

—
—
—

—

—
—

—
—

$ (111,723,273) $ 24,493,988

—

—

—

—

—

16,725,946

29,064,148

—

—

758,948

—
—
(23,788,799)

679,447
10,637,494
(23,788,799)

$(135,512,072) $ 58,571,172

—
—

—
—

81,014,989
554,268

—
7,876,584

$

(821,585)
—

—
(28,453,833)

(821,585)
(28,453,833)

$(821,585)
—
—

$(163,965,905) $118,741,595
152,640
5,024,512

—
—

220,816

—

220,816

—
—

—
(44,261,562)

—
(44,261,562)

$(600,769)

$(208,227,467) $ 79,878,001

—

—

—
—
—

—

—
—

—
—

—
—

—
—
—

—

—
—

—

The accompanying notes are an integral part of these consolidated ﬁnancial statements

F-7

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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 . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Realized loss from marketable securities
. . . . . . . . . . . . . . . . . . . .
Deferred income tax beneﬁt
Loss on sale of ﬁxed assets
. . . . . . . . . . . . . . . . . . . .
Issuance of warrants for services . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities:

Prepaid expenses and other current assets . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Security deposits
. . . . . . . . . . . . . . . .

Net cash used in operating activities

Cash ﬂows from investing activities

Purchases of ﬁxed assets
. . . . . . . . . . . . . . . . . . . .
Sale of ﬁxed assets . . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired in business combination . . . . . . . . . . . .
Security deposits collected . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . .
Redemptions of marketable securities . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . .

Cash ﬂows from ﬁnancing activities

Proceeds from common stock sold, net of underwriters’

discounts and cost

. . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . .
. . . . . . . . . . . . .
Net cash provided by ﬁnancing activities
Net increase (decrease) in cash and cash equivalents
. . . . . .
Cash and cash equivalents at the beginning of the period . . . .
Cash and cash equivalents at the end of the period . . . . .

Supplemental disclosure of cash ﬂow information:
Change in unrealized gain (loss) on marketable securities

available-for-sale, before tax expense . . . . . . . . . . . . . .
Cashless exercise of warrants . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in exchange for restricted

stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of preferred stock to common stock . . . . . . . . .

Supplemental disclosure of non-cash activities:
Assembly business combination
. . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Security deposits
. . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . .
Share exchange − business combination . . . . . . . . . . .
Fair value of vested options and restricted stock units − in
connection with business combination . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired in business combination . . . . . . . . . . . . . . .

2016

Year Ended December 31,
2015

2014

$(44,261,562)

$(28,453,833)

$(23,788,799)

80,251
5,024,512
1,139,861
(617,672)
—
—

93,111
1,004,433
2,713,619
(58,208)
(34,881,655)

(146,329)
—
—
—
(7,951,257)
44,294,160
36,196,574

64,989
7,876,584
27,033
—
954
—

(555,849)
456,097
1,968,844
(82,153)
(18,697,334)

(58,261)
150
—
—
(69,781,176)
4,983,777
(64,855,510)

10,974
10,637,494
—
—
—
679,447

(54,472)
(2,481,917)
23,771
—
(14,973,502)

(149,963)
—
509,363
(81,999)
—
—
277,401

—
152,640
152,640
1,467,559
27,107,526
$ 28,575,085

81,014,989
554,268
81,569,257
(1,983,587)
29,091,113
$ 27,107,526

16,725,946
—
16,725,946
2,029,845
27,061,268
$ 29,091,113

$
$

$
$

$

$

358,139
—

—
—

—
—
—
—
—
—
—

—
—
—

$
$

$
$

$

$

(821,585)
88

—
—

$
$

$
$

—
—

368,750
440

—
—
—
99,214
—
(99,214)
—

—
—
—

$

(23,540)
(10,350)
(29,000,000)
(12,737,350)
(16,606)
874,113
29,064,148

758,948
11,600,000
509,363

$

The accompanying notes are an integral part of these consolidated ﬁnancial statements

F-8

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 — Nature of Business

Overview

Assembly Biosciences, Inc. (‘‘Assembly’’ or the ‘‘Company’’) is a biotechnology company advancing two

innovative platform programs: (i) HBV-cure program, which is advancing a new class of oral therapeutics for
the treatment of hepatitis B virus (HBV) infection and (ii) Microbiome program, which is advancing a novel
class of oral synthetic live biotherapeutics, which are designed to restore health to a dysbiotic microbiome.

The Company’s HBV-cure program is aimed at increasing the current low cure rates for patients with
HBV and is pursuing multiple drug candidates that inhibit multiple steps of the HBV lifecycle. Assembly has
discovered several novel core protein Allosteric Modulators (CpAMs), which are small molecules that directly
target and allosterically modulate the HBV core (HBc) protein.

The Company’s Microbiome program consists of a fully integrated platform that includes a robust strain

identiﬁcation and selection process, methods for strain isolation and growth under current Good
Manufacturing Practices (cGMP) conditions, and a patent-pending delivery system, GEMICEL(cid:5), which allows
for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal (GI) tract.
The lead product candidate from this platform, ABI-M101, is in development for the treatment of C. difficile
infections (CDI). Using its microbiome platform, the Company is developing additional product candidates for
multiple indications including other gastrointestinal indications, metabolic disorders, immunotherapy, and
autoimmune diseases.

On January 6, 2017, the Company entered into a Research, Development, Collaboration and License

Agreement (the ‘‘Collaboration Agreement’’) with Allergan Pharmaceuticals International Limited
(‘‘Allergan’’) to develop and commercialize select microbiome gastrointestinal programs. Pursuant to the
Collaboration Agreement, the Company granted Allergan an exclusive worldwide license to certain of its
intellectual property, including its intellectual property arising under the Collaboration Agreement, to develop
and commercialize licensed compounds for ulcerative colitis, Crohn’s disease and irritable bowel syndromes.
Under the Collaboration Agreement, Allergan and the Company will collaborate on research and development
activities with respect to the licensed compounds in accordance with a mutually agreed upon research and
development plan. Pursuant to the terms of the Collaboration Agreement, in connection with the closing of the
transaction on February 10, 2017, Allergan paid the Company an upfront payment of $50 million.
Additionally, the Company is eligible to receive up to approximately $630 million in development milestone
payments and up to approximately $2.15 billion in commercial milestone payments in connection with the
successful development and commercialization of licensed compounds for up to six different indications. In
addition, the Company is eligible to receive tiered royalties at rates ranging from the mid-single digits to the
mid-teens based on net sales. See Note 12 for more details.

On March 19, 2015, the Company sold to various investors an aggregate of 5,555,555 shares of common
stock in a public offering. The purchase price paid by the investors was $13.50 per share and an aggregate of
$70.4 million (net of underwriters’ discount and equity issuance costs) were received. On April 6, 2015, the
underwriters exercised in full their option to purchase an additional 833,333 shares of common stock at the
public offering price of $13.50 per share, less underwriting discounts and commissions and offering expenses.
Proceeds from the sale of shares on the exercise of the underwriters’ option (net of underwriting discounts and
commissions) were approximately $10.6 million.

On July 11, 2014, Nasdaq listed Ventrus Biosciences, Inc. caused its wholly owned subsidiary to merge

with and into Assembly Pharmaceuticals, Inc., a private company (the ‘‘Merger’’), resulting in Assembly
Pharmaceuticals, Inc. being the surviving entity and becoming a wholly owned subsidiary of Ventrus
Biosciences, Inc. In connection with the Merger, Ventrus Biosciences, Inc. changed its name to Assembly
Biosciences, Inc. The Merger resulted in a shift in strategic focus, the addition of a new lead drug
development program and changes in personnel. In connection with the Merger, the Company’s Board of
Directors and stockholders approved a 1-for-5 reverse stock split of the Company’s common stock. The
reverse stock split became effective on July 11, 2014. All share and per share amounts in the consolidated

F-9

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 — Nature of Business − (continued)

ﬁnancial statements and notes thereto have been retroactively adjusted for all periods presented to give effect
to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common
stock to additional paid-in capital. In connection with the Merger, the shares of common stock issued and
outstanding of Assembly Pharmaceuticals, were converted into an aggregate of 4,008,848 shares of the
Company’s common stock. Also pursuant to the terms of the Merger, the outstanding options to purchase
shares of Assembly Pharmaceuticals’ common stock were assumed by the Company and became exercisable
for an aggregate of 621,651 shares of the Company’s common stock.

The Company accounted for the acquisition of Assembly Pharmaceuticals, Inc. as a business combination

under Accounting Standards Codiﬁcation (‘‘ASC’’) 805 with Ventrus Biosciences, Inc. as the accounting
acquirer. The Company determined Ventrus Biosciences, Inc. was the accounting acquirer in accordance with
ASC 805-10-25-5 as Ventrus Biosciences, Inc. gained control of Assembly Pharmaceuticals, Inc. upon
completion of the Merger. To make this determination, the Company considered factors as indicated in
ASC 805-10-55, including which entity issued equity interests to effect the combination, board of director
composition, shareholder ownership, voting control, restrictions on shareholder voting rights, anticipated
management positions and the relative size of the two companies.

On October 6, 2014, the Company sold to various institutional investors an aggregate of 1,959,000 shares
of common stock in a registered direct offering. The purchase price paid by the investors was $8.04 per share
and an aggregate of $15.0 million in net proceeds were received.

Liquidity

The Company has not derived any revenue from product sales to date as it currently has no approved
products. Once a product has been developed, it will need to be approved for sale by the U.S. Food and Drug
Administration (FDA) or an applicable foreign regulatory agency. Since inception, the Company’s operations
have been ﬁnanced primarily through the sale of equity securities, the proceeds from the exercise of warrants
and stock options and the issuance of debt. The Company has incurred losses from operations and negative
cash ﬂows from operating activities since inception and expects to continue to incur substantial losses for the
next several years as it continues its product development efforts. Management believes the Company
currently has sufficient funds to meet its operating requirements for at least the next twelve months. If the
Company cannot generate signiﬁcant cash from its operations, it intends to obtain any additional funding it
requires through strategic relationships, public or private equity or debt ﬁnancings, grants or other
arrangements. The Company cannot assure such funding will be available on reasonable terms, if at all.

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting Pronouncements

Basis of Presentation

The accompanying consolidated ﬁnancial statements include the accounts of the Company and its

subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Segments

The Company operates in one operating segment and, accordingly, no segment disclosures have been

presented herein.

Use of Estimates

The preparation of ﬁnancial statements in conformity with the accounting principles generally accepted in

the United States of America (‘‘U.S. GAAP’’) requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the ﬁnancial statements and reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.

F-10

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

Signiﬁcant estimates inherent in the preparation of the accompanying ﬁnancial statements include

recoverability and useful lives (indeﬁnite or ﬁnite) of intangible assets, assessment of impairment of goodwill,
and the fair value of stock options and warrants granted to employees, consultants, directors, investors,
licensors, placement agents and underwriters.

The Company’s estimates could be affected by external conditions, including those unique to the
Company and general economic conditions. It is reasonably possible that these external factors could have
an effect on the Company’s estimates and could cause actual results to differ from those estimates and
assumptions.

Reclassiﬁcation

The Company reclassiﬁed certain non-cash activities in the consolidated statements of cash ﬂows to

conform to the Assembly Pharmaceutical’s ﬁnal purchase price allocation in 2015.

Cash and cash equivalents

All highly liquid investments with maturities of three months or less at the time of purchase are

considered to be cash equivalents. All of the Company’s cash equivalents have liquid markets and high credit
ratings. The Company maintains its cash in bank deposit and other accounts, the balances of which, at times
and at December 31, 2016, exceed federally insured limits.

Marketable Securities

The Company has designated marketable securities as of December 31, 2016 as available-for-sale
securities and measures these securities at their respective fair values. Marketable securities are classiﬁed
as short-term or long-term based on the maturity date and their availability to meet current operating
requirements. Marketable securities that mature in one year or less are classiﬁed as short-term
available-for-sale securities and are reported as a component of current assets. Marketable securities that are
not considered available for use in current operations are classiﬁed as long-term available-for-sale securities
and are reported as a component of long-term assets.

Securities that are classiﬁed as available-for-sale are measured at fair value with temporary unrealized

gains and losses reported in other comprehensive loss, and as a component of stockholders’ equity until their
disposition. The Company reviews all available-for-sale securities at each period end to determine if they
remain available-for-sale based on then current intent and ability to sell the security if it is required to do so.
The cost of securities sold is based on the speciﬁc identiﬁcation method.

Marketable securities are subject to a periodic impairment review. The Company may recognize an
impairment charge when a decline in the fair value of investments below the cost basis is determined to be
other-than-temporary. There were no marketable securities deemed to be impaired as of December 31, 2016
or 2015.

Goodwill and Other Intangible Assets

Goodwill is the excess of purchase price over the fair value of identiﬁed net assets of businesses
acquired. The Company’s intangible assets with an indeﬁnite life are related to in-process research and
development (‘‘IPR&D’’) programs acquired in the Merger, as the Company expects future research and
development on these programs to provide the Company with substantial beneﬁt for a period that extends
beyond the foreseeable horizon. Intangible assets with indeﬁnite useful lives are measured at their respective
fair values as of the acquisition date. The Company does not amortize goodwill and intangible assets with
indeﬁnite useful lives. Intangible assets related to IPR&D projects are considered to be indeﬁnite lived until
the completion or abandonment of the associated R&D efforts. If and when development is complete, which

F-11

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

generally occurs if and when regulatory approval to market a product is obtained, the associated assets would
be deemed ﬁnite lived and would then be amortized based on their respective estimated useful lives at that
point in time.

The Company reviews goodwill and indeﬁnite-lived intangible assets at least annually for possible
impairment. Goodwill and indeﬁnite-lived intangible assets are reviewed for possible impairment between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value
of the reporting unit or the indeﬁnite-lived intangible assets below their carrying values. The Company tests
its goodwill and indeﬁnite-lived intangible assets each year on October 1. The Company has one reporting
unit. The Company reviews the carrying value of goodwill utilizing a market capitalization approach which
was based upon the closing price of the Company’s stock price as of the beginning of the 4th quarter. As of
October 1, 2016 and 2015, the fair value of the Company’s reporting unit was in excess of carrying value for
all scenarios that were tested and goodwill was not deemed to be impaired.

On October 1, 2016, the Company performed a qualitative assessment of IPR&D. As of October 1, 2015,

the Company utilized a discounted probable future cash ﬂow model to value acquired IPR&D. Signiﬁcant
assumptions used in the model include the period in which material net cash inﬂows are expected to
commence, anticipated material changes from historical pricing, margins and expense levels and an
appropriate risk adjusted discount rate applied to the estimated cash ﬂows. As of October 1, 2016 and 2015,
IPR&D was not deemed to be impaired.

Impairment of Long-lived Assets

The Company monitors the carrying value of long-lived assets for potential impairment and tests the
recoverability of such assets whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. If a change in circumstance occurs, the Company performs a test of recoverability by
comparing the carrying value of the asset or asset group to its undiscounted expected future cash ﬂows. If
cash ﬂows cannot be separately and independently identiﬁed for a single asset, the Company will determine
whether impairment has occurred for the group of assets for which the Company can identify the projected
cash ﬂows. If the carrying values are in excess of undiscounted expected future cash ﬂows, the Company
measures any impairment by comparing the fair value of the asset or asset group to its carrying value. There
were no indicators of impairment of long-lived assets during the year ended December 31, 2016 and 2015.

Business Combinations

The Merger (see Note 3) was made at a price above the fair value of the assets acquired and liabilities

assumed including deferred tax liability, resulting in goodwill, based on the Company’s expectations of
synergies and other beneﬁts of combining the acquired business. These synergies and beneﬁts include
elimination of redundant functions and staffing and use of the Company’s existing infrastructure to expand
development of the product candidates of the acquired business in a cost efficient manner.

Signiﬁcant judgment is required in estimating the fair value of intangible assets and in assigning their
respective useful lives. The fair value estimates are based on available historical information and on future
expectations and assumptions deemed reasonable by management, but which are inherently uncertain.

Net assets acquired are recorded at their fair values on the date of acquisition.

F-12

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

Property and Equipment

Property and equipment are stated at cost and consist of lab equipment and computer hardware and
software. The Company computes depreciation under the straight-line method over the following estimated
useful life of the related assets:

•
•
•

Lab equipment
Computer hardware and software
Office equipment

3 to 5 years
3 to 5 years
3 to 5 years

Leasehold improvements are amortized over the remaining terms of the respective leases or the estimated

useful life of the leasehold improvements, whichever is less. Maintenance and repair costs are expensed as
incurred.

Fair Value Measurements

The Company follows accounting guidance on fair value measurements for ﬁnancial instruments
measured on a recurring basis, as well as for certain assets and liabilities that are initially recorded at their
estimated fair values. Fair value is deﬁned as the exit price, or the amount that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The Company use the following three-level hierarchy that maximizes the use of observable inputs and
minimizes the use of unobservable inputs to value its ﬁnancial instruments:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments.

Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the
marketplace.

Level 3: Signiﬁcant unobservable inputs which are supported by little or no market activity and that are
ﬁnancial instruments whose values are determined using pricing models, discounted cash ﬂow
methodologies, or similar techniques, as well as instruments for which the determination of fair value
requires signiﬁcant judgment or estimation.

Financial instruments measured at fair value are classiﬁed in their entirety based on the lowest level of

input that is signiﬁcant to the fair value measurement. The assessment of the signiﬁcance of a particular input
to the fair value measurement in its entirety requires us to make judgments and consider factors speciﬁc to the
asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect
on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not
be indicative of the amount that the Company or holders of the instruments could realize in a current market
exchange.

The carrying amounts of cash equivalents and marketable securities approximate their fair value based
upon quoted market prices. Certain of the Company’s ﬁnancial instruments are not measured at fair value on a
recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term
nature, such as cash, accounts receivable, accounts payable and accrued expenses.

Stock-Based Compensation

The Company expenses stock-based compensation to employees over the requisite service period based

on the estimated grant-date fair value of the awards. For stock-based compensation awards to non-employees,
the Company remeasures the fair value of the non-employee awards at each reporting period prior to vesting
and ﬁnally at the vesting date of the award. Changes in the estimated fair value of these non-employee awards
are recognized as compensation expense in the period of change.

F-13

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing
model and the assumptions used in calculating the fair value of stock-based awards represent management’s
best estimates and involve inherent uncertainties and the application of management’s judgment.

Warrants

For the purpose of valuing the warrants (see Note 8), the Company used the Black-Scholes option pricing
model utilizing the assumptions for risk free interest rate, the expected term, expected volatility, and expected
dividend yield. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in
effect at the time of grant with a term consistent with the expected term of the Company’s awards. The
Company estimated the expected life of the warrants based on the full term of the warrant. The expected
dividend yield reﬂects the Company’s current and expected future policy for dividends on its common stock.
The expected stock price volatility for the Company’s stock was calculated by examining historical volatilities
for publicly traded industry peers as the Company did not have any trading history for its common stock at
the time the grants were issued.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include
salaries and personnel-related costs, consulting fees, fees paid for contract research services, fees paid to
clinical research organizations and other third parties associated with clinical trials, the costs of laboratory
equipment and facilities, and other external costs.

Income taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and

liabilities are recognized for the future tax effects attributable to temporary differences between the ﬁnancial
statement carrying amounts of existing assets and liabilities and their respective income tax bases, and
operating loss and tax credit carryforwards. The Company establishes a valuation allowance if it is more
likely than not that the deferred tax assets will not be recovered based on an evaluation of objective veriﬁable
evidence. For tax positions that are more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the beneﬁt that is greater than 50% likely of being realized. For tax positions
that are not more likely than not of being sustained upon audit, the Company does not recognize any portion
of the beneﬁt.

The Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards Codiﬁcation (‘‘ASC’’),
Topic 740, Income Taxes, or ASC 740, also clariﬁes the accounting for uncertainty in income taxes recognized
in an enterprise’s ﬁnancial statements and prescribes a recognition threshold and measurement process for
ﬁnancial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. For those beneﬁts to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. ASC 740 also provides guidance on derecoginition, classiﬁcation, interest
and penalties, accounting in interim period, disclosure and transition. Based on the Company’s evaluation, it
has been concluded that there are no signiﬁcant uncertain tax positions requiring recognition in the Company’s
consolidated ﬁnancial statements. The Company believes that its income tax positions and deductions would
be sustained on audit and does not anticipate any adjustments that would result in a material changes to its
ﬁnancial position.

The Company’s policy for recording interest and penalties associated with audits is to record such

expense as a component of income tax expense. There were no amounts accrued for penalties or interest as of
December 31, 2016 and 2015. Management is currently unaware of any issues under review that could result
in signiﬁcant payments, accruals or material deviations from its position.

F-14

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

Loss per common share

Basic net loss per common share excludes dilution and is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted net loss per common share reﬂects
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared in the earnings of
the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses,
basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the
future that was not included in the computation of diluted loss per share at December 31, 2016, 2015 and
2014 are as follows:

Warrants to purchase common stock . . . . . . . . . . . . .
Options to purchase common stock . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Comprehensive Loss

2016
16,909
4,457,251
4,474,160

Year Ended December 31,
2015
16,909
3,367,784
3,384,693

2014
270,761
3,249,651
3,520,412

Comprehensive loss is comprised of net loss and adjustments for the change in unrealized gains and
losses on investments in available-for-sale marketable securities. The Company displays comprehensive loss
and its components in the consolidated statements of operations and comprehensive loss.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to credit risk consist primarily of cash,
cash equivalents and marketable securities. The Company holds these investments in highly rated ﬁnancial
institutions, and, by policy, limits the amounts of credit exposure to any one ﬁnancial institution. These
amounts at times may exceed federally insured limits. The Company has not experienced any credit losses in
such accounts and does not believe it is exposed to any signiﬁcant credit risk on these funds. The Company
has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option
contracts or other hedging arrangements.

Adoption of Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update (‘‘ASU’’) 2014-15, Disclosure of

Uncertainties about an Entity’s Ability to Continue as a Going Concern, that requires management to evaluate
whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as
a going concern within one year after the ﬁnancial statements are issued or available to be issued on both an
interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that
substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue
as a going concern. The Company adopted ASU 2014-15 in the fourth quarter of 2016, and its adoption did
not have any signiﬁcant impact on the Company’s ﬁnancial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classiﬁcation of Deferred Taxes.

ASU 2015-17 requires that deferred tax liabilities and assets be classiﬁed as noncurrent in a classiﬁed
statement of ﬁnancial position. ASU 2015-17 is effective for ﬁnancial statements issued for ﬁscal years
beginning after December 15, 2016, and interim periods within those ﬁscal years. Early adoption is permitted.
The Company adopted this guidance in the fourth quarter of 2016 on a prospective basis, and its adoption did
not have any signiﬁcant impact on the Company’s consolidated ﬁnancial statements.

F-15

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires
entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in
an amount that reﬂects the consideration to which the entity expects to be entitled to in exchange for those
goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash ﬂows arising from customer contracts, including signiﬁcant judgments and
changes in judgments and assets recognized from costs incurred to obtain or fulﬁll a contract. The FASB has
subsequently issued ASU No. 2016-10, Revenue from Contracts with Customer (Topic 606) Identifying
Performance Obligations and Licensing to address issues arising from implementation of the new revenue
recognition standard. ASU 2014-09 and ASU 2016-10 are effective for interim and annual periods beginning
January 1, 2018, and may be adopted earlier, but not before January 1, 2017. The revenue standards are
required to be adopted by taking either a full retrospective or a modiﬁed retrospective approach. The
Company is currently evaluating the impact that ASU 2014-09 and 2016-10 will have on the Company’s
ﬁnancial statements and determining the transition method, including the period of adoption, that it will apply.
The Company is currently evaluating which transition approach it will utilize and the impact of adopting this
accounting standard on the Company’s ﬁnancial statements.

In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in
fair value recognized in net income; simpliﬁes the impairment assessment of equity investments without
readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the
requirement for public business entities to disclose the method(s) and signiﬁcant assumptions used to estimate
the fair value that is required to be disclosed for ﬁnancial instruments measured at amortized cost on the
balance sheet; requires public business entities to use the exit price notion when measuring the fair value of
ﬁnancial instruments for disclosure purposes; requires an entity to present separately in other comprehensive
income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-speciﬁc credit risk when the entity has elected to measure the liability at fair value in accordance
with the fair value option for ﬁnancial instruments; requires separate presentation of ﬁnancial assets and
ﬁnancial liabilities by measurement category and form of ﬁnancial assets on the balance sheet or the
accompanying notes to the ﬁnancial statements and clariﬁes that an entity should evaluate the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the
entity’s other deferred tax assets. ASU 2016-01 is effective for ﬁnancial statements issued for ﬁscal years
beginning after December 15, 2017, and interim periods within those ﬁscal years. The Company is currently
evaluating the impact that ASU 2016-01 will have on its consolidated ﬁnancial statements and related
disclosures.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Topic 840,
Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of
leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying
leases as either ﬁnance or operating leases based on the principle of whether or not the lease is effectively a
ﬁnanced purchase by the lessee. This classiﬁcation will determine whether lease expense is recognized based
on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is
also required to record a right-of-use asset and a lease liability for all leases with a term of greater than
twelve months regardless of classiﬁcation. Leases with a term of twelve months or less will be accounted for
similar to existing guidance for operating leases. The standard will be effective for annual and interim periods
beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently
evaluating the impact that ASU 2016-02 will have on its consolidated ﬁnancial statements and related
disclosures.

F-16

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 2 — Summary of Signiﬁcant Accounting Policies and Recent Accounting
Pronouncements − (continued)

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting. The amendment is to simplify several aspects of
the accounting for share-based payment transactions including the income tax consequences, classiﬁcation of
awards as either equity or liabilities, and classiﬁcation on the statement of cash ﬂows. For public entities, the
amendments in ASU 2016-09 are effective for interim and annual reporting periods beginning after
December 15, 2016. The Company will adopt this guidance as of and for the three months ended March 31,
2017. The Company does not expect the adoption of ASU 2016-09 to have a material impact on its
consolidated ﬁnancial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of

Credit Losses on Financial Instruments. ASU 2016-13 requires that expected credit losses relating to
ﬁnancial assets measured on an amortized cost basis and available-for-sale debt securities be recorded
through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for
available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires
the reversal of previously recognized credit losses if fair value increases. The new standard will be effective
on January 1, 2020. Early adoption will be available on January 1, 2019. The Company is currently evaluating
the effect that the updated standard will have on its consolidated ﬁnancial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classiﬁcation of Certain

Cash Receipts and Cash Payments, which addresses eight speciﬁc cash ﬂow issues with the objective of
reducing the existing diversity in practice in how certain cash receipts and cash payments are presented
and classiﬁed in the statement of cash ﬂows. The standard is effective for ﬁscal years beginning after
December 15, 2017, including interim periods within those ﬁscal years. Early adoption is permitted, including
adoption in an interim period. The Company is currently in the process of evaluating the impact of this new
pronouncement on its consolidated statements of cash ﬂows and related disclosures.

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the

Deﬁnition of a Business. The amendments in this Update is to clarify the deﬁnition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. The deﬁnition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company is
currently evaluating the impact of adopting this guidance.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350):

Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be
the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. This standard, which will be effective for the Company beginning in the ﬁrst quarter of
ﬁscal year 2021, is required to be applied prospectively. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently
evaluating the impact this standard will have on its ﬁnancial statements.

F-17

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 — Assembly Pharmaceuticals, Inc. Transaction

On July 11, 2014, the Company completed the Merger, whereby Assembly Pharmaceuticals became

the Company’s wholly-owned subsidiary. Pursuant to the terms of the Merger, the shares of Assembly
Pharmaceuticals were converted into an aggregate of 4,008,848 shares of the Company’s common stock. Also
pursuant to the terms of the Merger, the options to purchase shares of Assembly Pharmaceuticals were
assumed by the Company and became exercisable for an aggregate of 621,651 shares of the Company’s
common stock.

The allocation of the purchase price to the Assembly balance sheet is shown below:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill (as adjusted)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security deposits
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses (as adjusted)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

509,363
23,540
10,350
29,000,000
12,638,136
16,606
42,197,995
774,899
11,600,000
12,374,899
$29,823,096

The transaction was accounted for using the acquisition method. Accordingly, goodwill has been

measured as the excess of the total consideration over the amounts assigned to the identiﬁable assets acquired
and liabilities assumed including the related deferred tax liability. Goodwill is not deductible for tax purposes.

On the acquisition date, the fair value of net assets acquired was $29,823,096. The fair value of stock

issued to the Assembly Pharmaceuticals’ shareholders as part of the consideration of $29,064,148 was based
on reference to quoted market values of the Company’s common stock as of the date of acquisition. The
options assumed in the Merger were valued at $758,948. As of June 30, 2015, the Company ﬁnalized its
purchase price allocation. The Company adjusted certain accrued expenses, resulting in a decrease of goodwill
and accrued expenses of approximately $99,214 in the second quarter of 2015.

Note 4 — Marketable Securities

Marketable securities consist of the following as of December 31, 2016 and 2015:

Short-term available-for-sale securities

Corporate bonds . . . . . . . . . . . . . . . . . . . . . . .
Government and agency obligations
. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Municipal bonds

Long-term available-for-sale securities

Corporate bonds . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Gross unrealized gain (loss) is pre-tax.

Amortized
Cost

$22,032,191
1,225,000
1,596,160
24,853,351

2,434,251
2,434,251
$27,287,602

December 31, 2016
Gross
Unrealized
Gain(1)

Gross
Unrealized
Loss(1)

Fair Value

$3,190
661
4,257
8,108

1,502
1,502
$9,610

$(473,056)
—
—
(473,056)

$21,562,325
1,225,661
1,600,417
24,388,403

—
—
$(473,056)

2,435,753
2,435,753
$26,824,156

F-18

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 — Marketable Securities − (continued)

Short-term available-for-sale securities

Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Long-term available-for-sale securities
Government and agency obligations
. . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2015
Gross
Unrealized
Loss

Amortized
Cost

Fair Value

$41,126,524
41,126,524

$(569,872)
(569,872)

$40,556,652
40,556,652

1,225,000
1,596,160
20,822,682
23,643,842
$64,770,366

(3,834)
(4,384)
(243,495)
(251,713)
$(821,585)

1,221,166
1,591,776
20,579,187
23,392,129
$63,948,781

The contractual term to maturity of short-term marketable securities held by the Company as of

December 31, 2016 is less than one year. The contractual term to maturity of long-term marketable securities
held by the Company as of December 31, 2016 is from 1.0 to 1.2 years.

The proceeds from sales of available-for-sale securities were $44.3 million and $5.0 million as of

December 31, 2016 and 2015, respectively. Gross realized loss that has been included in net loss as a result of
those sales were approximately $1.1 million and $27,000 for the years ended December 31, 2016 and 2015,
respectively.

The fair value of marketable securities was classiﬁed into fair value measurement categories as follows:

Quoted prices in active markets for identical assets (Level 1)
Quoted prices for similar assets observable in the marketplace

As of December 31,

2016

2015

. . . .

$

— $

—

(Level 2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Signiﬁcant unobservable inputs (Level 3)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,824,156
—
$26,824,156

63,948,781
—
$63,948,781

The fair values of marketable securities are determined using quoted market prices from daily exchange
traded markets based on the closing price as of December 31, 2016 and 2015, and are classiﬁed as Level 2.

There were no transfers between levels 1, 2 or 3 for the years ended December 31, 2016 and 2015.

The following table shows the Company’s investments’ gross unrealized losses (pre-tax) and fair value,

aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2016.

Less than 12 Months

12 Months or More

Total

Fair Value
Corporate bonds . . . . . . . $6,022,560
. . . . . . . . . . . . . . $6,022,560
Total

Unrealized
Losses
$(17,305)
$(17,305)

Fair Value
$14,542,025
$14,542,025

Unrealized
Losses

Fair Value

$(455,751) $20,564,585
$(455,751) $20,564,585

Unrealized
Losses
$(473,056)
$(473,056)

F-19

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 4 — Marketable Securities − (continued)

The Company has determined that the unrealized losses are deemed to be temporary impairments as of

December 31, 2016. The Company believes that the unrealized losses generally are caused by increases in the
risk premiums required by market participants rather than an adverse change in cash ﬂows or a fundamental
weakness in the credit quality of the issuer or underlying assets. Because the Company has the ability and
intent to hold these investments until a recovery of fair value, which may be maturity, it does not consider the
investment in corporate bonds to be other-than-temporarily impaired at December 31, 2016.

Note 5 — Goodwill and Intangible Assets

Goodwill

In July 2014, the Company completed its merger with Assembly Pharmaceuticals (see Note 3). The fair
value of consideration paid, common stock and assumed options, totaled $29,823,096, which, net of amounts
allocated to assets and liabilities acquired at fair value, resulted in an allocation to goodwill (as adjusted) of
$12,638,136. The Company only has one reporting unit.

Goodwill is recorded as an indeﬁnite-lived asset and is not amortized for ﬁnancial reporting purposes but
is tested for impairment on an annual basis or when indications of impairment exist. No goodwill impairment
losses have been recognized. Goodwill is not deductible for income tax purposes since the tax basis is $0. The
Company performed impairment tests of the carrying value of the Company’s goodwill at October 1, 2016
and 2015, and deemed there was no goodwill impairment.

The net book value of goodwill decreased by $99,214 from December 31, 2014 to December 31, 2015,

as a result of the adjustment to purchase price accounting within the measurement period.

Intangible Assets

In July 2014, the Company completed its acquisition of Assembly Pharmaceuticals (see Notes 1 and 3).

The Company acquired in-process research and development related to Assembly Pharmaceuticals’ technology
which is an indeﬁnite lived intangible asset. The Company performed its annual impairment test as of
October 1, 2015 and 2016, and deemed there was no impairment of long-lived assets during the years ended
December 31, 2015 or 2016.

Note 6 — Property, Plant and Equipment, Net

Property, plant and equipment, consists of the following:

Computer hardware and software . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Lab equipment
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Leasehold improvement
Total property, plant and equipment . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . .
. . . . . . . . . . . . . .
Property, plant and equipment, net

Useful life
(Years)
3
3 to 5
3 to 5
1

As of December 31,
2015
$ 84,065
177,782
1,109
—
262,956
(114,347)
$ 148,609

2016
$ 86,228
253,735
1,109
68,213
409,285
(194,598)
$ 214,687

Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was approximately

$80,000, $65,000 and $11,000, respectively, and was recorded in both research and development expense and
general and administrative expense in the consolidated statements of operations and comprehensive loss.

F-20

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 — Accrued Expenses

Accrued expenses consist of the following:

As of December 31,

2016

2015

Accrued expenses:

Salaries, bonuses and employee beneﬁts . . . . . . . . . . . . . . . . . .
Accrued severance expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total accrued expenses

$2,884,000
241,737
916,674
710,412
—
$4,752,823

$1,628,975
106,777
120,700
—
182,752
$2,039,204

Note 8 — Stockholders’ Equity

Common and Preferred Stock Transactions

2014 Activity

In January 2014, the Company sold an aggregate of 92,472 shares of its common stock in its amended

at-the-market common equity offering program, resulting in net proceeds of approximately $1.8 million or
$19.07 per share.

In February 2014, all 44,000 outstanding shares of the Company’s Series A non-voting convertible

preferred stock converted into an aggregate 440,000 shares of common stock.

In July 2014, the Company issued 25,000 shares of common stock upon vesting of the restricted

stock units.

On October 6, 2014, the Company sold to various institutional investors an aggregate of 1,959,000 shares
of common stock in a registered direct offering. The purchase price paid by the investors was $8.04 per share
and an aggregate of approximately $15.0 million in net proceeds were received. In connection with the
offering, the Company entered into a placement agent agreement with William Blair & Company, L.L.C., who
acted as sole placement agent in the offering, and pursuant to which the Company paid a placement agent fee
equal to 5.0% of the gross proceeds of the offering.

On July 10, 2014, the Company’s stockholders approved a 1-for-5 reverse stock split of the issued and

outstanding shares of the Company’s common stock, par value $0.001 per share, effective as of July 11, 2014
at 5:01 p.m. Eastern time (the ‘‘Split Effective Time’’). At the Split Effective Time, all shares of common
stock issued and outstanding immediately prior to the Split Effective Time, including shares issued to
the shareholders of Assembly Pharmaceuticals, Inc. in connection with the acquisition of Assembly
Pharmaceuticals, Inc., were automatically reclassiﬁed into a smaller number of shares such that each ﬁve
shares of issued common stock immediately prior to the Split Effective Time were reclassiﬁed into one share
of common stock. Proportional adjustments to outstanding warrants, options and other equity awards and
equity compensation were also made. No fractional shares were issued and, in lieu thereof, any person who
would otherwise be entitled to a fractional share of common stock as a result of the reverse stock split was
entitled to receive a cash payment equal to the fraction to which such holder would otherwise be entitled
multiplied by the closing price per share of common stock on the NASDAQ Capital Market on July 11, 2014,
which was $1.45. All share and per share amounts in the consolidated ﬁnancial statements and notes thereto
have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including
reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

F-21

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 — Stockholders’ Equity − (continued)

On July 11, 2014, the Company completed the Merger, whereby Assembly Pharmaceuticals became

the Company’s wholly-owned subsidiary. Pursuant to the terms of the Merger, the shares of Assembly
Pharmaceuticals, common stock issued and outstanding were converted into an aggregate of 4,008,848 shares
of the Company’s common stock. Also pursuant to the terms of the Merger, the options to purchase shares of
Assembly Pharmaceuticals common stock issued and outstanding immediately prior to the Merger were
assumed by the Company and became exercisable for an aggregate of 621,651 shares of the Company’s
common stock. The fully vested assumed options in the Merger were valued at $758,948 using the
Black-Scholes model. The fair value of the options was recorded as a component of stockholders’ equity. The
fair value of the options was determined using the Black-Scholes model with the following assumptions: risk
free interest rate 1.66% − 2.15%, volatility 97.33% − 102.8%, expected term 5 − 6.1 years, and no expected
dividends.

2015 Activity

On March 19, 2015, the Company sold to various investors an aggregate of 5,555,555 shares of common
stock in a public offering. The purchase price paid by the investors was $13.50 per share and an aggregate of
$70.4 million in net proceeds were received, after deducting underwriting discounts and commissions and
estimated offering expenses. In addition, the Company granted the underwriters a 30-day option to purchase
up to an additional 833,333 shares of common stock.

On April 6, 2015, the underwriters exercised in full their option to purchase an additional 833,333 shares

of common stock at the public offering price of $13.50 per share, less underwriting discounts and
commissions and offering expenses. The closing of the option exercise resulted in net proceeds of
approximately $10.6 million. Exercise of the underwriters’ option increased the net proceeds (net of
underwriting discounts and commissions) of the public offering, from $70.4 million to $81.0 million.

On December 30, 2015, the Company ﬁled a registration statement on Form S-3 with the SEC using a
‘‘shelf’’ registration process, ﬁle number 333-208806, which became effective January 19, 2016. Under this
shelf registration process, the Company may from time to time sell any combination of the securities
described in the registration statement in one or more offerings for an aggregate offering price of up to
$150,000,000. The Company has not issued any securities under this registration statement as of this date.

2016 Activity

On June 29, 2016, the Company cancelled 108 shares of common stock, which represented the aggregate
number of fractional shares that were cashed out as a result of the reverse stock split effected in July 2014, as
described above.

Options, Warrants and Restricted Stock Units

Options

In July 2010, the stockholders approved the 2010 Equity Incentive Plan (the ‘‘2010 Plan’’) and on
May 19, 2011, the stockholders approved an amendment to the 2010 Plan increasing the authorized shares
thereunder by 300,000, on a post-Split Effective Time basis. As of December 31, 2016, there were outstanding
options to purchase an aggregate of 702,959 shares of common stock. Effective on June 2, 2016, the 2010
Plan was frozen and no further grants will be made under the 2010 Plan. Shares that are forfeited under the
2010 Plan on or after June 2, 2016 will become available for issuance under the Amended and Restated 2014
Plan (as deﬁned below).

In July 2014, the stockholders approved the 2014 Stock Incentive Plan (the ‘‘2014 Plan’’). On June 2,
2016, at the 2016 Annual Meeting of Stockholders (the ‘‘Annual Meeting’’), the stockholders of the Company
approved the amendment and restatement of the Company’s 2014 Plan (the ‘‘Amended and Restated 2014
Plan’’). Pursuant to the terms of the Amended and Restated 2014 Plan, the maximum number of shares
reserved for issuance thereunder is 4,160,000 (representing an increase of 1,600,000). As of December 31,

F-22

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 — Stockholders’ Equity − (continued)

2016, there were outstanding options to purchase an aggregate of 3,132,641 shares of common stock and
934,070 shares available for grant under the Amended and Restated 2014 Plan. Additionally, 32,501 shares of
common stock forfeited under the 2010 Plan are available for issuance under the Amended and Restated 2014
Plan.

On February 10, 2015, the Company’s former Chief Executive Officer, Dr. Russell Ellison, transitioned to

service as a consultant. The Company accelerated 266,667 of his options on March 3, 2015 in accordance
with the original terms of his employment agreement. The corresponding charge related to these options was
also accelerated in the ﬁrst quarter of 2015. The exercise period for Dr. Ellison’s vested options were also
extended until the end of their term, or July 9, 2024 in accordance with the original terms of his employment
agreement. The remainder of 266,666 unvested options were forfeited in accordance with the original terms of
his employment agreement.

On November 28, 2016, the Company’s former Chief Scientiﬁc Officer, Lee Arnold, resigned without
cause. In accordance with the separation agreement and Dr. Arnold’s original employment agreement, the
Company accelerated the expense associated with 21,585 of his options, which were to vest within six months
of his termination, and extended the exercise period for Dr. Arnold’s vested options until the end of their term,
or May 15, 2024.

A summary of the Company’s option activity and related information for the years ended December 31,

2016, 2015 and 2014 is as follows:

Outstanding as of December 31, 2014 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . .
Options vested and exercisable . . . . . . . . . . . . . . .

Number of
Shares
3,249,651
500,300
(76,422)
(11,800)
(293,945)
3,367,784
1,196,500
(21,200)
(85,833)
4,457,251
3,008,401

Weighted
Average
Exercise Price
$ 6.26
13.02
7.25
7.20
7.26
7.16
7.46
7.20
12.18
$ 7.14
$ 6.59

Total
Intrinsic Value
$ 5,187,924
—
22,348
—
—
3,971,205
5,676,405
—
—
$23,258,604
$17,156,719

The Company expects that all outstanding unvested options will vest. The fair value of the options

granted for the year ended December 31, 2016 and 2015, was based on the following assumptions:

Exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . .
Risk-free rate of interest . . . . . . . . . . . . . . . . . . . . . . . . .
Term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,
2015
7.88 − 16.55

2016
5.84 − 13.21

85.8% − 91.8% 88.62% − 95.55%
1.49% − 2.27%
1.36% − 2.18%
5.0 − 8.2
5.3 − 7.0

F-23

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 — Stockholders’ Equity − (continued)

Estimated future stock-based compensation expense relating to unvested stock options is as follows:

Year ended December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total

Future Stock
Option
Compensation
Expenses
$3,144,140
1,480,661
632,426
160,332
$5,417,559

The weighted average remaining amortization period is approximately 1.7 years at December 31, 2016.

Stock-based compensation expenses for the years ended December 31, 2016, 2015 and 2014 were as

follows:

Research and development . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . .

Warrants

2016
$3,025,178
1,999,334
$5,024,512

Year Ended December 31,
2015
$3,257,732
4,618,852
$7,876,584

2014
$ 2,707,336
7,930,158
$10,637,494

In connection with the Company’s ﬁnancings from 2007 to 2010, the Company issued warrants to

investors and/or placement agents, as well as certain consultants, to purchase shares of common stock. In
connection with the Merger, the Company issued warrants to purchase up to 120,265 shares of its common
stock to its ﬁnancial advisor for the Merger. The warrants were valued at $679,447 and expensed during the
quarter ended September 30, 2014.

On April 17, 2015, the Company issued an aggregate of 88,293 shares of common stock from the

cashless exercise of 120,265 warrants. The Company did not receive any proceeds from this cashless exercise.

During the year ended December 31, 2015, 133,587 warrants to purchase common stock expired

unexercised.

A summary of the Company’s warrant activity and related information is as follows:

Outstanding as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .

Warrants
270,761
(133,587)
(120,265)
16,909
16,909

Weighted
Average
Exercise Price
$24.34
39.34
5.13
$30.81
$30.81

There was no warrant activity for the year ended December 31, 2016. The weighted average remaining

contractual life of outstanding warrants at December 31, 2016 is approximately 3.4 years.

F-24

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 — Income Taxes

There was no current income tax provision for the years ended December 31, 2016, 2015 and 2014.
There was a deferred income tax beneﬁt of $617,672 for the years ended December 31, 2016. There was no
deferred income tax beneﬁt for the years ended December 31, 2015 and 2014.

The Company’s deferred tax assets as of December 31, 2016 and 2015 consist of the following:

As of December 31,

2016

2015

Deferred tax assets:

Net-operating loss carryforward . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . .
In-Process R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R&D credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized loss on marketable securities . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Asset, Net of Allowance . . . . . . . . . . . . . . . . . . .
In-process research and development (Assembly Merger) . . . . .
Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 59,926,000
9,279,000
4,050,000
3,962,000
178,000
316,000
77,711,000
(77,711,000)
$

11,119,651
$ 11,119,651

$ 46,365,000
10,397,000
5,282,000
3,068,000
368,000
783,000
66,263,000
(66,263,000)
—
11,600,000
$ 11,600,000

— $

The Company maintains a valuation allowance on deferred tax assets due to the uncertainty regarding the

ability to utilize these deferred tax assets in the future. The deferred tax liability was recorded in connection
with the acquisition of Assembly Pharmaceuticals in 2014 and relates to the difference between the carrying
amount of in-process research and development for ﬁnancial statement purposes relative to the amount used
for income tax purposes. The deferred tax liability was $11.1 and $11.6 million as of December 31, 2016 and
2015, respectively.

At December 31, 2016, the Company had potentially utilizable gross Federal net operating loss
carryforwards of approximately $146.5 million, State net operating loss carry-forwards of approximately
$174.0 million and research and development credit carry forward of approximately $4.0 million, all of which
expire between 2027 and 2036.

Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating

losses and certain other tax attributes to an annual limitation in the event of certain ownership changes, as
deﬁned. The Company has undergone an ownership change study and has determined that a ‘‘change in
ownership’’ as deﬁned by IRC Section 382 of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder, did occur in December 2010, January 2013 and October 2014.
Accordingly, approximately $39.1 million of the Company’s net operating loss carryforwards will expire
unused and not be available to offset future taxable income. Based on the company having undergone multiple
ownership changes throughout their history these net operating loss carryforwards before the October 2014
ownership change will free up over their carryforward periods.

F-25

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 — Income Taxes − (continued)

The following is a reconciliation of the U.S. federal statutory rate to the effective income tax rates for the

year ended December 31, 2016, 2015 and 2014:

Statutory Federal Income Tax Rate . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
State Taxes, Net of Federal Tax Beneﬁt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger Cost
Stock based Compensation − ISOs
. . . . . . . . . . . . . . . . . . . . . .
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in Valuation Allowance . . . . . . . . . . . . . . . . . . . . . . . .
Income Taxes Provision (Beneﬁt) . . . . . . . . . . . . . . . . . . . . . . .

Note 10 — License Agreements

HBV Research Agreement with Indiana University

As of December 31,
2015

2014

2016
(34.0)% (34.0)% (34.0)%
(4.3)% (11.0)% (11.0)%
—%
0.9%
—%
16.7%
—%
—%
—%
—%
—%
0.1%
45.0%
27.3%
—%
—%

—%
3.4%
(1.8)%
7.5%
2.3%
25.5%
(1.4)%

The Company, through its wholly-owned subsidiary, Assembly Pharmaceuticals, is party to a license
agreement with Indiana University Research and Technology Corporation (‘‘IURTC’’) from whom it has
licensed the Company’s HBV therapy. The license agreement requires the Company to make milestone
payments based upon the successful accomplishment of clinical and regulatory milestones related to the HBV
therapy. The aggregate amount of all performance milestone payments under the IURTC license agreement,
should all milestones through development be met, is $825,000. As of December 31, 2016, no performance
milestone payments have been made. The Company also is obligated to pay IURTC royalty payments based
on net sales of the licensed technology. The Company is also obligated to pay diligence maintenance fees
(starting at $25,000 in 2014 and rising to $100,000 in the year following ﬁrst commercial sale of licensed
product) each year to the extent that the royalty, sublicensing, and milestone payments to IURTC are less than
the diligence maintenance fee for that year.

Microbiome Targeted Colonic Delivery Platform

On November 8, 2013, Assembly entered into a License and Collaboration Agreement with Therabiome,

LLC, for all intellectual property and know-how owned or controlled by Therabiome relating to the oral
delivery of pharmaceutical drugs to speciﬁc sites in the intestine, using a pH sensitive controlled release
platform technology. Under the agreement, Therabiome granted to Assembly the exclusive worldwide license,
with rights to sublicense, to develop the intellectual property for commercialization (a) in the use of bacteria,
viruses, proteins and small molecules by oral delivery in (i) gastro-intestinal dysbiosis, including but not
limited to C. difficile, irritable bowel syndrome-constipation and inﬂammatory bowel disease, (ii) auto-immune
disorders and autism, including but not limited to as controlled by bacteria or virus, and (iii) orally delivered
vaccines, including viral and bacterial, and (b) any oral delivery of small molecules using the licensed
intellectual property. Assembly will be solely responsible for all research and development activities with
respect to any product it develops under the license.

For the license, Assembly paid Therabiome an upfront non-refundable license fee of $300,000. Assembly

must pay Therabiome clinical and regulatory milestones for each product or therapy advanced from the
platform for U.S. regulatory milestones. Assembly also must pay Therabiome lesser amounts for foreign
regulatory milestones, which vary by country and region. Assembly also must pay Therabiome royalties on
annual net sales of a product in the low to mid-single digit percentages plus, once annual net sales exceed two
certain thresholds, a one-time cash payment upon reaching each threshold.

F-26

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 10 — License Agreements − (continued)

Therabiome must pay Assembly royalties on annual net sales of any product it develops, using the

intellectual property, in the low double to mid-double digit percentages, depending on the level of
development or involvement Assembly had in the product.

Note 11 — Commitments and Contingencies
Real Property Leases and Equipment Leases

The Company leases office space for corporate functions in Carmel, IN under a lease agreement that

expires in June 2021. The leased locations in Carmel, IN support both the HBV-cure and microbiome
programs.

The Company leases office and laboratory space in San Francisco, California under a sublease that

expires in December 2017. Research activities for the HBV-cure program are also being conducted at
laboratory space leased from Indiana University at Bloomington, IN that expires in December 2017. Research
activities for the microbiome program are also conducted at office and laboratory space leased from the
University of Florida Research Foundation in Alachua, FL that expires in May 2017.

The total leasing expenses for the years ended December 31, 2016 and 2015 were approximately

$1.2 million and $0.7 million, respectively.

Pursuant to a Master Lease agreement dated November 25, 2014, the Company is leasing certain

laboratory equipment. The equipment lease expense for the year ended December 31, 2016 and
2015 amounted to approximately $705,000 and $107,000, respectively. These equipment leases begin to
expire in 2017, with the ﬁnal lease expiring in 2020. The sum of all future payments through termination is
approximately $1.7 million.

Future minimum rental payments for real estate and equipment required as of December 31, 2016 are as

follows:

Year Ended December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,900,556
786,419
376,686
111,013
55,353
$3,230,027

Employment Agreements

The Company has employment agreements with its Chief Executive Officer and Chief Financial
Officer/Chief Operating Officer, which agreements set forth the terms of their employment, including
severance arrangements. The Chief Executive Officer and Chief Financial Officer/Chief Operating Officer were
paid an aggregate annual base salary of approximately $780,500 in 2015 and approximately $823,000 in 2016.

Effective January 5, 2016, the Company entered into an employment agreement with its new Chief
Scientiﬁc Officer. The agreement has a term of ﬁve years and will be automatically extended for additional
one-year periods unless the Company notiﬁes the officer at least 180 days prior to the then current expiration
date that it intends to not extend the employment agreement. The employment agreement initially provides for
a base salary of $380,000 per year. The Chief Scientiﬁc Officer is also eligible for an annual discretionary
bonus based on achievement of ﬁnancial, clinical development and business milestones established by the
Board of Directors, with the Chief Scientiﬁc Officer eligible for a bonus of up to 35% of his base salary. The
Chief Scientiﬁc Officer also received a signing bonus payable after 30 days of employment in the amount of
$75,000, which signing bonus is subject to repayment in the event his employment terminates for certain
reasons prior to January 5, 2017. The employment agreement also provides for severance in connection with
the termination of employment.

F-27

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 — Commitments and Contingencies − (continued)

On January 9, 2016, the Company entered into an at-will employment letter agreement with its new
Chief Development Officer. The employment agreement provides for at-will employment, subject to payment
of severance beneﬁts depending on the circumstances of termination. The employment agreements initially
provided for a base salary of $360,000 per year and the employee is also eligible for an annual discretionary
bonus based on achievement of ﬁnancial, clinical development and business milestones established by the
Board of Directors of up to 35% of his base salary.

Effective September 26, 2016, the Company entered into an employment agreement with its new Chief

Scientiﬁc Officer — Microbiome. The agreement provides for an at-will employment arrangement. The
employment agreement initially provides for a base salary of $380,000 per year. The Chief Scientiﬁc
Officer — Microbiome is also eligible for an annual discretionary bonus based on achievement of ﬁnancial,
clinical development and business milestones established by the Board of Directors, with the Chief
Scientiﬁc Officer-Microbiome eligible for a bonus of up to 35% of his base salary. The Chief Scientiﬁc
Officer — Microbiome also receives, for up to twelve months following the effective date, a commuting
allowance of up to $75,000 and reimbursement of up to $100,000 for relocation expense incurred during the
twenty-four months following the effective date. Relocation expenses actually paid shall be repaid to the
Company in the event the Chief Scientiﬁc Officer — Microbiome resigns from the Company prior to the ﬁrst
anniversary of the effective date. The employment agreement also provides for severance in connection with
the termination of employment.

Litigation

The Company is not a party to any material legal proceedings and is not aware of any claims or actions

pending or threatened against it. From time to time, the Company may be subject to various legal proceedings
and claims that arise in the ordinary course of its business activities.

Note 12 — Subsequent Event

Allergan Collaboration Agreement

On January 6, 2017, the Company entered into a Research, Development, Collaboration and License

Agreement (the ‘‘Collaboration Agreement’’) with Allergan Pharmaceuticals International Limited
(‘‘Allergan’’) to develop and commercialize select microbiome gastrointestinal programs. Pursuant to the
Collaboration Agreement, the Company granted Allergan an exclusive worldwide license to certain of its
intellectual property, including its intellectual property arising under the Collaboration Agreement, to develop
and commercialize licensed compounds for ulcerative colitis, Crohn’s disease and irritable bowel syndrome.

Under the Collaboration Agreement, Allergan and the Company will collaborate on research and
development activities with respect to the licensed compounds in accordance with a mutually agreed upon
research and development plan.

Pursuant to the terms of the Collaboration Agreement, in connection with the closing of the transaction

on February 10, 2017, Allergan paid the Company an upfront payment of $50 million. Additionally, the
Company is eligible to receive up to approximately $630 million in development milestone payments and
up to approximately $2.15 billion in commercial milestone payments in connection with the successful
development and commercialization of licensed compounds for up to six different indications. In addition, the
Company is eligible to receive tiered royalties at rates ranging from the mid-single digits to the mid-teens
based on net sales. Allergan and the Company have agreed to share development costs up to an aggregate of
$75 million through proof-of-concept (‘‘POC’’) studies on a 2⁄3, 1⁄3 basis, respectively, and Allergan has agreed
to assume all post-POC development costs. In the event any pre-POC development costs exceed $75 million
in the aggregate, the Company may elect either (a) to fund 1⁄3 of such costs in excess of $75 million or (b) to
allow Allergan to deduct from future development milestone payments 1⁄3 of the development costs funded by

F-28

ASSEMBLY BIOSCIENCES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 — Subsequent Event − (continued)

Allergan in excess of $75 million plus a premium of 25%. The Company has an option to co-promote the
licensed programs in the United States and China, subject to certain conditions set forth in the Collaboration
Agreement.

Allergan may terminate the Collaboration Agreement for convenience at any time upon either 90 days’

(prior to the initiation of the ﬁrst POC trial of a licensed product) or 120 days’ (after the initiation of the ﬁrst
POC trial of a licensed product), as applicable, advance written notice to the Company. The Collaboration
Agreement also contains customary provisions for termination by either party, including in the event of breach
of the Collaboration Agreement, subject to cure.

Common Stock

In January and February, 2017, the Company issued an aggregate of 19,166 shares of common stock

from the exercise of options.

Note 13 — Selected Quarterly Financial Data (Unaudited)

The following table contains quarterly ﬁnancial information for ﬁscal years 2016 and 2015. The

Company believes that the following information reﬂects all normal recurring adjustments necessary for a fair
statement of the information for the periods presented.

First Quarter

Second Quarter Third Quarter

Fourth Quarter

2016
$ 11,868,254
Operating expenses . . . . . . . . . . . . . . . . . . . . . $ 11,277,152 $ 10,454,130 $ 11,678,925
225,681
378,381
Interest and other income . . . . . . . . . . . . . . . . $
$
Realized loss from marketable securities . . . . . . $
(521,786)
(273,573) $
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,988,558) $(10,152,200) $(11,574,117) $(11,546,687)
(0.67)
Basic and diluted net loss per common share . . . $

444,605 $
(142,675) $

490,421 $
(201,827) $

(0.67) $

(0.59) $

(0.64) $

2015
$ 8,176,281
Operating expenses . . . . . . . . . . . . . . . . . . . . . $ 7,203,218 $ 7,153,905 $ 7,122,226
456,647
$
502,684
Interest and other income . . . . . . . . . . . . . . . . $
Realized gain (loss) from marketable securities . . $
(28,642)
$
1,609
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,144,953) $ (6,942,671) $ (6,617,933) $ (7,748,276)
(0.45)
Basic and diluted net loss per common share . . . $

211,234 $
— $

58,265 $
— $

(0.38) $

(0.41) $

(0.64) $

F-29

CORPORATE INFORMATION

Directors

Anthony E. Altig
Chief Financial Offıcer, Biotix Holdings, Inc.

Mark Auerbach
Former Non-Executive Chairman of the Board and
Chairman of the Audit Committee for RCS Capital
Corporation; Former Lead Independent Director and
Chairman of the Audit Committee of Optimer
Pharmaceuticals, Inc.

Richard DiMarchi, Ph.D.
Cox Distinguished Professor of Biochemistry and
Gill Chair in Biomolecular Sciences and Vice President
of Research, Novo Nordisk Research Labs

Myron Z. Holubiak
President and Chief Executive Offıcer, Citius
Pharmaceuticals, Inc.

Alan J. Lewis, Ph.D.
Chief Executive Offıcer, DiaVacs, Inc.

William R. Ringo, Jr.
Director Sangamo BioSciences, Inc., Immune Design
Corp., Dermira, Inc. and Five Prime Therapeutics, Inc.

Derek A. Small
President and Chief Executive Offıcer,
Assembly Biosciences, Inc.

Headquarters

11711 N. Meridian Street, Suite 310
Carmel, IN 46032
855.971.4467

Website

www.assemblybio.com

Stock Listing

Assembly Biosciences, Inc. common stock is
listed on the Nasdaq Capital Market and quoted
under the symbol ‘‘ASMB’’

Officers

Derek A. Small
President and Chief Executive Offıcer

David J. Barrett, C.P.A.
Chief Financial Offıcer and Chief Operating Offıcer

Uri Lopatin, M.D.
Chief Medical Offıcer and Vice President of
Research and Development

Richard J. Colonno, Ph.D.
Chief Scientiﬁc Offıcer

Miguel S. Barbosa, Ph.D.
Chief Scientiﬁc Offıcer — Microbiome
Head of Microbiome Program

Thomas E. Rollins
Chief Development Offıcer

Transfer Agent

VStock Transfer, LLC
18 Lafayette Place
Woodmere, New York 11598
212.828.8436

www.assemblybio.com