Athenex

2018 Annual Report

Included in the 2018 Annual Report:
Form 10-K filed with the U.S. Securities and Exchange Commission on March 11, 2019

To Our Shareholders

2018 was a transforff mative year for Athenex. We completed enrollment of two pivotal Phase 3 studies of KX2-391
y and safety data in early 2019. We also achieved
ointment in actinic keratosis and presented topline positive efficac
for the Phase 3 study
several key milestones for the Oraxol program, including a second interim analysis conducted
in metastatic breast cancer. We continuen d to expand our clinical programs, with another Orascovery drug candidate
receiving an IND allowance and the initiation of additional studt
ies to evaluate combinations or new indications. The
company’s pipeline was further expanded with two new oncology technologies. We believe our commercial
infraff structure is falling into place for our proprietary product launch.

d

ff

e the lives of cancer patients by creating more effecff

The year didn’t come without its challenges, but we are readyd to face them head on. At Athenex, our mission is to
improvmm
and tolerabla e treatments. We remain committed
to delivering stellar execution and positive clinical outcomes from our growing and value-generating pipeline. We
believe this will keep us on the path towards realizing the true fundamental value of the company.

tive, saferff

I am very pleased with our achievements in 2018 and I am confideff

nt that 2019 will be another landmark year.

YOUNG COMPANY WITH A UNIQUE STORY

To look at what the future will bring, let us first look back at our history and evolution. Athenex (forff merly known as
Kinex) started out as a small company in Buffaloff
, New York developing Kinase inhibitors. 15 years later, our pipeline
has expanded to include four oncology-focused technologies with eight drug candidates in the clinic, which we soon
expect to be ten. Of these, two drug candidates are in Phase 3 and the remaining are in either Phase 1 or 2. Our
operations are spread across the globe, from the U.S. all the way to Asia. We are now eyeing Europe, bringing diversity
and growth opportunities from all over the world. We have developed a number of valuable and trusrr
ted collaborative
partnerships, including good relationships with two local governments. Our team is 500-strong and growing.

from our shareholders, many of whom have believed in and
We could not do all of this without tremendous support
uu
on the Nasdaq, a
stayed by Athenex since early in the company’s history. In June 2017, we took the company public
milestone that signifiedff
our increasing maturity and continuing growth. Since then, we completed a secondary offering
and secured a strategic financial investment from a highly reputable US-based healthcare investor. We are committed
to delivering value to reward our shareholders and believe we have come a long way in a short period of time.

u

ff

Our company story has many layers but the mission remains the same. There is a lot that we want to achieve, and we
are doing it with strategic focus and clarity, mindful of our experience in the laboratory while leveraging our corporate
experience, and by utilizing our resources effiff ciently. By focusing on execution and staying true to our vision, we
believe we will create more and more value for all of our stakeholders over the long run. There are so many
possibilities and it is only the beginning of an exciting and fruitful journey.

THE YEAR AHEAD

ing year for Athenex in terms of the clinical pipeline. Two Phase 3 studies are nearing
We believe 2019 will be a definff
completion and we have commercialization and marketing plans ready for these products,
if approved for
commercialization. The number of clinical studies has only continued to grow, and the development of two new
technologies is well underway.

1 | P a g e

With our lead drug candidate, Oraxol (HM30181A and oral paclitaxel), complmm eting target enrollment in January 2019
for the Phase 3 study in metastatic breast cancer and anticipating topline results later this year, we believe we have
real potential to change the tide of chemotherapy and establa ish our leadership in the oral taxane market. A similar
Phase 2 study in metastatic breast cancer, conducted in Taiwan, has already shown encouraging response rates and
safetff y results.

With the positive progress seen in the Oraxol program, we are extremely excited about what this means for the
Orascovery Platforff m. To capturtt e the immense opportunity we believe is available, we are pursuing clinical studies in
other indications as well as advancing the clinical programs for other Orascovery drug candidates in the pipeline.

Our study evaluating Oraxol in combination with Eli Lilly’s ramucirumab for the treatment of gastric cancer is in a
Phase 1b study, now in a third cohort afteff
r seeing positive preliminary results from the first and second cohorts. We
initiated a Phase 1/2 study to evaluate Oraxol in combination with an anti-PD1 antibody (pembrolizumab) in patients
with advanced solid malignancies. The U.S. FDA also granted Oraxol an Orphan Drugr Designation for the treatment
of angiosarcomas and we have initiated a pilot study for Oraxol. We are committed to producdd t life cycle management
and we are seeing the potential benefitff s of Oraxol to treat a broad range of cancers.

u

We believe that our Orascovery technology works for other commonly used chemotherapeutic drugs that are P-
glycoprotein substrat
es and have seen encouraging results confirff ming our belief.ff For instance, Oradoxel (HM30181A
and oral docetaxel) and Oratecan (HM30181A and oral irinotecan) are ready to advance to Phase 2 studies, with
preliminary results showing the potential for impromm ved effiff cacy and/or mitigation of certain majoa r side effeff cts seen
with the intravenous drugs. We are also delighted to have received an IND allowance for Eribulin ORA (HM30181A
and oral eribulin) in October 2018, as eribulin is a compoumm nd that targets paclitaxel-resistant tumors. Overall, we
believe the commercial opportunity for our Orascovery products could be very significaff

nt.

candidate, KX2-391 (also known as KX-01) ointment for actinic keratosis (AK), is part of our
Our other lead drugr
Src Kinase Inhibition Platform. AK are very common, precancerous lesions caused by UV exposure. We announced
topline Phase 3 results at the American Academy of Dermatology Annuann l Meeting in March 2019 in a late breaker
session, and the effiff cacy and safety results were very positive. KX2-391 ointment has the potential to be a valuable
treatment option for AK patients and we are working closely with our partner, Almirall, towards regulatory approval
and commercialization in the U.S. and Europe. We are also exploring other markets, which could provide additional
financial growth drivers.

KX2-391 is positioned for continued growth as we consider additional AK developments and other skin conditions
for the ointment, as well as opportuniu ties to treat skin-related diseases and cancers under other formulations. Also
from the Src Kinase Inhibition Platfoff rm is KX2-361 (also known as KX-02), which has received an Orphan Drug
Designation from the U.S. FDA for the treatment of glioblastoma multiforme. The ability of the compound to cross
the blood-brain-barrier is potentially groundbreaking and could open up new treatment possibilities for these
aggressive tumors.

In addition to the two Platforms above, we are making progress in the Cancer Immunotherapy and Arginine
Deprivation Therapy Platforms, which we in-licensed in mid-2018. For the cancer immunotherapy product, we have
seen encouraging preliminary results from investigator-initiated pilot studies in China. The program in China is led
by our partner, Xiangxue Life Sciences, which recently received IND allowance from China’s healthcare regulatory
agency. Pegtomarginase has shown proof of concept in preclinical studies and is
the first biologic drug we are
developing. We expect to submu
it IND applications to the U.S. FDA for both drug candidates this year and look forward
to initiating clinical studies in the U.S. soon.

All in all, we have two pivotal Phase 3 clinical candidates, and six other clinical candidates in either Phase 2 or 1
studies, demonstrating our breadth in R&D capabilities and commitment to our platforff ms.

LONGER TERM OUTLOOK

Oncology remains the largest therapeutic area in the world. The oncology field is constantly evolving, which is why
we need to innovate. We expect chemotherapy to continue to be one of the most widely used approaches for cancer

2 | P a g e

treatment, while we also anticipate competing innovations, like immunotherapy, which has shown promising
development and advancement in recent years, to compete for the oncology market share. There is also growing
evidence that manipulating the tumor microenvironment to optimize the effect
s of cancer therapies will be a critical
addition to this therapeutic area. We have learned that most cancer patients do not just take one therapy and a numberm
of them unfortunately see the disease metastasize. We believe that combination therapies will be the core to the future
of oncology, and maintenance therapy, a largely untapped area, will be increasingly relevant as it would give patients
the chance to take long-term control of an ever-evolving disease.

ff

re nearly 80% of all cancer-related mortality, we are already thinking
While our current pipeline is expected to captua
ts remain
about the second generation for Orascovery, namely the dual inhibition platform, and our preclinical efforff
active. The Cancer Immunotherapya
rts
and Arginine Deprivation Therapya
to replenish our pipeline and demonstrate a unique foresight to address evolving and majoa r unmet medical needs.
ng on the
These are all great examplmm es of the continuous pursuit of ouru mission and the longer-term vision of capitalizi
synergies in our pipeline. We are constantly innovating and, on the lookout, to evaluate and establis
h new technologies
that complement our product portfolio

and ultimately augment the cancer therapies available for patients.

Platforff ms form an impormm tant part of our effoff

a

a

ff

We remain focused on strong execution, which we have demonstrated to date by meeting the milestones we set out
during the IPO. Unlike many small-to-mid-sized biotechnology companies, we believe our commercial infrastructure
is falling into place, with marketing plans for Oraxol and KX2-391 ointment ready and relationships with the
healthcare community in the U.S. established, if and when the drugs get approved.

With the fundamental building blocks in place, we believe we are on the path to becoming a truly global oncology
organization.

OUR PEOPLE, PARTNERS AND PATIENTS

We would like to express our gratitude to our people, partners and patients, who have been instrumental in getting the
company to where it is today.

People

Our team is a diverse and hard-working groupuu spread around the world but united by a passion to find the cure to a
deadly disease and significantly improvm
e the lives of cancer patients. In 2018 we hired several key leaders in clinical,
commercial and operations to join our top-notch team. I am extremely fortunate to be able to work with seasoned
ionals who possess strong experience, knowledge and intuition, and share in the company’s vision. We will
ff
profess
uu
continue to add to our Athenex family by recruiting talent to suppo

rt our continued growth and development.

Partners

ant aspect for biotechnology companies. Since
Collaborations in development and commercialization are an importmm
our inception, we have developed strong relationships with partner companies and publu ic and private institutions
globally that have allowed us to expand our portfoli
o, continually innovate and ensure the broadest commercial reach
of our proprietary drugs once they are approved. Our partnership strategy is designed to create the most value for
patients, the company and our shareholders, and we thank our partners for their trust in us.

ff

Patients

We strive to develop and deliver life-ff changing medicines to cancer patients. We would like to thank the patients who
have participated and are currently participating in our clinical trials, which will help us achieve our goals and give us
valuable perspective as we continuen

to innovate.

CONCLUSION

We believe Athenex is well-positioned for long-term growth and to capture the maximum economic opportunity from
the entire biopharmaceutical value chain. We are focused on excellent execution and developing next generation

3 | P a g e

cancer therapies. I am extremely proud of our Athenex family and what we have achieved over the past 15 years
together. I am also extremely grateful to our Board of Directors for their guidance and suppuu

ort.

I look forward to 2019 and the years to come, as we continue to deliver results for patients and create increasing value
for our shareholders.

Sincerely,

Johnson Y.N. Lau

Chief Executive Offiff cer and Chairman of the Board of Directors

SSEE

FACTORTT

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STATTT EMENT
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potential growth opportunities, clinical developme

STT AND CERTEE AINTT
S MAY AFFEFF
FORWARWW D-RR LO- OKINGKK
We have included in this letter “forwa
rd-looking statements” within the meaning of Section 27A77 of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to our results ofo operations and financial
position, business strategy,gg
nt activities, the timing and results of
o
clinical trials and potential regue
latory apprpp oval and commercialization of product candidates. In some cases, these
forward-ldd ooking statements maya be identified by terminologygg such as “believe,” “may,” “will,” “sh“ ould,” “predict,”
tially,” “estimate,” “continue,” “anticipate,” “intend,” “indicate,” “could,l ” “would,”
“goal,” “st“ rategy,gg ” “poten
“project,” “pl“ an,” “expec
t,” “seek” and similar expressions. These statements are not guarantees of future
performance. Actual outcomes and results maya diffeff r materially from our expectations and what is expressed in these
forward-ldd ooking statements, based on riskii
Factorsrr ” section
s,kk uncertainties and other factors discussed in the “Risk
on Form 10-K and in other reports we file with the U.S. Securities and Exchange Commission,
of our Annual Report
oking
which are available through the Investor Relatll
statements speak only as of the date of thisii
letter or as of the date they are made, and we underdd take no obligation to
updatedd

ions section of our website at ir.athenex.com. Our forwarr

them.

rd-lodd

“

“

e

x

4 | P a g e

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
(cid:3)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018
or

(cid:4)(cid:4) 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 001-38112

ATHENEX, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
State or other jurisdiction of
incorporation or organization
1001 Main Street, Suite 600
Buffalo, NY
United States
(Address of principal executive offices)

43-1985966
(I.R.S. Employer
Identification No.)

14203
(Zip Code)

(716) 427-2950
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock, par value $0.001 per share

Name of Exchange on Which Registered
The Nasdaq Global Select Market

g

g

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 ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the

preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T

(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No (cid:4)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth
company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the ExchangeAct.

Large accelerated filer

(cid:4)

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Accelerated filer
Smaller reporting company
Emerging growth company

(cid:3)
(cid:4)
(cid:3)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised

financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:4) No ☒
The aggregate market value of common equity held by non-affiliates of the registrant calcul

aa

ated based on the closing price of $18.66 of the registrant’s commonmm

stocktt

as

reported on The Nasdaq Global Market

aa

on June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $692.6 million.

As of March 1, 2019, 67,023,498 shares of common stock of the registrant were outstanding.

Portions of the registrant’s definitive

ff

proxy statement for its 2019 annual meeting of stockholders currently scheduled to be held June 11, 2019 are incorporated by reference into Part III hereof.

DOCUMENTS INCORPORATED BY REFERENCE

PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

PART II.

Item 5.

Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.

PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

PART IV.
Item 15.
Item 16.

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine

Safety Disclosures

y

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Managements’ Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

pCompensation

Directors, Executive Officers and Corporate Governance
Executive
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

Exhibits and Financial Statement Schedules
Form 10-K Summary
gSignatures

Page

2
2
66
118
118
118
119

120

120
121
123
137
138
139
139
140

141
141
141
141
141
141

142
142
143
148

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (Annual Report) contains forward-looking statements within the meaning of Section 21E of

the Securities Exchange Act of 1934, as amended (Exchange Act), and section 27A of the Securities Act of 1933, as amended
(Securities Act). All statements other than statements of historical fact are “forward-looking statements” for purposes of this Annual
Report. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations
and financial position, business strategy, market size, potential growth opportunities, clinical development activities, the timing and
results of clinical trials and potential regulatory approval and commercialization of product candidates. In some cases, forward-
looking statements may be identified by terminology such as “believe,” “may,” “will,” “should,” “predict,” “goal,” “strategy,”
“potentially,” “estimate,” “continue,” “anticipate,” “intend,” “indicate,” “could,” “would,” “project,” “plan,” “expect,” “seek,”
“strategy,” “mission” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and
trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business
operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including those described in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. Moreover,
we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may
make. In light of these risks, uncertainties and assumptions, actual results could differ materially and adversely from those anticipated
or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance
or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to
update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results
or to changes in our expectations, except as required by law.

Unless the context indicates otherwise, as used in this Annual Report, the terms “Athenex,” “the Company,” “we,” “us,” and

“our” refer to Athenex, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.

1

Item 1.

Business.

Overview

PART I

We are a global clinical stage biopharmaceutical company dedicated to becoming a leader in the discovery and development of

next generation drugs for the treatment of cancer. Athenex is organized around three platforms, including an Oncology Innovation
Platform, a Commercial Platform and a Global Supply Chain Platform. The Company’s current clinical pipeline is derived from four
different platform technologies: (1) Orascovery, based on non-absorbed P-glycoprotein inhibitor, (2) Src kinase inhibition, (3) T-cell
receptor-engineered T-cells (TCR-T), and (4) Arginine deprivation therapy. We have assembled a leadership team and have
established operations in the U.S. and China across the pharmaceutical value chain to execute our mission to become a global leader in
bringing innovative cancer treatments to the market and improve health outcomes.

Orascovery platform

Common treatments for cancer include surgery, radiation therapy, chemotherapy and such newer methods as targeted therapy;
however, chemotherapy remains one of the key treatment options for cancer patients and is traditionally administrated intravenously.
A major part of cancer treatment consists of IV chemotherapy. The limitations of IV chemotherapy involve repeated painful IV line
insertions, potential anaphylactic reactions, expensive hospital visits, toxic side effects and poor quality of life for cancer patients. To
address this unmet medical need, development of oral chemotherapy that is more effective and more tolerable, can be taken easily
orally at home, avoiding weekly IV infusions and hospital visits (e.g. paclitaxel) is urgently needed. Oral administration of many IV
chemotherapy drugs has been unsuccessful because human intestinal cells have a P-gp pump that pumps out chemotherapy drugs (e.g.
paclitaxel, doxetaxel, irinotecan, etc.) before they can be absorbed. Many attempts at new drug development of P-gp inhibitors failed
clinically because of lack of clinical efficacy or significant toxicities.

We believe that oral administration can overcome key limitations and challenges around IV administration of certain cytotoxic

chemotherapies and that our Orascovery platform will establish a new paradigm in the use of oral anti-cancer drugs for cancer
treatments. Our Orascovery platform is based on the novel P-gp pump inhibitor molecule HM30181A, which we in-licensed in 2011
from Hanmi Pharmaceutical Co., Ltd. (“Hanmi”), a major Korean pharmaceutical company focusing on research and development.
The P-gp pump is a plasma membrane protein on the cells of the gut which forms a localized drug transport system and prevents oral
absorption at therapeutic levels of many well-known, widely used P-gp substrate cancer chemotherapeutic drugs such as paclitaxel,
irinotecan and docetaxel, limiting their current delivery to IV. These chemotherapy agents are widely used to treat multiple types of
cancer. A cancer patient’s inability to tolerate IV chemotherapies has limited the effectiveness of IV anti-cancer therapies. Co-
administration of HM30181A with oral chemotherapies, like paclitaxel, facilitates the oral absorption of paclitaxel by blocking P-gp in
intestinal cells and enables oral dosing at therapeutic blood levels which have not been successfully and safely achieved to date
without the use of HM30181A. We have learned through clinical studies that this technology allows for certain active
chemotherapeutic agents to be absorbed into the blood orally as compared to IV and may enable some patients to tolerate many cycles
of treatment. Oraxol, our leading Orascovery drug candidate is composed of HM30181A co-administered with an oral dosage form of
paclitaxel. We have four other major clinical product candidates in this platform, Oratecan, Oradoxel, Oratopo and Eribulin ORA,
which include HM30181A co-administered with an oral formulation of the widely used IV-administered chemotherapeutic agents,
irinotecan, docetaxel, topotecan and eribulin, respectively.

We believe our Orascovery platform will establish a new paradigm in the use of oral anti-cancer drugs for cancer treatments in

at least three ways. First, with the use of HM30181A, clinicians may be able to consistently deliver oral doses of certain
chemotherapeutic drugs over a greater number of cycles and duration of time. Second, we believe active drug exposure of
chemotherapeutic agents in the patient over time is a critical element in determining efficacy, and we believe we can achieve greater
tolerability with administration of HM30181A in combination with chemotherapeutic drugs as compared to the current IV standards
of care. Third, in light of better tolerability of standard chemotherapies delivered orally, combination with immuno-oncology and
targeted anti-cancer treatments can be potentially optimized compared to current treatment paradigms.

We are rapidly advancing our lead Orascovery drug candidate, Oraxol. In January 2018, we received positive feedback from the
United States Food and Drug Administration (FDA) on the design of the ongoing Phase 3 trial, which indicated that if the study meets
the primary endpoint with an acceptable benefit to risk profile, it could be adequate as a single comparative trial to support registration
of Oraxol in the United States (U.S.) for the indication of metastatic breast cancer. Also, in January 2018, the National Medical
Products Administration (NMPA, formerly the China Food & Drug Administration or CFDA) allowed the Investigational New Drug
(IND) application for Oraxol. Acceptance of the Oraxol IND by the NMPA allowed us to commence a clinical trial program for
Oraxol in China in 2018. In February 2018, we enrolled patients for a second interim analysis in the Oraxol KX-ORAX-001 Phase 3
clinical trial in the third quarter of 2018. In April 2018, the FDA granted orphan drug status to Oraxol for the treatment of
angiosarcomas. In September 2018, we received a positive recommendation by the Data and Safety Monitoring Board (DSMB) of the

2

second interim analysis of the Oraxol Phase 3 Clinical Trial, a randomized controlled clinical trial comparing Oraxol monotherapy
against IV paclitaxel monotherapy in patients with metastatic breast cancer. The DSMB reviewed the efficacy and safety data of this
clinical trial, noted that more than 320 patients had been recruited and unanimously recommended that the Company continue the
Oraxol Phase 3 Clinical Trial and complete the recruitment of the patients. In October 2018, we presented encouraging efficacy and
safety data of Oraxol in the treatment of metastatic breast cancer patients obtained from a Phase 2 clinical trial conducted in Taiwan at
the European Society for Medical Oncology (ESMO) Congress. Results from twenty-four patients with metastatic breast cancer were
reported. Eleven patients (45.8%) achieved partial remission (PR), ten patients (41.7%) had stable disease (SD) (two patients with SD
had their last computed tomography (CT) scans conducted in early November), and three patients had progressive disease (PD). Drug-
related serious adverse events consisting of grade 4 neutropenia were observed in three patients and all recovered completely. There
was no dose limiting neuropathy observed. The Oraxol pharmacokinetic (PK) profiles at week 1 were reproducible at week 4, and the
plasma area under the curve (AUC) exposure is similar to those reported for IV paclitaxel at 80 mg/m2 weekly. In November 2018, we
initiated a Phase 1/2 clinical study to assess the safety, tolerability and activity of Oraxol in combination with an anti-PD1 antibody
(pembrolizumab) in patients with advanced solid malignancies. The study, KX-ORAX-011, is a Phase 1/2 study being conducted in
patients with urothelial, gastric/gastroesophageal or non-small cell lung cancer that have previously failed treatment with a checkpoint
inhibitor. The primary outcome measures are tumor response rate and determination of maximum tolerated dose (MTD), while the
secondary outcome measures include progression free survival, overall survival, duration of response and pharmacokinetics. In
December 2018, our global Phase 1b clinical trial of Oraxol (oral paclitaxel plus HM30181A) plus ramucirumab (monoclonal
antibody to VEGF-R2) in gastric cancer patients who failed previous chemotherapies completed the second cohort of patients. The
results indicated strong positive signals of efficacy and the treatment was well tolerated. In January 2019, the target enrollment of 360
patients in the Oraxol Phase 3 clinical trial in metastatic breast cancer was achieved on schedule. We reaffirmed that top line data from
the study is expected to be available in mid-2019.

Src Kinase Inhibition platform

We have also developed novel small molecule compounds through our Src Kinase Inhibition platform. The Src Kinase
inhibition platform refers to novel small molecule compounds that have differentiated multiple-mechanisms of actions including:
(1) the inhibition of the activity of Src Kinase and (2) the inhibition of tubulin polymerization. We believe the combination of the two
mechanisms of action (MOAs) provides a broader range of anti-cancer activity compared to either MOA alone. Our three key clinical
product candidates in this platform are KX2-391 (or KX-01) ointments for actinic keratosis, skin cancers and psoriasis; KX-01 oral for
solid and liquid tumors; and KX2-361 (or KX-02) for glioblastoma multiforme, or GBM.

We are rapidly advancing our lead candidate in the Src Kinase Inhibition platform, KX2-391 ointment, for actinic keratosis, or

AK. AK has an estimated prevalence of over 58 million patients and was found in approximately 14% of patients visiting
dermatologists in the U.S. while GBM has an incidence of 2 to 3 per 100,000 adults per year and accounts for 52% of all primary
brain tumors according to satistics published by National Cancer Institue. If left untreated, 10-15% of AK lesions will develop into
skin cancers. Our Phase 1 clinical study and data from our Phase 2 clinical study demonstrated a complete response rate of up to 43%
among subjects who received treatment on their faces, with few severe local skin reactions, or LSRs, reported with the dosing regimen
studied. Currently available treatments are limited by severe LSRs such as vesiculation, pustulation, erosion and ulceration, with low
patient compliance. We believe physicians and patients have avoided topical treatments because of the pronounced side effects of the
current treatments such as ingenol mebutate, imiquimod, fluorouracil, and that an ointment product with good clinical activity and a
favorable side effect profile could capture substantial new market share for treatment of this condition. Patient enrollment in two
Phase 3 studies commenced in September 2017, and the enrollment was completed in February 2018. In July 2018, we announced
that both of our Phase 3 pivotal efficacy studies achieved their primary endpoint of 100% clearance of AK lesions at Day 57 within
the face or scalp treatment areas with each study achieving statistical significance (p<0.0001). Statistical significance (p<0.001) was
achieved for both face and scalp subgroups as well. These two double-blind, randomized, vehicle-controlled, studies were designed as
pivotal Phase 3 efficacy and safety studies to support the registration of KX2-391 (or KX-01) as field therapy for AK of the face and
scalp. The studies, each conducted at 31 centers in the U.S., enrolled a total of 702 subjects. KX2-391, or vehicle ointment, was
applied once daily for five days. In addition to the clinical activity of KX2-391, the LSR profile was within expectations, in line with
the Phase 2 study reported at the annual American Academy of Dermatology (AAD) meeting in February 2018 in San Diego. Both
studies are still on-going to complete the one-year follow-up of the patients who had complete responses. We will be submitting a
request to the FDA for a pre-new drug application (NDA) submission meeting to discuss the data and regulatory submission timelines.

In December 2017, we entered into a license agreement with Almirall S.A. (Almirall), pursuant to which we granted to Almirall

an exclusive, sublicensable license of certain of our intellectual property for the development and commercialization of topical
products containing KX-01 for the treatment of AK in the United States and substantially all European countries. We believe this
partnership validates the potential of this candidate and that this partnership is an important step in the development and
commercialization of KX-01 develop and commercialize this product. For additional information, please see “Business—License and
Collaboration Agreements—Almirall License Agreement.”

3

T-cell Receptor-engineered T-cells (TCR-T) Platform

In 2018 we commenced development of T-cell Receptor Engineered T-Cells (TCR-T) pursuant to a new in-license. The TCR-T
immunotherapy technology harnesses and enhances the patient’s immune cells to target and eliminate cancer. It is a cell-based therapy
that takes advantage of unique attributes of T-cell receptor (TCR) mediated target recognition and provides a potent and selective
TCR-T directed response against cancer cells. The preliminary results of pilot studies in China, in which patients received T-cell
receptor affinity enhanced specific T-cell therapy (TAEST), showed encouraging clinical signals in terms of efficacy and safety. For
additional information, please see “Business—License and Collaboration Agreements—TCR-T License Agreement.”

Arginine Deprivation Therapy Platform

In 2018 we commenced development of Arginine Deprivation Therapy pursuant to a new in-license. The Arginine Deprivation
Therapy product, based on a pegylated genetically engineered human arginase, targets cancer growth and survival by interrupting the
supply of an essential amino acid, arginine, to a proportion of cancers with disrupted urea cycle. Our proprietary arginase biologic
product is designed to deplete arginine from tumors with disrupted urea cycle, while healthy cells, capable of producing their own
arginineare largely unaffected.

4

In addition to our existing portfolio of clinical candidates, our research and development teams are evaluating additional
applications of our novel technology platforms. For example, our novel Cytochrome P450 (CYP) and P-gp dual inhibitor technology
could expand the breadth of application for our oral enabling platform.

The following pipeline chart sets forth certain information concerning our key innovative drug product candidates:

To date, we and our partners have conducted, or are conducting, clinical trials across sites in the U.S., South Korea, New

Zealand, Taiwan, Argentina, Chile, Colombia, Ecuador, Guatemala, Honduras, the Dominican Republic, Peru and China.

5

In advance of the launch of our proprietary product candidates in the U.S., our commercial team has begun to market oncology

and oncology symptom-related products to fund our infrastructure build-out. We believe it is important to minimize supply chain
disruptions for high potency oncology active pharmaceutical ingredients. We have thus internalized key components of the supply
chain that we believe are integral to minimizing the associated risks. We have organized our business model into three segments -
Oncology Innovation Platform, Commercial Platform and Global Supply Chain Platform - with operations in both the U.S. and China.
Our global operations across the three segments are shown below:

Our Global Supply Chain Platform manufactures active pharmaceutical ingredients, or API, for use internally in our research

and development and clinical studies and for sale to pharmaceutical customers globally. The platform includes Polymed Therapeutics,
Inc. and Chongqing Taihao Pharmaceutical Co Ltd, collectively Polymed. Our Commercial Platform currently markets eighteen APIs
produced by our Global Supply Chain Platform in the specialty and generic market segment in the U.S., twenty-four products by the
Athenex Pharmaceutical Division, or APD, and six products subject to Section 503B of the Federal Food, Drug and Cosmetic Act
(FDCA) through our FDA registered outsourcing facility. Our Commercial Platform is expected to launch an additional thirteen
products in the first half of 2019.

Our leadership team has been carefully assembled to capture the global commercial market opportunities in novel drug
development. Our executive officers are seasoned leaders with complementary skill sets across global pharmaceutical research and
development, operations, supply chain and manufacturing, capital markets and mergers and acquisitions. We believe this characteristic
is unique for a U.S. based company, and we believe we will be able to utilize this strength to create long term value for cancer
patients, our employees and our shareholders. Our team is excited about the prospects of creating new paradigms in the treatment of
cancer in developed markets and also driving our product candidates to emerging markets where patient access to treatments has
historically been limited.

Strategy and Mission

gy

We have a comprehensive and experienced leadership team who have come together under one organization to achieve our

mission. Our mission is to improve the lives of cancer patients by creating more effective, safer and tolerable treatments. To achieve
our mission, we intend to execute the following strategies:

6

Rapidly and concurrently advance our clinical product candidates.

We intend to pursue the fastest feasible pathways to approval of our existing novel oral absorption technology. We have recently
completed enrollment of patients in a Phase 3 clinical trial of Oraxol, which is comprised of a combination of our novel investigational
absorption-enhancing tablet, HM30181A, with the oral capsule formulation of paclitaxel. We believe that if we demonstrate the safety
and effectiveness of our oral absorption technology with Oraxol, the other drug candidates paired with this technology will face a
more efficient development process. In addition, we presented our Phase 2 clinical study data for KX-01 ointment at the AAD
meeting, and we completed patient enrollment for both Phase 3 clinical studies of KX-01 ointment for AK in February 2018. In July
2018, we announced that both of our Phase 3 pivotal efficacy studies achieved their primary endpoint of 100% clearance of AK
lesions at Day 57 within the face or scalp treatment areas. An IND for Eribulin has been allowed, and Phase 1 trials are expected to
commence in early 2019. We identified potential dosing regimens for Oratecan and Oradoxel Phase 2 development, which we are
planning to initiate in 2019. For Oratecan, we believe that we can identify a Phase 2 dose that will produce similar exposure to SN38
as a labeled dose of IV irinotecan. For Oradoxel, we believe that we can achieve similar exposure to IV docetaxel with one or two
days of dosing every three weeks. Preliminary results from our joint TAEST Phase 1 pilot study in China indicate positive clinical
efficacy and safety results. We plan to file an IND for pegtomarginase, an Arginine Deprivation Therapy product, in the first half of
2019.

Leverage our global research and development operations to continue development of an oncology-focused product pipeline.

We have research and development operations in the U.S. and China that are focused on advancing our existing product pipeline
and on developing additional novel clinical drug product candidates in order to replenish our development pipeline as other candidates
mature. We have developed a core competency in oral absorption technology and apply that skill to develop new methods of drug
discovery and to identify new pipeline candidates, such as our oral eribulin IND program. In addition, we may leverage our research
and development capabilities to partner with others for the development of new pipeline candidates. We believe that we can create
substantial long-term value by pursuing a robust, ongoing research and development program.

Build a proprietary commercial platform and selectively leverage collaborative relationships to achieve global drug sales,
marketing and distribution.

We built our U.S. commercial operation in preparation for future FDA approvals of our proprietary product candidates. We

believe that our experienced product commercialization team can build an infrastructure that leverages both our global facilities and
collaborative relationships to achieve global distribution of any products approved by the FDA and regulatory authorities in other
jurisdictions, as applicable, in a timely and cost-effff ective
the development in Europe and also to commercialize KX2-391 in the US and European countries, including Russia.

manner. Our strategic partner Almirall will employ its expertise to support

ff

Continue to build-out our supply chain and cGMP manufacturing capabilities.

Our internal supply chain is uniquely suited to execute in both the U.S. and China, two of the world’s largest pharmaceutical

markets. We intend to utilize current Good Manufacturing Practices, or cGMP, manufacturing facilities from our public/private
partnerships in both the China and U.S. markets as a mechanism to access both important markets and minimize supply disruptions.
We intend to manufacture certain of our proprietary drugs and our partnered drugs commercialized around the world. Additionally, we
expect that the expansion of our existing cGMP high potency API facilities will provide us with more flexibility and control over high
potency APIs as our drugs become commercialized. Our goal is to continue expanding this infrastructure and to leverage it to maintain
future financial flexibility by optimizing our financial commitments and capital expenditures, which we believe will create value for
shareholders.

Selectively pursue strategic M&A or licensing opportunities to complement our existing operations.

We continue to pursue acquisitions and in-licensing opportunities. Through in-licensing, we acquired an Arginine Deprivation
Therapy, Pegtomarginase, which is an enzyme capable of depleting some tumors of a key resource for their growth and survival, the
amino acid arginine. In addition, our newly formed entity, Axis Therapeutics, in-licensed the worldwide (excluding mainland China)
rights of all the intellectual properties and know-how of a TCR-T Cellular Immunotherapy. We will continue to target opportunities
that will complement our existing portfolio and operations to create value for shareholders and support our business strategy and
mission.

7

Operating Segments

We operate in three segments, including our Oncology Innovation Platform, dedicated to the research and development of the

Company’s proprietary drugs; our Commercial Platform, focused on the sales and marketing of the Company’s specialty drugs and the
market development of our proprietary drugs; and our Global Supply Chain Platform, dedicated to providing a stable and efficient
supply of active pharmaceutical ingredients for our clinical and commercial efforts.

Oncology Innovation Platform

Our Orascovery Research Platform

We are developing a series of orally administered chemotherapeutic agents using our proprietary P-gp pump inhibitor delivery

system. The technology is designed to enable the oral administration of many cancer agents, which currently are only given by IV due
to poor oral absorption. Oral administration of certain cytotoxic chemotherapies can potentially overcome several key challenges in IV
administration of those molecules. We believe that our Orascovery platform overcomes these challenges by allowing more frequent
dosing over longer periods of time, which we believe will lead to better tolerability and allow forff
exposure to the chemotherapeutic agent. Further, we believe additional agents like immuno-oncology and targeted therapy can be
better optimized with longer administration of oral chemotherapy agents.

higher total dosage and longer time

Chemotherapeutic agents such as paclitaxel, irinotecan, docetaxel, topotecan and eribulin are clinically proven and widely used

but have historically been limited to IV administration. The combined worldwide revenue of marketed formulations of these agents
was estimated to be $1.9 billion in 2015 and is expected to grow at a CAGR of 9.6% to reach $3.6 billion by 2022. We believe our
pipeline products, which leverage our proprietary delivery system that enables oral administration of these chemotherapeutic agents,
will substantially expand the use of these chemotherapeutic agents. Additionally, we believe that there is a substantial opportunity for
our products to be used in combination with targeted therapies. Furthermore, as shown by Abraxane, novel technology applied to a
traditional chemotherapy agent may achieve pricing premiums if data demonstrates superior efficacy
and tolerability as compared to
current standards of care. We believe our pipeline products will be able to capture a large untapped market and achieve significantly
larger market potential than the revenue generated by existing formulations, due to (1) increasing adoption of oral therapy due to
patient preference, (2) the potential for improved response rates through greater exposure (based on our predictive model), (3) the
potential for improved tolerability (based on our predictive model) and (4) the possibility to expand the market through combination
therapies with immune-oncology therapy and oral targeted treatments, of which, 39% are already oral.

ff

8

The table below shows certain clinical trials for our major Orascovery drug candidates.

Protocol
HM-OXL-101

HM-OXL-102

HM-OXL-103

HM-OXL-104

HM-OXL-201
ORAX-01-13-US
ORAX-01-14-NZ
KX-ORAX-001

Phase
I

I

I

I

I/II
I
I
III

ORAXOL

KX-ORAX-002

KX-ORAX-003

KX-ORAX-004

KX-ORAX-005

KX-ORAX-007
KX-ORAX-008

KX-ORAX-010

KX-ORAX-011

KX-ORAX-012

KX-ORAX-013

HM30181A

KX HM 001

ORATECAN

ORADOXEL

HM-OTE-101
HM-OTE-102
HM-OTE-103
ORTE-01-14-US
KX-ORTE-001
KX-ORADOX-002
KX-ORADOX-003

ORATOPO

KX-ORATOP-001

ERIBULIN ORA

KX-ERB-001

I

I

I

I

I
I

I

I

I

I

I

I
I
I
I
I
I
I

I

I

Indication
Solid Tumor
HM30181A PK, Safety,
Tolerability
P-glycoprotein
inhibition by
HM30181A
Duration of P-
glycoprotein inhibition
and verify the optimal
dose of HM30181AK.
Gastric
MTD PK
Bioavailability PK
Breast

Bioequivalence PK

Tolerability PK

MTD PK

Gastric

Breast
Bioavailability PK

Bioavailability PK

Pembrolizumab/Oraxol
Combination/PK
Food Effect / PK
Bioavailability / PK
Tablet 90mg vs 30mg
Drug to Drug
Interaction
(Dabigatran)
Solid Tumor
Solid Tumor
Solid Tumor
MTD PK
Bioavailability PK
Efficacy and Safety
MTD PK

Solid Tumor

Solid Tumor

Location
South Korea

South Korea

Status
Completed

Completed

South Korea

Completed

South Korea

Completed

South Korea
United States
New Zealand
South America
New Zealand/
Taiwan, AUS
New Zealand,
Taiwan, US
United States
Asia-Pacific/
United States
Asia-Pacific
Asia-Pacific
Asia-Pacific United
States

Completed
Completed
Completed
Enrollment complete

Enrolling

Enrolling

Enrolling

Enrolling

Enrollment complete
Enrolling

Enrolling

United states

Enrolling

United Kingdom

Approval pending

Europe

Under development

New Zealand

Enrollment complete

South Korea
South Korea
South Korea
United States
New Zealand
New Zealand
United States
United States,
United Kingdom
United States
United Kingdom

Completed
Completed
Completed
Ongoing
Start pending
Enrolling
Enrolling

US enrolling

US approval pending

9

HM30181A—Our Novel P-gp Pump Inhibitor

Overview

The novel P-gp inhibition by HM30181A forms the cornerstone of our Orascovery platform, and enables the administration of

oral dosing formats of paclitaxel (Oraxol), irinotecan (Oratecan), docetaxel (Oradoxel), topotecan (Oratopo) and eribulin (Eribulin
ORA), each of which is currently under clinical development. The feature that distinguishes HM30181A from other small molecule P-
gp inhibitors is that this novel compound is specific to P-gp, does not interfere significantly with the activity of other related
transporters and does not significantly inhibit cytochrome 3A4, an enzyme that is important in the metabolism of commonly used
drugs. HM30181A is minimally absorbed following oral administration. This localizes P-gp inhibitory activity in the gastrointestinal
tract, limiting the potential for interaction at additional systemic sites where P-gp is expressed. Based on the results of our HM30181A
clinical development programs to date, inhibition of gastrointestinal P-gp significantly improves the absorption of chemotherapy
agents to achieve systemic exposure profiles which enhance the efficacy and may reduce toxicity of these established
chemotherapeutic agents. Based on its pharmacological profile and low systemic absorption, HM30181A is not expected to cause
drug-to-drug interactions other than enhancement of oral absorption of medications which are P-gp substrates.

Background—Chemotherapy Treatments

IV paclitaxel is used widely for the treatment of breast, ovarian and lung cancer. Due to its poor solubility, paclitaxel is usually

dissolved in ethanol and polyethoxylated castor oil, which is a major cause of IV hypersensitivity reactions. As a result, premedication
with steroids and antihistamines is required to minimize these adverse reactions. Additional common toxicities associated with IV
administration of paclitaxel include neuropathy, neutropenia and alopecia. These side effects limit dose intensification and oftenff
require reduction in dosing.

As a single agent or in combination, IV paclitaxel is administered at a variety of doses and regimens that are approved for
therapeutic use for various indications, including 135 and 175 mg/m2 administered as both three and twenty-four hour infusions once
every three weeks. Over the past fifteen years, there has been great interest in dose dense therapy with paclitaxel, switching from the
conventional every three-week regimen to administering the drug once weekly. Dose dense treatment with paclitaxel has various
advantages that can lead to an increase in the overall exposure, as measured by AUC, over a treatment cycle, while balancing the
adverse event profile normally observed, such as neutropenia. This concept is consistent with the hypothesis of maintaining sufficient
drug concentrations above a threshold target value for an extended duration.

ff

Based on various clinical trials conducted across multiple tumor types, the weekly regimen of paclitaxel can lead to an increase
in response rate, progression free survival, and overall survival. For example, in a clinical trial investigating different dosing schedules
of paclitaxel for the treatment of breast cancer in the adjuvant setting, dose-dense paclitaxel given as 80 mg/m2 weekly led to an
improvement in disease-free and overall survival, with a five year survival rate of 81.5% versus 76.9%. In addition, weekly paclitaxel
(80 mg/m2) has a benefit in response rate (42% vs. 29%), time to tumor progression (TTP) (nine vs. five months), and median overall
survival (twenty-four vs. twelve months) over conventional 175 mg/m2 every three weeks.

A recent analysis compiling data from twenty-nine clinical trials of paclitaxel given as monotherapy investigated the
relationship between paclitaxel dose and dosing regimen versus safety and efficacy. This average weekly dose from the every three
week regimen (175—210 mg/m2) of paclitaxel produced a response rate of 30%, while the weekly regimen of 80 mg/m2 showed a
response rate of 37%. In another analysis, a trend towards reduced grade 3 neuropathy with weekly paclitaxel was observed. Together,
several clinical trials along with analyses, which evaluated efficacy and safety for dose-dense paclitaxel, suggested a trend of larger
therapeutic window and a better safety-efficacy profile for weekly paclitaxel.

10

Irinotecan is a potent anticancer drug that is marketed under the trade name Camptosar. Irinotecan is mainly administered to

patients with metastatic colorectal cancer (mCRC), but also in glioblastoma, lung, ovarian, cervical, upper gastrointestinal cancer and
pancreatic cancer. The active metabolite of Irinotecan, SN38, is a type 1 DNA topoisomerase inhibitor with potent antitumor activity
and wide antitumor spectrum. We believe that oral administration of irinotecan will more efficiently generate SN38, resulting in the
potential for better clinical response with reduced toxicity. Oratecan is intended for oral administration for the treatment of irinotecan-
responsive cancers.

Docetaxel is a potent anticancer drug within the class of antimicrotubule agents that is marketed under the trade name Taxotere.

Docetaxel is mainly administered to patients with breast, lung, prostate, gastric and head and neck cancers. Docetaxel has potent
activity with a wide antitumor spectrum. As a single-agent therapy, docetaxel is administered by IV infusion over one hour at a dose
of 60-100 mg/m2 for breast cancer and 75 mg/m2 for non-small cell lung cancer given once every three weeks. Docetaxel is also used
in combination with doxorubicin and cyclophosphamide (adjuvant treatment of breast cancer), cisplatin (lung), topical fluorouracil
(head and neck and gastric) and prednisone (prostate). Docetaxel causes dose-limiting toxicities that are more common at higher
doses. One significant dose-limiting toxicity is fluid retention that we believe is associated (at least in part) with the IV formulation
that contains polysorbate 80, a nonionic and emulsifier frequently used in food and cosmetics. Hypersensitivity reactions may also be
attributable to IV administration of polysorbate 80. We believe that oral administration of docetaxel with HM30181A will provide
therapeutic exposures of the drug and result in the potential for better clinical response with reduced toxicity.

Topotecan is a potent anticancer drug under the class of camptothecins that is marketed under the trade name Hycamtin.
Topotecan is mainly administered to patients with lung, ovarian and cervical cancer. Clinical activity has been shown in combination
with the taxanes, docetaxel and paclitaxel, for the treatment of a variety of tumors, including lung cancer. Topotecan causes dose-
limiting toxicities. These side effects mainly include neutropenia, late onset diarrhea and nausea and vomiting.

Eribulin is an anticancer intravenous drug marketed by Eisai Company under the trade name Halaven. It is used to treat certain

patients with breast cancer and liposarcoma. Eribulin is a synthetic derivative of the natural product Halichondrin B. The potent
anticancer effects of this agent come primarily from its unique means of targeting microtubule dynamics, a process critical to cell
proliferation. The nonclinical demonstration of a favorable PK profile, with lowered peak plasma concentration and longer duration of
the drug within the desired plasma concentration range, provides the potential for a better efficacy and an improved safety profile for
Eribulin, similar to what we have observed with Oraxol and other Orascovery products. We have also developed a novel and efficient
synthetic process for Eribulin with an excellent purity profile.

Mechanism of Action of HM30181A

P-gp plays an important physiologic role as a transporter protein at multiple barrier sites, including the gastrointestinal tract and
the blood brain barrier. The demonstrated role of P-gp in limiting intestinal absorption of multiple cancer chemotherapies highlighted
the potential utility of a small molecule P-gp inhibitor for enabling oral administration of P-gp substrate drugs otherwise restricted to
IV dosing. HM30181A was originally identified by Hanmi as a highly selective and potent P-gp inhibitor, capable of elevating the oral
bioavailability of paclitaxel from less than 5% (in the absence of HM30181A) to 41% in rats. Unlike previously developed small
molecule P-gp inhibitors, HM30181A is designed to not be systemically absorbed in the gastrointestinal tract following oral
administration with only small amounts detectable in the plasma even after relatively high doses. This unique property makes

11

HM30181A a good candidate for co-administration with P-gp substrate drugs, such as paclitaxel, which normally exhibit poor oral
bioavailability and are therefore limited to IV routes of dosing.

Preclinical and Clinical Development of HM30181A

In vitro Activity

HM30181A was first discovered as a novel P-gp inhibitor in 2006. A subsequent published study demonstrated selective activity

against P-gp, with low nanomolar inhibitory activity reported (IC50=0.6 nM in an in vitro assay of P-gp function, where the lower the
number, the higher the potency) and more potent than cyclosporin A, tariquidar and elacridar, which are previously tested P-gp
inhibitors, as shown in the first figure below. In similar assays, HM30181A did not inhibit the transporter proteins MRP1, MRP2 or
MRP3 at the concentrations evaluated and only marginally inhibited breast cancer resistance protein (BCRP) transporter activity (IC50
= 3,717 nM, as shown in the second figure below).

Inhibition concentration against P-gp transporter

Inhibition concentration against transporters

Compound
Cyclosporin A
Tariquidar
Elacridar
HM30181A

Transporter
MRP1
MRP2
MRP3
BCRP

IC50 (nM)
123.1
44.4
4.9
0.6

IC50 (nM)
> 5,000
> 5,000
> 5,000
2,960

In vivo Activity

In preclinical studies, HM30181A demonstrated poor absorption from the gastrointestinal tract following oral administration in

rats and dogs. The low systemic exposure to HM30181A may at least partially account for the good tolerability observed thus far in
preclinical toxicology studies. In a single dose rat study, no mortality was noted, and there were no test article-related clinical signs or
body weight changes and no gross necropsy findings fifteen days after treatment with single oral doses of HM30181A as high as 2,000
mg/kg. Likewise, the highest dose evaluated (200 mg/kg) was well-tolerated in repeat dose studies in both rats and dogs (once daily up
to thirteen weeks) with no dose-related mortality.

Multiple preclinical studies have evaluated the in vivo pharmacologic effect of HM30181A, generally in the context of a co-

administered P-gp substrate such as paclitaxel. In each case, co-administration of HM30181A significantly enhanced systemic
exposure of the co-administered substrate. In murine models of human cancer, oral co-administration of HM30181A with oral
paclitaxel or docetaxel conferred anti-tumor activity comparable to the IV dosing route.

12

Clinical Development

HM30181A belongs to a new class of P-gp inhibitor that has high potency, specificity and local action at the intestine cells.

Oraxol consists of two drug products, a paclitaxel capsule and a HM30181A tablet. The 15 mg HM30181A tablet has an established
room temperature shelf lifeff of thirty-six months. The 30 mg paclitaxel liquid-filled, hard gelatin capsule has an established room
temperature shelf life of eighteen months. Oratecan consists of two drug products, an irinotecan tablet and a HM30181A tablet. The
irinotecan 20 mg tablet has an established room temperature shelf life of at least eighteen months.

Phase 1 clinical trials showed HM30181A has a good clinical safety profile and was not significantly absorbed systemically in
humans. It has been given in amounts of up to 900 mg as a single dose, and up to 360 mg/day for five days without major toxicities.
The clinical dose we use currently in our Phase 3 clinical trial is 15 mg/day.

In three separate PK studies of HM30181A conducted in healthy subjects, a total of eighty-one individuals received single oral

doses of HM30181A tablets in single doses of up to 900 mg, and thirty individuals were enrolled in multiple dose cohorts with
treatment groups receiving HM30181A tablets ranging from 60 to 360 mg per day for five days. HM30181A was well-tolerated, with
mostly mild gastrointestinal side effects at high doses. At the current clinical dose of 15 mg given once daily for up to five days, the
Cmax in systemic circulation is low.

Our Orascovery Product Candidates

Oraxol (HM30181A tablet + Oral Paclitaxel)

Overview of Clinical Findings

As of December 31, 2018, four Phase 1 and 2 clinical studies of Oraxol have been completed with no MTD reached. Overall,

Oraxol has been well-tolerated by cancer patients. Studies have indicated that anti-cancer activity of paclitaxel may be related to blood
exposure in the patient. Oraxol administration results in similar blood concentration of paclitaxel over time as achieved with IV
paclitaxel. We believe oral dosing of paclitaxel can provide a longer drug exposure over a target drug concentration than intravenous
paclitaxel, which may translate to better clinical response. We have observed anti-cancer activity in a Phase 1/2 study of patients in
gastric cancer with Oraxol monotherapy, where the overall survival in the study for 43 subjects was 10.7 months, which compared
favorably to historical data for ramucirumab, the only FDA approved drug for second line treatment of gastric cancer, which reported
5.2 months of overall survival in a randomized, placebo controlled Phase 3 clinical study.

Completed Clinical Studies

HM-OXL-101 Phase 1 MTD Studyy

The Phase 1 MTD study was conducted by Hanmi in South Korea in twenty-four subjects with advanced solid cancer, with a

“3+3” design in which cycles were twenty-eight days and dosing with HM30181A tablets and an oral liquid formulation of paclitaxel
was given on Days 1, 8, and 15 of each cycle for three cycles. Premedication was not required prior to treatment with Oraxol.
Paclitaxel doses evaluated ranged from 60 to 420 mg/m2. HM30181A doses were half of paclitaxel doses (30 to 210 mg/m2). The
MTD was not reached in this study and dose escalation was stopped after 420 mg/m2 because the drug exposure at doses above 300
mg/m2 reached a plateau.

HM-OXL-201 Phase 2 Gastric Cancer Studyy

The Phase 1/2 gastric cancer study was conducted by Hanmi in South Korea. HM-OXL-201 was an open-label Phase 2, single-

arm clinical trial of Oraxol for second line treatment of advanced gastric cancer patients. This trial included dosing Oraxol at 150
mg/m2 per day, for two consecutive days per week, for 3 weeks out of a 4-week cycle. A total of forty-six subjects enrolled in this
study. Oraxol was well-tolerated by gastric cancer patients. The results of the Phase 2 portion of this clinical trial showed treatment
with Oraxol resulted in a median overall survival of 10.7 months.

ORAX-01-13-US Phase 1 MTD Studyy

We conducted this Phase 1 MTD study in the U.S. and it is clinically complete. The objective of this study was to demonstrate
the MTD of Oraxol. Study ORAX-01-13-US was a standard “3+3” Phase 1b study to determine the MTD of Oraxol in subjects with
advanced malignancies. Oraxol dosing was 270 mg (approximately 150 mg/m2) per day starting at two days of treatment per week for
3 weeks out of a 4-week cycle. Subjects in subsequent cohorts received 3, 4 or 5 days of treatment per week for 3 weeks out of a 4-
week cycle. Premedication was not required prior to Oraxol treatment. A total of thirty-four subjects were enrolled in this study,
including ten subjects in an expansion cohort at the highest weekly dose tested (five days per week of dosing). The MTD was not
reached in this study, showing daily oral dosing of Oraxol was well-tolerated.

13

y
ORAX-01-14-NZ Phase 1 Bioavailability Study

y

This Phase 1 bioavailability study was conducted by us in conjunction with ZenRX Limited, or ZenRx, in New Zealand and is
clinically complete. The objective of this study was to determine the absolute bioavailability of Oraxol and to compare the extent of
absorption of Oraxol to that of IV paclitaxel. This study showed that Oraxol can achieve blood paclitaxel concentrations over time that
are comparable in total exposure to IV paclitaxel.

The following figure shows the mean plasma concentrations of paclitaxel following intravenous administration of 80 mg/m2, as

compared to oral administrations of 274 mg/m2 orally dosed daily for two days:

In this study the aggregate Oraxol AUC was 7,052 ng*hr/mL for the 274 mg/m2 dosing regimen (N=2) versus IV Taxol AUC of

6,628 ng*hr/mL (N=2). Oraxol dose escalation above 274 mg/m2 did not further increase exposure (N=2). Based on this, we chose a
dose regimen of 15 mg HM30181A + 205 mg/m2 of Oraxol daily over three consecutive days each week for future study, that we
believe will produce similar exposure to paclitaxel as 80 mg/m2 IV Taxol given weekly. In addition, this 3-day dosing regimen is
expected to provide a longer time above the target plasma concentration and could lead to better anti-cancer efficacy.

Overview of Safety Observations in the four completed Oraxol Studies

y

p

The MTD for Oraxol was not reached in these studies. Oraxol was well-tolerated by cancer patients even when given without
premedication for hypersensitivity type reactions, in contrast to the premedication requirement for IV paclitaxel. No hypersensitivity
type reactions were observed. No new toxicity, apart from those typically observed with paclitaxel, was observed. Infusion related
reactions, including hypersensitivity type reactions, have not been observed. Additionally, severe toxicities associated with IV
administration of paclitaxel, including neuropathy, neutropenia and alopecia, are expected to be at a lower incidence and grade for
Oraxol.

In our Oraxol clinical studies to date, the serious adverse effects observed that were deemed to be possibly, likely or definitely

related to Oraxol include severe neutropenia, febrile neutropenia, sepsis, septic shock, altered state of consciousness, hypokalemia
and cardiac arrest, dehydration, pneumonia, death, nausea, vomiting, diarrhea, fatigue, anorexia and acute gastroenteritis.

14

Current and Planned Clinical Studies

Phase 1 Bioequivalence Study
y

q

The Phase 1 AUC bioequivalence study is being conducted by us in conjunction with ZenRx in New Zealand and is currently

ongoing. The study of approximately forty patients was designed to compare the area under the curve of Oraxol at the estimated
clinical dose to that of IV paclitaxel. We are evaluating the bioavailability, safety and tolerability of the Oraxol Phase 3 dosing
regimen of 15 mg HM30181A + 205 mg/m2 of paclitaxel daily over three consecutive days each week. The following chart shows
interim PK results from the first six completed patients, indicating that this dosing regimen could achieve similar exposure to weekly
AUC to 80 mg/m2 of IV paclitaxel:

According to findings from this study, patients treated with Oraxol demonstrated exposure that was comparable to IV paclitaxel

and no grade 3 or4 toxicities. These interim results were presented at ESMO Asia 2017 in Singapore.

Phase 1 MTD Study of Oraxol in Combination with Ramucirumab

y

We are conducting a Phase 1 MTD study of Oraxol in combination with ramucirumab in patients with advanced gastric cancer

in the U.S. and Asia through a clinical trial collaboration with Eli Lilly and Company (Lilly). We commenced a study of up to 32
patients in a dose escalation study of Oraxol in combination with a fixed dose of ramucirumab to determine the MTD in July 2017. In
a published Lilly-sponsored Phase 3 study comparing ramucirumab in combination with IV paclitaxel to IV paclitaxel alone, the
single agent IV paclitaxel arm of the study showed a median overall survival of 7.4 months as compared to 9.6 months with IV
paclitaxel in combination with ramucirumab.

The following list shows overall survival rates from the randomized, Phase 3 studies for Lilly’s FDA approved drug,

ramucirumab, approved in combination with IV paclitaxel for second line treatment of advanced gastric cancer:

Phase 3 clinical study of ramucirumab vs placebo (n=355)

Phase 3 trial of ramucirumab plus IV paclitaxel vs IV paclitaxel (n=665)

5.2 months ramucirumab
3.8 months placebo
9.6 months ramucirumab + IV paclitaxel
7.4 months IV paclitaxel

15

We conducted a Phase 1/2 study of single agent Oraxol dosing in end-stage gastric cancer patients at 150 mg/m2 for two
consecutive days each week, three weeks on, one week off, resulting in a median overall survival of 10.7 months. The objective of our
Phase 1 study is to define the MTD of daily Oraxol dosing, starting at 200 mg/m2 for three days in a week, three weeks on, one week
off, in combination with ramucirumab, which will be dosed every other week. In January 2018, we announced the completion of the
first cohort of patients in this study. Of the six patients in the first cohort, the Oraxol and ramucirumab combination treatment was
well-tolerated. Grade 4 neutropenia occurred in one patient who fully recovered and there were no patient deaths or neuropathy. Two
patients had partial responses (tumor shrinkage of 34-42%) and three patients had stable diseases (with tumor shrinkage of 27% in one
patient). Only one patient had progressive disease. Although early, these results are regarded as encouraging compared with previous
IV paclitaxel and ramucirumab combination therapy Phase 3 clinical trial results. In December 2018, we announced the completion of
the second cohort of patients in this study. The results indicate strong positive signals of efficacy, and the treatment was well-
tolerated. This second cohort of patients was given an escalated Oraxol dose of 250 mg/m2 with the same dosing regimen as the first
cohort. Three patients (50%) had partial responses. Grade 3 vomiting occurred in one patient who elected to withdraw from the study
and subsequently had complete recovery. We are currently advancing to the third cohort with an escalated dose of 300 mg/m2 of
Oraxol.

Phase 3 Study for Treatment of Metastatic Breast Cancer

y

Our Phase 3 study of Oraxol for the treatment of metastatic breast cancer is an open-label, randomized, multicenter study in

approximately 360 adult female subjects. The study contains a screening period, a treatment period of 18-21 weeks, and a treatment
extension period up to a total of forty-eight weeks. The study is currently being conducted in ten countries in Central and South
America and will have up to fifty sites participating. Subjects will be randomized to either Oraxol or IV paclitaxel in a 2:1 ratio. The
study is designed with two interim analyses which will be conducted after 90 and 180 evaluable subjects have been treated. Tumor
assessments will be performed utilizing Response Evaluation Criteria in Solid Tumors (RECIST) v1.1 guidelines by a blinded central
tt
radiologist group in the U.S. The blinded U.S. radiology group will measure tumor response rates with scans at week 10, 16 and week
19. An independent DSMB conducted and reviewed a planned interim analysis of the study in October 2017 and unanimously
recommended continuation of the study. In January 2018, we received positive feedback from the FDA on the design of the ongoing
Phase 3 trial, which indicated that if the study meets the primary endpoint with an acceptable benefit to risk profile, it could be
adequate as a single comparative trial to support registration of Oraxol in the U.S. for the indication of metastatic breast cancer. In
August 2018, an independent DSMB conducted and reviewed a second interim analysis of the study. The DSMB congratulated us on
the rapid patient recruitment and the promising results achieved. The DSMB recommended that we continue this study and complete
the recruitment of patients. In January 2019, we achieved target Phase 3 enrollment of 360 evaluable patients.

Our Oraxol dosing regimen consists of three days consecutive dosing each week of a 15 mg tablet HM30181A one hour before
dosing an oral formulation of paclitaxel of 205 mg/m2. The comparator IV paclitaxel arm is the labeled dosing regimen of 175 mg/m2
paclitaxel IV one week out of three.

The chart below shows the simulated comparison of one cycle of the labeled dose of IV paclitaxel (Taxol) of 175 mg/m2 and

Oraxol dosed daily at 205 mg/m2 for three consecutive days per week over a similar three-week period. While the expected aggregate
Oraxol AUC over the cycle is similar to IV Taxol at 15,240 as compared to 15,000, the expected time exposure of Oraxol in the
patient’s blood at a therapeutic level is projected to be longer. For Oraxol, the time above 40 ng/mL is forecasted to equal 108 hours
per 3-week cycle as compared to 54 hours for IV Taxol. We believe time exposure of the active pharmaceutical ingredient in the
patient’s blood is an important consideration in determining efficacy. In addition, the lower Cmax with Oraxol is believed to be
associated with better long-term tolerability of Oraxol.

16

Simulated PK comparison of Oraxol 205 mg/m2 QDx3 per week for three weeks vs. IV Taxol 175 mg/m2 one week out of three weeks
cycle:

In summary, we believe Oraxol’s longer paclitaxel exposure over time and lower Cmax (based on our predictive model) as

compared to the labeled dose of IV paclitaxel could translate into superior clinical response and improved tolerability.

Other Planned Clinical Development

We initiated a Phase 1/2 clinical study to assess the safety, tolerability and activity of Oraxol in combination with an anti-
programmed cell death protein 1 (anti-PD1) antibody (pembrolizumab) in patients with advanced solid malignancies, in collaboration
with Mayo Clinic. Pembrolizumab is a checkpoint inhibitor approved by the FDA. The study, KX-ORAX-011, is a Phase 1/2 study
being conducted in patients with urothelial, gastric or gastroesophageal or non-small cell lung cancer that have previously failed
treatment with a checkpoint inhibitor.

Oraxol is also in development for angiosarcoma, for which the FDA has granted orphan drug status.

Oratecan (HM30181A Tablet + Oral Irinotecan)

Completed Clinical Studies

Hanmi conducted three Oratecan Phase 1 studies, two as monotherapy (HM-OTE-101, HM-OTE-102), and one in combination

with capecitabine (HM-OTE-103), in a total of fifty-four Korean patients with advanced solid tumors. The tumor types in these
clinical trials were mostly gastric and colorectal cancers. MTD for Oratecan as monotherapy was defined as 100 mg/m2 per 3-week
cycle, either given as once daily for five consecutive days for one week (20 mg/day), or two weeks (10 mg/day), of a 3-week cycle.
Anti-cancer activity was observed in these studies.

HM-OTE-101 Phase 1 MTD Oratecan Studyy

Oratecan was administered to twenty patients with advanced solid tumors on Days 1 to 5 during a 21-day cycle. Irinotecan daily

doses ranged from 5 to 30 mg/m2, and HM30181A doses were 60 mg. MTD was identified at 20 mg/m2 per day for five days of a 3-
week cycle. Adverse events were typical of events seen with IV irinotecan. Common adverse events included nausea (90%), diarrhea
(65%), and vomiting (55%). Four subjects had dose-limiting toxicity (DLT) events (diarrhea, neutropenia, nausea/vomiting and AST
elevation). At the MTD, the SN-38 Cmax on Days 1 and 5 were 9 and 12 ng/mL. Estimated SN-38 cycle exposure (AUC) was
373 ng*hr/mL. In this study Oratecan monotherapy in patients with advanced solid tumors resulted in a disease control rate of 44%.

17

HM-OTE-102 Phase 1 MTD Oratecan Studyy

Oratecan was given once daily for five consecutive days each week for two weeks during a 21-day cycle to thirteen patients

with advanced solid tumors. Irinotecan doses ranged from 5 to 20 mg/m2. MTD was identified at 10 mg/m2 per day. Adverse events
were similar to those observed following IV irinotecan and included diarrhea, nausea, and anorexia. Five subjects had a DLT in Cycle
1. At the MTD, the resulting SN-38 Cmax on Days 1 and 12 were 5 and 4 ng/mL. Estimated cycle exposure (AUC) for SN-38 was
423 ng*hr/mL.

The following table shows the rate of control of the disease following administration of Oratecan once daily for five days for

two out of every three weeks.

Dose Level

HM30181A tablet 60 mg + irinotecan HCl tablet 5 mg/m2
HM30181A tablet 60 mg + irinotecan HCl tablet 10 mg/m2
HM30181A tablet 60 mg + irinotecan HCl tablet 15 mg/m2
HM30181A tablet 60 mg + irinotecan HCl tablet 20 mg/m2
Total

Disease control
rate (DCR)*

# of DCR (%)

3
3
1
1
8

(100%)
(60.0%)
(100%)
(50.0%)
(72.7%)

N
3
5
1
2
11

* DCR determined by the total number of subjects with complete response, partial response or stable disease, divided by the

number of subjects at each dose level.

HM-OTE-103 Phase 1 MTD Study of Oratecan in Combination with Capecitabine

y

p

This study was to determine the MTD of Oratecan in combination with capecitabine. Oratecan was administered to twenty-one

patients on Days 1 to 5 during a 21-day cycle. Irinotecan doses ranged from 10 to 20 mg/m2 per day, with HM30181A (15 mg) in
combination with capecitabine at 800-1000 mg/m2 for fourteen days. The MTD of Oratecan, in combination with capecitabine at the
1000 mg/m2 dose was identified at 15 mg/m2 per day. Adverse drug reactions in the study included diarrhea, nausea, anorexia and
vomiting. At the MTD of 15 mg/m2, the SN-38 Cmax on Days 1 and 5 were 6 and 4 ng/mL. Estimated SN-38 cycle exposure (AUC)
was 217 ng-hr/mL. In this study of combination of Oratecan with capecitabine in patients with a variety of solid tumors (mostly GI
cancers), 10 out of 18 (56%) patients had either stable disease or a partial response.

Overview of Safety Observations in completed Oratecan Studies

p

y

In our Oratecan clinical studies to date, the serious adverse effects observed that were deemed to be possibly, likely or definitely

related to Oratecan include diarrhea, rash, gastrointestinal hemorrhage, anorexia, vomiting, nausea, enteritis, asthenia, neutropenia,
increased alanine aminotransferase and increased aspartate aminotransferase.

18

Current and Planned Clinical Development

ORTE-01-14-US Phase 1 MTD Studyy

The Phase 1 MTD study is being conducted by us and is currently ongoing. This study is to determine the MTD of Oratecan,
when given once every three weeks, in subjects with advanced malignancies. In previous studies, Oratecan was given once daily for
five days every three weeks and achieved total cycle SN38 exposure, as measured by AUC, similar to IV administration of irinotecan.
This once every 3-week dosing strategy is being evaluated in order to assess if we can further increase SN-38 exposure while avoiding
toxicity. Based on Phase 1 results thus far, we believe that we can identify a Phase 2 dose that will produce similar exposure to SN-38
as a labeled dose of IV irinotecan. Phase 2 studies are being planned.

We are currently planning a Phase 1 bioavailability study of Oratecan to be conducted in conjunction with ZenRx in New
Zealand. The objective is to determine the absolute bioavailability of Oratecan and to compare the extent of absorption of Oratecan to
that of IV irinotecan based on levels of SN38. This study will allow us to determine the exposure of SN38 following Oratecan
administration that will be equivalent to the SN38 levels observed with the IV route of administration.

Oradoxel (HM30181A Tablet + Oral Docetaxel)

Preclinical Activity and Evaluation

The potential effectiveness of HM30181A to inhibit the P-gp pump’s ability to transport docetaxel out of cells was first
observed in vitro by an increase in the potency of docetaxel by 1,788-fold in a uterine sarcoma cell line. In rat oral PK studies, the
plasma concentrations of docetaxel versus time, shown below, showed a significant increase upon co-administration of HM30181A
with docetaxel. In this experiment, docetaxel was formulated in the currently proposed clinical formulation. Oradoxel was tested in
preclinical human prostate cancer murine model as shown in the table below. Overall, Oradoxel was more active than docetaxel given
orally without a P-gp inhibitor and was similar to the efficacy of IV docetaxel administration. At a dose of 25 mg/kg docetaxel with
HM30181A a percent of tumor control of 4.8% was achieved which is comparable to the standard 10 mg/kg IV dosing regimen of
docetaxel (2.9%). Without P-gp pump inhibition by HM30181A, oral administration of docetaxel demonstrated less inhibition of
tumor growth, with a percent of control of 50.5%, consistent with reduced absorption of oral docetaxel when dosed without
HM30181A.

Docetaxel +/- HM30181A in Prostate Cancer Murine Model

Treatment
Control
Docetaxel (10 mg/kg, IV)
Docetaxel (25 mg/kg. Oral) plus HM30181A
Docetaxel (25 mg/kg Oral)

Mean (±SEM) Tumor Weight (g)
on Day 21 Post Treatment
0.348 ± 0.047
0.01 ± 0
0.017 ± 0.003
0.176 ±0.035

(T/C (%))a
(—)
(2.87%)
(4.78%)
(50.53%)

a

Tumor Growth Inhibition is calculated by dividing the group average tumor volume for the treated group by the group average
tumor volume for the control group (T/C).

19

Current and Planned Clinical Studies

Based on the preclinical mouse efficacy data and rat and dog toxicology data, we expect that oral administration of docetaxel

together with HM30181A will be efficacious and well tolerated in the clinic. We believe it may minimize the dose-limiting toxicities
associated with docetaxel therapy, such as fluid retention, and allow increasing dosing to obtain superior efficacy.

The FDA authorized us to proceed with a Phase 1 clinical study under an IND in the first quarter of 2016, and we received
regulatory allowance for a clinical trial in New Zealand. The ongoing U.S. study is a Phase 1 dose escalation trial for Oradoxel in
patients with various solid tumors with a starting dose of 35 mg/m2 given once every three weeks. In New Zealand, a Phase 1 study is
being conducted to identify the absolute bioavailability of Oradoxel in prostate cancer patients. Based on Phase 1 results thus far, we
believe that we can achieve similar exposure to IV docetaxel with one or two days of dosing every three weeks. Phase 2 studies are
being planned.

Oratopo (HM30181A Tablet + Oral Topotecan)

Preclinical Activity and Evaluation

In rat oral PK studies, the plasma concentrations of topotecan versus time, shown below, demonstrates a significant increase

upon co-administration with HM30181A. This effect is evident when topotecan is formulated in saline or the marketed product,
Hycamtin. In preclinical murine models with human tumor transplants, including ovarian cancer, oral topotecan in combination with
HM30181A was more active than oral topotecan alone following administration at a dose of topotecan 1 mg/kg once daily for five
days per week, as illustrated in the lower chart below.

20

Topotecan +/- HM30181A in Ovarian Cancer Murine Model

Current and Planned Clinical Studies

IND enabling studies have been conducted. To date, dose-range finding studies along with Good Laboratory Practice, or GLP,
compliant toxicology and toxicokinetic studies following single and multiple daily doses are being conducted with oral Topotecan in
combination with HM30181A. These studies have been completed to establish the maximum tolerated dose for the 5-day regimen to
support our proposed clinical dosing regimen. We filed an IND application for oral topotecan in combination with HM30181A in
February 2017, and the FDA authorized us to proceed with a Phase 1 clinical study in March 2017. We are currently enrolling in a
Phase 1 clinical trial in advanced malignancies for Oratopo.

21

Eribulin ORA (HM30181A Tablet + Oral Eribulin)

Eribulin is an intravenous anticancer drug used to treat certain patients with breast cancer and advanced liposarcoma marketed

by Eisai Company under the trade name Halaven. Utilizing Athenex’s proprietary Orascovery platform with Eribulin, we were able to
demonstrate that good oral absorption of Eribulin is possible, based on preclinical studies. In addition, we have developed a novel and
efficient synthetic route for the synthesis of eribulin API which we believe will support our development of this candidate. In October
2018, the FDA allowed our IND for oral eribulin co-administered with HM30181A (Eribulin ORA). A Phase 1 study is expected to
commence in early 2019.

The table below shows certain clinical trials for our major Kinase inhibition drug candidates.

Our Src Kinase Inhibition Research Platform

Protocol

KX01 (Ointment)

KX01-AK-01-US
KX01-PS-01-TW
KX01-AK-002
KX01-AK-003
KX01-AK-004
KX01-006
KX01-007
KX01-008
KX01-009
KX01-01-07
KX01-02-09

KX01-03-11

KX01 (Oral)

HM-KX1-101

KX01-CA-001

KX01-CA-002
KX02-01-13

KX02

Phase
I
I
II
III
III
I
I
I
I
I
II

I

I
I

I
I

Indication
Safety PK
Psoriasis
Safety PK
Efficacy
Efficacy
RIPT (Sensitization)
Muse PK
Phototoxicity
Photoallergy
Solid Tumor
Prostate
Acute Myelogenous
Leukemia
Solid Tumor
Ovarian

Liquid Tumor
MTD PK

Location
United States
Taiwan
United States
United States
United States
United States
United States
United States
United States
United States
United States

Status
Completed
Ongoing
Completed
Follow-up ongoing
Follow-up ongoing
Completed
Enrolling
Completed
Completed
Completed
Completed

United States

Completed

South Korea
United States United
Kingdom
Taiwan
United States

Completed
Under Development

Under Development
Enrollment Closed

PK and MTD denote pharmacokinetics and maximum tolerated dose, respectively.

KX-01

Mechanism of Action

KX-01 is a novel small molecule, which we discovered and developed, which demonstrates at least two MOAs relevant to the

potential control of cancer and hyper-proliferative disorders: Src tyrosine kinase inhibition (non-ATP competitive) and tubulin
polymerization inhibition. Src plays a role in regulating multiple aspects of tumor development, growth and metastases, and its
inhibition limits such tumor activity. Interfering with tubulin polymerization activity is a clinically validated mechanism for treating
cancer. For both targets KX-01 binds at a novel binding site. Taken together, these two MOAs may provide for a potent means of
treating cancer and other hyper-proliferative disorders.

22

The first MOA defined for KX-01 is Src tyrosine kinase inhibition. We have observed the correlation of KX-01 inhibition of Src

fibroblasts with enhanced Src activity, and HT29, a cell line derived from colon cancer cells. Through in

auto-phosphorylation (a measure of Src activity) and cell growth during the proliferation phase of tumor cells in both c-Src527F/NIH-
3T3, a cell line derived fromff
vitro tests, KX-01 has been shown to induce caspase 3 cleavage and PARP cleavage, which are both markers for cell death or
apoptosis, as well as p53 induction, which is a protein involved in tumor suppression. Unlike most known Src inhibitors, KX-01 is
unique in that it is not an ATP competitive inhibitor of Src, but, rather, it is believed to be a substrate competitive inhibitor, which
means high specificity for the intended binding target. A computational model for how KX-01 is predicted to bind in the peptide
substrate site of Src is depicted in the figure below, as noted in an NMR/paramagnetic probe study conducted and published by Wyeth
LLC.

F

The second MOA defined for KX-01 is inhibition of tubulin polymerization, a step essential for cell growth. We have observed

the ability of KX-01 to inhibit tubulin polymerization in vivo within tumors in a mouse xenograft and synergistic activity with
paclitaxel to interrupt cell proliferation.

The two MOAs of KX-01 are believed to have the potential to control cell growth and proliferation of cancer cell types as well

as cell types involved in hyper-proliferative diseases. Specifically, KX-01 has been observed in vitro to have potent activity in
controlling cell growth in keratinocytes, or skin cells (with IC50 = 32 nM). This activity demonstrates the potential of these compounds
to control hyper-proliferative diseases of the skin, examples being actinic keratosis and psoriasis.

The following table shows the potential broad-spectrum activity of KX-01 against many cancer types. GI50 represents the
concentration of KX-01 that may be used to inhibit 50% of tumor cell growth. The lower the numerical value of GI50 the higher the
potency of KX-01.

Human Tumor Cell Line
HT29 (Colon)
SKOV-3 (Ovarian)
PC3-MM2 (Prostate)
L3.6pl (Pancreas)
MDA-MB-231 (Breast)
A549 (Lung)
HuH7 (Liver)
769-P (Kidney)
SNU-1 (Gastric)

KX-01 GI50
(nM)
25
10
9
25
20
9
9
45
6

Human Leukemia Cell Line
K562 (CML)
K562R (Gleevec resistant CML)
MOLT-4 (ALL)
CCRF-HSB-2 (ALL)
Jurkat (Adult T Cell Leukemia)
Ba/F3 + WT BCR-Abl
Ba/F3 + E225K (Gleevec Resistant)
Ba/F3 + T315l (Gleevec & Dasatinib Resistant)
KG-1 (AML)
RPMI8226 (Multiple Myeloma)
RL (non-Hodgkin’s lymphoma)

KX-01 GI50
(nM)
13
0.64
13
12
10
85
80
35
16
40
19

23

Research Background

Topical formulation development studies carried out by our licensing partner, PharmaEssentia, in Taiwan resulted in a

formulation believed to be suitable for clinical testing. KX-01 topical formulations were initially tested by PharmaEssentia in psoriasis
clinical trials in Taiwan. In parallel, we are evaluating topical KX-01 ointment in the clinic for AK in the U.S. The most common
cause of AK is exposure to ultraviolet radiation from the sun or tanning beds. This exposure can lead to oncogenic changes, such as
inactivation of p53, and consequential hyper-proliferation of mutated keratinocytes. If left untreated, 10-15% of AKs can progress to
skin cancer. KX-01 inhibits the proliferation of keratinocytes and up-regulates p53 so its utility in clinically treating AK is of interest.
Phase 2 clinical trials with a KX-01 topical ointment for treating AK have produced encouraging results, and Phase 3 studies have
completed recruitment. KX-01 ointment 1% has a room temperature shelf life of at least six months.

KX-01 Ointment for Topical Indications

Completed Clinical Study

Phase 1 Studyy

The Phase 1 study of KX-01 ointment for treatment of AK was conducted by us in the U.S. and is clinically complete. This was
study of three or five days, with treatment of 25 cm2 or 100 cm2 applied to the forearm. The results for the
a four cohort, PK and safetyff
Phase 1 studies showed that with 1% KX-01 ointment being applied for five consecutive days in on a 25 cm2 area of the forearm; 50%
(four of eight subjects) had complete response (100% clearance). This was achieved with very good local and systemic tolerability.
We believe that the high clearance rate with low skin toxicity compares well to existing treatments on the market.

Clinical data thus far indicate that KX-01 ointment produces a complete response without severe adverse skin reactions in some

patients, as shown in the images below:

Skin reaction from KX-01 ointment in a subject who had a 100% response

Current and Planned Clinical Development

Phase 2a Studyy

We completed enrollment in 2016 of an approximately 160-patient Phase 2a clinical study in the U.S. of KX-01 ointment for

treatment of AK on the face and scalp. This was an open label, two sequential cohort study of approximately eighty patients each with
treatment of KX-01 ointment 1% for either three or five days. The primary objective was to evaluate the complete response rate,
which was defined as 100% clearance of such patient’s AK at Day 57 after treatment. Additionally, we sought to further investigate
the findings from the Phase 1 proof of concept study indicating that KX-01 ointment has a favorable side effect profile.

Data from 168 patients in the Phase 2 study shows that the KX-01 dosing regimen used in this study is well-tolerated, with
mostly mild and transientLSRs. The five-day treatment cohort achieved a higher overall 100% clearance of actinic keratosis lesions at
Day 57 (i.e. eight weeks after the initiation of treatment) than the three-day treatment cohort (43% vs. 32%). In the five-day treatment
cohort, twenty-three of forty-four subjects (52%) with actinic keratosis on face and thirteen of forty (33%) on scalp attained 100%
clearance at Day 57. LSRs were mild and mostly erythema, flaking or scaling, crusting and swelling with the maja ority of the LSRs
scores of < 2 and resolved rapidly. Only one subject scored 4 in erythema and flaking or scaling, which both resolved rapidly without
concomitant medications. Erosions or ulcers and vesicles or pustules were observed in only 15% and 5% of subjects, respectively. No
subjects scored ≥ 3 in erosions or ulcers or vesicles or pustules. Treatment related adverse effects were few and predominately mild
transient application site pruritus, tenderness and pain. There were no treatment related serious adverse effects or discontinuations.
Plasma levels of KX2-391 were low to undetectable.

24

Skin reaction example from KX-01 ointment in a subject who had a 100% response

Day 1

Day 8

Day 57

The images above show the experience of a subject in our Phase 2 study who experienced a 100% response experienced no
severe skin reaction. Since skin toxicity is likely to be a significant consideration of clinicians and patients, especially on the face and
scalp, we believe that the market is likely to expand for topical treatments options for this pre-cancerous skin condition. To the extent
that skin toxicity has been limiting the market, we believe that KX-01 ointment may significantly expand the market as a result of a
low skin toxicity.

Phase 3 Studies

We commenced patient enrollment in two Phase 3 studies of KX-01 for treatment of AK on the face and scalp at approximately

sixty total sites in the United States in September 2017. Each trial is designed to enroll approximately 300 subjects. We completed
patient enrollment for both Phase 3 studies in February 2018 with 702 subjects. The endpoints of these studies are identical to those in
the Phase 2 program, although, unlike the Phase 2 study, the two identical Phase 3 clinical trials each include a vehicle-treated control
group and a double-blinded study design in which subjects are randomly assigned to receive either the vehicle or the KX-01 ointment.
In July 2018, both Phase 3 studies achieved their primary endpoint of 100% clearance of AK lesions at Day 57 within the face or scalp
treatment areas, with each study achieving statistical significance (p<0.0001). Statistical significance (p<0.001) was achieved for both
face and scalp subgroups as well. Topline results from the two Phase 3 studies were featured in a late breaker session at the 2019
American Dermatology Annual Meeting in March 2019. Results showed that 44% and 54% of patients in studies KX01-AK-003 and
KX-01-AK-004, respectively, achieved 100% AK lesion clearance at Day 57. Compliance rate in these two studies was greater than
99%. There was a statistically significant clearance rate in favor of the KX-01 ointment versus the vehicle in each of the patient
subgroups. A 12-month recurrence follow-up period is expected to be complete for the last subject in June 2019, and a final clinical
study report for both trials, marking official completion of the Phase 3 study, is expected to be available in the fourth quarter of 2019.

25

KX-01 Oral

Completed Clinical Studies

KX-01 oral capsules are available in strengths of 20 mg and 80 mg and have a room temperature shelf life of forty-eight months.
KX-01 oral has been evaluated in several early dose finding studies against both solid and liquid tumors. Initial clinical results indicate
activity against both solid and liquid tumors in patients in clinical studies. We are planning further probe studies to focus our
evaluation in certain of those indications where activity was observed.

Phase 1 and Phase 2a U.S. Study—Complete

y

p

A Phase 1 clinical trial in solid tumor patients identified the MTD for continuous twice daily oral dosing at 40 mg/dose, with a

favorable PK profile, and indications of activity. In this trial, forty-four
ff
well-tolerated and the DLTs were mainly elevated levels of AST and ALT, which were readily reversible. Eleven patients had stable
disease for at least four months, including patients with ovarian, carcinoid, papillary thyroid, prostate, pancreas and head and neck
cancer. An ovarian cancer patient had stable disease for 16 months and a KX-01 oral induced a large decrease in the ovarian cancer
CA-125 biomarker, which correlates well with clinical response. As shown in the table below, this patient had failed nine prior drug,
and drug combination therapies, showing a clear benefit from KX-01 oral treatment.

patients were enrolled in nine dose cohorts. The drug was

Therapy
Carboplatin, Paclitaxel
Gemcitabine, Carboplatin
Gemcitabine, Taxotere
Doxil
Cisplatin, Cyclophosphamide, Epirubicin
Tamoxifen
Topotecan
Abraxane, Avastin
Folfox, Avastin
KX-01 oral

Duration (months)

5
2
2
1
4
2
3
4
1
16

A subsequent Phase 2a clinical study in men with bone-metastatic castration-resistant prostate cancer using the twice daily 40

mg/dose was conducted. Thirty-one patients were dosed with KX-01 oral at 40 mg/dose twice daily until disease progression or
unacceptable toxicity. The primary endpoint was 24-week progression-free survival (PFS). The designated clinical endpoints were not
met with KX-01 oral at this dose.

A Phase 1b clinical study in elderly acute myeloid leukemia (AML) patients was conducted using once daily dosing. The doses
tested were 40, 80, 120, 140 and 160 mg of KX-01. Twenty-four patients were recruited with a median age of 76 years (range 63 to 86
years). Most had been previously treated for their disease, generally with decitabine or azacitidine. The MTD is estimated to be 105
mg of KX-01 oral daily.

Overview of Safety Observations in completed KX-01 Oral Studies

p

y

In our KX-01 Oral clinical studies to date, the serious adverse effects observed that were deemed to be possibly, likely or

definitely related to KX-01 Oral include allergic reaction, bacteremia, rash, syncope, tremor, dermatitis, neutropenic fever,
hyponatremia, hypersensitivity, failure to thrive, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia,
seizure and motor vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injury, increased bilirubin and albumin levels,
decreased blood platelet count, abdominal pain, arm pain, pyrexia, rigors, tachypenea, oxygen desaturation, pneumonia, anemia,
elevated ALT and AST, dehydration and leukopenia.

Current and Planned Clinical Development

Our licensing collaborator, Hanmi is completing a Phase 1b clinical trial in South Korea, combining escalating continuous once

daily doses of KX-01 with a standard IV paclitaxel treatment of 80 mg/m2 once weekly for three out of four weeks. This study is
clinically completed and awaiting a study report.

26

KX-02

Research Background

KX-02 is a closely related structural analog of KX-01 and has been observed to have a similar dual MOA of inhibition of Src

activity and microtubule polymerization. KX-02 was designed to readily cross the blood-brain-barrier (BBB). In vitro studies in mice
have found that the KX-02 levels in the mouse brain meet or exceed the levels in the plasma at the same time points after oral dosing,
indicating that KX-02 readily crosses the BBB. We believe that this ability to cross the BBB provides a rationale for investigating
brain cancers and metastases in the brain as potential therapeutic applications, which are traditionally considered to be an unmet
medical need.

Preclinical evaluation and activity

In Vivo Activity

Based on preclinical testing which found activity of KX-02 against a number of brain cancer cell lines and BBB penetration by
KX-02, KX-02 was tested orally in a mouse GBM tumor model, wherein mouse GBM tumor cells were implanted into the brains of
mice with fully-competent immune systems in order to simulate human patients. When compared with temozolomide (TMZ), the
current standard of treatment, in one particular study, KX-02 produced long -term survival mice, as compared to TMZ, which
extended survival but did not result in any long-term survivors. Across multiple experiments, an average of approximately 30% long
term survival mice were produced when dosed with KX-02 at 30 mg/kg once daily, as shown in the figure below.

To visualize tumor growth in situ, animals treated with KX-02 were compared to those that had been treated with placebo alone

using magnetic resonance imaging (MRI). The KX-02 treated mice that eventually survived long term did not have tumors whereas
the placebo mice had large tumors at the time points evaluated.

The potential role of an adaptive immune response in the responses of the mice treated with KX-02 was observed in three ways.
First, when the same mouse study was repeated with mice lacking an adaptive immune system, no cures were obtained. Second, when
mice that had been cured by KX-02 were re-challenged with mouse GBM cells, they failed to support sustained tumor growth,
whereas untreated mice readily showed pernicious tumor growth. Third, a larger infiltration of lymphocytes into brain tumor tissues

27

was seen in mice treated with KX-02 as compared to those treated with a placebo, and these lymphocytes stained as CD3 and CD8
immune cells. Accordingly, KX-02 also appears to facilitate the immune system’s recognition of brain tumor tissues as foreign cells,
in addition to its Src and tubulin-targeted activities. In our KX-02 clinical studies to date, the only serious adverse effects observed
were thromboembolic events, hyperuricemia and pulmonary embolism.

Current and Planned Clinical Studies

Phase 1 Studyy

We have completed enrollment in a Phase 1 study in the U.S. of KX-02 for treatment of solid tumors in order to determine the

MTD, PK and safety profile. We plan to initiate a new Phase 1 study using an improved oral formulation in 2019.

In 2012, we out-licensed KX-02 to Xiangxue for development and marketing in greater China, and clinical trials are currently
being planned. In May 2017, the NMPA allowed an IND to commence clinical trials in China. Based on the approval that has been
granted by the NMPA, we expect Xiangxue to commence Phase 1 clinical trials for KX-02 for GBM in China in 2019. We anticipate
this partnered clinical program in China will accelerate the development timeline of this candidate.

Our Src Kinase Product Candidates

KX-01

KX-01 is a compound developed under our Src Kinase Inhibition platform that, as a free base, has advantageous physical
properties for topical ointment formulations. A topical ointment with KX-01 has shown promising results in a proof of concept clinical
trial for AK. We completed enrollment of an approximately 160-patient Phase 2a study of KX-01 for treatment of AK in 2016, and we
commenced two Phase 3 studies in September 2017, which completed patient enrollment in February 2018. In July 2018, both Phase 3
studies achieved their primary endpoint of 100% clearance AK lesions at Day 57 within the face or scalp treatment areas. A 12-month
recurrence follow-up period is expected to be complete for the last subject in June 2019, and a final clinical study report for both trials,
marking official
quarter of 2019. An additional indication for
psoriasis is being evaluated in a Phase 1 clinical trial led by our out-licensing partner PharmaEssentia. Since AK can lead to skin
cancers, we are now investigating the initiation of a study in that basal cell carcinoma. These applications provide additional potential
therapeutic utilities for KX-01 ointment and could represent significant potential market expansions beyond AK. We are also
developing KX-01 in an oral formulation, and we have observed activity against both solid and liquid tumors in patients in clinical
studies, and we are planning further studies to focus our upcoming evaluation efforts in targeted indications.

completion of the Phase 3 study, is expected to be available in the fourth

ff

ff

In December 2017, we entered into a license agreement with Almirall, pursuant to which we granted to Almirall an exclusive,

sublicensable license of certain of our intellectual property for the development and commercialization of topical products containing
KX-01 for the treatment of AK in the U.S. and substantially all European countries. We believe this partnership validates the potential
of this candidate and that this partnership is an important step in the development and commercialization of KX-01 develop and
commercialize this product. For additional information, please see “Business—License and Collaboration Agreements—Almirall
License Agreement.” We presented data frff om our Phase 2 clinical trials at the AAD meeting in February 2018. Both studies are still
on-going to complete the one-year follow-up of the patients who had complete responses. We will be submitting a request to the FDA
for a pre-NDA submission meeting to discuss the data and regulatory submission timelines.

KX-02

KX-02 is the second compound we developed using our Src Kinase Inhibition platform. Although KX-02 is an analog of KX-

01, it has significantly different physical properties. These properties are designated to allow KX-02 freely cross the BBB such that the
concentration in the brain is equal to, or somewhat greater than, that in the plasma. This trait is uncommon for oncology drugs and
highlights the potential for KX-02 as a novel therapy for unmet medical needs such as brain cancers, including GBM and brain
metastases. The FDA has granted Orphan Drug Designation to KX-02 for the treatment of gliomas. KX-02 is a non-ATP competitive
Src Kinase inhibitor and tubulin polymerization inhibitor. Studies of KX-02 in preclinical syngeneic mouse GBM models resulted in
the complete eradication, without recurrence, of the tumors in an average of approximately 30% of treated mice. KX-02’s multiple
MOAs along with its ability to cross the BBB, make it a novel molecule for the treatment of brain tumors. KX-02 is currently in the
early stages of clinical development. The NMPA allowed the start of a Phase 1 trial in China, which commenced at the end of 2019.

28

Intranasal Granisetron (GNS)

The development of supportive therapy is complementary to our oncology drug platform. Chemotherapy-induced nausea and

vomiting, or CINV, is a common side effect
receptor antagonist, a class of anti-emetic drugs that are commonly used in the prevention of CINV. Our subsidiary, Comprehensive
Drug Enterprises, has developed intranasal formulations of granisetron for further evaluation in the clinic.

of cytotoxic chemotherapy treatments. Granisetron is a 5-hydroxytryptamine 3, or 5-HT3,

ff

Current Therapies and Limitations

Currently, granisetron is dosed in IV, oral and patch forms to treat CINV. We believe these dosing regimens have disadvantages

including time to effectiveness, and lack of ability to control the symptoms effectively at home.

Current and Planned Clinical Studies

We believe intranasal delivery will possess a number of advantages for the patient. These advantages may include a rapid

delivery of therapeutic drug levels for quick relief of CINV as well as the ability to self-dose outside of the hospital and IV settings
while experiencing CINV (when oral administration would be difficult). The intranasal route of administration of GNS leads to more
rapid achievement of systemic concentrations of the drug compared to the oral route.

A Phase 1 parallel-group study of GNS was conducted in Taiwan to assess the PK, safety and tolerability of GNS. A total of
were divided into the following treatment groups: 1 mg Kytril administered IV over

fifty healthy subjects, 25 male and 25 female,
thirty seconds to ten patients, 1 mg Kytril tablets administered orally to ten patients, and either 0.5, 1, or 2 mg of intranasal GNS
administered to ten patients. The results showed that the drug concentrations were dose proportional following intranasal delivery of
GNS and the side effects were acceptable.

ff

We are presently evaluating the market opportunity in various geographies for the development of an intranasal route of delivery

in order to determine the clinical development program for this drug candidate.

Our Proprietary Dual (CYP/P-gp) Inhibitor Program

We are developing a proprietary class of “dual” absorption enhancers that are intended to inhibit both the P-gp transporter and

the CYP enzymes within the gastrointestinal tract. There are many barriers that limit the oral absorption of drugs in humans. The P-gp
transporter is a major barrier to absorption of active chemotherapy drugs. However, certain other drugs with P-gp liabilities may also
have liabilities for other barriers such as metabolizing enzymes, such as the cytochrome P450, or CYP, class of enzymes. This
intestinal CYP mediated metabolisim can be a contributing factor in limiting oral absorption of certain drugs. This class of dual
absorption enhancers has shown potential to significantly improve the oral bioavailability of certain other drugs in laboratory tests and
may expand the application of our oral absorption platform to drugs where the CYP barrier to oral absorption is also important. These
dual absorption enhancers may lead to better performing next-generation oral medicines in our pipeline of clinical products.

The development of these dual absorption enhancers is at the preclinical stage. Proof of concept, providing increased oral
bioavailability in preclinical species, has been obtained with several absorption enhancers and candidate drugs. Currently additional
filters such as patentability/freedom to operate, physical-chemical characterization, pre-formulation studies, manufacturing analysis
and preliminary toxicity testing are being applied to our first group of lead candidates to facilitate election of an IND candidate.

Our TCR-T Immunotherapy and Arginine Deprivation Therapy Platforms

We commenced the development of two new in-licensed platforms based on our knowledge of absorption biology: TCR-T and

Arginine Deprivation Therapy.

TCR-T Immunotherapy

T Cell Receptor Engineered T Cell, or TCR-T, immunotherapy is a cell-based therapy that takes advantage of unique attributes
of TCR mediated target recognition and provides a potent and selective TCR-T directed response against cancer cells. Central to this
platform is the ability to first identify endogenous TCRs with specificity for a defined tumor antigen and to then enhance the affinity
of the TCR to optimize tumor recognition and killing. These High Affinity TCRs can be incorporated into a patient’s own T cells,
converting the cells into a potent anti-cancer therapy. Using this technology, we believe the platform has generated engineered T-cells
with higher binding affinity, specificity for intended target cells, expression level of the TCR and persistence in patients’ circulation
during therapy. Preliminary studies have shown positive clinical signals.

29

Pegtomarginase

Pegtomarginase, the Arginine Deprivation Therapy product, is based on our pegylated genetically engineered human arginase

technology that targets cancer growth and survival by interrupting the supply of arginine to a proportion of cancers with disrupted urea
cycles. Our proprietary arginase biologic product is well suited to deplete arginine from the tumors with disrupted urea cycle, while
healthy cells, capable of producing their own arginine, are largely unaffected.

Our Research and Development

We are an innovative oncology company with drug discovery, drug formulation, clinical development and API/drug product

manufacturing facilities in both the U.S. and China. The U.S. drug discovery, clinical development and formulation research facilities
are largely concentrated in Buffalo, New York and Cranford, New Jersey. The range of capabilities at these facilities includes
medicinal chemistry, biochemistry, cell biology, formulation, chemical manufacturing and control, quality control,
pharmacokinetics/pharmacodynamics (PK/PD) and data management, as well as pharmacovigilance, clinical development and
regulatory expertise functions. Animal efficacy, PK/PD and toxicology studies are carried out at various contract research
organizations, or CROs, around the world in order to facilitate the drug research and development process.

In China, our research and development center in Hong Kong is integrated with our research and development center in Buffalo.

This center concentrates on drug formulation development and evaluation. When we acquired Comprehensive Drug Enterprises, or
CDE, in 2015, we added scale to our formulation and research personnel in Hong Kong. The clinical oral formulation of docetaxel is
an example of a discovery emanating from our Hong Kong research and development center. Higher strength paclitaxel powder tablet
formulations, to be introduced into our future clinical evaluations of the Oraxol drug product, are a second example of the formulation
development work being successfully carried out at the Hong Kong research and development center.

Commercial Platform

We believe the value creation potential is higher for biopharmaceutical companies able to commercialize their proprietary

products as compared to companies who have a partner to commercialize. The infrastructure investment and build-out of a
commercial team prior to regulatory approval is typically costly and requires years of investment. In 2016, we launched a commercial
platform in the U.S. to begin building out this infrastructure in advance of our launch of proprietary products. Our commercial team
markets and sells a variety of in-licensed pharmaceutical products, which are therapeutically related to our proprietary portfolio.

Using our resources to commercialize products in oncology may create more value for investors than marketing product rights

pre-commercialization. We believe commercialization risks can be offset by establishing oncology manufacturing operations (API,
Manufacturing, etc.) and commercial operations (Multi-source Oncology, Pharmacy, Hospitals, etc.).

Our Commercial Operations

Target Audiences: U.S. Oncology Market

The U.S. Oncology market is highly complex with Gatekeepers, Influencers and Prescribers influencing sales of oncology
products. Launching a commercial operation in preparation for a proprietary drug approval is risky, difficult and expensive. Any
commercial oncology organization must be able to market to Gatekeepers, Influencers and Prescribers in the oncology market at
launch. Gatekeepers include hospitals (including pharmacies and therapeutics committees), buying groups, oncology managed care
organizations, specialty distributors and pharmacists. Influencers in the oncology market include Key Opinion Leader physicians,
regional cancer centers (as defined by the National Cancer Institute) and the U.S. government. Prescribers include oncologists and
dermatologists.

Key hurdles in establishing Commercial Operations in the oncology market include the unpredictability of timing for FDA

approval, the limited time to establish market relationships post approval, competition with companies with broader oncology
offerings and identifying key influencers in the local oncology market. Another hurdle is recruiting key senior business leaders since
they are responsible for recruiting a successful Oncology Sales and Marketing team. For all these reasons, establishing commercial
operations in the oncology market is risky and expensive.

In order to manage the risks and capture post commercial oncology economics, we launched two oncology product lines in

2017—Multisource Oncology products and 503B Compounded Oncology Products. We support these two product lines with a sales
and marketing organization to target Gatekeepers. Our National Accounts organization targets Gatekeepers and the U.S. Government
for these two oncology product lines. Regional Cancer Centers are targeted for Multisource Oncology and 503B Outsourced Facility
products.

30

503B Outsourced Facility Products

We manufacture certain products in our FDA registered 503B Outsourcing Facility. We use our internal cGMP operations and

select- contract manufacturers to make both sterile-to-sterile products and products from sterilized bulk API. For example, we
manufacture a ready to use (RTU) vasopressin product that is preservative free. We source certain of our API from our own internal
supply chain to make products from sterile API bulk. We also buy API from other sources. For sterile-to-sterile products, we source
the sterile vials and bags from national suppliers. This oncology business further expands our offering to the U.S. oncology market.

U.S. Specialty Pharmaceuticals

Our U.S. Specialty Pharmaceuticals business develops and sources products through licensing agreements with various partners,
whom we collectively refer to as our Global Partner network. The company has unique commercial expertise in multisource oncology
and injectable products and has developed a number of Global Partners that develop and manufacture multisource products for the
U.S. market. This Global Partner network supplies the products the company markets in the U.S. Specialty Pharmaceutical business.
We launched a commercial oncology business in the U.S. by launching multisource oncology and therapeutically related products
supplied by our Global Partner network. We structure collaborations whereby we split the profits with the Global Partners and market
the products to the acute hospital and oncology clinics in the U.S. oncology market. This will help the company prepare to launch
proprietary oncology products into the U.S. market.

As of December 31, 2018, APD markets twenty-four products with forty-nine SKUs. In addition, Athenex Pharma Solutions

(APS) markets six products with sixteen SKUs as of December 31, 2018. Our Commercial Platform is expected to launch an
additional thirteen products in the first half of 2019, including eleven products by APD and two products by APS.

Agreements with key Suppliers and Marketing Partners

g
Gland Agreement

From August 2016 to May 2017, we entered into four binding term sheets with Gland to market twenty-seven of Gland’s

the remaining five products. For each of the licensed products, we will pay a license fee to Gland. Additionally,

products. Gland has obtained FDA approval for twenty-two of such products and has filed an abbreviated new drug application, or
ANDA, in the U.S. forff
during the terms of the agreements we have a profit-sharing arrangement pursuant to which we will pay to Gland between 0% and
60% of the net profits from sales of each of the licensed products, depending on the product. The initial term of each of the Gland
license agreements is five years from the launch of each product licensed pursuant to the agreement, subject to automatic renewal for
additional two year terms, unless terminated by either party upon provision to the other party at least 90 days’ notice in advance of a
renewal date.

Pemetrexed, Supply Agreement Term Sheet

pp y g

,

In December 2016, we entered into a binding term sheet with Nang-Kuang Pharmaceutical Co., LTD and CANDA NK-2, LLC,

two affiliated pharmaceutical suppliers, pursuant to which we will enter into a definitive agreement for exclusive distribution of a
generic injectable oncology product for the U.S. market. The ANDA for this product has been filed by the suppliers with the FDA.
Upon signing of the term sheet, we were obligated to make a prepayment for a total of $12.0 million.

Under the agreement, we will make two additional product transfer payments, one equal to a premium between 10% and 20%
over the cost incurred by the suppliers to produce and ship the product after confirmation of each purchase order of the product and,
after receiving such product, we will make the other payments quarterly to the suppliers of between 40% and 60% of the earnings
from sales, less certain expenses, of the product.

The initial term of the definff

itive agreement will begin on the signing date and continue through ten years after

ff

the date of our

first commercial sale of the product, subject to automatic renewals of successive two-year terms, unless terminated by either party
with six months’ notice prior to the expiration of the initial term or any renewal term. The agreement will also contain customary
termination rights for either party in the event of a material breach of the agreement by the other party or bankruptcy or insolvency. In
addition, we will be able to terminate the agreement with 30 days’ notice to the suppliers if the net profits fromff
less certain expenses, equals zero or less and the parties cannot agree on reductions to the actual cost of the products.

sales of the product,

Amphastar Agreement

g

p

In February 2017, we entered into a definff

itive agreement with Amphastar Pharmaceuticals, Inc. (Amphastar) to acquire fourteen

ANDAs and inventory for certain APIs. The agreement requires payments of up to $6.4 million, which has been paid in full as of
December 31, 2018. In addition to the payments described above, we have agreed to pay Amphastar a royalty fee equal to 2% of our

31

net sales relating to the fourteen ANDAs and API inventory transferred to us by Amphastar for a period of ten years from the
execution of the agreement.

g
MAIA Agreement

In December 2018, we entered into a distribution and supply agreement with MAIA Pharmaceuticals effective as of October 3,

2018 whereby we acquired the exclusive license to a generic version of an approved product. The FDA has not yet approved the
ANDA for the generic version to which we have an exclusive license. In connection with the execution of this agreement, we agreed
to pay an upfront milestone payment in addition to profit sharing of 50% of the net profits from the sales of the licensed product. We
also agreed to pay an additional milestone payment to MAIA in the event the FDA approves the ANDA for the licensed product. The
initial term of the agreement is for seven years from the launch of the product and is subject to an automatic two-year renewal term
unless terminated by either party upon at least 180 days’ notice in advance of the renewal date.

Summary of Commercial Strategy & Source of Supply Chain

Product line

Launch date
Commercialization regions

Manufacturing sites

*EU is European Union

Proprietary Oral /
Dermal
To be determined
U.S., EU, China
Clarence, NY, Dunkirk,
NY, Chongqing, China

Multisource / Specialty
2017
U.S.
Partner network, Dunkirk,
NY, Chongqing, China

503B Products
2017
U.S.
Clarence, NY,
Dunkirk, NY

API
Ongoing
U.S., EU, China

Chongqing, China

Customers and Product Distribution

We distribute our products primarily through pharmaceutical wholesalers and, to a lesser extent, specialty distributors that focus

on particular therapeutic product categories, for use by a wide variety of end-users, including hospitals, integrated delivery networks
and alternative site facilities. For the year ended December 31, 2018, the products we sold through our three largest wholesalers,
AmerisourceBergen Corp. (Amerisource), Cardinal Health Inc. (Cardinal Health) and McKesson Corp. (McKesson), accounted for
approximately 12%, 9% and 9%, respectively, of our total revenue.

We utilize an outside third-party logistics contractor to distribute our U.S. products. Since the inception of the launch of our

specialty products, the third-party logistics provider has been handling all aspects of our product logistics efforts and related services
to us, including warehousing and shipment services, order-to-cash services, contract administration services and chargeback
processing. Our products are warehoused and distributed through a third-party logistics provider located in Memphis, Tennessee.
Under our agreement with the third-party logistics provider, we maintain ownership of our finished products until sale to our
customers. The initial term of the agreement is three years following the initial delivery date and will automatically renew for
successive 12-month periods, unless either we or the other party give notice of intent to terminate at least 90 days in advance of such
automatic renewal. We may also have the opportunity to terminate the agreement within 30 days of receiving notice of certain price
increases by the third-party logistics provider. The agreement also contains customary termination rights for either party, such as in
the event of a breach of the agreement.

Global Supplyl Chain Platformt

We believe it is important to minimize potential disruptions associated with a high potency oncology pharmaceutical supply

chain. Therefore, we have begun the process of internalizing key components of the supply chain that we believe are integral to
minimizing these risks and retaining value for shareholders. For example, the World Health Organization lists paclitaxel as an
essential medicine. Paclitaxel is derived from the bark of the Pacific yew tree and harvestable trees for the starting biomass are
globally limited in supply. While current supply of the starting biomass for paclitaxel may be sufficient to meet global paclitaxel API
demand, we believe future shortages are possible if we are successful in the commercialization of one of our lead drug candidates,
Oraxol. We believe this increased demand could lead to shortages of paclitaxel API potentially leading to market and supply
disruptions.

Our research group evaluated the purity and potency of some of the largest global suppliers of paclitaxel API. In 2015, we

acquired one of these suppliers, Polymed Therapeutics Inc. and Chongqing Taihao Pharmaceutical Co. Ltd., or Taihao. Taihao is a
cGMP manufacturer of high potency oncology API based in Chongqing, China and Polymed Therapeutics Inc. is the U.S. marketing
entity for Taihao’s API in North America and Europe. Historical production and sales of API by this subsidiary were to third parties.

32

We anticipate a greater share of Taihao’s manufacturing
and, therefore,
to third parties may decrease. Historically, Polymed Therapeutics Inc. sold certain of these API products internationally to mostly
large multi-national pharmaceutical companies. For the years ended December 31, 2018, 3% of our total revenue came from Intas
Pharmaceuticals and 6% came from Ebewe Pharmaceuticals.

capacity will be used for our internal needs in the future,

ff

ff

ff

sales

In 2014, we sought to obtain better control over our manufacturing of high potency oncology drugs used in global clinical
studies, and, in the third quarter of 2014 acquired QuaDPharma, one of our suppliers based in Clarence, New York. The number of our
clinical studies has grown since the close of the acquisition. We are standardizing and leveraging the acquired cGMP systems and
operating procedures in anticipation of developing multi-cGMP large scale manufacturing plants in both the U.S. and China.

Strategic Public-Private Partnerships

New York State Partnership

In May 2015, we entered into an agreement with Fort Schuyler Management Corporation (FSMC) a not-for-profit corporation
owned by the State of New York, for a medical technology research, development, innovation and commercialization alliance. Under
the agreement, FSMC agreed to pay up to $25 million for the construction of our North American headquarters and formulation lab
and equipment in Buffalo, New York. We moved into the North American Headquarters in October 2015 and are sub-leasing the
space from FSMC for a 10-year term, with an option to extend the term for an additional 10 years. For the first three years of the lease,
we are paying rent to FSMC equal to 35% of FSMC’s operating costs for the space and thereafter will pay 100% of FSMC’s operating
costs for the space for the remainder of the term. Under the agreement, we are obligated to spend $100 million in the Buffalo area over
the initial 10-year term of the lease and an additional $100 million during the second 10-year term if we elect to extend the lease. We
also committed to hiring 250 permanent employees in the Buffalo area within the first 5 years of completion of the project. As of
December 31, 2018, we had hired 162 permanent employees in the Buffalo area. In the event we are unable to hire enough employees
in the Buffalo area or meet our other obligations under this agreement, FSMC may terminate the agreement and we may have to
renegotiate our lease or relocate our North American headquarters.

Under the same May 2015 agreement, FSMC also agreed to fund the costs of construction of a new manufacturing facility in

Dunkirk, New York that we intend to use for large scale 503B compounding and other cGMP-compliant drug manufacturing. Under
the current arrangement, we have selected a general contractor for the project, and we will oversee the development of the facility.
Empire State Development (ESD), the parent entity of FSMC, is responsible for the costs of construction and all equipment for the
facility, up to an aggregate of $200 million, plus any additional funds available from the previous $25 million grant, and FSMC, not
us, will own the facility and equipment. We are entitled to lease the facility and all equipment at a rate of $1.00 per year for an initial
10-year term and for the same rate if we elect to extend the lease for an additional 10-year term. We are responsible for all operating
costs and expenses for the facility. In exchange, we have committed to spending $1.52 billion on operational expenses in our first 10-
year term in the facility, and an additional $1.5 billion on operational expenses if we elect to extend the lease for a second 10-year
term. We also committed to hiring 450 employees at our Dunkirk facility within the first 5 years of operations, including hiring at least
300 new employees within 2.5 years of the Dunkirk facility becoming operational. In September 2017, we entered into a grant
disbursement agreement with ESD, whereby the State of New York will grant up to $200 million, plus any additional funds available
from the previous $25 million ESD grant, to us in order to fund the construction of the Dunkirk facility. The funds will be deposited in
four installments of up to $50 million each into an ESD held account, and the first $50 million installment was deposited in the third
quarter of 2017. Actual disbursement of such funds to the Company occurs as the Company submits appropriate documentation
verifying that expenditures on the project have been incurred. In addition, in July 2017, we entered into a 20-year payment in-lieu of
tax agreement for the construction of the Dunkirk facility with the County of Chautauqua Industrial Development Agency (CCIDA),
under which we anticipate incurring sales tax exemption savings of approximately $9.1 million during the development of the facility
and property tax savings of approximately $78 million over 20 years.

In November 2017, we entered into a project agreement with the CCIDA which sets forth the obligations of the parties in
relation to the CCIDA’s grant to us of certain sales and use tax exemptions and real property tax exemptions in consideration for our
agreement to complete the Dunkirk facility. The project agreement estimates the cost of the Dunkirk project at greater than $208.0
million, which exceeds the $200 million grant committed to by the State of New York, and we will be responsible for the difference.
We are obligated to invest no less than $187.2 million in the facility prior to the completion of the project, which sum includes funds
committed by the State of New York. The agreement includes commitments to comply with state and local laws in connection with
the project. In December 2017, we entered into an agreement with M+W, U.S., Inc. (now renamed Exyte U.S., Inc.), whereby M+W
will be responsible for the design and construction of the Dunkirk facility at a cost estimated between $205 million and $210 million,
of which up to $200 million will be paid by a grant from the State of New York, with the remaining amount being paid by us.
Payments under the December 2017 agreement will be made to M+W over time based upon completion of certain milestones under
the agreement, and ESD must approve any payment from the grant funds.

33

Under the same September 2017 agreement with ESD, we must complete the construction of the facility in Dunkirk, New York

in accordance with the final plans and specifications approved in writing by ESD and must maintain our business operations at the
facility for a minimum of ten years aftff er its completion. In 2018, we began constructing the 320,000 sq. ft. facility and began ordering
equipment for our 503B compounding operations at the site. The September 2017 agreement may be subject to termination if ESD and
FSMC perform their obligations under the agreement, and we do not attain and or maintain certain levels of employment or spending
for specified periods of time. In such event and in accordance with the May 2015 agreement, any potential liability of us would be
capped at the amount of actual ESD spending on the facility in Dunkirk, New York times the percentage of required spending by us
which we have not yet incurred.

China Partnership

In October 2015, we entered into an agreement with Chongqing Maliu Riverside Development & Investment Co., Ltd. (CQ),
which is wholly owned by the Finance Bureau of Banan district of Chongqing, and is authorized to be responsible for investments,
financing, infrastructure construction, operations and management in the Chongqing Maliu Riverside Development Zone. Our
agreement with CQ provides for the construction of both a formulation plant and an API plant in China. After entering into the
agreement, and pursuant to its terms, we established a China-based subsidiary that is responsible for the operations of both facilities in
July 2016. CQ is now responsible for construction of both facilities according to U.S. GMP standards. We expect to begin utilizing the
facility in 2019. The land and buildings will be owned by CQ, and we will lease the facilities, rent-free, for the first 10-year term, with
an option to extend the lease for an additional 10-year term, during which, if we are profitable, we will pay a monthly rent of 5 RMB
per square meter of space occupied. We are responsible for the costs of all equipment for the facilities, and we have committed to
occupying and beginning to use the facilities within six months of the completion of construction. We have also committed to
achieving certain operational, revenue and tax generation milestones within certain time periods once we commence operations. If we
are unable to achieve these milestones, CQ will have the opportunity to terminate the agreement and dispose of the plants in its
discretion.

Our goal is to use our public-private partnerships as a capital efficient method for large scale cGMP manufacturing within our

supply chain and to facilitate market access in China. We believe our current facilities will be adequate and suitable for our operations
for the foreseeable future.

To date, we have utilized a combination of acquisitions and public-private partnerships to internalize certain key components of

our manufacturing and supply chain. We expect to continue to use a combination of collaborations and acquisitions to continue to
build out elements of our supply chain where needed as a mechanism to minimize execution risk and retain value for our shareholders.

License and Collaboration Agreements

In-Licenses

Arginase License Agreement

In June 2018, we entered into a license agreement with Avalon Polytom (HK) Limited (Polytom), an entity affiliated with

Avalon Global Holdings Limited and a related party of the Company, which we refer to as the Arginase License, pursuant to which
Polytom granted us an exclusive, sublicensable right and license to develop and commercialize products containing pegylated and
cobalt-replaced arginase for the treatment of cancer in humans, apart from ophthalmic uses and use as eye drops, worldwide. Dr.
Johnson Lau, our chief executive officer and chairman, and Dr. Manson Fok, one of our directors, collectively have a controlling
interest in, and serve on the board of directors of, Avalon Global Holdings Limited. Mr. Song-Yi Zhang, one of our directors, also has
a controlling interest in Avalon Global Holdings Limited.

We made an upfront payment of cash of $3.0 million and common stock of $2.0 million to Polytom upon effectiveness of the

Arginase License, and we were required to make payments to Polytom worth up to $45.0 million of our common stock or of cash
upon the occurrence of certain regulatory and sales milestones. We have also agreed to pay royalty payments ranging from 10% to
12% based on net sales of any products utilizing the intellectual property that is the subject of the Arginase License. Such royalties
will be reduced by 40% when competing generic products have 25% of the market share in the applicable country and will be
eliminated entirely when competing generic products have 50% of the market share in the applicable country.

The terms of the Arginase License shall extend for a period which may expire on a country-by-country basis upon the earliest to
occur of either (i) the expiration of the last of the patent rights licensed under the agreement, or (ii) invalidation of substantially all of
the patent rights licensed under the agreement. Notwithstanding the foregoing, after the occurrence of immediately preceding clauses
(i) or (ii) , the terms of the Arginase License shall automatically be extended for consecutive one year periods subject to the same
terms and conditions set forth in the agreement unless either Polytom or we give written notice of its intention not to extend the

34

agreement terms: (i) at least ninety days prior to the expiration of the patent rights licensed under the agreement; or (ii) as soon as
practically possible in the case of an invalidation claim and at least ninety days prior to the then current expiration date of the
agreement. Prior to the expiration of the term of the agreement, both parties may terminate the agreement in whole or in part upon
mutual written agreement. Subject to certain conditions, we may also terminate in whole or in part the agreement in our sole discretion
upon not less than six months prior written notice of termination at any time. The agreement also contains customary termination
rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

HepaPOC License and Supply Agreement

In June 2018, we entered into a license and supply agreement with Avalon HepaPOC Limited (HepaPOC), an entity affiliated
with Avalon Global Holdings Limited and a related party of the Company, which we refer to as the HepaPOC License, pursuant to
which HepaPOC agreed to exclusively sell to us the meter and consumable strips that can be used to detect galactose concentrations in
human blood and granted us an exclusive, sublicensable right and license to use and commercialize the meter and strips for conduct of
liver function tests in humans taking our oncology drugs. Dr. Johnson Lau, our chief executive officer and chairman, and Dr. Manson
Fok and Mr. Song-Yi Zhang, two of our directors, collectively have a controlling interest in, and/or serve on the board of directors of,
Avalon Global Holdings Limited.

We made an upfront payment of cash of $0.5 million to HepaPOC upon effectiveness of the HepaPOC License Agreement, and

we were required to make payments to HepaPOC worth up to $4.8 million in our common stock or in cash upon the occurrence of
certain regulatory and sales milestones. In addition, we have agreed to pay royalty payments of 5% based on aggregate net sales of any
products utilizing the intellectual property that is the subject of the HepaPOC License.

The terms of the HepaPOC License shall extend until the date on which the last of the patent rights licensed under the agreement

expires or is invalidated. Notwithstanding the foregoing, the terms of the HepaPOC license shall automatically be extended for
consecutive one year periods subject to the same terms and conditions set forth herein (unless agreed otherwise) unless either party
gives written notice of its intention not to extend the agreement term: (i) at least ninety days prior to the expiration date of the patent
rights licensed under the agreement or (ii) as soon as practically possible in the case of an invalidation claim or (iii) at least ninety
days prior to the then current expiration date of the agreement thereafter. Notwithstanding the foregoing, after the occurrence of (i) or
(ii) above, the terms of the HepaPOC License shall automatically be extended for consecutive one year periods subject to the same
terms and conditions set forth in the agreement unless either HepaPOC or we give written notice of its intention not to extend the
agreement terms: (i) at least ninety days prior to the expiration of the patent rights licensed under the agreement or (ii) as soon as
practically possible in the case of an invalidation claim and (iii) at least ninety days prior to the then current expiration date of the
agreement. Prior to the expiration of the term of the agreement, both parties may terminate the agreement in whole or in part upon
mutual written agreement. We may also terminate in whole or in part the agreement in our sole discretion upon not less than six
months prior written notice of termination at any time. The agreement also contains customary termination rights for either party, such
as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

TCR-T License Agreement

In June 2018, we entered into a Share Subscription Agreement with Xiangxue Life Sciences Ltd, or XLifeSc, a wholly-owned

subsidiary of Guangzhou Xiangxue Pharmaceutical Co., Ltd. to establish, operate and manage a limited liability company named Axis
Therapeutics Limited (Axis) to offer certain goods and services worldwide except in China. Axis is owned 45% by XLifeSc and 55%
by us.

In June 2018, Axis entered into a license agreement with XLifeSc, which we refer to as the TCR-T License, pursuant to which
XLifeSc granted Axis an exclusive, sublicensable right and license to use XLifeSc’s proprietary T-cell Receptor Engineered T-Cells
(TCR-T) to develop and commercialize therapeutic products for oncology indications worldwide except in China. Axis is responsible
for all development, manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting
from the agreement.

In September 2018, we completed the closing process under the Share Subscription Agreement which included an exchange of a

45% ownership interest in Axis to XLifeSc for a license of in-process research and development (IPR&D). Upon effectiveness of the
TCR-T License and satisfaction of certain conditions in the license agreement, Axis made an upfront payment of the Company’s
common stock of $5.0 million to XLifeSc, and Axis was required to make payments to XLifeSc worth up to $110.0 million in
aggregate upon the occurrence of certain regulatory and sales milestones to be achieved in the U.S., the EU, China and Japan. In
addition, XLifeSc has agreed to pay royalty payments of 10% to Axis based on aggregate net sales of any products using the licensed
intellectual property in China.

35

The term of the TCR-T License will remain in effect until the expiration of the patent rights licensed under the agreement. The
agreement will terminate automatically if the shareholders agreement between XLifeSc and us is terminated. The TCR-T License also
contains customary termination rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy
proceedings by the other party.

Hanmi Licensing Agreements

In December 2011 and June 2013, we entered into two separate in-licensing agreements with Hanmi pursuant to which Hanmi
granted us licenses to certain patents and know-how with respect to Hanmi’s Orascovery Program to research, discover and develop
compounds that enhance or increase the oral absorption of active pharmaceutical ingredients.

The December 2011 agreement, which we refer to as the 2011 Hanmi Agreement, granted us an exclusive, sublicensable license

for development and commercialization activities utilizing Hanmi’s patents and know-how related to the Orascovery Program in a
certain territory including North America, South America, the EU, Australia, New Zealand, Russia, Eastern Europe, Taiwan and Hong
Kong, and a non-exclusive license to utilize the same intellectual property in manufacturing worldwide for sales inside those
territories. The June 2013 agreement, which we refer to as the 2013 Hanmi Agreement, granted us an exclusive, sublicensable license
comparable to the 2011 Hanmi Agreement solely for China. The 2011 Hanmi Agreement was amended in November 2012 to add
Macau and Singapore to the territory licensed under the agreement; in October 2013 to add Malaysia, Thailand, Vietnam, the
Philippines and Indonesia; in March 2015 to add India; in March 2017 to add Japan; and again in September 2018 to all territories in
the world apart from the Republic of Korea.

Upon effectiveness of the 2011 Hanmi Agreement we made an upfront payment of $0.25 million to Hanmi, and we will pay

Hanmi tiered royalty payments in the teens based on aggregate net sales of any products using the licensed intellectual property in the
territory. Such royalties will be reduced if competing generic products gain market share in the applicable country. Depending on
when we receive regulatory approval of a product using the intellectual property licensed from Hanmi in the U.S. or Europe, we may
be obligated to pay Hanmi a regulatory bonus of $24.0 million to be paid (i) upon the occurrence of a liquidity event, if the regulatory
approval has already been received, or (ii) upon receipt of the regulatory approval, if such approval is received after a liquidity event.
We were also required to pay Hanmi an exit bonus, in shares of our common stock at a 20% discount to the initial public offering
price, of $6.25 million upon the completion of our initial public offering in June 2017 based on a nominal value of $5.0 million. In
connection with the March 2015 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $50,000 to Hanmi.
Additionally, in connection with the March 2017 amendment to the 2011 Hanmi Agreement, we issued a $7.0 million convertible
bond to Hanmi in lieu of an upfront payment. Hanmi elected to convert the $7.0 million principal amount of the convertible bond into
795,455 shares of our common stock, based on the agreed 20% discount to our initial public offering price, in September 2017. In
connection with the September 2018 amendment to the 2011 Hanmi Agreement, we made an upfront payment of $40,000 to Hanmi.

Upon effectiveness of the 2013 Hanmi Agreement we made an upfront payment of $0.1 million to Hanmi, and we will pay

Hanmi tiered royalty payments in the teens based on net sales of any products using the licensed intellectual property in China. The
royalties shall be reduced if competing generic products gain market share in China. We also granted to Hanmi a one-time right of
first negotiation to purchase all of our rights in Oraxol or Oratecan under the agreement during development and prior that, at Hanmi’s
discretion, requires us to negotiate in good faith the sale of our rights under such agreement to Hanmi at a purchase price determined
by an internationally-recognized investment banking firm with an office in Hong Kong at any time prior to the earlier of (i) our first
commercial sale of products using such technology or (ii) receipt by Hanmi of written notice from our company of the sublicense of
the rights in an applicable product to a third party.

Under each agreement, we are responsible for all clinical studies and development and commercialization activities, and the

related expenses, resulting from the agreements. Each of the 2011 Hanmi Agreement and the 2013 Hanmi Agreement expires on the
earlier of (i) expiration of the last of Hanmi’s patent rights licensed under the agreement or (ii) invalidation of Hanmi’s patent rights
which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year periods unless
either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the agreement or before the
then-current annual expiration date of the agreement. The patent rights licensed to us under the 2011 and 2013 Hanmi Agreements
have expiry dates ranging from in 2023 to 2033, unless the terms of such licensed patents are extended in accordance with applicable
laws and regulations.

Hanmi may also terminate the 2011 Hanmi Agreement if (i) we fail to file an IND with the FDA for Oraxol within six months of
the latest of (x) our receipt from Hanmi of all English translations necessary for the filing of an IND with the FDA, (y) the date we and
Hanmi agree that all studies necessary for the filing of an IND with the FDA have been completed or (z) the date of the final study
report for the last of any additional studies that are necessary for the filing of an IND with the FDA or (ii) we fail to commence
clinical studies for Oraxol within twelve months after the date of approval of an IND by the FDA.

The 2013 Hanmi Agreement may be terminated by Hanmi if (i) we fail to file an IND for Oraxol with the NMPA within six
months after the latest of (w) completion of all Chinese translations necessary for the filing of an IND with the NMPA, (x) completion
of all manufacturing and toxicology studies necessary for the filing of an IND with the NMPA (y) the date we and Hanmi agree that

36

all studies necessary for the filing of an IND with the NMPA have been completed or (z) the date of the final study report for the last
of any additional studies that are necessary for the filing of an IND with the NMPA or (ii) we fail to commence clinical studies for
Oraxol within twelve months after the date of approval of an IND by the NMPA.

Such clinical development milestones in respect of the termination right in both the 2011 Hanmi Agreement, and the 2013

Hanmi Agreement may be extended for twelve months if we reasonably request.

Prior to the expiration of the term of each agreement, we may terminate the agreement in our sole discretion, by providing six

months’ notice to Hanmi. Subject to certain conditions. The agreements also contain customary termination rights for either party,
such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party or by mutual
agreement.

Out-License

Hanmi Licensing Agreements

In April 2011, we entered into a license agreement with Hanmi, which we refer to as the Hanmi Out-License, pursuant to which

we granted to Hanmi an exclusive, sublicensable license to use certain of our intellectual property for development and
commercialization of products containing KX-01 in certain territory including South Korea, China, Taiwan, Hong Kong, Singapore,
Malaysia, Thailand, the Philippines, Indonesia and Vietnam. We also granted to Hanmi a right of first refusal for any KX-01 related
formulation or pharmaceutical that we develop and intend to grant an exclusive license for in the territory covered by the Hanmi Out-
License. Hanmi was responsible for all development, manufacturing and commercialization, and the related costs and expenses, of any
product candidates resulting from the agreement.

We received an upfront payment of $1.5 million from Hanmi upon effectiveness of the agreement, and we were entitled to

receive an aggregate of $4.0 million in additional development and regulatory milestone payments. We were also eligible to receive
tiered royalty payments in the teens on net sales of each product commercialized by Hanmi utilizing the intellectual property subject to
the Hanmi Out-License.

On August 20, 2018, we entered into a mutual letter of termination with Hanmi with respect to the Hanmi Out-License for our
KX-01 oral formulation, which terminated the Hanmi Out-License as of the same date. This termination will allow us to continue to
explore the potential of the KX-01 oral formulation worldwide.

ZenRx License Agreement

In April 2013, we entered into a license agreement with ZenRx, which we refer to as the ZenRx License, pursuant to which we

granted to ZenRx an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize Oratecan
and Oraxol in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound but only for use in
Oratecan and Oraxol. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and
expenses, of any product candidates resulting from the agreement.

We received a $50,000 payment from ZenRx upon effectiveness of the agreement, and we may be entitled to receive up to an

aggregate of $1.4 million in additional development, regulatory and sales milestone payments. We will also be eligible to receive
tiered royalties in the teens on net sales of each product commercialized by ZenRx utilizing the intellectual property that is the subject
of the ZenRx License. Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the
applicable country and will be eliminated entirely when competing generic products have 60% of the market share in the applicable
country.

As an incentive to ZenRx to further development and commercialization of Oratecan and Oraxol in the territory, if ZenRx
obtains certain regulatory approvals in the territory prior to regulatory approval of those products in either the U.S. or South Korea, we
may be required to make payments to ZenRx, at ZenRx’s option, either up to $0.6 million in cash or $0.35 million in cash plus $0.25
million worth of our common stock.

The term of the ZenRx License expires on the earlier of (i) expiration of the last of our patent rights licensed under the

agreement or (ii) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be
extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent
rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the
term of the agreement, ZenRx may terminate the agreement in its sole discretion, by providing three months’ notice to us. Subject to
certain conditions, we may also terminate the agreement if ZenRx fails to comply with certain development timelines set forth in the
ZenRx License. The agreement also contains customary termination rights for either party, such as in the event of a breach of the
agreement or the initiation of bankruptcy proceedings by the other party.

37

PharmaEssentia License Agreements

In December 2011 and December 2013, we entered into two separate out-licensing agreements with PharmaEssentia, pursuant
to which we granted to PharmaEssentia certain licenses to our intellectual property for use in development and commercialization of
certain products in specific territories.

The December 2011 agreement, which we refer to as the 2011 PharmaEssentia Agreement, granted an exclusive, sublicensable

license to use any pharmaceutical preparation containing KX-01 or KX-02 for use in treating psoriasis or other non-malignant skin
conditions in a territory that includes China, Taiwan, Macau, Hong Kong, Singapore and Malaysia. In December 2016, we agreed to
amend the 2011 PharmaEssentia Agreement such that the field under the license agreement does not include AK for any country in the
territory except Taiwan.

We received a $40,000 payment from PharmaEssentia upon effectiveness of the 2011 PharmaEssentia Agreement, and we may
be entitled to an aggregate of up to $1.6 million in additional development and regulatory milestone payments, $0.25 million of which
may be paid in the form of PharmaEssentia stock. PharmaEssentia has discretion to offer
stock, and we have discretion as to whether to accept such payment in the formff
royalties ranging from the high single-digits to teens on net sales of each product commercialized by PharmaEssentia utilizing the
intellectual property that is the subject of the 2011 PharmaEssentia Agreement. Such royalties will be reduced by 40% when
competing generic products have 30% of the market share in the applicable country and will be eliminated entirely when competing
generic products have 60% of the market share in the applicable country.

of its stock. We will also be eligible to receive tiered

to make such payment in the form of its

ff

The December 2013 agreement, which we refer to as the 2013 PharmaEssentia Agreement, granted an exclusive, sublicensable

license for development and commercialization of Oraxol and Oratecan in Taiwan and Singapore. Under the agreement,
PharmaEssentia may also have the right to expand its license to include China, if Hanmi does not exercise its right of first refusal to
such a product candidate under the Hanmi Out-License. In December 2016, we agreed to amend the 2013 PharmaEssentia Agreement
to also include Vietnam in the territories covered by the license, provided that, if PharmaEssentia has not completed a submission for
regulatory approval in Vietnam by 2021, the rights under the license in Vietnam will be returned to us. In November 2018, we agreed
to amend the 2013 PharmaEssentia Agreement to also include a license for development and commercialization of Oradoxel in
ss of the amended agreement.
Singapore, Taiwan and Vietnam. We received $2.0 million from PharmaEssentia upon effectivene

ff

We received a $50,000 payment from PharmaEssentia upon effectiveness of the 2013 PharmaEssentia Agreement and a $0.5
million payment upon the initiation of a 505b2 strategy registration study in the first quarter of 2017, and we may be entitled to an
aggregate of up to $1.5 million in additional development, regulatory and sales milestone payments. We may be obligated to pay
PharmaEssentia an aggregate of $1.0 million in incentives if PharmaEssentia achieves certain milestones within designated
timeframes. We will also be eligible to receive tiered royalties in the mid-teens on net sales of each product commercialized by
PharmaEssentia utilizing the intellectual property that is the subject of the 2013 PharmaEssentia Agreement. Such royalties will be
reduced by 40% when competing generic products have 30% of the market share in the applicable country and will be eliminated
entirely when competing generic products have 60% of the market share in the applicable country. Under the November 2018
amendment to the 2013 PharmaEssentia Agreement, we also received an upfront payment of $2.0 million, and we may be entitled to
an aggregate of up to $9.1 million in additional development and regulatory milestone payments related to Oradoxel.

Under each agreement, PharmaEssentia is responsible for all clinical studies and development and commercialization activities,

and the related expenses, resulting from the agreements. Each of the 2011 PharmaEssentia Agreement and the 2013 PharmaEssentia
Agreement expire on the earlier of (i) expiration of the last of our patent rights licensed under the agreement or (ii) invalidation of our
patent rights which are the subject of the agreement, provided that the term will automatically be extended for consecutive one year
periods unless either party gives notice to the other at least 90 days prior to expiration of the patent rights licensed under the
agreement or before the then current annual expiration date of the agreement.

Prior to the expiration of the term of each agreement, PharmaEssentia may terminate the agreement in its sole discretion, by
providing six months’ notice to us. Subject to certain conditions, we may also terminate the agreement if PharmaEssentia fails to
comply with certain development timelines set out in each of the agreements. The agreements also contain customary termination
rights for either party, such as in the event of a breach of the agreement or the initiation of bankruptcy proceedings by the other party.

Guangzhou Xiangxue License Agreement

In May 2012, we entered into a license agreement with Guangzhou Xiangxue New Drug Discovery and Development Company

Limited, or Xiangxue, which we refer to as the Xiangxue License, pursuant to which we granted to Xiangxue an exclusive,
sublicensable license to use certain of our intellectual property to develop and commercialize products containing KX-02 in all
indications for brain tumors in China, Taiwan, Hong Kong and Singapore. Xiangxue is responsible for all development,
manufacturing and commercialization, and the related costs and expenses, of any product candidates resulting from the agreement.

38

We received a $0.75 million payment from Xiangxue upon effectiveness of the agreement and in 2013 received a further $0.75
million payment upon meeting the first regulatory milestone under the agreement. We may be entitled to receive an aggregate of up to
$4.5 million in additional development and regulatory milestone payments. We will also be eligible to receive royalties in the teens on
net sales of each product commercialized by Xiangxue utilizing the intellectual property that is the subject of the Xiangxue License.
Such royalties will be reduced by 40% when competing generic products have 30% of the market share in the applicable country and
will be eliminated entirely when competing generic products have 60% of the market share in the applicable country.

The term of the Xiangxue License expires on the earlier of (i) expiration of the last of our patent rights licensed under the
agreement or (ii) invalidation of our patent rights which are the subject of the agreement, provided that the term will automatically be
extended for consecutive one year periods unless either party gives notice to the other at least 90 days prior to expiration of the patent
rights licensed under the agreement or before the then current annual expiration date of the agreement. Prior to the expiration of the
term of the agreement, Xiangxue may terminate the agreement in its sole discretion, by providing six months’ notice to us. Subject to
certain conditions, we may also terminate the agreement if Xiangxue fails to comply with certain development timelines set forth in
the Xiangxue License. The agreement also contains customary termination rights for either party, such as in the event of a breach of
the agreement or the initiation of bankruptcy proceedings by the other party.

Eli Lilly and Company Agreement

In October 2016, we entered into a Clinical Trial Collaboration and Supply Agreement with Eli Lilly and Company, which we

refer to as the Lilly Agreement, under which we and Lilly will conduct a Phase 1b trial of Oraxol in combination with Lilly’s
ramucirumab in patients with gastric, gastro-esophageal and esophageal cancers. Under the terms of the Lilly Agreement we will act
as the sponsor of the study and will hold the IND/CTA relating to the study, while all clinical data generated under the study will be
jointly owned by us and Lilly. Other than Lilly’s obligation to supply ramucirumab to us, we will be responsible for all other costs
associated with the conduct of the study.

The Lilly Agreement will remain in effect until the study contemplated by the agreement has been completed. The agreement
also contains customary termination rights for either party, such as in the event of a breach of the agreement by the other party, or in
the event a regulatory authority takes any action against or raises any objection to the study.

Almirall License Agreement

In December 2017, we entered into a license agreement with Almirall, which we refer to as Almirall License, pursuant to which

we granted to Almirall an exclusive, sublicensable license of certain of our intellectual property for the development and
commercialization of topical products containing KX-01 to treat and prevent skin disorders and diseases in humans (including AK), or
the Field, in a specified territory, which includes the U.S. and substantially all European countries (including Russia and Turkey),
or
the Licensed Territory. We also granted Almirall a right of first negotiation to license from us in the territory covered by the Almirall
license any compound (other than KX-01) that we may develop in the future with the same mechanism of action as KX-01 for topical
treatment of skin disorders and diseases if we decide to collaborate with a third party regarding that newly developed compound.
Under the Almirall License, Almirall also grants us an exclusive, sublicensable license to use certain of its intellectual property related
to the products containing our licensed KX-01 for use in the Field in order to commercialize such products outside of the Licensed
Territory and outside of the Field in the Licensed Territory and to commercialize other products containing KX-01 for indications
outside the Field. If we decide to sublicense that license from Almirall for certain additional products or indications, we will negotiate
with Almirall to allow them to reasonably participate in the commercial benefit of such sublicense.

rr

In March 2018, we received an upfront payment of $30 million from Almirall under this agreement, and we expect to receive

other near-term payments of up to $25 million. We may also be entitled to receive an aggregate of $65 million in additional milestone
payments, as well as sales milestone payments we estimate will likely total $155 million. Almirall will reward Athenex with
additional sales milestones should the sales exceed the currently projected amounts. In addition, we are eligible to receive tiered
royalty payments for a certain period starting at 15% based on annual net sales of the topical products commercialized by Almirall,
utilizing the intellectual property subject to the license agreement, with incremental increases in royalty rates commensurate with
increased sales. Additionally, under certain circumstances starting after one year following regulatory approval of certain licensed
products in the U.S., we would have the option to co-promote such licensed products under pre-negotiated terms and conditions with
Almirall.

The term of the Almirall License began in February 2018 when antitrust approval was obtained and continues for the entire life

of the licensed topical products on a country-by-country basis. Prior to the expiration of the term of the Almirall License, Almirall
may terminate the agreement in its entirety or with regard to a certain territory in its sole discretion by providing six months’ notice to
us. Almirall may also terminate the agreement upon written notice during a 45-day evaluation period if Almirall does not find certain
clinical data we provide to them to be satisfactory, upon which we may license the compound from Almirall in exchange for the
previously agreed-upon royalty payments and a one-time upfront fee, pursuant to the first amendment to the Almirall License and

39

letter agreement we entered into with Almirall in September 2018.We may also be required to reimburse Almirall in the event
Almirall provides notice that certain clinical endpoints under the agreement are not met. In addition, Almirall may terminate the
agreement effective immediately if the licensed topical products cannot be marketed in the territory due to significant safety concerns,
if regulatory approval is finally and irrevocably denied in a territory or if an approved product label is less favorable than the product
label submitted to the regulatory authorities in a way that would materially affect the commercial value of the product.

The agreement also contains customary termination rights forff

both parties, such as in the event of a breach of the agreement or if

the other party defaults in performance of its obligations under the agreement.

CJ License Agreement

In December 2018, through our subsidiary Chongqing Taihao Pharmaceutical Co., Ltd. (CT), we entered into a series of

agreements to license certain intellectual property to Chongqing Jingdong Junzhuo Pharmaceutical Co., Ltd. (CJ) to exclusively
develop and commercialize KX2-391 for the treatment of actinic keratosis and oncology indications in humans in mainland China
(excluding Hong Kong, Macau and Taiwan). Via the series of agreements, CJ obtained the exclusive right to promote, market, sell and
commercialize in mainland China those topical or oral products that contain our proprietary Src/tubulin inhibitor, KX-01, also known
as KX2-391. We have agreed to manufacture the products and to conduct all clinical trials, and CJ was required to use its reasonable
best efforts to commercialize the licensed products in mainland China. Under the agreements, CJ has agreed to pay CT (i) an upfront
payment of $14.5 million, (ii) certain milestone payments totaling $15 million and (iii) royalty payments based on the amount of sales
of the product. These agreements have been terminated by mututal consent of both parties as of March 6, 2019, and we will retain the
exclusive right to promote, market, sell and commercialize in mainland China those topical or oral products that contain KX2-391. We
are not subject to any termination penalties related to the termination of the license and sublicense agreements.

ff

Competition

The biopharmaceutical industry and the oncology subsector are characterized by rapid evolution of technologies, fierce
competition and strong defense of intellectual property. Any product candidates that we successfully develop and commercialize will
have to compete with existing therapies and new therapies that may become available in the future. While we believe that our product
candidates, platforms and scientific expertise in the field of biotechnology and oncology provide us with competitive advantages, a
wide variety of institutions, including large biopharmaceutical companies, specialty biotechnology companies, academic research
departments and public and private research institutions, are actively developing potentially competitive products and technologies.
We face substantial competition from biotechnology and biopharmaceutical companies developing oncology products. These
competitors generally fall within the following categories:

Oral administration: Taxol, Abraxane, Cynviloq, Camptosar, Onivyde, Taxotere and Hycamtin;

Src Kinase inhibitors: Picato and Temodar.

Many of our competitors, either alone or with strategic partners, have substantially greater financial, technical and human

resources than we do. Accordingly, our competitors may be more successful than us in obtaining approval for treatments and
achieving widespread market acceptance, rendering our treatments obsolete or non-competitive. Accelerated merger and acquisition
activity in the biotechnology and biopharmaceutical industries may result in even more resources being concentrated among a smaller
number of our competitors. These companies also compete with us in recruiting and retaining qualified scientific and management
personnel, establishing clinical study sites and patient registration for clinical studies, acquiring technologies complementary to, or
necessary for, our programs and for sales in the API business. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity could
be substantially limited in the event that our competitors develop and commercialize products that are more effective, safer, less toxic,
more convenient or less expensive than our comparable products. In geographies that are critical to our commercial success,
competitors may also obtain regulatory approvals before us, resulting in our competitors building a strong market position in advance
of our products’ entry. We believe the factors determining the success of our programs will be the efficacy, safety and convenience of
our product candidates and our access to supply of API.

Intellectual Property

We strive to protect and enhance the proprietary technologies, inventions, products and product candidates, methods of

manufacture, methods of using our products and product candidates, and improvements thereof that are commercially important to our
business. We protect our proprietary intellectual property position by, among others, filing patent applications in the U.S. and in
jurisdictions outside of the U.S. covering our proprietary technologies, inventions, products and product candidates, methods, and
improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how,
continuing innovation, and licensing opportunities to develop, strengthen and maintain our proprietary intellectual property position.

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As of December 31, 2018, we owned more than 150 granted patents and more than 40 pending patent applications worldwide. In
addition, we have in-licensed patents and patent applications relating to our Orascovery platform technology from Hanmi. In our
Orascovery platform, the lead compound is covered as composition-of-matter in granted patents in the U.S. and other territories, such
as China and Europe. These patents will expire in October 2023 or 2024, excluding any potential patent term adjustments and/or
patent term extensions that may be available. The lead compounds in our Src Kinase Inhibition platform are covered as composition-
of-matter in granted patents in the US and other territories, including China and Europe. These patents will begin to expire in
December 2025, excluding any potential patent term adjustments and/or patent term extensions that may be available.

The term of individual patents depends upon the laws of the countries in which they are obtained. In most countries in which we
file, the patent term is 20 years from the earliest date of filing of a non-provisional patent application. In the U.S., the term of a patent
may be lengthened by patent term adjustment to compensate the patentee for administrative delays by the United States Patent and
Trade Office (USPTO) in examining and granting the patent or may be shortened if the patent is terminally disclaimed over an earlier-
filed patent. In addition, a patent term may be extended to restore a portion of the term effectively lost as a result of FDA regulatory
review. However, the restoration period cannot be longer than five years and cannot extend the remaining term of a patent beyond a
total of fourteen years from the date of FDA approval, and only one patent applicable to an approved drug may be extended. Similar
extensions as compensation for regulatory delays are available in Europe and other jurisdictions. We intend to seek patent term
extensions where these are available. However, there is no guarantee that the applicable authorities, including the FDA in the U.S.,
will agree with our assessment of whether such extensions should be granted, and we cannot predict the length of the extensions even
if they are granted. The actual protection afforded by a patent varies on a claim-by-claim basis, from country-to-country, and depends
upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the
availability of legal remedies in a particular country and the validity and enforceability of the patent. For a granted patent to remain in
force most countries require the payment of annuities or maintenance fees, either yearly or at certain intervals during the term of a
patent. If an annuity or maintenance fee is not paid, the patent may lapse irrevocably.

Granted patents and pending patent applications related to the SRC Kinase Platform cover such aspects as composition-of-
matter claims to our lead product candidates and their analogs, claims to pharmaceutical compositions comprising such candidates and
claims to methods of making and method of treatment using such candidates. Not accounting for any patent term adjustment, patent
term extension or terminal disclaimer, and, assuming that all annuity and/or maintenance fees are paid, the patents and, if granted,
patent applications, will expire from 2025 to 2038.

Government Regulation and Product Approval

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

things, the research, development, testing, manufacture, approval, quality control, labeling, packaging, promotion, storage,
advertising, distribution, post-approval monitoring, marketing and export and import of products such as those we are developing. Our
therapeutic drug candidates and compounded products are regulated by the FDA through either Section 503B of the FDCA or the
NDA process in order for them to be legally marketed in the U.S. and will be subject to similar requirements in other countries prior
to marketing in those countries. The process of obtaining regulatory approvals and compliance with applicable federal, state, local and
foreign statutes and regulations require the expenditure of substantial time and financial resources.

U.S. Government Regulation

In the U.S., the FDA regulates drugs under the FDCA and its implementing regulations. Failure to comply with the applicable

U.S. requirements at any time during the product development or approval process, or after approval, may subject an applicant to
administrative or judicial sanctions, any of which could have a material adverse effff ect

on us. These sanctions could include:

ff

•

•

•

•

•

•

•

refusal to approve pending applications;

withdrawal of an approval;

imposition of a clinical hold;

warning or untitled letters;

seizures or administrative detention of product;

total or partial suspension of production or distribution or

injunctions, fines, restitution, disgorgement, refusal of government contracts, or civil or criminal penalties.

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NDA approval processes

The process required by the FDA before a therapeutic drug product may be marketed in the U.S. generally involves the

following:

•

•

•

•

•

•

•

completion of extensive nonclinical laboratory tests, animal studies and formulation studies conducted according to GLPs,
and other applicable regulations;

submission to the FDA of an IND, which must be authorized before human clinical trials may begin;

performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCPs, to
establish the safety and efficacy of the product candidate for its intended use;

submission to the FDA of an NDA;

satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the product
candidate is produced to assess readiness for commercial manufacturing and conformance to the manufacturing-related
elements of the application, to conduct a data integrity audit, and to assess compliance with cGMPs to assure that the
facilities, methods and controls are adequate to preserve the product candidate’s identity, strength, quality and purity;

potential FDA audit of the clinical trial sites that generated the data in support of the NDA and

FDA review and approval of the NDA.

Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical

tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. Such studies must
generally be conducted in accordance with the FDA’s GLPs. An IND sponsor must submit the results of the nonclinical tests, together
with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue even after
the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a protocol detailing,
among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to
be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective thirty days after
receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the
life of an IND and may affect one or more specific studies or all studies conducted under the IND.

ff

The manufacture of investigational drugs for the conduct of human clinical trials is subject to cGMP requirements.

Investigational drugs and API imported into the U.S. are also subject to regulation by the FDA relating to their labeling and
distribution. Further, the export of investigational drug products outside of the U.S. may be subject to regulatory requirements of the
receiving country as well as U.S. export requirements under the FDCA.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCP
requirements, which include, among other things, the requirements that all research subjects provide their informed consent in writing
for their participation in any clinical trial. Investigators must also provide certain information to the clinical trial sponsors to allow the
sponsors to make certain financial disclosures to the FDA. Clinical trials must be conducted under protocols detailing the objectives of
the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated.
Each protocol, and any subsequent material amendment to the protocol, must be submitted to the FDA as part of the IND, and
progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must report to the FDA
serious and unexpected adverse reactions in a timely manner. Reporting requirements also apply to, among other things, any clinically
important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator’s brochure and any
findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product candidate. An
institutional review board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a
clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be
provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise comply with
IRB regulations. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to
public registries within a certain timeframe for public dissemination on the National Institutes of Health clinicaltrials.gov website.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined.

•

Phase 1—The product candidate is initially introduced into healthy human subjects and tested for safety, dosage tolerance,
absorption, metabolism, distribution and elimination. In the case of some therapeutic candidates for severe or life-
threatening diseases, such as cancer, especially when the product candidate may be inherently too toxic to ethically
administer to healthy volunteers, the initial human testing is often conducted in patients.

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•

•

Phase 2—Clinical trials are performed on a limited patient population intended 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.

ff

Phase 3—Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient
population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit
ratio of the product and provide an adequate basis for product labeling.

A pivotal study is a clinical study that adequately meets regulatory agency requirements for the evaluation of a product

candidate’s efficacy and safety such that it can be used to justifyff
the approval of the product. Generally, pivotal studies are also Phase
3 studies but may be Phase 2 studies, with the agreement of FDA, if the trial design provides a reliable assessment of clinical benefit,
particularly in situations where there is an unmet medical need.

In the case of a 505(b)(2) NDA, which is a marketing application in which the sponsor may rely on investigations that were not

conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for
whom the investigations were conducted, some of the above-described studies and nonclinical studies may not be required or may be
abbreviated. The applicant may rely upon the FDA’s prior findings of safety and efficacy for a previously approved product or on
published scientific literature in support of its application. Bridging studies, including clinical studies, may be needed, however, to
demonstrate the applicability of the studies that were previously conducted by other sponsors to the drug that is the subject of the
marketing application.

Human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed or

may not be completed at all. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a
finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or
terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s
requirements or if the product candidate has been associated with unexpected serious harm to patients.

During the development of a new product candidate, sponsors are given opportunities to meet with the FDA at certain points;

specifically, prior to the submission of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be
requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the
FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their
Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the
new therapeutic. If a Phase 3 clinical trial is the subject of discussion at the end of Phase 2 meeting with the FDA, a sponsor may be
able to request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase 3
clinical trial protocol design and analysis that will form the primary basis of an efficacy claim. The agreement will be binding on the
FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and
the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the product
candidate was identified after the testing began.

Post-approval trials, sometimes referred to as “Phase 4” clinical trials, may be required after initial marketing approval. These

trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication.

Concurrent with clinical trials, sponsors usually complete additional animal safety studies, develop additional information about

the chemistry and physical characteristics of the product candidate and finalize a process for manufacturing commercial quantities of
the product candidate in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing
quality batches of the product candidate and the manufacturer must develop methods for testing the quality, purity and potency of the
product candidate. Additionally, for NDA products, appropriate packaging must be selected and tested and stability studies must be
conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process,
analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an
NDA requesting approval to market the product. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must
be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual
product fee for products and an annual establishment fee on facilities used to manufacture prescription drug products. Fee waivers or
reductions are available in certain circumstances, such as where a waiver is necessary to protect the public health, where the fee would
present a significant barrier to innovation or where the applicant is a small business submitting its first human therapeutic application
for review. Product candidates that are designated as orphan drugs are also not subject to user fees unless the application contains an
indication other than an orphan indication.

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Within sixty days following submission of the application, the FDA reviews a NDA submitted to determine if it is substantially

complete beforeff
the agency accepts it for filing. The FDA may refuse to accept any NDA that it deems incomplete or not properly
reviewable at the time of submission and may request additional information. In this event, the NDA must be resubmitted with the
additional information. The resubmitted application also is 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 of the NDA. The FDA reviews an NDA, whether the product is
safe and effective for its intended use, and in each case, whether the product is being manufactured in accordance with cGMP. The
FDA may refer applications for novel products 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 and under what conditions. The FDA is not bound by the recommendations of an advisory committee,
but it considers such recommendations when making decisions.

During the product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or
REMS, plan is necessary to assure the safe use of the product. If the FDA concludes that a REMS plan is needed, the sponsor of the
NDA must submit a proposed REMS plan prior to approval. The FDA has authority to require a REMS plan under the Food and Drug
Administration Amendments Act of 2007 (the “FDAAA”) when necessary to ensure that the benefits of a drug outweigh the risks. In
determining whether a REMS plan is necessary, the FDA must consider the size of the population likely to use the drug, the
seriousness of the disease or condition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of
known or potential adverse events, and whether the drug is a new molecular entity. A REMS plan may be required to include various
elements, such as a medication guide or patient package insert, a communication plan to educate health care providers of the risks,
limitations on who may prescribe or dispense the drug or other measures that the FDA deems necessary to assure the safe use of the
drug. In addition, the REMS plan must include a timetable to assess the strategy at eighteen months, three years and seven years after
the strategy’s approval.

The FDA may also require a REMS plan for a drug that is already on the market if it determines, based on new safety

information, that a REMS plan is necessary to ensure that the product’s benefits outweigh its risks.

Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve
the product unless it determines that the manufacturing processes and facilities are compliant with cGMP requirements and adequate
to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will
typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements
and GCP requirements. To assure cGMP and GCP compliance, an applicant must incur significant expenditure of time, money and
effort in the areas of training, record keeping, production and quality control.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the NDA does not satisfy

its regulatory criteria for approval and deny approval. Data obtained from clinical trials are not always conclusive, and the FDA may
interpret data differently than the applicant. If the agency decides not to approve the NDA in its then present form, the FDA will issue
a complete response letter that describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies identified
may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the
complete response letter may include recommended actions that the applicant might take to place the application in a condition for
approval. If a complete response letter is issued, the applicant must either resubmit the NDA, addressing all of the deficiencies
identified in the letter, withdraw the application, or request an opportunity for a hearing.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages or

the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may
require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions
and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or otherwise limit the scope
of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as “Phase 4” clinical trials,
designed to further assess a drug’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved
products that have been commercialized.

Expedited Review and Approval

The FDA has various programs, including Fast Track, priority review, accelerated approval and breakthrough therapy

designation, which are intended to expedite or simplify the process for reviewing therapeutic candidates, or provide for the approval of
a product candidate on the basis of a surrogate endpoint. Even if a product candidate qualifies for one or more of these programs, the
FDA may later decide that the product candidate no longer meets the conditions for qualification or that the time period for FDA
review or approval will be lengthened. Generally, therapeutic candidates that are eligible for these programs are those for serious or
life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over
existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of therapeutic
candidates to treat serious or life-threatening diseases or conditions and fill unmet medical needs. Priority review is designed to give

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therapeutic candidates that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review
within six months as compared to a standard review time of ten months.

Although Fast Track and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and
frequent meetings with a sponsor of a Fast Track designated product candidate and expedite review of the application for a product
candidate designated for priority review. Accelerated approval, which is described in Subpart H of 21 CFR Part 314, provides for an
earlier approval for a new product candidate that is (1) intended to treat a serious or life-threatening disease or condition; (2) generally
provides a meaningful advantage over available therapies and (3) demonstrates an effect
on either 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, or IMM, and is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity,
rarity or prevalence of the condition and the availability or lack of alternative treatments. A surrogate endpoint is a laboratory
measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a
condition of approval, the FDA may require that a sponsor of a product candidate receiving accelerated approval perform post-
marketing studies to verify and describe the predicted effect on irreversible morbidity or mortality or other clinical endpoint, and the
product may be subject to accelerated withdrawal procedures.

ff

In the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law in July 2012, the U.S.

Congress encouraged the FDA to utilize innovative and flexible approaches to the assessment of therapeutic candidates under
accelerated approval. The law required the FDA to issue related guidance and also promulgate confirming regulatory changes. In May
2014, the FDA published a final Guidance for Industry titled “Expedited Programs for Serious Conditions—Drugs and Biologics,”
which provides guidance on FDA programs that are intended to facilitate and expedite development and review of new therapeutic
candidates as well as threshold criteria generally applicable to concluding that a product candidate is a candidate for these expedited
development and review programs.

In addition to the Fast Track, accelerated approval and priority review programs discussed above, the FDA’s “Expedited
Programs” guidance also describes the breakthrough therapy designation. A breakthrough therapy is defined as a drug that is intended,
alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or conditions, and preliminary
clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically
significant endpoints. Drugs designated as breakthrough therapies are eligible for, among other things, the Fast Track designation,
intensive guidance on an efficient drug development program and a commitment from FDA to involve senior managers and
experienced review staffff in a proactive collaborative, cross-disciplinary review.

In December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act included numerous provisions

that may be relevant to our product candidates, including provisions designed to speed development of innovative and breakthrough
therapies. The Cures Act amends the FDCA and the Public Health Service Act, or PHSA, to reauthorize and expand funding for the
National Institutes of Health, or NIH, and to authorize FDA to increase spending on innovation projects. Central to the Cures Act are
provisions that enhance and accelerate FDA’s processes for reviewing and approving new drugs and supplements to approved NDAs.
These include, but are not limited to, provisions that (i) require FDA to establish a program to evaluate the potential use of real world
evidence to help to support the approval of a new indication for an approved drug and to help to support or satisfy post-approval study
requirements, (ii) provide that FDA may rely upon qualified data summaries to support the approval of a supplemental application
with respect to a qualified indication for an already approved drug, (iii) require FDA to issue guidance for purposes of assisting
sponsors in incorporating complex adaptive and other novel trial designs into proposed clinical protocols and applications for new
drugs, (iv) affirm that FDA should continue to expedite the approval of breakthrough therapies and (v) require FDA to establish a
process for the qualification of drug development tools for use in supporting or obtaining FDA approval for investigational use of a
drug. The Cures Act also includes a provision which requires certain manufacturers or distributors of an investigational drug to make
their policies on the availability of certain expanded access programs publicly available. Because the Cures Act was enacted recently
and the FDA may take several years to develop these policies, it is difficult to know whether or how the Cures Act will directly affect
our business.

Abbreviated New Drug Applications for Generic Drugs

NDA applicants are required to list with the FDA each patent with claims covering the applicant’s product or method of using

the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the
Orange Book can, in turn, be cited by potential generic or 505(b)(2) applicants in support of approval of an ANDA, or a 505(b)(2)
application. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage
form as the listed drug and has been shown to be bioequivalent to the listed drug. Other than the requirement for bioequivalence
testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or
effectiveness of their drug product. Drugs approved in this way can often be substituted by pharmacists under prescriptions written for
the original listed drug.

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The ANDA or 505(b)(2) applicant is required to make a certification to the FDA concerning any patents listed for the approved

NDA product in the FDA’s Orange Book. Specifically, the ANDA or 505(b)(2) applicant must certify that: (i) the required patent
information has not been filed; (ii) the listed patent has expired (iii) the listed patent has not expired, but will expire on a particular
date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The
ANDA applicant may also elect to submit a section viii statement certifying that its proposed ANDA labeling does not contain (or
carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the applicant
does not challenge the listed patents, the ANDA or 505(b)(2) application will not be approved until all the listed patents claiming the
referenced product have expired.

A certification that the ANDA or 505(b)(2) product will not infringe the already approved product’s listed patents, or that such

patents are invalid, is called a Paragraph IV certification. If the ANDA or 505(b)(2) applicant has provided a Paragraph IV
certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the
ANDA or 505(b)(2) application has been received by the FDA. The NDA and patent holders may then initiate a patent infringement
lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within forty-fiveff
the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) application until
the earlier of thirty months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to
the ANDA applicant.

days of

The ANDA or 505(b)(2) application will not be approved until any applicable non-patent exclusivity listed in the Orange Book

for the referenced product has expired.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our drug candidates, some of our U.S. patents

may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984,
commonly referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as
compensation for patent term lost during product development and the FDA regulatory review process. However, patent term
restoration cannot extend the remaining term of a patent beyond a total of fourteen years from the product’s approval date. The patent
term restoration period is generally one-half the time between the effective date of an IND and the submission date of an NDA plus
the time between the submission date of an NDA and the approval of that application, except that this review period is reduced by any
time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved product is eligible for the
extension, and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation
with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, if available, we intend
to apply for restorations of patent term for some of our currently owned patents beyond their current expiration dates, depending on
the expected length of the clinical trials and other factors involved in the filing of the relevant NDA; however, there can be no
assurance that any such extension will be granted to us.

Market exclusivity provisions under the FDCA can also delay the submission or the approval of certain applications. The FDCA
provides a five-year period of non-patent marketing exclusivity within the U.S. to the first applicant to gain approval of an NDA for a
new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same
active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA
may not accept for review an ANDA, or a 505(b)(2) NDA, submitted by another company for another version of such drug where the
applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be
submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of
marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than
bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the
application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the
conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs
containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA.
However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical
studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant Orphan Drug Designation to therapeutic candidates intended to treat a rare
disease or condition, which is generally a disease or condition that affects either (1) fewer than 200,000 individuals in the U.S., or
(2) or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and
making available in the U.S. a product candidate for this type of disease or condition will be recovered from sales in the U.S. for that
product candidate. Orphan Drug Designation must be requested before submitting an NDA. We have received Orphan Drug
Designation for KX-02 and Oraxol for the treatment of angiosarcomas. After the FDA grants Orphan Drug Designation, the identity of
the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan Drug Designation does not convey any
advantage in or shorten the duration of the regulatory review and approval process.

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If a product candidate that has Orphan Drug Designation subsequently receives the first FDA approval for the disease for which

it has such designation, the product candidate is entitled to orphan product exclusivity, which means that the FDA may not approve
any other applications to market the same drug for the same indication, except under limited circumstances, for seven years. Orphan
drug exclusivity, however, could also block the approval of one of our therapeutic candidates for seven years if a competitor obtains
approval of the same drug as defined by the FDA or if our product candidate is determined to be contained within the competitor’s
product candidate for the same indication or disease.

rr

Pediatric Exclusivity and Pediatric Use

Under the Best Pharmaceuticals for Children Act (BPCA), certain therapeutic candidates may obtain an additional six months of
exclusivity if the sponsor submits information requested in writing by the FDA, referred to as a Written Request, relating to the use of
the active moiety of the product candidate in children. Although the FDA may issue a Written Request for studies on either approved
or unapproved indications, it may only do so where it determines that information relating to that use of a product candidate in a
pediatric population, or part of the pediatric population, may produce health benefits in that population.

In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric studies for most therapeutic

candidates, for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration. Under
PREA, original NDAs and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or
waiver. The required assessment must assess the safety and effectiveness of the product candidate for the claimed indications in all
relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product
candidate is safe and effective. The sponsor or FDA may request a deferral of pediatric studies for some or all of the pediatric
subpopulations. A deferral may be granted for several reasons, including a finding that the product candidate is ready for approval for
use in adults before pediatric studies are complete or that additional safety or effectiveness data needs to be collected before the
pediatric studies begin. The law requires the FDA to send a PREA Non-Compliance letter to sponsors who have failed to submit their
pediatric assessments required under PREA, have failed to seek or obtain a deferral or deferral extension or have failed to request
approval for a required pediatric formulation. It further requires the FDA to post the PREA Non-Compliance letter and sponsor’s
response.

As part of the FDASIA, the U.S. Congress made a few revisions to the BPCA and PREA, which were slated to expire on

September 30, 2012, and made both laws permanent.

Post-Approval Requirements

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained
or if problems occur after the product candidate reaches the market. Later discovery of previously unknown problems with a product
candidate may result in restrictions on the product candidate or even complete withdrawal of the product candidate from the market.
After approval, some types of changes to the approved product candidate, such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may under some circumstances
require testing and surveillance programs to monitor the effect of approved therapeutic candidates that have been commercialized, and
the FDA under some circumstances has the power to prevent or limit further marketing of a product candidate based on the results of
these post-marketing programs.

Any therapeutic candidates manufactured or distributed pursuant to FDA approvals for prescription drugs are subject to

continuing regulation by the FDA, including, among other things:

•

•

•

•

•

•

reporting and record-keeping requirements;

reporting of adverse experiences with the product candidate;

providing the FDA with updated safety and efficacy information;

product sampling and distribution requirements;

notifying the FDA and gaining its approval of specified manufacturing or labeling changes and

complying with FDA promotion and advertising requirements, which include, among other things, standards for direct-to-
consumer advertising, restrictions on promoting products for uses or in patient populations that are not described in the
product’s approved labeling, limitations on industry-sponsored scientific and educational activities and requirements for
promotional activities involving the internet.

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Therapeutic manufacturers and other entities involved in the manufacture and distribution of approved therapeutic products are

required to register their establishments with the FDA and obtain licenses in certain states and are subject to periodic unannounced
inspections by the FDA and some state agencies for compliance with cGMPs and other laws. The FDA periodically inspects
manufacturing facilities to assess compliance with cGMP, which imposes extensive procedural, substantive and record-keeping
requirements. In addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the
change, may require FDA approval before being implemented. FDA regulations would also require investigation and correction of any
deviations from cGMP and impose reporting and documentation requirements upon us and any third-party manufacturers used.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial

information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of
investigation, study sites and investigators and other aspects of the clinical trial is then made public as part of the registration.
Sponsors are also obligated to disclose the results of their clinical trials after completion. Disclosure of the results of these trials can be
delayed under certain limited circumstances. Competitors may use this publicly available information
to gain knowledge regarding the
progress of development programs. The government recently released a regulation and policy to expand and enhance the requirements
related to registering and reporting the results of which may result in greater enforcement of these requirements in the future.

ff

Regulation of Compounding Pharmacies

Compounding is a practice in which a licensed pharmacist, a licensed physician, or in the case of an outsourcing facility, a
person under the supervision of a licensed pharmacists, combines, mixes, or alters ingredients of a drug to create a medication tailored
to the needs of an individual patient. We are engaged in the compounding of sterile drugs as an outsourcing facility registered with
FDA. The Compounding Quality Act, or CQA, allows an entity that compounds sterile drugs to register as an outsourcing facility.
Once registered (including payment of a fee), an outsourcing facility must meet certain conditions in order to be exempt from the
FDCA’s approval requirements and the requirement to label products with adequate directions for use. Under the CQA, a drug must
be compounded in compliance with cGMP by or under the direct supervision of a licensed pharmacist in a facility registered pursuant
to Section 503B of the FDCA in order to be so exempt. The outsourcing facility must also report specific information about the
products that it compounds, including a list of all of the products it compounded during the previous six months, and information
about the compounded products, such as the source of the active ingredients used to compound pursuant to Section 503B(b)(2). If the
outsourcing facility compounds using bulk drug substances, the bulk drug substances must either appear on a bulk or clinical need list
established by FDA of bulk drug substances for which there is a clinical need, or be used to compound drugs that appear on a list
established by FDA of drugs for which there is a shortage. Although FDA has not yet established a list of bulk drug substances for
which there is a clinical need, FDA has announced an interim policy pursuant to which bulk drug substances for which there is
sufficient supporting information for FDA to evaluate them may be nominated for inclusion on Category 1 list and, provided certain
conditions are met, FDA will apply its enforcement discretion to Category 1 substances pending evaluation of the substances for
inclusion on FDA’s list of bulk drug substances for which there is a clinical need.

In addition, an outsourcing facility must meet other conditions described in the CQA, including reporting adverse events

pursuant to Section 503B(b)(5) of the FDCA, and labeling its compounded products with certain information pursuant to
Section 503B(a)(10). Registered outsourcing facilities are prohibited from selling compounded drugs through a wholesale distributor,
or from compounding drugs that are essentially copies of FDA-approved drugs. Registered outsourcing facilities are subject to FDA
inspection, and FDA conducts inspections on a risk-based frequency under Section 503B(b)(4).

Pharmaceutical Coverage, Reimbursement and Pricing

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory
approval or compound. In the U.S., sales of any products for which we may compound or receive regulatory approval for commercial
sale will depend in part on the availability of coverage and reimbursement from third-party payors. Third-party payors include
government authorities such as Medicare, Medicaid, TRICARE and the Veterans Administration, managed care providers, private
health insurers and other organizations.

The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate
agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching
funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. Effective in 2010, the Affordable Care Act (ACA) made
several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising
the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price, or AMP, to 23.1%
of AMP, and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of

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solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition
of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical
manufacturers to pay rebates on Medicaid managed care utilization as of 2010 and by expanding the population potentially eligible for
Medicaid drug benefits. Centers for Medicare and Medicaid Services (CMS) will expand Medicaid rebate liability to the territories of
the United States as well, beginning in 2017, if the territories elect to enroll in the Medicaid Drug Rebate Program. In addition, the
ACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The
implementation of this requirement by CMS may also provide for the public availability of pharmacy acquisition cost data, which
could influence our decisions related to setting product prices and offering related discounts.

In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to

be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B
drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts
reported by the manufacturer. Effective in 2010, the ACA expanded the types of entities eligible to receive discounted 340B pricing;
although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible
to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is
determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described
above could cause the required 340B discount to increase.

The process for determining whether a payor will provide coverage for a product is typically separate from the process for
setting the reimbursement rate that the payor will pay for the product. Third-party payors may limit coverage to specificff products on
an approved list or formulary which might not include all of the FDA-approved products for a particular indication. Also, third-party
payors may refuse to include a particular branded drug on their formularies or otherwise restrict patient access to a branded drug when
a less costly generic equivalent or other alternative is available. However, under Medicare Part D—Medicare’s outpatient prescription
drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and all Part D prescription
drug plans are required to cover substantially all anti-cancer agents. However, a payor’s decision to provide coverage for a product
does not imply that an adequate reimbursement rate will be available. Adequate third-party reimbursement may not be available to
enable us to maintain price levels suffff iff cient to realize an appropriate return on our investment in product development.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical

products and services, in addition to their safety and efficacy. In order to obtain 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 any products, in addition to the costs required to obtain regulatory approvals. Our drug candidates
may not be considered medically necessary or cost-effective. If third-party payors do not consider a product to be cost-effective
compared to other available therapies, they may not cover an approved product as a benefit under their plans or, if they do, the level of
payment may not be sufficient to allow a company to sell its products at a profit.

The U.S. government and state legislatures 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. Further, the ACA, contains provisions that may reduce the profitability
of drug products, including, for example, increased rebates for drugs reimbursed by Medicaid programs and the extension of Medicaid
rebates to Medicaid managed care plans. Several other provisions of the ACA focused on cost containment include:

ff

•

•

•

•

The Patient-Centered Outcomes Research Institute, which was established to identify priorities in, and conduct
comparative clinical effectivenes
Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

s research, along with funding for such research. The research conducted by the Patient-

ff

The Independent Payment Advisory Board which, since 2014, has had authority to recommend certain changes to the
Medicare program to reduce expenditures by the program when spending exceeds a certain growth rate and such changes
could result in reduced payments for prescription drugs. Under certain circumstances, these recommendations will become
law unless Congress enacts legislation that will achieve the same or greater Medicare cost savings. However, as of late
2016, the President has yet to nominate anyone to serve on the board.

The Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models to
lower Medicare and Medicaid spending, potentially including prescription drug spending. Funding has been allocated to
support the mission of the Center for Medicare and Medicaid Innovation from 2011 to 2019.

Effective in 2011, the ACA imposed an annual, nondeductible fee on any entity that manufactures or imports certain
branded prescription drugs, apportioned among these entities according to their market share in certain government
healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan
indications.

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•

Effective in 2011, the ACA imposed a requirement on manufacturers of branded drugs to provide a 50% discount off the
negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., the “donut hole” or the
period of consumer payment for prescription medicine costs which lies between the initial coverage limit and the
catastrophic—coverage threshold).

The adoption of government controls and measures and tightening of restrictive policies in jurisdictions with existing controls

and measures, could also limit payments for pharmaceuticals.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government
and third-party payors fail to provide adequate coverage and reimbursement. Coverage policies and third-party reimbursement rates
may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we
receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Generic Drugs

Given that we manufacture and market generic drug products, our business may be impacted by laws and policies governing the
coverage, pricing and reimbursement of generic drugs. Generic drugs are the same API as initial innovator medicines and are typically
more affordable in comparison to the innovator’s products. Sales of generic medicines have benefitted from policies encouraging
generic substitution and a general increasing acceptance of generic drugs on the part of healthcare insurers, consumers, physicians and
pharmacists. However, while the U.S. generics market is one of the largest in the world, the recent trend of rising generic drug prices
has drawn scrutiny from the U.S. government. Specifically, beginning in 2014 generic drug pricing became the subject of
Congressional inquiries and media attention, and many generic drug manufacturers became the targets of government investigations.

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In addition, under amendments to the Medicaid Drug Rebate Statute in 2015, generic drug manufacturers are now required to

pay an inflation penalty if price increases on generic drugs exceed the rate of inflation. Specifically, the Bipartisan Budget Act of 2015
(BBA ‘15) amended section 1927(c)(3) of the Social Security Act to require manufacturers of non-innovator multiple source (N) drugs
to pay additional Medicaid rebates if a drug’s AMP increases at a rate that exceeds the rate of inflation. Manufacturers of generic
drugs must calculate the additional Medicaid rebates for non-innovator drugs beginning with the rebates that are calculated for the first
quarter of 2017.

Also, the ACA revised the methodology for setting Medicaid generic drug reimbursement in order to further limit the
reimbursement of generic drugs under the Medicaid program. Specifically, effective April 1, 2016, the Federal Upper Limit (FUL),
which establishes the government’s maximum payment amount for certain generic drugs, is no less than 175% of the weighted
average of the most recently reported monthly AMPs for pharmaceutically and therapeutically equivalent multiple source drug
products that are available for purchase by retail community pharmacies on a nationwide basis. Similarly, reimbursement for generic
drugs is also limited in Medicare Part B, as the Average Sales Price (the metric upon which reimbursement is based or ASP) for
multiple-source drugs included within the same multiple-source drug billing and payment code is the volume-weighted average of the
various manufacturers’ ASPs for those drug products.

Laboratory Testing Services Coverage and Reimbursement

Given that we market medical devices in the form of in vitro diagnostic devices, or IVDs, used in the performance of clinical

laboratory tests, currently limited to drugs of abuse, pregnancy and alcohol testing in the U.S., and cardiac marker and infectious
disease testing in Asia, our business may be impacted by laws and policies governing the coding, coverage, reimbursement and
demand for clinical laboratory services. With regard to the clinical laboratory services performed on Medicare beneficiaries, health
care providers utilizing such tests generally either are paid under prospective payment systems for most tests performed on hospital
inpatients and outpatients or must bill the Medicare Part B program directly in compliance with applicable coding, coverage and
reimbursement rules and accept the amount paid by the Medicare contractor under the Medicare Clinical Laboratory Fee Schedule
(CLFS) as payment in full. Currently, Medicare does not require the beneficiary to pay a co-payment for clinical laboratory services
paid under the CLFS. Pursuant to Section 216 of-the federal Protecting Access to Medicare Act of 2014 (PAMA), CMS is
modernizing the CLFS by creating a market-based reimbursement system which will require clinical laboratories subject to the law to
report certain private payor prices and test volumes, and CMS will set new payment rates for CLFS tests based on the weighted
median of reported prices, effective January 1, 2018. It is unclear how this new law will affect testing services that use our products at
this time, but, as a general matter, CMS has indicated that prices of many clinical laboratory tests will decrease under PAMA. In
addition, state Medicaid programs are prohibited from paying more (and in many instances, pay significantly less) than Medicare, and
payment is subject to state-specificff
require Medicaid recipients to pay co-payment amounts for clinical laboratory services. Likewise, payment by private payors is
subject to payor-determined coverage and reimbursement policies that vary considerably and are subject to change without notice.
Finally, there is increasing legislative attention to opioid abuse in the United States, including passage of the Comprehensive
Addiction and Recovery Act of 2016 which, among other things, strengthens state prescription drug monitoring programs and expands
educational efforts for certain populations, which may increase the need for drugs of abuse testing. Changes like these related to
clinical laboratory services and any other changes related to coverage or reimbursement may impact the demand for and pricing of
some of our products which could adversely affect our ability to operate our business and our financial results.

coverage, reimbursement and laboratory law requirements. Certain state Medicaid programs also

Reimbursement for Compounded Drugs

Given that we intend to compound and sell compounded products, some of which may include APIs that we manufacture, our

business may be impacted by the downstream coverage and reimbursement of compounded products. Generally, federal
reimbursement is available for compounded drugs but is typically dependent upon whether the individual ingredients or bulk drug
substances that make up the compounded product are FDA-approved. Certain of our API products have not yet received FDA
approval.

There is a national payment policy for compounded drugs under Medicare Part B, but the policy is unclear because it does not
stipulate whether payment is available for ingredients that are bulk drug substances, which are generally not FDA-approved. Under
Medicare Part B, claims for compounded drugs are typically submitted using a billing code for “not otherwise classified drugs,” and
CMS contractors who process Part B claims may conduct further reviews of outpatient claims to determine whether the drug billed
under a nonspecific billing code is a compounded drug and to identify its ingredients in order to make payment decisions. However,
CMS contractors who process Part B claims do not always collect information on the FDA-approval status of drug ingredients, and,
therefore, payment may be made for ingredients that are not FDA-approved products. Therefore, there is uncertainty as to whether
Medicare payments for compounded drugs are consistent with the Medicare Part B policy.

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Under Medicare Part D, federal payments are not available for non-FDA-approved products—including bulk drug substances—

and inactive ingredients used to make a compounded drug. Insurers that offer Medicare Part D benefits and Part D-only sponsors,
generally, pay pharmacies for each ingredient in the compounded drug that is an FDA-approved product and is otherwise eligible for
reimbursement under Part D. However, with respect to non-FDA approved bulk drug substances, insurers that offer Medicare Part D
benefits and Part D-only sponsors may choose to pay for such bulk substances but may not submit these payments as part of the Part D
transaction data CMS uses to determine federal payments to Part D plans.

Healthcare Fraud and Abuse Laws and Compliance Requirements

We are subject to various federal and state laws targeting fraud and abuse in the healthcare industry. These laws may impact,

among other things, our proposed sales and marketing programs. In addition, we may be subject to patient privacy regulation by both
the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

•

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•

•

•

ff

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting,
receiving, offff ering
example, gifts, discounts, chargebacks, and credits), directly or indirectly, in cash or in kind, to induce or reward, or in
return for, either the referral of an individual for, or the purchase, order or recommendation of, an item or service
reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

or paying remuneration (a term interpreted broadly to include anything of value, including, for

federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, claims for payment to Medicare, Medicaid
or other third-party payors that are false or fraudulent, or making a false statement or record material to payment of a false
claim or avoiding, decreasing or concealing an obligation to pay money owed to the federal government;

provisions of the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new
federal criminal statutes, referred to as the “HIPAA All-Payor Fraud Prohibition,” that prohibit knowingly and willfully
executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

the federal transparency laws, including the federal Physician Payment Sunshine Act, which was part of the ACA, that
require manufacturers of certain drugs and biologics to track and disclose payments and other transfers of value they make
to U.S. physicians and teaching hospitals as well as physician ownership and investment interests in the manufacturer, and
that such information is subsequently made publicly available in a searchable format on a CMS website;

provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its
implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of
individually identifiable health information

and

ff

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to
items or services reimbursed by any third-party payor, including commercial insurers, state transparency reporting and
compliance laws; and state laws governing the privacy and security of health information in certain circumstances, many
of which differ from each other in significant ways and which may not have the same effect, thus complicating
compliance effff orts.

ff

The ACA broadened the reach of the fraud and abuse laws by, among other things, amending the intent requirement of the
federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b. Pursuant
to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in
order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or
services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or frff audulent claim for purposes of the civil
False Claims Act or the civil monetary penalties statute. Many states have adopted laws similar to the federal Anti-Kickback Statute,
some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and
Medicaid programs.

The federal False Claims Act prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for
payment to federal programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent. Although we
would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the
submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or
promoting a product off-label. In addition, our future activities relating to the reporting of wholesaler or estimated retail prices for our
products, the reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-
party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this law. For example,
pharmaceutical companies have been prosecuted under the federal False Claims Act in connection with their alleged off-label
promotion of drugs, purportedly concealing price concessions in the pricing information submitted to the government for government

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price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal
health care programs for the product. Penalties for a False Claims Act violation include three times the actual damages sustained by
the government, plus mandatory civil penalties for each separate false claim, the potential for exclusion from participation in federal
healthcare programs, and, although the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation
may also implicate various federal criminal statutes. In addition, private individuals have the ability to bring actions under the federal
False Claims Act, and certain states have enacted laws modeled after the federal False Claims Act.

Medical Devices

Through our subsidiary Polymed, we currently market in vitro diagnostic rapid test kits used in the performance of clinical
laboratory tests (limited to drugs of abuse and pregnancy testing in the U.S.) pursuant to clearance under Section 510(k) of the FDCA
by the FDA. These products and our operations are subject to extensive regulation by the FDA and other federal and state authorities
in the U.S., as well as comparable authorities in foreign jurisdictions. Our test kits are subject to regulation as medical devices in the
U.S. under the FDCA, and related regulations enforced by the FDA. The FDA regulates, among other things, the development,
design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing,
recordkeeping, premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and
distribution of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses
and otherwise meet the requirements of the FDCA.

In addition, the Clinical Laboratory Improvement Amendments of 1988, or CLIA, established quality standards for laboratory
testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Pursuant to
CLIA, the FDA categorizes diagnostic tests into three categories based on their complexity in the testing process and risk of harm in
reporting erroneous results: (1) waived tests, (2) moderate complexity tests and (3) high complexity tests. Laboratories that perform
only waived tests and hold a Certificate of Waiver under CLIA (including most physician office laboratories) are subject to minimal
regulation as compared with laboratories that perform moderate or high complexity tests. To obtain a CLIA waived categorization for
diagnostic tests that are intended for home use or for use by laboratories holding a Certificate of Waiver, we must demonstrate to FDA
that the tests are simple to use with a low risk of error. Foreign countries may require similar or more onerous approvals to
manufacture or market our products or to allow the use of our products in certain settings. Most of our test strips are categorized as
CLIA waived, but some of our test strips are categorized as moderate in complexity.

FDA Premarket Clearance and Approval Requirements

pp

q

Unless an exemption applies, each medical device commercially distributed in the U.S. requires either FDA clearance of a

510(k) premarket notification submission, granting of a de novo classification request, or approval of a premarket approval
application, or PMA. Under the FDCA, medical devices are classified into one of three classes - Class I, Class II or Class III -
depending on the degree of risk associated with each medical device. Class I includes devices with the lowest risk to the patient and
are subject to the FDA’s general controls for medical devices, which include compliance with the applicable portions of the Quality
System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events and truthful and non-
misleading labeling, advertising and promotional materials. Class II devices are subject to the FDA’s general controls, and special
controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include
performance standards, post-market surveillance, patient registries and FDA guidance documents.

Most Class I devices are exempt from the 510(k) requirements. Manufacturers of most Class II devices are required to submit to
the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The
FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k)
clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices,
or devices that have a new intended use or use advanced technology that is not substantially equivalent to that of a legally marketed
device, are placed in Class III, requiring approval of a PMA. Our currently marketed products are Class II devices subject to 510(k)
clearance.

aa

y
510(k) Marketing Clearance and De Novo Pathways

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g

To obtain 510(k) clearance, a premarket notification submission must be submitted to the FDA demonstrating that the proposed

device is “substantially equivalent” to a predicate device. A predicate device is a legally marketed device that is not subject to
premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is
not required, a device that has been reclassified from Class III to Class II or I or a device that was found substantially equivalent
another device cleared through the 510(k) process. The FDA’s 510(k) review process usually takes from three to six months but may
take longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial
equivalence.

53

If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant 510(k) clearance to market the

device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is
automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a
risk-based classification determination for the device in accordance with the “de novo” process, which may determine that the new
device is of low to moderate risk and that it can be appropriately be regulated as a Class I or II device. If a de novo request is granted,
the device may be legally marketed and a new classification is established. If the device is classified as Class II, the device may serve
as a predicate for future 510(k) submissions.

y
PMA Approval Pathway

pp

Class III devices require PMA approval before they can be marketed. The PMA process is more demanding than the 510(k)

process. In a PMA the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by
extensive data, including data from preclinical studies and human clinical trials. The FDA will approve the new device for commercial
distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable
assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions
intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale
and distribution and collection of long-term follow-up data from patients in the clinical trial that supported PMA approval or
requirements to conduct additional clinical trials post-approval. Failure to comply with the conditions of approval can result in
material adverse enforcement action, including withdrawal of the approval.

Our products are not currently subject to PMA requirements. However, we may in the future develop devices that will require
the submission of a PMA, or FDA may find that some of our proposed uses are not substantially equivalent to previously cleared and
marketed devices, and thus a PMA is required.

Clinical Trials

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All

clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s
investigational device exemption (IDE) regulations which govern investigational device labeling, prohibit promotion of the
investigational device and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study
investigators. If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor
to submit an IDE application to the FDA, which must be approved prior to commencing human clinical trials. A significant risk device
is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or
sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment
of human health or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate
data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is
scientifically sound. The IDE will automatically become effective
thirty days after
the investigation may not begin. If the FDA determines that there are deficiencies
modification, the FDA may permit a clinical trial to proceed under a conditional approval.

receipt by the FDA unless the FDA notifiesff
us that
or other concerns with an IDE for which it requires

ff

ff

ff

During a clinical trial, the sponsor is required to comply with applicable FDA requirements, and the clinical investigators are

also subject to FDA’s regulations. Both must comply with GCPs, which among other things require that informed consent be obtained
from each research subject, that the investigational plan and study protocol be followed, that the disposition of the investigational
device be controlled and that reporting and recordkeeping requirements are followed. Additionally, after a trial begins, we, the FDA or
the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects
outweigh the anticipated benefits. Even if a clinical trial is completed, there can be no assurance that the data generated during a
clinical trial will meet the safety and effectiveness endpoints or otherwise produce results that will lead the FDA to grant marketing
clearance or approval.

Post-Market Regulation

g

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These

include:

•

•

•

establishment registration and device listing with the FDA;

QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing,
control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

labeling regulations and requirements related to promotional activities, including FDA prohibitions against the promotion
of investigational products, or ”off-label” uses of cleared or approved products;

54

•

•

•

•

•

clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or
effectiveness or that would constitute a major change in intended use of one of our cleared devices;

medical device reporting requirements, which require that a manufacturer report to the FDA if a device it markets may
have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it
markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;

correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections
and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the
FDCA that may present a risk to health;

the FDA’s mandatory recall authority, whereby the agency can order device manufacturers to recall from the market a
product that is in violation of governing laws and regulations and

post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the
public health or to provide additional safety and effectiveness data for the device.

Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the

ff

facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging,
distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things,
maintenance of a device master file,
are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR
requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our product.
The discovery of previously unknown problems with our product, including unanticipated adverse events or adverse events of
increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a
physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market
or voluntary or mandatory device recalls.

device history file and complaint files. As a manufacturer, we and our third-party manufacturers

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, marketing, coverage and reimbursement of products regulated by the FDA
or other government agencies. In addition to new legislation, FDA and healthcare fraud and abuse and coverage and reimbursement
regulations and policies are often revised or interpreted by the agency in ways that may significantly affect our business and our
products. In particular, we expect that the current presidential administration and U.S. Congress will continue to seek to modify, repeal
or otherwise invalidate all, or certain provisions of, the ACA. Most recently, the Tax Cuts and Jobs Act was enacted, which, among
other things, removes penalties for not complying with the individual mandate to carry health insurance. There is still uncertainty with
respect to the impact President Trump’s administration and the U.S. Congress may have, if any, and any changes will likely take time
to unfold. Such reforms could have an adverse effect
develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop
therapeutic candidates. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the
impact of potential legislation on us.

on anticipated revenues from therapeutic candidates that we may successfully

ff

Furthermore, in the U.S., the health care industry is subject to political, economic and regulatory influences. Initiatives to reduce

health care coverage are increasing cost-containment efforts. We anticipate that federal

the federal budget and debt and to reformff
agencies, Congress, state legislatures and the private sector will continue to review and assess alternative health care benefits, controls
on health care spending, and other fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit
coverage or the amounts that federal and state governments will pay for health care products and services, which could also result in
reduced demand for our products or additional pricing pressures and limit or eliminate our spending on development projects and
affect our ultimate profitability. We are not able to predict whether further legislative changes will be enacted or whether FDA or
healthcare fraud and abuse or coverage and reimbursement regulations, guidance, policies or interpretations will be changed or what
the effect of such changes, if any, may be.

Foreign Corrupt Practices Act

The FCPA prohibits any U.S. individual or business from corruptly offering, paying, promising or authorizing the provision of

anything of value, directly or indirectly, to any foreign official, foreign political party or official thereof, or candidate for foreign
political office to obtain or retain business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with
accounting provisions requiring the issuer to maintain books and records that accurately and fairly reflect all transactions of the issuer
and its controlled subsidiaries and to devise and maintain an adequate system of internal accounting controls.

55

Environment

We are subject to inspections by the FDA for compliance with cGMP and other U.S. regulatory requirements, including U.S.

federal, state and local regulations regarding environmental protection and hazardous and controlled substance controls, among others.
Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We have
incurred, and may continue to incur, significant expenditures to ensure that we are in compliance with these laws and regulations. We
would be subject to significant penalties for failure to comply with these laws and regulations.

China Government Regulation

In China, we operate in an increasingly complex legal and regulatory environment. We are subject to a variety of Chinese laws,

rules and regulations affecting many aspects of our business. This section summarizes the principal Chinese laws, rules and
regulations relevant to our business and operations.

Foreign Investment in Pharmaceutical Industry

The Foreign Investment Industrial Guidance Catalogue (2017 Version), or the Foreign Investment Catalogue jointly

ff

categories: encouraged, permitted, restricted or prohibited. In September 2016, the National

promulgated by the National Development and Reform Commission, or NDRC, and the Ministry of Commerce, or MOFCOM, in June
2017 and effective in July 2017 and replaced the previous versions. The Foreign Investment Catalogue divides foreign investments in
the pharmaceutical industry into four
People’s Congress Standing Committee adopted a decision on amending the law of foreign invested companies which became
effective from October 1, 2016. Upon the effectiveness of the decision, the establishment of the foreign invested enterprise and its
subsequent changes will be required to be filed with the relevant authorities instead of obtaining approvals from relevant commerce
authorities, except for the foreign invested enterprises which are subject to the special administrative measures regarding foreign
investment entry. In June 2018, NDRC and MOFCOM jointly issued a revised notice, according to which the industries falling within
the categories in which foreign investment is prohibited or restricted and those falling within the encouraged category subject to
relevant requirements of equity or senior management under the Foreign Investment Catalogue, will be subject to the special
administrative measures for foreign investment entry.

General Regulations on China Drug Administration

The pharmaceuticals industry in China is mainly regulated and administrated by the State Administration for Market Regulation,

the National Health Commission and the Bureau of National Health Care. Pursuant to the Decision of the First Session of the
Thirteenth National People’s Congress on the State Council Institutional Reform Proposal promulgated by the Chinese National
Congress on March 17, 2018, (1) the State Administration for Market Regulation shall be established; and the CFDA shall cease to
exist, while the NMPA was established as a department under the State Administration for Market Regulation.; (2) the National
Health and Family Planning Commission shall cease to exist, while the National Health Commission shall be established as a
department under the State Council, incorporating duties of supervision and management which had been assigned to relevant
departments and (3) the Bureau of National Health Care shall be established as a bureau directly subordinate to the State Council.

The NMPA monitors and supervises the administration of pharmaceutical products, as well as medical devices and equipment.

The NMPA’s primary responsibility includes evaluating, registering and approving new drugs, generic drugs and imported drugs;
approving and issuing permits for the manufacture, export and import of pharmaceutical products and medical appliances; approving
the establishment of enterprises for pharmaceutical manufacture and distribution; formulating administrative rules and policies
concerning the supervision and administration of pharmaceuticals and handling significant accidents involving these products. The
local provincial drug administrative authorities are responsible for supervision and administration of drugs within their respective
administrative regions.

The People’s Republic of China Drug Administration Law promulgated by the Standing Committee of the National People’s

Congress in 1984 and the Implementing Measures of the Chinese Drug Administration Law promulgated by the Ministry of Health, or
the MOH, in 1989 set forth the legal framework for the administration of pharmaceutical products, including the research,
development and manufacturing of drugs.

The Chinese Drug Administration Law was revised in February 2001, December 2013 and again in April 2015, respectively.
The purpose of the revisions was to strengthen the supervision and administration of pharmaceutical products and to ensure the quality
and safety of those products for human use. The revised Chinese Drug Administration Law applies to entities and individuals engaged
in the development, production, trade, application, supervision and administration of pharmaceutical products. It regulates and
prescribes a framework for the administration of pharmaceutical preparations of medical institutions and for the development,
research, manufacturing, distribution, packaging, pricing and advertisement of pharmaceutical products. Revised Implementing
Measures of the Chinese Drug Administration Law promulgated by the State Council took effect in September 2002 and was revised
in February 2016, providing detailed implementing regulations for the revised Chinese Drug Administration Law.

56

The Legislative Affairs Commission of the Standing Committee of the National People’s Congress released the Draft

Amendments of the Drug Administration Law of China (Draft for Comments) , or the DALDA, on November 1, 2018, to seek
comments from the public, and as compared to the current Drug Administration Law, mainly includes the following key highlights:

•

•

•

•

•

The supervision and administration of pharmaceutical products will be improved by emphasizing the responsibility of the
enterprise, strengthening the management of drug production process and clarifying the traceability requirements of drug
quality and safety;

The responsibility for drug supervision will be clarified, and the supervision measures will be improved;

The punishment of illegal behaviors will be aggravated by increasing the fine limit, strengthening the punishment for the
relevant personnel of pharmaceutical production enterprises and supplementing the responsibility of the drug marketing
authorization holder (MAH);

The MAH system will be implemented, which will cause the MAH holder to undertake the responsibility of the safety and
effectiveness of drugs and to bear legal responsibility during the whole process of development, production, management
and use of drugs; and

The drug approval system will be reformed, including the abolishment of the separation of GMP and GSP certification.

As of the latest practicable date, the DALDA has not been approved by the National People’s Congress or its Standing

Committee. There is no specific timeline for the official enactment of the DALDA.

Under these regulations, we need to follow related regulations for preclinical research, clinical trials and production of new

drugs.

Good Laboratories Practice Certification for Preclinical Research

To improve the quality of preclinical research, the NMPA promulgated the Administrative Measures for Good Laboratories

Practice of Preclinical Laboratory in 2003 and began to conduct the certification program of GLP. Under the Certifying Measures for
Clinical Test Units, or NMPA Circular 44, promulgated in February 2004, the NMPA decides whether an institution is qualified for
undertaking pharmaceutical preclinical research upon the evaluation of the institution’s organizational administration, its research
personnel, its equipment and facilities and its operation and management of preclinical pharmaceutical projects. If all requirements are
met, a GLP Certification will be issued by the NMPA, and the result will be published on the NMPA’s website.

Approval for Clinical Trials and Production of New Drugs

According to the Provisions for Drug Registration promulgated by the NMPA in 2007, the Chinese Drug Administration Law,

the Provisions on the Administration of Special Examination and Approval of Registration of New Drugs, or the Special Examination
and Approval Provisions issued by the NMPA in 2009 and the Circular on Information Publish Platform for Pharmaceutical Clinical
Trials issued by the NMPA in 2013, we must comply with the following procedures and obtain several approvals for clinical trials and
production of new drugs.

Clinical Trial Application

pp

Upon completion of its preclinical research, a research institution must apply for approval of a CTA before conducting clinical

trials. According to the Decision of the NMPA on Adjusting the Approval Procedures of the Administrative Approval Items for
Certain Drugs promulgated by the NMPA on March 17, 2017, the decision on the approval of clinical trials of drugs enacted by the
NMPA can be made by the Center for Drug Evaluation of the NMPA, or the CDE in the name of the NMPA from May 1, 2017. In
July 2018, the NMPA promulgated the Announcement of the State Drug Administration on Adjusting Evaluation and Approval
Procedures for Clinical Trials for Drugs, which further adjusted for those who apply for drug clinical trials in China, if an applicant
does not receive any negative or questioning opinions from the CDE within sixty days after the date of accepting the application and
the payment of the fee, drug clinical trials may be conducted in accordance with the plan being submitted.

Four Phases of Clinical Trials

A clinical development program consists of Phases 1, 2, 3 and 4. Phase 1 refers to the initial clinical pharmacology and safety
evaluation studies in humans. Phase 2 refers to the preliminary evaluation of a drug candidate’s therapeutic effectiveness and safety
for particular indication(s) in patients, provides evidence and support for the design of Phase 3 clinical trial and settles the
administrative dose regimen. Phase 3 refers to clinical trials undertaken to confirm the therapeutic effectiveness of a drug. Phase 3 is
used to further verify the drug’s therapeutic effff ectiveness
and safety on patients with target indication(s), to evaluate overall benefit-
risk relationships of the drug and ultimately to provide sufficient evidence for the review of drug registration application. Phase 4
refers to a new drug’s post-marketing study to assess therapeutic effectiveness and adverse reactions when the drug is widely used, to

ff

57

evaluate overall benefit-risk relationships of the drug when used among general population or specific groups and to adjust the
administration dose, etc.

New Drug Application

When Phase 1, 2 and 3 of the clinical trials have been completed, the applicant must apply to the NMPA for approval of a new
drug application. The NMPA then determines whether to approve the application according to the comprehensive evaluation opinion
provided by the CDE of the NMPA. We must obtain approval of a new drug application before our drugs can be manufactured and
sold in the Chinese market.

Good Manufacturing Practice

All facilities and techniques used in the manufacture

ff

of products for clinical use or for sale in China must be operated in

conformity with cGMP guidelines as established by the NMPA. Failure to comply with applicable requirements could result in the
termination of manufacturing and significant fines.

Animal Test Permits

According to Regulations for the Administration of Affairs Concerning Experimental Animals promulgated by the State Science

and Technology Commission in November 1988, as revised in January 2011 and July 2013, and Administrative Measures on the
Certificate for Animal Experimentation promulgated by the State Science and Technology Commission and other regulatory
authorities in January 2001, performing experimentation on animals requires a Certificate for Use of Laboratory Animals. Applicants
must satisfy the following conditions:

•

•

•

•

•

•

Laboratory animals must be qualified and sourced from institutions that have Certificates for Production of Laboratory
Animals;

The environment and facilities for the animals’ living and propagating must meet state requirements;

The animals’ feed and water must meet state requirements;

The animals’ feeding and experimentation must be conducted by professionals, specialized and skilled workers or other
trained personnel;

The management systems must be effective and efficient and

The applicable entity must follow other requirements as stipulated by the Chinese laws and regulations.

We obtained a Certificate for Use of Laboratory Animals in 2012 regarding the scope of rats and mice.

g
Domestic Category 1 New Drugs Are Eligible for Special Examination and Approval

g y

pp

g

p

According to the Provisions for Drug Registration, drug registration applications are divided into three different types, namely
Domestic New Drug Application, Domestic Generic Drug Application and Imported Drug Application. Drugs fall into one of three
categories, namely chemical medicine, biological product or traditional Chinese or natural medicine. The registrations of chemical
medicines are divided into six categories, among which, a Category 1 drug is a new drug that has never been marketed in any country.
All of our clinical-stage drug candidates qualify as domestic Category 1 new drugs.

In March 2016, the NMPA promulgated the Work Plan for Reforming the Chemical Medicines Registration Classification

System, under which, the registrations of chemical medicines are divided into five categories as follows:

Category 1: Innovative drugs that are not marketed both domestically and abroad. These drugs contain new compounds with

clear structures and pharmacological effects, and they have clinical value.

Category 2: Modified new drugs that are not marketed both domestically and abroad. With known active components, the drug’s

structure, phase, prescription manufacturing process, administration route and indication are optimized, and it has obvious clinical
advantage.

Category 3: The drugs that are imitated by domestic applicants to original drugs that have been marketed abroad but not

domestically. These kinds of drugs are supposed to have the same quality and effects with original drugs. Original drugs are the

58

foremost drugs that are approved to be marketed domestically and /or abroad with complete and full safety and validity data as
marketing evidence.

Category 4: The drugs that are imitated by domestic applicants to original drugs that have been marketed domestically. These

kinds of drugs are supposed to have the same quality and effects with original drugs.

Category 5: The drugs that have been marketed abroad are applied to be marketed domestically.

The registration of Category 1 or Category 2 drugs above will be subject to the requirements of Domestic New Drug
Application under the Provisions for Drug Registration, Domestic Generic Drug Application will be applicable to Category 3 or
Category 4 drugs registration, and Imported Drug Application will be applicable to Category 5 drugs registration. The applicants
whose registration applications for chemical medicines have been accepted by the NMPA before the date of promulgation of the Work
Plan for Reforming
the Chemical Medicines Registration Classification System can choose to continue the applications process
according to the Provisions for Drug Registration or to comply with the new categories under the Work Plan for Reforming the
Chemical Medicines Registration Classification System

ff

According to the Special Examination and Approval Provisions, the NMPA conducts special examination and approval for new

drugs registration application when:

(1)

(2)

(3)

active ingredients and their preparations extracted from plants, animals and minerals, and newly discovered medical
materials and their preparations have not been marketed in China;

the chemical raw material medicines as well as the preparations and biological products thereof have not been approved
for marketing home and abroad

the new drugs are for treating AIDS, malignant tumors and rare diseases, etc., and have obvious advantages in clinic
treatment; or

(4)

the new drugs are for treating diseases with no effective methods of treatment.

The Special Examination and Approval Provisions provide that the applicant may file for special examination and approval at

the stage of Clinical Trial Application if the drug candidate falls within items (1) or (2), and forff
items (3) or (4), the application for special examination and approval must be made when filing for production.

drug candidates that fall within

The registration of Category 1 or Category 2 drugs above will be subject to the requirements of Domestic New Drug
Application under the Provisions for Drug Registration, Domestic Generic Drug Application will be applicable to Category 3 or
Category 4 drugs registration and Imported Drug Application will be applicable to Category 5 drugs registration. The applicants
whose registration applications for chemical medicines have been accepted by the NMPA before the date of promulgation of the
Reform Plan Regarding the Category of the Registration of Chemical Medicines can choose to continue the applications process
according to the Provisions for Drug Registration or to comply with the new categories under the Reform Plan Regarding the Category
of the Registration of Chemical Medicines.

We believe that certain of our products fall within items (2) and (3) above. Therefore, we may file an application for special
examination and approval at the CTA stage, which may enable us to pursue a more expedited path to approval in China and bring
therapies to patients more quickly.

g
The Advantages of Category 1 New Drugs over Category 5 Drugs

g y

g y

g

g

Under the Provisions for Drug Registration and the Work Plan for Reforming the Chemical Medicines Registration

Classification System, Category 5 drugs are drugs which have already been marketed abroad by multinational companies but are not
yet approved in China, and Category 5 drug registration will be subject to the requirements of the Imported Drug Application.
Compared with the application for Category 5 drugs, the application for Category 1 domestic new drugs has a more straight-forward
registration pathway. According to the Special Examination and Approval Provisions, where a special examination and approval
treatment is granted, the application for clinical trial and manufacturing will be handled with priority and with enhanced
communication with the CDE, which will establish a working mechanism for communicating with the applicants. If it becomes
necessary to revise the clinical trial scheme or make other major alterations during the clinical trial, the applicant may file an
application for communication. When an application for communication is approved, the CDE will arrange the communication with
the applicant within one month.

In comparison, according to the Provisions for Drug Registration, the registration pathway for Category 5 drugs is complicated
and evolving. Category 5 drug applications may be submitted after a company obtains an NDA approval and receive the CPP granted

59

by a major regulatory authority, such as the FDA or the European Medicines Agency (EMA). Multinational companies may need to
apply for conducting multi-regional clinical trials (MRCTs), which means that companies do not have the flexibility to design the
clinical trials to fit the Chinese patients and standard-of-care. Category 5 drug candidates may not qualify to benefit from fast track
review with priority at the CTA stage. Moreover, a requirement to further conduct local clinical trials can potentially delay market
access by several years from its international NDA approval.

Adjustment on the Administration of Imported Drug Registration

g

g

p

j

On October 10, 2017, the NMPA promulgated the Decision on Adjusting Relevant Matters Concerning the Administration of

Imported Drug Registration, effective as of the date of its promulgation, which stipulates that, among others, (1) simultaneous research
and application are allowed, meaning that, in the case of a clinical trial concerning a drug subject
international multi-center clinical trial (IMCCT) in China, Phase 1 clinical trials of the drug are allowed simultaneously, and the
requirement that the drug subject to the clinical trial need to have been previously registered overseas or to have entered a Phase 2 or
Phase 3 clinical trial shall not apply, except for preventative biological products; (2) the drug registration procedure is to be optimized,
meaning that, upon the completion of a clinical trial at an IMCCT in China, an applicant may directly file a drug registration
application and (3) for a new chemical drug or an innovative therapeutic biological drug for which a clinical trial or market
registration is made, in each case as an imported drug, the requirement that such drug has received an overseas license issued by the
country or region where the drug’s overseas pharmaceutical manufacturer is located shall not apply.

thereto to be conducted at an

b

Changes to the Review and Approval Process

In August 2015, the State Council issued a statement, Opinions on Reforming the Review and Approval Process for

Pharmaceutical Products and Medical Devices, which contained several potential policy changes that could benefit the pharmaceutical
industry:

•

•

•

A plan to accelerate innovative drug approval with a special review and approval process, with a focus on areas of high
unmet medical needs, including drugs for HIV, cancer, serious infectious diseases, orphan diseases and drugs on national
priority lists.

A plan to adopt a policy which would allow companies to act as the marketing authorization holder and to hire contract
manufacturing organizations to produce drug products.

A plan to improve the review and approval of clinical trials, and to allow companies to conduct clinical trials at the same
time as they are in other countries and encourage local clinical trial organizations to participate in international multi-
center clinical trials.

In November 2015, the NMPA released the Circular Concerning Several Policies on Drug Registration Review and Approval,

which further clarified the following policies potentially simplifying and accelerating the approval process of clinical trials:

•

•

A one-time umbrella approval procedure allowing approval of all phases of a new drug’s clinical trials at once, rather than
the current phase-by-phase approval procedure, will be adopted for new drugs’ CTAs.

A fast track drug registration or clinical trial approval pathway will be available for the following applications:
(1) registration of innovative new drugs treating HIV, cancer, serious infectious diseases and orphan diseases;
(2) registration of pediatric drugs; (3) registration of geriatric drugs and drugs treating China-prevalent diseases;
(4) registration of drugs sponsored by national science and technology grants; (5) registration of innovative drugs using
advanced technology, using innovative treatment methods, or having distinctive clinical benefits; (6) registration of
foreign innovative drugs to be manufactured locally in China; (7) concurrent applications for new drug clinical trials
which are already approved in the U.S. or EU, or concurrent drug registration applications for drugs which have applied
for marketing authorization and passed onsite inspections in the U.S. or EU and are manufactured using the same
production line in China and (8) clinical trial applications for drugs with urgent clinical need and patent expiry within
three years, and marketing authorization applications for drugs with urgent clinical need and patent expiry within one
year.

In March 2016, the NMPA issued the Interim Provisions on the Procedures for Drug Clinical Trial Data Verification that

provides procedural rules for NMPA’s on-site verification of clinical data before drug approvals.

Also in February 2016, the NMPA published the Opinions on Implementing a Prioritized Review System to Avoid Drug

Review Backlogs, which introduces a prioritized review and approval pathway to clinical trial applications and registration
applications of certain drugs as part of NMPA’s ongoing reform of its current drug review and approval system.

60

The NMPA issued the Procedures for Priority Examination and Approval of Medical Devices (Procedures) on October 25,

2016, which shall come into effect on January 1, 2017. The Procedures, composed of seventeen articles, specify that the priority in
examination and approval shall be given, in relation to the applications of registering Class-III domestic, or Class-II and Class-III
imported medical devices, when those applications fall within such categories as diagnosis or treatment of rare disease or malignant
tumor with significant clinical advantage. According to the Procedures, the medical device technical evaluation center of the NMPA
will tentatively decide on the applicants applying for their project given priority examination and approval, names of their products
and the reception numbers and disclose such information on its website for a period of no less than five working days. The Procedures
provide that for projects given priority in examination and approval, the medical device technical evaluation center shall communicate
with applicants in an active way, as required by applicable provisions, in the course of evaluating relevant technologies and may
arrange for special talks when necessary; food and drug administrative departments at provincial levels shall take the review of the
registered quality management system of medical devices as priority and the NMPA will prioritize their administrative examination
and approval.

In December 2017, the NMPA innovations promulgated the Opinions on Encouraging the Prioritized Evaluation and Approval

for Drug, the NMPA would prioritize the examination and approval on applications of new drugs in particular cases, including (1)
applications of new drugs with significant clinical value satisfying particular conditions; (2) applications of new drugs with significant
clinical advantages preventing or treating particular diseases and (3) other particular conditions.

According to the Announcement on Optimizing the Evaluation and Approval of Drug Registration promulgated by the NMPA
and the National Health Commission in May 2018, the Chinese government seeks to further simplify and accelerated the clinical trial
approval process.

Chinese Enterprise Income Tax Law and Its Implementation

The Chinese Enterprise Income Tax Law (EIT Law) and its implementation rules provide that from January 1, 2008, a uniform

income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises and permit certain High
and New Technologies Enterprises (HNTEs) to enjoy preferential enterprise income tax rates subject to these HNTEs meeting certain
qualification criteria.

The EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other

distributions payable by a Chinese resident enterprise to investors who are “non-resident enterprises” (that do not have an
establishment or place of business in China, or that have such establishment or place of business but the relevant dividend or other
distribution is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between
the Mainland and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a Chinese
resident enterprise is 5% if the Hong Kong enterprise owns at least 25% of the capital of the Chinese enterprise; otherwise, the
dividend withholding tax rate is 10%. According to the Notice of the Chinese State Administration of Taxation on Issues relating to
the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009 and effective on the same day, the
corporate recipient of dividends distributed by Chinese enterprises must satisfy the direct ownership thresholds at all times during the
twelve consecutive months preceding the receipt of the dividends. The Chinese State Administration of Taxation issued the Notice on
How to Understand and Identify the Owner of Benefits in the China-HK Tax Agreement on October 27, 2009. Pursuant to these
regulations and the Administrative Measures for Tax Treaty Treatment for Non-Resident Taxpayers promulgated by the Chinese State
Administration of Taxation in August 2015, non-resident enterprises are required to file information sheets to the competent tax
authorities in order to enjoy the favorable treatments under the treaties. However, the relevant tax authorities may check and verify at
the
their discretion, and if a company is deemed to be a pass-through entity rather than a qualified owner of benefits, it cannot enjoyn
favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements are deemed by the relevant tax
authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under the tax arrangement, such favorable
tax treatments may be subject to adjustment by the relevant tax authorities in the future.

On July 27, 2011, the Ministry of Finance, the General Administration of Customs, and the State Administration of Taxation

issued the Notice on the Relevant Tax Policies for the Implementation of the Strategy of Extensive Development of the Western
Regions, under which from January 1, 2011 to December 31, 2020, a reduced enterprise income tax rate of 15% is applicable to the
enterprises set up in the western regions as designated by the relevant Chinese regulations with their main business in the encouraged
industries. The encouraged industries are those listed in the Catalog of Encouraged Industries in the Western Regions as promulgated
by NDRC. To qualify for the reduced tax rate, an enterprise must derive 70% or more of its revenue from the business listed in the
Catalog of Encouraged Industries in the Western Regions.

Regulations Relating to Business Tax and Value-added Tax

Pursuant to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993

and effective on January 1, 1994, as amended on November 10, 2008 and effective January 1, 2009, any entity or individual

61

conducting business in a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from
providing such services.

In November 2011, the Ministry of Finance and the State Administration of Taxation (SAT) promulgated the Pilot Plan for

Imposition of Value-Added Tax to Replace Business Tax (Pilot Plan). Since January 2012, the SAT has been implementing the Pilot
Plan, which imposes value-added tax (VAT) in lieu of business tax for certain industries in Shanghai. The Pilot Plan was expanded to
other regions, including Beijing, in September 2012 and was further expanded nationwide beginning August 1, 2013. VAT is
applicable at a rate of 6% in lieu of business taxes for certain services, and 17% for the sale of goods and provision of tangible
property lease services. VAT payable on goods sold or taxable services provided by a general VAT taxpayer for a taxable period is the
net balance of the output VAT for the period after crediting the input VAT for the period. In March 2016, the Ministry of Finance and
SAT jointly issued the Notice on Adjustment of Transfer Business Tax to Value Added Tax effective from May 2016, according to
which Chinese tax authorities have started imposing VAT on revenues from various service sectors, including real estate, construction,
financial services and insurance as well as other lifestyle service sectors, replacing the business tax.

Regulations Relating to Environmental Protection

China has adopted extensive environmental laws and regulations with national and local standards for emissions control,
discharge of waste water and storage and transportation, treatment and disposal of waste materials. At the national level, the relevant
environmental protection laws and regulations include the Chinese Environmental Protection Law, the Chinese Law on the Prevention
and Control of Air Pollution, the Chinese Law on the Prevention and Control of Water Pollution, the Chinese Law on the Promotion
of Clean Production, the Chinese Law on the Prevention and Control of Noise Pollution, the Chinese Law on the Prevention and
Control of Solid Waste Pollution, the Chinese Recycling Economy Promotion Law, the Chinese Law on Environmental Impact
Assessment, the Administrative Regulations on the Levy and Use of Discharge Fees and the Measures for the Administration of the
Charging Rates for Pollutant Discharge Fees. In recent years, the Chinese Government has introduced a series of new policies
designed to generally promote the protection of the environment. For instance, on November 10, 2016, the General Office of the State
Council has released the Implementing Plan for the Permit System for Controlling the Discharge of Pollutants (Plan). The Plan
proposes the need of instituting a system for enterprises and public institutions to control their respective total amount of pollutants
discharged, which shall be connected with the environmental impact assessment system organically. The Plan also stipulates that it is
necessary to regulate the orderly issuance of pollutant discharge permits, to make a name list to manage the permission of pollutant
discharge, to promote the administration of such permission system per industry and to impose severer administration and control over
enterprises and public institutions located at such places where environment quality fails to reach relevant standards. Furthermore, the
Plan requires that a national pollutant discharge permit management information
the information disclosure and social supervision.

platform shall be established by 2017 to strengthen

ff

Regulations Relating to Foreign Exchange and Dividend Distribution

Foreign Exchange Regulation

g

g

g

The Foreign Exchange Administration Regulations, most recently amended in August 2008, are the principal regulations
governing foreign currency exchange in China. Under the Chinese foreign exchange regulations, payments of current account items,
such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without
prior approval from the State Administration of Foreign Exchange (SAFE) by complying with certain procedural requirements. In
contrast, approval from or registration with appropriate government authorities is required when Renminbi is (RMB) to be converted
into a foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans.

In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration

ff

of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises (SAFE Circular 142), regulating the
conversion by a foreign-invested enterprise of foreign
currency-registered capital into Renminbi by restricting how the converted
RMB may be used. In addition, SAFE promulgated Notice on Issues concerning Further Clarifying and Regulating the Foreign
Exchange Administration under Some Capital Accounts (Circular 45) on November 9, 2011 to clarify the application of SAFE
Circular 142. Under SAFE Circular 142 and Circular 45, RMB capital converted from foreign currency registered capital of a foreign-
invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and
may not be used for equity investments within China. In addition, SAFE strengthened its oversight of the flow and use of the RMB
capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be
changed without SAFE’s approval, and such RMB capital may not, in any case, be used to repay RMB loans whose proceeds were not
used. Furthermore, SAFE promulgated Notice on Issues Concerning Strengthening Administration of Foreign Exchange Services in
November 2010, which tightens the regulation over settlement of net proceeds from overseas offerings, such as our initial public
offering, and requires, among other things, the authenticity of settlement of net proceeds from offshore offerings to be closely
examined and the net proceeds to be settled in the manner described in our prospectus or otherwise approved by our board of
directors. Violations of these SAFE regulations may result in severe monetary or other penalties, including confiscation of earnings

62

derived from such violation activities, a fine of up to 30% of the RMB funds converted from the foreign invested funds or in the case
of a severe violation, a fine ranging from 30% to 100% of the RMB funds converted from the foreign-invested funds.

In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration
Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to
this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign
exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in China, and remittance of
foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or
verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not
previously possible. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies
that the administration by the SAFE or its local branches over direct investment by foreign investors in China will be conducted by
way of registration, and banks must process foreign exchange business relating to the direct investment in China based on the
registration information provided by SAFE and its branches.

Under the Circular of the SAFE on Further Improving and Adjusting the Policies for Foreign Exchange Administration under

Capital Accounts promulgated by the SAFE on January 10, 2014 and effective from February 10, 2014, administration over the
outflow of the profits by domestic institutions has been further simplified. In principle, a bank is no longer required to examine
transaction documents when handling the outflow of profits of no more than the equivalent of $50,000 by a domestic institution. When
handling the outflow of profits exceeding the equivalent of $50,000, the bank, in principle, is no longer required to examine the
financial audit report and capital verification report of the domestic institution, provided that it must examine, according to the
principle of transaction authenticity, the profit distribution resolution of the board of directors (or the profit distribution resolution of
the partners) relating to this profit outflow and the original copy of its tax record-filing form. After each profit outflow, the bank must
form to indicate the actual amount of the profit
affix its seal to and endorsements on the original copy of the relevant tax record-filing
outflow and the date of the outflow.

ff

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of
Foreign Exchange Capital of Foreign-invested Enterprises (SAFE Circular 19), which became effective on June 1, 2015. According to
SAFE Circular 19, the foreign exchange capital of foreign-invested enterprises may be settled on a discretionary basis, meaning that
the foreign exchange capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary
contribution has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the
banks) can be settled at the banks based on the actual operational needs of the foreign-invested enterprise. The proportion of such
discretionary settlement is temporarily determined as 100%. The RMB converted from the foreign exchange capital will be kept in a
designated account, and if a foreign-invested enterprise needs to make further payment from such account, it still must provide
supporting documents and go through the review process with the banks.

Furthermore, SAFE Circular 19 stipulates that the use of capital by foreign-invested enterprises must adhere to the principles of

authenticity and self-use within the business scope of enterprises. The capital of a foreign-invested enterprise and capital in RMB
obtained by the foreign-invested enterprise from foreign exchange settlement must not be used for the following purposes:

(1)

(2)

(3)

(4)

directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by
relevant laws and regulations;

directly or indirectly used for investment in securities, unless otherwise provided by relevant laws and regulations;

directly or indirectly used for granting the entrusted loans in RMB, unless permitted by the scope of business, repaying the
inter-enterprise borrowing (including advances by the third party), or repaying the bank loans in RMB that have been sub-
lent to the third party and/or

paying the expenses related to the purchase of real estate that is not for self-use, except for the foreign-invested real estate
enterprises.

On June 9, 2016, SAFE issued the Notice to Reform and Regulate the Administration Policies of Foreign Exchange Capital

Settlement to further reformff

foreign exchange capital settlement nationwide.

Our Chinese subsidiaries’ distributions to the offshore parent and carrying out cross-border foreign exchange activities shall

comply with the various SAFE registration requirements described above.

63

p
Share Option Rules

Under the Administration Measures on Individual Foreign Exchange Control issued by the People’s Bank of China on

December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which
Chinese citizens participate require approval from SAFE or its authorized branch. In addition, under the Notices on Issues concerning
the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed
Companies, commonly known as SAFE Circular 7, or Share Option Rules, issued by the SAFE on February 15, 2012, Chinese
residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are
required to (1) register with the SAFE or its local branches; (2) retain a qualified Chinese agent, which may be a Chinese subsidiary of
the overseas listed company or another qualified institution selected by the Chinese subsidiary, to conduct the SAFE registration and
other procedures with respect to the share incentive plans on behalf of the participants and (3) retain an overseas institution to handle
matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We have made
and will to continue to make efforts to comply with these requirements since the completion of our initial public offering in June 2017.

In addition, the State Administration of Taxation has issued certain circulars concerning employee share options or restricted

shares, including the Circular of the State Administration of Taxation on Issues Concerning Individual Income Tax in Relation to
Share Options, promulgated in August 2009. Under these circulars, the employees working in China who exercise share options or are
granted restricted shares will be subject to Chinese individual income tax. The Chinese subsidiaries of such overseas listed companies
have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold
individual income taxes of those employees who exercise their share options. If the employees fail to pay or the Chinese subsidiaries
fail to withhold their income taxes in accordance with relevant laws and regulations, the Chinese subsidiaries may face fines or
sanctions imposed by tax authorities or other Chinese government authorities.

Regulation of Dividend Distribution

g

The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in China are the
Company Law of China, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations, the Cooperative
Joint Venture Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations. Under
these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as
determined in accordance with Chinese accounting standards and regulations. Both Chinese domestic companies and wholly-foreign
owned Chinese enterprises are required to allocate at least 10% of their respective accumulated after-tax profits each year, if any, to
fund certain capital reserve funds until the aggregate amount of these reserve funds have reached 50% of the registered capital of the
enterprises. A Chinese company is not permitted to distribute any profits until any losses from prior fiscal years have been offset.
Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.

ff

Labor Laws and Social Insurance

Pursuant to the Chinese Labor Law and the Chinese Labor Contract Law, employers must execute written labor contracts with
full-time employees. All employers must comply with local minimum wage standards. Violations of the Chinese Labor Contract Law
and the Chinese Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious
violations.

In addition, according to the Chinese Social Insurance Law, employers like our Chinese subsidiaries in China must provide
employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury
insurance, and medical insurance and housing funds.

Rest of the World Regulation

For other countries outside of the U.S. and China, the requirements governing the conduct of clinical trials, drug licensing,

pricing and reimbursement vary from country to country. In all cases the clinical trials must be conducted in accordance with GCP
requirements and the applicable regulatory requirements and the ethical principles having their origin in the Declaration of Helsinki.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines,

suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Employees

As of December 31, 2018, we had 575 full-time employees and 7 part-time employees. Of these, 218 are engaged in full-time

research and development and laboratory operations, 228 are engaged in manufacturing activities and 129 are engaged in full-time

64

selling, general and administrative functions. As of December 31, 2018, 42% of our personnel were located in the U.S. and 58% were
located in Asia. We have also engaged and may continue to engage independent consultants and contractors to assist us with our
operations. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have never
experienced any employment related work stoppages, and we consider our relations with our employees to be good.

Financial Information

We manage our operations and allocate resources in line with our three distinct reportable segments. Financial information
regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2018, 2017, and 2016 and our
total assets as of December 31, 2018 and 2017, is included in our Consolidated Financial Statements in Item 8 of this Annual Report.

Corporate Information

We were originally formed under the laws of the state of Delaware in November 2003 under the name Kinex Pharmaceuticals,

LLC. In December 2012, we converted from a limited liability company to a Delaware corporation, Kinex Pharmaceuticals, Inc. In
August 2015, we amended and restated our certificate of incorporation to change our name to Athenex, Inc. Our principal executive
offices are located at 1001 Main Street, Suite 600, Buffalo, NY 14203, and our telephone number is (716) 427-2950. Our website
address is www.athenex.com. Information contained on, or that can be accessed through, our website is not incorporated by reference
into this Annual Report, and you should not consider information on our website to be part of this Annual Report.

Available Information

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information
with the Securities and Exchange Commission (SEC). Our filings with the SEC are available free of charge on the SEC’s website at
www.sec.gov and on our website under the “Investor Relations” tab as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.

65

Item 1A.

Risk Factors.

Investing in our common stock involves a high degree of risk. You should consider carefully the following risk factors, as well as
the other information in this report, including our consolidated financial statements and related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”, before deciding whether to invest in our common stock. The
occurrence of any of the events or developments described below could harm our business, financial condition and results of
operations and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part
of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred net losses every year since our inception and anticipate that we will continue to incur net losses for the
foreseeable future.

Investment in pharmaceutical product development is highly speculative because it entails substantial upfront costs and
expenses and significant risk that a drug candidate will fail to gain regulatory approval or become commercially viable. Since our
formation, the company has relied on a combination of private securities offerings, public-private partnerships, the issuance of
convertible notes and public grants to fund our operations. We have devoted most of our financial resources to research and
development, including our non-clinical development activities and clinical trials. We have not generated substantial revenue from
product sales to date, and we continue to incur significant development and other expenses related to our ongoing operations. As a
result, we incurred losses in 2018, 2017 and 2016. For the years ended December 31, 2018, 2017 and 2016, we reported net losses of
$117.4 million, $131.2 million and $87.7 million, respectively, and had an accumulated deficit of $443.7 million as of December 31,
2018. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development
programs and from selling, general and administrative expenses associated with our operations.

We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase as we continue our
development of, and seek regulatory approvals for, our drug candidates, and begin to commercialize approved drugs, if any. Typically,
it takes many years to develop a new drug before it is available for treating patients. We may encounter unforeseen expenses,
difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses
will depend, in part, on the rate of future growth of our expenses, our ability to generate revenue and the timing and amount of
milestones and other required payments to third parties in connection with our potential future arrangements with third parties. If any
of our drug candidates fail in clinical trials or do not gain regulatory approval, or if approved, fail to achieve market acceptance, we
may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent
periods. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our shareholders’ equity
and working capital.

We expect our research and development expenses to continue to be significant

in connection with our continued investment in
our drug candidates and our ongoing and planned clinical trials for our drug candidates. Furthermore, if we obtain regulatory approval
for our drug candidates, we expect to incur increased selling, general and administrative expenses. In addition, as a public company,
we incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and
increasing operating losses and negative cash flows from operations for the foreseeable future. These losses have had and will
continue to have a material adverse effect on our stockholders’ equity, financial position, cash flows and working capital.

ff

Our ability to continue as a going concern will require us to obtain additional financing to fund our current operations, which may
be unavailable on acceptable terms, or at all.

Our recurring losses from operations and our current operating plans raise substantial doubt about our ability to continue as a
going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our
consolidated financial statements as of and for the year ended December 31, 2018 with respect to this uncertainty. Our ability to
continue as a going concern will require us to obtain additional financing to fund our current operating plans. We believe that our
existing cash and cash equivalents and short-term investments, together with cash to be generated from our operating activities, will be
sufficient to fund our current operating plans through at least the fourth quarter of 2019. We have based these estimates, however, on
assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect
and need to raise additional funds sooner than we anticipate. If we are unable to raise capital when needed or on acceptable terms, we
would be forced to delay, reduce or eliminate our research and drug development programs or commercialization efforts.

We have not yet been profitable, despite beginning to generate revenue from product sales, and may never become profitable.

Our ability to generate revenue and become profitable depends upon our ability to successfully complete the development of,

and obtain the necessary regulatory approvals for, our proprietary drug candidates, as we currently only have commercialized our API

66

products, such including paclitaxel and docetaxel, and specialty products, such as medical testing kits. Our product sales of API
totaled $18.0 million, $15.4 million and $15.3 million in the years ended December 31, 2018, 2017 and 2016, respectively. Our
specialty products launched in March 2017 and sales reached a total of $30.4 million for the year ended December 31, 2018. We
expect to continue to incur substantial and increasing losses through the projected development and commercialization of our drug
candidates. None of our proprietary drug candidates have been approved for marketing in the U.S., China or any other jurisdiction,
and they may never receive such approval. Our ability to achieve revenue and profitability is dependent on our ability to complete the
development of our proprietary drug candidates, obtain necessary regulatory approvals, and have our proprietary drugs manufactured
and successfully marketed.

Even if we receive regulatory approval of our proprietary drug candidates for commercial sale, we do not know when they will
generate revenue, if at all. Our ability to generate revenue from product sales of our drug candidates depends on a number of factors,
including our ability to:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

complete research regarding, and non-clinical and clinical development of, our proprietary drug candidates;

ff
formulate

appropriate dosing protocols, drug preparations and capsule encapsulation methods;

obtain regulatory approvals and marketing authorizations for drug candidates for which we complete clinical trials;

develop a sustainable and scalable manufacturing processes, including establishing and maintaining commercially viable
supply relationships with third parties and establishing our own manufacturing capabilities and infrastructure;

compliantly launch and commercialize proprietary drug candidates for which we obtain regulatory approvals and
marketing authorizations, either directly or with a collaborator or distributor;

obtain market acceptance of our proprietary drug candidates and their routes of administration as viable treatment options;

obtain adequate coverage and reimbursement for our proprietary drug candidates from government (including U.S. federal
healthcare programs) and private payors;

identify, assess, acquire and/or develop new proprietary drug candidates;

address any competing technological and market developments;

negotiate and maintain favorable terms in any collaboration, licensing or other arrangements into which we may enter;

maintain, protect and expand our portfolio of intellectual property rights, including patents, trade secrets and know-how;

successfully commercialize our 503B outsourcing facility products and U.S. specialty pharmaceutical products;

ff
further

develop our API business and

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with drug development, we are unable to predict the

timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain profitability. In addition, our expenses
could increase beyond expectations if we are required by the FDA, NMPA or regulatory authorities in other jurisdictions to performff
studies in addition to those that we currently anticipate. Even if our proprietary drug candidates are approved for commercial sale, we
anticipate incurring significant costs associated with the commercial launch of these drugs.

If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our

operations at planned levels and be forced to reduce our operations. Failure to become and remain profitable may adversely affect the
market price of our common stock and our ability to raise capital and continue operations. A decline in the value of our company
could also cause you to lose all or part of your investment.

We will need to obtain additional financing to fund our operations, and if we are unable to obtain such financing, we may be
unable to complete the development and commercialization of our drug candidates.

We have financed our operations with a combination of private securities offerings, public-private partnerships, issuance of

convertible notes and public grants. In June 2018, we entered into a series of equity and debt financing transactions with Perceptive
Advisors LLC and its affiliates (Perceptive) that provided us with an aggregate of $100 million for our research and development
activities and other corporate purposes. We entered into a stock purchase agreement with Perceptive, pursuant to which we agreed to
sell 2,679,528 shares of common stock at a purchase price of $18.66 per share of common stock. We also entered into a $50.0 million
senior secured loan agreement with Perceptive in conjunction with the equity transaction described above. Our drug candidates will
require the completion of regulatory review, significant sales and marketing efforts and substantial investment before they can provide
us with any product sales revenue. Our operations have consumed substantial amounts of cash since inception. The net cash used for
our operating activities was $109.4 million, $81.5 million and $47.9 million for the years ended December 31, 2018, 2017 and 2016
respectively. We expect to continue to spend substantial amounts on advancing the clinical development of our proprietary drug

67

candidates, launching and commercializing any proprietary drug candidates for which we receive regulatory approval, including
building our own commercial organizations to address certain markets.

We will need to obtain additional financing to fund our future operations, including completing the development and

commercialization of our proprietary drug candidates. We also need to obtain additional financing to conduct additional clinical trials
for the approval of our proprietary drug candidates if requested by regulatory bodies and to complete the development of any
additional proprietary drug candidates we might discover. Moreover, our research and development expenses and other contractual
commitments are substantial and are expected to increase in the future. In addition, to the extent the costs of constructing the Dunkirk
facility exceed $225 million, we will be responsible for those costs.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-

looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the
factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong,
and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on
many factors, including, but not limited to:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

the progress, timing, scope and costs of our clinical trials, including the ability to timely enroll patients in our planned and
potential future clinical trials;

the outcome, timing and cost of regulatory approvals by the FDA, NMPA and regulatory authorities in jurisdictions where
we seek such approvals, including the possibility that the FDA, NMPA or regulatory authorities may require that we
perform more studies than those that we currently expect;

our ability to secure adequate coverage and reimbursement for our proprietary drug candidates from government
(including U.S. federal health care programs) and private payors;

the number and characteristics of drug candidates that we may in-license and develop;

our ability to successfully and compliantly launch and commercialize our drug candidates;

the amount of sales and other revenues from drug candidates that we may commercialize, if any, including the selling
prices for such potential products and the availability of adequate reimbursement by third-party payors;

the amount of rebates or other price concessions we may owe under U.S. federal health care programs that cover and
reimburse our proprietary drug candidates;

the amount and timing of the milestone and royalty payments we receive from our collaborators under our licensing
arrangements;

the cost of filing, prosecuting, defending and enforcing

ff

any patent claims and other intellectual property rights;

selling and marketing costs associated with our potential products, including the cost and timing of expanding our
marketing and sales capabilities;

the terms and timing of any potential future collaborations, licensing or other arrangements that we may establish;

cash requirements of any future acquisitions and/or the development of other drug candidates;

the costs of operating as a public company;

the cost and timing of completion of commercial-scale outsourced manufacturing activities and

the time and cost necessary to respond to technological and market developments.

Until we can generate a sufficient amount of revenue, we may finance future cash needs through public or private equity
offerings, debt financings, collaborations and strategic alliances. Additional funds may not be available when we need them on terms
that are acceptable to us, or at all. General market conditions or the market price of our common stock may not support capital raising
transactions such as an additional public or private offering of our common stock or other securities. In addition, our ability to raise
additional capital may be dependent upon our common stock being quoted on The Nasdaq Global Select Market or upon obtaining
shareholder approval to issue a sufficient number of shares of our common stock. There can be no assurance that we will be able to
satisfy the criteria for continued listing on The Nasdaq Global Select Market or that we will be able to obtain shareholder approval of
such stock issuances if it is necessary. If adequate funds are not available to us on acceptable terms, or at all, we may be required to
delay or reduce the scope of, or eliminate, one or more of our research or development programs or our commercialization efforts. We
may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need
for additional capital at that time. In addition, if we raise additional funds through collaborations, strategic alliances or marketing,
distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue
streams or drug candidates or to grant licenses on terms that may not be favorable to us.

68

We believe that our existing cash and cash equivalents and short-term investments will not be sufficient to enable us to complete

all necessary development or commercially launch our proprietary drug candidates. If we are unable to raise capital when needed or
on attractive terms, we will be forced to delay, reduce or eliminate our research and development programs or future
commercialization efforts. Our inability to obtain additional funding when needed could seriously harm our business.

We entered into a $50.0 million senior secured loan agreement, which subjects the Company to significant interest rate and creditdd
risk.

On June 29, 2018, the Company entered into a 5-year $50.0 million loan agreement with Perceptive, which closed on July 3,
2018, bearing interest at a floating
per annum rate equal to the London Interbank Offering Rate (LIBOR) (with a floor of 2%) plus
9%. Thus, a change in the short-term interest rate environment (especially a material change) could have a material adverse effect
our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to
decline. As of December 31, 2018, we did not have any outstanding interest rate swap contracts.

ff

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on

We may not be able to refinance, extend, or repay our substantial indebtedness owed to our senior secured lender, which would
have a material adverse effect on our financial condition and ability to continue as a going concern.

We anticipate that we will need to raise a significant amount of debt or equity capital in the future in order to repay our
outstanding debt obligations owed to our senior secured lender when they mature on July 3, 2023 and fund our operations. We are
required to make monthly interest-only payments with a bullet payment of the principal amount of $50.0 million at maturity. If we are
unable to raise sufficient capital to repay these obligations at maturity and we are otherwise unable to extend the maturity dates or
refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise the necessary
amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these
obligations. Upon a default on the senior debt, our senior secured lender would have the right to exercise its rights and remedies to
collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business
and, if our senior secured lender exercises its rights and remedies, we would likely be forced to seek bankruptcy protection.

Covenants in the agreements governing our existing debt agreement restrict the manner in which we conduct our business.

The senior secured loan agreement contains various covenants that limit, subject to certain exemptions, our ability and/or our

restricted subsidiaries’ ability to, among other things:

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Incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

make loans, investments, or acquisitions;

engage in any other business other than the business engaged in on the date of the loan agreement;

pay dividends or make distributions on capital stock by any subsidiary;

make any unscheduled payments on the Company’s existing debt prior to the stated maturity thereof;

sell assets and capital stock of our subsidiaries;

enter into certain transactions with affiliates; and

sell, transfer, license, lease, or dispose of our or our subsidiaries’ assets.

The senior secured loan agreement requires that we maintain a minimum aggregate balance of $4.0 million in cash free and
clear of all liens and that we meet certain minimum revenue targets for each quarter during which the loan is outstanding. In addition,
the loan agreement is secured by substantially all of our assets and is guaranteed by certain of our subsidiaries, including APD,
Athenex Pharmaceuticals LLC (AP), and APS.

The restrictions contained in our senior secured loan agreement governing our debt could adversely affect our ability to:

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finance our operations;

make needed capital expenditures;

make strategic acquisitions or investments or enter into alliances;

withstand a future downturn in our business or the economy in general;

engage in business activities, including future opportunities, that may be in our interest; and

plan for or react to market conditions or otherwise execute our business strategies.

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A breach of any of these covenants could result in a default under the senior secured loan agreement governing our debt.
Further, additional indebtedness that we incur in the future may subject us to further covenants. If a default under any such loan
agreement is not cured or waived, the default could result in the acceleration of debt, which could require us to repurchase or repay
debt prior to the date it is otherwise due and that could adversely affect our financial condition. If we default, Percpetive may seek
repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.

Our ability to comply with the covenants contained in our senior secured loan agreement may be affected

ff

by events beyond our

control, including prevailing economic, financial, and industry conditions. Even if we are able to comply with all of the applicable
covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among
other things, limiting our ability to take advantage of financings, mergers, acquisitions, and other corporate opportunities that we
believe would be beneficial to us. In addition, our obligations under the loan agreement are secured, on a first-priority basis, and such
security interests could be enforced in the event of default by the collateral agent for the loan agreement.

Raising additional capital may cause dilution to our shareholders, restrict our operations or require us to relinquish rights to our
technologies or drug candidates.

We may seek additional funding through a combination of equity offerings, debt financings, collaborations and licensing
arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership
interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our
common stock. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed
payment obligations and could also result in certain additional restrictive covenants, such as limitations on our ability to incur
additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. In addition, issuance of additional equity securities, or the
possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations
or licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or
licensing to a third party on unfavorable terms our rights to technologies or proprietary drug candidates that we otherwise would seek
to develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more
favorable terms.

Certain of our executive officers and employees have received grants of stock options and shares of restricted stock, which vest

over time. Under certain circumstances, such vesting may be accelerated. The accelerated vesting of stock options and shares of
restricted stock could result in dilution to our existing stockholders and lower the market price of our common stock.

An impairment of goodwill could have a material adverse effect on our results of operations.

Acquisitions frequently result in the recording of goodwill and other intangible assets. As of December 31, 2018, our existing

goodwill represented $37.5 million, or 16.2% of our total assets, primarily as a result of our acquisitions of QuaDPharma, LLC, CDE,
and Polymed Therapeutics, Inc. and Chongqing Taihao Pharmaceutical Co Ltd. Goodwill is not amortized and is subject to
impairment testing at least annually using a fair value based approach. The identification and measurement of goodwill impairment
involves the estimation of the fair value of our reporting units. The estimates of fair value of reporting units are based on the best
information available as of the date of the assessment and incorporate management assumptions about expected future cash flows and
other valuation techniques. Future cash flows can be affected by changes in industry or market conditions, among other factors. The
recoverability of goodwill is evaluated at least annually or more frequently when events or changes in circumstances indicate that the
fair value of a reporting unit has more likely than not declined below its carrying value. We cannot accurately predict the amount and
timing of any future impairment of assets, and, going forward, we may be required to take goodwill or other asset impairment charges
relating to certain of our reporting units. Any such charges would have an adverse effect on our financial results.

Risks Related to Clinical Development of Our Proprietary Drug Candidates

Our primary clinical candidates are still in the development stage and have not yet received regulatory approval, which may make
it difficult to evaluate our current business and predict our future performance.

We are a globally-focused biopharmaceutical company formed in November 2003. Our operations to date have focused on
organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting
preclinical studies and clinical trials of our drug candidates. We have not yet successfully completed large-scale, pivotal clinical trials,
or obtained regulatory approvals for our drug candidates and have not yet established sales and marketing activities necessary for
successful commercialization. Consequently, any predictions you make about our future success or viability may not be accurate. In
addition, as a developing business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and
unknown challenges.

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We are focused on the discovery and development of innovative drugs for the treatment of cancers. The fact that we have not

yet, among other things, demonstrated our ability to initiate or complete large-scale clinical trials or manufacture drugs at commercial
scale, particularly in light of the rapidly evolving cancer treatment field, may make it difficult to evaluate our current business and
predict our future performance. These constraints make any assessment of our future success or viability subject to significant
uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields as we
seek to transition to a company capable of supporting commercial activities. If we do not address these risks and difficulties
successfully, our business will suffer. We depend substantially on the success of our proprietary drug candidates, which are in pre-
clinical and clinical development.

As of the date of this Annual Report, we had a total of 40 planned, ongoing and completed clinical trials for our drug candidates,

including a Phase 2 and two Phase 3 clinical trials for KX-01 ointment and a Phase 3 clinical trial for Oraxol. Our business and the
ability to generate revenue related to product sales from our proprietary drug candidates will depend on the successful development,
regulatory approval and commercialization for the treatment of patients with our drug candidates, which are still in development, and
other drugs we may develop. Clinical development is a lengthy and expensive process with an uncertain outcome. The results of pre-
clinical studies and early clinical trials of our drug candidates may not be predictive of the results of later-stage clinical trials. In the
case of any trials we conduct, results have in the past, and may in the future, fail to meet the desired safety and efficacy endpoints, or
differ from earlier trials due to the larger number of clinical trial sites and additional countries and populations involved in such trials.
We have invested a significant portion of our efforts and financial resources in the development of our existing drug candidates. The
success of our proprietary drug candidates will depend on several factors, including:

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successful enrollment in, and completion of, clinical studies;

receipt of regulatory approvals from the FDA, NMPA and other regulatory authorities for our drug candidates;

establishing commercial manufacturing capabilities, either by using our own facilities or making arrangements with third-
party manufacturers;

conducting our clinical trials compliantly and efficiently, and in many cases, relying on third parties to do so;

obtaining, maintaining and protecting our intellectual property rights, including patent, trade secrets, know-how and
regulatory exclusivity;

ensuring we do not infringe, misappropriate or otherwise violate the patent, trade secret or other intellectual property
rights of third parties;

competition with other drug candidates and drugs, including existing IV chemotherapy treatments, potential oncology
biologics and other oral dosing technologies developed or being developed by competitors and

continued acceptable safety profile for our drug candidates following regulatory approval, if and when received.

If we do not achieve one or more of these requirements in accordance with our business plans or at all, we could experience

significant delays in our ability to obtain approval for and/or to successfully commercialize our drug candidates, which would
materially harm our business and we may not be able to generate sufficient revenues and cash flows to continue our operations.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. For example, our
current lead product candidate, Oraxol, currently in Phase 3 clinical trials, has been in development by us since 2011. Failure can
occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our drug candidates may
not be predictive of the results of later-stage clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired
safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In some instances, there can be
significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors,
including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, including
genetic differences, patient adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial
participants. In the case of any trials we conduct, results may differ from early trials due to the larger number of patients, clinical trial
sites and additional countries and populations involved in such trials. A number of companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles,
notwithstanding promising results in earlier trials. Our future clinical trial results may not be favorable.

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We may not be successful in our efforts to identify or discover additional drug candidates. Due to our limited resources and access
to capital, we must and have in the past decided to prioritize development of certain product candidates; these decisions may prove
to have been wrong and may adversely affect our business.

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To date, we have focused our drug discovery efforts on developing our cancer platform, particularly our Orascovery and Src

Kinase Inhibition product candidates. If our cancer platform fails to identify potential drug candidates, our business could be
materially harmed. Additionally, our management, at the direction of our board of directors, has discretion in prioritizing which
product candidates to develop.

Research programs to pursue the development of our drug candidates for additional indications and to identify new drug

candidates and disease targets require substantial technical, financial and human resources whether or not we ultimately are
successful. Our research programs may initially show promise in identifying potential indications and/or drug candidates, yet fail to
yield results for clinical development for a number of reasons, including:

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the research methodology used may not be successful in identifying potential indications and/or drug candidates;

potential drug candidates may, after further study, be shown to lack efficacy, have harmful adverse effects or other
characteristics that indicate they are unlikely to be effective drugs; or

it may take greater human and financial resources to identify additional therapeutic opportunities for our drug candidates
or to develop suitable potential drug candidates through internal research programs than we possess, thereby limiting our
ability to diversify and expand our drug portfolio.

Because we have limited financial and managerial resources, we focus on research programs and drug candidates for specific
indications. As a result, we may forego or delay pursuit of opportunities with other drug candidates or for other indications that later
prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to
capitalize on viable commercial products or profitable market opportunities.

Accordingly, there can be no assurance that we will be able to identify additional therapeutic opportunities for our drug

candidates or to develop suitable potential drug candidates through internal research programs, which could materially adversely
affect our future growth and prospects. We may focus our efforts and resources on potential drug candidates or other potential
programs that ultimately prove to be unsuccessful.

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or
otherwise adversely affected.

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a

sufficient number of patients who remain in the trial until its conclusion. We and our research partners have from time to time and
may in the future experience difficulties in patient enrollment in our clinical trials for a variety of reasons, including:

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the availability of a sizeable population of eligible patients;

the design of the trial;

our ability to recruit clinical trial investigators with the appropriate competencies and experience;

competing clinical trials for similar therapies or other new therapeutics;

clinicians’ and patients’ perceptions as to the potential advantages and side effects of the drug candidate being studied in
relation to other available therapies,

our ability to obtain and maintain patient consents;

the failure of patients to complete a clinical trial and

the availability of approved therapies that are similar in mechanism to our drug candidates.

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In addition, our clinical trials will compete with other clinical trials for drug candidates that are in the same therapeutic areas as

our drug candidates, and this competition will reduce the number and types of patients available to us because some patients who
might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the
number of qualified clinical investigators is limited, we have conducted and expect to conduct some of our clinical trials at the same
clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at
such clinical trial sites.

Even if we are able to enroll a sufficient number of patients in our clinical trials, delays in patient enrollment may result in
increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and
adversely affff ect

our ability to advance the development of our drug candidates.

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Some of our drug candidates represent a novel approach to cancer treatment, which could result in delays in clinical development,
heightened regulatory scrutiny, delays in our ability to achieve regulatory approval or commercialization, or market acceptance by
physicians and patients of our drug candidates.

Some of our drug candidates, particularly those developed through our Orascovery platform, represent a departure from more
commonly used methods for cancer treatment, and therefore represent a novel approach that carries inherent development risks. For
instance, our Orascovery platform intends to facilitate the delivery of chemotherapy agents orally, as opposed to IV, while our Src
Kinase inhibitor candidates operate by a new mechanism of action. To develop our Orascovery platform, we must successfully
develop oral formulations of the active ingredients and ensure they can be delivered safely and consistently in capsule form. The need
to further develop or modify in any way the protocols related to our drug candidates to demonstrate safety or efficacy may delay the
clinical program, regulatory approval or commercialization, if approved. Our Src Kinase inhibitor platform is based on a novel
molecule with an additional mechanism of action that is not found in other Src Kinase inhibitors. Because of this, unexpected safety
and tolerability concerns may arise during the development process.

In addition, potential patients and their doctors may be inclined to use conventional standard-of-care treatments rather than
enroll patients in any future clinical trial or to use our product candidates commercially once approved. This may have a material
impact on our ability to generate revenues from our drug candidates. Further, given the novelty of the administration of our drug
candidates, hospitals and physicians may prefer traditional treatment methods, may be reluctant to adopt the use of our products or
may require a substantial amount of education and training, any of which could delay or prevent acceptance of our products by
physicians and patients and materially hinder successful commercialization of our drug candidates.

Our products and product candidates may cause undesirable, or an increase in the frequency of, side effects that could delay or
prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences
following marketing approval, if any.

Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt
clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, NMPA or other
regulatory authorities. Further, if a product candidate receives marketing approval and we or others identify undesirable side effects
caused by the product after the approval, or if drug abuse is determined to be a significant problem with an approved product, a
number of potentially significant negative consequences could result, including:

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regulatory authorities may withdraw or limit their approval of the product;

regulatory authorities may require the addition of labeling statements, such as a “Black Box warning” or a
contraindication;

we may be required to change the way the product is distributed or administered, conduct additional clinical trials or
change the labeling of the product;

we may decide to remove the product from the marketplace;

we could be sued and held liable for injury caused to individuals exposed to or taking the product and

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and

could substantially increase the costs of commercializing an affected product or product candidate and significantly impact our ability
to successfully commercialize or maintain sales of our product or product candidates and generate revenues.

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If clinical trials of our drug candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, NMPA or other
regulatory authorities or do not otherwise produce positive results, we may incur costs or experience delays in completing, or
ultimately be unable to complete, the development and commercialization of our drug candidates.

We may experience various unexpected events during, or as a result of, clinical trials that could delay or prevent our ability to

receive regulatory approval or commercialize our drug candidates, including:

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regulators, IRBs or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a
clinical trial at a prospective trial site;

clinical trials of our drug candidates may produce negative or inconclusive results, and we may decide, or regulators may
require us, to conduct additional clinical trials or abandon drug development programs;

the number of patients required for clinical trials of our drug candidates may be larger than we anticipate, enrollment may
be insufficient or slower than we anticipate or patients may drop out at a higher rate than we anticipate;

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a
timely manner, or at all;

we might have to suspend or terminate clinical trials of our drug candidates for various reasons, including a finding of a
lack of clinical response or a finding that participants are being exposed to unacceptable health risks;

regulators, IRBs or ethics committees may require that we or our investigators suspend or terminate clinical research for
various reasons, including noncompliance with regulatory requirements;

the cost of clinical trials of our drug candidates may be greater than we anticipate;

the supply or quality of our drug candidates or other materials necessary to conduct clinical trials of our drug candidates
may be insufficient or inadequate and

our drug candidates may cause adverse events, have undesirable side effects or other unexpected characteristics, causing
us or our investigators to suspend or terminate the trials.

If we are required to conduct additional clinical trials or other testing of our drug candidates beyond those that we currently
contemplate, if we are unable to successfully complete clinical trials of our drug candidates or other testing, if the results of these trials
or tests are not positive or are only modestly positive or if they raise safety concerns, we may:

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be delayed in obtaining regulatory approval for our drug candidates;

not obtain regulatory approval at all;

obtain approval for indications that are not as broad as intended;

have the drug removed from the market after obtaining regulatory approval;

be subject to additional post-marketing testing requirements;

be subject to restrictions on how the drug is distributed or used or

be unable to obtain reimbursement for use of the drug.

Delays in testing or approvals may result in increases in our drug development costs. We do not know whether any clinical trials

will begin as planned, will need to be restructured or will be completed on schedule, or at all.

Significant clinical trial delays also could shorten any periods during which we have the exclusive right to commercialize our

drug candidates or allow our competitors to bring drugs to market before we do and impair our ability to commercialize our drug
candidates and may harm our business and results of operations.

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Manufacturing risks, including our inability to manufacture API and clinical products used in the clinical trials of our proprietary
product candidates could adversely affect our ability to commercialize our product candidates.

Our business strategy depends on our ability to manufacture API in sufficient quantities and on a timely basis so as to meet our

needs to manufacture our product candidates for our clinical trials and to meet consumer demand for our future products, while
adhering to product quality standards, complying with regulatory requirements and managing manufacturing costs. We are subject to
numerous risks relating to our manufacturing capabilities, including:

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our inability to manufacture API and clinical products in sufficient quantities to meet the needs of our clinical trials or to
commercialize our products;

our inability to secure product components in a timely manner, in sufficient quantities or on commercially reasonable
terms;

our failure to increase production of products to meet demand;

our inability to modify production lines to enable us to efficiently produce future products or implement changes in
current products in response to regulatory requirements;

difficulty identifying and qualifying

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alternative suppliers for components in a timely manner and

potential damage to or destruction of our manufacturing

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equipment or manufacturing facility.

In addition, we conduct manufacturing operations at our facility in Chongqing, China to manufacture our proprietary product

candidates. As a result, our business is subject to risks associated with doing business in China, including:

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adverse political and economic conditions, particularly those negatively affecting the trade relationship between the U.S.
and China;

trade protection measures, such as tariff increases, and import and export licensing and control requirements;

potentially negative consequences from changes in tax laws;

difficulties associated with the Chinese legal system, including increased costs and uncertainties associated with enforcing
contractual obligations in China;

potentially lower protection of intellectual property rights;

unexpected or unfavorable changes in regulatory requirements;

possible patient or physician preferences
in the U.S. and

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for more established pharmaceutical products and medical devices manufactured

difficulties in managing foreign relationships and operations generally.

These risks are likely to be exacerbated by our limited experience with our current products and manufacturing processes. If, as

we expect, our need for API increases, or demand for our products increase, we will have to invest additional resources to purchase
components, hire and train employees and enhance our manufacturing processes. If we fail to increase our production capacity
efficiently, our sales may not increase in line with our forecasts and our operating margins could fluctuate or decline. Any of these
factors may affect our ability to manufacture our product and could reduce our revenues and profitability.

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Risks Related to Obtaining Regulatory Approval for Our Drug Candidates

The regulatory approval processes of the FDA, NMPA and other regulatory authorities are lengthy, time consuming and
inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our drug candidates, our business will
be substantially harmed.

The time required to obtain approval by the FDA, NMPA and other regulatory authorities in jurisdictions where we seek such

approval is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and
depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies,
regulations or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s
clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any drug candidate, and it is
possible that none of our existing drug candidates or any drug candidates we may discover, in-license or acquire and seek to develop
in the future will ever obtain regulatory approval.

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Our drug candidates could fail to receive regulatory approval from the FDA, NMPA or another regulatory authority for many

reasons, including:

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disagreement with the design or implementation of our clinical trials;

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failure

to demonstrate that a drug candidate is safe and effective for its proposed indication;

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failure

of clinical trial results to meet the level of statistical significance required for approval;

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failure

to demonstrate that a drug candidate’s clinical and other benefits outweigh its safety risks;

disagreement with our interpretation of data from preclinical studies or clinical trials;

the insufficiency of data collected from clinical trials of our drug candidates to support the submission and filing of a new
drug application, or NDA, or other submission or to obtain regulatory approval;

the FDA, NMPA or another regulatory authority’s finding of deficiencies related to the product, manufacturing processes
or facilities of ours or of third-party manufacturers with whom we contract for clinical and commercial supplies and

changes in approval policies or regulations that render our preclinical and clinical data insufficient for approval.

The FDA, NMPA or a regulatory authority in another jurisdiction may require more information, including additional
preclinical or clinical data, to support approval, which may delay or prevent approval and our commercialization plans, or we may
decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our drug
candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-
marketing clinical trials, or may approve a drug candidate with a label that is not desirable for the successful commercialization of that
drug candidate. In addition, if our drug candidate produces undesirable side effects or safety issues, the FDA may require the
establishment of REMS, or the NMPA or a regulatory authority may require the establishment of a similar strategy, that may, for
instance, restrict distribution of our drug candidates and impose burdensome implementation requirements on us. Any of the foregoing
scenarios could materially harm the commercial prospects of our drug candidates.

The approval process for pharmaceutical products outside the U.S. varies among countries and may limit our ability to develop,
manufacture and sell our products internationally. Failure to obtain marketing approval in international jurisdictions would
prevent our product candidates from being marketed abroad.

In order to market and sell our products internationally, we must obtain separate marketing approvals and comply with
numerous and varying regulatory requirements. The approval procedure varies among countries and may involve additional testing.
We may conduct clinical trials for, and seek regulatory approval to market, our product candidates in countries other than the U.S. and
China. Depending on the results of clinical trials and the process for obtaining regulatory approvals in other countries, we may decide
to first seek regulatory approvals of a product candidate in countries other than the U.S., or we may simultaneously seek regulatory
approvals in the U.S. and other countries. If we seek marketing approval for a product candidate outside the U.S., we will be subject to
the regulatory requirements of health authorities in each country in which we seek approval. With respect to marketing authorizations
in China, we will be required to seek regulatory approval from the NMPA. The approval procedure varies among regions and
countries and may involve additional testing, and the time required to obtain approval may differff
approval.

from that required to obtain FDA

Obtaining regulatory approvals from health authorities in countries outside the U.S. is likely to subject us to all of the risks
associated with obtaining FDA approval described above. In addition, marketing approval by the FDA does not ensure approval by the
health authorities of any other country, and marketing approvals by foreign health authorities do not ensure a similar approval by the
FDA.

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We are conducting, and may in the future conduct, clinical trials for our product candidates in sites outside the U.S. and the FDA
may not accept data from trials conducted in such locations.

We have conducted, and may in the future conduct, certain of our clinical trials outside of the U.S. Although the FDA may
accept data from clinical trials conducted outside the U.S., acceptance of this data is subject to certain conditions imposed by the FDA.
There can be no assurance the FDA will accept data from any clinical trials we conduct outside of the U.S. If the FDA does not accept
the data from any of our clinical trials conducted outside the U.S., it would likely result in the need for additional clinical trials in the
U.S., which would be costly and time-consuming and could delay or prevent the commercialization of any of our product candidates.

Regulatory approval may be substantially delayed or may not be obtained for one or all of our drug candidates for a variety of
reasons.

We may be unable to complete development of our drug candidates on schedule, if at all. The completion of the studies for our

drug candidates will require funding beyond our current resources. In addition, if regulatory authorities require additional time or
studies to assess the safety or efficacy of our drug candidates, we may not have or be able to obtain adequate funding to complete the
necessary steps for approval for any or all of our drug candidates. Preclinical studies and clinical trials required to demonstrate
safety and efficacy of our drug candidates are time consuming and expensive and together take several years or more to complete. For
example, our current lead product candidate, Oraxol, currently in Phase 3 clinical trials, has been in development since 2011. Delays
in clinical trials, regulatory approvals or rejections of applications for regulatory approval in the U.S., Taiwan, New Zealand, China or
other jurisdictions may result from many factors, including:

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our inability to obtain sufficient funds required for a clinical trial;

regulatory requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;

regulatory questions regarding interpretations of data and results and the emergence of new information regarding our
drug candidates or other products;

clinical holds, other regulatory objb ections to commencing or continuing a clinical trial or the inability to obtain regulatory
approval to commence a clinical trial in countries that require such approvals;

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failure

to reach agreement with the FDA, NMPA or other regulators regarding the scope or design of our clinical trials;

delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a
regulatory authority regarding the scope or design of a clinical trial;

our inability to enroll a sufficient number of patients who meet the inclusion and exclusion criteria in a clinical trial;

our inability to conduct a clinical trial in accordance with regulatory requirements or our clinical protocols;

clinical sites and investigators deviating from trial protocol, failing to conduct the trial in accordance with regulatory
requirements, or dropping out of a trial;

withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site
to participate in our clinical trials;

inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other
clinical trial programs, including some that may be for the same indication;

ff
failure

of our third-party clinical trial managers to satisfy their contractual duties or meet expected deadlines;

delay or failure in adding new clinical trial sites;

ambiguous or negative interim results, or results that are inconsistent with earlier results;

unfavorable or inconclusive results of clinical trials and supportive non-clinical studies, including unfavorable results
regarding effectiveness of drug candidates during clinical trials;

ff
feedback
preclinical studies and clinical trials, that might require modification to the protocol;

from the FDA, NMPA, IRB, DSMB or comparable entities, or results from earlier stage or concurrent

unacceptable risk-benefit profile or unforeseen safety issues or adverse side effects;

decision by the FDA, NMPA, IRB, comparable entities or the Company, or recommendation by a DSMB or comparable
regulatory entity, to suspend or terminate clinical trials at any time for safety issues or for any other reason;

ff
failure

to demonstrate a benefit from using a drug or biologic;

lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions;

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•

•

•

our inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be
subject to extensive negotiation and may vary significantly among different

CROs and trial sites;

ff

our inability to obtain approval from IRBs or ethics committees to conduct clinical trials at their respective sites;

manufacturing issues, including problems with manufacturing or timely obtaining from third parties sufficient quantities
of a drug candidate for use in a clinical trial and

difficulty in maintaining contact with patients after treatment, resulting in incomplete data.

Changes in regulatory requirements and guidance may also occur, and we may need to amend clinical trial protocols submitted

to applicable regulatory authorities to reflect these changes. Amendments may require us to resubmit clinical trial protocols to IRBs or
ethics committees for re-examination, which may impact the costs, timing or successful completion of a clinical trial.

According to the Provisions for Drug Registration and the Reform Plan Regarding the Category of the Registration of Chemical
Medicines promulgated by the NMPA, the registrations of chemical medicines in China are divided into five categories, among which,
Category 1 means the registration of innovative drugs that are not marketed either domestically or abroad, and Category 5 for the
registration of drugs that have been marketed abroad and are being registered for marketing in China for the first time. Our drug
candidates are all new therapeutic agents and we have built both research and development, clinical trial capacities, and commercial
manufacturing facilities in China. As a result, we expect all of our current drug candidates to fall within the Category 1 application
process but cannot be sure we will be granted or be able to maintain Category 1 designation. We believe the local drug registration
pathway, Category 1, is a faster and more efficient path to obtain approval in the Chinese market than the drug registration pathway
for imported drugs under Category 5. Category 5 drug candidates may not qualify to benefit from fast track review with priority at the
CTA stage. Category 1 drugs receive special examination and approval treatment. The advantages of such treatment include a separate
pathway for Category 1 application to queue up for examination by the Center for Drug Evaluation of the NMPA, or the CDE, and a
working mechanism for communication with the applicants for discussion of relevant technical issues. The applications for Category 1
drugs are handled with higher priority and enhanced communications with the CDE. Compared with Category 5 drugs, Category 1
drugs are qualified to apply for special examination and approval at both the CTA stage and the production registration application
stage. If the special examination and approval are granted at the CTA stage, such treatment will apply to the production registration
application stage without further approval. During the CTA stage, reduction or exemption of clinical trial may be available if Category
1 drugs are for orphan diseases or other special diseases. The advantages also include, by providing priority resources, shortening time
limits to review and exam applications of Category 1 drugs’ clinical trials and of production registration, and to handle document
submission and approval process. We cannot be sure that the NMPA will grant such priority treatment to any of our drugs candidates.
Please see “Business—Government Regulation and Product Approval—Chinese Government Regulation.”

If we experience delays in the completion of, or the termination of, a clinical trial, of any of our drug candidates, the commercial

prospects of our drug candidates will be harmed, and our ability to generate revenues from the sale of any of those drug candidates
will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our drug candidate
development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these
occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead
to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our
drug candidates.

Our drug candidates have caused and may cause undesirable adverse events 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 any regulatory approval.

Undesirable adverse events caused by our drug candidates could cause us or regulatory authorities to interrupt, delay or halt

clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA, NMPA or another
regulatory authority. Results of our trials could reveal a high and unacceptable severity or prevalence of adverse events. In such an
event, our trials could be suspended or terminated and the FDA, NMPA or other regulatory authorities could order us to cease further
development of, or deny approval of, our drug candidates for any or all targeted indications. Drug-related adverse events could affect
patient recruitment or the ability of enrolled subjects to complete the trial, and could result in potential product liability claims. Any of
these occurrences may significantly harm our reputation, business, financial condition and prospects.

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In our clinical studies to date, we have observed the following serious adverse effects that were deemed to be possibly, likely or

definitely related to each of our product candidates:

•

•

•

•

Oraxol - severe neutropenia, febrile neutropenia, sepsis, septic shock, altered state of consciousness, hypokalemia and
cardiac arrest, dehydration, pneumonia, death, nausea, vomiting, diarrhea, fatigue, anorexia and acute gastroenteritis;

Oratecan - diarrhea, rash, gastrointestinal hemorrhage, vomiting, nausea, asthenia, neutropenia, anorexia, increased
alanine aminotransferase, increased aspartate aminotransferase and enteritis;

KX-01 oral - allergic reaction, bacteremia, rash, syncope, dermatitis, neutropenic fever, hyponatremia, failure to thrive,
hypersensitivity, lower extremity edema, mucositis, neutropenia, pancytopenia, thrombocytopenia, seizure and motor
vehicle accident, embolic stroke, pneumonitis, fever, acute kidney injn ury, increased bilirubin and albumin levels,
decreased blood platelet count, abdominal pain, arm pain, pyrexia, rigors, tachypenea, oxygen desaturation pneumonia,
anemia, elevated ALT and AST, dehydration and leukopenia and

KX-02 - embolism.

Additionally, if one or more of our drug candidates receives regulatory approval, and we or others later identify undesirable side

effects caused by such drugs, a number of potentially significant negative consequences could result, including:

•

•

•

•

•

•

•

we may suspend marketing of the drug;

regulatory authorities may withdraw approvals of the drug;

regulatory authorities may require additional warnings on the label;

we may be required to develop a REMS for the drug or, if a REMS is already in place, to incorporate additional
requirements under the REMS, or to develop a similar strategy as required by a regulatory authority;

we may be required to conduct post-marketing studies;

we could be sued and held liable for harm caused to subjects or patients and

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular drug candidate, if

approved, and could significantly harm our business, results of operations and prospects.

We may seek Orphan Drug Designation for some of our drug candidates, and we may be unsuccessful.

We have received Orphan Drug Designation from the FDA for our proprietary product candidates KX-02 for the treatment of
glioma and Oraxol for the treatment of angiosarcomas. As part of our business strategy, we may seek Orphan Drug Designation for
our product candidates, and we may be unsuccessful. Regulatory authorities in some jurisdictions, including the U.S. and Europe, may
designate drugs for relatively small patient populations as orphan drugs or medicines, respectively. Under the Orphan Drug Act, the
FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a
disease with a patient population of fewer than 200,000 individuals in the U.S., or a patient population greater than 200,000 in the U.S.
where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the U.S.

Generally, if a drug with an Orphan Drug Designation subsequently receives the first regulatory approval for the indication for

which it has such designation, the drug is entitled to a period of marketing exclusivity, which precludes the FDA from approving
another marketing application for the same drug for the same indication during the period of exclusivity, with certain limited
exceptions. Orphan designations for medicines in Europe also benefit from incentives such as reduced fees and protocol assistance.
The applicable post-approval exclusivity period is seven years in the U.S. and ten years in Europe. The European exclusivity period
can be reduced to six years if a drug no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable
so that market exclusivity is no longer justified. Orphan Drug Exclusivity may be lost if the FDA determines that the request for
designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of
patients with the rare disease or condition.

Even if we obtain Orphan Drug Exclusivity for a drug candidate, exclusivity may not effff ectively

ff

protect the drug candidate from

competition because different drugs can be approved for the same condition and the same drugs can be approved for a different
condition but used off-label for any orphan indication we may obtain. Even after an orphan drug is approved, the FDA may
subsequently approve a different drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is
shown to be safer, more effective or makes a major contribution to patient care.

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Even if we receive regulatory approval for our drug candidates, we will be subject to ongoing regulatory obligations and continued
regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with
regulatory requirements or experience unanticipated problems with our drug candidates.

If our drug candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling,
packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety,
efficacy and other post-marketing information, including both federal and state requirements in the U.S. and requirements of
regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive requirements of the FDA, NMPA and
regulatory authorities, including, in the U.S., ensuring that quality control and manufacturing procedures conform to current cGMP
regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with
cGMP and adherence to commitments made in any NDA or other marketing application, and previous responses to inspection
observations. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of
regulatory compliance, including manufacturing, production and quality control.

Any regulatory approvals that we receive for our drug candidates may be subject to limitations on the approved indicated uses

for which the drug may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing
testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the drug candidate. The FDA may also
require a REMS program as a condition of approval of one or more of our drug candidates, which could entail requirements for long-
term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as
restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA, NMPA or a regulatory
authority approves our drug candidates, we will have to comply with requirements including, for example, submissions of safety and
other post-marketing information and reports, registration, and continued compliance with cGMPs and or GCPs for any clinical trials
that we conduct post-approval.

The FDA may impose consent decrees or withdraw approval if compliance with regulatory requirements and standards is not
maintained or if problems occur after the drug reaches the market. Later discovery of previously unknown problems with our drug
candidates, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or 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-marketing studies or clinical studies to assess new safety risks; or imposition of distribution
restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

•

•

•

•

•

restrictions on the marketing or manufacturing of our drugs, withdrawal of the product from the market, or voluntary or
mandatory product recalls;

ff
fines,

untitled or warning letters, or holds on clinical trials;

refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or
revocation of license approvals;

product seizure or detention, or refusal to permit the import or export of our drug candidates and

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 may

be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA, NMPA and
other regulatory authorities 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. The policies of the FDA, NMPA and of
other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit or delay
regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise
from future legislation or administrative action, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existing
requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose
any regulatory approval that we may have obtained, and we may not achieve or sustain profitability.

In addition, if we were able to obtain accelerated approval of any of our drug candidates, the FDA would require us to conduct a

confirmatory study to verify the predicted clinical benefit and additional safety studies. Other regulatory authorities outside the U.S.,
such as the NMPA, may have similar requirements. The results from the confirmatory study may not support the clinical benefit,
which would result in the approval being withdrawn. While operating under accelerated approval, we will be subject to certain
restrictions that we would not be subject to upon receiving regular approval.

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Risks Related to Commercialization of Our Drug Candidates

If we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be able to commercialize
our drug candidates, and our ability to generate revenue will be materially impaired.

ii

We currently do not have any proprietary drug candidates that have gained regulatory approval for sale in the U.S., China or any
other country, and we cannot guarantee that we will ever obtain regulatory approval for marketable proprietary drugs. Our business is
substantially dependent on our ability to complete the development of, obtain regulatory approval for and successfully commercialize
drug candidates in a timely manner. We cannot commercialize drug candidates without first obtaining regulatory approval to market
each drug from the FDA, NMPA or regulatory authorities in the relevant jurisdictions. Our proprietary drug candidates are currently
undergoing various phases of FDA clinical trials. We cannot predict whether these trials and future trials will be successful or whether
regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

Before obtaining regulatory approvals for the commercial sale of any drug candidate for a target indication, we must

demonstrate in preclinical studies and well-controlled clinical trials, and, with respect to approval in the U.S., to the satisfaction of the
FDA, that the drug candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and
controls are adequate. An NDA must include extensive preclinical and clinical data and supporting information to establish the drug
candidate’s safety and effectiveness.
information regarding the chemistry, manufacturing and
controls for the drug. Obtaining approval of an NDA is a lengthy, expensive and uncertain process, and approval may not be obtained.
If we submit an NDA to the FDA, the FDA decides whether to accept or reject the submission for filing. We cannot be certain that any
submissions will be accepted for filing and review by the FDA.

The NDA must also include significant

ff

ff

country to country and could delay or prevent the introduction of our drug candidates. Clinical trials conducted in

Regulatory authorities outside of the U.S., such as the regulatory authorities in emerging markets, also have requirements for
approval of drugs for commercial sale with which we must comply prior to marketing in those areas. Regulatory requirements can
vary widely fromff
one country may not be accepted by regulatory authorities in other countries and obtaining regulatory approval in one country does not
mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve
additional product testing and validation and additional administrative review periods. Seeking non-U.S. regulatory approval could
require additional non-clinical studies or clinical trials, which could be costly and time-consuming. The non-U.S. regulatory approval
process may include all of the risks associated with obtaining FDA approval and other risks specific to the relevant jurisdiction. For all
of these reasons, we may not obtain non-U.S. regulatory approvals on a timely basis, if at all.

If we are unable to obtain regulatory approval for our drug candidates in one or more jurisdictions, or any approval contains
significant limitations, our target market will be reduced and our ability to realize the full market potential of our drug candidates will
be harmed. Furthermore, if we are not able to obtain, or experience delays in obtaining, required regulatory approvals, we will not be
able to commercialize our drug candidates, and our ability to generate revenue will be materially impaired.

Even if any of our drug candidates receives regulatory approval, they may fail to achieve the degree of market acceptance by
physicians, patients, third-party payors and others in the medical community necessary for commercial success.

If any of our drug candidates receives regulatory approval, they may nonetheless fail to gain sufficient market acceptance by

physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments like
chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these
treatments to the exclusion of our drug candidates. In addition, physicians, patients and third-party payors may prefer other novel
products to ours, and we may experience difficulties gaining acceptance for our orally administered drug candidates. We are also
subject to regulatory restrictions on how we market our drug candidates. If our drug candidates do not achieve an adequate level of
acceptance, we may not generate significant product sales revenues, and we may not become profitable. The degree of market
acceptance of our drug candidates, if approved for commercial sale, will depend on a number of factors, including:

•

•

•

•

•

•

•

the clinical indications for which our drug candidates are approved;

physicians, hospitals, cancer treatment centers and patients considering our drug candidates as a safe and effective
treatment;

the potential and perceived advantages of our drug candidates over alternative treatments;

the prevalence and severity of any side effects;

product labeling or product insert requirements of the FDA, NMPA or other regulatory authorities;

limitations or warnings contained in the labeling approved by the FDA, NMPA or other regulatory authorities;

the timing of market introduction of our drug candidates as well as competitive drugs;

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•

•

•

•

the cost of treatment in relation to alternative treatments;

the amount of upfront costs or training required for physicians to administer our drug candidates;

the availability of adequate coverage, reimbursement and pricing by third-party payors and government authorities
(including U.S. federal healthcare programs);

the willingness of patients to pay out-of-pocket in the absence of coverage and reimbursement by third-party payors and
government authorities;

relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies
and

the effectiveness of our sales and marketing efforts.

If our drug candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, cancer
treatment centers or others in the medical community, we will not be able to generate significant revenue. Even if our drugs achieve
market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced
that are more favorably received than our drugs, are more cost effective or render our drugs obsolete.

We market certain medical devices that, if modified, may be subject to FDA clearance and failure to obtain such clearance could
adversely affect our financial condition or results of operations.

Through our subsidiary, Polymed, we currently market in-vitro diagnostic rapid test kits used in the performance of clinical

laboratory tests (limited to drugs of abuse and pregnancy testing in the U.S.) under 510(k) clearance by the FDA pursuant to
Section 510(k) of the FDCA. These products and our operations are subject to extensive regulation by the FDA and other federal and
state authorities in the U.S., as well as comparable authorities in foreign jurisdictions. After a device receives 510(k) marketing
clearance, any modification that could significantly affect
its safety or effectiveness, or that would constitute a major change or
modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification PMA. The FDA
requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance,
but the FDA can review that decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s
determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k)
marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or
penalties. In the event we make additional product enhancements to our 510(k)-cleared products, we cannot be assured that the FDA
would agree with any of our decisions to not submit 510(k) premarket notifications for these modified devices.

ff

Our manufacturing experience is limited and any failure by us to manufacture our products for commercial sale after receiving
FDA approval would materially impact our revenue and financial condition.

The manufacture of drugs for commercial sale is subject to regulation by the FDA under cGMP regulations and by other
regulators under other laws and regulations. We cannot assure you that we will continue to manufacture our products under cGMP
regulations or other laws and regulations in sufficient quantities for commercial sale, or in a timely or economical manner.

Our manufacturing facilities require specialized personnel and are expensive to operate and maintain. Any delay in the

regulatory approval or market launch of product candidates to be manufactured in these facilities will require us to continue to operate
these expensive facilities and retain specialized personnel, which may increase our expected losses.

Through our public-private partnerships, additional cGMP manufacturing facilities for our use are currently being built in
Dunkirk, New York and Chongqing, China. Our facility in Dunkirk, New York is being built pursuant to an agreement with FSMC.
Under the current arrangement, we will select and hire contractors for the project and oversee the development of the Dunkirk facility.
ESD, the parent entity of FSMC, is responsible for the costs of construction and all equipment for the facility, up to an aggregate of
$200 million, and ESD, not us, will own the facility and equipment. We have limited experience in overseeing the development of
such a facility and we may not be able to complete the development within the timeframe expected, within the expected budget, or at
all. If development of the Dunkirk facility is delayed or not completed it could materially adversely affect our operations and financial
results.

Additionally, upon completion, both the Dunkirk and Chongqing facilities will need to be cGMP validated prior to operating.

Validation is a lengthy process that must be completed before we can manufacture under cGMP guidelines. We cannot guarantee that
the FDA or foreign regulatory agencies will approve any of the other facilities or, once they are approved, that such facilities will
remain in compliance with cGMP regulations.

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The manufacture of pharmaceutical products is a highly complex process in which a variety of difficulties

ff

may arise from time

to time. We may not be able to resolve any such difficulties in a timely fashion, if at all. If anything were to interfere with the
continuing manufacturing operations in our facilities, it could materially adversely affect our business and financial condition.

Currently, many of our product candidates are manufactured in small quantities for use in clinical trials. We cannot assure you

that we will be able to successfully scale up the manufacture of each of our product candidates in a timely or economical manner, or at
all. If any of these product candidates are approved by the FDA or other drug regulatory authorities for commercial sale, we will need
to manufacture them in larger quantities. If we are unable to successfully scale up our manufacturing capacity, the regulatory approval
or commercial launch of such product candidate may be delayed or there may be a shortage in supply of such product candidate.

If we fail to develop manufacturing capacity and experience, fail to continue to contract for manufacturing on acceptable terms,

or fail to manufacture our product candidates economically on a commercial scale or in accordance with cGMP regulations, our
development programs will be materially adversely affected. This may result in delays in receiving FDA or foreign regulatory
approval for one or more of our product candidates or delays in the commercial production of a product that has already been
approved. Any such delays could materially adversely affect our business and financial condition.

The manufacture of API is highly regulated by FDA, NMPA and other regulatory bodies and is subject to current good
manufacturing practice requirements and to inspection by such regulators, which may result in adverse findings and actions
against certain API manufacturing facilities.

API manufacturing facilities are subject to regulation by the applicable regulatory bodies in the place of manufacture as well as
the regulatory agency in the country to which the product is exported. For instance, FDA’s cGMP regulations apply to these facilities
and violation of these, or other, regulations may result in adverse action against the facility, including cessation of manufacturing
activities. Our API manufacturing facilities in Chongqing are also subject to regulation by the NMPA. If the FDA, NMPA or other
regulators discover a problem at one facility, we may be subject to increased scrutiny and/or adverse actions across our operations,
including fines or orders to cease manufacturing, which could have a material impact on our operations, clinical development,
business strategy or results of operations.

We have limited experience in marketing proprietary drug products. If we are unable to establish such marketing and sales
capabilities or enter into agreements with third parties to market and sell our proprietary drug candidates, we may not be able to
generate sales revenue from such products.

We have limited sales, marketing and commercial product experience. We intend to continue to develop our in-house

commercial organization and sales force for such products, which will require significant capital expenditures, management resources
and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing
and sales personnel.

If we are unable to establish internal sales, marketing and commercial distribution capabilities for our proprietary drug
candidates, we will need to pursue collaborative arrangements for the sales and marketing of our proprietary drugs. However, there
can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they
will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be
successful. We may have less control over the marketing and sales efforts of such third parties which may present fraud and abuse and
other regulatory considerations, and our revenue from product sales may be lower than if we had commercialized our proprietary drug
candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our
proprietary drug candidates.

There can be no assurance that we will be able to develop our in-house sales and commercial distribution capabilities or

establish or maintain relationships with third-party collaborators to successfully commercialize any proprietary product, and as a
result, we may not be able to generate sales revenue from such products.

We face substantial competition, and our competitors may discover, develop or commercialize competing drugs before or more
successfully than we do.

The development and commercialization of new drugs is highly competitive. We face competition with respect to our current
drug candidates and will face competition with respect to any drug candidates that we may seek to develop or commercialize in the
future, from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. There
are a number of large pharmaceutical and biotechnology companies that currently market and sell drugs or are pursuing the
development of drugs for the treatment of the types of cancer for which we are developing our drug candidates. Some of these
competitive drugs and therapies are based on scientific approaches that are the same as or similar to our approach, and others are

83

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.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize drugs that are safer,
more effective, have fewer or less severe side effects, are more convenient or are less expensive than any drugs that we may develop.
Our competitors also may obtain approval from the FDA, NMPA or other regulatory authorities for their drugs more rapidly than we
may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter
the market and/or slow our regulatory approval.

Many of the companies against which we are competing or against which we may compete in the future have significantly

ff

greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved drugs than we do. Mergers and acquisitions in the pharmaceutical and
biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller
and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with
large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management
personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary
to, or necessary for, our programs.

Even if we are able to commercialize any drug candidates, the drugs may become subject to unfavorable pricing regulations, thirdrr
party reimbursement practices or healthcare reform initiatives, which could harm our business.

Successful sales of our drug candidates, if approved, depend on the availability of adequate coverage and reimbursement from
third-party payors. Patients who are provided medical treatment for their conditions generally rely on third-party payors to reimburse
all or part of the costs associated with their treatment. Adequate coverage and reimbursement fromff
such as Medicare and Medicaid in the U.S., and commercial payors are critical to new drug acceptance.

governmental healthcare programs,

The regulations that govern regulatory approvals, pricing and reimbursement for new therapeutic products vary widely from

country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the
pricing review period begins after marketing or licensing approval is granted. In some non-U.S. markets, prescription pharmaceutical
pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain
regulatory approval for a drug in a particular country but be subject to price regulations that delay our commercial launch of the drug
and negatively impact the revenues we are able to generate from the sale of the drug in that country. For example, according to the
guidance issued in March 2015 by the central government of China, each province will decide which drugs to include in its provincial
major illness reimbursement lists and the percentage of reimbursement, based on local funding. Adverse pricing limitations may
hinder our ability to recover our investment in one or more drug candidates, even if our drug candidates obtain regulatory approval.
For example, in China, according to a statement, Opinions on reforming the review and approval process for pharmaceutical products
and medical devices, issued by the State Council in August 2015, the enterprises applying for new drug approval will be required to
undertake that the selling price of new drug on Chinese mainland market shall not be higher than the comparable market prices of the
product in its country of origin or Chinese neighboring markets, as applicable.

Our ability to commercialize any drugs successfully also will depend in part on the extent to which coverage and reimbursement
for these drugs 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. Coverage and reimbursement by a
third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a drug is:

•

•

•

•

•

a covered benefit under its health plan;

safe, effective and medically necessary;

appropriate for the specific patient;

cost-effective and

neither experimental nor investigational.

We cannot be sure that reimbursement will be available for any drug that we commercialize and, if coverage and reimbursement
are available, what the level of reimbursement will be. Reimbursement may impact the demand for, or the price of, any drug for which
we obtain regulatory approval. Obtaining reimbursement for our drugs may be particularly difficult because of the higher prices often
associated with branded drugs and drugs administered under the supervision of a physician. If reimbursement is not available or is
available only at limited levels, we may not be able to successfully commercialize any drug candidate that we successfully develop.

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In the U.S., no uniform policy of coverage and reimbursement for drugs exists among third-party payors. As a result, obtaining
coverage and reimbursement approval of a drug from a government or other third-party payor is a time-consuming and costly process
that could require us to provide to each payor supporting scientific, clinical and cost-effectiveness data for the use of our drugs on a
payor-by-payor basis, with no assurance that coverage and adequate reimbursement will be obtained. Even if we obtain coverage for a
given drug, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require
co-payments that patients find unacceptably high. Additionally, third-party payors may not cover, or provide adequate reimbursement
for, long-term follow-up evaluations required following the use of our drugs. However, under Medicare Part D—Medicare’s
outpatient prescription drug benefit—there are protections in place to ensure coverage and reimbursement for oncology products and
all Part D prescription drug plans are required to cover substantially all anti-cancer agents.

The State Council required central and provincial authorities across China to promote a medical insurance program for major

illnesses, which targets covering at least 50% of the medical cost as incurred by treating major illnesses but falls out of the coverage of
the basic insurance programs. The State Council requires provincial authorities to increase reimbursement rates over the next three
years.

We intend to seek approval to market our drug candidates in the U.S., China and other selected jurisdictions. If we obtain

approval in one or more non-U.S. jurisdictions for our drug candidates, we will be subject to rules and regulations in those
jurisdictions. In some non-U.S. countries, the pricing of drugs and biologics is subject to governmental control. In these countries,
pricing negotiations with governmental authorities can take considerable time after obtaining regulatory approval of a drug candidate.
In addition, market acceptance and sales of our drug candidates will depend significantly on the availability of adequate coverage and
reimbursement from third-party payors for our drug candidates and may be affected by existing and future health care reform
measures.

We intend to market our drugs, if approved, in a variety of international markets and we are exploring the licensing of
commercialization rights or other forms of collaboration worldwide, which exposes us to additional risks of conducting business in
additional international markets.

We conduct business operations in regions including the U.S., China, Taiwan and New Zealand, and non-U.S. markets are an

important component of our growth strategy. If we fail to obtain licenses or enter into collaboration arrangements with third parties in
these markets, or if these parties are not successful, our revenue-generating growth potential will be adversely affected.

Moreover, international business relationships subject us to additional risks that may materially adversely affect our ability to

attain or sustain profitable operations, including:

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initiatives to develop an international sales, marketing and distribution organization may increase our expenses, divert our
management’s attention from the acquisition or development of drug candidates or cause us to forgo profitable licensing
opportunities in these geographies;

efforts to enter into collaboration or licensing arrangements with third parties in connection with our international sales,
marketing and distribution efforts may increase our expenses or divert our management’s attention from the acquisition or
development of drug candidates;

changes in a specific country’s or region’s laws, regulations or political and cultural climate or economic condition;

differing regulatory requirements for drug approvals and marketing internationally;

difficulty of effective enforcement of contractual provisions and intellectual property rights in local jurisdictions;

potentially reduced protection for intellectual property rights;

potential conflicting third-party patent or other intellectual property rights;

unexpected changes in tariffff s, trade barriers and regulatory requirements, such as Export Administration Regulations
promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;

economic weakness, including inflation or political instability, particularly in non-U.S. economies and markets;

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

the effects of applicable non-U.S. tax structures and potentially adverse tax consequences;

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

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workforce uncertainty and labor unrest, particularly in non-U.S. countries where labor unrest is more common than in the
U.S.;

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local
prices, opts to import goods from a non-U.S. market with low or lower prices rather than buying them locally;

of our employees and contracted third parties to comply with Office of Foreign Asset Control rules and regulations

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and the Foreign Corrupt Practices Act;

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad and

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including
earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

These and other risks may materially adversely affect our ability to obtain or sustain revenue fromff

international markets.

The use of legal, regulatory, and legislative strategies by both brand and generic competitors, including but not limited to
“authorized generics” and regulatory petitions, as well as the potential impact of proposed and newly enacted legislation, may
increase costs associated with the introduction or marketing of our generic products, could delay or prevent such introduction, and
could adversely affect our results of operations.

Our competitors, both branded and generic, often pursue strategies to prevent, delay, or eliminate competition from generic

alternatives to branded products. These strategies include, but are not limited to:

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entering into agreements whereby other generic companies will begin to market an authorized generic, a generic
equivalent of a branded product, at the same time or after generic competition initially enters the market;

launching a generic version of their own branded product prior to or at the same time or after generic competition initially
enters the market;

petitions with the FDA or other regulatory bodies seeking to prevent or delay approvals, including timing the filings

filing
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so as to thwart generic competition by causing delays of our product approvals;

seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence or to
meet other requirements for approval, and/or to prevent regulatory agency review of applications, such as through the
establishment of patent linkage (laws and regulations barring the issuance of regulatory approvals prior to patent
expiration);

initiating legislative or other efforts to limit the substitution of generic versions of brand pharmaceuticals;

suits for patent infringement and other claims that may delay or prevent regulatory approval, manufacture, and/or

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scale of generic products;

introducing “next-generation” products prior to the expiration of market exclusivity for the reference product, which often
materially reduces the demand for the generic or the reference product for which we seek regulatory approval;

persuading regulatory bodies to withdraw the approval of brand name drugs for which the patents are about to expire and
converting the market to another product of the brand company on which longer patent protection exists;

obtaining extensions of market exclusivity by conducting clinical trials of brand drugs in pediatric populations or by other
methods and

seeking to obtain new patents on particular formulations of drugs or methods of administering drugs for which patent
protection on the drug itself is about to expire.

If any other actions by our competitors and other third parties to prevent or delay activities necessary to the approval,
manufacture, or distribution of our products are successful, our entry into the market and our ability to generate revenues associated
with new products may be delayed, reduced, or eliminated, which could have a material adverse effect on our business, financial
condition, results of operations, cash flows and/or share price.

Our compounded preparations and the pharmacy compounding industry are subject to regulatory and customer scrutiny, which
may impair our growth and sales.

Formulations prepared and dispensed by compounding pharmacies may contain ingredients found in FDA-approved drugs, and

such formulations and the compounding thereof are subject to various FDA regulatory requirements. Outsourcing facilities are
regulated under Section 503B. Certain compounding pharmacies have been the subject of widespread negative media coverage in

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recent years, and the actions of these pharmacies have resulted in increased scrutiny of compounding pharmacy activities from the
FDA and state governmental agencies. For example, the FDA has in the past requested that a number of compounding pharmacies
conduct a recall of all non-expired, purportedly sterile drug products and cease sterile compounding operations due to lack of sterility
assurance, and additional compounding pharmacies have suspended sterile production or voluntarily recalled certain sterile
compounding products aftff er an FDA inspection of the relevant facilities. As a result of this exercise of caution, or due to the absence
of FDA approval, though such approval is not required, some physicians may be hesitant to prescribe, and some patients may be
hesitant to purchase and use, these compounded formulations.

In addition, an outsourcing facility must meet certain conditions under Section 503B of the FDCA in order for its compounded
products to be exempt from the FDCA’s premarket approval requirements and from the FDCA requirement that products be labeled
with adequate directions for use; for example, the drug must be compounded by or under the direct supervision of a licensed
pharmacist, in a facility registered pursuant to Section 503B of the FDCA and in compliance with cGMP. If our outsourcing facility or
any of our compounded products are found not to satisfy the criteria of Section 503B, the marketing of our products absent the FDA
approval and/or absent adequate directions for use in the product labeling could render our products adulterated or misbranded under
the FDCA, which could have an adverse effect on our business. Furthermore, if an outsourcing facility compounds drugs using bulk
drug substances, such bulk drug substances must either appear on a list established by the FDA of bulk drug substances for which
there is a clinical need or be used to compound drugs that appear on a list established by the FDA of drugs for which there is a
shortage. The FDA has not yet placed any bulk drug substances on the clinical list; however, the FDA has announced an interim
policy pursuant to which bulk drug substances with sufficient supporting information for FDA to evaluate the bulk drug substances
may be nominated for inclusion on a Category 1 list and, provided certain conditions are met, the FDA does not intend to enforce
against such outsourcing facilities pending evaluation of the Category 1 substances for inclusion on the FDA’s list of bulk drug
substances for which there is a clinical need. In addition to a clinical need determination, the FDA has established guidance on
determining whether a product is an essential copy of an FDA approved product. If our products were ever determined to be an
essential copy of an FDA approved product, administrative or judicial action could be taken. We use bulk drug substances in the
preparation of certain of our compounded products. In the event the FDA’s evaluation of these bulk drug substances results in a
determination not to include such substances on the FDA’s list of bulk drug substances for which there is a clinical need, or if FDA
were to change its interim policy such that compounding with such bulk drug substances could not proceed while the FDA’s
evaluation of the substances is pending or until the FDA has issued its list of bulk drug substances for which there is a clinical need,
our ability to continue marketing compounded products subject to Section 503B would be impaired, and our business could be
harmed.

We use bulk vasopressin to produce a compounded ready to use vasopressin product that is preservative free. If we are able to
continue to sell our compounded vasopressin product, revenues from those sales are expected to be used to fund clinical trials for our
cancer drugs in development. Vasopressin was nominated on July 27, 2017 and FDA placed it on the 503B Category 1 list. On
September 4, 2018, the FDA proposed not to list Vasopressin on its list of bulk substances for which there is a clinical need. We
submitted substantial technical, legal and policy comments opposing the FDA’s proposed action. On March 4, 2019, the FDA decided
in a final action not to list vasopressin on the list of bulk substances for which there is a clinical need. We are currently engaged in
litigation regarding FDA’s decision not to list vasopressin on the list of bulk drug substances for which there is a clinical need, in
which we are seeking a temporary restraining order and preliminary injunction regarding FDA’s decision, as well as an order vacating
its decision. If we are unsuccessful in obtaining the relief we seek in this litigation, we would have to abandon revenue-generating line
of business, which would have a material adverse effect on our business, results of operations, financial condition and cash flows.
Vasopressin remained on FDA’s Category 1 list until March 4, 2019, when FDA decided in final action published in the Federal
Register not to list vasopressin on the list of bulk drug substances for which there is a clinical need. Also, on March 4, 2019, Athenex,
Inc., APS, and APD filed a complaint against FDA seeking to vacate its decision. In this case, FDA has represented to the court that
“until the Court issues a decision on the merits of this action, FDA will not initiate enforcement action against Athenex based solely
on Athenex’s use of the bulk drug substance vasopressin to compound drugs and distribute those drugs” and the court has incorporated
FDA’s representation into its published order. Because of the court’s order, Athenex will continue to produce and distribute
compounded vasopressin during the period that the case is pending and will reevaluate its position after the Court issues its decision
on the merits of Athenex’s lawsuit. If we are ultimately unsuccessful in overturning FDA’s final vasopressin decision, we would have
to abandon this revenue-generating line of business, which would have a material adverse effect on our business, results of operations,
financial condition and cash flows.

We are also engaged in litigation regarding the legal validity of the Category 1 list. See “Item 3. Legal Proceedings” and the

risk factor captioned, “If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and
time-consuming and could prevent or delay us from developing or commercializing our drug candidates.”

If a compounded drug formulation provided through our compounding services leads to patient injury or death or results in a
product recall, we may be exposed to significant liabilities and reputational harm.

The production, labeling and packaging of compounded drugs is inherently risky. The success of our compounded formulations

and pharmacy operations depends to a significant extent upon perceptions of the safety and quality of our products. We could be
adversely affected if our formulations are subject to negative publicity. We could also be adversely affected if any of our formulations

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or other products, any similar products sold by other companies, or any products sold by other compounding outsourcing facilities,
prove to be, or are asserted to be, harmful to patients. There are a number of factors that could result in the injn ury or death of a patient
who receives one of our compounded formulations, including quality issues, manufacturing or labeling flaws, improper packaging or
unanticipated or improper uses of the products, any of which could result from human or other error. Any of these situations could
lead to a recall of, or safety alert relating to, one or more of our products. Similarly, to the extent any of the components of approved
drugs or other ingredients used by us to produce compounded formulations have quality or other problems that adversely affect the
fiff nished compounded preparations, our sales could be adversely affected. In addition, in the ordinary course of business, we may
voluntarily retrieve products in response to a customer complaint. Because of our dependence upon medical and patient perceptions,
any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar
products sold by other companies or any other compounded formulations, could have a material adverse impact on our business,
results of operations and financial condition.

Risks Related to Our Intellectual Property

A significant portion of our intellectual property portfolio currently comprises pending patent applications that have not yet been
issued as granted patents, and if our pending patent applications fail to issue our business will be adversely affected. If we are
unable to obtain and maintain patent protection for our technology and drugs, our competitors could develop and commercialize
technology and drugs similar or identical to ours, and our ability to successfully commercialize our technology and drugs may be
adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the U.S., China and other countries

with respect to our proprietary technology and drug candidates. We have sought to protect our proprietary position by filing patent
applications in the U.S., China and other countries related to novel technologies and drug candidates that we consider important to our
business. As of December 31, 2018, we owned more than 150 granted patents and 40 pending patent applications worldwide,
including one pending international patent application under the Patent Cooperation Treaty, or PCT, which we plan to file nationally
in the U.S. and other jurisdictions. The process of obtaining patent protection 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.
There can be no assurance that our pending patent applications will result in issued patents Moreover, even our issued patents do not
guarantee us the right to practice our technology in relation to the commercialization of our platforms’ product candidates. Third
parties may have blocking patents that could be used to prevent us from commercializing our patented technologies, platforms and
product candidates and practicing our proprietary technology. There can also be no assurance that a third party will not challenge the
validity of our patents or that we will obtain sufficient claim scope in those patents, in view of prior art, to prevent a third party from
competing successfully with our drug candidates. We may become involved in interference, inter partes review, post grant review, ex
parte reexamination, derivation, opposition or similar other proceedings challenging our patent rights or the patent rights of others.
Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop
others from using or commercializing similar or identical technology and drug candidates, or limit the duration of the patent protection
of our technology and drug candidates. Given the amount of time required for the development, testing and regulatory review of new
drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a
result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing drug candidates similar or
identical to ours.

The patent position of biotechnology and pharmaceutical companies is highly uncertain, involves complex legal and factual
questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and
commercial value of our patent rights are highly uncertain. Changes in patent laws or the interpretation of patent laws in the U.S. and
other countries may diminish the value of our patents or narrow the scope of our patent protection. Publications of discoveries in
scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not
published until eighteen months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make
the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such
inventions.

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

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions, due to
inconsistent policies regarding the scope of claims allowable in patents. Changes in patent laws and rules, either by legislation, judicial
decisions, or regulatory interpretation in the U.S. and other countries may diminish our ability to protect our inventions and enforce
our intellectual property rights, and more generally could affect the value of our intellectual property.

In addition, the laws of certain non-U.S. countries do not protect intellectual property rights to the same extent as U.S. federal

and state laws do. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the
U.S., or from selling or importing drugs made using our inventions in and into the U.S. or non-U.S. jurisdictions. Competitors may use
our technologies in jurisdictions where we have not obtained patent protection to develop their own drugs and further, may export

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otherwise infringing drugs to non-U.S. jurisdictions where we have patent protection but where enforcement rights are not as strong
those in the U.S. These drugs may compete with our drug candidates and our patent or other intellectual property rights may not be
effective or adequate to prevent them from competing.

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as

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

jurisdictions, including China. The legal systems of some countries do not favor the enforcement of patents, trade secrets and other
intellectual property, particularly those relating to biopharmaceutical products, which could make it diffff iff cult in those jurisdictions for
us to stop the infringement or misappropriation of our patents or other intellectual property rights, or the marketing of competing
drugs in violation of our proprietary rights. Proceedings to enforce our patent and other intellectual property rights in non-U.S.
jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business.

Furthermore, such proceedings could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly,

could put our patent applications at risk of not issuing, and could provoke third parties to assert claims of infringement or
misappropriation against us. We may not prevail in any lawsuits that we initiate, and 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.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and
unsuccessful and our patent rights relating to our drug candidates could be found invalid or unenforceable if challenged in court
or before the U.S. Patent and Trademark Office or comparable non-U.S. authority.

Competitors may infringe our patent rights or misappropriate or otherwise violate our intellectual property rights. To counter

infringement or unauthorized use, litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. Such litigation
can be expensive and time-consuming. Our current and potential competitors may have the ability to dedicate substantially greater
resources to enforce and/or defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able
to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial costs
and diversion of management resources, which could harm our business and financial results. In addition, in an infringement
proceeding, a court may decide that patent or other intellectual property rights owned by us are invalid or unenforceable, or may
refuse to stop the other party from using the technology at issue on the grounds that our patent or other intellectual property rights do
not cover the technology in question. An adverse result in any litigation proceeding could put our patent, as well as any patents that
may issue in the future from our pending patent applications, at risk of being invalidated, held unenforceable or interpreted narrowly.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk
that some of our confidential information could be compromised by disclosure.

If we initiate legal proceedings against a third party to enforce any patent, or any patents that may issue in the future fromff
our
patent applications, that relates to one of our drug candidates, the defendant could counterclaim that such patent rights are invalid or
unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity or unenforceability are commonplace, and
there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Third parties may also raise
similar claims before administrative bodies in the U.S. or abroad, even outside the context of litigation. Such mechanisms include ex
parte re-examination, inter partes review, post-grant review, derivation and equivalent proceedings in non-U.S. jurisdictions, such as
opposition proceedings. Although any party alleging invalidity or unenforceability of our patents has a high burden of proof,
nonetheless such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover and
protect our drug candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect
to the validity of our patents, for example, we cannot be certain that there is no invalidating prior art of which we, our patent counsel,
and the patent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on certain drug candidates. Such a loss of patent
protection could have a material adverse impact on our business.

We may be subject to claims challenging the inventorship of our patents and ownership of other intellectual property.

Although we are not currently experiencing any claims challenging the inventorship of our patents or ownership of our
intellectual property, we may in the future be subject to claims that former employees, collaborators or other third parties have an
interest in our patents or other intellectual property as inventors or co-inventors. For example, we may have inventorship disputes arise
from conflicting obligations of consultants or others who are involved in developing our drug candidates. Litigation may be necessary
to defend against these and other claims challenging inventorship. If we fail in defending any such claims, we may lose rights such as
exclusive ownership of, or right to use, our patent or other intellectual property rights. Such an outcome could have a material adverse
effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.

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If we are sued for infringing intellectual property rights of third parties, such litigation could be costly and time-consuming and
could prevent or delay us from developing or commercializing our drug candidates.

Our commercial success depends in part on our avoiding infringement of the patents and other intellectual property rights of
third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and
pharmaceutical industries, including litigation in the U.S. courts, inter partes review, post grant review, interference
parte reexamination proceedings before the USPTO or oppositions and other comparable proceedings in non-U.S. jurisdictions.
Numerous issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are
developing drug candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk
increases that our drug candidates or manufacturing processes may give rise to claims of infringement of the patent rights of others.

and ex

ff

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party

patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment
related to the use or manufacture of our drug candidates. Because patent applications can take many years to issue, patent applications
that are currently pending may later result in issued patents that our drug candidates may infringe. In addition, third parties may obtain
patents in the future and claim that use of our technologies that are first publicized or commercialized after the filing date of those
patents infringes upon them. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing
process of any of our drug candidates, any molecules formed during the manufacturing process or any final product itself, the holders
of any such patents may be able to prevent us from commercializing such drug candidate unless we obtain a license under the
applicable patents, or until such patents expire or are finally determined to be held invalid or unenforceable. Similarly, if any third-
party patent is held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods of
use, including combination therapy or patient selection methods, the holders of any such patent may be able to block our ability to
develop and commercialize the applicable drug candidate unless we obtain a license, limit our uses, or until such patent expires or is
finally determined to be held invalid or unenforceable. In either case, such a license may not be available on commercially reasonable
terms or at all.

Third parties who bring successful claims against us for infringement of their intellectual property rights may obtain injunctive

or other equitable relief, which could prevent us from developing and commercializing one or more of our drug candidates. Defense of
these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of
management and employee resources from our business. In the event of a successful claim of infringement or misappropriation against
us, we may have to pay substantial damages, including treble damages and attorneys’ fees in the case of willful infringement, obtain
one or more licenses from third parties, pay royalties or redesign our infringing drug candidates, which may be impossible or require
substantial time and monetary expenditure and undertaking additional preclinical studies, clinical trials or regulatory review. In the
event of an adverse result in any such litigation, or even in the absence of litigation, we may need to obtain licenses from third parties
to advance our research or allow commercialization of our drug candidates. We cannot predict whether any required license would be
available on commercially reasonable terms, or at all, and we may fail to obtain any of these licenses on commercially reasonable
terms, if at all. In the event that we are unable to obtain such a license, we would be unable to further develop and commercialize one
or more of our drug candidates, which could harm our business significantly. We may also elect to enter into license agreements in
order to settle patent infringement claims or to resolve disputes prior to litigation and any such license agreements may require us to
pay royalties and other fees that could significantly harm our business.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur
significant expenses, and could distract our technical personnel, management personnel, or both from their normal responsibilities. In
addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if
securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of
our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available
for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other
resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in
the marketplace.

In particular, on August 13, 2018, APS and APD, our wholly-owned subsidiaries, filed a complaint for declaratory judgment
against Par Pharmaceuticals, Inc., Par Sterile Products, LLC and Endo Par Innovation Company, LLC (together, Par) in the United
States District Court for the Western District of New York (the Court), seeking a declaratory judgment from the Court that our
compounded vasopressin drug products in ready-to-use form do not infringe on patents that Par has with respect to its Vasostrict®
product and that Par’s patents are invalid. On October 22, 2018, Par filed a motion to dismiss the complaint on the basis that the Court
does not have subject matter jurisdiction. Athenex has opposed Par’s motion and that motion is fully briefed and currently pending.
Par has not filed a claim for infringement of its patents in this suit, but if Par’s motion to dismiss Athenex’s patent suit is denied and

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the declaratory action proceeds, Par could proceed to lodge a counterclaim for patent infringement. If such an infringement claim were
brought and the Court ruled for Par, Athenex could be enjoined from further production of compounded vasopressin within in the
United States and sale of compounded vasopressin in or from the United States and for payment of damages to Par for U.S.
manufacture or sale of compounded vasopressin that has already taken place.

In addition, on August 13, 2018, APS and APD filed a motion to intervene and seek the dismissal of Par’s complaint against the

FDA and certain governmental officials in the United States District Court for the District of Columbia. Par has sought declaratory
and injunctive relief against the FDA and certain governmental officials that: (i) vasopressin be delisted from Category 1 of the FDA’s
list of bulk drug substances under evaluation pursuant to Section 503B of the Federal Food, Drug and Cosmetic Act (FDCA), (ii) the
expansion of the FDA’s enforcement discretion to Category 1 substances, be enjoined; and (iii) that the FDA be enjoined from
authorizing the compounding of vasopressin under Section 503B of the FDCA. Our motion to intervene was granted. Par filed a
preliminary injunction motion and we and the FDA filed motions for judgment on the pleadings. This action currently stayed. On
March 4, 2019, FDA published in the Federal Register its final decision not to include vasopressin on the list of bulk drug substances
for which there is a clinical need. Also, on March 4, 2019, Athenex, Inc., APS, and APD filed a complaint against FDA seeking to
vacate its decision. In this case, FDA has represented to the Court “until the Court issues a decision on the merits of this action, FDA
will not initiate enforcement action against Athenex based solely on Athenex’s use of the bulk drug substance vasopressin to
compound drugs and distribute those drugs” and the court has incorporated FDA’s representation into its published order. Because of
the court’s order, Athenex will continue to produce and distribute compounded vasopressin during the period that the case is pending
and will reevaluate its position after the Court issues its decision on the meirits of Atheenx’s lawsuit.

If we are unsuccessful in these legal proceedings, we would need to abandon this revenue-generating unit of our business, which

would have a material adverse effect on our business, results of operations, financial condition and cash flows.

If our products conflict with the intellectual property rights of third parties, we may incur substantial liabilities and we maya be
unable to commercialize products in a profitable manner or at all.

We seek to launch generic pharmaceutical products either where patent protection or other regulatory exclusivity of equivalent

branded products has expired, where patents have been declared invalid or where products do not infringe the patents of others.
However, at times, we may seek approval to market generic products before the expiration of patents relating to the branded versions
of those products, based upon our belief that such patents are invalid or otherwise unenforceable or would not be infringed by our
products. Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties.
The manufacture, use and sale of generic versions of products has been subject to substantial litigation in the pharmaceutical industry.
These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. If our products were found to be
infringing the intellectual property rights of a third-party, we could be required to cease selling the infringing products, causing us to
lose future sales revenue from such products and face substantial liabilities for patent infringement, in the form of payment forff
the
innovator’s lost profits or a royalty on our sales of the infringing product. These damages may be significant and could materially
adversely affect our business. Any litigation, regardless of the merits or eventual outcome, would be costly and time consuming and
we could incur significant costs and/or a significant reduction in revenue in defending the action and from the resulting delays in
manufacturing, marketing or selling any of our products subject to such claims.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee
payment, and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or
eliminated for noncompliance with these requirements.

The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. Periodic maintenance fees on any issued patent are due
to be paid to the USPTO and other patent agencies in several stages over the lifetime of the patent. Although an inadvertent lapse can
in many cases be cured by payment of a late feeff
which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of
patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment of a patent application or lapse of a
patent include failure to respond to official actions within prescribed time limits, non-payment of fees, and failure to properly legalize
and submit formal documents. In any such event, our competitors might be able to enter the market, which would have a material
adverse effect on our business.

or by other means in accordance with the applicable rules, there are situations in

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The terms of our patents may not be sufficient to effectively protect our drug candidates and business.

In most countries in which we file patent applications, including the U.S., the term of an issued patent is twenty years from the
earliest claimed filing date of a non-provisional patent application in the applicable country. With respect to any issued patents in the
U.S., we may be entitled to obtain a patent term extension or extend the patent expiration date provided we meet the applicable
requirements for obtaining such patent term extensions. Although such extensions may be available, the life of a patent and the
protection it affords is by definition limited. Even if patents covering our drug candidates are obtained, we may be open to competition
from other companies as well as generic medications once the patent life has expired for a drug. If patents are issued on our currently
pending patent applications, the resulting patents will be expected to expire on dates ranging from 2025 to 2038, excluding any
potential patent term extension or adjustment. Upon the expiration of our issued patents, we will not be able to assert such patent
rights against potential competitors and our business and results of operations may be adversely affected.

In addition, the rights granted under any issued patents may not provide us with protection or competitive advantages against

competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. For these
reasons, we may have competition for our technologies, platforms and product candidates. Moreover, because of the extensive time
required for development, testing and regulatory review of a potential product, it is possible that a related patent may expire before
any particular product candidate can be commercialized or that such patent will remain in force for only a short period following
commercialization, thereby reducing any significant advantage of the patent.

If we do not obtain additional protection under the Hatch-Waxman Amendments and similar legislation in other countries
extending the terms of our patents, if issued, relating to our drug candidates, our business may be materially harmed.

Depending upon the timing, duration and specifics of FDA regulatory approval for our drug candidates, one or more of our U.S.

patents, if issued, may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration
Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent term extension of up
to five years as compensation for patent term lost during drug development and the FDA regulatory review process. Patent term
extensions, however, cannot extend the remaining term of a patent beyond a total of fourteen years from the date of drug approval by
the FDA, and only one patent can be extended for a particular drug.

The application for patent term extension is subject to approval by the USPTO, in conjunction with the FDA. We may not be
granted an extension due to, for example, failure to apply within applicable deadlines, failure to apply prior to expiration of relevant
patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection
afforded could be less than we request. If we are unable to obtain a patent term extension for a given patent or the term of any such
extension is less than we request, the period during which we will have the right to exclusively market our drug will be shortened and
our competitors may obtain earlier approval of competing drugs. As a result, our ability to generate revenues could be materially
adversely affected.

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

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly

patent rights. Obtaining and enforcing patents in the biopharmaceutical industry involves both technological and legal complexity, and
is therefore costly, time-consuming, and inherently uncertain. In addition, the U.S. has recently enacted and is currently implementing
wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in
certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard
to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents
once obtained. Depending on decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing
patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and
patents that we might obtain in the future. For example, in Assoc. for Molecular Pathology v. Myriad Genetics, Inc., the U.S. Supreme
Court held that certain claims to naturally-occurring substances are not patentable. Although we do not believe that our issued patents
or any patents that may issue from our pending patent applications directed to our drug candidates if issued in their currently pending
forms, as well as patent rights licensed by us, will be found invalid based on this decision, we cannot predict how future decisions by
the courts, the U.S. Congress or the USPTO may impact the value of our patent rights. There could be similar changes in the laws of
foreign jurisdictions that may impact the value of our patent or our other intellectual property rights.

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If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. We may
also be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

In addition to our issued patents and pending patent applications, we rely on trade secrets, including unpatented know-how,
technology and other proprietary information, to maintain our competitive position and to protect our drug candidates. We seek to
protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties that have access to
them, such as our employees, corporate collaborators, outside scientific collaborators, sponsored researchers, contract manufacturers,
consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our
employees and consultants. These agreements provide that all confidential information concerning our business or financial affairs
developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions
conceived by the individual, and which are related to our current or planned business or research and development or made during
normal working hours, on our premises or using our equipment or proprietary information, are our exclusive property. In many cases
our confidentiality and other agreements with consultants, outside scientific collaborators, sponsored researchers and other advisors
require them to assign to us or grant us licenses to inventions they invent as a result of the work or services they render under such
agreements or grant us an option to negotiate a license to use such inventions. However, any of these parties may breach such
agreements and disclose our proprietary information, and we may not be able to obtain adequate remedies for such breaches.
Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and
the outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we
would have no right to prevent them from using that technology or information to compete with us and our competitive position would
be harmed.

Furthermore, many of our employees, including our senior management, were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Some of these employees, including each member of
our senior management, executed proprietary rights, non-disclosure and non-competition agreements in connection with such previous
employment. Although we try to ensure that our employees do not use the proprietary information or know-how of others in their
work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade
secrets or other proprietary information, of any such employee’s former employer. We are not aware of any threatened or pending
claims related to these matters or concerning the agreements with our senior management, but litigation may be necessary in the future
to defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in
substantial costs and be a distraction to management.

In addition, while we typically require our employees, consultants and contractors who may be involved in the development of

intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an
agreement with each party who in fact develops intellectual property that we regard as our own, which may result in claims by or
against us related to the ownership of such intellectual property. If we fail in prosecuting or defending any such claims, in addition to
paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in prosecuting or defending
against such claims, litigation could result in substantial costs and be a distraction to our management and scientific personnel.
Further, to the extent that our employees, contractors, consultants, collaborators and advisors use intellectual property owned by others
in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

We also seek to preserve the integrity and confidentiality of our proprietary technology and processes by maintaining physical
security of our premises and physical and electronic security of our information technology systems. Although we have confidence in
the security of our systems, security measures may be breached, and we may not have adequate remedies for any such breach.

We may not be successful in obtaining or maintaining necessary rights for our development pipeline through acquisitions and in-
licenses.

Because our programs may involve additional drug candidates that require the use of proprietary rights held by third parties, the

growth of our business may depend in part on our ability to acquire and maintain licenses or other rights to use these proprietary
rights. We may be unable to acquire or in-license any compositions, methods of use, or other third-party intellectual property rights
from third parties that we identify. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a
number of established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may
consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources and
greater clinical development and commercialization capabilities.

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In addition, companies that perceive us to be a competitor may be unwilling to assign or license intellectual property rights to

us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an
appropriate return on our investment. If we are unable to successfully obtain rights to required third-party intellectual property rights,
our business, financial condition and prospects for growth could suffer.

If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third partiestt
otherwise experience disruptions to our business relationships with our licensors, we could be required to pay monetary damages
or could lose license rights that are important to our business.

or

We have entered into license agreements with third parties providing us with rights under various third-party patents and patent

applications, including the rights to prosecute patent applications and to enforce patents. Certain of these license agreements impose
and, for a variety of purposes, we may enter into additional licensing and funding arrangements with third parties that also may
impose diligence, development or commercialization timelines and milestone payment, royalty, insurance and other obligations on us.
Certain of these license agreements provide us with the exclusive right to practice technologies in major markets including North
America, South America, the EU, Australia, New Zealand, Eastern Europe, China, Taiwan, Hong Kong, Macau and parts of Southeast
Asia, although the right to practice the technologies and any inventions arising out of such technologies outside of these territories
may be reserved to the licensing company. In addition, under certain of our existing licensing agreements, we are obligated to pay
royalties on net product sales of our drug candidates once commercialized, pay a percentage of sublicensing revenues, make other
specified payments relating to our drug candidates or pay license maintenance and other fees. We also have diligence and clinical
development obligations under certain of these agreements that we are required to satisfy. If we fail to comply with our obligations
under our current or future license agreements, our counterparties may have the right to terminate these agreements, in which event we
might not be able to develop, manufacture or market any drug or drug candidate that is covered by the licenses or we may face claims
for monetary damages or other penalties under these agreements. Such an occurrence could diminish the value of these products and
our company. Termination of the licenses provided in these agreements or reduction or elimination of our rights under these
agreements may result in our having to negotiate new or reinstated agreements with less favorable terms or cause us to lose our rights
under these agreements, including our rights to important intellectual property or technology.

In particular, our ability to stop third parties from making, using, selling, offering to sell or importing any of our patented
inventions, either directly or indirectly, will depend in part on our success in obtaining, defending, and enforcing patent claims that
cover our technology, inventions and improvements. With respect to both licensed and company-owned intellectual property, we
cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent
applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the
future will be commercially useful in protecting our platforms and product candidates and the methods used to manufacture those
platforms and product candidates. Our issued patents and those that may issue in the future may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors from marketing related platforms or product candidates or limit the
length of the term of patent protection that we may have for our technologies, platforms and product candidates.

If our licensing and sublicensing activities result in non-compliance with our licensing agreements, our business relationships
with our licensing partners may suffer and we may be required to pay monetary damages or rescind or amend existing agreements
which are important to our business.

We have entered into agreements with third parties under which we have granted licenses to use certain of our patents and

patent applications, including the rights to develop, seek regulatory approval for and sell products using our KX-01 and KX-02
products. We have also entered into similar agreements sublicensing the intellectual property for the Orascovery platform, which we
have licensed from Hanmi. We have granted exclusive patent rights to certain of these partners and have granted them certain
additional rights with respect to the intellectual property we have licensed to them. From time to time we may engage in other
licensing transactions in which we acquire licenses to certain intellectual property or sublicense intellectual property rights. If we fail
to comply with or are found to have violated the terms of any of our licenses, we may be required to rescind or amend our license
agreements or pay damages to license counterparties or other rightsholders. This may also negatively impact our relationships with our
licensing and sublicensing partners for our candidate platforms. For further information regarding the terms of our licenses, please see
“Business—License and Collaboration Agreements”.

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Risks Related to Our Reliance on Third Parties

We depend on our agreements with Hanmi Pharmaceutical Co. Ltd, or Hanmi, to provide rights to the intellectual property
relating to certain of our lead product candidates. Any termination or loss of significant rights under those agreements would
adversely affect our development or commercialization of our lead product candidates.

We have licensed the intellectual property rights related to HM30181A, an integral part of our current product candidates, from
Hanmi pursuant to two license agreements. If, for any reason, our license agreements are terminated or we otherwise lose those rights,
it would adversely affect our business. Our license agreements with Hanmi impose on us obligations relating to exclusivity, territorial
rights, development, commercialization, funding, payment, diligence, sublicensing, insurance, intellectual property protection and
other matters. If we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may
be required to pay damages to Hanmi, and Hanmi may have the right to terminate our license, which could result in us being unable to
develop, manufacture and sell our product candidates that incorporate HM30181A.

rr

In addition, under our 2013 license agreement with Hanmi, we have granted Hanmi a one-time right of first negotiation that, at

Hanmi’s discretion, requires us to negotiate in good faith the sale of our rights in Oraxol and Oratecan under such agreement to Hanmi
at a purchase price determined by an internationally-recognized investment banking firm with an office in Hong Kong at any time
prior to the earlier of (i) our first commercial sale of products using such technology or (ii) receipt by Hanmi of written notice from
our company of the sublicense of the rights in an applicable product to a third party. If Hanmi exercises this right of first negotiation
and we reach an agreement to sell our rights under that licensing agreement, our ability to continue to develop certain of our product
candidates would be significantly impaired and would adversely affect our business and results of operations.

Each of our license agreements with Hanmi expires on the earlier of (i) expiration of the last of Hanmi’s patent rights licensed
under the agreement or (ii) invalidation of Hanmi’s patent rights which are the subject of the agreement, provided that the term will
automatically be extended for consecutive one year periods unless either party gives notice to the other at least ninety days prior to
expiration of the patent rights licensed under the agreement or before the then current annual expiration date of the agreement. The
patent rights licensed to us under the agreements with Hanmi have expiry dates ranging from 2023 to 2033, unless the terms of such
licensed patents are extended in accordance with applicable laws and regulations. Subject to certain conditions, Hanmi may also
terminate the license agreements if we fail
to comply with certain development milestones set out in each of the agreements. The
agreements also contain customary termination rights for either party, such as in the event of a breach of the agreement or the
initiation of bankruptcy proceedings by the other party or by mutual agreement. For further information regarding the license terms,
right of first negotiation and termination provisions of the Hanmi in-license agreements, please see “Business—License and
Collaboration Agreements—In-Licenses —Hanmi Licensing Agreements.”

ff

We may rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry
out their contractual duties, meet expected deadlines, perform satisfactorily or operate in compliance with laws and regulations, we
may not be able to obtain regulatory approval for or commercialize our drug candidates and our business could be substantially
harmed.

We have relied upon and may, in the future, rely upon third-party CROs to monitor and manage data for our ongoing preclinical

and clinical programs. We rely on these parties for execution of our preclinical studies and clinical trials, and control only certain
aspects of their activities. Nevertheless, 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 the CROs does not relieve us of
our regulatory responsibilities. We and our CROs are required to comply with GCPs, which are regulations and guidelines enforced by
the FDA, NMPA and other regulatory authorities for all of our drugs in clinical development. Regulatory authorities enforce these
GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply
with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, NMPA or regulatory
authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that
upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with
GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to
comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative

CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available
to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our
ongoing clinical, non-clinical and preclinical programs. In the event that any of our foreign CROs are impacted by political, social or
financial instability, they may be unable to maintain production capacity or compliance with regulatory requirements. If CROs 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,
environmental, health and safety laws and regulations, or for other reasons, our clinical trials may be extended, delayed or terminated
and we may not be able to obtain regulatory approval for or successfully commercialize our drug candidates. As a result, our results of

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operations and the commercial prospects for our drug candidates would be harmed, our costs could increase and our ability to generate
revenues could be delayed.

Our total revenue is highly dependent on a limited number of API customers and pharmaceutical wholesalers, and the loss of, or
any significant decrease in business from, any one or more of our major API customers or pharmaceutical wholesalers could
adversely affect our financial condition and results of operations.

We have derived a significant

ff

portion of our revenue from a limited number of customers, as is typical in the pharmaceutical

industry. During the year ended December 31, 2016, prior to the launch of our specialty products, we generated 62% of our total
revenue from our two largest API customers, Intas Pharmaceuticals and Ebewe Pharmaceuticals. During the year ended December 31,
2017, we generated 28% of our total revenue from those API customers and generated 28% of our total revenue from the three largest
wholesalers in the U.S. market, Amerisource, Cardinal Health, and McKesson (15%, 7%, and 6%, respectively). During the year
ended December 31, 2018, we generated 10% of our total revenue from those API customers and generated 30% of our total revenue
from the three largest wholesalers in the U.S. market, Amerisource, Cardinal Health, and McKesson (12%, 9%, and 9%, respectively).

There are a number of factors that could cause us to lose major API customers. We do not enter into long-term sales contracts

with customers but sell API to them based on short-term purchase orders. Accordingly, these customers may choose to use other
suppliers with little or no notice, based upon considerations of price, quality, shipping time, competitive or other reasons. In addition,
our API customers use the API to manufacture drugs, and they are subject to regulation and oversight by the FDA and other relevant
regulatory agencies. If for any reason, any such customer violates an FDA regulation that results in their being prohibited from
manufacturing drugs, they would no longer purchase API from us. Such sanctions or regulatory action against drug manufacturers
could happen without notice, and our revenue stream could be adversely affected without notice.

If we are unable to maintain our business relationships with these major API customers and pharmaceutical wholesalers on

commercially acceptable terms, it could have a material adverse effect on our financial condition and results of operations.

Additionally, Polymed, our wholly owned subsidiary, sells API to third parties for use in those third parties’ products, which

may be manufactured in cGMP facilities. In the event Polymed’s customers fail to remain in compliance with cGMP regulations, their
operations may be adversely impacted, causing them to cancel or cease API orders from Polymed. Any decrease in orders by
Polymed’s customers may impact Polymed’s revenue and, as a result, our overall financial condition.

If our Global Supply Chain Platform is insufficient, we may rely on third parties to manufacture at least a portion of our drug
candidate supplies, and for at least a portion of the manufacturing process of our drug candidates, if approved. Our business could
be harmed if those third parties fail to provide us with sufficient quantities of product or fail to do so at acceptable qualityt
levels or
prices.

Although we currently have a facility that may be used as our clinical-scale manufacturing and processing facility, we partially

rely on outside vendors to manufacture supplies and process our drug candidates. We have not yet begun to manufacture or process
our drug candidates on a commercial scale and may not be able to do so for any of our drug candidates.

We have limited experience in managing the manufacturing process, and our process may be more difficult or expensive than

the approaches currently in use.

Although we do intend to further develop our manufacturing facilities, and those leased to us under our public-private
partnerships, we may also use third parties as part of our manufacturing process. Our reliance on third-party manufacturers may
expose us to the following risks:

•

•

•

•

we may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is
limited and the FDA, NMPA or other regulatory authorities must approve any manufacturers. This approval would require
new testing and cGMP-compliance inspections by FDA, NMPA or other regulatory authorities. In addition, a new
manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our drugs;

our manufacturers may have little or no experience with manufacturing our drug candidates and, therefore, may
experience quality issues or require a significant amount of support from us in order to implement and maintain the
infrastructure and processes required to manufacture our drug candidates;

our third-party manufacturers might be unable to timely manufacture our drug or produce the quantity and quality
required to meet our clinical and commercial needs, if any;

contract manufacturers may not be able to execute our manufacturing procedures and other logistical support requirements
appropriately;

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•

•

•

•

•

•

our future contract manufacturers may not perform as agreed, may not devote sufficient resources to our drugs, or may not
remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce,
store and distribute our drugs;

we may not own, or may have to share, the intellectual property rights to any improvements made by our third-party
manufacturers in the manufacturing process for our drugs;

our third-party manufacturers could breach or terminate their agreement with us;

raw materials and components used in the manufacturing process, particularly those for which we have no other source or
supplier, may not be available or may not be suitable or acceptable for use due to material or component defects;

our contract manufacturers and critical reagent suppliers may be subject to inclement weather, as well as natural or man-
made disasters and

our contract manufacturers may have unacceptable or inconsistent product quality success rates and yields.

Each of these risks could delay or prevent the completion of our clinical trials or the approval of any of our drug candidates by
the FDA, NMPA or other regulatory authorities, result in higher costs or adversely impact commercialization of our drug candidates.
In addition, we will rely on third parties to perform certain specification tests on our drug candidates prior to delivery to patients. If
these tests are not conducted appropriately and test data are not reliable, patients could be put at risk of serious harm and the FDA,
NMPA or other regulatory authorities could place significant restrictions on our company until deficiencies are remedied.

The manufacture of drug and biological products is complex and requires significant expertise and capital investment, including

the development of advanced manufacturing techniques and process controls.

Currently, raw materials used in our manufacturing activities, including the pacific yew used in many of the API products we

manufacture, are supplied by multiple suppliers. We have agreements for the supply of such raw materials with manufacturers or
suppliers that we believe have sufficient capacity to meet our demands. In addition, we believe that adequate alternative sources for
such supplies exist. However, there is a risk that, if supplies are interrupted, it would materially harm our business.

Manufacturers of drug and biological products often encounter difficulties in production, particularly in scaling up or out,
validating the production process, and assuring high reliability of the manufacturing process (including the absence of contamination).
These problems include logistics and shipping, difficulties with production costs and yields, quality control, including stability of the
product, product testing, operator error, availability of qualified personnel, as well as compliance with strictly enforced federal, state
and non-U.S. regulations. Furthermore, if contaminants are discovered in our supply of our drug candidates or in the manufacturing
facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the
contamination. We cannot assure you that any stability failures or other issues relating to the manufacture of our drug candidates will
not occur in the future. Additionally, our manufacturers may experience manufacturing difficulties due to resource constraints or as a
result of labor disputes or unstable political environments. If our manufacturers were to encounter any of these difficulties, or
otherwise fail to comply with their contractual obligations, our ability to provide our drug candidate to patients in clinical trials would
be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase
the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to begin new clinical
trials at additional expense or terminate clinical trials completely.

If third-party manufacturers fail to comply with pharmaceutical manufacturing regulations, our financial results and financial
condition will be adversely affected.

Before a third party can begin commercial manufacture of our drug candidates and potential drugs, contract manufacturers are

subject to regulatory inspections of their manufacturing facilities, processes and quality systems. Due to the complexity of the
processes used to manufacture drug and biological products and our drug candidates, any potential third-party manufacturer may be
unable to initially pass federal, state or international regulatory inspections in a cost effective manner in order for us to obtain
regulatory approval of our drug candidates. If our contract manufacturers do not pass their inspections by the FDA, NMPA or other
regulatory authorities, our commercial supply of drug product or substance will be significantly delayed and may result in significant
additional costs, including the delay or denial of any marketing application for our drug candidates. In addition, drug and biological
manufacturing facilities are continuously subject to inspection by the FDA, NMPA and other regulatory authorities, before and after
drug approval, and must comply with cGMPs. Our contract manufacturers may encounter difficulties in achieving quality control and
quality assurance and may experience shortages in qualified personnel. In addition, contract manufacturers’ failure to achieve and
maintain high manufacturing standards in accordance with applicable regulatory requirements, or the incidence of manufacturing
errors, could result in patient injury, product liability claims, product shortages, product recalls or withdrawals, delays or failures in
product testing or delivery, cost overruns or other problems that could seriously harm our business, reputation or corporate image. If a
third-party manufacturer with whom we contract is unable to comply with manufacturing regulations, we may also be subject to fines,
unanticipated compliance expenses, recall or seizure of our drugs, product liability claims, total or partial suspension of production
and/or enforcement actions, including injunctions and criminal or civil prosecution. These possible sanctions could materially
adversely affect our financial results and financial condition.

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Furthermore, changes in the manufacturing process or procedure, including a change in the location where the product is
manufactured or a change of a third-party manufacturer, could require prior review by the FDA, NMPA or other regulatory authorities
and/or approval of the manufacturing process and procedures in accordance with the FDA or NMPA’s regulations, or comparable
requirements. This review may be costly and time consuming and could delay or prevent the launch of a product. The new facility will
also be subject to pre-approval inspection. In addition, we have to demonstrate that the product made at the new facility is equivalent
to the product made at the former facility by physical and chemical methods, which are costly and time consuming. It is also possible
that the FDA, NMPA or other regulatory authorities may require clinical testing as a way to prove equivalency, which would result in
additional costs and delay.

We have entered into collaborations and may form or seek collaborations or strategic alliances or enter into additional licensing
arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.

We have partnered with companies such as Hanmi, Almirall, XLifeSci/Guangzhou Xiangxue Pharmaceuticals and Gland and

may form or seek strategic alliances, create joint ventures or collaborations, or enter into additional licensing arrangements with third
parties that we believe will complement or augment our development and commercialization efforts with respect to our drug
candidates and any future drug candidates that we may develop. Any of these relationships may require us to incur non-recurring and
other charges, increase our near and long-term expenditures, issue securities that dilute our existing shareholders, or disrupt our
management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation
process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other
alternative arrangements for our drug candidates because they may be deemed to be at too early of a stage of development forff
collaborative effort and third parties may not view our drug candidates as having the requisite potential to demonstrate safety and
efficacy. If and when we collaborate with a third party for development and commercialization of a drug candidate, we can expect to
relinquish some or all of the control over the future success of that drug candidate to the third party.

Further, collaborations involving our drug candidates are subject to numerous risks, which may include the following:

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collaborators have significant discretion in determining the efforts and resources that they will apply to a collaboration;

collaborators may not pursue development and commercialization of our drug candidates or may elect not to continue or
renew development or commercialization programs based on clinical trial results, changes in their strategic focus due to
the acquisition of competitive drugs, availability of funding or other external factors, such as a business combination that
diverts resources or creates competing priorities;

collaborators may delay clinical trials, provide insufficient funding for a clinical trial, stop a clinical trial, abandon a drug
candidate, repeat or conduct new clinical trials or require a new formulation of a drug candidate for clinical testing;

collaborators could independently develop, or develop with third parties, drugs that compete directly or indirectly with our
drugs or drug candidates;

a collaborator with marketing and distribution rights to one or more drugs may not commit sufficient resources to their
marketing and distribution;

collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or
proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our
intellectual property or proprietary information or expose us to potential liability;

disputes may arise between us and a collaborator that cause the delay or termination of the research, development or
commercialization of our drug candidates, or that result in costly litigation or arbitration that diverts management attention
and resources;

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further
development or commercialization of the applicable drug candidates and

collaborators may own or co-own intellectual property covering our drugs that results from our collaborating with them,
and in such cases, we would not have the exclusive right to commercialize such intellectual property.

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As a result, if we enter into collaboration agreements and strategic partnerships or license our drugs, we may not be able to
realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company
culture, which could delay our timelines or otherwise adversely affect our business. We also cannot be certain that, following a
strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. If we are unable to
reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development
of a drug candidate, reduce or delay its development program or one or more of our other development programs, delay its potential
commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or
commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our
own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all.
If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and
commercialization activities, we may not be able to further develop our drug candidates or bring them to market and generate product
sales revenue, which would harm our business prospects, financial condition and results of operations.

We have engaged and will continue to rely on a single vendor to manage our order to cash cycle and our distribution activities in
the U.S., and the loss or disruption of service from this vendor could adversely affect our operations and financial condition.

Our U.S. customer management, order processing, invoicing, cash application, chargeback and rebate processing and

distribution and logistics activities are managed by Dohmen Life Science Services (DLSS), a managed services provider with a focus
on life sciences companies. If we were to lose the availability of DLSS’s services due to a dispute, termination of or inability to renew
the contract, or other factors such as fire, natural disaster or other disruption, such loss could have a material adverse effect on our
operations. Although multiple providers of such services exist, there can be no assurance that we could secure another source to
handle these transactions on acceptable terms or otherwise to our specifications in the event of a disruption of services at operational
centers.

Risks Related to Our Industry, Business and Operation

We are dependent on our key personnel, and if we are not successful in attracting and retaining qualified personnel, we may not
be able to successfully implement our business strategy. Additionally, certain members of our leadership may engage in other
business ventures that may have interests in conflict with ours.

We are highly dependent on Dr. Lau, our Chief Executive Officer, Dr. Kwan, our Chief Medical Officer and the other principal

members of our management and scientific teams. We do not maintain “key person” insurance for any of our executives or other
employees. The loss of the services of any of these persons could impede the achievement of our research, development and
commercialization objectives.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock

option grants that vest over time. The value to employees of these equity grants that vest over time may be significantly affected by
changes in the price of our common stock that are beyond our control and may at any time be insufficient to counteract more lucrative
offers from other companies. Although we have employment agreements with our key employees, any of our employees could leave
our employment at any time, with or without notice.

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel or consultants will also

be critical to our success. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in
formulating our discovery and preclinical development and commercialization strategy. The loss of the services of our executive
officers or other key employees and consultants could impede the achievement of our research, development and commercialization
objectives and seriously harm our ability to successfully implement our business strategy.

Furthermore, replacing executive officers and key employees or consultants may be difficult and may take an extended period of

time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully
develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be
unable to hire, train, retain or motivate these key personnel or consultants on acceptable terms given the competition among numerous
pharmaceutical and biotechnology companies for similar personnel.

We may choose to hire part-time employees or use consultants. As a result, certain of our employees, officers, directors and

consultants may not devote all of their time to our business, and may from time to time serve as officers, directors and consultants of
other companies. These other companies may have interests in conflict with ours. For instance, Dr. Johnson Lau, who serves as our
Chief Executive Officer and Chairman, Dr. Manson Fok, who serves on our board of directors, are also directors of Avalon Global
Holdings Limited, or Avalon, a shareholder of ours.

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We also face competition for the hiring of scientific and clinical personnel from universities and research institutions. Our
consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory
contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality
personnel, our ability to pursue our growth strategy will be limited.

We are substantially dependent on our public-private partnerships and if we or our counterparties fail to meet the obligations of
those agreements and we lose the benefits of those partnerships, it would materially impact our development, operations and
prospects.

Our long-term public-private partnerships with governments and government agencies, including in certain emerging markets,
include agreements to build and/or maintain manufacturing facilities for us. For example, we entered into an agreement with FSMC,
whereby FSMC agreed to fund the costs of construction of a new manufacturing facility in Dunkirk, New York. FSMC is responsible
for the costs of construction and of all equipment for the facility, up to an amount not to exceed $225 million, and shall retain
ownership of the facility and the equipment. To the extent the costs of constructing the Dunkirk facility exceed $225 million, we will
be responsible for those costs. We are entitled to lease the facility and all equipment at a rate of $1.00 per year for an initial 10-year
term, and for the same rate if we elect to extend the lease for an additional 10-year term. We are responsible for all operating costs and
expenses for the facility. In exchange, we have committed to spending $1.52 billion on operational expenses in the Dunkirk facility in
our first 10-year term in the facility, and an additional $1.5 billion on operational expenses if we elect to extend the lease for a second
10-year term. We have also committed to hiring 450 permanent employees within the first 5 years at the Dunkirk facility. In addition,
in July 2017, we entered into a 20-year payment in-lieu of tax agreement with the CCIDA for the construction of our Dunkirk facility,
valued at approximately $9.1 million. We have also entered into similar arrangements with FSMC relating to our headquarters, and
Chongqing Maliu Riverside Development & Investment Co., Ltd. relating to a plant in Chongqing, China, under which we have
committed to achieving certain operating, revenue and tax generation milestones. If we are unable to comply with our obligations
under these arrangements, including the milestones we have committed to achieve, we may lose access to the properties covered by
such arrangements which could disrupt our operations and manufacturing activities, cause us to divert resources to finding alternative
facilities, which would not have any subsidies, and would have a significant impact on our operations and financial performance. We
may also be subject to lawsuits or claims for damages against us if we are unable to comply with our obligations under these
arrangements. For example, our potential liability in connection with a failure to comply with the New York State partnership
agreements could be as high as $225 million, depending on the amount of funding ESD had contributed to the Dunkirk project at the
time of the claim.

Furthermore, there is no guarantee that the counterparties to our public-private partnerships will comply with the terms of the

agreements, including that their ability to fund their capital commitments under the agreements may be subject
additional capital and that construction timetables may not be met, nor is there guarantee that the successors to such counterparties
will continue to comply with terms of the agreements, regardless of existence of such government stipulations as a guideline released
on November 4, 2016 by the State Council of China, which provides that, among others governments and relevant departments at all
levels shall strictly keep policy commitments lawfully made to society and administrative counterparties, shall carefully perform all
the contracts lawfully entered into with investment subjects in activities like attraction of investment and public-private partnership,
shall not breach contracts with such excuses as government transition and replacement of leaders, and shall bear legal and economic
liability in event of their infringements and contract breaches. If our public-private partnership counterparties or their successors fail to
comply with their obligations under these arrangements, our development programs and prospects will be materially adversely
affected. Public-private partnerships are also subject to risks associated with government and government agency counterparties,
including risks related to government relations compliance, sovereign immunity, shifts in the political environment, changing
economic and legal conditions and social dynamics.

to their ability to raise

b

We will need to continue to increase the size and capabilities of our organization, and we may experience difficulties in managing
our growth.

As of December 31, 2018, we had 582 employees and consultants and most of our employees are full-time. As our development

and commercialization plans and strategies develop, and as we continue to operate as a public company, we must add a significant
number of additional managerial, operational, sales, marketing, financial and other personnel. Future growth will impose significant
added responsibilities on members of management, including:

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identifying, recruiting, integrating, maintaining and motivating additional employees;

managing our internal development efforts effectively, including the clinical and FDA or other comparable authority
review process for our drug candidates, while complying with our contractual obligations to contractors and other third
parties; and

improving our operational, financial and management controls, reporting systems and procedures.

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Our future financial

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performance and our ability to commercialize our drug candidates will depend, in part, on our ability to

effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away
from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. In addition, we expect
to incur additional costs in hiring, training and retaining such additional personnel.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and

contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our drug
candidates and, accordingly, may not achieve our research, development and commercialization goals.

If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report our consolidated
financial results.

ii

We cannot assure you that there will not be material weaknesses and significant deficiencies that our independent registered
public accounting firm or we will identify in the future. Under standards established by the Public Company Accounting Oversight
Board, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow
management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely
basis. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented
or detected and corrected on a timely basis. As a public company, we also need to establish and maintain effective disclosure and
financial controls and make changes in our corporate governance practices including our board and committee practices. If we identify
such issues or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected, and we
may be unable to maintain compliance with applicable listing requirements.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

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Upon completion of our initial public offering, we became subject to the periodic reporting requirements of the Exchange Act.

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we
file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC.

We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and

operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system,
misstatements due to error or fraud may occur and not be detected, which would cause us to be unable to produce accurate financial
statements and may adversely affect our business.

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other
improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of fraud, misconduct or other illegal activity by our employees, independent contractors, consultants,

commercial partners and vendors. Misconduct by these parties could include intentional, reckless and negligent conduct that fails to:
comply with the laws of the FDA and other similar non-U.S. regulatory authorities; provide true, complete and accurate information to
the FDA and other similar non-U.S. regulatory authorities; comply with manufacturing standards we have established; comply with
healthcare fraud and abuse and privacy laws in the U.S. and similar non-U.S. fraudulent misconduct laws; or report financial
information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our drug candidates
and begin commercializing those drugs in the U.S., our potential exposure under U.S. laws will increase significantly and our costs
associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current
activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs.
In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the
healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These
laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and
commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also
involve the improper use of information obtained in the course of patient recruitment for clinical trials, which could result in
regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees
and other parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to
comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other
sanctions.

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We may have conflicts of interest with our affiliates and related parties, and in the past we have engaged in transactions and
entered into agreements with affiliates that were not negotiated at arms’ length.

We have engaged, and may in the future engage, in transactions with affiliates and other related parties. These transactions may
not have been, and may not be, on terms as favorable to us as they could have been if obtained from non-affiliated persons. While an
effort has been made and will continue to be made to obtain services from affiliated persons and other related parties at rates and on
terms as favorable as would be charged by others, there will always be an inherent conflict of interest between our interests and those
of our affiliates and related parties. Our majority stockholders may economically benefit from our arrangements with related parties. If
we engage in related party transactions on unfavorable terms, our operating results will be negatively impacted.

If we engage in future acquisitions or strategic partnerships, this may increase our capital requirements, dilute our shareholders,
cause us to incur debt or assume contingent liabilities, and subject us to other risks.

We may evaluate various acquisitions and strategic partnerships, including licensing or acquiring complementary products,

intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks,
including:

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increased operating expenses and cash requirements;

assimilation of operations, intellectual property and products of an acquired company, including difficulties associated
with integrating new personnel;

the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a
strategic merger or acquisition;

retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business
relationships;

risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their
existing drugs or drug candidates and regulatory approvals and

our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in
undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we undertake acquisitions, we may issue dilutive securities, assume or incur debt obligations, incur large one-time

expenses and acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to
locate suitable acquisition opportunities and this inability could impair our ability to grow or obtain access to technology or products
that may be important to the development of our business.

Our internal computer systems, or those used by our CROs, collaboration partners, third-party service providers or other
contractors or consultants, may fail or suffer security breaches.

Despite the implementation of cybersecurity measures, our information technology and Internet based systems, including those

of our current and future CROs, collaboration partners, third-party service providers and other contractors and consultants, are
vulnerable to damage, interruption, or failure from computer viruses, unauthorized access, intrusion, and other cybersecurity incidents.
This could result in the exposure of sensitive data including the loss of trade secrets, intellectual property, personal identifiable or
sensitive information of employees, customers, partners, clinical trial patients and others, leading to a material disruption of our
development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials
could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise,
we partially rely on our third-party research institution collaborators for research and development of our drug candidates and other
third parties for the manufacture of our drug candidates and to conduct clinical trials, and similar cybersecurity incidents relating to
their computer systems could also have a material adverse effff ect
on our business. Certain data security breaches must be reported to
affected individuals and the government, and in some cases to the media, under provisions of HIPAA, other U.S. federal and state law,
and requirements of non-U.S. jurisdictions, and financial penalties may also apply. To the extent that any disruption or security breach
were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary
information, we could incur liability and the further development and commercialization of our drug candidates could be delayed.

ff

We are aware of a security breach that occurred in March 2017. That incident occurred when the credentials of an approved
consultant were compromised, and the consultant’s credentials were used to access the remote desktop server and active directory
server of our wholly-owned subsidiary APS. Upon discovery of the breach, we immediately took steps to void the compromised
credentials and reset all credentials having access to APS’ systems. These particular APS information systems are independent of ours
and did not contain any drug candidate, clinical trial or patient-specific data. However, information stored on APS’ systems may have
been vulnerable during the intrusion. To help mitigate future incidents, we have put in place enhanced security measures required for

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access by consultants. Notwithstanding such measures, we cannot be certain that no future security breaches will occur or that future
breaches will not result in a material disruption of our development programs and our business operations.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations, and those of our third-party research institution collaborators, CROs, suppliers and other contractors and
consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes,
typhoons, fires, extreme weather conditions, medical epidemics, acts of war or terrorism, and other natural or man-made disasters or
business interruptions, for which we are predominantly self-insured. In addition, we partially rely on our third-party research
collaborators for conducting research and development of our drug candidates, and they may be affected by government shutdowns or
withdrawn funding. The occurrence of any of these business disruptions could seriously harm our operations and financial condition
and increase our costs and expenses. Our ability to obtain clinical supplies of our drug candidates could be disrupted if the operations
of these suppliers are affected by a man-made or natural disaster or other business interruption. Damage or extended periods of
interruption to our corporate, development or research facilities due to fire, natural disaster, power loss, communications failure,
unauthorized entry or other events could cause us to cease or delay development of some or all of our drug candidates. Although we
maintain property damage and business interruption insurance coverage on these facilities, our insurance might not cover all losses
under such circumstances and our business may be seriously harmed by such delays and interruption.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our drug candidates or our 503B products.

We face an inherent risk of product liability as a result of the clinical testing of our drug candidates and will face an even greater

risk if we commercialize any of our clinical candidates. For example, we may be sued if our drug candidates that we plan to
manufacture, or our 503B products that we currently manufacture or plan to manufacture cause or are perceived to cause injn ury or are
found to be otherwise unsuitable during clinical testing, as applicable, manufacturing, marketing or sale. Any such product liability
a
claims may include allegations of defeff cts in manufacturing, defects in design, a failure to warn of dangers inherent in the drug,
negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot
successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit
commercialization of our drug candidates. Even successful defense would require significant financial and management resources.
Regardless of the merits or eventual outcome, liability claims may result in:

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decreased demand for our drugs;

injury to our reputation;

withdrawal of clinical trial participants and inability to continue clinical trials;

initiation of investigations by regulators;

costs to defend the related litigation;

a diversion of management’s time and our resources;

substantial monetary awards to trial participants or patients;

product recalls, withdrawals or labeling, marketing or promotional restrictions;

loss of revenue;

exhaustion of any available insurance and our capital resources;

the inability to commercialize any drug candidate and

a decline in the price of our common stock.

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 drugs we develop, alone or with collaborators. Although we currently carry
clinical trial insurance, which we believe to be adequate for our current operations, the amount of such insurance coverage may not be
adequate now, or in the future, and we may be unable to maintain such insurance, or we may not be able to obtain additional or
replacement insurance at a reasonable cost, if at all. Our insurance policies may also have various exclusions, and we may be subject
to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a
settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain,
sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification
against losses, such indemnification may not be available or adequate should any claim arise.

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Additionally, we may be sued if the products that we commercialize, market or distribute for our partners cause or are perceived

to cause injury or are found to be otherwise unsuitable, and may result in:

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decreased demand for those products;

damage to our reputation;

costs incurred related to product recalls;

limiting our opportunities to enter into future commercial partnership and

a decline in the price of our common stock.

We have limited insurance coverage, and any claims beyond our insurance coverage may result in our incurring substantial costs
and a diversion of resources.

We maintain property insurance policies covering physical damage to, or loss of, our buildings and their improvements,
equipment, office furniture and inventory. We hold employer’s liability insurance generally covering death or work-related injury of
employees. We hold public liability insurance covering certain incidents involving third parties that occur on or in the premises of the
company. We hold directors and officers liability insurance and business interruption insurance. We do not maintain key-man lifeff
insurance on any of our senior management or key personnel. Our insurance coverage may be insufficient to cover any claim for
product liability, damage to our fixed assets or employee injuries. Any liability or damage to, or caused by, our facilities or our
personnel beyond our insurance coverage may result in our incurring substantial costs and a diversion of resources.

We may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media coverage,
including social media and malicious reports, all of which could severely damage our reputation and materially and adversely
affect our business and prospects.

We focus on the development of drugs used in the treatment of cancers, and such drugs may be the subject of regulatory,

watchdog and media scrutiny and coverage, which also the possibility of heightened attention from the public, the media and our
participants. In addition, members of our management and board include high-profile public figures who may be the subject of media
and public scrutiny and attention. From time to time, these objections or allegations, regardless of their veracity, may result in public
protests or negative publicity, which could result in government inquiry or harm our reputation. Corporate transactions we or related
parties undertake may also subject us to increased media exposure and public scrutiny. There is no assurance that we would not
become a target for public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation as
well as our business and prospects.

In addition, our directors and management have been in the past, and may continue to be, subject to scrutiny by the media and

the public regarding their activities in and outside our company, which may result in unverified, inaccurate or misleading information
about them being reported by the press. Negative publicity about our directors or management, even if untrue or inaccurate, may harm
our reputation.

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

We have incurred operating losses that are treated as taxable losses for U.S. federal income tax purposes. To the extent that we
continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses
expire. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an ownership
change (generally defined as a greater than 50 percentage points change (by value) in its equity ownership over a rolling three-year
period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its
post-change income may be limited. We believe that we have experienced an ownership change in the past, which may affect our
ability to utilize our net operating loss carryforwards. As of December 31, 2018, we had federal net operating loss carryforwards of
approximately $253.8 million that could be limited by our past and any future ownership change, which could have an adverse effect
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future
on our future results of operations. Similar limitations will apply to our ability to carry forward any unused tax credits to offset
taxable income.

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Our business, financial condition and stock price may be adversely affected by volatile global markets and economic conditions.

Our business and operating results could be affected by global economic conditions. When global economic conditions
deteriorate or economic uncertainty continues, customers and potential customers may delay or cancellation of plans to purchase our
products, governments may reduce healthcare expenditures, and other payors may reduce their reimbursement coverage or
reimbursement rates. This uncertainty contributes to volatile global markets generally and may have a negative impact on the market
value of our common stock. Our sensitivity to economic cycles and any related fluctuations in the businesses of our customers or
potential customers could have a material adverse impact on our business and financial results. Although we are uncertain about the
extent to which global financial market disruptions or a slowdown of the U.S. or Chinese economy would impact our business in the
long term, there is a risk that our business, results of operations and prospects would be materially and adversely affected by any
global economic downturn or the slowdown of the U.S. or Chinese economy.

If our manufacturing facilities are damaged or destroyed or production at such facilities is otherwise interrupted, our business and
prospects would be negatively affected.

If our manufacturing facilities or the equipment in them is damaged or destroyed, we may not be able to quickly or

inexpensively replace our manufacturing capacity or replace it at all. In the event of a temporary or protracted loss of the facilities or
equipment, we might not be able to transfer manufacturing to a third party. Even if we could transfer manufacturing to a third party,
the shift would likely be expensive and time-consuming, particularly since the new facility would need to comply with the necessary
regulatory requirements and we would need FDA, NMPA or and other comparable regulatory agency approval before selling any
drugs manufactured at that facility. Such an event could delay our clinical trials or reduce our product sales if and when we are able to
successfully commercialize one or more of our drug candidates.

Any interruption in manufacturing operations at our manufacturing facilities could result in our inability to satisfyff

the demands

of our clinical trials or commercialization. A number of factors could cause interruptions, including:

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equipment malfunctions or failures;

malfunctions or compromise by third party actors of our technology systems;

work stoppages;

damage to or destruction of either facility due to natural disasters;

regional power shortages;

product tampering or

terrorist activities.

Any disruption that impedes our ability to manufacture our drug candidates in a timely manner could materially harm our

business, financial condition and operating results.

Currently, we maintain insurance coverage against damage to our property and equipment. However, our insurance coverage

may not reimburse us, or may not be sufficient to reimburse us, for any expenses or losses we may suffer. We may be unable to meet
our requirements for our drug candidates if there were a catastrophic event or failure of our manufacturing facilities or processes.

Risks Related to Government Regulation

Recently enacted and future legislation may increase the difficulty and cost for us to obtain regulatory approval of and
commercialize our drug candidates and affect the prices we may obtain.

In the U.S., China and certain other jurisdictions, there have been a number of legislative and regulatory changes and proposed

changes regarding the healthcare system that could prevent or delay regulatory approval of our drug candidates, restrict or regulate
post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain regulatory approval.

In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way
Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly
and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this
legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. Cost reduction initiatives
and other provisions of this legislation could decrease the coverage and price that we receive for any approved products. While the
MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment

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limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result
in a similar reduction in payments from private payors.

The Affordable Care Act, or ACA, included provisions to broaden access to health insurance, reduce or constrain the growth of
healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health insurance
industries, impose new taxes and fees on the health industry and impose additional health policy reforms.

Among the provisions of the ACA of importance to our potential drug candidates are the following:

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an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and
biologics;

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;

expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new
government investigative powers, and enhanced penalties for noncompliance;

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale
discounts off negotiated prices;

extension of manufacturers’ Medicaid rebate liability;

expansion of eligibility criteria for Medicaid programs;

expansion of the entities eligible for discounts under the Public Health Service Act pharmaceutical pricing program;

requirements to report payments and other transfers of value made to physicians or teaching hospitals;

a requirement to annually report drug samples that manufacturers and distributors provide to physicians and

a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research.

In addition, other legislative changes have been proposed and adopted in the U.S. since the ACA was enacted. These changes

included aggregate reductions to Medicare payments to providers of 2% per fiscal year, starting in 2013. In January 2013, the
American Taxpayer Relief Act of 2012 was enacted, which, among other things, reduced Medicare payments to several providers, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These
laws may result in additional reductions in Medicare and other healthcare funding.

We expect that the ACA, as well as other healthcare reform legislative measures that have been since adopted or may be
adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive
for any approved drug. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may
prevent us from being able to generate revenue, attain profitability or commercialize our drugs. In particular, we expect that the
current presidential administration and U.S. Congress will seek to modify, repeal, or otherwise invalidate all, or certain provisions of,
the ACA. Most recently, the Tax Cuts and Jobs Act was enacted, which, among other things, removes penalties for not complying
with the individual mandate to carry health insurance. There is still uncertainty with respect to the impact President Trump’s
administration and the U.S. Congress may have, if any, and any changes will likely take time to unfold. Such reforms could have an
adverse effect on anticipated revenues from therapeutic candidates that we may successfully develop and for which we may obtain
regulatory approval and may affect our overall financial condition and ability to develop therapeutic candidates. However, we cannot
predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.

Other legislative and regulatory proposals have been made to expand post-approval requirements and restrict coverage and

reimbursement and sales and promotional activities, for pharmaceutical products. We cannot be sure whether additional legislative
changes will be enacted, or whether agencies such as the FDA or Centers for Medicare and Medicaid Services will issue new
regulations, guidance or interpretations that may impact our drug candidates. In addition, increased scrutiny by the U.S. Congress of
the FDA’s approval process may significantly delay or prevent regulatory approval, as well as subject us to more stringent product
labeling and post-marketing testing and other requirements.

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We are subject, directly or indirectly, to applicable U.S. federal and state anti-kickback, false claims laws, physician payment
transparency laws, fraud and abuse laws or similar healthcare and privacy and security laws and regulations, which could expose
us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and others play a primary role in the recommendation and prescription of our products and any

of our product candidates for which we obtain regulatory approval. Our operations are subject to various federal and state fraud and
abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act and physician payment
transparency laws and regulations. These laws may impact, among other things, our proposed sales and marketing programs as well as
any patient support programs we may consider offering. In addition, we may be subject to patient privacy regulation by both the
federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

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the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving,
offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in
cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or
recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a
federal healthcare program, such as the Medicare and Medicaid programs;

federal
civil and criminal false claims laws and civil monetary penalty laws, such as the federal False Claims Act which
ff
imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for
knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval from
Medicare, Medicaid or other third-party payors that are false or fraudulent, including failure to timely return an
overpayment received from the federal government or making a false statement to avoid, decrease or conceal an
obligation to pay money to the federal government;

provisions of HIPAA, which created new federal criminal statutes referred to as the “HIPAA All-Payor Fraud
Prohibition,” prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare
benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or
property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor
(e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material
fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits,
items or services relating to healthcare matters;

provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009
and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health
plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that
involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and
transmission of individually identifiable health information without appropriate authorization;

the federal transparency requirements under the ACA, including the provision commonly referred to as the Physician
Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the U.S.
Department of Health and Human Services information related to all payments or other transfers of value made to
physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate
family members unless a specific exclusion applies; and

consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that

federal
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potentially harm consumers.

Additionally, we are subject to state and non-U.S. equivalents of each of the healthcare laws described above, among others,
some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the
Federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not
just governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies
to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or
the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also
impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are
ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law
requirement, we could be subject to penalties.

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Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that

some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform
legislation has strengthened these laws. For example, the ACA, among other things, amends the intent requirement of the federal Anti-
Kickback and criminal healthcare fraud statutes. As a result of such amendment, a person or entity no longer needs to have actual
knowledge of these statutes or specific intent to violate them in order to have committed a violation. Moreover, the ACA provides that
the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statutett
constitutes a false or fraudulent claim for purposes of the False Claims Act.

Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including penalties, fines and/or
exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid and debarment from contracting
with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the U.S. government under the
Federal False Claims Act as well as under the false claims laws of several states.

Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of our practices may

be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable
healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our
business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or
other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and
administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and
other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of
our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, the
approval and commercialization of any of our drug candidates outside the U.S. will also likely subject us to non-U.S. equivalents of
the healthcare laws mentioned above, among other non-U.S. laws.

If any of the physicians or other providers or entities with whom we expect to do business is found to be not in compliance with

applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded
healthcare programs.

Lastly, political, economic and regulatory influences are subjecting the health care industry in the U.S. to fundamental change.

Initiatives to reduce the federal budget and debt and to reform health care coverage are increasing cost-containment efforts. We
anticipate that federal agencies, Congress, state legislatures, and the private sector will continue to review and assess alternative health
care benefits, controls on health care spending, and other fundamental changes to the healthcare delivery system. Any proposed or
actual changes could limit coverage for or the amounts that federal and state governments will pay for health care products and
services, which could also result in reduced demand for our products or additional pricing pressures, and limit or eliminate our
spending on development projects and affect our ultimate profitability.

Our business is subject to applicable laws and regulations relating to sanctions, anti-money laundering and anti-bribery practices,
the violation of which could adversely affect our operations.

We must comply with all applicable economic sanctions, anti-money laundering and anti-bribery laws and regulations of the

U.S. and other foreign jurisdictions where we operate, including China. U.S. laws and regulations applicable to us include the
economic trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets
Control, or OFAC, as well as certain laws administered by the U.S. Department of State. Our business is also subject to anti-money
laundering laws and regulations, including the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Money Laundering
Regulations 2007 in the U.K., the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986 and the USA PATRIOT Act
of 2001 in the U.S. and equivalent or similar legislation in the other countries where we do business. In addition, we are subject to the
Foreign Corrupt Practices Act of 1977, or FCPA, and other anti-bribery laws such as the U.K. Bribery Act 2010 that generally prohibit
the corrupt provision of anything of value to foreign governments and their officials and political parties for the purpose of influencing
official conduct or obtaining or retaining an undue business advantage. Applicable anti-bribery laws also may prohibit commercial
bribery.

We have operations, conduct clinical trials, deal with government entities, including hospitals and public health regulators, and

have contracts in countries known to experience corruption and commercial bribery. Our activities in these countries, particularly
China, create the risk of unauthorized payments or offers of payments by our employees, brokers or agents that could be in violation
of various laws, including the FCPA, even though these parties are not always subject to our control and supervision. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in China, where we conduct business. There
is no assurance that our existing safeguards and procedures will be completely effective in ensuring compliance with such laws, and
our employees, brokers or agents may engage in conduct for which we may be held responsible. Violations of the FCPA or other anti-

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bribery laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect
our reputation, business, operating results, and financial condition.

Regulations administered by OFAC govern transactions with countries and persons subject to U.S. trade sanctions. We are also
subject to U.S. Government restrictions on transactions with specific entities and individuals, including, without limitation, those set
forth on the Entity List, the Specially Designated Nationals List, the Denied Persons List, the Unverified List, and the U.S. State
Department’s lists of debarred parties and sanctioned entities, and we may also be subject to restrictions on transactions with specific
entities and individuals subject to the sanctions administered by the United Nations Security Council, the EU, Her Majesty’s Treasury,
or other relevant sanctions authority. These regulations prohibit us from entering into or facilitating unlicensed transactions with, for
the benefit of, or in some cases involving the property and property interests of such persons, governments, or countries designated by
the relevant sanctions authority under one or more sanctions regimes. Failure to comply with these sanctions and embargoes may
result in material fines, sanctions or other penalties being imposed on us or other governmental investigations. In addition, various
state and municipal governments, universities and other investors maintain prohibitions or restrictions on investments in companies
that do business involving sanctioned countries or entities.

International economic and trade sanctions are complex and subject to frequent change, including jurisdictional reach and the

lists of countries, entities, and individuals subject to the sanctions. Current or future economic and trade sanctions regulations or
developments might have a negative impact on our business or reputation, and we may incur significant
or changing sanctions programs, as well as investigations, fines, fees or settlements, which may be difficult to predict. In addition,
companies subject to SEC reporting obligations are required under Section 13 of the Exchange Act to disclose in their periodic reports
specified dealings or transactions involving Iran or other individuals and entities targeted by certain sanctions promulgated by OFAC
that the reporting company or any of its affiliates engaged in during the period covered by the relevant periodic report. In some cases,
Section 13 requires companies to disclose transactions even if they are permissible under U.S. law. The SEC is required to post this
notice of disclosure pursuant to Section 13 on its website and report to the President and certain congressional committees regarding
such filings.

costs related to current, new,

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On January 16, 2016, OFAC issued General License H, which authorized certain transactions relating to Iran. Pursuant to

General License H, certain of our non-U.S. subsidiaries may conduct business relating to Iran. SEC guidance to date indicates that
activities authorized by General License H generally are not subject to disclosure under Section 13, but should applicable SEC
guidance or disclosure requirements change, or should our non-U.S. subsidiaries engage in activities subject to disclosure under
Section 13, we may be required to disclose certain Iran-related transactions in future periodic reports with the SEC. Even if such
activity is permitted under applicable law, disclosure could harm our reputation and have a negative impact on our business. Our non-
U.S. subsidiaries also remain subject to OFAC secondary sanctions governing trade with Iran, and any violations of OFAC secondary
sanctions regulations could negatively affect our reputation, business, operating results, and financial condition.

Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is

possible that an employee or intermediary could fail to comply with applicable laws and regulations. In such event, we could be
exposed to civil penalties, criminal penalties and other sanctions, including fines or other punitive actions, and the government may
seek to impose modifications to business practices, including cessation of business activities in sanctioned countries, and
modifications to compliance programs, which may increase compliance costs. In addition, such violations could damage our business
and/or our reputation. Such criminal or civil sanctions, penalties, other sanctions, and damage to our business and/or reputation could
have a material adverse effff ect

on our financial condition and results of operations.

ff

Any failure to comply with applicable regulations and industry standards or obtain various licenses and permits could harm our
reputation and our business, results of operations and prospects.

A number of governmental agencies or industry regulatory bodies in the U.S., and in non-U.S. jurisdictions including China,
impose strict rules, regulations and industry standards governing pharmaceutical and biotechnology research and development and
manufacturing and marketing activities, which apply to us. Our failure to comply with such regulations could result in the termination
of ongoing research or manufacturing and marketing, administrative penalties imposed by regulatory bodies or the disqualification of
data for submission to regulatory authorities. This could harm our reputation, prospects for future work and operating results. For
example, if we were to treat research animals inhumanely or in violation of international standards set out by the Association for
Assessment and Accreditation of Laboratory Animal Care, it could revoke any such accreditation and the accuracy of our animal
research data could be questioned.

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

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory
procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of
hazardous and flammable materials, including chemicals. Our operations also produce hazardous waste products. We generally
contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury

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these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any
resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal
fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses, we may incur due to injuries to our

employees resulting from the use of or exposure to hazardous materials, this insurance may not provide adequate coverage against
potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in
connection with our storage, use or disposal of biological or hazardous materials.

In addition, we may be required to incur substantial costs to comply with current or future environmental, health and safety laws

and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues and liquidity may suffer,rr
and our drugs could be subject to restrictions or withdrawal from the market.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response

and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely
affect our ability to commercialize and generate revenues from our drugs. If regulatory sanctions are applied or if regulatory approval
is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate
revenues from our product sales, our potential for achieving profitability will be diminished and the capital necessary to fund our
operations will be increased.

Risks Related to Our Doing Business in China

The pharmaceutical industry in China is highly regulated and such regulations are subject to change which may affect approval
and commercialization of our drugs.

Certain of our research operations and manufacturing facilities are in China. The pharmaceutical industry in China is subject to
comprehensive government regulation and supervision, encompassing the approval, registration, manufacturing, packaging, licensing
and marketing of new drugs. In recent years, the regulatory framework in China regarding the pharmaceutical industry has undergone
significant changes, and we expect that it will continue to undergo significant changes. Any such changes or amendments may result
in increased compliance costs on our business or cause delays in or prevent the successful development or commercialization of our
drug candidates in China and reduce the current benefits we believe are available to us from developing and manufacturing drugs in
China. Chinese authorities have become increasingly vigilant in enforcing laws in the pharmaceutical industry and any failure by us or
our partners to maintain compliance with applicable laws and regulations or obtain and maintain required licenses and permits may
result in the suspension or termination of our business activities in China. We believe our strategy and approach is aligned with the
Chinese government’s policies, but we cannot ensure that our strategy and approach will continue to be aligned.

Fluctuations in exchange rates could result in foreign currency exchange losses, which may adversely affect our financial
condition, results of operations and cash flows.

We incur portions of our expenses, and may in the future derive revenues, in currencies other than U.S. dollars, in particular, the

RMB. As a result, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to
fluctuations in foreign currency exchange rates. For example, a portion of our clinical trial activities are conducted outside of the U.S.,
and associated costs may be incurred in the local currency of the country in which the trial is being conducted, which costs could be
subject to fluctuations in currency exchange rates. We currently do not engage in hedging transactions to protect against uncertainty in
future exchange rates between particular foreign currencies and the U.S. dollar. A decline in the value of the U.S. dollar against
currencies in countries in which we conduct clinical trials could have a negative impact on our research and development costs.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes
in political and economic conditions and the foreign exchange policy adopted by China and other non-U.S. governments. Specifically
in China, on July 21, 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Following
the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years.
Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained
within a narrow band. Since June 2010, the Chinese government has allowed the RMB to appreciate slowly against the U.S. dollar
again, and it has appreciated more than 10% since June 2010. In April 2012, the Chinese government announced that it would allow
more RMB exchange rate fluctuation and in August 2015, China’s central bank executed a 2% devaluation in the RMB. From
December 31, 2016 to December 31, 2017, the RMB appreciated approximately 6.3% against the U.S. dollar. From December 31,

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2017 to December 31, 2018, the RMB depreciated approximately 5.6% against the U.S. dollar. It remains unclear what further
fluctuations may occur or what impact this will have on the currency and our results of operations.

It is difficult to predict how market forces or China, U.S. or other government policies may impact the exchange rate between

the RMB, U.S. dollar and other currencies in the future. There remains significant international pressure on the Chinese government to
adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. Substantially all of
our revenues are denominated in U.S. dollars and our costs are denominated in U.S. dollars and RMB, and a large portion of our
financial assets is denominated in U.S. dollars. Generally, to the extent that we need to convert U.S. dollars into RMB for our
operations, appreciation of the RMB against the U.S. dollar would have an adverse effect
Conversely, if we decide to convert our RMB into U.S. dollars for other business purposes, appreciation of the U.S. dollar against the
RMB would have a negative effect on the U.S. dollar amount we would receive. We cannot predict the impact of foreign currency
fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash
flows.

on the RMB amount we would receive.

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Changes in the political and economic policies of the Chinese government may materially and adversely affect our business,
financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.

A significant portion of our operations are in China. Accordingly, our financial condition and results of operations are affected

to a large extent by economic, political and legal developments in China.

The Chinese economy differs from the economies of most developed countries in many respects, including the extent of
government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the
Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of
state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial
portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a
significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant
control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or
companies.

While the Chinese economy has experienced significant growth in the past three decades, growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may
also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by
government control over capital investments or changes in tax regulations that are applicable to us and consequently have a material
adverse effect on our businesses, financial condition and results of operations.

Tariffs imposed by the U.S. and those imposed in response by other countries, as well as rapidly changing trade relations, could
have a material adverse effect on our business and results of operations.

Changes in U.S. and foreign governments’ trade policies have resulted in, and may continue to result in, tariffs on imports into
and exports from the U.S. Throughout 2018, the U.S. imposed tariffs on imports from several countries, including China. In response,
China has proposed and implemented their own tariffs on certain products, which may impact our supply chain and our costs of doing
business. If we are impacted by the changing trade relations between the U.S. and China, our business and results of operations may
be negatively impacted. Continued diminished trade relations between the U.S. and other countries, including potential reductions in
trade with China and others, as well as the continued escalation of tariffs, could have a material adverse effect on our financial
performance and results of operations.

There are uncertainties regarding the interpretation and enforcement of laws, rules and regulations in China.

A portion of our operations are conducted in China through our Chinese subsidiaries, and are governed by Chinese laws, rules

and regulations. Our Chinese subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The
Chinese legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be
cited for reference

but have limited precedential value.

ff

In 1979, the Chinese government began to promulgate a comprehensive system of laws, rules and regulations governing

economic matters in general. The overall effect of legislation over the past few decades has significantly enhanced the protections
afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and
recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to

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significant degrees of interpretation by Chinese regulatory agencies. In particular, because these laws, rules and regulations are
relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the
laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and
enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the
Chinese legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or
at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after
the occurrence of the violation.

Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources

and management attention. Since Chinese administrative and court authorities have significant discretion in interpreting and
implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court
proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our
ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and
results of operations.

Substantial uncertainties exist with respect to the enactment timetable, the final version, interpretation and implementation of draft
Chinese Foreign Investment Law and how it may impact the viability of our current corporate governance.

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to,
upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint
Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law,
together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected Chinese
regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce has solicited
comments on this draft and substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and
implementation.

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle

of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign
Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs,
whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce or
its local counterparts, treated as a Chinese domestic investor provided that the entity is “controlled” by Chinese entities and/or
citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (1) holding
50% of more of the shares, equity or voting rights of the subject entity; (2) holding less than 50% of the voting rights of the subject
entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the
voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies or
(3) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial
matters or other key aspects of business operations. Once an entity is determined to be an FIE, it will be subject to the foreign
investment restrictions or prohibitions, if the FIE is engaged in the industry listed in the “negative list” which will be separately issued
by the State Council later. Unless the underlying business of the FIE falls within the negative list, which calls forff market entry
clearance by the Ministry of Commerce or its local counterparts, prior approval from the government authorities as mandated by the
existing foreign investment legal regime would no longer be required for establishment of the FIE.

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and

increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information
reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment
amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large
foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with
these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons
directly responsible may be subject to criminal liabilities.

Chinese regulations relating to investments in offshore companies by Chinese residents may subject our future Chinese-resident
beneficial owners or our Chinese subsidiaries to liability or penalties, limit our ability to inject capital into our Chinese
subsidiaries or limit our Chinese subsidiaries’ ability to increase their registered capital or distribute profits.

The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4,
2014, which replaced the former circular, commonly known as SAFE Circular 75, promulgated by SAFE on October 21, 2005. SAFE
Circular 37 and other SAFE rules require Chinese residents to register with local branches of SAFE or delegated commercial banks in
connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and
financing, with such Chinese residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests,

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referred to in SAFE Circular 37 as a “special purpose vehicle”. SAFE Circular 37 further requires amendment to the registration in the
event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by
Chinese individuals, share transfer or exchange, merger, division or other material events. In the event that a Chinese shareholder
holding interests in a special purpose vehicle fails to fulfill the required registration, the Chinese subsidiaries of that special purpose
vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border
foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its
Chinese subsidiary. Moreover, failure to comply with the various registration requirements described above could result in liability
under Chinese law for evasion of foreign exchange controls.

We believe that certain of our shareholders are Chinese residents under SAFE Circular 37. These certain shareholders have
undertaken to (i) apply to register with local SAFE branch or its delegated commercial bank as soon as possible after exercising their
options and (ii) indemnify and hold harmless us and our subsidiaries against any loss suffered arising from their failure to complete
the registration. We do not have control over the shareholders and our other beneficial owners and cannot assure you that all of our
Chinese-resident beneficial owners have complied with, and will in the future comply with, SAFE Circular 37 and subsequent
implementation rules. The failure of Chinese-resident beneficial owners to register or amend their SAFE registrations in a timely
manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future Chinese-resident beneficial owners
of our company to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may
subject such beneficial owners or our Chinese subsidiaries to fines and legal sanctions. Furthermore, SAFE Circular 37 is unclear how
this regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and
implemented by the relevant Chinese government authorities, and we cannot predict how these regulations will affect our business
operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute
additional capital to our Chinese subsidiaries and limit our Chinese subsidiaries’ ability to distribute dividends to us. These risks could
in the future have a material adverse effect on our business, financial condition and results of operations.

Any failure to comply with Chinese regulations regarding the registration requirements for employee share option plans may
subject the Chinese plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic

Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, commonly known as SAFE Circular 7, or
the Share Option Rules, replacing earlier rules promulgated in 2007. Pursuant to these rules, Chinese residents who are granted shares
or share options by companies listed on overseas stock exchanges under share incentive plans are required to (1) register with the
SAFE or its local branches; (2) retain a qualified Chinese agent, which may be a Chinese subsidiary of the overseas listed company or
another qualified institution selected by the Chinese subsidiary, to conduct the SAFE registration and other procedures with respect to
the share incentive plans on behalf of the participants and (3) retain an overseas institution to handle matters in connection with their
exercise of share options, purchase and sale of shares or interests and funds transfers. We and our executive officers and other
employees who are Chinese residents and who have been granted options will be subject to these regulations. Failure to complete the
SAFE registrations may subject them to fines, and legal sanctions, and may also limit our ability to contribute additional capital into
our Chinese subsidiary and limit our Chinese subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties
that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under Chinese law.
See “Regulation—Regulations Relating to Foreign Exchange and Dividend Distribution—Share Option Rules.”

We may be treated as a resident enterprise for Chinese tax purposes under the Chinese Enterprise Income Tax Law, and we may
therefore be subject to Chinese income tax on our global income.

Under the Chinese Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008,
enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be
considered Chinese tax resident enterprises for tax purposes and may be subject to the Chinese enterprise income tax at the rate of
25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall
management and control over the production and business, personnel, accounting books and assets of an enterprise. The State
Administration of Taxation has issued guidance, known as Circular 82 that provides certain specific criteria for determining whether
the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82
only applies to offshore enterprises controlled by Chinese enterprises, not those, such as us, controlled by foreign enterprises or
individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how
the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of
whether they are controlled by Chinese enterprises. Currently, our management is located in the U.S., and we generate a portion of our
revenues within China and a portion outside China. We believe that neither we nor any of our subsidiaries outside of China is a
Chinese resident enterprise for Chinese tax purposes. However, the tax resident status of an enterprise is subject to determination by
the Chinese tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body”. If we
were to be considered a Chinese resident enterprise, we would be subject to Chinese enterprise income tax at the rate of 25% on our
global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed
under the Chinese Enterprise Income Tax Law.

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Dividends payable to our foreign investors and gains on the sale of our common stock by our foreign investors may become subject
to Chinese tax law.

Under the Chinese Enterprise Income Tax Law and its implementing rules issued by the State Council, in general, a 10%

Chinese withholding tax is applicable to dividends payable to investors that are non-resident enterprises that do not have an
establishment or place of business in China or which have such establishment or place of business but the dividends are not effectively
connected with such establishment or place of business, to the extent such dividends are derived from sources within China. Similarly,
any gain realized on the transfer of shares of our common stock by such investors is also subject to Chinese tax at a current rate of
10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources
within China. If we are deemed a Chinese resident enterprise, dividends paid on our common stock, and any gain realized from the
transfer of our common stock, would be treated as income derived from sources within China and would as a result be subject to
Chinese taxation. Furthermore, if we are deemed a Chinese resident enterprise, dividends payable to individual investors who are non-
Chinese residents and any gain realized on the transfer of common stock by such investors may be subject to Chinese tax at a current
rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether we or any of our
subsidiaries established outside China are considered a Chinese resident enterprise, holders of our common stock would be able to
claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends payable to
our non-Chinese investors or gains from the transfer of our common stock by such investors are subject to Chinese tax, the value of
your investment in our common stock may decline significantly.

ff

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in Chinese resident enterprises by
their non-Chinese holding companies.

Pursuant to a notice, or Circular 698, issued by the State Administration of Taxation, where a non-resident enterprise conducts

an “indirect transfer” by transferring the equity interests of a Chinese resident enterprise indirectly via disposing of the equity interests
of an overseas holding company, and such overseas holding company is located in a tax jurisdiction that: (1) has an effective tax rate
less than 12.5% or (2) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the
relevant tax authority of the Chinese resident enterprise such indirect transfer. Using a “substance over form” principle, the Chinese
tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was
established for the purpose of reducing, avoiding or deferring Chinese tax. As a result, gains derived from such indirect transfer may
be subject to Chinese enterprise income tax, currently at a rate of 10%. In 2015, the State Administration of Taxation issued a circular,
known as Circular 7, which replaced or supplemented certain previous rules under Circular 698. Circular 7 sets out a wider scope of
indirect transfer of Chinese assets that might be subject to Chinese enterprise income tax, and more detailed guidelines on the
circumstances when such indirect transfer is considered to lack a bona fide commercial purpose and thus regarded as avoiding Chinese
tax. The conditional reporting obligation of the non-Chinese investor under Circular 698 is replaced by a voluntary reporting by the
is subject
transferor, the transferee or the underlying Chinese resident enterprise being transferred. Furthermore, if the indirect transferff
to Chinese enterprise income tax, the transferee has an obligation to withhold tax from the sale proceeds, unless the transferor reports
the transaction to the Chinese tax authority under Circular 7. Late payment of applicable tax will subject the transferor to default
interest. Gains derived from the sale of shares by investors through a public stock exchange are not subject to the Chinese enterprise
income tax pursuant to Circular 7 where such shares were acquired in a transaction through a public stock exchange. Circular 698 was
abolished by an announcement promulgated by the State Administration of Taxation in October 2017 and effective from December 1,
2017, or SAT Circular 37, which, among other things, provides specific provisions on matters concerning withholding of income tax
of non-resident enterprises at the source.

As newly implemented, there is uncertainty as to the application of Circular 7 and SAT Circular 37, both of which may be

determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore
subsidiaries where non-resident enterprises, being the transferors, were involved. The Chinese tax authorities may pursue such non-
resident enterprises with respect to a filing regarding the transactions and request our Chinese subsidiaries to assist in the filing. As a
result, we and our non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed
under Circular 7, and may be required to expend valuable resources to comply with Circular 7 or to establish that we and our non-
resident enterprises should not be taxed under Circular 7, for our previous and future restructuring or disposal of shares of our offshore
subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

Restrictions on currency exchange may limit our ability to utitt lill zii e our revenue effectively.

The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currency out of China. A portion of our revenue may in the future be denominated in RMB. Shortages in availability of
foreign currency may then restrict the ability of our Chinese subsidiaries to remit sufficient foreign currency to our offshore entities
for our offshore entities to pay dividends or make other payments or otherwise to satisfy our foreign currency denominated
obligations. The RMB is currently convertible under the “current account,” which includes dividends, trade and service-related foreign
exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans, including loans we
may secure from our onshore subsidiaries. Currently, our Chinese subsidiaries, which are wholly-foreign owned enterprises, may

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purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval
of SAFE by complying with certain procedural requirements. However, the relevant Chinese governmental authorities may limit or
eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a portion of our future revenue
may be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue
generated in RMB to fund our business activities outside of China or pay dividends in foreign currencies to our shareholders,
including holders of our common stock. Foreign exchange transactions under the capital account remain subject to limitations and
require approvals from, or registration with, SAFE and other relevant Chinese governmental authorities. This could affect our ability
to obtain foreign currency through debt or equity financing for our subsidiaries.

Recent litigation and negative publicity surrounding China-based companies listed in the U.S. may result in increased regulatoryr
scrutiny of us and negatively impact the trading price of our common stock and could have a material adverse effect upon our
business, including our results of operations, financial condition, cash flows and prospects.

We believe that litigation and negative publicity surrounding companies with operations in China, including concerning the
directors and officers of such companies, that are listed in the U.S. have negatively impacted stock prices for such companies. Various
equity-based research organizations have published reports on China-based companies after examining, among other things, their
corporate governance practices, related party transactions, sales practices and financial statements that have led to special
investigations and stock suspensions on national exchanges, including as a result of purported whistle-blowing or leaking by
employees or former employees. Any similar scrutiny of us, regardless of its lack of merit, could result in a diversion of management
resources and energy, potential costs to defend ourselves against rumors, decreases and volatility in the trading price of our common
stock, and increased directors and officers insurance premiums and could have a material adverse effect upon our business, including
our results of operations, financial condition, cash flows and prospects.

Risks Related to Our Common Stock

The trading price of our common stock has been and is likely to continue to be volatile, which could result in substantial losses to
you.

The trading price of our common stock has been and is likely to continue to be volatile and could fluctuate widely in response to

a variety of factors, many of which are beyond our control. In addition, the performance and fluctuation of the market prices of other
companies with a portion of their business operations located in China that have listed their securities in the U.S. may affect the
volatility in the price of and trading volumes for our common stock. Some of these companies have experienced significant volatility,
including significant price declines after their initial public offerings. The trading performances of these companies’ securities at the
time of or after their offerings may affect the overall investor sentiment towards other companies with significant China operations
listed in the U.S. and consequently may impact the trading performance of our common stock.

In addition to market and industry factors,

ff

the price and trading volume for our common stock may be highly volatile for

specific business reasons, including:

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announcements of regulatory approval or a complete response letter, or specific label indications or patient populations for
its use, or changes or delays in the regulatory review process;

announcements of therapeutic innovations or new products by us or our competitors;

adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and
marketing activities;

any adverse changes to our relationship with manufacturers or suppliers;

the results of our testing and clinical trials;

the results of our efforts to acquire or license additional drug candidates;

variations in the level of expenses related to our existing drug candidates or preclinical and clinical development
programs;

any intellectual property infringement actions in which we may become involved;

announcements concerning our competitors or the pharmaceutical industry in general;

achievement of expected product sales and profitability;

manufacture, supply or distribution shortages;

variations in our results of operations;

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•

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announcements about our earnings that are not in line with analyst expectations, the risk of which is enhanced because it
is our policy not to give guidance on earnings;

publication of operating or industry metrics by third parties, including government statistical agencies, that differ from
expectations of industry or financial analysts;

changes in financial estimates by securities research analysts;

announcements made by us or our competitors of new product and service offerings, acquisitions, strategic relationships,
joint ventures or capital commitments;

press reports or other negative publicity, whether or not true, about our business;

additions to or departures of our management;

ff
fluctuations

of exchange rates between the RMB and the U.S. dollar;

release or expiry of lock-up or other transfer restrictions on our outstanding common stock;

sales or perceived potential sales of additional common stock;

sales of our common stock by us, our executive officers and directors or our shareholders in the future;

general economic and market conditions and overall fluctuations in the U.S. equity markets;

changes in accounting principles and

changes or developments in China or global regulatory environment.

Any of these factors may result in large and sudden changes in the volume and trading price of our common stock. In the past,
following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action
litigation against that company. If we were involved in a class action suit, it could divert the attention of management, and, if
adversely determined, have a material adverse effect on our financial condition and results of operations.

In addition, the stock market, in general, and small pharmaceutical and biotechnology companies have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating
performance. Further, the current decline in the financial markets and related factors beyond our control may cause our common stock
price to decline rapidly and unexpectedly.

We may be subject to securities litigation, which could result in significant legal expenses and settlement or damage awards and
could divert management attention.

The price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of

their common stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future.
We generally, to the extent permitted by law, indemnify our executive offff iff cers. Regardless, securities litigation against us could result
in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

We are currently an “emerging growth company.” As a result of the reduced disclosure requirements applicable to emerging
growth companies, our common stock may be less attractive to investors.

We are currently an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).
For so long as we remain an emerging growth company, we are permitted and intend to rely on some of the exemptions from certain
reporting requirements that are applicable to other public companies that are not emerging growth companies. These exemptions
include but are not limited to not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-
Oxley Act of 2002, not being required to comply with any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements, reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved.

We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. If

some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and
the price of our common stock may be more volatile.

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Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our common stock for
return on your investment, if any.

We intend to retain most, if not all, of our available funds and earnings to fund the development and growth of our business. As
a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our
common stock as a source for any future dividend income.

Our board of directors has significant discretion as to whether to distribute dividends. Even if our board of directors decides to

declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future
results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly,
the return on an investment in our common stock will likely depend entirely upon any future price appreciation of our common stock.
There is no guarantee that our common stock will appreciate in value or even maintain its current market price. You may not realize a
return on your investment in our common stock and you may even lose your entire investment in our common stock. See “Dividend
Policy.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
markrr et price for our common stock and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish

about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the
analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, the market
price for our common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume
for our common stock to decline significantly.

Our directors, executive officers and principal stockholders have substantial control over us, which could limit your ability to
influence the outcome of key transactions, including a change of control.

Our directors, officers and stockholders who own greater than 5% of our outstanding common stock, together with their
affiliates, beneficially owned, in the aggregate, approximately 13% of our outstanding common stock based on the number shares
outstanding as of March 1, 2019. As a result, these stockholders, if acting together, will be able to influence or control matters
requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other
extraordinary transactions. In addition, these stockholders, acting together, would have the ability to control the management and
affairs of our company. They may also have interests that differ from yours and may vote in a way with which you disagree and which
may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of
control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a
sale of our company and might ultimately affect the market price of our common stock.

In addition, our directors and officers as a group, will beneficially own in the aggregate approximately 19% of our outstanding
common stock based on the number shares outstanding as of December 31, 2018. As such, our directors and executive officers could
have considerable influence over matters such as approving a potential acquisition of us. Our directors and executive officers’
investment in and position in our company could also discourage others from pursuing any potential acquisition of us, which could
have the effect of depriving the holders of our common stock of the opportunity to sell their shares at a premium over the prevailing
market price.

Anti-takeover provisions in our charter documents may discourage our acquisition by a third party, which could limit our
shareholders’ opportunity to sell their shares at a premium.

Our amended and restated certificate of incorporation and bylaws include provisions that could limit the ability of others to
acquire control of our company, modify our structure or cause us to engage in change-of-control transactions. These provisions could
have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control in a tender offer or similar transaction.

We will continue to incur increased costs as a result of operating as a public company, and our management are required to devote
substantial time to compliance initiatives and corporate governance practices.

As a public company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a

private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing

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requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on
public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance
practices including our board and committee practices. Our management and other personnel need to devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and
have made some activities more time-consuming and costly.

We will continue to evaluate these rules and regulations on an ongoing basis. These rules and regulations are often subject to
varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our

management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be
required to include an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document
and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue
to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the
adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through
testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal
control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed
timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more
material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our
financial statements.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Our corporate headquarters is located in Buffalo, New York, where we occupy approximately 51,000 square feet of the
Conventus Center for Collaborative Medicine, which includes approximately 16,000 square feet of a formulation testing and
chemistry lab under a lease that expires in July 2025 and is renewable for an additional 10 years. We also occupy approximately
15,000 square feet of office space in the Woodfield Preserve Office Center in Schaumberg, Illinois under a lease that expires in March
2027 which serves as the headquarters for our Commercial Platform. We occupy approximately 1,300 square feet of office space in
Cranford, New Jersey under a lease that expires in February 2025 that serves as our clinical research headquarters. We also occupy
approximately 10,672 square fee of office and lab space which represents a portion of the IC Development Centre in Hong Kong
under a lease that expires in July 2019 and is renewable annually that serves as our Hong Kong headquarters and research and
development center serving our Oncology Innovation Platform. We occupy approximately 6,200 square feet of office space in Taipei,
Taiwan under a lease that expires in December 2022 which serves for clinical research and clinical data management.

We occupy space in facilities in Clarence and Amherst, New York and Chongqing, China which provide our manufacturing and

packaging capabilities for our proprietary and 503B products and our Active Pharmaceutical Ingredient operations. In addition,
pursuant to an agreement with FSMC, FSMC is funding the costs of constructing a new manufacturing facility in Dunkirk, New York,
which we will lease. FSMC will retain ownership of the facility and equipment, and we will lease the facility and equipment for $1.00
per year for an initial 10-year term in exchange for meeting certain spending and employment targets in the Dunkirk area during our
term in the facility. The manufacturing facility is expected to be 320,000 sq. ft. and is targeted for completion in 2020. See “Item 1.

Business — Global Supply Chain Platform — Strategic Public-Private Partnerships — New York State Partnership” for more

information.

We believe that these facilities will be sufficient to meet our current needs.

Item 3.

Legal Proceedings.

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our

business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs,
unfavorable awards, diversion of management resources and other factors.

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On August 13, 2018, Athenex Pharma Solutions and Athenex Pharmaceutical Division, LLC, our wholly-owned subsidiaries,

filed a complaint for declaratory judgment against Par Pharmaceuticals, Inc., Par Sterile Products, LLC and Endo Par Innovation
Company, LLC (together, Par) in the United States District Court for the Western District of New York (the Court), seeking a
declaratory judgment from the Court that our compounded vasopressin drug products in ready-to-use form do not infringe on patents
that Par has with respect to its Vasostrict® product and that Par’s patents are invalid. On October 22, 2018, Par filed a motion to
dismiss the complaint on the basis that the Court does not have subject matter jurisdiction. Athenex has opposed Par’s motion and that
motion is fully briefed and currently pending. Par has not filed a claim for infringement of its patents in this suit but if Par’s motion to
dismiss Athenex’s patent suit is denied and the declaratory action proceeds, Par could proceed to lodge a counterclaim for patent
infringement. If such an infringement claim were brought and the Court ruled for Par, Athenex could be enjoined from further
production of compounded vasopressin within in the United States and sale of compounded vasopressin in or from the United States
and for payment of damages to Par for U.S. manufacture or sale of compounded vasopressin that has already taken place, which could
have a material adverse effff ect

on our business.

ff

In addition, on August 13, 2018, Athenex Pharma Solutions, LLC and Athenex Pharmaceutical Division, LLC filed a motion to

intervene and seek the dismissal of Par’s complaint against the FDA and certain governmental officials in the United States District
Court for the District of Columbia. Par has sought declaratory and injunctive relief against the FDA and certain governmental officials
that: (i) vasopressin be delisted from Category 1 of the FDA’s list of bulk drug substances under evaluation pursuant to Section 503B
of the Federal Food, Drug and Cosmetic Act (FDCA), (ii) the expansion of the FDA’s enforcement discretion to Category 1
substances, be enjoined; and (iii) that the FDA be enjoined from authorizing the compounding of vasopressin under Section 503B of
the FDCA. Our motion to intervene was granted. Par filed a preliminary injunction motion and we and the FDA filed motions for
judgment on the pleadings. This action is currently stayed. On March 4, 2019, FDA published in the Federal Register its final
decision not to include vasopressin on the list of bulk drug substances for which there is a clinical need. Also, on March 4, 2019,
Athenex, Inc., APS, and APD filed a complaint against FDA seeking to vacate its decision. In this case, FDA has represented to the
court that “until the Court issues a decision on the merits of this action, FDA will not initiate enforcement
based solely on Athenex’s use of the bulk drug substance vasopressin to compound drugs and distribute those drugs” and the court has
incorporated FDA’s representation into its published order. Because of the court’s order, Athenex will continue to produce and
distribute compounded vasopressin during the period that the case is pending and will reevaluate its position after the court issues its
decision on the merits of Athenex’s lawsuit.

action against Athenex

ff

ff

On August 14, 2018, we began selling compounded vasopressin injection in ready-to-use premix IV bags. If we are

unsuccessful in obtaining the relief we seek in our lawsuit against FDA, or there is an adverse final determination that Par’s patent is
valid and infringed, we would have to abandon this revenue-generating line of business; such events could have a material adverse
effect on our business, results of operations, financial condition and cash flows.

Item 4.

Mine Safety Disclosures.

Not applicable.

119

PART II

Item 5.

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

Market for our Common Stock

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “ATNX” since June 14, 2017. Prior to

that date, there was no public trading market for our common stock.

As of March 1, 2019, there were 133 holders of record of our common stock. The actual number of stockholders is greater than
this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street by brokers and
other nominees.

Stock Price Performance Graph

The graph below shows a comparison from June 14, 2017, the date on which our common stock first began trading on the

Nasdaq Global Select Market, of the cumulative total return on an assumed investment of $100.00 in cash in our common stock as
compared to the same investment in the NASDAQ Composite Index and the NASDAQ Biotechnology Index, all through to
December 31, 2018. Such Returns are based on historical results and are not intended to suggest future performance.

Comparison of Total Return
Among Athenex, Inc., the NASDAQ Composite Index, and the NASDAQ Biotechnology Index

$170.00

$150.00

$130.00

$110.00

$90.00

6/14/2017

12/31/2017

12/31/2018

Athenex, Inc.

NASDAQ Composite

NASDQ Biotechnology

Cumulative Total Return Comparison

Athenex, Inc.
NASDAQ Composite
NASDAQ Biotechnology Index

June 14,
2017

December 31,
2017

December 31,
2018

$
$
$

100.00
100.00
100.00

$
$
$

144.55
111.44
108.33

$
$
$

115.36
107.11
98.23

This performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the

Exchange Act, or incorporated by reference into any of our filings under the Securities Act or the Exchange Act, except as shall be
expressly set forth by specific reference to such filing.

Dividend Policy

We have never declared or paid cash or stock dividends on our common stock. We currently intend to retain all available funds
and any future earnings for use in the operations of our business and do not anticipate paying any dividends on our common stock in
the foreseeable future. Any future determination to declare dividends on common stock will be made at the discretion of our board of
directors and will depend on our financial condition, operating results, capital requirements, general business conditions, any
contractual restrictions on dividends, and other factors that our board of directors may deem relevant.

120

Item 6.

Selected Financial Data.

The following selected statements of operations and comprehensive loss data and the cash flow data for the years ended

December 31, 2018, 2017, and 2016 and the balance sheet data as of December 31, 2018 and 2017 are derived from our audited
consolidated financial statements included elsewhere in this report. You should read this data together with our audited consolidated
financial statements and related notes appearing elsewhere in this filing and the information
Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our
future results. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States, or U.S. GAAP.

under the caption “Management’s

ff

Year Ended December 31,
2017
(In thousands, except share and per share data)

2018

2016

Statements of Operations and Comprehensive Loss Data:
Revenue:

Product sales, net
License fees and consulting revenue
Grant revenue

Total revenue

Costs and operating expenses:

Cost of sales
Research and development expenses
Selling, general, and administrative expenses

Total costs and operating expenses
Operating loss
Interest expense, net
Loss on derivative liability
Income tax (benefit) expense
Net loss
Less: net loss attributable to non-controlling interests
Net loss attributable to Athenex, Inc.
Net loss per share attributable to Athenex, Inc. common

stockholders, basic and diluted (1)

Weighted-average shares used in computing net loss per

share attributable to Athenex, Inc. common stockholders,
basic and diluted (1)
Comprehensive loss

$

$

$

$

56,394
32,387
319
89,100

$

36,106
1,105
832
38,043

19,394
392
765
20,551

47,005
119,905
49,008
215,918
(126,818)
1,793
—
100
(128,711)
(11,271)
(117,440) $

25,122
76,797
46,112
148,031
(109,988)
5,912
15,411
85
(131,396)
(226)
(131,170) $

19,718
60,624
25,956
106,298
(85,747)
1,891
533
(265)
(87,906)
(191)
(87,715)

(1.82) $

(2.63) $

(2.19)

64,590,270

49,960,925

$

(117,950) $

(130,012) $

40,120,908
(88,796)

(1) See Note 15 to our audited consolidated financial statements appearing elsewhere in this report for a description of the method

used to calculate basic and diluted net loss per share attributable to Athenex, Inc. common stockholders and pro forma basic and
diluted net loss per share attributable to Athenex, Inc. common stockholders.

December 31,

2018

2017

(In thousands)

$

$

49,794
57,629
37,495
119,143
231,095
46,764
102,326
(10,586)
128,769

$

$

39,284
11,753
37,795
38,615
140,413
1,981
49,691
685
90,722

Selected Balance sheet data:
Cash and cash equivalents
Short-term investments
Goodwill
Working capital(1)
Total assets
Long-term debt
Total liabilities
Non-controlling interests
Total stockholders' equity

121

2018

Year Ended December 31,
2017
(In thousands)

2016

$

$

(109,387) $
(48,963)
169,035
(175)
10,510
39,284
49,794

$

(81,512) $
(10,018)
96,896
793
6,159
33,125
39,284

$

(47,870)
2,659
35,272
(431)
(10,370)
43,495
33,125

Selected Cash flow data:
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Net effect of foreign
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

exchange rate changes

ff

(1) Working capital = total current assets - total current liabilities.

122

Item 7.

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

The following discussion contains management’s discussion and analysis of our financial condition and results of operations

and should be read together with the historical consolidated financial statements and the notes thereto included in Part II, Item 8
“Consolidated Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that reflect our
plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk
Factors” section of this Annual Report. Actual results may differ materially from those contained in any forward-looking statements.
You should carefully read “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.”

Overview

We are a global clinical stage biopharmaceutical company dedicated to becoming a leader in the discovery and development of

next generation drugs for the treatment of cancer. Athenex is organized around three platforms, including an Oncology Innovation
Platform, a Commercial Platform and a Global Supply Chain Platform. The Company’s current clinical pipeline is derived from four
different platform technologies: (1) Orascovery, based on non-absorbed P-glycoprotein inhibitor, (2) Src kinase inhibition, (3) T-cell
receptor-engineered T-cells (TCR-T), and (4) Arginine deprivation therapy. We have assembled a leadership team and have
established global operations in the U.S. and China across the pharmaceutical value chain to execute our mission to become a global
leader in bringing innovative cancer treatments to the market and improve health outcomes.

Our Orascovery platform is based on the novel P-gp pump inhibitor molecule HM30181A, which we in-licensed in 2011 from

ff

Hanmi, a major Korean pharmaceutical company focusing on research and development. The P-gp pump is a plasma membrane
protein on the cells of the gut which forms a localized drug transport system and prevents oral absorption at therapeutic levels of many
well-known, widely used P-gp substrate cancer chemotherapeutic drugs such as paclitaxel, irinotecan and docetaxel, limiting their
current delivery to IV. These chemotherapy agents are widely used to treat multiple types of cancer. A cancer patient’s inability to
tolerate IV chemotherapies has limited the effectiveness
chemotherapies, like paclitaxel, facilitates the oral absorption of paclitaxel by blocking P-gp in intestinal cells and enables oral dosing
at therapeutic blood levels which have not been successfully and safely achieved to date without the use of HM30181A. We have
learned through clinical studies that this technology allows for certain active chemotherapeutic agents to be absorbed into the blood
orally as compared to IV and may enable some patients to tolerate a greater number of treatment cycles and duration of treatment
time. Oraxol, our leading Orascovery drug candidate is composed of HM30181A co-administered with an oral dosage form of
paclitaxel. We have four other major clinical product candidates in this platform, Oratecan, Oradoxel, Oratopo and Eribulin ORA,
which include HM30181A co-administered with an oral formulation of the widely used IV-administered chemotherapeutic agents,
irinotecan, docetaxel, topotecan and eribulin, respectively. In light of better tolerability of standard chemotherapies delivered orally,
combination with immuno-oncology and targeted anti-cancer treatments can be potentially optimized compared to current treatment
paradigms.

of IV anti-cancer therapies. Co-administration of HM30181A with oral

We are rapidly advancing our lead Orascovery drug candidate, Oraxol. In January 2018, we received positive feedback from the

FDA on the design of the ongoing Phase 3 trial, which indicated that if the study meets the primary endpoint with an acceptable
benefit to risk profile, it could be adequate as a single comparative trial to support registration of Oraxol in the U.S. for the indication
of metastatic breast cancer. Also, in January 2018, the CFDA allowed the IND application for Oraxol. Acceptance of the Oraxol IND
by the CFDA allowed us to commence a clinical trial program for Oraxol in China in 2018. In February 2018, the enrollment of
patients was on target for the Company to be able to conduct a second interim analysis in the Oraxol KX-ORAX-001 Phase 3 clinical
trial in the third quarter of 2018. In April 2018, the FDA granted Orphan Drug status to Oraxol for the treatment of angiosarcomas. In
August 2018, we received a positive recommendation by the DSMB of the second interim analysis of the Oraxol 001 Phase 3 Clinical
Trial, a randomized controlled clinical trial comparing Oraxol monotherapy against IV paclitaxel monotherapy in patients with
metastatic breast cancer. In October 2018, we presented encouraging efficacy and safety data of Oraxol in the treatment of metastatic
breast cancer patients obtained from a Phase 2 clinical trial conducted in Taiwan at the ESMO Congress. Results from twenty-four
patients with metastatic breast cancer were reported. Eleven patients (45.8%) achieved partial remission (PR), ten patients (41.7%)
had stable disease (SD), and three patients had progressive disease (PD). Drug-related serious adverse events consisting of grade 4
neutropenia were observed in three patients and all recovered completely. There was no dose limiting neuropathy observed. In
November 2018, we initiated a Phase 1/2 clinical study to assess the safety, tolerability and activity of Oraxol in combination with an
anti-PD1 antibody (pembrolizumab) in patients with advanced solid malignancies, in collaboration with Mayo Clinic. In December
2018, our global Phase 1b clinical trial of Oraxol (oral paclitaxel plus HM30181A) plus ramucirumab (monoclonal antibody to VEGF-
R2) in gastric cancer patients who failed previous chemotherapies completed the second cohort of patients. In January 2019, the target
enrollment of 360 evaluable patients in the Oraxol Phase 3 clinical trial in metastatic breast cancer was achieved.

123

We have also developed novel small molecule compounds through our Src Kinase Inhibition research platform, which refers to
novel small molecule compounds that have differentiated multiple-mechanisms of actions including: (1) the inhibition of the activity
of Src Kinase and (2) the inhibition of tubulin polymerization. We believe the combination of the two MOAs provides a broader range
of anti-cancer activity compared to either MOA alone. Our three key clinical product candidates in this platform are KX-01 ointments
for AK, pre-cancerous lesions, skin cancers and psoriasis; KX-01 oral for solid and liquid tumors and KX-02 for GBM.

We are rapidly advancing our lead candidate in the Src Kinase Inhibition platform, KX-01 ointment, for AK. AK has an
estimated prevalence of over 58 million patients and was found in approximately 14% of patients visiting dermatologists in the U.S.
while GBM has an incidence of 2 to 3 per 100,000 adults per year and accounts for 52% of all primary brain tumors. If left untreated,
10-15% of AK lesions will develop into skin cancers. Our Phase 1 clinical study and data from our Phase 2 clinical study
demonstrated a complete response rate of up to 43% among subjects who received treatment on their faces, with few severe LSRs
reported with the dosing regimen studied. Currently available treatments are limited by severe LSRs such as vesiculation, pustulation,
erosion and ulceration, with low patient compliance. We believe physicians and patients have avoided topical treatments because of
the pronounced side effects of the current treatments such as ingenol mebutate, imiquimod, fluorouracil, and that an ointment product
with good clinical activity and a favorable side effect profile could capture substantial new market share for treatment of this
condition. Patient enrollment in two Phase 3 studies commenced in September 2017, and the enrollment was completed in February
2018. In July 2018, both of our Phase 3 pivotal efficacy studies achieved their primary endpoint of 100% clearance of AK lesions at
Day 57 within the face or scalp treatment areas, with each study achieving statistical significance (p<0.0001). Topline results from the
two Phase 3 studies were featured in a late breaker session at the 2019 American Dermatology Annual Meeting in March 2019.
Results showed that 44% and 54% of patients in studies KX01-AK-003 and KX-01-AK-004, respectively, achieved 100% AK lesion
clearance at Day 57. Compliance rate in these two studies was greater than 99%. There was a statistically significant clearance rate in
favor of the KX-01 ointment versus the vehicle in each of the patient subgroups.

In 2018, we commenced development of two new in-licensed programs: TCR-T and Arginine Deprivation Therapy. The TCR-T

immunotherapy technology harnesses and enhances the patient’s own immune cells to target and eliminate cancer. It is a cell-based
therapy that takes advantage of unique attributes of TCR mediated target recognition and provides a potent and selective TCR-T
directed response against cancer cells. The Arginine Deprivation Therapy product, based on pegylated genetically engineered human
arginase, targets cancer growth and survival by interrupting the supply of an essential amino acid, arginine, to a proportion of cancers
with disrupted urea cycle. Our proprietary arginase biologic product is well suited to deplete arginine from the tumors with disrupted
urea cycle, while healthy cells, capable of producing their own arginine, are largely unaffected.

Since inception, we have devoted substantially all of our resources to research and development of our lead product candidates

under our Orascovery and Src Kinase Inhibition research platforms. We have incurred significant net losses since inception. As of
December 31, 2018, we had an accumulated deficit of approximately $443.7 million. Our recurring losses from operations and
negative cash flows from operations have raised substantial doubt regarding our ability to continue as a going concern, and as a result,
our independent registered public accounting firm has noted this in the opinion they issued on our consolidated financial statements
for the year ended December 31, 2018. As a result of the acquisitions of QuaDPharma in 2014 and Polymed in 2015, we started to
generate revenue from those businesses. Our Commercial Platform also launched sales of generic injectable products in 2017 and
503B products in 2018. Product sales totaled $56.4 million, $36.1 million and $19.4 million for the years ended December 31, 2018,
2017 and 2016, respectively, of which $5.1 million was attributable to 503B products during 2018. We expect to continue to incur
significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in
connection with our ongoing activities, as we:

•

•

•

•

•

•

•

•

Continue to advance our lead programs, Orascovery and Src Kinase Inhibition research platforms, through clinical
development;

Continue our current preclinical and clinical research program and development activities;

Seek to identify additional research programs and product candidate;

Continue investment in acquiring or in-licensing other drugs and technologies;

Continue investment in our manufacturing facilities;

Hire additional research, development and business personnel;

Maintain, expand and protect our intellectual property portfolio; and

Incur additional costs associated with operating as a public company.

In June 2017, we completed the initial public offering (IPO) of our common stock pursuant to a registration statement on Form

S-1. In the IPO, we sold an aggregate of 6,900,000 shares of our common stock, which included 900,000 shares of common stock
purchased by the underwriters upon the full exercise of their options to purchase additional common stock, at a price to the public of

124

$11.00 per share. We received aggregate cash proceeds of approximately $64.2 million from the initial public offering, net of
underwriting discounts and commissions and offering expenses. Upon the IPO, convertible bonds with an aggregate principal value of
$68.0 million, and a carrying value of $55.8 million, were converted into 7,727,273 shares of common stock at a 20% discount from
the IPO price of $11.00 per share. On September 29, 2017, the remaining convertible bond with a principal value of $7.0 million was
converted into 795,455 shares of common stock, at a 20% discount from the IPO price of $11.00 per share.

In January 2018, we completed an underwritten public offering of 4,300,000 shares of common stock at a public offering price

of $15.25 per share. In addition, we granted the underwriters a 30-day option to purchase up to an additional 645,000 shares of
common stock at the same price. In February 2018, the underwriters partially exercised their option to purchase an additional 465,000
shares of common stock at the offering price of $15.25 per share. Net proceeds from this public offering were - approximately $68.1
million, after deducting underwriting discounts and commissions and offering expenses paid or payable by us of approximately $4.5
million.

On June 29, 2018, we entered into a series of debt and equity financing agreements with Perceptive which provided us capital

for our research and development activities and other corporate purposes. In connection with these financing agreements, we received
aggregate net proceeds of $97.1 million from the issuance of 2,679,528 shares of common stock at a purchase price of $18.66 per
share and from a 5-year $50.0 million senior secured loan bearing interest at a floating per annum rate equal to LIBOR (with a 2%
floor) plus 9%, net of fees and offering expenses. The senior secured loan agreement requires that we maintain a minimum aggregate
balance of $4.0 million in cash free and clear of all liens and that we meet certain minimum revenue targets for each quarter during
which the loan is outstanding. The loan is secured by substantially all of our assets and is guaranteed by certain of our subsidiaries.
Our issuance of common stock to Perceptive was exempt from registration under the Securities Act pursuant to Section 4 (a)(2), in
addition, pursuant to a registration rights agreement with Perceptive, we were required to register the shares within 90 days after
closing of the transactions. The requirement was fulfilled in September of 2018. In connection with the senior secured loan agreement,
the Company granted Perceptive a warrant for the purchase of 425,000 shares of common stock at a purchase price of $18.66 per
share.

the

ff

We have funded our operations to date primarily from the issuance and sale of our common stock, including public and private

offerings, convertible bonds and debt. Cash used in operations for the year ended December 31, 2018 was $109.4 million compared
with cash used in operations of $81.5 million and $47.9 million for the year ended December 31, 2017 and December 31, 2016,
respectively. As of December 31, 2018, we had cash and cash equivalents of $49.8 million and short-term investments of $57.6
million.

We believe that revenue generated from our Global Supply Chain Platform and Commercial Platform will grow at a steady pace
in the years ahead. However, due to both unforeseeable factors such as global political and economic changes and foreseeable factors
such as market competition, revenue generated from these segments might not be sufficient
to meet their operating costs. Therefore,
we will continue to require substantial additional capital to continue our clinical development and potential commercialization
activities. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of
our clinical development efforts. We cannot assure you that we will be profitable or generate positive cash flow from operating
activities in the next three years, or at all.

ff

ff

Components of Statements of Operations

Revenue

We derive our consolidated revenue primarily from (i) the sales of API and medical devices by our Global Supply Chain
Platform; (ii) the sales of generic injectable products and 503B products by our Commercial Platform; (iii) licensing and collaboration
projects conducted by our Oncology Innovation Platform, which generates revenue in the form of upfront payments, milestone
payments and payments received for providing research and development services for our collaboration projects and for other third
parties; and (iv) grant awards from government agencies and universities for our continuing research and development efforts. The
following table sets forth the components of our consolidated revenue and the amount as a percentage of total revenue for the periods
indicated.

125

Product sales, net
Licensing fees and consulting

revenue

Grant revenue

2018

(in thousands)
56,394
$

32,387
319
89,100

$

%
63%

36%
1%

Year ended December 31,
2017

(in thousands)
36,106
$

1,105
832
38,043

$

%
95%

3%
2%

2016

(in thousands)
19,394
$

392
765
20,551

$

%
94%

2%
4%

We do not anticipate revenue being generated from sales of our product candidates under development in our Oncology
Innovation Platform until we have obtained regulatory approval. We cannot assure you that we will succeed in achieving regulatory
approval for our drug candidates as planned, or at all.

Cost of Sales

Along with sourcing from third party manufacturers, we manufacture our clinical products in our cGMP facility in New York

and APIs at our cGMP facility in China. Cost of sales primarily includes the cost of finished products, raw materials, labor costs,
manufacturing overhead expenses, reserves for expected scrap, as well as transportation costs. Cost of sales also includes depreciation
expense for production equipment, changes to our excess and obsolete inventory reserves, and certain direct costs such as shipping
costs, net of costs charged to customers.

Research and Development Expenses

Research and development expenses consist of the costs associated with in licensing of product candidates, conducting
preclinical studies and clinical trials, activities related to regulatory filings and other research and development activities. The
following table sets forth the components of our research and development expenses and the amount as a percentage of total research
and development expenses for the periods indicated.

Wages, benefits, and related costs
Clinical trial costs
Preclinical research costs
Drug licensing costs
Other research and development

costs

Total research and development

2018

Year Ended December 31,
2017

2016

(in thousands)
17,715
$
49,572
3,699
38,037

10,882

%
15%
41%
3%
32%

9%

(in thousands)
12,190
$
31,070
3,101
22,298

8,138

%
16%
40%
4%
29%

11%

(in thousands)
19,531
$
14,438
5,449
17,690

3,516

%
32%
24%
33%
29%

6%

costs

$

119,905

$

76,797

$

60,624

Our current research and development activities mainly relate to the clinical development of the following programs:

Orascovery platform—Comprised of our in-licensed and novel P-gp inhibitor, HM30181A, that is combined with various

chemotherapeutic agents and enables them to be absorbed into the blood when given orally:

•

•

•

•

•

Oraxol, combining HM30181A with an oral dosage form of paclitaxel;

Oratecan, combining HM30181A with an oral dosage form of irinotecan;

Oradoxel, combining HM30181A with an oral dosage form of docetaxel;

Oratopo, combining HM30181A with an oral dosage form of topotecan; and

Oral eribulin, combining HM30181A with an oral dosage form of eribulin.

126

Src Kinase Inhibition platform—Targets the tyrosine kinase protein in regulating cell growth that leads to blockade of

metastasis:

•

•

•

KX-01 ointment, Src kinase inhibitor that is being topically administered to treat skin cancers and pre-cancers;

KX-01 oral, Src kinase inhibitor that is being orally administered to treat certain solid and liquid tumors; and

KX-02, Src kinase inhibitor that is orally administered to treat brain cancer, such as glioblastoma multiforme (GBM).

We expense research and development costs as incurred. We record costs for certain development activities, such as clinical

trials, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or clinical site
activations. We do not allocate employee related costs, depreciation, rental and other indirect costs to specific research and
development programs because these costs are deployed across multiple product programs under research and development.

We cannot determine with certainty the duration, costs and timing of the current or future preclinical or clinical studies of our

drug candidates. The duration, costs, and timing of clinical studies and development of our drug candidates will depend on a variety of
factors, including:

•

•

•

•

•

The scope, rate of progress, and costs of our ongoing, as well as, any additional clinical studies and other research and
development activities;

Future clinical study results;

Uncertainties in clinical study enrollment rates;

Significant and changing government regulation; and

The timing and receipt of any regulatory approvals.

A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant

change in the costs and timing associated with the development of that drug candidate.

Research and development activities are central to our business model. We expect our research and development expenses to
continue to increase for the foreseeable future as we continue to support the clinical trials of Oraxol, Oratecan, Oradoxel, Oratopo, oral
eribulin, KX-01 ointment, KX-01 oral and KX-02, as well as initiate and prepare for additional clinical and preclinical studies. We
also expect spending to increase in the research and development for API, 503B and specialty products. There are numerous factors
associated with the successful commercialization of any of our drug 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 likely impact our clinical development programs and plans.

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses primarily consist of compensation, including salary, employee benefits
and stock-based compensation expenses for sales and marketing personnel, and for administrative personnel that support our general
operations such as, executive management, legal counsel, financial accounting, information technology, and human resources
personnel. SG&A expenses also includes professional fees for legal, patents, consulting, auditing and tax services, as well as other
direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in selling, general and
administrative activities. Further, we have incurred additional SG&A expenses in connection with operating as a public company,
which may increase further when we are no longer able to rely on the “emerging growth company” exemption pursuant to the JOBS
Act.

We anticipate that our SG&A expenses will increase in future periods to support increases in our research and development and

commercialization activities. We expect these increases will likely result in increased headcount, increased share compensation
charges, expanded infrastructure and increased costs for insurance. We also anticipate increases to legal, compliance, accounting and
investor and public relations expenses associated with being a public company.

Interest Expense, Net

Interest expense consists primarily of interest on our long term loan and the amortization of our debt discount. Interest income
consists primarily of interest generated from our cash and short term investments in U.S. treasury securities, U.S. agency securities,
high rated commercial papers and corporate bonds

127

Loss on Derivative Liability

The loss results from re-measuring to fair value of the embedded derivative of the convertible bonds as of each balance sheet

date. The related remeasurement adjustments
Company records adjustments to the fair value of the derivative liability until the conversion or repayment of the convertible bonds.
The derivative liability was no longer outstanding as of December 31, 2018.

are recognized in the consolidated statements of operations and comprehensive loss. The

d

Results of Operations

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2018 and

2017, together with the changes in those items in dollars and as a percentage. This information should be read together with our
consolidated financial statements and related notes included elsewhere in this report. Our operating results in any period are not
necessarily indicative of the results that may be expected for any future period.

Year ended December 31,

Revenue
Cost of sales
Research and development expenses
Selling, general, and administrative expenses
Interest expense
Unrealized loss on derivative liability
Income tax (benefit) expense
Net loss
Less: net loss attributable to non-controlling interests
Net loss attributable to Athenex, Inc.

Change

2018
(in thousands)
89,100
$
(47,005)
(119,905)
(49,008)
(1,793)
—
100
(128,711)
(11,271)

2017
(in thousands)
38,043
$
(25,122)
(76,797)
(46,112)
(5,912)
(15,411)
85
(131,396)
(226)

$ (117,440) $ (131,170) $

(in thousands)
51,057
$
(21,883)
(43,108)
(2,896)
4,119
15,411
15
2,685
(11,045)
13,730

%

134%
87%
56%
6%
-70%
NM

18%

NM

Revenue

Revenue for the year ended December 31, 2018 was $89.1 million, an increase of $51.1 million, or 134%, as compared to $38.0

million for the year ended December 31, 2017. The increase was primarily attributable to the $30.0 million license fees related to the
collaboration agreement with Almirall, S.A. and the $2.0 million upfront license fees related to our license agreement with
PharmaEssentia. Revenue from product sales also increased due to an increase in specialty product revenue of $13.2 million, an
increase in 503B revenue of $5.1 million, an increase in API sales of $2.6 million, and an increase in medical device sales of $0.6
million, offset by a decrease in contract manufacturing revenue and other sales of $1.2 million and a decrease in grant revenue of $0.5
million.

Cost of Sales

Cost of sales totaled $47.0 million for the year ended December 31, 2018, an increase of $21.9 million, or 87%, as compared to
$25.1 million for the year ended December 31, 2017. The increase in specialty product sales, 503B sales, and API sales increased cost
of sales by $15.2 million, $3.7 million, and $3.0 million, respectively. Changes in availability of products and market demand could
increase or decrease our revenue and gross profit in the future.

Research and Development Expenses

Research and development expenses totaled $119.9 million for the year ended December 31, 2018, an increase of $43.1 million,

or 56%, as compared to $76.8 million for the year ended December 31, 2017. This increase was primarily due to the advancement of
our clinical pipeline and additional drug licensing fees, and included the following:

•

•

$18.6 million increase of clinical trial costs with the progression of the Phase 3 trials of KX-01 Ointment and Oraxol;

$15.7 million increase in drug licensing fees primarily due to a $29.5 million non-cash license fee related to the purchase
of T-Cell technology in connection with the establishment of Axis, of which $24.5 million related to the fair value of the
IPR&D and $5.0 million related to the Company's common stock issued to XLifeSc. This was offset by a decrease in drug
licensing fees paid to Hanmi, Gland and Amphastar;

128

•

•

•

$5.4 million increase of employee salary and benefits, which was primarily attributable to hiring more research and
development personnel to support our expanding research and clinical activities, including the expansion of our clinical
R&D team in Taiwan;

$2.8 million increase in general product development of 503B products as they were introduced and production was
scaled-up to a commercial level and product development of our proprietary products; and

$0.6 million increase in the cost of preclinical studies as research was performed on an oral formulation of Eribulin.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses totaled $49.0 million for the year ended December 31, 2018, an increase of $2.9

million, or 6%, as compared to $46.1 million for the year ended December 31, 2017. This was primarily due to an increase in
operating activities and professional fees and included the following:

•

•

$2.9 million increase in professional fees including legal fees related to the launch of 503B products and consulting fees
related to the contruction of the manufacturing facility in Dunkirk, NY; and

$2.2 million increase in other office expenses including property and sales taxes, insurance expenses, rent and utilities,
and others.

These costs were offset by a decrease in employee compensation of $1.6 million from the stock-based compensation incurred in

the prior year in connection with our IPO and a decrease in marketing costs of $0.6 million.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

The following table sets forth a summary of our consolidated results of operations for the years ended December 31, 2017 and

2016, together with the changes in those items in dollars and as a percentage. This information should be read together with our
consolidated financial statements and related notes included elsewhere in this report. Our operating results in any period are not
necessarily indicative of the results that may be expected for any future period.

Year Ended December 31,

Revenue
Cost of sales
Research and development expenses
Selling, general, and administrative expenses
Interest expense
Loss on derivative liability
Income tax (expense) benefit
Net loss
Less: net loss attributable to non-controlling interests
Net loss attributable to Athenex, Inc.

Change

2017
(in thousands)
38,043
$
(25,122)
(76,797)
(46,112)
(5,912)
(15,411)
(85)
(131,396)
(226)

2016
(in thousands)
20,551
$
(19,718)
(60,624)
(25,956)
(1,891)
(533)
265
(87,906)
(191)
(87,715) $

(in thousands)
17,492
$
(5,404)
(16,173)
(20,156)
(4,021)
(14,878)
(350)
(43,490)
(35)
(43,455)

$ (131,170) $

%
85%
27%
27%
78%
NM
NM
(132)%
49%
18%

Revenue

Our revenue increased by $17.5 million, or 85%, from the year ended December 31, 2017 to the year ended December 31, 2016,

primarily due to an increase from sales primarily of API, of $6.5 million, a portion of which increase was due to the inclusion of
Polymed in our consolidated financial statements for the full
activity in 2015.

twelve months of activity in 2016 compared to only seven months of

ff

Cost of Sales

Our cost of sales similarly increased as a result of the June 1, 2015 acquisition of Polymed. Polymed’s cost of sales in 2016 was

$14.2 million compared to the seven-month cost of sales of $9.2 million included in the consolidated operating results for the year
ended December 31, 2015, a $5.0 million, or 54%, increase. Also, cost of sales at QuaDPharma increased by $1.8 million as a result of
increased costs to support the internal production of clinical supplies.

129

Research and Development Expenses

Our research and development expenses increased by $16.2 million, or 27%, to $76.8 million in the year ended December 31,

2017 from $60.6 million in the year ended December 31, 2016, primarily due to the advancement of our clinical and preclinical
pipeline, and included the following:

•

•

•

•

•

$16.6 million increase in the costs of clinical studies, primarily for Oraxol, KX-01 Ointment, and Oratecan;

$4.6 million increase resulting from drug licensing fees to Hanmi, Gland, and Amphastar;

$2.7 million increase in general product development and supplies related to 503B products;

$1.6 million increase in API research and development expenses; and

$0.3 million increase in the amortization of license fees.

These increases were partially offset by a $7.3 million decrease in compensation expenses due to a shift in focus of certain
personnel to support selling, general, and administrative functions and additional R&D stock-based compensation in 2016 associated
to the accelerated forgiveness of promissory notes from officers prior to our IPO, as well as a $2.3 million decrease in preclinical
study costs as our proprietary drugs entered the clinical stages.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased by $20.2 million, or 78%, from $25.9 million in the year ended
December 31, 2016 to $46.1 million in the year ended December 31, 2017 primarily due to an increase in employee compensation and
selling and marketing costs, and included the following:

•

•

•

•

$12.6 million increase in employee and executive compensation, due to the expansion of our sales and marketing force
and a shift in focus of certain personnel to general and administrative functions, and stock-based compensation resulting
from awards made upon the IPO;

$3.7 million increase in office expenses, rent and utilities, and other expenses related to the expansion of our business
operations;

$3.1 million increase in selling and marketing costs related to the launch of our generic injectable products and the
branding of our proprietary products; and

$0.8 million increase in professional fees, which included accounting, legal, and consulting fees.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. Substantially all of our losses

have resulted from funding our research and development programs and selling, general and administrative costs associated with our
operations. We incurred net losses of $117.4 million, $131.2 million and $87.7 million for the years ended December 31, 2018, 2017,
and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $443.7 million. Our primary use of cash is to fund
research and development costs. Our operating activities used $109.4 million, $81.5 million and $47.9 million of cash during the years
ended December 31, 2018, 2017, and 2016, respectively. Our principal sources of liquidity as of December 31, 2018 were cash and
cash equivalents totaling of $49.8 million and short-term investments totaling $57.6 million, which are generally U.S. government or
high quality investment grade corporate debt securities.

In June 2017, we sold an aggregate of 6,900,000 shares of common stock at a price of $11.00 per share for cash proceeds of
$64.2 million in our IPO, net of underwriting discounts and commissions of $6.1 million and offering costs of $5.6 million. In January
2018, we completed a second public offering of 4,300,000 shares of common stock at a price of $15.25 per share; and in February
2018, the underwriters exercised their option to purchase an additional 465,000 shares of common stock at the public offering price of
$15.25 per share. Net proceeds of the 2018 follow-on offering were approximately $68.1 million, after deducting underwriting
discounts and commissions and offering expenses of approximately $4.6 million.

Perceptive Financing

In July 2018, the Company closed a privately placed debt and equity financing deal with Perceptive for gross proceeds of $100.0

million and received aggregate net proceeds of $97.1 million, net of fees and offering expenses. The Company entered into a 5-year
senior secured loan for $50.0 million of this financing and issued 2,679,528 shares of its common stock at a purchase price of $18.66
per share for the remaining $50.0 million. The loan matures on the fifth anniversary from the closing date and bears interest at a
floating per annum rate equal to LIBOR (with a floor of 2.0%) plus 9.0%. The Company is required to make monthly interest-only

130

payments with a bullet payment of the principal at maturity. The loan agreement contains specifiedff
including that we maintain a minimum aggregate balance of $4.0 million in cash free and clear of all liens and that we meet certain
minimum revenue targets for each quarter during which the loan is outstanding. In addition, the loan agreement is secured by
substantially all of our assets and is guaranteed by certain of our subsidiaries, including APD, AP, and APS. In connection with the
loan agreement, the Company granted Perceptive a warrant for the purchase of 425,000 shares of common stock at a purchase price of
$18.66 per share.

financial maintenance covenants,

Based on our current operating plan, we expect that our existing cash, cash equivalents and short-term investments as of
December 31, 2018, together with cash to be generated from our operating activities, will enable us to fund our operating expenses
and capital expenditures requirements at least through the fourth quarter of 2019. We expect that our expenses will increase
substantially as we continue to fund clinical development of our Orascovery and Src Kinase Inhibition research programs, new and
ongoing research and development activities and working capital and other general corporate purposes. We have based our estimates
on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because
of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable
to accurately estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development and
commercialization of our drug candidates.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-

looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the
factors discussed in the “Risk Factors” section.

Our future capital requirements will depend on many factors, including:

•

•

•

•

•

•

•

•

our ability to generate revenue from our Commercial Platform or otherwise;

the costs, timing and outcome of regulatory reviews and approvals;

the ability of our drug candidates to progress through clinical development successfully;

the initiation, progress, timings, costs and results of nonclinical studies and clinical trials for our other programs and
potential drug candidates;

the number and characteristics of the drug candidate we pursue;

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

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

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

We believe that the existing cash and cash equivalents and short-term investments will not be sufficient to enable us to complete

all necessary development or commercially launch our proprietary drug candidates. Until such time, if ever, as we can generate
substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings,
collaborations, strategic alliances, licensing arrangements, and government grants. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the
terms of these securities may include liquidation or other preferences that adversely affect rights of holders of common stock. 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 and might require the issuance of warrants, which
could potentially dilute the ownership interest of holders of common stock. If we raise additional funds through collaborations,
strategic alliances or licensing arrangements with third parties, we might have to relinquish valuable rights to our technologies, future
revenue streams or research programs or to grant licenses on terms that might not be favorable to us. If we are unable to raise
additional funds through equity or debt financings when needed, we might be required to delay, limit, reduce, or terminate our product
development or future commercialization efforts or grant rights to develop and market products or drug candidates that we would
otherwise prefer to develop and market ourselves.

Cash kept in our subsidiaries in China is subject to Chinese regulations restricting transfer of funds overseas. Thus, our Chinese

subsidiaries are restricted in their ability to transfer their net assets to us as cash dividends, loans or advances. As of December 31,
2018, we had cash and cash equivalents of approximately $3.2 million at our Chinese subsidiaries. Although we do not currently
require any such dividends, loans or advances from our Chinese subsidiaries to fund our operations, should we require additional
sources of liquidity in the future, such restrictions may have a material adverse effeff ct on our liquidity and capital resources.

131

Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Net effect of foreign exchange rate changes
Net increase (decrease) in cash and cash equivalents

2018

Year ended December 31,
2017
(in thousands)

2016

$

$

(109,387) $
(48,963)
169,035
(175)
10,510

$

(81,512) $
(10,018)
96,896
793
6,159

$

(47,870)
2,659
35,272
(431)
(10,370)

Net Cash Used in Operating Activities

The use of cash in all periods presented resulted primarily from our net losses adjusted for non-cash charges and changes in

components of working capital. The primary use of our cash in all periods presented was to fund our research and development,
regulatory and other clinical trial costs, drug licensing costs, inventory purchases, and other expenditures related to sales, marketing
and administration. Our prepaid expenses and other current assets, accounts payable and accrued expense balances in all periods
presented were affff ected

by the timing of vendor invoicing and payments.

ff

During the year ended December 31, 2018, operating activities used $109.4 million of cash, which resulted principally from our

net loss of $128.7 million, adjusted for non-cash charges of $46.8 million and partially offset by $0.4 million change in deferredrr
income taxes. Cash used in our operating assets and liabilities was $27.1 million. Our net non-cash charges during the year ended
December 31, 2018 primarily consisted of $3.3 million in depreciation and amortization expense, $11.0 million in stock-based
compensation expense, $0.5 million in amortization of debt discount, and $31.5 million in license fees settled with stock.

During the year ended December 31, 2017, operating activities used $81.5 million of cash, which resulted principally from our

net loss of $131.4 million, adjusted for non-cash charges of $54.0 million and partially offset by $0.3 million change in deferredrr
income taxes. Cash used in our operating assets and liabilities was $3.8 million. Our net non-cash charges during the year ended
December 31, 2017 primarily consisted of $3.7 million in depreciation and amortization expense, $14.6 million in stock-based
compensation expense, $15.4 million in fair value change of derivative liabilities, $3.3 million in amortization of debt discount, $13.3
million license in fees settled with convertible bond and stock and $2.8 million in interest incurred on converted bonds.

During the year ended December 31, 2016, operating activities used $47.9 million of cash, which resulted principally from our
net loss of $87.9 million, adjusted for non-cash charges of $24.7 million which was partially offset by $0.5 million change in deferred
income taxes. Cash provided from our operating assets and liabilities was $15.8 million. Our net non-cash charges during the year
ended December 31, 2016 primarily consisted of $2.0 million in depreciation and amortization expense, $19.5 million in stock-based
compensation expense, and $1.0 million in loss on disposal of assets and impairment charges.

Net Cash (Used in) Provided by Investing Activities

In 2018, cash used in investing activities of $49.0 million was primarily attributable to $3.3 million in purchasing property and

equipment, $45.5 million in net purchasing short-term investments, and $0.1 million in payment for licenses.

In 2017, cash used in investing activities of $10.0 million was primarily attributable to $5.4 million in purchasing property and

equipment, $3.1 million in net purchasing short-term investments and $1.6 million in payment for licenses.

In 2016, cash provided by investing activities was $2.7 million, consisting of $5.5 million in sales of short-term investments and

$1.0 million in receipt of refundable deposit, partially offset by $2.7 million in payment for licenses and $1.5 million in purchasing
property and equipment.

Net Cash Provided by Financing Activities

In 2018, cash provided by financing activities was $169.0 million, consisting primarily of $123.1 million in proceeds from the
sales of common stock in our 2018 follow-on offering and private placement of shares to Perceptive, $50.0 million in proceeds from
the issuance of a senior secured loan with Perceptive, and $4.0 million from the exercise of options to purchase common stock, offset
by $7.5 million in costs associated with the sale of stock and the issuance of debt and $0.5 million in repayment of capital lease
obligations and long-term debt.

132

In 2017, cash provided by financing activities was $96.9 million, consisting primarily of $75.9 million in net proceeds received
from the sales of common stock, $30.0 million from the issuance of convertible bonds and $2.3 million from the exercise of options to
purchase common stock, offset by $10.2 million in certain offering costs and $1.2 million in repayment of capital lease obligations
and long-term debt.

In 2016, cash provided by financing activities was $35.3 million, consisting primarily of $38.0 million in proceeds from the
issuance of convertible bonds and $8.5 million from the sales of common stock, partially offset by $5.9 million in purchase of treasury
stock, $3.2 million in payment of contingent consideration, $1.5 million in offering costs and $1.3 million in repayment of capital
lease obligation and long-term debt.

Indebtedness

We had $46.8 million and $2.0 million of debt as of December 31, 2018 and 2017, respectively. This consisted of three seller

promissory notes that were negotiated as part of the Polymed acquisition and paid in full during 2018, a mortgage under CDE, capital
lease obligations, and a senior secured loan entered into with Perceptive during 2018.

The Polymed promissory notes matured on June 1, 2018, and had a 6% stated interest rate during their 36-month term. The

outstanding principal on the Polymed promissory notes was $0 and $0.5 million as of December 31, 2018 and December 31, 2017,
respectively.

In connection with the acquisition of CDE, we assumed a mortgage liability associated with the manufacturing plant asset in
China. The mortgage payments extend through July 30, 2019. The remaining mortgage principal payment of $0.8 million is due in
2019.

In 2018, the Company issued a senior secured loan with a principal value of $50.0 million and a maturity date of June 30, 2023
to Perceptive. The loan bears interest at a floating per annum rate equal to LIBOR (with a floor of 2.0%) plus 9.0%. The Company is
required to make monthly interest-only payments with a bullet payment of the principal at maturity. The loan agreement contains
specified financial maintenance covenants, including that we maintain a minimum aggregate balance of $4.0 million in cash free and
clear of all liens and that we meet certain minimum revenue targets for each quarter during which the loan is outstanding. In addition,
the loan agreement is secured by substantially all of our assets and is guaranteed by certain of our subsidiaries, including APD, AP,
and APS.

Capital Expenditures

Our liquidity position and capital requirements are subject to a number of factors. For example, our cash inflow and outflow

may be impacted by the following:

•

•

Our ability to generate revenue; and

Fluctuations in working capital.

Our primary short term capital needs, which are subject to change, include expenditures related to:

•

•

•

•

Continuous support of the development and research of our proprietary drug products;

Build out of our new API plant in China and improvements in our existing manufacturing capacity and efficiency;

New research and product development efforts; and

Support of our commercialization efforts related to our current and future products.

Although we believe the foregoing items reflect our most likely uses of cash in the short term, we cannot predict with certainty

all of our short-term cash uses or the timing or amounts of cash used. If cash generated from operations is insufficient to satisfy our
working capital and capital expenditure requirements, we may be required to sell additional equity or debt securities or obtain credit
financing. This capital may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be
dilutive to our stockholders, and debt financing, if available, may include restrictive covenants.

In 2015, we entered into two public-private partnerships. New York State is investing in a 315,000 square foot, ISO Class 5 high

potency oral and sterile injectable pharmaceutical manufacturing facility, which will be built in Dunkirk, New York. The estimated
cost of the facility will be approximately $200 million, and we will be able to occupy the space on concessionary terms. In Chongqing,
China, funded by the Banan District government, a GMP API and a GMP pharmaceutical manufacturing plant will be built, which we

133

will occupy on concessionary terms. We plan to utilize these plants to manufacture API and the finished drugs in which these API will
be used. We do not have significant construction period risks. New York State and the Banan District governments will each fund a
majority of the construction costs and hold ownership of the manufacturing and office facilities. In addition, in July 2017 we entered
into a 20-year payment in-lieu of tax agreement for the construction of our Dunkirk facility with the CCIDA, valued at approximately
$9.1 million. In December 2017, we entered into an agreement with M+W U.S., Inc., or M+W, whereby M+W will be responsible for
the design and construction of the Dunkirk facility at a cost estimated between $205 million and $210 million, of which up to $200
million will be paid by a grant from the State of New York, with the remaining amount being paid by us. We are also responsible for
the cost of furnishing the facility. Payments under the December 2017 agreement will be made to M+W over time based upon
completion of certain milestones under the agreement, and ESD must approve any payment from the grant funds. Construction of the
Dunkirk manufacturing facility has begun and is expected to be completed in 2020. Contruction of the API manufacturing facility is
expected to be completed in 2019.

Future Capital Requirements

We believe that our existing cash and cash equivalents and short-term investments, together with cash to be generated from our
operating activities, will be sufficient to fund our current operating plans through at least the end of 2019. To the extent that we raise
additional capital through future equity financings, 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 existing common stockholders. If we raise
additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations.
There can be no assurance that such additional financing, if available, can be obtained on terms acceptable to us. If we are unable to
obtain such additional financing, we would need to reevaluate our future operating plans.

Inflation

Inflationary factors, such as increases in our cost of sales and SG&A expenses, may adversely affect our operating results.

Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high
rate of inflation in the future may have an adverse effect on our ability to maintain and increase our net income and SG&A expenses
as a percentage of our revenue if the selling prices of our products do not increase as much or more than these increased costs.

Contractual Obligations

A summary of our contractual obligations as of December 31, 2018 is as follows:

Operating leases
Long-term debt
Accrued licensing fees
Capital leases

Payments Due by Period

Less than 1
year

1 to 3 years

$

$

2,943
778
4,828
182
8,731

$

$

4,506
—
—
401
4,907

3 to 5 years
(in thousands)
3,577
$
50,000
—
21
53,598

$

$

$

More than
5 years

Total
Amounts
Committed

3,099
—
—
—
3,099

$

$

14,125
50,778
4,828
604
70,335

The operating leases include (1) the rental of our global headquarters in the Conventus Center for Collaborative Medicine in
Buffalo, NY and (2) the rental of our research and development facility in the IC Development Centre in Hong Kong and (3) the rental
of the Commercial Platform headquarters in Chicago, IL and (4) the rental of our clinical research headquarters in Cranford, NJ and
(5) the rental of our clinical data management center in Taipei, Taiwan and (6) the rental of our Global Supply Chain distribution
office in Houston, TX and (7) the rental of our Global Supply Chain API manufacturing facility in Chongqing, China and (8) the
rental of other facilities and equipment located mainly in Buffalo, NY. These locations represent $8.5 million, $0.4 million, $2.4
million, $0.3 million, $0.7 million, $0.4 million, $1.0 million, and $0.4 million, respectively, of the total amounts committed.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and
liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the periods. We evaluate our
estimates and judgments on an ongoing basis, including but not limited to, estimating the useful lives of long-lived assets, assessing
the impairment of long-lived assets, stock-based compensation expenses, and the realizability of deferred income tax assets. We base

134

our estimates on historical experience, known trends and events, contractual milestones and other various factors that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Changes in the accounting estimates are likely to occur from period to
period. Actual results could be significantly different from these estimates. We believe that the accounting policies discussed below
are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgment and estimates.

Revenue Recognition

1.

Oncology Innovation Platform

License fees and consulting revenue

The Company out-licenses certain of its intellectual property (“IP”) and provides related consulting services to pharmaceutical

companies in specific territories that allow the customer to use, develop, commercialize, or otherwise exploit the licensed IP. In
accordance with Accounting Standards Codification Topic 606, the Company determines each of its performance obligations under
the agreements and allocates the transaction price to those obligations accordingly. The Company’s obligations may include delivering
the license of IP (if the license is deemed to be distinct), performing continued research and development on the licensed IP,
manufacturing the licensed product, or maintaining the legal protection for the licensed IP throughout the duration of the agreement,
among other obligations. Most of the Company’s revenue from its out-licensing is recognized at a point-in-time when the performance
obligation is satisfied.

Grant revenue

The Company receives grant award funding to support its continuing research and development efforts. The Company considers

these grants to be operating revenue as they support the Company’s primary operating activities. Revenue is recognized when the
underlying performance obligation is satisfied, which is generally when all grant eligibility criteria are met at a point-in-time.

2.

Global Supply Chain Platform

The Company’s Global Supply Chain Platform manufactures API for use internally in its research and development and clinical
studies and for sale to pharmaceutical customers globally. API revenue earned by the Global Supply Platform is recognized when the
Company has satisfied its performance obligation, which is the shipment or delivery of drug product. The underlying contracts for
these sales are generally purchase orders and the Company recognizes revenue at a point-in-time.

3.

Commercial Platform

The Company’s Commercial Platform generates revenue by distributing specialty products through independent pharmaceutical
wholesalers. The wholesalers then sell to an end-user, normally a hospital, alternative healthcare facility, or an independent pharmacy,
at a lower price previously established by the end-user and the Company. Sales are initially recorded at the list price sold to the
wholesaler. Because these prices will be reduced for the end-user, the Company records a contra asset in accounts receivable and a
reduction to revenue at the time of the sale, using the difference between the list price and the estimated end-user contract price. Upon
the sale by the wholesaler to the end-user, the wholesaler will chargeback the difference between the original list price and price at
which the product was sold to the end-user and such chargeback is offset against the initial estimated contra asset. The significant
estimates inherent in the initial chargeback provision relate to wholesale units pending chargeback and to the ultimate end-user
contract selling price. The Company bases the estimate for these factors on product-specific sales and internal chargeback processing
experience, as well as estimated wholesaler inventory stocking levels. As of December 31, 2018 and 2017, the Company’s
chargebacks and other deductions totaled $11.8 million and $3.3 million, respectively, included as a reduction of accounts receivable.
The Company’s total expenses for chargebacks and other deductions was $33.5 million and $9.8 million for the years ended
December 31, 2018 and 2017, respectively.

ff

The Company offers cash discounts, which approximate 2% of the gross sales price, as an incentive for prompt customer
payment, and, consistent with industry practice, the Company’s return policy permits customers to return products within a window of
time before and after the expiration of product dating. The Company expects that its wholesale customers will make prompt payments
to take advantage of the cash discounts, and expects customers to use their right of return. Therefore, at the time of sale, product
revenue and accounts receivable are reduced by the full amount of the discount offered and the return expected. The Company
considers payment performance and historical return rates and adjusts the accrual to reflect actual experience. As of December 31,

135

2018 and December 31, 2017, the Company’s accrual for cash discounts and return accrual included as a reduction of accounts
receivable were not material to the consolidated financial statements.

The Company also offers contractual allowances, generally rebates or administrative fees, to certain wholesale customers, group

purchasing organizations (“GPOs”), and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates
and fees may generally occur from one to five months from date of sale. The Company provides a provision for contractual
allowances at the time of sale based on the historical relationship between sales and such allowances. Contractual allowances are
reflected in the consolidated financial statements as a reduction of revenue and as accrued expenses.

The Company estimates the variable transaction price at the time of the sale and recognizes revenue when the performance
obligation is satisfied. The underlying contracts for these sales are generally purchase orders and the Company recognizes revenue at a
point-in-time.

Research and Development Expenses

Research and development expenses represent costs associated with developing our proprietary drug candidates, our

collaboration agreements for such drugs, and our ongoing clinical studies.

Clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with

third parties that perform various clinical trial activities on our behalf in the ongoing development of our drug candidates. Expenses
related to clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective
period. If the contracted amounts are revised or the scope of a contract is revised, we will modify the accruals accordingly on a
prospective basis and will do so in the period in which the facts that give rise to the revision become reasonably certain.

Goodwill

Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified

intangible assets acquired. Goodwill is allocated to our reporting units based on the relative expected fair value provided by the
acquisition. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to
as a component, or a combination thereof.

We perform an annual impairment assessment on October 1, or more frequently if indicators of potential impairment exist, to

determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Impairment test
approaches with a weighting of the Discounted Cash Flow (income approach) and Guideline Public Company method (market
approach) are utilized. Weighting will most likely be greater for the market approach given the lack of historical results to be able to
rely significantly on financial projections. The performance of the goodwill impairment test involves a two-step process. The first step
is to estimate the fair value of each reporting unit and compare the fair value to the carrying value. For reporting units in which the
step-one impairment assessment concludes that it is more likely than not that the fair value of the reporting unit exceeds the carrying
value of the net assets assigned to that reporting unit, goodwill is not considered to be impaired and we do not perform additional
analysis. For reporting units in which the step-one impairment assessment concludes that it is more likely than not that the carrying
value of the net assets assigned to that reporting unit exceeds the fair value of the reporting unit, we must perform the second step,
which is to measure the amount of impairment. We then record the impairment loss equal to the difference between the fair value and
the carrying value. None of our reporting units are at risk of failing step one of the impairment test, as the fair value is substantially in
excess of the carrying value for each reporting unit.

Off Balance Sheet Arrangements

We do not maintain any off balance sheet partnerships, arrangements, or other relationships with unconsolidated entities or

others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off
balance sheet arrangements or other contractually narrow or limited purposes.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other
authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to
Note 2 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this
report for additional information about these recently issued accounting standards and their potential impact on our financial condition
or results of operations.

136

Jumpstart Our Business Startups Act of 2012 (JOBS Act)

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take

advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised
accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and,
as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required
for other public companies.

Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without

limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional
information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging
growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or
in
more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering
June 2017; (c) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (d) the
date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.

ff

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Exchange Risk

A significant portion of our business is located outside the United States and, as a result, we generate revenue and incur
expenses denominated in currencies other that the U.S. dollar, a majority of which is denominated in RMB. In 2018, 2017, and 2016,
approximately 2%, 7% and 7%, respectively, of our sales, excluding intercompany sales, were denominated in foreign currencies. As a
result, our revenue can be significantly impacted by fluctuations in foreign currency exchange rates. We expect that foreign currencies
will represent a lower percentage of our sales in the future due to the anticipated growth of our U.S. business. Our international
selling, marketing, and administrative costs related to these sales are largely denominated in the same foreign currencies, which
somewhat mitigates our foreign currency exchange risk rate exposure.

Currency Convertibility Risk

A portion of our revenues and expenses, and a portion of our assets and liabilities are denominated in RMB. On January 1, 1994,
the Chinese government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank
of China, or PBOC. However, the unification of exchange rates does not imply that the RMB may be readily convertible into U.S.
dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks
authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approvals of foreign currency payments by
the PBOC or other institutions require submitting a payment application form together with suppliers’ invoices, shipping documents
and signed contracts.

Additionally, the value of the RMB is subject to changes in central government policies and international economic and political

developments affecting supply and demand in the Chinese foreign exchange trading system market.

Interest Rate Sensitivity

We had cash and cash equivalents of $49.8 million and short-term investments of $57.6 million as of December 31, 2018, which

consisted primarily of U.S. government or high quality investment grade corporate debt securities. Our primary exposure to market
risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the
short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material
impact on our consolidated financial condition or results of operations. We do not believe that our cash or cash equivalents have
significant risk of default or illiquidity.

We had a 5-year $50.0 million loan agreement with Perceptive, which closed on July 3, 2018, bearing interest at a floating per
annum rate equal to1-Month LIBOR (with a floor of 2%) plus 9%. If 1-Month LIBOR increased by 1%, we would be required to pay
Perceptive an additional $0.5 million in interest annually. If 1-Month LIBOR decreased by 1%, we would be required to pay
Perceptive $0.5 million less in interest annually.Thus, a change in the short-term interest rate environment (especially a material
change) could have a material adverse effect on our business, financial condition, cash flows and results of operations and could cause
the market value of our common shares to decline. As of December 31, 2018, we did not have any outstanding interest rate swap
contracts.

137

Credit Risk

We had cash and cash equivalents of $49.8 million, $39.3 million and $33.1 million and marketable securities of $57.6 million,
$11.8 million and $8.6 million at December 31, 2018, 2017, and 2016, respectively. Substantially all of our bank deposits are in major
financial institutions, which we believe are of high credit quality. The primary objectives of our investment activities are to preserve
principle, provide liquidity and maximize income without significant increasing risk.

We make periodic assessments of the recoverability of trade and other receivables and amounts due from related parties. Our
historical experience in collection of receivables falls within the recorded allowances, and we believe that we have made adequate
provision for uncollectible receivables.

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Athenex, Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Page

F-1
F-2
F-3
F-4
F-5
F-6

138

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Athenex, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Athenex, Inc. and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the schedule listed in the
Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally
accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and negative cash flows
from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of
this uncertainty.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error of fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Williamsville, New York
March 11, 2019

We have served as the Company’s auditor since 2015.

F-1

ATHENEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

Assets
Current assets:

Cash and cash equivalents
Short-term investments
Accounts receivable, net of chargebacks and other deductions of $13,101

and $3,711, respectively, and allowance for doubtful accounts
of $9 and $84, respectively

Inventories
Prepaid expenses and other current assets

Total current assets

Property and equipment, net
Goodwill
Intangible assets, net
Deferred income tax asset
Other long-term assets
Total assets
Liabilities and stockholders' equity
Current liabilities:

Accounts payable
Accrued expenses
Current portion of long-term debt - related parties
Current portion of long-term debt

Total current liabilities

Long-term liabilities:

Deferred compensation
Deferred rent
Capital lease obligation
Long-term debt

Total liabilities

Commitments and contingencies (Note 20)
Stockholders' equity:
Common stock, par value $0.001 per share, 250,000,000 shares authorized at
December 31, 2018 and 2017; 68,668,986 and 59,894,362 shares issued at
December 31, 2018 and 2017, respectively; 66,996,066 and 58,221,442 shares
outstanding at December 31, 2018 and 2017, respectively

Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Less: treasury stock, at cost; 1,672,920 shares at December 31,

2018 and 2017

Total Athenex, Inc. stockholders' equity

Non-controlling interests

Total stockholders' equity
Total liabilities and stockholders' equity

December 31,

2018

2017

$

$

$

$

49,794
57,629

$

12,951
28,787
21,658
170,819
11,447
37,495
10,848
486
—
231,095

12,997
37,718
—
961
51,676

2,825
2,022
422
45,381
102,326

69
591,064
(656)
(443,716)

(7,406)
139,355
(10,586)
128,769
231,095

$

$

$

39,284
11,753

8,468
16,561
7,692
83,758
9,651
37,795
8,572
121
516
140,413

16,659
26,978
491
1,015
45,143

2,313
1,760
475
—
49,691

60
423,805
(146)
(326,276)

(7,406)
90,037
685
90,722
140,413

The accompanying notes are an integral part of these consolidated financial statements.

F-2

ATHENEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)

Revenue:

Product sales, net
License fees and consulting revenue
Grant revenue

Total revenue

Costs and operating expenses:

Cost of sales
Research and development expenses
Selling, general, and administrative expenses

Total costs and operating expenses

Operating loss

Interest expense, net
Loss on derivative liability

Loss before income tax (benefit) expense

Income tax (benefit) expense
Net loss
Less: net loss attributable to non-controlling interests
Net loss attributable to Athenex, Inc.
Unrealized gain (loss) on investment, net of income taxes
Foreign currency translation adjustment, net of income taxes
Comprehensive loss
Net loss per share attributable to Athenex, Inc. common stockholders,

basic and diluted (Note 15)

2018

Year Ended December 31,
2017

2016

$

56,394
32,387
319
89,100

47,005
119,905
49,008
215,918
(126,818)
1,793
—
(128,611)
100
(128,711)
(11,271)
(117,440) $
15
(525)
(117,950) $

$

36,106
1,105
832
38,043

25,122
76,797
46,112
148,031
(109,988)
5,912
15,411
(131,311)
85
(131,396)
(226)
(131,170) $
(26)
1,184
(130,012) $

19,394
392
765
20,551

19,718
60,624
25,956
106,298
(85,747)
1,891
533
(88,171)
(265)
(87,906)
(191)
(87,715)
(33)
(1,048)
(88,796)

(1.82) $

(2.63) $

(2.19)

$

$

$

$

Weighted-average shares used in computing net loss per share attributable

to Athenex, Inc. common stockholders, basic and diluted (Note 15)

64,590,270

49,960,925

40,120,908

The accompanying notes are an integral part of these consolidated financial statements.

F-3

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(

ATHENEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization
Stock-based compensation expense
Change in fair value of contingent consideration
Loss on derivative liability
Amortization of debt discount
Deferred rent expense
Net loss on disposal of assets and impairment charges
Research and development license fees settled with convertible bond and stock
Interest incurred on converted bonds
Deferred income taxes

Changes in operating assets and liabilities:

Receivables, net
Prepaid expenses and other assets
Inventories
Accounts payable and accrued expenses

Net cash used in operating activities

Cash flows from investing activities:

Proceeds from sale of property and equipment
Purchase of property and equipment
Receipts of refundable deposit
Payments for licenses
Purchases of short-term investments
Sale of short-term investments

Net cash (used in) provided by investing activities

Cash flows from financing activities:
Proceeds from sale of stock
Proceeds from issuance of convertible bonds
Proceeds from issuance of debt
Costs incurred related to the sale of stock
Costs incurred related to the issuance of debt
Proceeds from exercise of stock options
Investment from non-controlling interest
Repayment of capital lease obligations and long-term debt
Payment of contingent consideration
Purchase of treasury stock

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, end of period

Supplemental cash flow disclosures

Interest paid
Income taxes paid
Non-cash investing and financing activities:
Accrued purchases of property and equipment
Cost of equity raise in accounts payable and accrued expenses
Convertible bond issued in lieu of licensing cash payment
Common stock issued in lieu of licensing cash payment
Common stock issued upon the conversion of bonds and derivative liability
Property and equipment financed under capital lease
Accrued purchases of licenses
Stock issued in connection with the acquisition of Polymed

2018

Year ended December 31,
2017

2016

$

(128,711 )

$

(131,396 )

$

(87,906 )

3,269
11,011
—
—
514
262
236
31,545
—
(365 )

(4,483 )
(13,966)
(12,226 )
3,527
(109,387 )

—
(3,321)
—
(110)
(113,259)
67,727
(48,963 )

123,134
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(1,993)
3,956
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10,685
39,284
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49,794

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3,349
856
80
13,250
2,759
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(5,691 )
(4,537)
(12,321 )
18,791
(81,512 )

—
(5,440)
110
(1,550)
(55,282)
52,144
(10,018 )

75,900
30,000
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49
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5,366
33,125
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39,284

109
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53
533
889
649
1,034
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1,055
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(984 )
16,120
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335
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1,000
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(9,750)
15,261
2,659

8,500
38,000
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50
569
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(5,861)
35,272
(9,939 )
43,495
(431 )
33,125

144
329

348
264
—
—
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343
2,500

The accompanying notes are an integral part of these consolidated financial statements.

F-5

ATHENEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

COMPANY AND NATURE OF BUSINESS

Description of Business

Athenex, Inc. (the “Company” or “Athenex”), originally under the name Kinex Pharmaceuticals LLC (“Kinex”), formed in
November 2003, commenced operations on February 5, 2004, and operated as a limited liability company until it was incorporated in
the State of Delaware under the name Kinex Pharmaceuticals, Inc. on December 31, 2012. The Company changed its name to
Athenex, Inc. on August 26, 2015.

Athenex is a global biopharmaceutical company dedicated to the discovery, development and commercialization of novel

therapies for the treatment of cancer. The Company’s mission is to improve the lives of cancer patients by creating more effective,
safer and tolerable treatments. The Company has generated its clinical product candidates through its Orascovery and Src Kinase
Inhibition research platforms, which are based on their understanding of human absorption biology and novel kinase binding selection,
respectively. The Company has assembled a leadership team and have established global operations in the U.S. and China across the
pharmaceutical value chain to execute its mission to become a global leader in bringing innovative cancer treatments to the market and
improve health outcomes. The Company’s primary activities since commencement have been conducting research and development
internally and through corporate collaborators, in-licensing and out-licensing pharmaceutical compounds and technology, and
conducting clinical trials.

As of December 31, 2018, the Company had cash and cash equivalents of $49.8 million and short-term investments of $57.6

million. The Company expects that its existing cash and cash equivalents and short-term investments, together with cash to be
generated from the operating activities, are suffiff cient to fund our current operating plans through at least the end of 2019.

Significant Risks and Uncertainties

The Company has incurred operating losses and negative cash flows from operations since its inception and, as a result, as of
December 31, 2018 and 2017 had an accumulated deficit of $443.7 million and $326.3 million, respectively. Operations have been
funded primarily through the sale of common stock and, to a lesser extent, from convertible bond financing and grant funding. The
Company will require significant additional funds to conduct clinical trials and to fund its operations. There can be no assurances,
however, that additional funding will be available on favorable terms, or at all. If adequate funds are not available, the Company may
be required to delay, modify, or terminate its research and development programs or reduce its planned commercialization efforts. The
Company believes that it will be able to obtain additional working capital through equity financings or other arrangements to fund
operations, including additional public offerings; however, there can be no assurance that such additional financing, if available, can
be obtained on terms acceptable to the Company. If the Company is unable to obtain such additional financing, the Company will
need to reevaluate future operating plans. Accordingly, there is substantial doubt regarding the Company’s ability to continue as a
going concern.

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue

to realize its assets and discharge its liabilities in the normal course of the business. The Company’s recurring losses from operations
and negative cash flows from operations have raised substantial doubt regarding its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

The Company has a senior secured loan agreement which contains various covenants. A breach of any of these covenants could

result in a default. If a defaff ult under any such loan agreement is not cured or waived, the default could result in the acceleration of
debt, which could require us to repurchase or repay debt prior to the date it is otherwise due. If we default, the lender may seek
repayment through our subsidiary guarantors or by executing on the security interest granted pursuant to the loan agreement.

Athenex is subject to a number of risks similar to other biopharmaceutical companies, including, but not limited to, the lack of
available capital, possible failure of preclinical testing or clinical trials, inability to obtain marketing approval of product candidates,
competitors developing new technological innovations, market acceptance of the Company’s products, and protection of proprietary
technology. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate
sufficient product revenue and might not, if ever, achieve profitability.

F-6

Initial Public Offering

On June 13, 2017, the Company’s Registration Statement on Form S-1 (File No. 333-217928) relating to the initial public
offering (“IPO”) of its common stock was declared effective by the Securities and Exchange Commission (“SEC”). Pursuant to such
Registration Statement, the Company sold an aggregate of 6,900,000 shares of its common stock at a price of $11.00 per share for
cash proceeds of $64.2 million, net of underwriting discounts and commissions of $6.1 million and offering costs of $5.6 million.

On June 14, 2017, the day of the IPO, convertible bonds with an aggregate principal value of $68.0 million, and a carrying value

of $55.8 million, were converted into 7,727,273 shares of common stock. The IPO closed on June 19, 2017. On September 29, 2017,
the remaining convertible bond with a principal value of $7.0 million was converted into 795,455 shares of common stock, at a 20%
discount from the IPO price of $11 per share.

Follow-On Offering

In January 2018, the Company completed an underwritten public offering of 4,300,000 shares of its common stock. The

Company granted the underwriters a 30-day option to purchase up to an additional 645,000 shares of common stock. In February
2018, the underwriters partially exercised their option, purchasing an additional 465,000 shares of common stock. All shares were
offered by the Company at a price of $15.25 per share. Net proceeds were $68.1 million, after deducting underwriting discounts and
commissions and offering expenses of $4.6 million.

Debt and Equity Offering

On July 3, 2018, the Company closed a privately placed debt and equity financing deal with Perceptive Advisors LLC and its

affiliates (“Perceptive”) for gross proceeds of $100.0 million and received aggregate net proceeds of $97.1 million, net of fees and
offering expenses. The Company entered into a 5-year senior secured loan for $50.0 million of this financing and issued 2,679,528 shares
of its common stock at a purchase price of $18.66 per share for the remaining $50.0 million. The loan matures on the fifth anniversary
from the closing date and bears interest at a floating per annum rate equal to London Interbank Offering Rates (“LIBOR”) (with a floor of
2.0%) plus 9.0%. The Companymm
The loan agreement contains specified financial maintenance covenants. The Company was in compliance
December 31, 2018. In connection with the loan agreement, the Company granted Perceptive a warrant for the purchase of 425,000 shares
of common stock at a purchase price of $18.66 per share. This was accounted for as a detachable warrant at its fair value and is recorded
as an increase to additional paid-in-capital on the consolidated statement of stockholders’ equity for the year ended December 31, 2018. A
corresponding debt discount was recorded as a reduction of the related debt in the consolidated balance sheet as of Decemberm 31, 2018.

is required to make monthly interest-only payments withtt a bullet payment of the principal at maturity.

withtt such covenants as of

mm

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

These consolidated financial statements reflect the accounts and operations of the Company and those of its subsidiaries in

which the Company has a controlling financial

ff

interest. Intercompany transactions and balances have been eliminated.

Use of Estimates

These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the

United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
statements and the reported amount of revenue and expenses during the reporting
liabilities as of the date of the consolidated financial
period. Such management estimates include those relating to assumptions used in contract research accruals, measurement of acquired
assets and assumed liabilities in business combinations, allowance for doubtful accounts, inventory reserves, the valuation of the
derivative liability, income taxes, the estimated useful life and recoverability of long-lived assets, and the valuation of stock-based
awards. Actual results could differ from those estimates.

ff

Functional Currency

Assets and liabilities of subsidiaries that prepare financial statements in currencies other than the U.S. dollar are translated using

rates of exchange as of the balance sheet date and the statements of operations and comprehensive loss are translated at the average
rates of exchange for each reporting period. The Company recorded a foreign currency translation loss in accumulated other
comprehensive loss of $0.5 million for the year ended December 31, 2018, a gain of $1.2 million for the year ended December 31,
2017 and a loss of $1.0 million for the years ended December 31, 2016.

F-7

Cash, Cash Equivalents, and Marketable Securities

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to

be cash equivalents. The Company deposits its cash primarily in checking, money market accounts, as well as certificates of deposit.
The Company generally does not enter into investments for trading or speculative purposes, rather to preserve its capital for the
purpose of funding operations.

Accounts Receivable, net

Accounts receivable are recorded at the invoiced amount. On a periodic basis, the Company evaluates its accounts receivable

and establishes an allowance for doubtful accounts, based upon a history of past write-offs, the age of the receivables, and current
credit conditions.

Inventories

Inventories for clinical trials are stated at the lower of cost and net realizable value, with approximate cost being determined on

a first-in-first-out basis. Active pharmaceutical ingredient (“API”) inventory is stated at the lower of cost and net realizable value, with
approximate cost being determined on a weighted average basis.

The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand

forecasts. The write-down is measured as the difference between the cost of the inventory and market, based upon assumptions about
future demand, and is charged to the provision for inventory, which is a component of cost of sales. At the point of the loss
recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result
in the restoration or increase in that newly established cost basis.

Property and Equipment, net

Property and equipment are recorded at cost or acquisition date fair value in a business acquisition. Depreciation is recorded

lives of the related assets using the straight-line method. Leasehold improvements are amortized on a

over the estimated usefulff
straight-line basis over the shorter of the useful life or term of the lease. Upon retirement or disposal, the cost and related accumulated
depreciation are removed from the consolidated balance sheets and the resulting gain or loss is recorded to general and administrative
expense in the consolidated statements of operations and comprehensive loss. Routine expenditures for maintenance and repairs are
expensed as incurred.

Estimated useful lives for property and equipment are as follows:

Property and Equipment
Land
Equipment
Furniture and fixtures
Computer hardware
Leasehold improvements

Construction in process

Estimated Useful Life

Not depreciated
5 - 8 years
5 years
3 years
Lesser of estimated useful
life or remaining lease term
Not depreciated

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, short-term investments, marketable securities, an investment,

accounts receivable, accounts payable, accrued liabilities, and long-term debt. Cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities, and debt, are stated at their carrying value, which approximates fair
value due to the short time to the expected receipt or payment date of such amounts.

Goodwill

The Company tests goodwill for impairment annually on October 1st, the Company’s annual goodwill impairment measurement

date, or more frequently if a triggering event occurs. The Company has three operating segments: Oncology Innovation Platform,
Commercial Platform, and Global Supply Chain Platform which has two components: Polymed and QuaDPharma. Accordingly, the
Company has four reporting units: Oncology Innovation Platform, Commercial Platform, Polymed, and QuaDPharma, all of which
have discrete financial information that are reviewed by segment managers. Goodwill is assigned to three reporting units: Oncology

F-8

Innovation Platform, Polymed, and QuaDPharma. Goodwill impairment exists when the fair value of goodwill is less than its carrying
value. The Company concluded that there was no impairment of goodwill for the years ended December 31, 2018, 2017, and 2016.

Intangible Assets, net

Intangible assets arising from a business acquisition are recognized at fair value as of the acquisition date. The Company

amortizes intangible assets using the straight-line method. When the straight-line method of amortization is utilized, the estimated
useful life of the intangible asset is shortened to assure the recognition of amortization expense corresponds with the expected cash
flows. Other purchased intangibles, including certain licenses, are capitalized at cost and amortized on a straight-line basis over the
license life,ff when a future economic benefit is probable and measurable. If a future economic benefit is not probable or measurable,
the license costs are expensed as incurred within research and development expenses.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived assets, excluding goodwill, when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the
ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of
the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between
the estimated fair value and carrying value is recorded. Impairment charges of $0.3 million, $0.1 million and $0.3 million were
recorded for the years ended December 31, 2018, 2017, and 2016 respectively. See Note 5—Goodwill and Intangible Assets, net for
additional details.

Treasury Stock

The Company records treasury stock activities at the cost of the acquired stock. The Company’s accounting policy upon the

formal retirement of treasury stock is to deduct the par value from common stock and to reflect any excess of cost over par value as a
reduction to additional paid-in capital (to the extent created by previous issuances of the stock) and then accumulated deficit.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”), Topic 606, “Revenue from

Contracts with Customers,” using the modified retrospective transition method. Under this method, the Company was required to
evaluate the impacts of implementing the standard on existing contracts on the date of the adoption, accounting for those contracts in
accordance with Topic 606. This standard applies to all contracts with customers, except for contracts that are within the scope of
other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity
recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an
entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identifies the contract(s) with a
customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction
price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration
it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined
to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those
that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as
revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied. For a complete discussion of accounting for product sales, license fees and consulting revenue, and grant
revenue, see Note 18 – Revenue Recognition. The Company did not record an adjustment to revenue upon adoption.

Research and Development Expenses

Costs for research and development (“R&D”) of products, including payroll, contractor expenses, and supplies, are expensed as
incurred. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. Where
contingent milestone payments are due to third parties under research and development arrangements, the obligations are recorded
when the milestone results are probable of being achieved.

Deferred Rent

Rent expense is recognized on a straight-line basis over the term of the lease. Lease incentives, including rent holidays provided

by lessors and rent escalation provisions, are accounted for as deferred rent.

F-9

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and

other events and circumstances from non-owner sources. Changes in unrealized gains and losses on investments and foreign currency
translation adjustments represent the differences between the Company’s net loss and comprehensive loss.

Stock-Based Compensation

Awards granted to employees

p y

g

The Company recognizes stock-based compensation based on the grant date fair value of stock options granted to employees,

officers, and directors. The Company used the Black-Scholes option pricing model to calculate the grant date fair value of stock
options. The Black-Scholes option pricing model requires inputs for risk-free interest rate, dividend yield, volatility, fair value of
common stock, and expected lives of the stock options. The risk-free rate for periods within the expected life of the stock option is
based on the U.S. Treasury yield curve in effect at the time of the grant. No dividend yield is used, consistent with the Company’s
history. Expected volatility is based on historical volatilities of the stock prices of peer biopharmaceutical companies. The fair value of
common stock is based on the quoted market price of the Company’s common stock on grant date. The Company uses the simplified
method for determining the expected lives of stock options. The Company recognizes compensation expenses based on the grant date
fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting period.

g
Stock grants

The Company grants common stock to key officers and directors and records the fair value of these grants, based on the fair

value of the common stock on the grant date, as compensation expense throughout the requisite service period.

Awards granted to non-employees

p y

g

The Company has accounted for equity instruments issued to non-employees in accordance with the provisions of ASC 718,

Compensation—Stock Compensation, and ASC 505, Equity. All transactions in which goods or services are received in exchange for
equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The expense is recognized in the same manner as if the Company had paid cash for the
services provided by the non-employees.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are

recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. Deferred income tax expense or benefit is the result of changes in the deferred income tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred income tax assets where, based upon the available evidence,
management concludes that it is more-likely-than not that the deferred income tax assets will not be realized. In evaluating its ability
to recover deferred income tax assets, the Company considers all available positive and negative evidence, including its operating
results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. Because of the uncertainty
of the realization of the deferred income tax assets, the Company has recorded a valuation allowance against its deferred income tax
assets.

Reserves are provided for tax benefits for which realization is uncertain. Such benefits are only recognized when the underlying

tax position is considered more likely than not to be sustained on examination by a taxing authority, assuming they possess full
knowledge of the position and facts. Interest and penalties related to uncertain tax positions are recognized in income tax expense
(benefit); however, the Company currently has no interest or penalties related to income taxes.

Segment and Geographic Information

The Company’s chief operating decision-maker, its Chief Executive Officer, reviews its operating results on an aggregate basis
and at the operating segment level for purposes of allocating resources and evaluating financial performance. The Company has three
business platforms which are the operating segments: (1) Oncology Innovation Platform, for the discovery and development of cancer
supportive therapies, (2) Commercial Platform, the manufacturing and selling of commercial pharmaceutical products, and (3) Global
Supply Chain Platform, the cGMP manufacturing and marketing of API, medical devices, and clinical products. Each operating

F-10

segment has a segment manager who is held accountable for operations and operating results. Accordingly, the Company operates in
three reportable segments.

Concentration of Credit Risk, Other Risks and Uncertainties

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash

equivalents and investments. The Company deposits its cash equivalents in interest-bearing money market accounts and certificates of
deposit. Although the Company deposits the cash with multiple financial institutions, cash balances may occasionally be in excess of
the amounts insured by the Federal Deposit Insurance Corporation. The primary focus of the Company’s investment strategy is to
preserve capital and meet liquidity requirements. The Company’s investment policy addresses the level of credit exposure by limiting
the concentration in any one corporate issuer and establishing a minimum allowable credit rating. The Company also has significant
assets and liabilities held in its overseas manufacturing facility in China, Taihao, and therefore is subject to foreign currency
fluctuation.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,

"Leases (Topic 842)", which requires lessees to recognize leases on-balance sheet and disclose key information about leasing
arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset
representing the right to use the underlying asset over the lease term and lease liability on the balance sheet for all leases with a term
longer than 12 months. Lease obligations are to be measured at the present value of lease payments and accounted for using the
effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and classification of
expense recognition in the income statement. For finance leases, the leased asset is depreciated on a straight-line basis and recorded
separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For
operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and
presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and
classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and
quantitative information related to lease agreements. In July 2018, the FASB issued new guidance that provided for a new optional
transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect
adjustment to opening retained earnings. Under this approach, comparative periods are not restated.

The Company adopted the new lease standard on January 1, 2019 and used the effective date as our date of initial application.
Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for
dates and periods before January 1, 2019. The processes that are in final refinement related to our full implementation of the standard
include: i) finalizing our estimates related to the applicable incremental borrowing rate at January 1, 2019 and ii) process
enhancements for refining our financial reporting procedures to develop the additional required qualitative and quantitative disclosures
required beginning in 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected the package of

practical expedients permitted under the transition guidance within the new standard, which allows the Company (1) to not reassess
whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing
leases, and (3) to not reassess initial direct costs for any existing leases In preparation for adoption of the standard, the Company has
implemented internal controls to enable the preparation of fiff nancial information. Further, the Company has made an accounting policy
election to keep leases with an initial term of twelve months or less off the balance sheet. The Company will recognize those lease
payments in the consolidated statement of operations and comprehensive loss over the lease term.

The standard will have a material impact on our consolidated balance sheets, but is not expected to have a material impact on

our consolidated statements of operations and comprehensive loss. The most significant impact will be the recognition of ROU assets
and lease liabilities for operating leases. The Company expects that adoption of the standard will result in the recognition of additional
ROU assets ranging between $7.5 million to $10.0 million and a ROU liability ranging between $9.5 million to $12.0 million as of
January 1, 2019. The difference relates to the de-recognition of the Company’s current deferred rent balance of $2.0 million.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718, “Compensation – Stock Compensation,”
which only included share-based payments to employees, to include share-based payments issued to nonemployees for goods and
services. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company will only need to remeasure liability-classifiedff
equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained

awards that have not yet been settled as of the date of adoption, and

F-11

earnings as of the beginning of the fiscal year of adoption. The Company does not expect that the adoption of this standard will have a
material effect

on its consolidated financial statements.

ff

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which requires an

entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU has replaced most historical revenue recognition guidance in U.S. GAAP when it became effective. The Company adopted
this standard on January 1, 2018 using the modified retrospective transition method. The Company did not record a cumulative catch-
up adjustment upon adoption, as there was no effect on the timing or amount of revenue recognized for existing contracts that were
not completed as of the implementation date. Refer to Note 18 – Revenue Recognition for more information on the effect of this ASU.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” The primary
purpose of this ASU is to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash
on the statement of cash flows. This ASU will require that a statement of cash flows explain the change during the period in the total
of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on
January 1, 2018 and the adoption of this ASU did not impact the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Stock Compensation—Scope of Modification Accounting,” which provides
guidance as to when a modification of a share-based award must be accounted for. In general, if a modification of the terms and
conditions of an award does not change the fair value of the award (or calculated value or intrinsic value, if used instead of fair value),
does not change the vesting conditions of the award, and does not change the classification of the award as an equity instrument or a
liability instrument, then an entity need not account for the modification. The new rules are applied prospectively to awards modified
after the adoption date. The Company adopted this standard on January 1, 2018 and the adoption of this ASU did not impact the
Company’s consolidated financial statements.

3.

INVENTORIES

Inventories consist of the following (in thousands):

Raw materials and purchased parts
Work in progress
Finished goods

Total inventories

4.

PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following (in thousands):

Land
Equipment
Furniture and fixtures
Computer hardware
Leasehold improvements
Construction in process

Property and equipment, gross

Less: accumulated depreciation
Property and equipment, net

December 31,

2018

2017

4,092 $
3,166
21,529
28,787 $

1,471
1,877
13,213
16,561

December 31,

2018

2017

1,132
6,236
640
2,118
1,380
3,826
15,332
(3,885)
11,447

$

$

1,196
5,123
975
1,395
1,326
3,225
13,240
(3,589)
9,651

$

$

$

$

Depreciation expense amounted to $1.7 million, $2.1 million, and $1.2 million for the years ended December 31, 2018, 2017,

and 2016, respectively.

F-12

5.

GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The changes in the carrying amount of goodwill for each reporting unit with goodwill for the periods indicated are as follows (in

thousands):

Balance as of January 1, 2017
Effect of currency translation adjustment
Balance as of December 31, 2017
Effect of currency translation adjustment
Balance as of December 31, 2018

APS

Polymed

Oncology
Innovation
Platform

$

$

4,586
—
4,586
—
4,586

$

$

21,592
332
21,924
(277)
21,647

$

$

11,374
(89)
11,285
(23)
11,262

$

$

Total

37,552
243
37,795
(300)
37,495

Intangible Assets, Net

g

,

The Company’s identifiable intangible assets, net, consist of the following (in thousands):

Amortizable intangible assets

Licenses
Polymed customer list
Polymed technology
Product rights

Indefinite-lived intangible assets:

CDE in-process research and development (IPR&D)

Effect of currency translation adjustment
Total intangibles, net

Amortizable intangible assets

Licenses
Polymed customer list
Polymed technology
Product rights

Indefinite-lived intangible assets:

CDE in-process research and development (IPR&D)

Effect of currency translation adjustment
Total intangibles, net

December 31, 2018

Cost/Fair
Value

Accumulated
Amortization

Impairments

Net

$

$

$

$

$

8,935
1,593
3,712
530

1,026
(390)
15,406

$

2,060
938
999
263

—
—
4,260

$

$

— $
—
—
—

6,875
655
2,713
267

298
—
298

$

728
(390)
10,848

December 31, 2017

Cost/Fair
Value

Accumulated
Amortization

Impairments

Net

$

4,650
1,593
3,712
530

1,106
(197)
11,394

$

1,173
675
762
132

—
—
2,742

$

$

— $
—
—
—

80
—
80

$

3,477
918
2,950
398

1,026
(197)
8,572

As of December 31, 2018, licenses at cost include an Orascovery license of $0.4 million and licenses purchased from Gland
Pharma Ltd (“Gland”) of $4.5 million, and a license purchased from MAIA Pharmaceuticals, Inc (“MAIA”) for $4.0 million. The
Orascovery license with Hanmi Pharmaceuticals Co. Ltd. (“Hanmi”) was purchased directly from Hanmi and is being amortized on a
straight-line basis over a period of 12.75 years, the remaining life of the license agreement at the time of purchase.

The licenses purchased from Gland are being amortized on a straight-line basis over a period of 5 years, the remaining life of the

license agreement at the time of purchase. The license purchased from MAIA is being amortized over a period of 7 years, the
remaining life of the license agreement at the time of purchase.

The remaining intangible assets were acquired in connection with the acquisitions of Athenex Pharma Solutions (“APS” or

“Athenex Pharma Solutions,”), Polymed Therapeutics, Inc. (“Polymed”), and Comprehensive Drug Enterprises (“CDE”). Intangible
assets are amortized using an economic consumption model over their useful lives. The APS customer list is amortized on a straight-
line basis over 7 years. The Polymed customer list and technology are amortized on a straight-line basis over 6 and 12 years,

F-13

respectively. The CDE in-process research and development, or IPR&D, will not be amortized until the related projects are completed.
IPR&D is tested annually for impairment, unless conditions exist causing an earlier impairment test (e.g., abandonment of project).
During the year ended December 31, 2018, the Company abandoned a project within IPR&D and therefore, the related balance of
$0.3 million was written-off as impaired and is included within research and development expenses in the consolidated statement of
operations and comprehensive loss for the year ended December 31, 2018. During the year ended December 31, 2017, an impairment
charge of $0.1 million was recorded within research and development expenses due to the impairment of a project within CDE’s
IPR&D. During the year ended December 31, 2016, impairment charges of $0.2 million and $0.1 million were recorded within
research and development costs and selling, general, and administrative costs, respectively, in the 2016 consolidated statement of
operations and comprehensive loss. The charge of $0.2 million was due to the impairment of CDE’s IPR&D. The charge of
$0.1 million was due to the impairment of the APS customer list. This was due to the business model change of APS from a contract
manufacturer to a facility primarily producing FDA shortage products under 503B regulations, which changed the Company’s
anticipated use of the customer list. The weighted-average useful life for all intangible assets was 7.85 years as of December 31, 2018.

The Company recorded $1.6 million, $1.6 million, and $0.8 million of amortization expense for the years ended December 31,

2018, 2017, and 2016, respectively.

The Company expects amortization expense related to its finite-lived intangible assets for the next 5 years and thereafter to be as

follows as of December 31, 2018 (in thousands):

Year ending December 31:
2019
2020
2021
2022
2023
Thereafter

Estimated
Amortization
Expense

$

$

2,216
2,216
1,763
995
965
2,355
10,510

6.

FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements, establishes a framework for measuring fair value. That framework provides a fair value

hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the ASC 820 are described as follows:

Level 1—Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets

that the plan has the ability to access.

Level 2—Inputs to the valuation methodology include:

•

•

•

•

•

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in inactive markets;

Inputs other than quoted prices that are observable for the asset or liability;

Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full
term of the asset or liability.

Level 3—Inputs to the valuation methodology are unobservable, supported by little or no market activity, and that are significant

to the fair value measurement.

Transfers between levels, if any, are recorded as of the beginning of the reporting period in which the transfer occurs; there were

no transfers between Levels 1, 2 or 3 of any financial assets or liabilities during the years ended December 31, 2018, 2017, or 2016.

F-14

The following tables represent the fair value hierarchy for those assets and liabilities that the Company measures at fair value on

a recurring basis (in thousands):

Assets:

Financial assets included within cash and cash equivalents

Money market funds
Short-term investments - commercial paper

Financial assets included within short-term investments

Short-term investments - commercial paper
Short-term investments - corporate notes
Short-term investments - U.S. government bonds

Available-for-sale

ff
Total assets

investment

Assets:

Financial assets included within cash and cash equivalents

Money market funds
Short-term investments - commercial paper
Short-term investments - corporate notes
Short-term investments - U.S. government bonds

Financial assets included within short-term investments

Short-term investments - commercial paper
Short-term investments - U.S. government bonds

Available-for-sale investment

Total assets

Fair Value Measurements at December 31, 2018 Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

$

25
5,396

$

25
—

— $

5,396

36,544
16,699
3,998
388
63,050

$

—
—
—
388
413

$

36,544
16,699
3,998
—
62,637

$

—
—

—
—
—
—
—

Fair Value Measurements at December 31, 2017 Using:

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

13,804
5,740
2,824
2,495

9,242
2,511
328
36,944

$

$

13,804
—
—
—

—
—
328
14,132

$

— $

5,740
2,824
2,495

9,242
2,511
—
22,812

$

$

—
—
—
—

—
—
—
—

$

$

$

$

The Company classifies its certificates of deposit and money market funds within Level 1 because it uses quoted market prices

to determine their fair value. The Company classifies its commercial paper, corporate notes, and U.S. government bonds within
Level 2 because it uses quoted prices for similar assets or liabilities in active markets and each has a specified term and all level 2
inputs are observable for substantially the full term of each instrument.

The Company owns 68,000 shares of PharmaEssentia, a company publicly traded on the Taiwan OTC Exchange. As of

December 31, 2018 and 2017, the Company’s investment in PharmaEssentia is valued at the reported closing price. This investment is
classified as a level 1 investment.

F-15

7.

ASSET ACQUISITION

On June 29, 2018, the Company entered into a Share Subscription Agreement (“SSA”) for Axis Therapeutics Limited (“Axis”),

a subsidiary of the Company jointly owned by Athenex and Xiangxue Life Sciences Limited (“XLifeSc”). Under the SSA, Athenex
contributed $30.0 million cash for a 55% ownership interest in Axis and XLifeSc contributed a license for IPR&D of certain
immunotherapy technology for a 45% ownership interest in Axis. Also, on June 29, 2018, through a license agreement entered into
between XLifeSc and Axis, XLifeSc granted Axis an exclusive, sublicensable worldwide (excluding mainland China) right and
license to use its proprietary TCR-engineered T Cell therapy to develop and commercialize products for oncology indications (“TCR-
T License”). Upon effectiveness of the TCR-T License and satisfaction of certain conditions of the license agreement, the Company
issued 267,952 shares of its common stock equal to $5.0 million to XLifeSc. On September 14, 2018, Athenex completed the $30.0
million cash injection to Axis and all the closing conditions under the SSA were fulfilled.

The Company has consolidated the financial statements of Axis into its consolidated financial statements as of and for the year

ended December 31, 2018 using the voting interest model. The nonmonetary exchange of 45% of the shares of Axis for the IPR&D
from XLifeSc has been accounted for as an asset acquisition that does not constitute a business under ASC 805. Therefore, the
acquisition of IPR&D was expensed as research and development expense at its fair value. The Company determined that the fair
value of the equity issued to XLifeSc was $24.5 million for the IPR&D, considering the $30.0 million contribution made by the
Company for its 55% ownership interest and the arms-length nature of the transaction. Accordingly, the Company recorded an
expense of $24.5 million within research and development expenses on its consolidated statements of operations and comprehensive
loss for the year ended December 31, 2018.

8.

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

Accrued wages and benefits
Accrued clinical expenses
Accrued operating expenses
Deferred revenue
Accrued cost of equity raise
Accrued R&D licensing fees
Accrued inventory purchases
Accrued tax withholdings
Accrued selling fees and rebates
Accrued construction costs
Total accrued expenses

December 31,

2018

2017

$

$

5,061 $
2,653
8,128
190
—
4,827
—
—
423
16,436
37,718 $

3,817
3,826
1,529
1,202
186
5,729
6,835
357
788
2,709
26,978

The accrued construction costs relate to the building of the manufacturing facility in Dunkirk, NY (refer to Note 13 – Business

and Economic Collaborative Agreements). The Company expects to be reimbursed by the State for these costs.

9.

INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Reform Act) was signed into law. This legislation significantly changes

U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a
repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate
income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.

Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from
35% to 21% under the Tax Reform Act, the Company revalued its net U.S. deferred income tax liabilities at December 31, 2017. The
Company has reduced its income tax expense from continuing operations by approximately $34.1 million due to the revaluation of
U.S. deferred tax liabilities, offset by an increase in the valuation allowance. The valuation allowance for deferred tax assets increased
by $28.1 million for the year ended December 31, 2018 and decreased by $1.9 million for the year ended December 31, 2017. The
change in the valuation allowance was due to an increase of deferred tax assets mainly for additional net operating losses and tax
credit carryforwards.

F-16

The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary
earnings and profits (“E&P”) through the year ended December 31, 2017. The one-time transition tax is based on the Company’s total
post-1986 earnings and profits for which it has previously deferred from U.S. income taxes. The Company did not record a provisional
amount in income tax expense for the transition tax as it has accumulated losses in its foreign subsidiaries, and thus was not subject to
the transition tax.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base
erosion provisions - the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”)
provisions.

The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an
subsidiary’s tangible assets. The Company does not expect that it will be subject to incremental U.S.

allowable return on the foreign
tax on GILTI income beginning in 2018. In the event that the Company is subject to this tax, it has elected to recognize the tax on
GILTI as a period expense in the period the tax is incurred.

ff

The BEAT provisions in the Tax Reform Act eliminates the deduction of certain base-erosion payments made to related foreign
corporations, and impose a minimum tax if greater than regular tax. The Company does not expect to be impacted by this tax based on
annual gross receipts threshold for 2018.

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address

the application of GAAP in situations when a registrant does not have the necessary information
(including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reformff
Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these
amounts in its consolidated financial statements for the year ended December 31, 2018. For the year ended December 31, 2018, the
Company completed its analysis of the Tax Reform Act. In addition to the amounts reported above, the Company recognized an
addition $0.3 million income tax expense from continuing operations for adjustments to deferred tax assets pertaining to executive
compensation, offset by a valuation allowance.2018

available, prepared, or analyzed

Act. The

ff

The Company recorded an income tax expense of $0.1 million during each of the years ended December 31, 2018 and 2017 and

an income tax benefit of $0.3 million for the year ended December 31, 2016. The current and prior year income tax expense is
attributable to foreign withholding taxes. The Company and its other subsidiaries were in a cumulative loss position as of
December 31, 2018.

The components of loss before income tax expense (benefit) consist of the following (in thousands):

Domestic
Foreign

Year Ended December 31,
2017
(125,770) $
(5,541)
(131,311) $

2018
(95,479) $
(33,132)
(128,611) $

$

$

2016
(83,714)
(4,457)
(88,171)

The components of the income tax expense (benefit) consist of the following (in thousands):

Current:

Federal
State
Foreign

Deferred:

Federal
State
Foreign

Change in valuation allowance

Year Ended December 31,
2017

2016

2018

$

$

— $
27
455
482

(26,260)
(293)
(1,863)
(28,416)
28,034
100

$

$

64
(92)
440
412

—
61
165
226

(3,222)
5,799
(874)
1,703
(2,030)
85

$

(26,386)
(4,165)
(848)
(31,399)
30,908
(265)

F-17

The income tax (expense) benefit differs from the federal statutory rate due to the following:

Statutory rate
State taxes, net of federal benefit
Foreign rate differential
Federal income tax rate change
Valuation allowance
Other

Deferred tax assets (liabilities) consist of the following (in thousands):

Intangible assets
Property and equipment
Stock-based compensation
Net operating loss carryforwards
Other

Gross deferred income tax assets

Less: valuation allowance

Net deferred income tax assets

Intangible assets

Gross deferred income tax liabilities
ff
Net deferred

income tax assets

Year Ended December 31,
2017

2016

2018

21.0%
0.2
(0.3)
—
(21.6)
0.6
(0.1)%

34.0%
(4.3)
(0.6)
(25.9)
1.5
(4.8)
(0.1)%

34.0%
5.4
(0.8)
—
(35.1)
(3.2)
0.3%

December 31,

2018

2017

$

$

10,273
238
7,508
60,362
11,482
89,863
(88,455)
1,408
(922)
(922)
486

$

$

8,923
70
6,489
44,008
2,014
61,504
(60,379)
1,125
(1,004)
(1,004)
121

As of December 31, 2018, there exists $253.8 million federal net operating losses and $48.3 million of state net operating losses,

respectively. Of the federal net operating losses, $184.8 million expire beginning in 2027 and $69.0 million have an indefinite life. In
addition, there exists $19.9 million of foreign net operating losses as of December 31, 2018 which may be carried forward indefinitely.

ff

The Company considers whether any positions taken on the Company’s income tax returns would be considered uncertain tax

positions that may require the recognition of a liability. The Company has concluded that there are no material uncertain tax positions
as of December 31, 2018, 2017, and 2016. The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of income benefit in the consolidated statement of operations and comprehensive loss. There were no amounts recognized
for interest and penalties related to unrecognized tax benefits during the years ended December 31, 2018, 2017, and 2016. The income
tax returns for the taxable years 2012 to 2017 in the U.S., China, and Hong Kong remain open and subject to income tax audits.

Provision has not been made for U.S. taxes on undistributed earnings of foreign subsidiaries. Those earnings have been and will

continue to be indefinitely reinvested.

Under the provisions of Section 382 of the Internal Revenue Code (“IRC”), net operating loss and credit carryforwards and
other tax attributes may be subject to limitation if there has been a significant change in ownership of the Company, as definff ed by the
IRC. Changes in ownership of our common stock could result in limitations on net operating loss carryforwards.

F-18

10. DEFERRED COMPENSATION

The Company has a non-qualified deferred

ff

compensation plan for certain key employees. In connection with the agreements

between the Company and certain members of management, the employees have agreed to defer a portion of their salary to the future
which is payable upon their retirement or separation of service with the Company. The deferred compensation accrues interest at 4%
annually which is included with the total balance due. The Company incurred $0.5 million, $0.6 million, and $0.7 million of deferred
compensation expense included within research and development expenses ($0.1 million, $0 million, and $0.4 million) and selling,
general, and administrative expenses ($0.4 million, $0.6 million, and $0.3 million) during the years ended December 31, 2018, 2017,
and 2016, respectively. The Company paid $0.1 million and $0.5 million of deferred compensation associated with the separation of
key employees in 2018 and 2017, respectively. The related liability as of December 31, 2018 and 2017 totaled $2.8 million and
$2.3 million, respectively.

ff

11. DEBT

The Company’s debt as of December 31, 2018 and 2017, consists of the following (in thousands):

Current portion of promissory notes to related parties
Current portion of mortgage
Current portion of capital lease obligation
Long-term portion of promissory notes to related parties
Long-term portion of capital lease obligation
Senior secured loan, net of debt discount and financing fees

of $4,619
Total

December 31,

2018

2017

— $

779
182
—
422

491
835
180
—
475

45,381
46,764 $

—
1,981

$

$

The promissory notes had a 36 month maturity beginning on July 1, 2015 and ended on June 1, 2018 with a 6% stated interest

rate. The promissory notes were paid in full during 2018. The mortgage payments extend through July 30, 2019. Future minimum
principal payments on these promissory notes and mortgage consist of $0.8 million due in the year ending December 31, 2019.

During 2018, the Company issued a senior secured loan with a principal value of $50.0 million and a maturity date of June 30,
2023. The loan bears interest at a floating per annum rate equal to LIBOR (with a floor of 2.0%) plus 9.0%. The Company is required
to make monthly interest-only payments with a bullet payment of the principal at maturity.

12. RELATED PARTY TRANSACTIONS

During the years ended December 31, 2018, 2017, and 2016, the Company entered into transactions with individuals and other

companies that have financial interests in the Company. Related party transactions included the following:

a.

In 2015, CDE signed an agreement with Avalon BioMedical (Management) Limited and its subsidiaries (“Avalon”) under
which Avalon would receive certain administrative services and would occupy space at CDE’s research location. Avalon would
reimburse CDE for these administrative services as incurred and pay CDE a percentage of the total rent payment based on its
staff headcount occupying the Hong Kong research and development facility (See Note 20—Commitments and Contingencies).
Members of the Company’s board and management collectively have a controlling interest in Avalon. The Company does not
hold any interest in Avalon and does not have any obligations to absorb losses or any rights to receive benefits from Avalon. As
of December 31, 2018 and December 31, 2017, Avalon held 786,061 and 678,880 shares of the Company’s common stock,
respectively, which represented approximately 1% of the Company’s total issued shares for both periods. Balances due from
Avalon recorded on the consolidated balance sheets were not significant.

In June 2018, the Company entered into two in-licensing agreements with Avalon wherein the Company obtained certain
intellectual property from Avalon in an effort to develop and commercialize the underlying products. Under these agreements
the Company is required to pay upfront fees and future milestone payments and sales-based royalties. During the year ended
December 31, 2018, the Company recorded $5.5 million of upfront fees, consisting of $3.5 million in cash and $2.0 million in
equity, as research and development expense on its 2018 consolidated statement of operations and comprehensive loss. During
the year ended December 31, 2018, 107,181 shares of common stock were issued to Avalon at a price of $18.66 per share, the
closing price of the stock on the date the agreement was executed, in connection with the license agreements.

F-19

b.

c.

d.

e.

f.

g.

The Company receives consulting and licensing revenue from PharmaEssentia, a company in which Athenex has an investment
classified as available-for-sale (see Note 6 —Fair Value Measurements). Revenue recorded and cost-sharing funds received
from PharmaEssentia amounted to $2.3 million, $0.5 million, and $0 for the years ended December 31, 2018, 2017, and 2016,
respectively.

The Company receives certain clinical development services from ZenRx Limited and its subsidiaries (“ZenRx”), a company for
which one of our executive officers serves on the board of directors. In connection with such services, the Company made
payments to ZenRx of $0.3 million, $0.6 million, and less than $0.1 million for the years ended December 31, 2018, 2017, and
2016, respectively. In April 2013, the Company entered into a license agreement with ZenRx pursuant to which the Company
granted an exclusive, sublicensable license to use certain of our intellectual property to develop and commercialize Oratecan and
Oraxol in Australia and New Zealand, and a non-exclusive license to manufacture a certain compound, but only for use in
Oratecan and Oraxol. ZenRx is responsible for all development, manufacturing and commercialization, and the related costs and
expenses, of any product candidates resulting from the agreement. No revenue was earned from this license agreement in the
periods presented in these consolidated financial statements.

The Company received consulting services from RSJ Consulting LLC (“RSJ”), a limited liability company for which one of our
executive officers serves as the principal. Services incurred from RSJ amounted to $0, $0.1 million, and $0.2 million for the
years ended December 31, 2018, 2017, and 2016, respectively.

The Company purchases certain pharmaceutical ingredients from Chongqing Taisheng Biotechnology Co., Ltd. (“Taisheng”), a
company which is owned by one of our executive officers. Purchases from Taisheng amounted to $0 for the years ended
December 31, 2018 and 2017 and $0.2 million for the year ended December 31, 2016. No amounts were owed to Taisheng as of
December 31, 2018 and 2017.

During the first quarter of 2017, the Company issued and sold $4.0 million in convertible bonds to two related parties. One of
the holders of more than 5% of our outstanding common stock as of the IPO date and a director of the Company each purchased
$2.0 million in convertible bonds. In June 2017, these bonds were converted into 2,727,273 shares of common stock.

Certain family members of our executive officers perform consulting services to the Company. Such services were not
significant to the consolidated financial statements.

13. BUSINESS AND ECONOMIC COLLABORATIVE AGREEMENTS

New York State

On May 1, 2015, the Company executed an agreement for a medical technology research, development, innovation, and
commercialization alliance with Fort Schuyler Management Corporation (“FSMC”), a not-for-profit corporation existing under the
laws of the State of New York (the “State”). The Company expects that $25 million be invested by the State to build new corporate
offices including a formulation lab with related equipment for the Company.

The Company, through its partnership with FSMC, Empire State Development (“ESD”), and The State University of New York

(“SUNY”) Polytechnic, plans to build a 315,000 square foot, ISO Class 5 high potency oral and sterile injectable pharmaceutical
manufacturing facility in Dunkirk, New York. On September 4, 2017, the Company entered into a Grant Disbursement Agreement
whereby the State agreed to grant up to $200 million, plus any additional funds available from the previous $25 million ESD Grant for
the Company’s corporate offices, to fund the construction of the new pharmaceutical manufacturing facility. If construction costs
exceed $225 million, the Company is responsible for funding those construction costs. The Company is also responsible for the costs
of furnishing the facility. The Company is entitled to lease the facility and all equipment purchased with grant funds at a rate of $1.00
per year for an initial 10-year term, and for the same rate if the Company elects to extend the lease for an additional 10-year term. In
exchange, the Company committed to spending $1.52 billion on operational expenses in the facility in its first 10-year term, and an
additional $1.50 billion on operational expenses if the Company elects to extend the lease for a second 10-year term. The State will
fund a majority of the construction costs and hold ownership of the manufacturing and office facilities. Construction of these facilities
has begun and is expected to be completed in 2020.

F-20

Chongqing Government Department of Economic Development

gq g

p

p

f

In October 2015, the Company completed and executed an agreement with the Banan District in Chongqing, China to construct

one GMP API and one GMP pharmaceutical manufacturing plant on Banan sites identified and selected by the Company’s
management. Under the terms of the agreement, Banan will provide the funding for the land and construction of the manufacturing
plants according to Athenex specifications and the Company will equip the plant. This agreement allows the Company to expand its
existing high potency oncology active pharmaceutical ingredient manufacturing capacity as well as its drug manufacturing capacity in
China. The Company does not have significant construction period risks and the Banan District will fund a majority of the
construction costs and hold ownership of the facilities. Construction of these facilities has begun and is expected to be completed in
2019.

In connection with these arrangements with FSMC and the Banan District we have committed to certain operational milestones.

If we are unable to comply with such, we may lose access to these properties.

14.

STOCK-BASED COMPENSATION

Common Stock Option Plans

p

The Company has three common stock option plans adopted in 2013, 2007 and 2004 (the “Plans”) which authorize the grant of pup
to 11,800,000 common stock options to employees, directors, and consultants. Additionally, on June 14, 2017, the Company adopted its
2017 Omnibus Incentive Plan and 2017 Employee Stock Purchase Plan (the “2017 Plans”). Under the 2017 Plans, 5,200,000 shares fof
common stock were reserved for future issuance to employees, directors, and consultants,
Stock Purchase Plan (“ESPP”), which was established at the time of the IPO.

including 1,000,000 reserved for the Emp yployee

m

g

Stock Options

p

The total fair value of stock options vested and recorded as compensation expense during the year ended December 31, 2018,

g

2017, and 2016 was $9.8 million, $8.0 million, and $11.0 million, respectively. As of December 31, 2018, $17.4 million fof
unrecognized cost related to non-vested stock options was expected to be recognized over a weighted-average period of approximately
cember
r
1.8 years. The total intrinsic value of poptions exercised was pp
respectively.
y
31, 2018 and 2017,

approximately $6.7 million and $4.2 million for the yyears ended De

p

y

p y

The following table summarizes the status of the Company’s stock option activity granted under the Plans and 2017 Plans to
except stock poption amounts and exercise pprice): Stock options granted have a

employees, directors, and consultants (in thousands,
contractual term of 10 years and generally vest over a 2-4 year period. A limited number of stock options vest immediately in certain
circumstances. The following table summarizes the status of the Company’s stock option activity granted under the Plans and 2017
Plans to employees, directors, and consultants (in thousands, except stock option amounts):

p

Outstanding at December 31, 2017

Granted
Exercised
Forfeited
Expired

Outstanding at December 31, 2018
Vested and exercisable at December 31, 2018

Stock Options
10,176,643
1,449,650
(673,230)
(257,513)
(7,900)
10,687,650
7,889,450

Weighted-
Average
Exercise Price
7.19
$
17.12
5.85
11.85
9.97
8.51
6.53

$
$

Weighted-
Average
Remaining
Contractual
Term

6.83
—
—
—
—
6.87
5.56

Aggregate
Intrinsic
Value

$

88,615

$
$

44,688
48,618

F-21

The Company determines the fair value of stock option awards on the grant date using the Black-Scholes option pricing model,
which is impacted by assumptions regarding a number of highly subjective variables. The following table summarizes the weighted-
average assumptions used as inputs to the Black-Scholes option pricing model during the periods indicated:

Weighted average grant date fair value
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options (in years)

Year Ended December 31,

2018

2017

2016

$

9.80

$

7.01

$

—%
59%
2.61%
6.1

—%
66%
1.74%
6.2

5.53

—%
65%
1.29%
6.0

Restricted Stock

Restricted stock grants cliff vest on the anniversaries of their grant dates. During the year ended December 31, 2018, 240,000

restricted shares were vested and as of December 31, 2018, no restricted shares remained unvested.

EEmployee Stock Purchase Plan

p y

The ESPP is available to eligible employees as defined in the plan document. Under the ESPP, shares of the Company’s
common stock may be purchased at a discount (15%) of the lesser of the closing price of the Company’s common stock on the
first
t
trading or the last trading day of the offering period. The current offering period extends from December 1, 2018 to May 31, 2019.
The Company expects to continue to offer 6-month offering periods after the current period. The 2017 Plans reserved 1,000,000 shares
of common stock for issuance under the ESPP. Stock-based
ended December 31, 2018 and $0 for all p
stock to participants in connection with the first offering period spanning July 1, 2018 to November 30, 2018.

compensation related to the ESPP amounted to $0.2 million for the yearyear
preceding pperiods. On November 30, 2018, the Company issued 41,733 shares of common

p

g

p
Stock-Based Compensation Expense

p

The components of stock-based compensation and the amounts recorded within research and development expenses and selling,
general, and administrative expenses in the Company’s consolidated statements of operations and comprehensive loss consisted of the
following for the years ended December 31, 2018, 2017, and 2016 (in thousands):

Stock options
Restricted stock expense
Stock awarded to directors and officers
Employee stock purchase plan

Total stock-based compensation expense

Cost of sales
Research and development expenses
Selling, general, and administrative expenses
Total stock-based compensation expense

Year Ended December 31,
2017

2016

2018

$

$
$

$

9,786
1,008
—
217
11,011
228
2,621
8,162
11,011

$

$
$

$

8,031
2,160
4,400
—
14,591
137
2,030
12,424
14,591

$

$
$

$

10,977
8,534
—
—
19,511
—
8,573
10,938
19,511

15. NET LOSS PER SHARE ATTRIBUTABLE TO ATHENEX, INC. COMMON STOCKHOLDERS

Basic net loss per share is calculated by dividing net loss attributable to Athenex, Inc. common stockholders by the weighted-

average number of common shares issued, outstanding, and vested during the period. Diluted net loss per share is computed by
dividing net loss attributable to Athenex, Inc. common stockholders by the weighted-average number of common share and common
shares equivalents for the period using the treasury-stock method. For the purposes of this calculation, warrants for common stock and
stock options are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share
when their effff ect

is dilutive.

ff

F-22

The following weighted average outstanding shares of common stock equivalents were excluded fromff

the calculation of diluted

net loss per share attributable Athenex, Inc. to common stockholders for the periods presented because including them would have
been antidilutive:

Stock options and other common stock equivalents
Unvested restricted common shares
Total potential dilutive common shares

2018
10,480,084
113,260
10,593,344

Year Ended December 31,
2017

2016

9,534,658
393,408
9,928,066

9,624,689
948,484
10,573,173

16. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components and changes of accumulated other comprehensive loss, net of related income tax effects, are as follows (in

thousands):

Balance as of January 1, 2016

Foreign currency translation adjustment
Unrealized loss on investment
Balance as of December 31, 2016

Foreign currency translation adjustment
Unrealized loss on investment
Balance as of December 31, 2017

Foreign currency translation adjustment
Unrealized gain on investment
Balance as of December 31, 2018

$

$

(223)
(1,048)
(33)
(1,304)
1,184
(26)
(146)
(525)
15
(656)

17. BUSINESS SEGMENT, GEOGRAPHIC, AND CONCENTRATION RISK INFORMATION

The Company has three operating segments, which are organized based mainly on the nature of the business activities
performed and regulatory environments in which they operate. The Company also considers the types of products from which the
reportable segments derive their revenue (only applicable to two reportable segments). Each operating segment has a segment
manager who is held accountable for operations and has discrete financial information that is regularly reviewed by the Company’s
chief operating decision-maker. The Company’s operating segments are as follows:

Oncology Innovation Platform—This primary operating segment performs research and development on certain of the

Company’s proprietary drugs, from the preclinical development of its chemical compounds, to the execution and analysis of its several
clinical trials. This segment focuses specifically on the oral absorption cancer drug platform, the Src Kinase inhibitors, and the
transmucosal drug delivery system. This segment performs research in the United States, Taiwan, Hong Kong, and mainland China.

Global Supply Chain Platform—This operating segment includes QuaDPharma and Polymed. QuaDPharma manufactures and
sell pharmaceutical products under 503B regulations set forth by the U.S. Food and Drug Administration (“FDA”). QuaDPharma is
also a contract manufacturing company that provides small to mid-scale cGMP manufacturing of clinical and commercial products for
pharmaceutical and biotech companies. QuaDPharma also performs microbiological and analytical testing for raw material and
formulated products. Polymed markets and sells API and medical devices in North America, Europe, and Asia from its locations in
Texas and mainland China. Polymed also develops new compounds, processing techniques, and manufactures API at Taihao, a cGMP
facility in Chongqing, China. The pharmaceutical manufacturing facilities being built in the Banan District in Chongqing, China (see
Note 13—Business
and Economic Collaborative Agreements) will be included within this segment and the Company anticipates that
—
this segment will support the Oncology Innovation Platform segment when drugs in development are approved for market.

Commercial Platform—This operating segment includes Athenex Pharmaceutical Division, a newly-formed component that is

focused on the manufacturing, distribution, and sales of generic pharmaceuticals. This segment provides services and products to
external customers based mainly in the United States.

The segments operate in North America and Asia. The Company’s Oncology Innovation Platform segment operates and holds
long-lived assets located in the United States, Taiwan, Hong Kong, and mainland China. The Global Supply Chain Platform segment
operates and holds long-lived assets located in the United States and China. The Commercial Platform segment operates and holds
long-lived assets located in the United States. For geographic segment reporting, product sales have been attributed to countries based
on the location of the customer.

F-23

Segment information is as follows (in thousands):

Net loss attributable to Athenex, Inc.:
Oncology Innovation Platform
Global Supply Chain Platform
Commercial Platform

Total consolidated net loss attributable to Athenex, Inc.

Total revenue:

Oncology Innovation Platform
Global Supply Chain Platform
Commercial Platform

Total revenue for reportable segments
Intersegment revenue
Total consolidated revenue

Year Ended December 31,
2017

2016

2018

(89,912) $
(16,858)
(10,670)
(117,440) $

(108,563) $
(7,179)
(15,428)
(131,170) $

(64,837)
(11)
(22,867)
(87,715)

Year Ended December 31,
2017

2016

2018

32,776
31,274
30,426
94,476
(5,376)
89,100

$

$

1,411
28,427
17,218
47,056
(9,013)
38,043

$

$

998
26,581
—
27,579
(7,028)
20,551

$

$

$

$

Intersegment revenue eliminated in the above table reflects sales from the Global Supply Chain Platform to the Oncology

Innovation Platform.

Total revenue by product group:

API sales
Medical device sales
Contract manufacturing revenue
Commercial product sales
License fees and consulting revenue
Grant revenue

Total consolidated revenue

Year Ended December 31,
2017

2016

2018

$

$

17,952
2,344
458
35,640
32,387
319
89,100

$

$

15,351
1,747
1,360
17,648
1,105
832
38,043

$

$

15,331
2,338
1,497
228
392
765
20,551

Intersegment revenue is recorded by the selling segment when it is realized or realizable and all revenue recognition criteria are

met. Upon consolidation, all intersegment revenue and related cost of sales are eliminated from the selling segment’s ledger.

Total depreciation and amortization
Oncology Innovation Platform
Global Supply Chain Platform
Commercial Platform

Total consolidated depreciation and amortization

Total assets:

Oncology Innovation Platform
Global Supply Chain Platform
Commercial Platform

Total assets

Year Ended December 31,
2017

2016

2018

$

$

690
1,603
976
3,269

$

$

482
2,272
919
3,673

$

$

195
1,644
187
2,026

December 31,

2018

2017

$

$

135,878 $
58,816
36,401
231,095 $

65,966
51,128
23,319
140,413

F-24

Total revenue

United States
India
Austria
China
Spain
Taiwan
Other foreign countries
Total consolidated revenue

Total property and equipment, net:

United States
China

Total property and equipment, net

Year Ended December 31,
2017

2016

2018

$

$

37,904
3,457
9,569
4,416
30,000
—
3,754
89,100

$

$

19,933
8,479
3,962
2,803
—
500
2,366
38,043

$

$

3,573
7,803
5,197
2,338
—
—
1,640
20,551

December 31,

2018

2017

$

$

6,549 $
4,898
11,447 $

5,305
4,346
9,651

Customer revenue and accounts receivable concentration amounted to the following for the identified periods:

Percentage of total revenue by customer:

Customer A
Customer B
Customer C
Customer D

Percentage of total accounts receivable by customer:

Customer A
Customer B
Customer C
Customer D

Year Ended December 31,
2017

2016

2018

34%
12%
6%
4%

—
15%
9%
19%

December 31,

2018

2017

—
—
24%
38%

18%
16%
12%
—

18%
10%
26%
13%

18.

REVENUE RECOGNITION

The Company records revenue in accordance with ASC, Topic 606 “Revenue from Contracts with Customers.” Under Topic

pexpects to receive in ex

606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
g
consideration which it
arrangements
that the Company determines are within the scope of Topic 606, the entity performs the following five steps: (i) identifiesff
the
contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv)
allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the entity
satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will
collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
revenue
.
principal activities –
p

change for those ggoods or services. To determine revenue

gsegments – from which the

Company ggenerates its

recognition for

Following is a

pseparated yby

preportable

description fof
p

p y

g

p

g

g

F-25

1.

Oncology Innovation Platform

License fees and consulting revenue

The Company out-licenses certain of its intellectual property (“IP”) and provides related consulting services to pharmaceutical

companies in specific territories that allow the customer to use, develop, commercialize, or otherwise exploit the licensed IP. In
accordance with Topic 606, the Company analyzes each of its out-licensing contracts with customers to identify each of the
performance obligations within the contract. Each out-license may contain multiple performance obligations. The Company has
determined that each of its out-license agreements with customers are classified as functional licenses and are capable of being
distinct, because the IP that is licensed carries standalone value and is not expected to be altered through the life of the agreement.
Therefore, for each of its out-licensing agreements, the Company has determined that the execution of the license and delivery of the
IP to the licensee is a distinct performance obligation. As such, the Company records revenue at a point-in-time for its out-licensing if
any of the transaction price is allocated to the obligation, including up-front licensing fee payments. The Company’s classification of
each out-licensing as such requires significant judgment to be used by management. The Company considers the economic and
regulatory characteristics of the licensed IP to determine if it has standalone value on the date of the licensing, which would make the
licensing distinct and dictate that the Company recognizes any transaction price allocated to the license performance obligation at a
point-in-time. Revenue recognized at a point-in-time for the execution of a distinct licensing of IP amounted to $32.0 million and $0.5
million for the years ended December 31, 2018 and 2017, respectively.

Other performance obligations included in the Company’s out-licensing agreements include reaching milestone development
and regulatory events by performing research and development activities. The Company reached one milestone event during each of
the years ended December 31, 2018 and 2017 resulting in $2.0 million and $0.5 million of revenue recognized, respectively. The
Company recorded the associated milestone payment portions of transaction prices as revenue at a point-in-time. Certain out-licensing
agreements include performance
approved for commercial sale. To date, the Company has not satisfied any of these performance obligations as none of its drugs have
been approved by the regulatory agencies in each of the licensed territories.

obligations to manufacture and provide drug product in the future when the licensed product is

ff

In addition to the multiple performance obligations, the Company’s out-licensing agreements include variable consideration.

After the performance obligations are identified, the Company determines each portion of the transaction price, which generally
includes upfront fees, milestone payments, and royalty payments. The Company begins by allocating the payments set forth in the
agreement to the performance obligation to which the consideration is related. Then, the Company considers whether or not that
transaction price is fixed, variable, or subject to return. If any portion of the transaction price is constrained by more than one
performance obligation, the Company allocated that portion of the transaction price to the performance obligation that will be satisfied
later and will not recognize revenue until it is fully satisfied and the constraint on the transaction price no longer exists. There are no
other significant
methods employed to allocate the transaction price to performance obligations in a contract. The Company exercises
significant judgment when allocating the variable transaction prices to the proper performance obligations, considering if any of those
payments are refundable or are contingent on any future events.

ff

Grant revenue

The Company receives grant award funding to support its continuing research and development efforts. The Company considers

these grants to be operating revenue as they support the Company’s primary operating activities. Revenue is recognized when the
underlying performance obligation is satisfied, which is generally when all grant eligibility criteria are met at a point-in-time.

2.

Global Supply Chain Platform

The Company’s Global Supply Chain Platform manufactures and sells pharmaceutical products under 503B regulations set forth
by the FDA. The Global Supply Chain Platform also manufactures API for use internally in its research and development and clinical
studies and for sale to pharmaceutical customers globally. API revenue earned by the Global Supply Platform is recognized when the
Company has satisfied its performance obligation, which is the shipment or the delivery of drug products. The underlying contracts for
these sales are generally purchase orders and the Company recognizes revenue at a point-in-time. Any remaining performance
obligations related to product sales are the result of customer deposits and are reflected in the deferred revenue contract liability
balance.

The Company also generates revenue, to a lesser extent, by providing small to mid-scale cGMP manufacturing of clinical and

commercial products for pharmaceutical and biotech companies.

F-26

3.

Commercial Platform

The Company’s Commercial Platform generates revenue by distributing specialty products through independent pharmaceutical
wholesalers. The wholesalers then sell to an end-user, normally a hospital, alternative healthcare facility, or an independent pharmacy,
at a lower price previously established by the end-user and the Company. Sales are initially recorded at the list price sold to the
wholesaler. Because these prices will be reduced for the end-user, the Company records a contra asset in accounts receivable and a
reduction to revenue at the time of the sale, using the difference between the list price and the estimated end-user contract price. Upon
the sale by the wholesaler to the end-user, the wholesaler will chargeback the difference between the original list price and price at
which the product was sold to the end-user and such chargeback is offset against the initial estimated contra asset. The significant
estimates inherent in the initial chargeback provision relate to wholesale units pending chargeback and to the ultimate end-user
contract selling price. The Company bases the estimate for these factors on product-specific sales and internal chargeback processing
experience, as well as estimated wholesaler inventory stocking levels. As of December 31, 2018 and 2017, the Company’s
chargebacks and other deductions totaled $11.8 million and $3.3 million, respectively, included as a reduction of accounts receivable.
The Company’s total expense for chargebacks and other deductions was $33.5 million and $9.8 million for the years ended December
31, 2018 and 2017, respectively.

ff

The Company offers cash discounts, which approximate 2.0% of the gross sales price, as an incentive for prompt customer
payment, and, consistent with industry practice, the Company’s return policy permits customers to return products within a window of
time before and after the expiration of product dating. The Company expects that its wholesale customers will make prompt payments
to take advantage of the cash discounts, and expects customers to use their right of return. Therefore, at the time of sale, product
revenue and accounts receivable are reduced by the full amount of the discount offered and the return expected. The Company
considers payment performance and historical return rates and adjusts the accrual to reflect actual experience. As of December 31,
2018 and 2017, the Company’s accrual for cash discounts and return accrual included as a reduction of accounts receivable were not
material to the consolidated financial statements.

The Company also offers contractual allowances, generally rebates or administrative fees, to certain wholesale customers, group

purchasing organizations (“GPOs”), and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates
and fees may generally occur from one to five months from date of sale. The Company provides a provision for contractual
allowances at the time of sale based on the historical relationship between sales and such allowances. Contractual allowances are
reflected in the consolidated financial statements as a reduction of revenue and accounts receivable or as accrued expenses.

The Company exercises significant judgment in its estimates of the variable transaction price at the time of the sale and recognizes
revenue when the performance obligation is satisfied. Factors that determine the final net transaction price include chargebacks, fees for
service, cash discounts, rebates, returns, warranties, and other factors. The Company estimates all of these variables based on historical
data obtained from previous sales finalized with the end-user customer on a product-by-product basis. At the time of sale, revenue is
recorded net of each of these deductions. Through the normal course of business, the wholesaler will sell the product to the end-user,
determining the actual chargeback, return products, and take advantage of cash discounts, charge fees for services, and claim warranties
on products. The final transaction price per product is compared to the initial estimated net sale price and reviewed for accuracy. The final
prices and other factors are immediately included in the Company’s historical data from which it will estimate the transaction price for
future sales. The underlying contracts for these sales are generally purchase orders including a single performance obligation, generally
the shipment or delivery of products and the Company recognizes this revenue at a point-in-time.

aa

Disaggregation of revenue

The following represents the Company’s revenue for its reportable segment by country, based on the locations of the customer

(in thousands).

United States
Spain
India
Austria
China
Other Foreign Countries

Total Revenue

For the Year Ended December 31, 2018

Global Supply
Chain Platform

Commercial
Platform

Consolidated
Total

7,478
—
3,457
9,569
1,640
3,754
25,898

$

$

30,426
—
—
—
—
—
30,426

$

$

37,904
30,000
3,457
9,569
4,416
3,754
89,100

$

$

Oncology
Innovation
Platform

— $

30,000
—
—
2,776
—
32,776

F-27

$

United States
Taiwan
India
Austria
China
Other Foreign Countries

Total Revenue

United States
India
Austria
China
Other Foreign Countries

Total Revenue

For the Year Ended December 31, 2017

Oncology
Innovation
Platform

Global Supply
Chain Platform

Commercial
Platform

Consolidated
Total

— $
500
—
—
911
—
1,411

$

2,715
—
8,479
3,962
1,892
2,366
19,414

$

$

17,218
—
—
—
—
—
17,218

$

$

19,933
500
8,479
3,962
2,803
2,366
38,043

For the Year Ended December 31, 2016

Oncology
Innovation
Platform

Global Supply
Chain Platform

Commercial
Platform

Consolidated
Total

63
—
—
935
—
998

$

$

3,510
7,803
5,197
1,403
1,640
19,553

$

$

— $
—
—
—
—
— $

3,573
7,803
5,197
2,338
1,640
20,551

$

$

$

$

The Company also disaggregates its revenue by product group which can be found in Note 17 – Business Segment, Geographic,

and Concentration Risk Information.

Contract balances

The following table provides information about receivables and contract liabilities from contracts with customers. The Company

has not recorded any contract assets from contracts with customers (in thousands).

Accounts receivable, gross
Chargebacks and other deductions
Allowance for doubtful accounts

Accounts receivable, net

Deferred revenue

Total contract liabilities

December 31,

2018

2017

$

$

$

26,061
(13,101)
(9)
12,951
190
190

$

$

$

12,263
(3,711)
(84)
8,468
1,202
1,202

The following tables illustrate accounts receivable by reportable segments (in thousands).

Accounts receivable, gross
Chargebacks and other deductions
Allowance for doubtful accounts

Accounts receivable, net

December 31, 2018

Oncology
Innovation
Platform

$

$

Global Supply
Chain Platform

Commercial
Platform

Consolidated
Total

— $
—
—
— $

7,814
—
(9)
7,805

$

$

18,247
(13,101)
—
5,146

$

$

26,061
(13,101)
(9)
12,951

F-28

Accounts receivable, gross
Chargebacks and other deductions
Allowance for doubtful accounts

Accounts receivable, net

December 31, 2017

Oncology
Innovation
Platform

$

$

Global Supply
Chain Platform

Commercial
Platform

Consolidated
Total

49
—
—
49

$

$

4,553
—
(84)
4,469

$

$

7,661
(3,711)
—
3,950

$

$

12,263
(3,711)
(84)
8,468

As of December 31, 2018, $0.2 million of the deferred revenue balance relates to customer deposits made by customers of the

Global Supply Chain Platform.

As of December 31, 2017, the $1.2 million contract liability related to customer deposits made by customers of the Global
Supply Chain Platform. The Company satisfied its performance obligations allocated to these contract liabilities during the year ended
December 31, 2018.

There were no other material changes to contract balances during the year ended December 31, 2018.

Practical expedients used

During the adoption of ASC 606, the Company applied the practical expedient in paragraph 606-10-10-4, the Portfolio

Approach. This allowed the Company to apply the new revenue standard to a portfolio of contracts with similar characteristics
because it reasonably expected that the effects on the financial statements of applying the guidance to the portfolio would not differ
materially from applying the guidance to the individual contracts within that portfolio. The Company used this to determine the
cumulative catch-up required under the modified retrospective transaction method. The Company used the portfoff lio approach for
product sales under the Global Supply Chain Platform and product sales under the Commercial Platform. The Company did not use
this approach for its out-licensing contracts, because each of those contracts have unique economic characteristics.

The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining

performance obligations related to the license of IP. This practical expedient is applied because the out-licensing agreements include
sales-based royalties in exchange for the license of IP accounted for in accordance with Topic 606 and there is significant uncertainty
surrounding the future variable consideration that could be received.

F-29

19.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables present our unaudited quarterly results of operations for each quarter within the two most recent fiscal
years. This unaudited quarterly information has been prepared on the same basis as our audited consolidated financial statements and,
in the opinion of management, the statement of operations data includes all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the results of operations for these periods. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future periods.

Statements of Operations Data:
Revenue:

Product sales
License fees and consulting revenue
Grant revenue

Total revenue

Costs and operating expenses:

Costs of sales
Research and development expenses(2)
Selling, general, and administrative expenses
Total costs and operating expenses

Operating loss
Net loss
Less: net loss attributable to non-controlling interests
Net loss attributable to Athenex, Inc.
Net loss per share attributable to Athenex, Inc.

common stockholders, basic and diluted

Statements of Operations Data:
Revenue:

Product sales
License fees and consulting revenue
Grant revenue

Total revenue

Costs and operating expenses:

$

$

$

$

March 31,
2018

Fiscal 2018 Quarter Ended
June 30,
2018

September 30,
2018

(In thousands, except per share data)

December 31,
2018

12,605
25,091
140
37,836

11,326
21,303
13,080
45,709
(7,873)
(7,339)
(41)
(7,298)

(0.12)

$

$

$

11,471
91
3
11,565

9,443
26,572
12,817
48,832
(37,267)
(36,950)
(91)
(36,859)

(0.58)

$

$

$

13,309
5,096
23
18,428

11,965
51,202
11,493
74,660
(56,232)
(57,260)
(11,090)
(46,170)

(0.70)

$

$

$

19,009
2,109
153
21,271

14,271
20,828
11,618
46,717
(25,446)
(27,162)
(49)
(27,113)

(0.41)

March 31,
2017

Fiscal 2017 Quarter Ended
June 30,
2017

September 30,
2017

(In thousands, except per share data)

December 31,
2017

$

3,900
598
83
4,581

$

4,416
98
81
4,595

$

13,662
60
272
13,994

Cost of sales
Research and development expenses
Selling, general, and administrative expenses

Total costs and operating expenses

Operating loss
Net loss (1)
Less: net loss attributable to non-controlling interests

2,839
26,408
9,799
39,046
(34,465)
(41,025)
(37)

4,137
17,597
13,632
35,366
(30,771)
(38,668)
(43)

8,082
11,944
10,364
30,390
(16,396)
(23,308)
(34)

14,128
349
396
14,873

10,064
20,848
12,317
43,229
(28,356)
(28,395)
(112)

Net loss attributable to Athenex, Inc.
Net loss per share attributable to Athenex, Inc.

common stockholders, basic and diluted

$

(40,988)

$

(38,625) $

(23,274) $

(28,283)

$

(1.01)

$

(0.88) $

(0.41) $

(0.49)

Note (1): Results for the quarters ended March 31, June 30, and September 30, 2017 include interest expense and losses on derivative

liabilities related to convertible notes.

Note (2): Research and development expenses for the quarter ended September 30, 2018 includes $29.5 million of non-cash license

fees related to the purchase of T-Cell technology in connection with the establishment of Axis.

F-30

20. COMMITMENTS AND CONTINGENCIES

Rental and lease commitments

In August 2015, the Company entered into a lease agreement with FSMC to occupy a portion of the Conventus Center for
Collaborative Medicine in Buffalo, NY. A deferred rent liability for this agreement of $1.7 million and $1.5 million was recorded as
of December 31, 2018 and 2017, respectively. Total rent expense related to this location, recognized on a straight-line basis, was $1.0
million for the each of the years ended December 31, 2018, 2017, and 2016.

In July 2015, CDE entered into an agreement to lease facilities in Hong Kong. Under the rental agreement, CDE will make
monthly payments of less than $0.1 million for three years beginning on July 1, 2015. Total rent expense related to this location,
recognized on a straight-line basis, amounted to $0.4 million, $0.4 million, and $0.3 million for the years ended December 31, 2018,
2017, and 2016, respectively.

In October 2016, the Company’s Commercial Platform entered into an agreement to lease office space in Chicago, IL. Under the

lease agreement, the Company will make monthly payments based on an escalating scale over ten years. Total rent expense related to
this location, recognized on a straight-line basis, amounted to $0.3 million, less than $0.2 million, and $0.1 for the years ended
December 31, 2018, 2017, and 2016, respectively. The Company has recorded a deferred rent liability of $0.3 million as of
December 31, 2018 and 2017. In lieu of a security deposit, an irrevocable letter of credit was issued to the landlord in the amount of
$0.3 million.

The Company entered into a lease agreement expiring in 2025 to lease office space in Cranford, New Jersey that serves as its

clinical research headquarters. Rent expense is recognized on a straight-line basis and amounted to $0.1 million for each of the years
ended December 31, 2018, 2017, and 2016, respectively.

The Company entered into a lease agreement expiring in 2025 to lease office space in Taipei, Taiwan which serves for clinical
research and clinical data management. Rent expense is recognized on a straight-line basis and amounted to less than $0.1 million for
each of the years ended December 31, 2018, 2017, and 2016, respectively.

The Company leases its manufacturing and office facilities in Chongqing, China, where it produces API and performs research
and development. Rent expense is recognized on a straight-line basis and amounted to $0.6 million ended December 31, 2018, 2017,
and 2016.

The Company entered into additional leases for lab space, warehouse facilities, and various equipment, mainly in Buffalo, NY,

during 2018 and 2019. Rent expense recognized for these operating leases was not material to the financial statements for the years
ended December 31, 2018, 2017, and 2016.

Future minimum payments under the non-cancelable operating leases consists of the following as of December 31, 2018 (in

thousands):

Year ending December 31:
2019
2020
2021
2022
2023
Thereafter

Minimum
payments

2,943
2,466
2,040
1,902
1,675
3,099
14,125

$

$

g
Legal Proceedings

g

On August 13, 2018, Athenex Pharma Solutions and Athenex Pharmaceutical Division, LLC, our wholly-owned subsidiaries,

filed a complaint for declaratory judgment against Par Pharmaceuticals, Inc., Par Sterile Products, LLC and Endo Par Innovation
Company, LLC (together, Par) in the United States District Court for the Western District of New York (the Court), seeking a
declaratory judgment from the Court that our compounded vasopressin drug products in ready-to-use form do not infringe on patents
that Par has with respect to its Vasostrict® product and that Par’s patents are invalid. On October 22, 2018, Par filed a motion to
dismiss the complaint on the basis that the Court does not have subject matter jurisdiction. Athenex has opposed Par’s motion and that
motion is fully briefed and currently pending. Par has not filed a claim for infringement of its patents in this suit but if Par’s motion to

F-31

dismiss Athenex’s patent suit is denied and the declaratory action proceeds, Par could proceed to lodge a counterclaim for patent
infringement. If such an infringement claim were brought and the Court ruled for Par, Athenex could be enjoined from further
production of compounded vasopressin within in the United States and sale of compounded vasopressin in or from the United States
and for payment of damages to Par for U.S. manufacture or sale of compounded vasopressin that has already taken place, which could
have a material adverse effect on our business.

In addition, on August 13, 2018, Athenex Pharma Solutions, LLC and Athenex Pharmaceutical Division, LLC filed a motion to

intervene and seek the dismissal of Par’s complaint against the FDA and certain governmental officials in the United States District
Court for the District of Columbia. Par has sought declaratory and injunctive relief against the FDA and certain governmental officials
that: (i) vasopressin be delisted from Category 1 of the FDA’s list of bulk drug substances under evaluation pursuant to Section 503B
of the Federal Food, Drug and Cosmetic Act (FDCA), (ii) the expansion of the FDA’s enforcement discretion to Category 1
substances, be enjoined; and (iii) that the FDA be enjoined from authorizing the compounding of vasopressin under Section 503B of
the FDCA. Our motion to intervene was granted. Par filed a preliminary injunction motion and we and the FDA filed motions for
judgment on the pleadings. This action is currently stayed. On March 4, 2019, FDA published in the Federal Register its final
decision not to include vasopressin on the list of bulk drug substances for which there is a clinical need. Also on March 4, 2019,
Athenex, Inc., APS, and APD filed a complaint against FDA seeking to vacate its decision; FDA has represented to the Court in this
case that “until the Court issues a decision on the merits of this action, FDA will not initiate enforcement
solely on Athenex’s use of the bulk drug substance vasopressin to compound drugs and distribute those drugs.”.

action against Athenex based

ff

ff

On August 14, 2018, we began selling compounded vasopressin injection in ready-to-use premix IV bags. If we are

unsuccessful in obtaining the relief we seek in our lawsuit against FDA, or there is an adverse final determination that Par’s patent is
valid and infringed, we would have to abandon this revenue-generating line of business; such events could have a material adverse
effect on our business, results of operations, financial condition and cash flows.

******

F-32

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Board Chairman (Principal Executive Officer) and

our Chief Financial Officer (Principal Financial and Accounting Officer), evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be
disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of
achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our Chief
Executive Offff iff cer and Board Chairman (Principal Executive Officer) and our Chief Financial Officer (Principal Financial and
Accounting Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by

Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's Annual Report on Internal Control over Financial Reporting

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over

financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to
exemptions provided to issuers that qualify as an “emerging growth company,” as defined in Section 2(a) of the Securities Act of
1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. However, for as long
as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of the exemption permitting us
not to comply with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness
of our 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 Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with generally accepted accounting principles. 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.

As of December 31, 2018, management assessed the effectiveness of our internal control over financial reporting based on the

framework established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) (2013 Framework). Based on this evaluation, management has determined that our internal control
over financial reporting was effective as of December 31, 2018.

139

Item 9B.

Other Information.

Termination of Hanmi Out-License

On August 20, 2018, we entered into a mutual letter of termination with Hanmi with respect to the Hanmi Out-License for our

KX-01 oral formulation, which terminated the out-licensing agreement as of the same date. This termination will allow us to continue
to explore the potential of the KX-01 oral formulation worldwide. We are also party to in-licensing agreements with Hanmi as
described below and in “Item 1. Business — License and Collaboration Agreements — In-Licenses — Hanmi Licensing
Agreements.” A copy of the mutual letter of termination is filed as an exhibit to this Annual Report on Form 10-K.

Amendment of 2011 Hanmi Agreement

On September 4, 2018, we entered into the fifth amendment to the December 2011 in-licensing agreement with Hanmi, which

provided for Athenex to pursue worldwide development of the Orascovery Program, except for Korea. Hanmi retained the right to
oversee the development of the Orascovery Program and related regulatory efforts in Korea. Going forward, we will have the
opportunity to develop the Orascovery Program in the Middle East, North Africa and South Africa territories. In connection with
entering into this amendment, we agreed to pay Hanmi $40,000. A copy of this amendment is filed as an exhibit to this Annual Report
on Form 10-K.

Changes in Named Executive Officer Compensation.

On March 27, 2018, our Board of Directors approved the compensation of our executive officers for the year ended December

31, 2018, including their annual salaries, cash bonus awards and equity-based compensation. For 2018, the Board of Directors
approved an annual salary for Johnson Lau of $500,000, along with a cash bonus of up to $400,000, the amount of which will be
based solely on the discretion of the Board of Directors. The Board of Directors approved a base salary for Jeffrey Yordon of
$400,000, along with a cash bonus of up to $320,000, the amount of which will be based solely on the discretion of the Board of
Directors. The Board of Directors approved a base salary for Rudolf Kwan of $320,000, along with a cash bonus of up to $192,000,
the amount of which will be based solely on the discretion of the Board of Directors. Messrs. Lau, Yordon and Kwan were also
granted 250,000, 100,000 and 120,000 time-vesting options to purchase Common Stock, respectively, which vest in four equal annual
installments beginning on the anniversary of the grant date of March 27, 2018.

140

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

The information required by this Item is incorporated by reference from the sections captioned “Election of Directors,”

“Executive Officers,” “Corporate Governance Matters,” “Code of Business Conduct and Ethics,” “Section 16(a) Beneficial Ownership
Reporting Compliance” contained in our proxy statement related to the 2019 Annual Meeting of Stockholders (Proxy Statement)
currently scheduled to be held on June 11, 2019, which we intend to file with the Securities and Exchange Commission within 120
days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K.

Item 11.

Executive Compensation.

The information required by this Item is incorporated by reference from the information under the sections captioned “Executive

Compensation,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Proxy
Statement.

Item 12.

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

The information required by this Item is incorporated by reference from the information under the sections captioned “Executive

Compensation”, “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management”
contained in the Proxy Statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this Item is incorporated by reference from the information under the sections captioned “Certain

Relationships and Related Party Transactions” and “Corporate Governance Matters” in the Proxy Statement.

Item 14.

Principal Accounting Fees and Services.

The information required by this Item is incorporated by reference from the information under the section captioned “Audit

Committee Report” in the Proxy Statement.

141

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report.

1. Financial Statements.

The financial statements of the Company and the related report of the Company’s independent registered public accounting firm

thereon have been filed under Item 8 hereof.

2. Financial Statement Schedules.

Schedule II—Valuation and Qualifying Accounts

Activity in the following valuation and qualifying accounts consisted of the following (in thousands):

Col. A
Description
December 31, 2018
Allowance for doubtful accounts
Allowance for chargebacks and other deductions
Deferred tax asset valuation allowance
December 31, 2017
Allowance for doubtful accounts
Allowance for chargebacks and other deductions
Deferred tax asset valuation allowance
December 31, 2016
Allowance for doubtful accounts
Deferred tax asset valuation allowance

Col. C - Additions

Col. B
Balance at
Beginning of
Period

Charged to
Costs &
Expenses

Charged to
Other
Accounts -
Describe

Col. D
Deductions -
Describe

Col. E
Balance at
End of
Period

$
$
$

$
$
$

$
$

84
3,711
60,379

$
$
$

28 (1) $
36,102 (2) $
$
—

—
—
28,076 (3) $

(103) (1) $
$
$ (26,712) (2) $
$
—

155

$
— $
$

62,308

662 (1) $
3,834 (2) $
$

—

—
$
—
$
(1,929) (3) $

(733) (1) $
(123) (2) $
$

—

9
13,101
88,455

84
3,711
60,379

478
31,400

$
$

267 (1) $
$
—

—
$
30,908 (3) $

(590) (1) $
$

—

155
62,308

(1)

(2)

(3)

Increases in the allowance for doubtful accounts consist of our provision for bad debts, which is included within selling, general,
and administrative expenses on the consolidated statements of operations and comprehensive loss. Decreases in the allowances
for doubtful accounts consist of the write-off of specific accounts and the recovery of previously reserved receivables.
Increases in the allowance for chargebacks and other deductions consist of our provision for chargebacks, cash discounts, returns,
fees, and other credits, which are a deduction from product sales on the consolidated statements of operations and comprehensive
loss. Decreases in the allowances for chargebacks and other deduction consist of the collection of the underlying accounts and
advances received on chargebacks.
Increases and decreases in the valuation allowance for deferred income tax assets offset the increases and decreases in our gross
deferred tax assets, based on the expected realization of those future tax benefits.

142

Item 16. Form 10-K Summary.

None.

(b) Exhibits.

Exhibit
Number

3.1

3.2

4.1

10.1+

10.2+

10.3+

10.4+

10.5+

10.6+

10.7^

10.7.1

10.7.2

10.7.3

10.7.4^

10.8^

10.9^

10.10^

Incorporated by Reference
(Unless Otherwise Indicated)

Exhibit Title

Form

File

Exhibit

Filing Date

Amended and Restated Certificate of Incorporation of the
Company, effective as of June 19, 2017.

Form 8-K

001-38112

3.1

June 22, 2017

Amended and Restated Bylaws of the Company, effective as
of June 19, 2017.

Form 8-K

001-38112

Specimen Common Stock Certificate.

Form S-1

333-217928

3.2

4.1

June 22, 2017

May 12, 2017

Form of Director and Officer Indemnification Agreement.

Form S-1

333-217928

10.1

May 12, 2017

First Amended and Restated 2004 Common Unit Option Plan
and Form of Unit Option Agreement.

First Amended and Restated 2007 Common Unit Option Plan
and Form of Unit Option Agreement.

2013 Common Stock Option Plan and Form of Common
Stock Option Agreement.

2017 Omnibus Incentive Plan and Form of Stock Option
Award Agreement.

Form S-1

333-217928

10.2

May 12, 2017

Form S-1

333-217928

10.3

May 12, 2017

Form S-1

333-217928

10.4

May 12, 2017

Form S-1/A

333-217928

10.5

June 2, 2017

2017 Employee Stock Purchase Plan.

Form S-1/A

333-217928

10.6

June 2, 2017

License Agreement by and between Hanmi Pharmaceutical
Ltd. and Kinex Pharmaceuticals, LLC, effective as of
December 16, 2011.

First Amendment to License Agreement by and between
Kinex Pharmaceuticals, LLC and Hanmi Pharmaceutical Co.,
Ltd., effective as of November 9, 2012.

Second Amendment to License Agreement by and between
Kinex Pharmaceuticals, LLC and Hanmi Pharmaceutical
Ltd., effective as of October 21, 2013.

Third Amendment to License Agreement by and between
Kinex Pharmaceuticals, Inc. and Hanmi Pharmaceutical Ltd.,
effective as of March 3, 2015.

Fourth Amendment to License Agreement by and between
Athenex, Inc. and Hanmi Pharmaceutical Co. Ltd., effective
as of March 7, 2017.

License Agreement by and among Hanmi Pharmaceutical
Co., Ltd., Kinex Therapeutics (HK) Limited, and Kinex
Pharmaceuticals, Inc., effective as of June 28, 2013.

License Agreement by and between Kinex Pharmaceuticals,
LLC and Hanmi Pharmaceutical Ltd., effective as of April
2011.

License Agreement by and between Kinex Pharmaceuticals,
LLC and PharmaEssentia Corp., effective as of December 8,
2011.

143

Form S-1

333-217928

10.7

May 12, 2017

Form S-1

333-217928

10.7.1 May 12, 2017

Form S-1

333-217928

10.7.2 May 12, 2017

Form S-1

333-217928

10.7.3 May 12, 2017

Form S-1

333-217928

10.7.4 May 12, 2017

Form S-1

333-217928

10.8

May 12, 2017

Form S-1

333-217928

10.9

May 12, 2017

Form S-1

333-217928

10.10 May 12, 2017

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

Exhibit
Number

10.10.1

10.11^

10.11.1

10.12^

10.13^

10.14^

10.14.1^

10.14.2^

10.14.3^

10.15^

First Amendment to License Agreement by and between
Athenex, Inc. and PharmaEssentia Corp., effective as of
December 23, 2016.

License Agreement by and between Kinex Pharmaceuticals,
Inc. and PharmaEssentia Corp, effective as of December 16,
2013.

First Amendment to License Agreement by and between
Athenex, Inc. and PharmaEssentia Corp., effective as of
December 23, 2016.

License Agreement by and between Kinex Pharmaceuticals,
Inc. and ZenRx Limited, effective as of April 25, 2013.

License Agreement by and between Kinex Pharmaceuticals,
LLC and Guangzhou Xiangxue New Drug Discovery and
Development Company Limited, effective as of May 6, 2012.

Binding Term Sheet for License by and between Athenex
Pharmaceutical Division, LLC and Gland Pharma Limited,
effective as of August 1, 2016.

Binding Term Sheet for License by and between Athenex
Pharmaceutical Division, LLC and Gland Pharma Limited,
effective as of August 26, 2016.

Binding Term Sheet for License by and between Athenex
Pharmaceutical Division, LLC and Gland Pharma Limited,
effective as of February 22, 2017.

Binding Term Sheet for License by and between Athenex
Pharmaceutical Division, LLC and Gland Pharma Limited,
effective as of May 5, 2017.

Joint Venture Agreement by and between SunGen Pharma
LLC and Athenex Pharmaceutical Division, effective as of
September 22, 2016.

10.15.1^ Addendum to Joint Venture Agreement by and between

SunGen Pharma LLC and Athenex Pharmaceutical Division,
LLC, effective November 29, 2016.

10.15.2

10.16^

10.17^

10.18

Limited Liability Company Agreement of Peterson Athenex
Pharmaceuticals, LLC.

Service Agreement by and between Dohmen Life Science
Services, LLC and Athenex Pharmaceutical Division, LLC,
effective as of August 9, 2016.

Clinical Trial Collaboration and Supply Agreement by and
among Athenex, Inc., Eli Lilly and Company and ImClone
LLC, effective as of October 24, 2016.

Agreement for Medical Technology Research, Development,
Innovation, and Commercialization Alliance by and between
Fort Schuyler Management Corporation and Kinex
Pharmaceuticals, Inc., effective as of May 1, 2015.

144

Form S-1

333-217928

10.10.1 May 12, 2017

Form S-1

333-217928

10.11 May 12, 2017

Form S-1

333-217928

10.11.1 May 12, 2017

Form S-1

333-217928

10.12 May 12, 2017

Form S-1

333-217928

10.13 May 12, 2017

Form S-1

333-217928

10.14 May 12, 2017

Form S-1

333-217928

10.14.1 May 12, 2017

Form S-1

333-217928

10.14.2 May 12, 2017

Form S-1/A

333-217928

10.14.3

June 2, 2017

Form S-1

333-217928

10.15 May 12, 2017

Form S-1

333-217928

10.15.1 May 12, 2017

Form S-1

333-217928

10.15.2 May 12, 2017

Form S-1

333-217928

10.16 May 12, 2017

Form S-1

333-217928

10.17 May 12, 2017

Form S-1

333-217928

10.18 May 12, 2017

Exhibit
Number

10.18.1

10.18.2

10.19

10.20

10.21^

10.22

10.23+

10.24+

10.25+

10.26+

10.27+

10.28+

10.29

10.30^

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

First Amendment to Agreement for Medical Technology
Research, Development, Innovation, and Commercialization
Alliance by and between Fort Schuyler Management
Corporation and Kinex Pharmaceuticals, Inc., effective as of
July 21, 2015.

Second Amendment to Agreement for Medical Technology
Research, Development, Innovation, and Commercialization
Alliance by and between Fort Schuyler Management
Corporation and Athenex, Inc., effective as of June 22, 2016.

Schuyler
Sublease Agreement by and between Fort Schuyler
Management Corporation and Kinex Pharmaceuticals, Inc.,
effective as of

yJuly 21, 2015.

Athenex Pharmaceutical Base Projeo ct Located in the
Chongqing Maliu Riverside Development Zone Agreement
with Chongqing Maliu Riverside Development and
Investment Co., Ltd., effective as of October 16, 2015
(English translation of original foreign

language agreement).

ff

Binding Term Sheet for License, Supply and Distribution
Agreement by and among Athenex API Limited, Nang-
Kuang Pharmaceutical Co., LTD and CANDA NK-2, LLC,
effective as of December 29, 2016.

Asset Purchase Agreement by and between Athenex, Inc.
and
2017.

pAmphastar Pharmaceuticals, Inc., dated

February 1,

y

Amended and Restated Employment Agreement by and
between Johnson Lau and Kinex Pharmaceuticals, Inc.,
effective as of June 1, 2015.

Employment Agreement by and between Kinex Polymed
Hong Kong Ltd. and William Zuo, PhD, effective as of June
1, 2015.

Employment Agreement by and between Athenex, Inc. and
Dr. Rudolf Min-Fun Kwan, effective as of February 21,
2017.

Employment Agreement by and between Athenex, Inc. and
Dr. Simon Pedder, effective as of February 20, 2017.

Employment Agreement by and between Athenex, Inc. and
J. Nick Riehle, effective as of February 21, 2017.

Employment Agreement by and between Athenex, Inc. and
Jeffrey Yordon, effective as of February 21, 2017.

Grant Disbursement Agreement by and between New York
State Urban Development Corporation d/b/a Empire State
Development and Athenex, Inc., dated September 4, 2017.

License and Development Agreement by and between
Athenex, Inc., Almirall, S.A. and Aqua Pharmaceuticals
LLC., dated as of December 11, 2017.

Form S-1

333-217928

10.18.1 May 12, 2017

Form S-1

333-217928

10.18.2 May 12, 2017

Form S-1

333-217928

10.19 May 12, 2017

Form S-1

333-217928

10.20 May 12, 2017

Form S-1

333-217928

10.21 May 12, 2017

Form S-1

333-217928

10.22 May 12, 2017

Form S-1

333-217928

10.23 May 12, 2017

Form S-1

333-217928

10.24 May 12, 2017

Form S-1

333-217928

10.25 May 12, 2017

Form S-1

333-217928

10.26 May 12, 2017

Form S-1

333-217928

10.27 May 12, 2017

Form S-1

333-217928

10.28 May 12, 2017

Form 10-Q

001-38112

10.30

Form 8-K

001-38112

10.1

November 9,
2017

December 15,
2017

10.31

Standard Form of Agreement by and between M+W U.S.,
Inc. and Athenex, Inc. on December 29, 2017.

Form 10-K

001-38112

10.32 March 26, 2018

145

Exhibit
Number

10.32+

10.33

10.34

10.35^

10.36^

10.37^

10.38

10.40^

10.41^

10.42^

10.43^

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

Transition Agreement by and between Athenex, Inc. and
James Zukin, dated April 27, 2018.

Form 8-K

001-38112

10.33

April 30, 2018

Stock Purchase Agreement dated as of June 29, 2018 by and
between Athenex, Inc. and Perceptive Life Sciences Master
Fund, Ltd.

Senior Secured Term Loan Agreement dated as of June 30,
2018 by and between Athenex, Inc. and Perceptive Advisors
LLC.

License Agreement dated as of June 29, 2018 by and
between Xiangxue Life Sciences Ltd. and Axis Therapeutics
Limited.

License Agreement dated as of June 29, 2018 by and
between Athenex Therapeutics Limited and Avalon Polytom
(HK) Limited Pegtomarginase.

License and Supply Agreement dated as of June 29, 2018 by
and between Athenex Therapeutics Limited and Avalon
HepaPOC Limited Galactose Meter and Strip.

Form 8-K

001-38112

10.1

July 2, 2018

Form 8-K

001-38112

10.2

July 2, 2018

Form 8-K

001-38112

10.3

July 2, 2018

Form 8-K

001-38112

10.4

July 2, 2018

Form 8-K

001-38112

10.5

July 2, 2018

Registration Rights Agreement dated as of July 3, 2018 by
and between Athenex, Inc. and Perceptive Life Sciences
Master Fund Ltd.

Form 10-Q

001-38112

10.7

10.39+

Employment Agreement between the Company and Randoll
Sze dated as of August 20, 2018.

Form 8-K

001-38112

10.1

First Amendment to License and Development Agreement
by and between Athenex, Inc., Almirall, S.A., and Aqua
Pharmaceuticals LLC, dated as of September 26, 2018.

Form 10-Q

001-38112

10.3

August 14,
2018

August 20,
2018

November 14,
2018

November 14,
2018

Letter Agreement by and between Athenex, Inc., Almirall,
S.A. and Aqua Pharamceuticals LLC dated as of
September 26, 2018.

License Agreement dated as of December 30, 2018 by and
between Athenex, Inc. and Chongqing Taihao
Pharmaceutical Co. Ltd.

Sublicense Agreement dated as of December 30, 2018 by
and among Chongqing Taihao Pharmaceutical Co. Ltd.,
Chongqing Jingdong Junzhuo Pharmaceutical Co., Ltd. and
Athenex, Inc.

146

Form 10-Q

001-38112

10.4

Form 8-K

001-38112

10.1

January 3, 2019

Form 8-K

001-38112

10.2

January 3, 2019

Exhibit Title

Form

File

Exhibit

Filing Date

Incorporated by Reference
(Unless Otherwise Indicated)

Exhibit
Number

10.44

10.45

Mutual Letter of Termination of the License Agreement by
and between Kinex Pharmaceuticals, LLC and Hanmi
Pharmaceutical Ltd., effective as of August 20, 2018.

Fifth Amendment to License Agreement by and between
Athenex, Inc. and Hanmi Pharmaceutical Co. Ltd., effective
as of September 4, 2018.

10.46^^

Second Amendment to License Agreement by and between
Athenex, Inc. and PharmaEssentia Corp., effective as of
November 27, 2018.

21.1

23.1

24.1

31.1

31.2

32.1

Subsidiaries of Athenex, Inc.

Consent of Deloitte & Touche LLP,
g
Public

Accounting Firm.

Independent
p

gRegistered

Power of Attorney (included on signature page hereto).

Certification of the Chief Executive Officer and Board
Chairman (Principal Executive Officer) pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

Certification of the Chief Financial Officer (Principal
Financial and Accounting Officer) pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

Certification of the Chief Executive Officer and Board
Chairman (Principal Executive Officer) and Chief Financial
Officer (Principal Financial and Accounting Officer)
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCHY XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase
Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase

kk

Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase
Document.

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

__

Filed herewith

__

Filed herewith

__

__

__

__

__

Filed herewith

Filed herewith

Filed herewith

Filed herewith

Filed herewith

__

Filed herewith

__

Filed herewith

__

__

__

__

__

__

Filed herewith

Filed herewith

Filed herewith

Filed herewith

Filed herewith

Filed herewith

+
^

Indicates management contract or compensatory plan.
Confidential treatment has been granted for certain confidential portions of this exhibit pursuant to Rule 406 under the Securities
Act. In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the
Securities and Exchange Commission.

^^ Confidential treatment is requested for certain confidential portions of this exhibit pursuant to Rule 406 under the Securities Act.

In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the
Commission.

147

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has

duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

ATHENEX, INC.

By: /s/ Johnson Y.N. Lau
Johnson Y.N. Lau
Chief Executive Officer and Board Chairman

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints Randoll Sze and Teresa Bair, and each of

them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-
in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and
in each capacity stated below, and to fiff le any and all amendments to this annual report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to
be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the

following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature

Title

/s/ Johnson Y.N. Lau
Johnson Y.N. Lau

Chief Executive Officer and Board Chairman
(Principal Executive Officff er)

/s/ Randoll Sze
Randoll Sze

/s/ Kim Campbell
Kim Campbell

/s/ Manson Fok
Manson Fok

/s/ Jinn Wu
Jinn Wu

/s/ Song-Yi Zhang
Song-Yi Zhang

/s/ Sheldon Trainor-
Degirolamo
Sheldon Trainor-
Degirolamo

/s/ Benson Tsang
Benson Tsang

Chief Financial Officer
(Principal Financial and Accounting Officer)

Director

Director

Director

Director

Director

Director

148

Date

March 11, 2019

March 11, 2019

March 11, 2019

March 11, 2019

March 11, 2019

March 11, 2019

March 11, 2019

March 11, 2019

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

Exhibit 31.1

I, Johnson Y.N. Lau, certify that:

1.

2.

3.

4.

I have reviewed this Annual Report on Form 10-K of Athenex, Inc. (the registrant);

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial
accounting principles;

statements for external purposes in accordance with generally accepted

ff

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred

during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial

reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in

the registrant’s internal control over financial reporting.

Date: March 11, 2019

/s/ Johnson Y.N. Lau
Name:
Title:
(Principal Executive Offff iff cer)

Johnson Y.N. Lau
Chief Executive Offff iff cer and Board Chairman

[THIS PAGE INTENTIONALLY LEFT BLANK]

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

Exhibit 31.2

I, Randoll Sze, certify that:

1. I have reviewed this Annual Report on Form 10-K of Athenex, Inc. (the registrant);

2.

3.

4.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred

during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial

reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in

the registrant’s internal control over financial reporting.

Date: March 11, 2019

/s/ Randoll Sze
Name: Randoll Sze
Title:
(Principal Financial and Accounting Officer)

Chief Financial Offff iff cer

[THIS PAGE INTENTIONALLY LEFT BLANK]

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32.1

In accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Johnson
Y.N. Lau, Chief Executive Officer and Board Chairman (Principal Executive Officer) of Athenex, Inc. (the “registrant”), and
Randoll Sze, Chief Financial Officer of the registrant (Principal Financial and Accounting Officer), each hereby certifies that,
to the best of their knowledge:

1.

2.

The registrant’s Annual Report on Form 10-K for the period ended December 31, 2018, to which this Certification is
attached as Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant
at the end of the period covered by the Report and results of operations of the registrant for the period covered by the
Report.

Date: March 11, 2019

/s/ Johnson Y.N. Lau
Name:
Title:
(Principal Executive Officer)

Johnson Y.N. Lau
Chief Executive Offff iff cer and Board Chairman

/s/ Randoll Sze
Name: Randoll Sze
Title:
(Principal Financial and Accounting Officer)

Chief Financial Officff er

[THIS PAGE INTENTIONALLY LEFT BLANK]

Board of Directors

Executive Offiff cers

Johnson Y.N. Lau, M.D., Chief Executive
Officer

Randoll Sze, Chief Financial Officer

ff

Jeffrff ey Yordon, Chief Operating Officff er and
President, Athenex Pharmaceutical Division

Rudolf Kwan, M.B.B.S., Chief Medical Officff

er

Simon Pedder, Ph.D., Chief Business and
Strategy Officff er, Proprietary Products

William Zuo, Ph.D., President, China Division

Johnson Y.N. Lau, M.D., Director
Chief Executive Officer and Chairman of the
Board, Athenex, Inc.

Kim Campbell, Director
Founding Principal, Peter Lougheed Leadership
College at the University of Alberta

Stephanie Davis, Director
Senior Client Partner, Korn Ferry

Manson Fok, Director
Chairman, Virtus Medical Group
Dean, Faculty of Health Sciences, Macau
University of Science and Technology

Jordan Kanfer, Director
Managing Director of Convertible and Equity
Research, Opti Capital

John Tiong Lu Koh, Director
Senior Advisor, Global Counsel

Benson Kwan Hung Tsang, Director
Founder, Benita Consulting Company

John Moore Vierling, Ph.D., Director
Tenured Professor of Medicine and Surgery and
Chief of Hepatology, Baylor College of Medicine

Jinn Wu, Ph.D., Director
Scientific Strategic Advisor, WuXi AppTec
Group

Financial Reports

Copies of the Company’s Annual Report on Form 10-K as filed with the Securities and
Exchange Commission are available at www.athenex.com or on request, free of charge, by
calling (716) 427-2950 or emailing IR@athenex.com.

1001 Main Street, Suite 600
Buffalo, New York 14203
Phone: (716) 427-2950
www.athenex.com