UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-34655
AVEO PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
04-3581650
(I.R.S. Employer
Identification No.)
One Broadway, 14th Floor
Cambridge, Massachusetts 02142
(Address of Principal Executive Offices) (zip code)
Registrant’s telephone number, including area code: (617) 588-1960
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.001 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will
not be contained, to the best 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, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the registrant’s common stock, $0.001 par value per share (“Common Stock”), held by non-affiliates of the
registrant, based on the last reported sale price of the Common Stock on the NASDAQ Global Select Market at the close of business on June 30,
2016, was $61,056,258
The number of shares outstanding of the registrant’s Common Stock as of March 17, 2017 were 75,862,946.
Documents incorporated by reference:
Portions of our definitive proxy statement for our 2017 annual meeting of stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
AVEO PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I
Item 1.
Business..........................................................................................................................................................................
Item 1A. Risk Factors .....................................................................................................................................................................
Item 1B. Unresolved Staff Comments ..........................................................................................................................................
Item 2.
Properties........................................................................................................................................................................
Item 3.
Legal Proceedings ..........................................................................................................................................................
Item 4. Mine Safety Disclosures ................................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....
Item 6.
Selected Financial Data..................................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................................................................
Item 8.
Financial Statements and Supplementary Data ..............................................................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................
Item 9A. Controls and Procedures ................................................................................................................................................
Item 9B. Other Information...........................................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance.............................................................................................
Item 11. Executive Compensation................................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................
Item 13. Certain Relationships and Related Person Transactions, and Director Independence...................................................
Item 14. Principal Accountant Fees and Services ........................................................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules .......................................................................................................................
Item 16. Form 10-K Summary ......................................................................................................................................................
SIGNATURES..................................................................................................................................................................................
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References to AVEO
Throughout this Form 10-K, the words “we,” “us,” “our” and “AVEO”, except where the context requires otherwise, refer to
AVEO Pharmaceuticals, Inc. and its consolidated subsidiaries, and “our board of directors” refers to the board of directors of AVEO
Pharmaceuticals, Inc.
Forward-Looking Information
Any statement contained in this Annual Report on Form 10-K or in the documents we incorporate by reference herein other than
a statement of historical fact, may be a forward-looking statement, including statements regarding our and our collaborators’ future
discovery, development and commercialization efforts, our strategy, future operations, future financial position, future revenue,
projected costs, prospects, plans and objectives of management. In some cases, you can identify forward-looking statements by such
terms as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “should,” “target,”
“will,” “would” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.
Forward-looking statements may include, but are not limited to, statements about:
the initiation, timing, progress and results of future clinical trials, and our development programs;
our plans to develop and commercialize our product candidates;
our ability to secure new collaborations, maintain existing collaborations or obtain additional funding;
the timing or likelihood of regulatory filings and approvals;
the implementation of our business model, strategic plans for our business, product candidates and technology;
our commercialization, marketing and manufacturing capabilities and strategy;
the rate and degree of market acceptance and clinical utility of our products;
our competitive position;
our intellectual property position;
developments and projections relating to our competitors and our industry;
our estimates of the period in which we anticipate that existing cash, cash equivalents and investments will enable us to
fund our current and planned operations;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
our ability to continue as a going concern.
Our actual results may differ materially from those indicated by these forward-looking statements as a result of various
important factors, including risks relating to:
our ability to maintain our third party collaboration agreements and our ability, and the ability of our licensees, to achieve
development and commercialization objectives under these arrangements;
our ability, and the ability of our licensees, to demonstrate to the satisfaction of applicable regulatory agencies the safety,
efficacy and clinically meaningful benefit of our product candidates;
our ability to successfully enroll and complete clinical trials of our product candidates, including our TIVO-3 trial;
our ability to maintain compliance with the $10.0 million financial covenant under our loan agreement with Hercules;
our ability to achieve and maintain compliance with all regulatory requirements applicable to our product candidates;
our ability to obtain and maintain adequate protection for intellectual property rights relating to our product candidates
and technologies;
developments, expenses and outcomes related to our ongoing shareholder litigation;
our ability to successfully implement our strategic plans;
our ability to raise the substantial additional funds required to achieve our goals;
unplanned capital requirements;
adverse general economic and industry conditions;
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competitive factors;
our ability to continue as a going concern; and
those risks discussed under the heading “Risk Factors” in Part I, Item 1A of this report.
If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or
achievements may vary materially from any future results, performance or achievements expressed or implied by the forward-looking
statements we make.
You should consider these factors and the other cautionary statements made in this report and the documents we incorporate by
reference herein as being applicable to all related forward-looking statements wherever they appear in this report or the documents
incorporated by reference. While we may elect to update forward-looking statements wherever they appear in this report or the
documents incorporated by reference herein, we do not assume, and specifically disclaim, any obligation to do so, whether as a result
of new information, future events or otherwise, unless required by law.
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ITEM 1.
Business
Overview
PART I
We are a biopharmaceutical company dedicated to advancing a broad portfolio of targeted therapeutics for oncology and other
areas of unmet medical need. Our proprietary platform has delivered unique insights into cancer and related diseases. Our strategy is
to leverage these biomarker insights and partner resources to advance the development of our clinical pipeline. We are focused on
developing our lead candidate tivozanib in North America as a treatment for renal cell carcinoma, or RCC. In addition, we have
entered into partnerships to fund the further development and commercialization of our clinical stage assets, including AV-380,
ficlatuzumab, AV-203, and tivozanib for oncology indications outside of North America and for non-oncologic indications worldwide.
We are currently seeking a partner to develop the AV-353 platform, a preclinical asset, worldwide for the potential treatment of
pulmonary arterial hypertension, or PAH.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. To
continue as a going concern, we must secure additional capital to provide us with additional liquidity. We believe that our approximate
$23.3 million in existing cash, cash equivalents and marketable securities at December 31, 2016, could allow us to fund our planned
operations into the fourth quarter of 2017; however, additional funds will be needed to extend these operations into 2018 and maintain
compliance with our $10.0 million financial covenant under our loan agreement with Hercules Technology II, L.P. and Hercules
Technology III, L.P., affiliates of Hercules Technology Growth, which we collectively refer to as Hercules. We expect that, in order to
obtain additional capital, we will need to complete public or private financings of debt or equity, receive milestone payments from our
partners, or both. We may also seek to procure additional funds through future arrangements with collaborators, licensees or other
third parties, and these arrangements would generally require us to relinquish or encumber rights to some of our technologies or drug
candidates. Moreover, we may not be able to receive milestone payments, complete additional financing or enter into such
arrangements on acceptable terms, if at all. For a further discussion of our liquidity, please refer to Part II, Item 7 of this report under
the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Operating Capital Requirements and Going Concern” and Note 1 to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Tivozanib
Our pipeline includes our lead candidate tivozanib, an oral, once-daily, vascular endothelial growth factor, or VEGF, tyrosine
kinase inhibitor, or TKI. Tivozanib is a potent, selective and long half-life inhibitor of all three VEGF receptors and is designed to
optimize VEGF blockade while minimizing off-target toxicities, potentially resulting in improved efficacy and minimal dose
modifications. Tivozanib has been investigated in several tumor types, including renal cell, colorectal and breast cancers.
Clinical and Regulatory Development in RCC
RCC First Line Phase 3 Trial (TIVO-1): We conducted a global phase 3 clinical trial, which we refer to as the TIVO-1 trial,
comparing the efficacy and safety of tivozanib with Nexavar® (sorafenib), an approved therapy, for first-line treatment of RCC. The
trial met its primary endpoint for progression-free survival, or PFS, but showed a non-statistically significant trend favoring the
sorafenib arm in overall survival, or OS. In June 2013, the U.S. Food and Drug Administration, or FDA, issued a complete response
letter informing us that it would not approve tivozanib for the first-line treatment of advanced RCC based solely on the data from this
trial, and recommended that we perform an additional clinical trial adequately sized to assure the FDA that there is no adverse effect
on OS.
TIVO-1 Extension Study - One-way crossover from sorafenib to tivozanib (Study 902): We completed a TIVO-1 extension study
in which patients with advanced RCC received tivozanib as second-line treatment subsequent to disease progression on the sorafenib
arm in the TIVO-1 first-line RCC trial. We presented the final results at the 2015 American Society of Clinical Oncology (ASCO)
Annual Meeting on June 1, 2015. The final results showed a median PFS of 11.0 months and a median OS of 21.6 months,
demonstrating the clinically meaningful efficacy of tivozanib in a VEGF treatment refractory population. We believe that the long OS
derived from tivozanib following sorafenib that was demonstrated in Study 902 contributed to the discordance in the efficacy results
in the TIVO-1 trial between the PFS benefit, which significantly favored tivozanib, and the OS, which trended in favor of sorafenib.
However, the FDA did not accept this explanation, finding that the OS results were uninterpretable, and recommended that we
perform a second phase 3 trial, as set forth above.
European Marketing Authorization Application by EUSA. Tivozanib has previously been granted orphan drug designation in
Europe for the treatment of RCC. Our licensee, EUSA Pharma (UK) Limited, or EUSA, submitted a marketing authorization
application, or MAA, for tivozanib for the treatment of RCC to the European Medicines Agency, or EMA, in February 2016 based
primarily on our existing dataset, which includes the results from the TIVO-1 clinical trial of tivozanib in the first-line treatment of
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RCC, combined with the TIVO-1 extension trial, and one phase 1 and two phase 2 trials in RCC. The EMA validated the MAA in
March 2016, confirming that the submission was complete and that it would initiate its review process. EUSA received the Day 120
List of Questions from the Committee for Medicinal Products for Human Use, or CHMP, of the EMA in July 2016, and submitted its
responses in November 2016. In January 2017, EUSA received the Day 180 List of Outstanding Issues, or LOI, from the CHMP. The
Day 180 LOI signifies that the MAA is not approvable at the present time, and outlines outstanding deficiencies, which are then
required to be satisfactorily addressed in an oral explanation and/or in writing prior to a final application decision. EUSA has
informed us that it expects to submit written responses to the Day 180 LOI in April 2017, and the EMA has tentatively scheduled
EUSA to provide an oral explanation to the CHMP in May 2017.
RCC Third Line Phase 3 Trial (TIVO-3): In May 2016, we initiated enrollment and treatment of patients in a phase 3 trial of
tivozanib in the third-line treatment of patients with refractory RCC, which we refer to as the TIVO-3 trial. The TIVO-3 clinical trial
was designed to address the OS concerns from the TIVO-1 trial presented in the June 2013 complete response letter from the FDA and
to support a request for regulatory approval of tivozanib in the United States as a third-line treatment and as a first-line treatment for
RCC. Our trial design, which we reviewed with the FDA, provides for a randomized, controlled, multi-center, open-label phase 3
clinical trial of approximately 322 subjects randomized 1:1 to receive either tivozanib or sorafenib. Subjects enrolled in the trial must
have failed two systemic therapies one of which must have been a VEGF TKI. Patients may have received prior immunotherapy,
including immune checkpoint (PD-1) inhibitors, reflecting a potentially evolving treatment landscape. The primary objective of the
TIVO-3 trial is to show improved PFS, and secondary endpoints include OS, safety and objective response rate, or ORR. The trial’s
sites are located in North America and Europe. The TIVO-3 trial does not include a crossover design, meaning that patients who
progress in one therapy will not then be offered the opportunity to cross over to the other therapy. We expect to complete enrollment
in the TIVO-3 trial in June 2017, and to report top line data in the first quarter of 2018. The TIVO-3 trial passed an initial safety data
assessment in February 2017. We expect a pre-planned interim futility analysis to occur mid-year 2017.
RCC PD-1 Combination Trial with Opdivo (TiNivo): In March 2017, we initiated enrollment in a phase 1/2 clinical trial of
tivozanib in combination with Opdivo® (nivolumab), an immune checkpoint (PD-1) inhibitor, for the treatment of RCC, which we
refer to as the TiNivo trial. Bristol-Myers Squibb is supplying nivolumab for the TiNivo trial, and we are the trial sponsor. In recent
clinical trials, TKIs and PD-1 inhibitors have shown promising efficacy in treating RCC in combination. However, several TKI/PD-1
combinations have encountered toxicity levels that we believe are likely to challenge or prohibit such TKIs from safely combining
with PD-1 inhibitors for RCC treatment. In our clinical trials, tivozanib has demonstrated a superior tolerability profile relative to
certain other TKIs, including lower rates of key potential overlapping toxicities with PD-1 inhibitors. We believe that tivozanib’s
tolerability profile has the potential to allow tivozanib to combine with PD-1 inhibitors more safely than other TKIs. The TiNivo trial
is being led by the Institut Gustave Roussy in Paris under the direction of Professor Bernard Escudier, MD, Chairman of the
Genitourinary Oncology Committee. The phase 1 trial will primarily evaluate the safety of tivozanib in combination with nivolumab at
escalating doses of tivozanib and, assuming favorable results, is expected to be followed by a phase 2 expansion at the established
combination dose. We expect to receive initial data from the phase 1 portion of the TiNivo trial in the first half of 2017.
Tivozanib Partnerships
In-License from KHK. In 2006, we acquired the exclusive rights to develop and commercialize tivozanib in all countries outside
of Asia and the Middle East under a license from Kyowa Hakko Kirin Co., Ltd. (formerly Kirin Brewery Co. Ltd.), or KHK.
EUSA License Agreement: In December 2015, we entered into a license agreement with EUSA, under which we granted EUSA
the right to develop and commercialize tivozanib for all diseases and conditions in humans, excluding non-oncologic diseases or
conditions of the eye, in Europe (excluding Russia, Ukraine and the Commonwealth of Independent States), Latin America (excluding
Mexico), Africa, Australasia and New Zealand.
Ficlatuzumab
Ficlatuzumab is a potent Hepatocyte Growth Factor, or HGF, inhibitory antibody. HGF is the sole known ligand of the c-Met
receptor, which is believed to trigger many activities that are involved in cancer development and metastasis. In April 2014, we and
Biodesix, Inc., or Biodesix, entered into a worldwide Co-Development and Collaboration Agreement, or the Biodesix Agreement, to
develop and commercialize ficlatuzumab.
We have completed two phase 1 clinical studies of ficlatuzumab administered as a single agent and in combination with
erlotinib, an endothelial growth factor receptor, or EGFR, TKI. We also performed a phase 2 clinical trial evaluating ficlatuzumab in
combination with gefitinib, an EGFR TKI, in first-line non-small cell lung cancer, or NSCLC. The phase 2 trial failed to demonstrate
a statistically significant benefit in the intent-to-treat, or ITT, population. However, a retrospective exploratory subgroup analysis
utilizing Biodesix’s companion diagnostic, VeriStrat®, identified a sub-population of patients who experienced a progression free
survival and overall survival benefit from the addition of ficlatuzumab to gefitinib. In December 2014, we and Biodesix initiated the
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FOCAL trial, a phase 2 confirmatory study of ficlatuzumab in combination with erlotinib in the subset of patients with first-line
advanced NSCLC previously identified. After experiencing lower rates of positivity for the two markers and slower than expected
enrollment, a blinded look at the FOCAL trial data from enrolled patients found that the patients, who were known to be selected for
poor prognosis, experienced materially higher discontinuation rates than observed in both the general ITT population and the
retrospective exploratory subgroup population of the prior phase 2 clinical trial. This observation significantly compromised the
commercial opportunity and the feasibility of the FOCAL trial. Based on the findings from the interim analysis and the slow
enrollment, we and Biodesix agreed in September 2016 to discontinue the FOCAL trial.
We and Biodesix are also funding an investigator-sponsored clinical trial of ficlatuzumab in combination with ERBITUX®
(cetuximab) in squamous cell carcinoma of the head and neck. We anticipate that we will present preliminary clinical observations
from this phase 1 trial at an upcoming scientific conference. We and Biodesix are also funding an investigator-sponsored clinical trial
of ficlatuzumab in combination with Cytosar (cytarabine) in acute myeloid leukemia. We anticipate that we will present preliminary
clinical observations from this phase 1 trial at an upcoming scientific conference. We continue to evaluate several additional
opportunities for the further clinical development of ficlatuzumab.
AV-203
AV-203 is a potent anti-ErbB3 (also known as HER3) specific monoclonal antibody with high ErbB3 affinity. We have
observed potent anti-tumor activity in mouse models. AV-203 selectively inhibits the activity of the ErbB3 receptor, and our
preclinical studies suggest that neuregulin-1, or NRG1 (also known as heregulin), levels predict AV-203 anti-tumor activity. We have
completed a phase 1 dose escalation study of AV-203, which established a recommended phase 2 dose, demonstrated good tolerability
and promising early signs of activity, and reached the maximum planned dose of AV-203 monotherapy. In 2014, the expansion cohort
of this trial was discontinued to conserve capital resources.
In March 2016, we entered into a collaboration and license agreement with CANbridge Life Sciences Ltd., or CANbridge, under
which we granted CANbridge the exclusive right to develop, manufacture and commercialize AV-203 in all countries other than the
United States, Canada and Mexico. CANbridge has begun its work to optimize the manufacturing of AV-203. CANbridge expects
that AV-203 will reenter the clinic in 2018.
AV-380
AV-380 is a potent humanized IgG1 inhibitory monoclonal antibody targeting growth differentiating factor-15, or GDF15, a
divergent member of the TGF-ß family, for the potential treatment or prevention of cachexia. Cachexia is defined as a multi-factorial
syndrome of involuntary weight loss characterized by an ongoing loss of skeletal muscle mass (with or without loss of fat mass) that
cannot be fully reversed by conventional nutritional support and leads to progressive functional impairment. Cachexia is associated
with various cancers as well as chronic kidney disease, congestive heart failure, chronic obstructive pulmonary disease, or COPD, and
other diseases. We believe that AV-380 represents a unique approach to treating cachexia because it addresses key underlying
mechanisms of the syndrome. AV-380 focuses on a significant area of patient need. It is estimated that approximately 30% of all
cancer patients die due to cachexia and over half of cancer patients who die do so with cachexia present (J Cachexia Sarcopenia
Muscle 2010). In the United States alone, the estimated prevalence of cancer cachexia is over 400,000 patients, and the prevalence of
cachexia due to cancer, COPD, congestive heart failure, frailty and end stage renal disease combined is estimated to total more than 5
million patients (Am J Clin Nutr 2006).
We have demonstrated preclinical proof-of-concept for AV-380 in multiple cancer cachexia models and have completed cell
line development. In September 2014, we presented the results from four preclinical studies of AV-380 in various in vivo cachexia
models and in vitro assays at the 2nd Cancer Cachexia Conference in Montreal, Canada. Our research was also selected for
presentation in an oral session at the conference. In April 2015, we also presented the results from a preclinical study of AV-380 in a
cachectic human tumor xenograft model at the Annual Meeting of the American Association of Cancer Research. We have established
preclinical proof-of-concept for GDF15 as a key driver of cachexia by demonstrating, in animal models, that the administration of
GDF15 induces cachexia, and that inhibition of GDF15 reverses cachexia and provides a potential indication of an overall survival
benefit.
In August 2015, we entered into a license agreement under which we granted Novartis International Pharmaceutical Ltd., or
Novartis, the exclusive right to develop and commercialize AV-380 and our related antibodies. Under this agreement, Novartis is
responsible for all activities and costs associated with the further development, regulatory filing and commercialization of AV-380
worldwide. In connection with the AV-380 program, we have in-licensed certain patents and patent applications from St. Vincent’s
Hospital Sydney Limited in Sydney, Australia, which we refer to as St. Vincent’s.
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AV-353 Platform
The AV-353 platform includes a number of potent inhibitory antibody candidates specific to Notch 3. The Notch 3 pathway is
important in cell-to-cell communication involving gene regulation mechanisms that control multiple cell differentiation processes
during the entire life cycle. Scientific literature has implicated the Notch 3 receptor pathway in multiple diseases, including cancer,
cardiovascular diseases and neurodegenerative conditions. Publications, including Nature Medicine (2009), have implicated the Notch
3 pathway in PAH, a rare and life-threatening disorder that affects approximately 250,000 people worldwide (Global Data 2016 PAH
Opportunity Analyzer; 2012 Decision Resources PAH Report) and is caused by enlargement of the arterial walls in small arteries
between the heart and the lungs, resulting in restricted blood flow. Currently, no known cure for PAH exists. Existing treatments for
PAH have focused on controlling symptoms by avoiding vasoconstriction and increasing vasodilation of blood vessels but have not
reversed the underlying cause of the disease. However, the results of a recently concluded pre-clinical research study conducted at the
University of California at San Diego (and recently presented in a poster at the November 2016 American Heart Association meeting)
using one of our anti-Notch3 antibody candidates, generated preclinical data that supports the ability of the antibody to potentially
reverse the thickening of vascular smooth muscle cells, which would represent a disease-modifying approach to treatment. A
manuscript of the results is being prepared for submission to a peer-reviewed journal.
We are seeking patent protection of our AV-353 platform, which was developed utilizing our research and development
platform and have already filed composition of matter patent applications. We are currently seeking a partner to develop the AV-353
platform worldwide for the potential treatment of PAH.
Competition
The biotechnology and pharmaceutical industries are highly competitive. There are many pharmaceutical companies,
biotechnology companies, public and private universities and research organizations actively engaged in the research and development
of products that may be similar to our products. A number of multinational pharmaceutical companies, as well as large biotechnology
companies, including, but not limited to, Roche Laboratories, Inc., or Roche, Pfizer Inc., or Pfizer, Bayer HealthCare AG, or Bayer,
Amgen, Inc., Eli Lilly and Company, or Lilly, GlaxoSmithKline plc, or GSK, Xbiotech Inc., Novartis, Bristol-Myers Squibb
Company, Merck & Co., Merrimack Pharmaceuticals, Inc., Arqule, Inc., Exelixis, Inc., Eisai Co., Ltd., Merck KGaA and AstraZeneca
plc are pursuing the development or are currently marketing pharmaceuticals that target VEGF, HGF, ErbB3, Notch 3 or other
pathways that could compete with our development candidates in oncology, cachexia, age-related macular degeneration, or AMD, and
PAH. It is probable that the number of companies seeking to develop products and therapies for the treatment of unmet needs in the
lives of people with cancer, cachexia, AMD, and PAH will increase.
Many of our competitors, either alone or with their strategic partners, have greater financial, technical and human resources than
we do and greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals
of products, and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in
obtaining approval for drugs and achieving widespread market acceptance. Our competitors’ drugs may be safer and more effective, or
more effectively marketed and sold, than any drug we may commercialize and may render our product candidates obsolete or non-
competitive before we can recover the expenses of developing and commercializing any of our product candidates. We anticipate that
we will face intense and increasing competition as new drugs enter the market and advanced technologies become available.
Tivozanib
There are currently eleven FDA-approved drugs in oncology which target the VEGF receptors. Eight of the FDA-approved
VEGF pathway inhibitors are oral small molecule receptor tyrosine kinase inhibitors, or TKIs. Nexavar (sorafenib) and Stivarga
(regorafenib) are marketed by Bayer and Onyx Pharmaceuticals Inc., a subsidiary of Amgen, Sutent (sunitinib) and Inlyta (axitinib)
are marketed by Pfizer, and Votrient (pazopanib) is marketed by Novartis. Most of these approved VEGF TKIs are not specific to the
VEGF 1, 2 and 3 receptors. Nexavar is approved for advanced RCC and unresectable hepatocellular cancer. Stivarga is approved for
refractory metastatic colorectal cancer, or mCRC, and refractory gastrointestinal stromal tumors, or GIST. Sutent is approved for
advanced RCC, GIST, and progressive, well-differentiated pancreatic neuroendocrine tumors. Inlyta is approved for advanced RCC
after failure of one prior systemic therapy. Votrient is approved for advanced RCC and advanced soft tissue sarcoma after prior
chemotherapy. Caprelsa (vandetanib), marketed by AstraZeneca, Kisplyx (lenvatinib) marketed by Eisai in combination with
everolimus and Cometriq/Cabometyx (cabozantinib), marketed by Exelixis, are approved for RCC.
Avastin (bevacizumab), marketed by Roche/Genentech, Inc., is a monoclonal antibody approved for intravenous administration in
combination with other anti-cancer agents for the treatment of mCRC, non-squamous non-small cell lung cancer, and metastatic RCC. It
is also approved as a monotherapy for the treatment of glioblastoma in patients with progressive disease following prior therapy. Zaltrap
(zif-aflibercept), marketed by Sanofi S.A. and Regeneron Pharmaceuticals, Inc., is a VEGF-trap molecule that binds to multiple
circulating VEGF factors, and is approved in combination with standard chemotherapy agents for treatment of second line metastatic
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CRC. Cyramza (ramucirumab), marketed by Lilly, is an antibody that binds to the VEGF-2 receptor that is approved for the treatment of
advanced gastric or gastro-esophageal junction adenocarcinoma and in combination with docetaxel for the treatment of NSCLC.
Many of the approved VEGF pathway inhibitor agents are in ongoing development in additional cancer indications including
RCC. Additionally, we are aware of a number of companies that have ongoing programs to develop both small molecules and
biologics that target the VEGF pathway.
In addition, the emergence of PD-1/PD-L1 inhibitor therapies present additional competition for tivozanib in advanced RCC.
For example, Opdivo (nivolumab), marketed by Bristol-Myers Squibb, is an approved anti-PD-1 for second line RCC. Additional
clinical trials that are testing mono and combination therapies of PD-1/PD-L1 with other immuno-oncology targets and VEGF TKIs
targeting RCC are in the pipeline. We are aware of several ongoing phase 3 registration studies evaluating PD-1/PD-L1 inhibitors in
combination with VEGF TKIs in RCC as well as combinations of PD-1 agents in combination with other immune therapies for RCC.
Ficlatuzumab
We believe the products that are considered competitive with ficlatuzumab include those agents targeting the HGF/c-Met
pathway. The agents exclusively targeting this pathway consist of Amgen’s AMG-102 (rilotumumab), initiated in a phase 3 clinical
trial (which has been discontinued), as well as Lilly’s c-Met receptor antibody LY-2875358, currently in multiple phase 2 trials. In
addition, Roche has conducted multiple phase 3 trials for a c-Met receptor antibody onartuzumab (MetMAb/ 5D5 Fab). Roche
announced that an independent data monitoring committee recommended that its phase 3 trial of onartuzumab in second and third line
NSCLC be stopped due to lack of efficacy. ArQule, Inc. and Daiichi Sankyo, Inc., under a collaboration agreement, completed a phase
3 trial of ARQ-197 (tivantinib) in liver cancer that failed to meet its primary endpoint.
Other marketed or late clinical-stage drugs which target the HGF/c-Met pathway, though not exclusively, include Pfizer’s PF-
2341066 (Xalkori, crizotinib), Exelixis Inc.’s XL-184 (Cometriq, cabozantinib), Mirati Therapeutics’ (formerly MethylGene) MGCD-
265, Eisai Co. Ltd.’s E-7050 (golvatinib), Exelixis Inc.’s and GSK’s XL-880 (foretinib), Incyte Corp.’s and Novartis’s INCB-028060
and Sanofi-Aventis U.S. LLC’s SAR-125844, EMD Serono, Inc.’s MSC2156119J, Amgen BioPharma’s AMG-337 and AMG-208,
Lilly’s merestinib (LY2801653), Les Laboratoires Servier SAS’s S-49076, AstraZeneca and Hutchison MediPharma Limited’s
savolitinib, Merck KGaA’s tepotinib, AbbVie Inc.’s ABT-700, Deciphera Pharmaceuticals, LLC’s altiratinib, Betta Pharmaceuticals
Co., Ltd.’s BPI-9016 and Bristol-Myers Squibb Company’s and Aslan Pharmaceuticals’ BMS-777607.
AV-203
We believe the most direct competitors to our AV-203 program are monoclonal antibodies that specifically target the ErbB3
receptor, including Merrimack Pharmaceuticals, Inc.’s MM-121, which is currently in pivotal phase 2 clinical development, and
Daiichi Sankyo, Inc.’s and Amgen, Inc.’s patritumab (AMG-888), which recently entered phase 2 clinical development for head and
neck cancer and metastatic breast cancer. Other clinical-stage ErbB3-specific competitors include Roche’s RG-7116, Novartis’s
elgemtumab, Regeneron’s REGN1400, GSK’s GSK-2849330, Merus N.V.’s MCLA-128, AstraZeneca’s sapitinib, Celldex
Therapeutics Inc.’s KTN-3379 and Sihuan Pharmaceutical Holdings Group Ltd.’s pirotinib and sirotinib. Clinical stage competitors
targeting ErbB3 in addition to other targets include Roche’s MEHD7945A, and Merrimack Pharmaceuticals MM-111 and MM-141.
AV-380 Program in Cachexia
Only a limited number of agents have been approved for the treatment or prevention of cachexia caused by any disease. In the
United States, Megace is the only approved agent for the treatment of cachexia (in patients with the diagnosis of AIDS). Megace and
medroxyprogesterone are approved for cancer cachexia in Europe. Three agents have recently completed or are currently being
studied in phase 3 trials. One agent, GTx, Inc.’s selective androgen receptor modulator, or SARM, called enobosarm (GT-024)
recently completed two phase 3 trials for the prevention and treatment of muscle wasting in newly diagnosed locally advanced or
metastatic non-small cell lung cancer patients. The trials suggested limited benefits in a larger patient population and the company has
discontinued its commercialization efforts. Another agent that has recently completed phase 3 trials is Helsinn’s anamorelin, for which
Helsinn filed for EMA approval in 2015 for treating locally advanced non-small cell lung cancer patients who have cachexia. A third
agent, XBiotech’s xilonix (MABp1), is in a phase 3 trial for metastatic colorectal cancer patients who are cachectic and refractory to
standard therapies and has shown encouraging overall survival results.
A number of agents with different mechanisms of action have completed or are currently being studied in phase 2 trials in
cachexia or muscle wasting. Agents targeting the muscle regulatory molecule myostatin include Lilly’s LY2495655, Regeneron’s
REGN-1033, and Atara Biotherapeutics, Inc.’s PINTA 745. Of these, both Lilly’s LY2495655 and PINTA 745 have announced
failures to demonstrate clinical proof of concept in their respective phase 2 trials. Novartis is currently studying bimagrumab (BYM-
338), an agent targeting the activin receptor. Drugs with other mechanisms currently in or recently completing phase 2 clinical trials
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include Alder Biotherapeutics Inc.’s clazakizumab (ALD-518, targeting IL-6), PsiOxus Therapeutics, Ltd.’s MT-102 (dual acting
catabolic/anabolic transforming agent), Acacia Pharma Group plc’s APD-209 (progestin/ß2 antagonist) and Ohr Pharmaceutical,
Inc.’s OHR118 (cytoprotectant/immunomodulator). PsiOxus’s espindolol has completed phase 1 trials.
AV-353 Platform
There are currently no Notch 3-specific inhibitors approved or in clinical trials in oncology or PAH indications. Pfizer recently
stopped development of PF-06650808, a Notch 3-specific antibody drug conjugate which was in phase 1 trials in multiple oncology
indications. However, a number of agents for applications in oncology are being explored which target the Notch 3 receptor and may
inhibit other Notch receptors including Notch 1, Notch 2 and Notch 4, including BMS-906024, BMS-986115, BMS-871 and
Tarextumab (OMP-59R5).
There are multiple treatments approved for PAH through various other mechanisms apart from Notch 3 inhibition. These
include treatments such as epithelial receptor antagonists, phosphodiesterase type 5 inhibitors, and prostacyclin analogues. We do not
believe that any of these approved therapies has demonstrated disease modifying effects.
Strategic Partnerships
CANbridge
On March 16, 2016, which we refer to as the Effective Date, we entered into a collaboration and license agreement with
CANbridge, or the CANbridge Agreement, under which we granted CANbridge the exclusive right to develop, manufacture and
commercialize AV-203, our proprietary ErbB3 (HER3) inhibitory antibody, for the diagnosis, treatment and prevention of disease in
humans and animals in all countries other than the United States, Canada and Mexico. Under the terms of the CANbridge Agreement,
if we determine to grant a license to any ErbB3 inhibitory antibody in the United States, Canada or Mexico, we are obligated to first
negotiate with CANbridge for the grant to CANbridge of a license to such rights. The parties have both agreed not to directly or
indirectly develop or commercialize any other ErbB3 inhibitory antibody product during the term of the CANbridge Agreement other
than pursuant to the CANbridge Agreement.
CANbridge has responsibility for all activities and costs associated with the further development, manufacture, regulatory
filings and commercialization of AV-203 throughout its licensed territory. CANbridge is obligated to use commercially reasonable
efforts to develop and obtain regulatory approval for AV-203 in each of China, Japan, the United Kingdom, France, Italy, Spain, and
Germany. CANbridge will bear all costs for development of AV-203 through proof-of-concept in Esophageal Squamous Cell
Carcinoma, after which we would expect to contribute to certain worldwide development costs.
Pursuant to the CANbridge Agreement, CANbridge paid us an upfront fee of $1.0 million in April 2016. CANbridge also agreed
to reimburse us $1.0 million for certain manufacturing costs and expenses that we previously incurred, $0.5 million of which will be
due on the earlier of (i) the date of validation by CANbridge of certain manufacturing development activities we conducted and
(ii) twelve months from the Effective Date, and the remaining $0.5 million of which will be due on the earlier of (i) the date of
validation by CANbridge of such manufacturing development activities or (ii) eighteen months from the Effective Date. We are also
eligible to receive up to $42.0 million in potential development and regulatory milestone payments and up to $90.0 million in potential
sales based milestone payments based on annual net sales of licensed products. Upon commercialization, we are eligible to receive a
tiered royalty, with a percentage range in the low double-digits, on net sales of approved licensed products. CANbridge’s obligation to
pay royalties for each licensed product expires on a country-by-country basis on the later of the expiration of patent rights covering
such licensed product in such country, the expiration of regulatory data exclusivity in such country and ten years after the first
commercial sale of such licensed product in such country. A percentage of any milestone and royalty payments received by us,
excluding upfront and reimbursement payments, are due to Biogen Idec International GmbH, or Biogen Idec, as a sublicensing fee
under our option and license agreement with Biogen dated March 18, 2009, as amended.
The term of the CANbridge Agreement commenced on the Effective Date and will continue until the last to expire royalty term
applicable to licensed products. Either party may terminate the CANbridge Agreement in the event of a material breach of the
CANbridge Agreement by the other party that remains uncured for a period of 45 days, in the case of a material breach of a payment
obligation, and 90 days in the case of any other material breach. CANbridge may terminate the CANbridge Agreement without cause
at any time upon 180 days’ prior written notice to us. We may terminate the CANbridge Agreement upon thirty days’ prior written
notice if CANbridge challenges any of the patent rights licensed to CANbridge under the CANbridge Agreement.
EUSA
In December 2015, we entered into a license agreement with EUSA under which we granted to EUSA the exclusive,
sublicensable right to develop, manufacture and commercialize tivozanib in the territories of Europe (excluding Russia, Ukraine and
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the Commonwealth of Independent States), Latin America (excluding Mexico), Africa, Australasia and New Zealand for all diseases
and conditions in humans, excluding non-oncologic diseases or conditions of the eye.
EUSA is obligated to use commercially reasonable efforts to seek regulatory approval for and commercialize tivozanib
throughout its licensed territories for RCC. With the exception of certain support to be provided by us in connection with the
application for marketing approval by the EMA, EUSA has responsibility for all activities and costs associated with the further
development, manufacture, regulatory filings and commercialization of tivozanib in its licensed territories.
Under the license agreement, EUSA made a research and development funding payment to us of $2.5 million in 2015. EUSA is
required to make a further research and development funding payment of $4.0 million if the EMA grants marketing approval for
tivozanib for treatment of RCC. We are eligible to receive additional research funding from EUSA, including up to $20.0 million for
the data generated from our phase 3 clinical trial in third-line RCC if EUSA elects to utilize such data for regulatory or commercial
purposes, and up to $2.0 million for the data generated from a phase 1 combination trial with a checkpoint inhibitor if EUSA elects to
utilize such data for regulatory or commercial purposes. We would be entitled to receive milestone payments of $2.0 million per
country upon reimbursement approval, if any, for RCC in each of France, Germany, Italy, Spain and the United Kingdom, and an
additional $2.0 million for the grant of marketing approval, if any, in three of the following five countries: Argentina, Australia,
Brazil, South Africa and Venezuela. We are also eligible to receive a payment of $2.0 million in connection with a filing by EUSA
with the EMA for marketing approval, if any, for tivozanib for the treatment of each of up to three additional indications and $5.0
million per indication in connection with the EMA’s grant of marketing approval for each of up to three additional indications, as well
as up to $335.0 million upon EUSA’s achievement of certain sales thresholds. We are also eligible to receive tiered double digit
royalties on net sales, if any, of licensed products in its licensed territories ranging from a low double digit up to mid-twenty percent
depending on the level of annual net sales. Thirty percent of any non-research and development related milestones and royalty
payments we receive is due to KHK as a sublicensing fee under our license agreement with KHK. The research and development
funding payments under the EUSA license agreement are not subject to sublicensing payment to KHK.
The term of the license agreement commenced on the effective date and will continue on a product-by-product and country-by-
country basis until the later to occur of (a) the expiration of the last valid patent claim for such product in such country, (b) the
expiration of market or regulatory data exclusivity for such product in such country or (c) the 10th anniversary of the effective date.
Either party may terminate the license agreement in the event of the bankruptcy of the other party or a material breach by the other
party that remains uncured, following receipt of written notice of such breach, for a period of (a) thirty (30) days in the case of breach
for nonpayment of any amount due under the license agreement, and (b) ninety (90) days in the case of any other material breach.
EUSA may terminate the license agreement at any time upon one hundred eighty (180) days’ prior written notice. In addition, we may
terminate the license agreement upon thirty (30) days’ prior written notice if EUSA challenges any of the patent rights licensed under
the license agreement.
Novartis
In August 2015, we entered into a license agreement with Novartis, under which we granted Novartis the exclusive right to
develop and commercialize AV-380 and our related antibodies that bind to GDF15 worldwide. Under this agreement, Novartis is
responsible for all activities and costs associated with the further development, regulatory filing and commercialization of AV-380
worldwide.
Novartis made an upfront payment to us of $15.0 million in September 2015. We are also eligible to receive (a) up to $53.0
million in potential clinical milestone payments and up to $105.0 million in potential regulatory milestone payments tied to the
commencement of clinical trials and to regulatory approvals of products developed under the license agreement in the United States,
the European Union and Japan; and (b) up to $150.0 million in potential sales based milestone payments based on annual net sales of
such products. Upon commercialization, we are eligible to receive tiered royalties on net sales of approved products ranging from the
high single digits to the low double-digits. Novartis has responsibility under the license agreement for the development, manufacture
and commercialization of the licensed antibodies and any resulting approved therapeutic products. In December 2015, Novartis also
exercised its right under the license agreement to acquire our inventory of clinical quality drug substance, reimbursing us
approximately $3.5 million for such existing inventory.
Certain milestones achieved by Novartis would trigger milestone payment obligations from us to St. Vincent’s, under our
amended and restated license agreement with St. Vincent’s. In addition, royalties on approved products, if any, will be payable to
St. Vincent’s, and we and Novartis will share that obligation equally.
The term of the license agreement commenced in August 2015 and will continue on a country-by-country basis until the later to
occur of the 10th anniversary of the first commercial sale of a product in such country or the expiration of the last valid patent claim
for a product in that country. We or Novartis may terminate the license agreement in the event of a material breach by the other party
that remains uncured for a period of sixty (60) days, which period may be extended an additional thirty (30) days under certain
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circumstances. Novartis may terminate the license agreement, either in its entirety or with respect to any individual products or
countries, at any time upon sixty (60) days’ prior written notice. In addition, we may terminate the license agreement upon thirty (30)
days’ prior written notice if Novartis challenges certain patents controlled by us related to our antibodies.
Biodesix
In April 2014, we and Biodesix entered into the Biodesix Agreement to develop and commercialize ficlatuzumab. Under the
Biodesix Agreement, we granted Biodesix perpetual, non-exclusive rights to certain intellectual property, including all clinical and
biomarker data related to ficlatuzumab, to develop and commercialize VeriStrat®, Biodesix’s proprietary companion diagnostic test.
Biodesix granted us perpetual, non-exclusive rights to certain intellectual property, including diagnostic data related to VeriStrat, with
respect to the development and commercialization of ficlatuzumab; each license includes the right to sublicense, subject to certain
exceptions. Pursuant to a joint development plan, we retain primary responsibility for clinical development of ficlatuzumab. In
September 2016, we and Biodesix announced the termination of the FOCAL trial, a phase 2 proof-of-concept clinical study of
ficlatuzumab in which VeriStrat was used to select clinical trial subjects.
Under the Biodesix Agreement, with the exception of the costs incurred for the FOCAL trial, we and Biodesix are each required
to contribute 50% of all clinical, regulatory, manufacturing and other costs to develop ficlatuzumab. Pursuant to the Biodesix
Agreement, Biodesix was obligated to fund all costs of the FOCAL trial up to a cap of $15 million, following which all costs of the
FOCAL trial would be shared equally. In connection with the discontinuation of the FOCAL trial, on October 14, 2016, we and
Biodesix amended the Biodesix Agreement. Under the amendment, we agreed to share 50% of all the program costs from August 1,
2016 forward. In return for bearing 50% of the FOCAL costs after August 1, 2016, we will be entitled to recover an agreed multiple of
the additional costs borne by us out of any income Biodesix receives from the partnership in connection with the licensing,
development or commercialization of ficlatuzumab. We do not anticipate that these remaining costs will be material. Following such
recovery, the payment structure under the original Biodesix Agreement, which generally provides that the parties share equally in any
costs and revenue, will resume without such modification.
Pending marketing approval or the sublicense of ficlatuzumab, and subject to the negotiation of a commercialization agreement,
each party would share equally in commercialization profits and losses, subject to our right to be the lead commercialization party.
Prior to the first commercial sale of ficlatuzumab, each party has the right to elect to discontinue participating in further
development or commercialization efforts with respect to ficlatuzumab, which is referred to as an “Opt-Out”. If either we or Biodesix
elects to Opt-Out, with such party referred to as the “Opting-Out Party,” then the Opting-Out Party shall not be responsible for any
future costs associated with developing and commercializing ficlatuzumab other than any ongoing clinical trials. If we elect to Opt-
Out, we will continue to make the existing supply of ficlatuzumab available to Biodesix for the purposes of enabling Biodesix to
complete the development of ficlatuzumab, and Biodesix will have the right to commercialize ficlatuzumab. After election of an Opt-
Out, the non-opting out party shall have sole decision-making authority with respect to further development and commercialization of
ficlatuzumab. Additionally, the Opting-Out Party shall be entitled to receive, if ficlatuzumab is successfully developed and
commercialized, a royalty equal to 10% of net sales of ficlatuzumab throughout the world, if any, subject to offsets under certain
circumstances.
Prior to any Opt-Out, the parties shall share equally in any payments received from a third party licensee; provided, however,
after any Opt-Out, the Opting-Out Party shall be entitled to receive only a reduced portion of such third-party payments.
The agreement will remain in effect until the expiration of all payment obligations between the parties related to development
and commercialization of ficlatuzumab, unless earlier terminated.
St. Vincent’s Hospital
In July 2012, we entered into a license agreement with St. Vincent’s, under which we obtained an exclusive, worldwide license
to research, develop, manufacture and commercialize products for therapeutic applications that benefit from inhibition or decreased
expression or activity of MIC-1, which is also known as GDF15. We believe GDF15 is a novel target for cachexia, and we are
exploiting this license in our AV-380 program for cachexia. Under the agreement, we have the right to grant sublicenses subject to
certain restrictions. We have a right of first negotiation to obtain an exclusive license to certain improvements that St. Vincent’s or
third parties may make to licensed therapeutic products. Under the license agreement, St. Vincent’s also granted us non-exclusive
rights for certain related diagnostic products and research tools.
In connection with entering into the original license agreement with St. Vincent’s in July 2012, we paid St. Vincent’s an upfront
license fee of $0.7 million and a low five-figure amount to reimburse St. Vincent’s for patent-related expenses it incurred with respect
to a specified licensed patent.
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In August 2015, in connection with the execution of our license agreement with Novartis, we entered into an amended and
restated agreement with St. Vincent’s, pursuant to which we made an upfront payment to St. Vincent’s of $1.5 million.
Under our license agreement with St. Vincent’s:
we (or any sublicensee) are obligated to use diligent efforts to conduct research and clinical development and
commercially launch at least one licensed therapeutic product, and to maximize profits from licensed therapeutic products
for the benefit of us and St. Vincent’s. Subject to certain conditions, we have also agreed to achieve specified research,
development and regulatory milestones by specified dates. If we (or a sublicensee) do not achieve a given milestone by
the agreed date, we have the option of paying the amount we would have been obligated to pay had we timely achieved
the milestone, and, if we do so, St. Vincent’s will not have the right to terminate the license agreement based on our
failure to timely achieve such milestone.
we have agreed that, for as long as there is a valid claim in the licensed patents, we will not, and we will ensure that our
affiliates and our sublicensees do not, develop or commercialize any product, other than a licensed therapeutic product, for
the treatment, prevention or prophylaxis of cachexia, decreased appetite or body weight, that binds to GDF15 or the
GDF15 receptor and that is a GDF15 antagonist, and will not license or induce any other person to do the same.
we (or any sublicensee) are required to make milestone payments, up to an aggregate total of $18.9 million, upon the
earlier of achievement of specified development and regulatory milestones or a specified date for the first indication, and
upon the achievement of specified development and regulatory milestones for the second and third indications, for
licensed therapeutic products, some of which payments may be increased by a mid to high double-digit percentage rate for
milestones payments made after we grant any sublicense under the license agreement, depending on the sublicensed
territory or territories;
we (or any sublicensee) will be required to pay tiered royalty payments equal to a low-single-digit percentage of any net
sales we or our sublicensees make from licensed therapeutic products, an obligation we share with Novartis equally. The
royalty rate escalates within the low-single-digit range during each calendar year based on increasing licensed therapeutic
product sales during such calendar year. Our royalty payment obligations for a licensed therapeutic product in a particular
country end on the later of 10 years after the date of first commercial sale of such licensed therapeutic product in such
country or expiration of the last-to-expire valid claim of the licensed patents covering such licensed therapeutic product in
such country, and are subject to offsets under certain circumstances; and
we (or any sublicensee) will be required to reimburse St. Vincent’s for some or all of the reasonable costs and expenses it
incurs in patent management, filing, prosecuting and maintaining the licensed patents.
The license agreement will remain in effect until the later of 10 years after the date of first commercial sale of licensed
therapeutic products in the last country in which a commercial sale is made, or expiration of the last-to-expire valid claim of the
licensed patents, unless we elect, or St. Vincent’s elects, to terminate the license agreement earlier.
St. Vincent’s has the right to terminate the agreement due to any patent-related challenge by us, our affiliates or any sublicensee,
or if we or our affiliates or any sublicensee cause or induce any other person to make a patent-related challenge, and such challenge
continues after a specified cure period.
We have the right to terminate the agreement on six months’ notice if we terminate our GDF15 research and development
programs as a result of the failure of a licensed therapeutic product in pre-clinical or clinical development, or if we form the
reasonable view that further GDF15 research and development is not commercially viable, and we are not then in breach of any of our
obligations under the agreement. If we form the reasonable view that further GDF15 research and development is not commercially
viable and terminate the agreement before we start a phase 1 clinical trial on a licensed therapeutic product, we will be required to pay
St. Vincent’s a low-to-mid six-figure termination payment.
Any termination of the agreement, in whole or in part, will result in a loss of our rights to the relevant licensed patents and
know-how. If St. Vincent’s terminates the agreement in its entirety due to our breach, insolvency or a patent-related challenge, or we
terminate the agreement due to a development failure or lack of commercial viability, as described above, St. Vincent’s will have a
non-exclusive license from us to certain intellectual property rights and know-how relating to the licensed therapeutic products, and
we must transfer to St. Vincent’s certain then-existing regulatory approvals and related documents for the licensed therapeutic
products.
Biogen Idec
In March 2009, we entered into an exclusive option and license agreement with Biogen Idec regarding the development and
commercialization of our discovery-stage ErbB3-targeted antibodies for the potential treatment and diagnosis of cancer and other
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diseases in humans outside of North America. In March 2014, we amended our agreement with Biogen Idec, and regained worldwide
rights to AV-203. Pursuant to the amendment, we were obligated to in good faith use reasonable efforts to seek a collaboration partner
to fund further development and commercialization of ErbB3-targeted antibodies. We satisfied this obligation in March 2016 upon
entering into our license agreement with CANbridge. We are obligated to pay Biogen Idec a percentage of milestone payments we
receive under the CANbridge agreement and single-digit royalty payments on net sales related to the sale of AV-203, up to cumulative
maximum amount of $50.0 million.
Kyowa Hakko Kirin
In December 2006, we entered into a license agreement with KHK under which we obtained an exclusive license, with the right
to grant sublicenses subject to certain restrictions, to research, develop, manufacture and commercialize tivozanib, pharmaceutical
compositions thereof and associated biomarkers. Our exclusive license covers all territories in the world except for Asia and the
Middle East, where KHK has retained the rights to tivozanib. Under the license agreement, we obtained exclusive rights in our
territory under certain KHK patents, patent applications and know-how related to tivozanib, to research, develop, make, have made,
use, import, offer for sale, and sell tivozanib for the diagnosis, prevention and treatment of any and all human diseases and conditions.
We and KHK each have access to and can benefit from the other party’s clinical data and regulatory filings with respect to tivozanib
and biomarkers identified in the conduct of activities under the license agreement.
Under the license agreement, we are obligated to use commercially reasonable efforts to develop and commercialize tivozanib in
our territory, including meeting certain specified diligence goals. Prior to the first anniversary of the first post-marketing approval sale
of tivozanib in our territory, neither we nor any of our subsidiaries has the right to conduct certain clinical trials of, seek marketing
approval for or commercialize any other cancer product that also works by inhibiting the activity of a VEGF receptor.
We have upfront, milestone and royalty payment obligations to KHK under our license agreement. Upon entering into the
license agreement with KHK, we made an upfront payment in the amount of $5.0 million. In March 2010, we made a milestone
payment to KHK in the amount of $10.0 million in connection with the dosing of the first patient in our first phase 3 clinical trial of
tivozanib (TIVO-1). In December 2012, we made a $12.0 million milestone payment to KHK in connection with the acceptance by
the FDA of our 2012 new drug application, or NDA, filing for tivozanib. Each milestone under the KHK agreement is a one-time only
payment obligation. Accordingly, we did not owe KHK another milestone payment in connection with the dosing of the first patient
in our TIVO-3 trial, and would not owe a milestone payment to KHK if we file an NDA with the FDA following the completion of
our TIVO-3 clinical trial. If we obtain approval for tivozanib in the U.S., we would owe KHK a one-time milestone payment of $18.0
million, provided that we do not sublicense U.S. rights for tivozanib prior to obtaining a U.S. regulatory approval. If we were to
sublicense the U.S. rights, the associated U.S. regulatory milestone would be replaced by a specified percentage of sublicensing
revenue, as set forth below.
If we sublicense any of our rights to tivozanib to a third party, as we have done with EUSA pursuant to our license agreement,
the sublicense defines the payment obligations of the sublicensee, which may vary from the milestone and royalty payment obligations
under our KHK license relating to rights we retain. We are required to pay KHK a fixed 30% of amounts we receive from our
sublicensees, including upfront license fees, milestone payments and royalties, but excluding amounts we receive in respect of
research and development funding or equity investments, subject to certain limitations. In accordance with the sublicensing
provisions of our KHK agreement, in 2011 we made a $22.5 million payment to KHK related to the upfront license payment received
under a collaboration and license agreement we entered into with Astellas Pharmaceuticals, Inc., the termination of which became
effective on August 11, 2014. If tivozanib is approved in the European Union, or EU, the $4.0 million research and development
reimbursement milestone that would be owed to us by EUSA would not be subject to a sublicense revenue payment to KHK, nor
would a research and development reimbursement payment upon an election by EUSA to use the data generated from our TIVO-3 or
TiNivo trials for regulatory or commercial purposes, which could be up to $20.0 million for the TIVO-3 data and up to $2.0 million
TiNivo data. We would, however, owe KHK 30% of other, non-research and development payments we may receive from EUSA
pursuant to our license agreement, including EU reimbursement approval milestones in up to five specified EU countries, EU
marketing approvals for up to three additional indications beyond RCC, marketing approvals in up to three specified licensed
territories outside of the EU, sales-based milestones and royalties, as set forth above.
We are also required to pay tiered royalty payments on net sales we make of tivozanib in our territory, which range from the low
to mid-teens as a percentage of net sales. The royalty rate escalates within this range based on increasing tivozanib sales. Our royalty
payment obligations in a particular country in our territory begin on the date of the first commercial sale of tivozanib in that country,
and end on the later of 12 years after the date of first commercial sale of tivozanib in that country or the date of the last to expire of the
patents covering tivozanib that have been issued in that country.
The license agreement will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to KHK,
determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail
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to meet our obligations under the agreement and are unable to cure such failure within specified time periods, KHK can terminate the
agreement, resulting in a loss of our rights to tivozanib and an obligation to assign or license to KHK any intellectual property or other
rights we may have in tivozanib, including our regulatory filings, regulatory approvals, patents and trademarks for tivozanib.
Intellectual Property Rights
Patent Rights
We continue to build a strong intellectual property portfolio, and, whenever possible, we seek to have multiple tiers of patent
protection for our product candidates.
Tivozanib
With respect to tivozanib, we have exclusively licensed from KHK its patents that cover the molecule and its therapeutic use, a
key step in manufacturing the molecule, and a crystal form of the molecule.
With respect to tivozanib, we have the following in-licensed patents:
U.S.: 3 granted patents with expirations ranging from 2018 to 2023
Europe: 3 granted patents with expirations ranging from 2018 to 2023
Canada: 1 granted patent expiring in 2022
Australia: 1 granted patent expiring in 2022
The U.S. patent covering the tivozanib molecule and its therapeutic use is expected to expire in 2022. However, in view of the
length of time that tivozanib has been under regulatory review at the FDA, a patent term extension of up to five years may be available
under The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, which, if a five year
extension were to be granted, would extend the term of this patent to 2027.
KHK has recently filed a patent application with the Japan Patent Office (Filing Date: September 13, 2016) related to a new
invention corresponding to a formulation for tivozanib with ophthalmologic applications. Pursuant to the KHK license agreement, we
have exclusive, sub-licensable rights to this new invention and the corresponding know-how outside of Asia and the Middle East.
In addition, we also own two issued U.S. patents that cover different biomarker tests for identifying human patients likely to
respond to treatment with tivozanib, and one pending international patent application relating to the use of Neuropilin-1 as a serum-
based biomarker for identifying patients, including patients with colorectal cancer, likely to respond to treatment with tivozanib.
With respect to tivozanib related technologies, we have:
U.S.: 2 granted patents expiring in 2029
International (PCT): 1 pending patent application, which if nationalized and granted, will expire in 2036
Ficlatuzumab
With respect to our anti-HGF platform, including ficlatuzumab, we have seven U.S. patents covering our anti-HGF antibodies,
nucleic acids and expression vectors encoding the antibodies, host cells, methods of making the antibodies, and methods of treatment
using the antibodies. With respect to our anti-HGF platform we have:
U.S.: 7 granted patents with expirations ranging from 2027 to 2028
Europe: 1 granted patent expiring in 2027
Japan: 3 granted patents expiring in 2027
Canada: 1 granted patent expiring in 2027
Australia: 1 granted patent expiring in 2027
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AV-203
With respect to our anti-ErbB3 platform, including AV-203, we have two U.S. patents covering our anti-ErbB3 antibodies,
nucleic acids and expression vectors encoding the antibodies, host cells, and methods of making the antibodies; an allowed U.S. patent
application directed to methods of treatment using our anti-ErbB3 antibodies; and a pending U.S. patent application directed to a
method of predicting tumor response to our AV-203 antibody. With respect to our anti-ErbB3 platform we have:
U.S.: 2 granted patents, and 2 pending patent applications, if granted, with expirations ranging from 2031 to 2032
Europe: 1 granted patent, and 1 pending patent application, if granted, with expirations ranging from 2031 to 2032
Japan: 1 granted patent, and 1 pending patent application, if granted, with expirations ranging from 2031 to 2032
Canada: 2 pending patent applications, if granted, with expirations ranging from 2031 to 2032
Australia: 2 pending patent applications, if granted, with expirations ranging from 2031 to 2032
Anti-GDF15 Antibodies
With respect to our anti-GDF15 platform, we have exclusively licensed certain patent rights from St. Vincent’s, which include a
granted U.S. patent directed to a method of increasing appetite and/or body weight upon administering an effective amount of an anti-
GDF15 antibody (patent expiration 2029).
With respect to the licensed patent rights, we have:
U.S.: 1 granted patent, and 1 pending patent application, if granted, with expirations ranging from 2025 to 2029
Europe: 1 granted patent expiring in 2025
Japan: 2 granted patents expiring in 2025
Canada: 1 pending patent application, if granted, expiring in 2025
Australia: 1 granted patent expiring in 2025
In addition, we also own an issued U.S. patent covering our GDF15 antibodies and a pending U.S. patent application directed to
methods of treating cachexia and inhibiting loss of muscle mass associated with cachexia using our GDF15 antibodies. This patent
and patent application, if granted, would be expected to expire in 2033. We also have two pending U.S. patent applications directed to
methods of treating or preventing congestive heart failure or chronic kidney disease using GDF15 antibodies. These patent
applications, if granted, would be expected to expire in 2035.
With respect to our GDF15 platform, we have:
U.S.: 1 granted patent, and 3 pending patent applications, if granted, with expirations ranging from 2033 to 2035
Europe: 3 pending patent applications with expirations, if granted, ranging from 2033 to 2035
Japan: 3 pending patent applications with expirations, if granted, ranging from 2033 to 2035
Canada: 2 pending patent applications with expirations, if granted, ranging from 2033 to 2035
Australia: 2 pending patent applications with expirations, if granted, ranging from 2033 to 2035
AV-353 Platform
With respect to our AV-353 platform, we own a non-provisional U.S. patent application and two provisional U.S. patent
applications covering our anti-Notch3 antibodies, nucleic acids and expression vectors encoding the antibodies, host cells, methods of
making the antibodies, and methods of treatment using the antibodies. The non-provisional U.S. patent application, if granted, would
be expected to expire in 2033, whereas the two provisional U.S. applications, if converted into a non-provisional patent application
and granted, would be expected to expire in 2037.
With respect to our AV-353 platform, we have:
U.S.: 3 pending patent applications with expirations, if granted, ranging from 2033 to 2037
Europe: 1 pending patent application expiring, if granted, in 2033
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The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most
countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application. In the
United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays
by the U.S. Patent and Trademark Office in granting a patent. A U.S. patent term may be shortened, if a patent is terminally
disclaimed by its owner, over another patent.
The patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits
patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price
Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years
beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory
review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval,
and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and other foreign
jurisdictions to extend the term of a patent that covers an approved drug. In the future, if our pharmaceutical products receive FDA
approval, we expect to apply for patent term extensions on patents covering those products.
Many pharmaceutical companies, biotechnology companies, and academic institutions are competing with us in the field of
oncology and filing patent applications potentially relevant to our business. With regard to tivozanib, we are aware of a third party
United States patent, and corresponding foreign counterparts, that contain broad claims related to the use of an organic compound that,
among other things, inhibits tyrosine phosphorylation of a VEGF receptor caused by VEGF binding to such VEGF receptor. We are
also aware of a third party United States patent that contains broad claims related to the use of a tyrosine kinase inhibitor in
combination with a DNA damaging agent such as chemotherapy or radiation, and we have received written notice from the patent
owners indicating that they believe we may need a license from them in order to avoid infringing their patent rights. With regard to
ficlatuzumab, we are aware of two separate families of United States patents, United States patent applications, and foreign
counterparts, with each of the two families being owned by a different third party, that contain broad claims related to anti-HGF
antibodies having certain binding properties and their use. With regard to AV-203, we are aware of a third party United States patent
that contains broad claims relating to anti-ErbB3 antibodies. In the event that an owner of one or more of these patents were to bring
an infringement action against us, we may have to argue that our product, its manufacture or use does not infringe a valid claim of the
patent in question. Furthermore, if we were to challenge the validity of any issued United States patent in court, we would need to
overcome a statutory presumption of validity that attaches to every United States patent. This means that in order to prevail, we would
have to present clear and convincing evidence as to the invalidity of the patent’s claims. There is no assurance that a court would find
in our favor on questions of infringement or validity.
Over the years, we have found it necessary or prudent to obtain licenses from third party intellectual property holders. Where
licenses are readily available at reasonable cost, such licenses are considered a normal cost of doing business. In other instances,
however, we may have used the results of freedom-to-operate studies to guide our research away from areas where we believed we
were likely to encounter obstacles in the form of third party intellectual property. For example, where a third party holds relevant
intellectual property and is a direct competitor, a license might not be available on commercially reasonable terms or available at all.
In spite of our efforts to avoid obstacles and disruptions arising from third party intellectual property, it is impossible to
establish with certainty that our technology platform or our product programs will be free of claims by third party intellectual property
holders. Even with modern databases and on-line search engines, literature searches are imperfect and may fail to identify relevant
patents and published applications. Even when a third party patent is identified, we may conclude upon a thorough analysis, that we do
not infringe the patent or that the patent is invalid. If the third party patent owner disagrees with our conclusion and we continue with
the business activity in question, patent litigation may be initiated against us. Alternatively, we might decide to initiate litigation in an
attempt to have a court declare the third party patent invalid or non-infringed by our activity. In either scenario, patent litigation
typically is costly and time-consuming, and the outcome is uncertain. The outcome of patent litigation is subject to uncertainties that
cannot be quantified in advance, for example, the credibility of expert witnesses who may disagree on technical interpretation of
scientific data. Ultimately, in the case of an adverse outcome in litigation, we could be prevented from commercializing a product or
using certain aspects of our technology platform as a result of patent infringement claims asserted against us. This could have a
material adverse effect on our business.
To protect our competitive position, it may be necessary to enforce our patent rights through litigation against infringing third
parties. Litigation to enforce our own patent rights is subject to the same uncertainties discussed above. In addition, however, litigation
involving our patents carries the risk that one or more of our patents will be held invalid (in whole or in part, on a claim-by-claim
basis) or held unenforceable. Such an adverse court ruling could allow third parties to commercialize our products or our platform
technology, and then compete directly with us, without making any payments to us.
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Trademarks
We seek trademark protection in the U.S. and other jurisdictions where available and when appropriate. We have filed
applications and obtained registrations for several trademarks intended for potential use in the marketing of Tivozanib, including the
trademark FOTIVDA, which we have registered in the United States and 16 other jurisdictions, and for which we have filed
applications in additional countries. We own U.S. and European Union registrations for a stylized FOTIVDA trademark. We own a
U.S. registration for HUMAN RESPONSE PLATFORM, a trademark that we use in connection with our research and development.
We own U.S. registrations for AVEO, AVEO (in stylized letters), THE HUMAN RESPONSE and AVEO ONCOLOGY THE
HUMAN RESPONSE (in stylized letters), trademarks that we use in connection with our business in general. We have also registered
AVEO as a trademark in over 20 other jurisdictions.
Manufacturing
We or our partners currently contract with third parties, to the extent we require, for the manufacture of our product candidates
and intend to do so in the future for both clinical and potential commercial needs. We do not own or operate manufacturing facilities
for the production of clinical or commercial quantities of our product candidates. We currently have no plans to build our own clinical
or commercial scale manufacturing capabilities. Although we rely on contract manufacturers, we have personnel with extensive
manufacturing experience to oversee the relationships with our contract manufacturers.
One of our contract manufacturers has manufactured what we believe to be sufficient quantities of tivozanib drug substance to
support our ongoing and planned clinical trials. In addition, we currently engage a separate contract manufacturer to manufacture,
package, label and distribute clinical supplies of tivozanib on an as–needed basis.
To date, our third-party manufacturers have met our manufacturing requirements. We believe that there are alternate sources of
supply that can satisfy our current clinical or potential future commercial requirements, although we cannot be certain that identifying
and establishing relationships with such sources, if necessary, would not result in significant delay or material additional costs.
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions,
including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, quality
control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval
monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the
United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations
and other regulatory authorities, require the expenditure of substantial time and financial resources.
Review and Approval of Drugs and Biologics in the United States
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and related
regulations. Drugs are also subject to other federal, state and local statutes and regulations. Biological products are subject to
regulation by the FDA under the Public Health Service Act, or PHSA, FDCA and related regulations, and other federal, state and local
statutes and regulations. An applicant seeking approval to market and distribute a new drug or biological product in the United States
must typically undertake the following:
completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good
laboratory practice, or GLP, regulations;
submission to the FDA of an investigational new drug application, or IND, which must take effect before human clinical
trials may begin;
approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial
may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to
establish the safety and efficacy of the proposed drug product for each indication;
preparation and submission to the FDA of an NDA, for a drug candidate product and a biological licensing application, or
BLA, for a biological product requesting marketing for one or more proposed indications;
review by an FDA advisory committee, where appropriate or if applicable;
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satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or
components thereof, are produced to assess compliance with current Good Manufacturing Practices, or cGMP,
requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity,
strength, quality and purity;
satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the
clinical data;
payment of user fees and securing FDA approval of the NDA or BLA; and
compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and
Mitigation Strategy, or REMS, and the potential requirement to conduct post-approval studies.
Preclinical Studies
Before an applicant begins testing a compound with potential therapeutic value in humans, the product candidate enters the
preclinical testing stage. Preclinical studies include laboratory evaluation of the purity and stability of the manufactured substance or
active pharmaceutical ingredient and the formulated product, as well as in vitro and animal studies to assess the safety and activity of
the product candidate for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is
subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with
manufacturing information, analytical data, any available clinical data or literature and plans for clinical studies, among other things,
are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events
and carcinogenicity, and long term toxicity studies, may continue after the IND is submitted.
The IND and IRB Processes
An IND is an exemption from the FDCA that allows an unapproved product candidate to be shipped in interstate commerce for
use in an investigational clinical trial and a request for FDA authorization to administer an investigational drug to humans. Such
authorization must be secured prior to interstate shipment and administration of any new drug or biologic that is not the subject of an
approved NDA or BLA. In support of a request for an IND, applicants must submit a protocol for each clinical trial and any
subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of the preclinical tests,
together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among
other things, are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND
before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND to determine whether human
research subjects will be exposed to unreasonable health risks. At any time during this 30-day period, or thereafter, the FDA may
raise concerns or questions about the conduct of the trials as outlined in the IND and impose a clinical hold or partial clinical hold. In
this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin.
In addition to the foregoing IND requirements, an IRB representing each institution participating in the clinical trial must review
and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and
reapprove the trial at least annually. The IRB must review and approve, among other things, the trial protocol and informed consent
information to be provided to trial subjects. An IRB must operate in compliance with FDA regulations. Information about certain
clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on its
ClinicalTrials.gov website. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents,
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.
The FDA’s primary objectives in reviewing an IND are to assure the safety and rights of patients and to help assure that the
quality of the investigation will be adequate to permit an evaluation of the drug’s effectiveness and safety and of the biological
product’s safety, purity and potency. The decision to terminate development of an investigational drug or biological product may be
made by either a health authority body such as the FDA, an IRB or ethics committee, or by us for various reasons. Additionally, some
trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring
board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based
on access that only the group maintains to available data from the trial. Suspension or termination of development during any phase of
clinical trials can occur if it is determined that the participants or patients are being exposed to an unacceptable health risk. Other
reasons for suspension or termination may be made by us based on evolving business objectives and/or competitive climate.
Human Clinical Studies in Support of an NDA or BLA
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified
investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects
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provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written trial
protocols detailing, among other things, the inclusion and exclusion criteria, the objectives of the trial, the parameters to be used in
monitoring safety and the effectiveness criteria to be evaluated.
The clinical investigation of an investigational drug or biological product is generally divided into four phases. Although the
phases are usually conducted sequentially, they may overlap or be combined. The four phases of an investigation are as follows:
Phase 1. Phase 1 studies include the initial introduction of an investigational new drug or biological product into humans.
These studies are designed to evaluate the safety, dosage tolerance, metabolism and pharmacologic actions of the
investigational drug or biological product in humans, the side effects associated with increasing doses, and if possible, to
gain early evidence on effectiveness. During phase 1 clinical trials, sufficient information about the investigational drug’s
or biological product’s pharmacokinetics and pharmacological effects may be obtained to permit the design of well-
controlled and scientifically valid phase 2 clinical trials.
Phase 2. Phase 2 includes the controlled clinical trials conducted to preliminarily or further evaluate the effectiveness of
the investigational drug or biological product for a particular indication(s) in patients with the disease or condition under
trial, to determine dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks
associated with the drug or biological product. Phase 2 clinical trials are typically well-controlled, closely monitored, and
conducted in a limited patient population.
Phase 3. Phase 3 clinical trials are generally controlled clinical trials conducted in an expanded patient population
generally at geographically dispersed clinical trial sites. They are performed after preliminary evidence suggesting
effectiveness of the drug or biological product has been obtained, and are intended to further evaluate dosage, clinical
effectiveness and safety, to establish the overall benefit-risk relationship of the investigational drug or biological product,
and to provide an adequate basis for product approval.
Phase 4. Post-approval studies may be conducted after initial marketing approval. These studies are used to gain
additional experience from the treatment of patients in the intended therapeutic indication.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if
serious adverse events occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and
unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in
humans exposed to the drug; and any clinically important increase in the case of a serious suspected adverse reaction over that listed in
the protocol or investigator brochure. The FDA or the sponsor or the data monitoring committee may suspend or terminate a clinical
trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk.
The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data
submitted.
Review of an NDA or BLA by the FDA
In order to obtain approval to market a drug or biological product in the United States, a marketing application must be
submitted to the FDA that provides data establishing the safety and effectiveness of the proposed drug product for the proposed
indication, and the safety, purity and potency of the biological product for its intended indication. The application includes all relevant
data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as positive findings,
together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other
things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or
from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted
must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational drug product and the safety,
purity and potency of the biological product to the satisfaction of the FDA.
The NDA and BLA are thus the vehicles through which applicants formally propose that the FDA approve a new product for
marketing and sale in the United States for one or more indications. Every new product candidate must be the subject of an approved
NDA or BLA before it may be commercialized in the United States. Under federal law, the submission of most NDAs and BLAs is
subject to an application user fee, which for federal fiscal year 2017 is $2,038,100. The sponsor of an approved NDA or BLA is also
subject to annual product and establishment user fees, which for fiscal year 2017 are $97,750 per product and $512,200 per
establishment. Certain exceptions and waivers are available for some of these fees, such as an exception from the application fee for
drugs with orphan designation and a waiver for certain small businesses, an exception from the establishment fee when the
establishment does not engage in manufacturing the drug during a particular fiscal year, and an exception from the product fee for a
drug that is the same as another drug approved under an abbreviated pathway.
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Following submission of an NDA or BLA, the FDA conducts a preliminary review of the application generally within
60 calendar days of its receipt and strives to inform the sponsor by the 74th day after the FDA’s receipt of the submission to determine
whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather
than accept the application for filing. In this event, the application must be resubmitted with the additional information. The
resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the
FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review process of NDAs and
BLAs. Under that agreement, 90% of applications seeking approval of New Molecular Entities, or NMEs, are meant to be reviewed
within ten months from the date on which FDA accepts the NDA for filing, and 90% of applications for NMEs that have been
designated for “priority review” are meant to be reviewed within six months of the filing date. For applications seeking approval of
products that are not NMEs, the ten-month and six-month review periods run from the date that FDA receives the application. The
review process and the Prescription Drug User Fee Act goal date may be extended by the FDA for three additional months to consider
new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the
original submission.
Before approving an application, the FDA typically will inspect the facility or facilities where the product is or will be
manufactured. These pre-approval inspections may cover all facilities associated with an NDA or BLA submission, including drug
component manufacturing (e.g., active pharmaceutical ingredients), finished drug product manufacturing, and control testing
laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in
compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.
Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with
GCP. In addition, as a condition of approval, the FDA may require an applicant to develop a REMS. REMS use risk minimization
strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine
whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease,
expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the
product is a new molecular entity.
The FDA may refer an application for a novel product to an advisory committee or explain why such referral was not made.
Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews,
evaluates and provides 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 carefully when making
decisions.
The FDA’s Decision on an NDA or BLA
On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the inspection of
the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes
commercial marketing of the product with specific prescribing information for specific indications. A complete response letter
generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA
to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the
NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months
depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide
that the application does not satisfy the regulatory criteria for approval.
If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications,
warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be
conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after
commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including
REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further
marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to
the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further
testing requirements and FDA review and approval.
Fast Track, Breakthrough Therapy, Priority Review and Regenerative Advanced Therapy Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need
in the treatment of a serious or life-threatening disease or condition. These programs are referred to as fast track designation,
breakthrough therapy designation, priority review designation and regenerative advanced therapy designation.
Specifically, the FDA may designate a product for Fast Track review if it is intended, whether alone or in combination with one
or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to
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address unmet medical needs for such a disease or condition. For Fast Track products, sponsors may have greater interactions with the
FDA and the FDA may initiate review of sections of a Fast Track product’s application before the application is complete. This rolling
review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a Fast
Track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the
remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a Fast
Track application does not begin until the last section of the application is submitted. In addition, the Fast Track designation may be
withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Second, a product may be designated as a Breakthrough Therapy if it is intended, either alone or in combination with one or
more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the
product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to Breakthrough
Therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product
sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project
lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved,
would provide a significant improvement in safety or effectiveness. The FDA determines, on a case- by-case basis, whether the
proposed product represents a significant improvement when compared with other available therapies. Significant improvement may
be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a
treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious
outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall
attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing
application from ten months to six months.
Finally, with passage of the 21st Century Cures Act, or the Cures Act, in December 2016, Congress authorized the FDA to
accelerate review and approval of products designated as regenerative advanced therapies. A product is eligible for this designation if
it is a regenerative medicine therapy that is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition
and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or
condition. The benefits of a regenerative advanced therapy designation include early interactions with FDA to expedite development
and review, benefits available to breakthrough therapies, potential eligibility for priority review and accelerated approval based on
surrogate or intermediate endpoints.
Post-Approval Regulation
Drugs and biologics manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation
by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and
distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the
approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also
are continuing, annual user fee requirements for any marketed products and the establishments at which such products are
manufactured, as well as new application fees for supplemental applications with clinical data.
In addition, manufacturers and other entities involved in the manufacture and distribution of approved products are required to
register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and
these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often
require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations
from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the
sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and
quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is
not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a
product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with
regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market
studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other
potential consequences include, among other things:
restrictions on the marketing or manufacturing of the product, suspension of the approval, or complete withdrawal of the
product from the market or product recalls;
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fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product
license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Products
may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other
agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have
improperly promoted off-label uses may be subject to significant liability.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or
PDMA, and its implementing regulations, as well as the Drug Supply Chain Security Act, or DSCA, which regulate the distribution
and tracing of prescription drugs and prescription drug samples at the federal level, and set minimum standards for the regulation of
drug distributors by the states. The PDMA, its implementing regulations and state laws limit the distribution of prescription
pharmaceutical product samples, and the DSCA imposes requirements to ensure accountability in distribution and to identify and
remove counterfeit and other illegitimate products from the market.
Generic Drugs
In 1984, with passage of the Hatch-Waxman Act, Congress established an abbreviated regulatory scheme authorizing the FDA
to approve generic drugs that are shown to contain the same active ingredients as, and to be bioequivalent to, drugs previously
approved by the FDA pursuant to NDAs. To obtain approval of a generic drug, an applicant must submit an abbreviated new drug
application, or ANDA, to the agency. An ANDA is a comprehensive submission that contains, among other things, data and
information pertaining to the active pharmaceutical ingredient, bioequivalence, drug product formulation, specifications and stability
of the generic drug, as well as analytical methods, manufacturing process validation data and quality control procedures. ANDAs are
“abbreviated” because they generally do not include preclinical and clinical data to demonstrate safety and effectiveness. Instead, in
support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug
product previously approved under an NDA, known as the reference-listed drug, or RLD.
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with
respect to the active ingredients, the route of administration, the dosage form, the strength of the drug and the conditions of use of the
drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the
statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant difference
from the rate and extent of absorption of the listed drug...” Upon approval of an ANDA, the FDA indicates whether the generic
product is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products with Therapeutic Equivalence
Evaluations,” also referred to as the “Orange Book.” Physicians and pharmacists consider a therapeutic equivalent generic drug to be
fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s
designation of therapeutic equivalence often results in substitution of the generic drug without the knowledge or consent of either the
prescribing physician or patient.
Under the Hatch-Waxman Act, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for
the RLD has expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drug containing a new
chemical entity. For the purposes of this provision, a new chemical entity, or NCE, is a drug that contains no active moiety that has
previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion responsible for the physiological or
pharmacological action of the drug substance. In cases where such NCE exclusivity has been granted, an ANDA may not be filed
with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case
the applicant may submit its application four years following the original product approval. The FDCA also provides for a period of
three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or
bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application.
Biosimilars
The 2010 Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, included a subtitle called
the Biologics Price Competition and Innovation Act of 2009 or BPCIA. That Act established a regulatory scheme authorizing the FDA
to approve biosimilars and interchangeable biosimilars. To date, four biosimilar products have been approved by FDA for use in the
United States. No interchangeable biosimilars, however, have been approved. The FDA has issued several guidance documents
outlining an approach to review and approval of biosimilars. Additional guidance is expected to be finalized by FDA in the near term.
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Under the Act, a manufacturer may submit an application for licensure of a biologic product that is “biosimilar to” or
“interchangeable with” a previously approved biological product or “reference product.” In order for the FDA to approve a biosimilar
product, it must find that there are no clinically meaningful differences between the reference product and proposed biosimilar product
in terms of safety, purity, and potency. For the FDA to approve a biosimilar product as interchangeable with a reference product, the
agency must find that the biosimilar product can be expected to produce the same clinical results as the reference product, and (for
products administered multiple times) that the biologic and the reference biologic may be switched after one has been previously
administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date
of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the
reference product was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company
could market a competing version of that product if the FDA approves a full BLA for such product containing the sponsor’s own
preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their
product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it
is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are
governed by state pharmacy law.
Orphan Drug Designation and Exclusivity
Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease
or condition, generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is
no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the
disease or condition will be recovered from sales of the product. A company must request orphan drug designation before submitting
an NDA or BLA for the candidate product. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its
potential use. Orphan drug designation does not shorten the Prescription Drug User Fee Act, or PDUFA, goal dates for the regulatory
review and approval process, although it does convey certain advantages such as tax benefits and exemption from the PDUFA
application fee.
If a product with orphan designation receives the first FDA approval for the disease or condition for which it has such
designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will
receive orphan drug exclusivity. Orphan drug exclusivity means that the FDA may not approve another sponsor’s marketing
application for the same drug for the same indication for seven years, except in certain limited circumstances. Orphan exclusivity
does not block the approval of a different product for the same rare disease or condition, nor does it block the approval of the same
product for different indications. If a drug or biologic designated as an orphan drug ultimately receives marketing approval for an
indication broader than what was designated in its orphan drug application, it may not be entitled to exclusivity. Orphan exclusivity
will not bar approval of another product under certain circumstances, including if a subsequent product with the same drug or biologic
for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or
providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand.
Pediatric Exclusivity
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the
attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-
patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA or BLA sponsor submits pediatric data that
fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the
pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is
granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever
statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent
term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application.
FDA Approval and Regulation of Companion Diagnostics
If safe and effective use of a therapeutic depends on an in vitro diagnostic, then the FDA generally will require approval or
clearance of that diagnostic, known as a companion diagnostic, at the same time that the FDA approves the therapeutic product. In
August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeutic products and in
vitro companion diagnostics. According to the guidance, if FDA determines that a companion diagnostic device is essential to the safe
and effective use of a novel therapeutic product or indication, FDA generally will not approve the therapeutic product or new
therapeutic product indication if the companion diagnostic device is not approved or cleared for that indication. Approval or clearance
of the companion diagnostic device will ensure that the device has been adequately evaluated and has adequate performance
characteristics in the intended population. The review of in vitro companion diagnostics in conjunction with the review of our
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therapeutic treatments for cancer will, therefore, likely involve coordination of review by the FDA’s Center for Drug Evaluation and
Research and the FDA’s Center for Devices and Radiological Health Office of In Vitro Diagnostics Device Evaluation and Safety.
Under the FDCA, in vitro diagnostics, including companion diagnostics, are regulated as medical devices. In the United States,
the FDCA and its implementing regulations, and other federal and state statutes and regulations govern, among other things, medical
device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing,
manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post-market surveillance.
Unless an exemption applies, diagnostic tests require marketing clearance or approval from the FDA prior to commercial distribution.
The two primary types of FDA marketing authorization applicable to a medical device are premarket notification, also called 510(k)
clearance, and premarket approval, or PMA approval.
The 21st Century Cures Act
On December 13, 2016, President Obama signed the Cures Act into law. The Cures Act is designed to modernize and
personalize healthcare, spur innovation and research, and streamline the discovery and development of new therapies through
increased federal funding of particular programs. It authorizes increased funding for the FDA to spend on innovation projects. The
new law also amends the Public Health Service Act to reauthorize and expand funding for the National Institutes of Health. The Act
establishes the NIH Innovation Fund to pay for the cost of development and implementation of a strategic plan, early stage
investigators and research. It also charges NIH with leading and coordinating expanded pediatric research. Further, the Cures Act
directs the Centers for Disease Control and Prevention to expand surveillance of neurological diseases.
With amendments to the FDCA and the Public Health Service Act, or PHSA, Title III of the Cures Act seeks to accelerate the
discovery, development, and delivery of new medicines and medical technologies. To that end, and among other provisions, the Cures
Act reauthorizes the existing priority review voucher program for certain drugs intended to treat rare pediatric diseases until 2020;
creates a new priority review voucher program for drug applications determined to be material national security threat medical
countermeasure applications; revises the FDCA to streamline review of combination product applications; requires FDA to evaluate
the potential use of “real world evidence” to help support approval of new indications for approved drugs; provides a new “limited
population” approval pathway for antibiotic and antifungal drugs intended to treat serious or life-threatening infections; and authorizes
FDA to designate a drug as a “regenerative advanced therapy,” thereby making it eligible for certain expedited review and approval
designations.
Review and Approval of Drug Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory
requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical
trials, marketing authorization, commercial sales and distribution of drug products. Whether or not it obtains FDA approval for a
product, the company would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can
commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies
between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time
required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA
approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in
obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Clinical Trial Approval in the EU
Pursuant to the currently applicable Clinical Trials Directive 2001/20/EC and the Directive 2005/28/EC on Good Clinical
Practice, or GCP, an applicant must obtain approval from the competent national authority of the EU Member State in which the
clinical trial is to be conducted. If the clinical trial is conducted in different EU Member States, the competent authorities in each of
these EU Member States must provide their approval for the conduct of the clinical trial. Furthermore, the applicant may only start a
clinical trial at a specific trial site after the competent ethics committee has issued a favorable opinion.
In April 2014, the EU adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set to replace the current Clinical
Trials Directive 2001/20/EC. The new Clinical Trials Regulation will be directly applicable to and binding in all 28 EU Member
States without the need for any national implementing legislation. The new Clinical Trials Regulation (EU) No 536/2014 was
designed to only become applicable no earlier than 28 May 2016. It will overhaul the current system of approvals for clinical trials in
the EU. Specifically, the new legislation aims at simplifying and streamlining the approval of clinical trials in the EU. Under the new
coordinated procedure for the approval of clinical trials, the sponsor of a clinical trial will be required to submit a single application
for approval of a clinical trial to a reporting EU Member State (RMS) through an EU Portal. The submission procedure will be the
same irrespective of whether the clinical trial is to be conducted in a single EU Member State or in more than one EU Member State.
The Clinical Trials Regulation also aims to streamline and simplify the rules on safety reporting for clinical trials.
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Marketing Authorization
In the EU, marketing authorizations for medicinal products may be obtained through several different procedures founded on the
same basic regulatory process.
The centralized procedure provides for the grant of a single marketing authorization that is valid for all EU Member States. The
centralized procedure is compulsory for medicinal products produced by certain biotechnological processes, products designated as
orphan medicinal products, and products with a new active substance indicated for the treatment of certain diseases. It is optional for
those products that are highly innovative or for which a centralized process is in the interest of patients. Under the centralized
procedure in the EU, the maximum timeframe for the evaluation of a MAA is 210 days, excluding clock stops, when additional
written or oral information is to be provided by the applicant in response to questions asked by the CHMP. Accelerated evaluation
may be granted by the CHMP in exceptional cases. These are defined as circumstances in which a medicinal product is expected to be
of a “major public health interest.” Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease,
such as severely disabling or life-threatening diseases, to be treated; the absence or insufficiency of an appropriate alternative
therapeutic approach; and anticipation of high therapeutic benefit. In these circumstances, the EMA ensures that the opinion of the
CHMP is given within 150 days.
Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of a marketing authorization
application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in
response to questions asked by the CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases, when a
medicinal product is expected to be of a major public health interest, defined by three cumulative criteria: the seriousness of the
disease (e.g. heavy disabling or life-threatening diseases) to be treated; the absence or insufficiency of an appropriate alternative
therapeutic approach; and anticipation of high therapeutic benefit. In this circumstance, EMA ensures that the opinion of the CHMP is
given within 150 days.
The decentralized procedure provides for approval by one or more other concerned EU Member States of an assessment of an
application for marketing authorization conducted by one EU Member State, known as the reference EU Member State. In
accordance with this procedure, an applicant submits an application for marketing authorization to the reference EU Member State and
the concerned EU Member States. This application is identical to the application that would be submitted to the EMA for
authorization through the centralized procedure. The reference EU Member State prepares a draft assessment and drafts of the related
materials within 120 days after receipt of a valid application. The resulting assessment report is submitted to the concerned EU
Member States which, within 90 days of receipt, must decide whether to approve the assessment report and related materials. If a
concerned EU Member State cannot approve the assessment report and related materials due to concerns relating to a potential serious
risk to public health, disputed elements may be referred to the European Commission, whose decision is binding on all EU Member
States. In accordance with the mutual recognition procedure, the sponsor applies for national marketing authorization in one EU
Member State. Upon receipt of this authorization the sponsor can then seek the recognition of this authorization by other EU Member
States. Authorization in accordance with either of these procedures will result in authorization of the medicinal product only in the
reference EU Member State and in the other concerned EU Member States.
A marketing authorization may be granted only to an applicant established in the EU. Regulation No. 1901/2006 provides that,
prior to obtaining a marketing authorization in the EU, an applicant must demonstrate compliance with all measures included in a
Pediatric Investigation Plan, or PIP, approved by the Pediatric Committee of the EMA, covering all subsets of the pediatric
population, unless the EMA has granted a product-specific waiver, class waiver, or a deferral for one or more of the measures included
in the PIP.
Orphan Drug Designation and Exclusivity in the EU
Regulation (EC) No 141/2000 and Regulation (EC) No. 847/2000 provide that a product can be designated as an orphan
medicinal product by the European Commission if its sponsor can establish that the product is intended for the diagnosis, prevention
or treatment of: (1) a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the
EU when the application is made, or (2) a life-threatening, seriously debilitating or serious and chronic condition in the EU and that
without incentives the medicinal product is unlikely to be developed. For either of these conditions, the applicant must demonstrate
that there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in
the EU or, if such method exists, the medicinal product will be of significant benefit to those affected by that condition.
Once authorized, orphan medicinal products are entitled to ten years of market exclusivity in all EU Member States and, in
addition, a range of other benefits during the development and regulatory review process, including scientific assistance for trial
protocols, authorization through the centralized marketing authorization procedure covering all member countries and a reduction or
elimination of registration and marketing authorization fees. However, marketing authorization may be granted to a similar medicinal
product with the same orphan indication during the ten year period with the consent of the marketing authorization holder for the
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original orphan medicinal product or if the manufacturer of the original orphan medicinal product is unable to supply sufficient
quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphan indication if the product
is safer, more effective or otherwise clinically superior to the original orphan medicinal product. The period of market exclusivity
may, in addition, be reduced to six years if it can be demonstrated on the basis of available evidence that the original orphan medicinal
product is sufficiently profitable not to justify maintenance of market exclusivity.
Pharmaceutical Coverage, Pricing and Reimbursement
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers
performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs.
Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government
authorities. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent to which third-party
payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and
managed care organizations, provide coverage, and establish adequate reimbursement levels for, the product. The process for
determining whether a payor will provide coverage for a product may be separate from the process for setting the price or
reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging
the prices charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and
imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also known as a
formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct
expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition
to the costs required to obtain FDA or other comparable marketing approvals. Nonetheless, product candidates may not be considered
medically necessary or cost effective. A decision by a third-party payor not to cover a product candidate could reduce physician
utilization once the product is approved and have a material adverse effect on sales, results of operations and financial condition.
Additionally, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be
approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also
provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor
to payor.
The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices of drugs
have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including
price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and
cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could
further limit a company’s revenue generated from the sale of any approved products. 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 a
company or its collaborators receive marketing approval, less favorable coverage policies and reimbursement rates may be
implemented in the future.
Outside the United States, ensuring adequate coverage and payment for a product also involves challenges. Pricing of
prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities
can extend well beyond the receipt of regulatory marketing approval for a product and may require a clinical trial that compares the
cost effectiveness of a product to other available therapies. The conduct of such a clinical trial could be expensive and result in delays
in commercialization.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that
products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional
studies that compare the cost-effectiveness of a particular drug candidate to currently available therapies or so called health technology
assessments, in order to obtain reimbursement or pricing approval. For example, the European Union provides options for its member
states to restrict the range of products for which their national health insurance systems provide reimbursement and to control the
prices of medicinal products for human use. European Union member states may approve a specific price for a product or it may
instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other
member states allow companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance
to physicians to limit prescriptions. Recently, many countries in the European Union have increased the amount of discounts required
on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the
severe fiscal and debt crises experienced by many countries in the European Union. The downward pressure on health care costs in
general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of
new products. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations
may continue after reimbursement has been obtained. Reference pricing used by various European Union member states, and parallel
trade, i.e., arbitrage between low-priced and high-priced member states, can further reduce prices. There can be no assurance that any
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country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and
pricing arrangements for any products, if approved in those countries.
Healthcare Law and Regulation
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug products that
are granted marketing approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly
applicable fraud and abuse, anti-kickback, false claims laws, reporting of payments to physicians and teaching physicians and patient
privacy laws and regulations and other healthcare laws and regulations that may constrain business and/or financial arrangements.
Restrictions under applicable federal and state healthcare laws and regulations, include the following:
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully
soliciting, offering, paying, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or
reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which
payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;
the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws,
which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the
federal government, claims for payment that are false, fictitious or fraudulent or knowingly making, using or causing to
made or used a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal
government.
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created additional federal
criminal laws that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to
defraud any healthcare benefit program or making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and their respective
implementing regulations, including the Final Omnibus Rule published in January 2013, which impose obligations,
including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually
identifiable health information;
the federal false statements statute, which prohibits knowingly and willfully falsifying, concealing ·or covering up a
material fact or making any materially false statement in connection with the delivery of or payment for healthcare
benefits, items or services;
the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient
Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or the Affordable Care
Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the
Centers for Medicare & Medicaid Services, or CMS, within the United States Department of Health and Human Services,
information related to payments and other transfers of value made by that entity to physicians and teaching hospitals, as
well as ownership and investment interests held by physicians and their immediate family members; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to
healthcare items or services that are reimbursed by third-party payors, including private insurers.
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers
to report information related to payments and transfers of value to other health care providers and health care entities, or marketing
expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which
differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Healthcare Reform
A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of
federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting
coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in
the United States.
In March 2010, the United States Congress enacted the Affordable Care Act, or the ACA, which, among other things, includes
changes to the coverage and payment for products under government health care programs. In January 2017, Congress voted to adopt
a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal
portions of the ACA. The Budget Resolution is not a law, however, it is widely viewed as the first step toward the passage of
legislation that would repeal certain aspects of the ACA. Further, on January 20, 2017, President Trump signed an Executive Order
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directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the
implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare
providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent
legislation to replace elements of the ACA that are repealed.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. For example, in
August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint
Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years
2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in
April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama
signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several
providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years.
With the new Administration and Congress, there will likely be additional legislative changes, including repeal and replacement
of certain provisions of the ACA. It remains to be seen, however, precisely what the new legislation will provide, when it will be
enacted and what impact it will have on the availability of healthcare and containing or lowering the cost of healthcare.
Employees
As of December 31, 2016, we had 20 employees. None of our employees is represented by a labor union or is covered by a
collective bargaining agreement. We consider our relationship with our employees to be good.
Research and Development Costs
Our research and development costs were $23.7 million, $12.9 million and $38.3 million for the years ended December 31,
2016, 2015 and 2014, respectively. These costs consist of the cost of our own independent research and development efforts and the
costs associated with collaborative research and development and in-licensing arrangements. Research and development costs,
including upfront fees and milestones paid to collaboration partners, are expensed as incurred if the underlying products have not
received regulatory approval and have no alternative future use.
Segment and Geographic Information
We view our operations and manage our business in one operating segment. As of December 31, 2016, we operate only in the
United States.
Executive Officers of the Registrant
The following table lists the positions, names and ages of our executive officers as of March 17, 2017:
Executive Officers
Michael P. Bailey........................................
Keith S. Ehrlich ..........................................
Michael N. Needle ......................................
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66
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Chief Executive Officer, President and Director
Chief Financial Officer
Chief Medical Officer
Michael P. Bailey was appointed President and Chief Executive Officer and a member of our Board of Directors effective
January 6, 2015. Mr. Bailey joined our company in September 2010 as our Chief Commercial Officer and was named our Chief
Business Officer in June 2013. Prior to joining our company, Mr. Bailey served as Senior Vice President, Business Development and
Chief Commercial Officer at Synta Pharmaceuticals Corp., a biopharmaceutical company focused on research, development and
commercialization of oncology medicines, from 2008 to September 2010. From 1999 to 2008, Mr. Bailey worked at ImClone Systems
Incorporated, a biopharmaceutical company focused on the development and commercialization of treatments for cancer patients.
During his nine-year tenure at ImClone, he was responsible for commercial aspects of the planning and launch of ERBITUX®
(cetuximab) across multiple oncology indications, as well as new product planning for the ImClone development portfolio, which
included CYRAMZA® (ramucirumab) and PORTRAZZA® (necitumumab). In addition, Mr. Bailey was a key member of the strategic
leadership committees for ImClone and its North American and worldwide partnerships and led their commercial organization, most
recently as Senior Vice President of Commercial Operations. Prior to his role at ImClone. Mr. Bailey managed the cardiovascular
development portfolio at Genentech, Inc., a biotechnology company, from 1997 to 1999. Mr. Bailey started his career in the
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pharmaceutical industry as part of SmithKline Beecham’s Executive Marketing Development Program, where he held a variety of
commercial roles from 1992 to 1997, including sales, strategic planning, and product management. Mr. Bailey received a B.S. in
psychology from St. Lawrence University and an M.B.A. in international marketing from the Mendoza College of Business at
University of Notre Dame.
Keith S. Ehrlich, C.P.A. was appointed Chief Financial Officer in April 2015. Mr. Ehrlich served as a financial consultant to us
from February 2015 to April 2015. Prior to joining our company, he worked with Synta Pharmaceuticals Corp. Mr. Ehrlich served as
Synta’s vice president of finance and administration from March 2004 until February 2015, and as its Chief Financial Officer from
October 2006 to December 2014. Prior to Synta, Mr. Ehrlich served in various senior finance roles, including Chief Financial Officer
of Argentys Corporation, Dyax Corp. and OraVax, Inc. Mr. Ehrlich also previously served as a director of finance at Vertex
Pharmaceuticals, Inc. and as a senior audit manager with PricewaterhouseCoopers, LLP. Mr. Ehrlich received his B.A. in Biology
from Drew University and his M.B.A. in Finance and Accounting from Rutgers University.
Michael N. Needle, M.D. was appointed Chief Medical Officer in January 2015. Dr. Needle has more than 15 years of
pharmaceutical industry experience in drug development and regulatory affairs. This includes central roles in the development of
oncology and hematology drugs, including Erbitux® (cetuximab), Revlimid® (lenalidomide) and Pomalyst® (pomolidimide). He most
recently served as Chief Medical Officer for Array BioPharma Inc., a biopharmaceutical company, from April 2013 to September
2014. Prior to Array, Dr. Needle was Chief Medical Officer of the Multiple Myeloma Research Foundation and Consortium (MMRF),
a research organization, from April 2012 to April 2013. From April 2010 to April 2012, Dr. Needle was Assistant Professor of
Pediatrics at the College of Physicians and Surgeons of Columbia University. Previously, he held multiple Vice President level
positions at Celgene Corporation, a biotechnology company, in Clinical Research and Development in Oncology, Strategic Medical
Business Development, and Pediatric Strategy from March 2004 to April 2010. Dr. Needle also served as the Vice President of
Clinical Affairs at ImClone from April 2000 to February 2004. Dr. Needle received his fellowship in Pediatric Hematology/Oncology
at the Children’s Hospital Medical Center, the Fred Hutchinson Cancer Research Center of the University of Washington in Seattle
and the University of Texas M.D. Anderson Cancer Center in Houston. Dr. Needle has held faculty positions at the University of
Pennsylvania and Columbia University. Dr. Needle graduated from Binghamton University with a Bachelor of Arts in Physics and
received his medical degree from SUNY Downstate Medical Center, in Brooklyn, New York.
Available Information
We file reports and other information with the SEC as required by the Securities Exchange Act of 1934, as amended, which we
refer to as the Exchange Act. You can find, copy, and inspect information we file at the SEC’s public reference room, which is located
at 100 F Street, N.E., Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information about the
operation of the SEC’s public reference room. You can review our electronically filed reports and other information that we file with
the SEC on the SEC’s web site at http://www.sec.gov.
We were incorporated under the laws of the State of Delaware on October 19, 2001 as GenPath Pharmaceuticals, Inc. and
changed our name to AVEO Pharmaceuticals, Inc. on March 1, 2005. Our principal executive offices are located at 1 Broadway, 14th
Floor, Cambridge, Massachusetts, 02142, and our telephone number is (617) 588-1960. Our Internet website is
http://www.aveooncology.com. We make available free of charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and
15(d) of the Exchange Act. We also make available, free of charge on our website, the reports filed with the SEC by our executive
officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act. We make these reports available through our
website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC, or, in the
case of Section 16 reports, as soon as reasonably practicable after copies of those filings are provided to us by the filing persons. In
addition, we regularly use our website to post information regarding our business, product development programs and governance, and
we encourage investors to use our website, particularly the information in the section entitled “For Investors” and “For Media,” as a
source of information about us.
We have adopted a code of business conduct and ethics, which applies to all of our officers, directors and employees, as well as
charters for our audit committee, our compensation committee and our nominating and governance committee, and corporate
governance guidelines. We have posted copies of our code of business conduct and ethics and corporate governance guidelines, as
well as each of our committee charters, on the Corporate Governance page of the Investors section of our website, which you can
access free of charge.
The foregoing references to our website are not intended to, nor shall they be deemed to, incorporate information on our website
into this report by reference.
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Item 1A.
Risk Factors
Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our
actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in this Annual
Report on Form 10-K and other filings with the SEC, press releases, communications with investors and oral statements. Any or all of
our forward-looking statements in this Annual Report on Form 10-K and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be
guaranteed. Actual future results may differ materially from those anticipated in our forward-looking statements. We undertake no
obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosure we make in our reports filed with the SEC.
Risks Related to Our Financial Position and Need for Additional Capital
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
We may be forced to delay or reduce the scope of our development programs and/or limit or cease our operations if we are
unable to raise substantial additional funding to meet our future working capital needs and maintain compliance with our $10.0 million
financial covenant under our loan agreement with Hercules. We believe that our approximate $23.3 million in cash, cash equivalents
and marketable securities at December 31, 2016, could allow us to fund our planned operations into the fourth quarter of 2017;
however, additional funds will be needed to extend these operations into 2018 and maintain compliance with our financial covenant.
However, we cannot guarantee that we will be able to obtain sufficient additional funding when needed or that such funding, if
available, will be obtainable on terms satisfactory to us. In the event that these plans cannot be effectively realized, there can be no
assurance that we will be able to continue as a going concern.
We anticipate that we will continue to incur significant operating losses for the foreseeable future. It is uncertain if we will ever
attain profitability, which would depress the market price of our common stock.
We have incurred net losses of $26.9 million, $15.0 million and $52.7 million for the fiscal years ended December 31, 2016,
2015 and 2014, respectively. As of December 31, 2016, we had an accumulated deficit of $521.9 million. To date, we have not
commercialized any products or generated any revenues from the sale of products, and absent the realization of sufficient revenues
from product sales, we may never attain profitability. Our losses have resulted principally from costs incurred in our discovery and
development activities. We anticipate that we will continue to incur significant operating costs over the next several years as we seek
to develop our product candidates. As noted above, we and our auditors have identified conditions and events that raise substantial
doubt about our ability to continue as a going concern.
If we do not successfully develop and obtain regulatory approval for our existing and future pipeline of product candidates and
effectively manufacture, market and sell any product candidates that are approved, we may never generate product sales. Even if we
do generate product sales, we may never achieve or sustain profitability on a quarterly or annual basis. Our failure to become and
remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our
business, diversify our product offerings or continue our operations.
We will require substantial additional funding, and a failure to obtain this necessary capital when needed would force us to delay,
limit, reduce or terminate our research, product development or commercialization efforts.
We will require substantial additional funds to continue our development programs and to fulfill our planned operating goals. In
particular, our currently planned operating and capital requirements include the need for substantial working capital to support our
development activities for tivozanib. For example, we estimate that the remaining costs for the TIVO-3 trial for RCC, including drug
supply and distribution, could be in the range of $22.0 million to $25.0 million in the aggregate through 2018. We have also initiated
the TiNivo trial in collaboration with BMS, which is providing nivolumab for the study. We are the trial sponsor. The TiNivo trial is a
phase 1/2 clinical trial of tivozanib combined with nivolumab, a PD-1 inhibitor, for the treatment of patients with RCC for which our
costs, including tivozanib drug supply and distribution, could be in the range of $2.0 million to $2.5 million through 2018. Moreover,
we have future payment obligations and cost-sharing arrangements under certain of our collaboration and license agreements. For
example, under our agreements with KHK and St. Vincent’s, we are required to make certain clinical and regulatory milestone
payments, have royalty obligations with respect to product sales and are required to pay a portion of sublicense revenue in certain
instances.
We are party to a loan and security agreement with a third party, Hercules, that includes a financial covenant that requires us to
maintain an unrestricted cash position (defined as cash and liquid cash, including marketable securities) greater than or equal to $10.0
million through the date of completion of our Phase 3 TIVO-3 trial. Non-compliance with the financial covenant under the loan and
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security agreement with Hercules would be considered an event of default that could result in Hercules, at its option, accelerating and
demanding payment of all outstanding obligations together with a prepayment charge.
Based upon our approximate $23.3 million in existing cash, cash equivalents and marketable securities as of December 31, 2016
and the $10.0 million financial covenant under the Loan Agreement with Hercules, we do not have sufficient cash on hand to support
operations and maintain compliance with the $10.0 million financial covenant under our loan agreement with Hercules for at least the
next twelve months from the date of filing of this Annual Report on Form-10K. These conditions and events raise substantial doubt
about our ability to continue as a going concern. Moreover, we believe that our approximate $23.3 million in cash, cash equivalents
and marketable securities at December 31, 2016 could allow us to fund our planned operations into the fourth quarter of 2017. This
estimate assumes no receipt of milestone payments from our partners or related payment of potential licensing milestones to third
parties, no additional funding from new partnership agreements, no equity financings, no debt financings, no accelerated repayment of
our term loan and no further sales of equity under our sales agreement with FBR. Accordingly, the timing and nature of activities
contemplated for 2017 and thereafter will be conducted subject to the availability of sufficient financial resources.
Furthermore, there are numerous risks and uncertainties associated with research, development and commercialization of
pharmaceutical products. Accordingly, our future capital requirements may vary from our current expectations and depend on many
factors, including but not limited to:
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such
agreements;
the number and characteristics of the product candidates we pursue;
the scope, progress, results and costs of developing our product candidates and of conducting preclinical and clinical
trials;
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including
litigation costs and the outcome of such litigation;
the absence of any breach, acceleration event or event of default under our loan agreement with Hercules or under any
other agreements with third parties;
the outcome of legal actions against us, including the current lawsuits described in Part I, Item 3 of this report under the
heading “Legal Proceedings”;
the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales
and distribution costs;
the cost of manufacturing our product candidates and any products we successfully commercialize;
the timing, receipt and amount of sales of, or royalties on, our future products, if any; and
our ability to continue as a going concern.
We will require additional funding to extend our planned operations into 2018 and maintain compliance with our financial
covenant under our loan agreement with Hercules. We may seek to sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise
additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or
the loans under credit facilities could provide for rights senior to those of our common stock and could contain covenants that would
restrict our operations. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. We also
expect to seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would
generally require us to relinquish or encumber rights to some of our technologies or drug candidates, and we may not be able to enter
into such arrangements on acceptable terms, if at all.
If we are unable to raise substantial additional capital in the near term, whether on terms that are acceptable to us, or at all then
we would trigger an event of default under our loan agreement with Hercules and we may be required to:
delay, limit, reduce or terminate our clinical trials or other development activities for one or more of our product
candidates; and/or
delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be
necessary to commercialize our product candidates, if approved.
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We are a development stage company, which may make it difficult for you to evaluate the success of our business to date and to
assess our future viability.
All of our product candidates are in the development stage. We have not yet demonstrated our ability to obtain marketing
approvals, manufacture a commercial scale medicine, or arrange for a third party to do so on our behalf, or conduct sales and
marketing activities necessary for successful commercialization. Typically, it takes about 10 to 15 years to develop one new medicine
from the time it is discovered to when it is available for treating patients. Preclinical studies and clinical trials may involve highly
uncertain results and a high risk of failure. Moreover, positive data from preclinical studies and clinical trials of our product candidates
may not be predictive of results in ongoing or subsequent preclinical studies and clinical trials. Consequently, any predictions you
make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
In addition, as a development stage business, we may encounter unforeseen expenses, difficulties, complications, delays and
other known and unknown factors. To be profitable, we will need to transition from a company with a research and development focus
to a company capable of supporting commercial activities. We may not be successful in such a transition.
Risks Related to our Litigation
We and certain of our former officers and present and former directors have been named as defendants in multiple lawsuits that
could result in substantial costs and divert management’s attention.
We, and certain of our former officers and directors, were named as defendants in a consolidated class action lawsuit initiated in
2013 that generally alleges that we and those individuals violated federal securities laws by making allegedly false and/or misleading
statements in 2012 and 2013, concerning the development of our drug tivozanib and its prospects for FDA approval at that time. The
lawsuit seeks unspecified damages, interest, attorneys’ fees, and other costs. The consolidated amended complaint was dismissed
without prejudice on March 20, 2015, and the lead plaintiffs then filed a second amended complaint bringing similar allegations. This
second amended complaint was dismissed with prejudice on November 18, 2015. The lead plaintiffs appealed the court’s decision to
the United States Court of Appeals for the First Circuit and also filed a motion to vacate and reconsider the district court’s judgment,
which we opposed. On January 3, 2017, the Court granted Plaintiffs’ motion to vacate the dismissal and judgment and Plaintiffs filed
a motion to dismiss their appeal on February 8, 2017. On February 2, 2017, Plaintiffs filed a third amended complaint alleging claims
similar to those alleged in the prior complaints, namely that we and certain of our former officers and directors violated Sections 10(b)
and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or
misleading statements concerning the phase 3 trial design and results for our TIVO-1 clinical trial in an effort to lead investors to
believe that the drug would receive approval from the FDA. On March 2, 2017, we filed an answer to the third amended complaint,
and the parties have initiated discovery. The lawsuit seeks unspecified damages, interest, attorneys’ fees, and other costs. Another
plaintiff has also filed a derivative complaint, allegedly on our behalf, naming us as a nominal defendant and also naming as
defendants present and former members of our board of directors, alleging breach of fiduciary duty and abuse of control on the part of
those directors with respect to the same statements at issue in the securities litigation. The derivative complaint seeks, among other
relief, unspecified damages, costs and expenses, including attorneys’ fees, an order requiring us to implement certain corporate
governance reforms, restitution from the defendants and such other relief as the court might find just and proper. The derivative
complaint was dismissed with prejudice on March 18, 2015. The plaintiff has appealed the court’s decision to the United States Court
of Appeals for the First Circuit. The parties have reached an agreement in principle to settle this matter. The settlement involves
certain corporate governance changes and other non-monetary relief. The plaintiff is seeking an award of attorney’s fees, costs, and
expenses in the amount of $822,116, as well as an incentive award of $2,500, both of which we expect will be paid by insurance in the
amount ordered by the Court. On September 16, 2016, the Court granted preliminary approval to the proposed settlement. On
December 19, 2016, the Court held a final settlement hearing on the terms of the proposed settlement and to consider the award of fees
to the plaintiff’s attorneys. No objections to the settlement were filed with the Court or raised at the hearing. At the hearing, the Court
indicated orally that the settlement will be approved, and heard argument regarding the size of plaintiff’s potential attorney’s fee
award. A formal approval order has not yet entered and the Court has not ruled on the final amount of fees for the plaintiff’s attorneys
(which, as stated above, are expected to be paid by insurance). Until a formal approval order has been entered, there can be no
complete assurance that the Court will approve the settlement.
We intend to continue to deny the allegations in the class action case and to engage in a vigorous defense of such lawsuit. We
intend to resolve the derivative lawsuit in accordance with the proposed settlement. However, we are unable to predict the outcome of
these matters at this time. Moreover, any conclusion of these matters in a manner adverse to us could have a material adverse effect on
our financial condition and business. For example, we could incur substantial costs not covered by our liability insurance, suffer a
significant adverse impact on our reputation and divert management’s attention and resources from other priorities, including the
execution of business plans and strategies that are important to our ability to grow our business, any of which could have a material
adverse effect on our business. In addition, any of these matters could require payments that are not covered by, or exceed the limits
of, our available liability insurance, which could have a material adverse effect on our operating results or financial condition.
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We have concluded a settlement with the SEC, but the SEC is still pursuing an action against our former officers.
We paid $4.0 million to settle a lawsuit filed by the SEC in federal court alleging that we violated federal securities laws by
omitting to disclose the recommendation of the staff of the U.S. Food and Drug Administration, on May 11, 2012, that we conduct an
additional clinical trial with respect to tivozanib. See Part I, Item 3 of this report under the heading “Legal Proceedings” for a further
discussion of these claims. The SEC also named three of our former officers as defendants in the same lawsuit, and those claims are
still pending. We are not a party to the continuing litigation between the SEC and the former officers. However, those individuals
have and may continue to seek advancement of legal expenses or indemnification for any losses, either of which could be material to
the extent not covered by our director and officer liability insurance.
Risks Related to Development and Commercialization of Our Drug Candidates
In the near term, we are substantially dependent on the success of tivozanib. If we are unable to complete the clinical development
of, obtain marketing approval for or successfully commercialize tivozanib, either alone or with our collaborators, or if we
experience significant delays in doing so, our business could be substantially harmed.
We currently have no products approved for sale and are investing a significant portion of our efforts and financial resources in
the development of tivozanib for marketing approval in North America. Our prospects are substantially dependent on our ability to
develop, obtain marketing approval for and successfully commercialize tivozanib in one or more disease indications.
The success of tivozanib will depend on a number of factors, including the following:
our ability to secure the substantial additional capital required to complete our clinical trials of tivozanib, including the
TIVO-3 trial and the TiNivo trial;
successful enrollment and completion of clinical trials;
a safety, tolerability and efficacy profile that is satisfactory to the FDA, EMA or any other comparable foreign regulatory
authority for marketing approval;
timely receipt of marketing approvals from applicable regulatory authorities;
the performance of our collaborators and third-party contractors;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
maintenance of existing or establishment of new supply arrangements with third-party raw materials suppliers and
manufacturers including with respect to the supply of active pharmaceutical ingredient for tivozanib and finished drug
product that is appropriately packaged for sale;
adequate ongoing availability of raw materials and drug product for clinical development and any commercial sales;
obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and
internationally, including our ability to maintain our license agreement with KHK;
protection of our rights in our intellectual property portfolio, including our ability to maintain our license agreement with
KHK;
successful launch of commercial sales following any marketing approval;
a continued acceptable safety profile following any marketing approval;
commercial acceptance by patients, the medical community and third-party payors;
successful identification of biomarkers for patient selection; and
our ability to compete with other therapies.
Many of these factors are beyond our control, including clinical trial results, the regulatory approval process, potential threats to
our intellectual property rights and the development, manufacturing, marketing and sales efforts of our collaborators. If we are unable
to develop, receive marketing approval for and successfully commercialize tivozanib on our own or with our collaborators, or
experience delays as a result of any of these factors or otherwise, our business could be substantially harmed.
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If clinical trials of any product candidates that we or our collaborators may develop fail to satisfactorily demonstrate safety and
efficacy to the FDA and other regulators, we or our collaborators may incur additional costs or delays, or may be unable to
complete, the development and commercialization of these product candidates.
We, and any collaborators, including our partners and sublicensees, are not permitted to commercialize, market, promote or sell
any product candidate in the United States without obtaining marketing approval from the FDA. Foreign regulatory authorities, such
as the EMA, impose similar requirements. We and our collaborators must complete extensive preclinical development and clinical
trials that demonstrate the safety and efficacy of our product candidates in humans before we can obtain these approvals.
Clinical testing is expensive, is difficult to design and implement, and can take many years to complete. It is inherently
uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all.
The clinical development of our product candidates is susceptible to the risk of failure inherent at any stage of product development,
as well as failure to demonstrate efficacy at all in a clinical trial or across a broad population of patients, the occurrence of adverse
events that are medically severe or commercially unacceptable, failure to comply with protocols or regulatory requirements and
determination by the applicable regulatory authority that a product candidate may not continue development or is not approvable.
Even if a product candidate has a beneficial effect, that effect may not be detected during clinical evaluation due to a variety of
factors, including the size, duration, design, measurements, conduct or analysis of our clinical trials. Conversely, as a result of the
same factors, our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive
effect, if any. Similarly, in our clinical trials we may fail to detect toxicity or intolerability of our product candidates, or mistakenly
believe that our product candidates are toxic or not well tolerated when that is not in fact the case.
Any inability to timely or successfully complete preclinical and clinical development could result in additional unplanned costs
and impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties. Moreover,
if we, or any collaborators, are required to conduct additional clinical trials or other testing of our product candidates beyond those
planned, or if the results of these trials or tests are unfavorable, uncertain, only modestly favorable or indicate safety concerns, we or
our collaborators, may:
be delayed in obtaining marketing approval for our product candidates;
not obtain marketing approval at all;
obtain approval for indications or patient populations that are not as broad as intended or desired;
obtain approval with labeling that includes significant use or distribution restrictions or significant safety warnings,
including boxed warnings;
be subject to additional post-marketing testing or other requirements; or
be required to remove the product from the market after obtaining marketing approval.
Our failure to successfully complete clinical trials of our product candidates and to demonstrate the efficacy and safety
necessary to obtain regulatory approval would significantly harm our business.
Adverse events or undesirable side effects caused by, or other unexpected properties of, tivozanib or our other product candidates
may be identified during development and could delay or prevent their marketing approval or limit their use.
Adverse events or undesirable side effects caused by, or other unexpected properties of, tivozanib or our other product
candidates could cause us, any collaborators, an institutional review board or regulatory authorities to interrupt, delay or halt clinical
trials of one or more of our product candidates and could result in a more restrictive label or the delay or denial of marketing approval
by the FDA or comparable foreign regulatory authorities. If any of our product candidates is associated with adverse events or
undesirable side effects or has properties that are unexpected, we, or any collaborators, may need to abandon development or limit
development of that product candidate to certain uses or subpopulations in which the undesirable side effects or other characteristics
are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many compounds that initially showed promise in
clinical or earlier stage testing have later been found to cause side effects that prevented further development of the compound.
35
If we or our collaborators experience any of a number of possible complications in connection with preclinical or clinical trials of
our product candidates, potential clinical development, marketing approval or commercialization of our product candidates could
be delayed or prevented.
We or our collaborators may experience numerous complications in connection with preclinical or clinical trials that could delay
or prevent clinical development, marketing approval or commercialization of our product candidates including:
regulators or institutional review boards may not authorize us, any collaborators or our or their investigators to commence
a clinical trial or conduct a clinical trial at a prospective trial site;
delay or failure to reach agreement on clinical trial contracts or clinical trial protocols with prospective trial sites;
unfavorable or inconclusive clinical trial results;
our decision or a regulatory order to conduct additional clinical trials or abandon product development programs;
the number of patients required for our clinical trials may be larger than anticipated, patient enrollment may be slower
than anticipated or participants may drop out of these clinical trials at a higher rate than anticipated;
the costs of our clinical trials may be greater than we anticipate;
our third-party contractors, including those manufacturing our product candidates, or conducting clinical trials on our
behalf, may fail to successfully comply with regulatory requirements or meet their contractual obligations in a timely
manner or at all;
patients that enroll in a clinical trial may misrepresent their eligibility to do so or may otherwise not comply with the
clinical trial protocol, resulting in the need to drop the patients from the clinical trial, increase the needed enrollment size
for the clinical trial or extend the clinical trial’s duration;
We may decide, or regulators or institutional review boards may require that we suspend or terminate clinical research for
various reasons, including noncompliance with regulatory requirements or their standards of conduct, a finding that the
participants are being exposed to unacceptable health risks, undesirable side effects or other unexpected characteristics of
the product candidate or findings of undesirable effects caused by a chemically or mechanistically similar product or
product candidate;
the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ clinical trial designs or
interpretation of data from preclinical studies and clinical trials;
the FDA or comparable foreign regulatory authorities may fail to approve or subsequently find fault with the
manufacturing processes or facilities of third-party manufacturers with which we, or any collaborators, enter into
agreements for clinical and commercial supplies;
the supply or quality of raw materials or manufactured product candidates or other materials necessary to conduct clinical
trials of our product candidates may be insufficient, inadequate or not available at an acceptable cost, or we may
experience interruptions in supply; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a
manner rendering our clinical data insufficient to obtain marketing approval.
Product development costs for us and our collaborators will increase if we experience delays in testing or pursuing marketing
approvals, and we may be required to obtain additional funds to complete clinical trials and prepare for possible commercialization.
We do not know whether any 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 may have the exclusive right to commercialize our
product candidates or allow our competitors to bring products to market before we do could impair our ability to successfully
commercialize our product candidates and may harm our business and results of operations. In addition, many of the factors that lead
to clinical trial delays may ultimately lead to the denial of marketing approval of any of our product candidates.
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If we or our collaborators experience delays or difficulties in the enrollment of patients in clinical trials, receipt of necessary
regulatory approvals could be delayed or prevented.
We or our collaborators may not be able to initiate or continue clinical trials for our product candidates if we are unable to locate
and enroll a sufficient number of eligible patients to participate in clinical trials. Patient enrollment is a significant factor in the timing
of clinical trials, and is affected by many factors, including:
the size and nature of the patient population;
the severity of the disease under investigation;
the availability of approved therapeutics for the relevant disease;
the proximity of patients to clinical sites;
the eligibility criteria for the trial;
the design of the clinical trial;
efforts to facilitate timely enrollment;
competing clinical trials; and
clinicians’ and patients’ perceptions as to the potential advantages and risks of the drug being studied and the drug being
provided as a control in relation to other available therapies, including any new drugs that may be approved for the
indications we are investigating.
Our inability to enroll a sufficient number of patients for our clinical trials could result in significant delays or may require us to
abandon one or more clinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for
our product candidates, delay or halt the development of and approval processes for our product candidates and jeopardize our ability
to commence sales of and generate revenues from our product candidates, which could cause the value of our company to decline and
limit our ability to obtain additional financing, if needed.
Results of early clinical trials may not be predictive of results of late-stage clinical trials.
The outcome of early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical
trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we have and
could, in the future, face similar setbacks. For example, in June 2013, the FDA issued a response letter informing us that it would not
approve tivozanib for the treatment of first-line advanced renal cell carcinoma based solely on the data from TIVO-1, our initial phase
3 trial, and recommended that we perform an additional clinical trial that is adequately sized to assure the FDA that there is no adverse
effect on overall survival.
The design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a
clinical trial may not become apparent until the clinical trial is well advanced. We have limited experience in designing clinical trials
and may be unable to design and execute a clinical trial to support marketing approval. In addition, preclinical and clinical data are
often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed
satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates.
Even if we, or any collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the
FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.
In some instances, there can be significant variability in safety or efficacy results between different clinical 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, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout
among clinical trial participants. If we fail to receive positive results in clinical trials of our product candidates, the development
timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly,
our business and financial prospects would be negatively impacted.
We have never obtained marketing approval for a product candidate, and we may never obtain marketing approval for our product
candidates.
We have never obtained marketing approval for a product candidate. It is possible that the FDA, the EMA or any other
comparable foreign regulatory agency may refuse to accept for substantive review any future application that we or a collaborator may
submit to market and sell our product candidates, or that any such agency may conclude after review of our or our collaborator’s data
37
that such application is insufficient to obtain marketing approval of our product candidate. For example, our TIVO-1 trial met its
primary endpoint for progression-free survival, or PFS, but showed a non-statistically significant trend favoring the control arm in
overall survival, or OS. In June 2013, the FDA issued a complete response letter informing us that it would not approve tivozanib for
the first-line treatment of advanced RCC based solely on the data from the TIVO-1 trial, and recommended that we perform an
additional clinical trial adequately sized to assure the FDA that there is no adverse effect on OS.
Subsequently, EUSA, our licensee, submitted a MAA for tivozanib for the treatment of RCC with the EMA in February 2016
based primarily on our existing dataset, which includes the results from the TIVO-1 trial combined with the TIVO-1 extension trial,
and one phase 1 and two phase 2 trials in RCC. The EMA validated the MAA in March 2016, confirming that the submission was
complete and that it would initiate its review process. EUSA received the Day 120 List of Questions from the CHMP of the EMA in
July 2016, and submitted its responses in November 2016. In January 2017, EUSA received the Day 180 LOI from the CHMP. The
Day 180 LOI signifies that the MAA for tivozanib is not approvable at the present time, and outlines outstanding deficiencies, which
are then required to be satisfactorily addressed in an oral explanation and/or in writing prior to a final application decision. EUSA has
informed us that it expects to submit written responses to the Day 180 LOI in April 2017, and the EMA has tentatively scheduled
EUSA to provide an oral explanation to the CHMP in May 2017. We cannot predict the outcome of EUSA’s MAA submission to the
EMA for tivozanib.
If the FDA, EMA or any other foreign regulatory agency does not accept or approve any application to market and sell any of
our product candidates, such agency may require that we conduct additional clinical trials, preclinical studies or manufacturing
validation studies and submit that data before it will reconsider our application. Depending on the extent of these or any other required
trials or studies, approval of any application that we submit may be delayed by several years, or may require us or our collaborator to
expend more resources than we or they have available. It is also possible that additional trials or studies, if performed and completed,
may not be considered sufficient by the FDA, EMA or any other regulatory agency to approve our applications for marketing and
commercialization.
Any delay in obtaining, or an inability to obtain, marketing approvals would prevent us or our collaborators from
commercializing our product candidates and generating revenues. If any of these outcomes occur, we would not be eligible for
milestone and royalty revenue under our partnership agreements, our collaborators could terminate our partnership agreements, and
we may be forced to abandon our development efforts for our product candidates, which could significantly harm our business.
Even if a product candidate receives marketing approval, we or others may later discover that the product is less effective than
previously believed or causes undesirable side effects that were not previously identified, which could compromise our ability, or
that of any collaborators, to market the product.
Clinical trials of our product candidates will be conducted in carefully defined subsets of patients who have agreed to participate
in these. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is
greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a
product candidate, we, or others, discover that the product is less effective than previously believed or causes undesirable side effects
that were not previously identified, any of the following adverse events could occur:
regulatory authorities may withdraw their approval of the product or seize the product;
we may be required to recall the product, change the way the product is administered or conduct additional clinical trials;
additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;
we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a
contraindication;
we may be required to create a Medication Guide outlining the risks of the previously unidentified side effects for
distribution to patients;
we could be sued and held liable for harm caused to patients;
physicians and patients may stop using our product; and
our reputation may suffer.
Any of these events could harm our business and operations, and could negatively impact our stock price.
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Even if our product candidates receive marketing 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, in which case we may not
generate significant revenues or become profitable.
We have never commercialized a product, and even if one of our product candidates is approved by the appropriate regulatory
authorities for marketing and sale, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party
payors and others in the medical community. Physicians are often reluctant to switch their patients from existing therapies even when
new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they
are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch
therapies due to lack of reimbursement for existing therapies.
Efforts to educate the medical community and third-party payors on the benefits of our product candidates may require
significant resources and may not be successful. If any of our product candidates is approved but does not achieve an adequate level of
market acceptance, we may not generate significant revenues and we may not become profitable. The degree of market acceptance of
our product candidates, if approved for commercial sale, will depend on a number of factors, including:
the efficacy and safety of the product;
the advantages of the product compared to competitive therapies;
the number of competitors approved for similar uses;
the relative promotional effort of us as compared with our competitors;
the prevalence and severity of any side effects;
whether the product is designated under physician treatment guidelines as a first-, second- or third-line therapy;
our ability to offer the product for sale at competitive prices;
the product’s convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try, and of physicians to prescribe, the product;
limitations or warnings, including distribution or use restrictions, contained in the product’s approved labeling;
the strength of sales, marketing and distribution support;
changes in the standard of care for the targeted indications for the product; and
availability and amount of coverage and reimbursement from government payors, managed care plans and other
third-party payors.
If we are unable to establish sales, marketing and distribution capabilities or enter into sales, marketing and distribution
arrangements with third parties, we may not be successful in commercializing any product candidates if approved.
We do not have sales, marketing or distribution infrastructure and have no experience as an organization in the sale, marketing
or distribution of pharmaceutical products. To achieve commercial success for any approved product, we must either develop a sales
and marketing organization or outsource these functions to third parties. The development of sales, marketing and distribution
capabilities will require substantial resources, will be time consuming and, if not initiated sufficiently in advance of marketing
approval, could delay any product launch. Conversely, the commercial launch of a product candidate for which we recruit a sales force
and establish marketing and distribution capabilities is delayed or does not occur for any reason, we could incur substantial costs and
our investment could be lost if we cannot retain or reposition our sales and marketing personnel. In addition, we may not be able to
hire or retain a sales force in the United States that is sufficient in size or has adequate expertise in the medical markets that we plan to
target. If we are unable to establish or retain a sales force and marketing and distribution capabilities, our operating results may be
adversely affected.
If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or
the profitability of these product revenues may be substantially lower than if we were to directly market and sell products in those
markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with third parties or may be unable to do
so on terms that are favorable to us. In addition, we may have little or no control over such third parties, and any of them may fail to
devote the necessary resources and attention to sell and market our products effectively.
We may seek to enter into collaborations that we believe may contribute to our ability to advance development and ultimately
commercialize our product candidates. We also seek to enter into collaborations where we believe that realizing the full commercial
value of our development programs will require access to broader geographic markets or the pursuit of broader patient populations or
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indications. If a potential partner has development or commercialization expertise that we believe is particularly relevant to one of our
products, then we may seek to collaborate with that potential partner even if we believe we could otherwise develop and
commercialize the product independently.
If we do not establish sales, marketing and distribution capabilities, either on our own or in collaboration with third parties, we
will not be successful in commercializing any of our product candidates that receive marketing approval.
If we are unable to successfully develop companion diagnostics for certain of our therapeutic product candidates, or experience
significant delays in doing so, we may not realize the full commercial potential of these therapeutics.
A component of our business strategy may be to develop, in collaboration with a third party, companion diagnostics for some of
our therapeutic product candidates. There has been limited success to date industry-wide in developing companion diagnostics. To be
successful, we or our collaborators will need to address a number of scientific, technical, regulatory and logistical challenges. We have
limited experience in the development of diagnostics and may not be successful in developing appropriate diagnostics to pair with any
of our therapeutic product candidates. The FDA and similar regulatory authorities outside the United States are generally expected to
regulate companion diagnostics as medical devices. In each case, companion diagnostics require separate regulatory approval prior to
commercialization. We expect to rely in part on third parties for the design, development and manufacture of any companion
diagnostic. If we, or any third parties that we engage to assist us, are unable to successfully develop companion diagnostics for our
therapeutic product candidates, or experience delays in doing so, the development of our therapeutic product candidates may be
adversely affected, our therapeutic product candidates may not receive marketing approval and we may not realize the full commercial
potential of any therapeutics that receive marketing approval. As a result, our business would be harmed, possibly materially.
We face substantial competition from existing approved products. Our competitors may also discover, develop or commercialize
new competing products before, or more successfully, than we do.
The biotechnology and pharmaceutical industries are highly competitive. Our future success depends on our ability to
demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of product
candidates. Our objective is to design, develop and commercialize new products with superior efficacy, convenience, tolerability and
safety. We expect any product candidate that we commercialize with our strategic partners will compete with existing, market-leading
products.
There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations
actively engaged in the research and development of products that may be similar to our products. A number of multinational
pharmaceutical companies, as well as large biotechnology companies, including, but not limited to, Actelion Pharmaceuticals Ltd.,
Amgen, Inc., Arqule, Inc., AstraZeneca, Bayer HealthCare AG, Bristol-Myers Squibb, Eisai Co., Ltd., Eli Lilly and Company,
Exelixis, Inc., Gilead Sciences, Inc., GlaxoSmithKline plc, GTx, Inc., Helsinn and XBiotech, Incyte Corporation, Janssen
Pharmaceuticals, Inc. (a division of Johnson and Johnson), Jazz Pharmaceuticals plc, Merck, Merrimack Pharmaceuticals, Inc.,
Novartis, OncoMed Pharmaceuticals, Inc., Pfizer Inc., Roche Laboratories, Inc., and United Therapeutics Corporation are pursuing the
development or are currently marketing pharmaceuticals that target VEGF, HGF, ErbB3, Notch 3 or other pathways on which we may
focus, as well as cachexia. It is probable that the number of companies seeking to develop competing products and therapies will
increase.
Many of our competitors, either alone or with their strategic partners, have greater financial, technical and human resources than
we do and greater experience in product discovery and development, obtaining FDA and other regulatory approvals, and
commercialization. Many are already marketing products to treat the same indications, and having the same biological targets, as the
product candidates we are developing, including with respect to renal cell carcinoma. In addition, many of these competitors have
significantly greater commercial infrastructures than we have. We will not be able to compete successfully unless we effectively:
design, develop and commercialize products that are superior to other products in the market in terms of, among other
things, safety, efficacy, convenience, or price;
obtain patent and/or other proprietary protection for our processes and product candidates;
obtain required regulatory approvals;
obtain favorable reimbursement, formulary and guideline status; and
collaborate with others in the design, development and commercialization of our products.
Established competitors may invest heavily to discover and develop novel compounds that could make our product candidates
obsolete. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy,
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convenience, tolerability and safety in order to obtain approval, to overcome price competition and to be commercially successful. If
we are not able to compete effectively, our business will not grow and our financial condition and operations will suffer.
There are currently 11 FDA-approved drugs in oncology which, like tivozanib, target the VEGF pathway as a part or all of their
inhibitory mechanism. Eight of the FDA-approved VEGF pathway inhibitors are oral small molecule receptor tyrosine kinase
inhibitors, or TKIs. Many of the approved VEGF pathway inhibitors are in ongoing development in additional cancer indications
including RCC. Additionally, we are aware of a number of companies that have ongoing programs to develop both small molecules
and biologics that target the VEGF pathway. The emergence of PD-1/PD-L1 inhibitor and other immune system-targeted therapies
present additional competition for tivozanib in advanced RCC, and clinical trials for mono and combination therapies of PD-1/PD-L1
with other immune-oncology targets and VEGF TKIs targeting RCC are in the pipeline. We are aware of several ongoing phase 3
registration studies evaluating PD-1/PD-L1 inhibitors in combination with VEGF TKIs in RCC, as well as combinations of PD-1
agents in combination with other immune therapies for RCC.
We believe the products that are considered competitive with ficlatuzumab include those agents targeting the HGF/c-Met
pathway. We believe the most direct competitors to our AV-203 program are monoclonal antibodies that specifically target the ErbB3
receptor. There are also other agents that target ErbB3 as a part or all of their inhibitory mechanism. Only a limited number of agents
have been approved for the treatment or prevention of cachexia caused by any disease. A number of agents with different mechanisms
of action, however, have completed or are currently being studied in phase 2 trials in cachexia or muscle wasting. Currently, there are
no ongoing clinical trials of Notch 3-specific inhibitors or any approved Notch 3-specific inhibitors in PAH patients; however, there
are multiple treatments approved for PAH through various mechanisms.
Even if we or our collaborators are able to commercialize any product candidate, the product may become subject to unfavorable
pricing regulations, third-party payor reimbursement practices or healthcare reform initiatives, any of which could harm our
business.
The commercial success of our product candidates will depend substantially, both domestically and abroad, on the extent to
which the costs of our product candidates will be paid by third-party payors, including government health care programs and private
health insurers. If coverage is not available, or reimbursement is limited, we, or any collaborators, may not be able to successfully
commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to
allow us or our collaborators to establish or maintain pricing sufficient to realize a sufficient return on our investments. In the United
States, no uniform policy of coverage and reimbursement for products exists among third-party payors, and coverage and
reimbursement levels for products can differ significantly from payor to payor. As a result, the coverage determination process is often
time consuming and costly and may require us to provide scientific and clinical support for the use of our products to each payor
separately, with no assurance that coverage and adequate reimbursement will be obtained or applied consistently.
There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved drugs. Marketing
approvals, pricing and reimbursement for new drug 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 product
licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing
governmental control even after initial approval is granted. As a result, we or our collaborators might obtain marketing approval for a
product in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for
lengthy time periods, which may negatively impact the revenues we are able to generate from the sale of the product in that country.
Adverse pricing limitations may hinder our ability to recoup our or their investment in one or more product candidates, even if our
product candidates obtain marketing approval.
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. Therefore, our ability, and the ability of any collaborators, to commercialize successfully any
of our product candidates will depend in part on the extent to which coverage and adequate reimbursement for these products and
related treatments will be available from third-party payors. Third-party payors decide which medications they will cover and establish
reimbursement levels. The healthcare industry is acutely focused on cost containment, both in the United States and elsewhere.
Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of
reimbursement for particular medications, which could affect our ability to sell our product candidates profitably. These payors may
not view our products, even if approved, as cost-effective, and coverage and reimbursement may not be available to our customers or
may not be sufficient to allow our products to be marketed on a competitive basis. Cost-control initiatives could cause us or our
collaborators to decrease the price we might establish for products, which could result in lower than anticipated product revenues. If
the prices for our products, if any, decrease or if governmental and other third-party payors do not provide coverage or adequate
reimbursement, our prospects for revenue and profitability will suffer.
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There may also be delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more
limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover,
eligibility for reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers our costs, including
research, development, manufacture, sale and distribution. Reimbursement rates may vary, for example, according to the use of the
product and the clinical setting in which it is used. Reimbursement rates may also be based on reimbursement levels already set for
lower cost drugs or may be incorporated into existing payments for other services.
In addition, increasingly, third-party payors are requiring higher levels of evidence of the benefits and clinical outcomes of new
technologies and are challenging the prices charged. Further, the net reimbursement for drug products may be subject to additional
reductions if there are changes to laws that presently restrict imports of drugs from countries where they may be sold at lower prices
than in the United States. An inability to promptly obtain coverage and adequate payment rates from both government-funded and
private payors for any of our product candidates for which we obtain marketing approval could significantly harm our operating
results, our ability to raise capital needed to commercialize products and our overall financial condition.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our product candidates.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even
greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is
found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may
include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence,
strict liability, and 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 product candidates. Even successful defense could require significant financial and management resources.
Regardless of the merits or eventual outcome, product liability claims may result in:
decreased demand for our product candidates;
withdrawal of clinical trial participants;
delay or termination of our clinical trial;
costs to defend the related litigation;
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;
the inability to commercialize our product candidates; and
injury to our reputation;
a decline in our stock price.
Our inability to maintain sufficient product liability insurance at an acceptable cost to protect against potential product liability
claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering
our clinical studies in the amount of $20 million in the aggregate. Although we maintain such insurance, any claim that may be
brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance
or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject
to a product liability claim for which we have no coverage. We will 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.
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Risks Related to Our Dependence on Third Parties
We rely on third parties, such as contract research organizations, or CROs, to conduct clinical trials for our product candidates,
and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for
our product candidates.
We, in consultation with our collaborators, where applicable, design the clinical trials for our product candidates, but we have
relied, and will rely, on contract research organizations and other third parties to assist us in managing, monitoring and otherwise
carrying out many of these trials. We compete with larger companies for the resources of these third parties.
Although we plan to continue to rely on these third parties to conduct our ongoing any future clinical trials, we are responsible
for ensuring that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the
FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical
practices, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to assure that the data
and results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on
third parties that we do not control does not relieve us of these responsibilities and requirements.
The third parties on whom we rely generally may terminate their engagements with us at any time. If we are required to enter
into alternative arrangements because of any such termination, the introduction of our product candidates to market could be delayed.
If these third parties do not successfully carry out their duties under their agreements with us, if the quality or accuracy of the
data they obtain is compromised due to their failure to adhere to our clinical trial protocols or regulatory requirements, or if they
otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory
requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our preclinical
development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not
be able to obtain regulatory approval of our product candidates and our reputation could be harmed.
We rely on third-party manufacturers to produce our preclinical and clinical product candidate supplies, and we intend to rely on
third parties to produce commercial supplies of any approved product candidates. Any failure by a third-party manufacturer to
produce supplies for us may delay or impair our ability to complete our clinical trials or commercialize our product candidates.
We do not possess all of the capabilities to fully commercialize any of our product candidates on our own. We have relied upon
third-party manufacturers for the manufacture of our product candidates for preclinical and clinical testing purposes and intend to
continue to do so in the future. If we are unable to arrange for third-party manufacturing sources, or to do so on commercially
reasonable terms, we may not be able to complete development of such product candidates or to market them.
Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates
ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the
manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture
our product candidates in accordance with our product specifications), failure of the third party to accept orders for supply of drug
substance or drug product and the possibility of termination or nonrenewal of the agreement by the third party, based on its own
business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our
product candidates be manufactured according to cGMP and similar foreign standards. Any failure by our third-party manufacturers to
comply with cGMP or failure to scale-up manufacturing processes as needed, including any failure to deliver sufficient quantities of
product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product
candidates. In addition, such failure could be the basis for action by the FDA to withdraw approvals for product candidates previously
granted to us and for other regulatory action, including recall or seizure, fines, imposition of operating restrictions, total or partial
suspension of production or injunctions.
We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates
for our clinical studies. There are a small number of suppliers for certain capital equipment and raw materials that we use to
manufacture our product candidates. Such suppliers may not sell this capital equipment or these raw materials to our manufacturers at
the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition
of this capital equipment or these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the
commercial production of these raw materials. Any significant delay in the supply of a product candidate or the raw material
components thereof for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay
completion of our clinical studies, product testing and potential regulatory approval of our product candidates. If our manufacturers or
we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial
launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate
revenues from the sale of our product candidates.
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Because of the complex nature of many of our early stage compounds and product candidates, our manufacturers may not be
able to manufacture such compounds and product candidates at a cost, quantity or timeframe necessary to develop and commercialize
related products. If we successfully commercialize any of our drugs, we may be required to establish or access large-scale commercial
manufacturing capabilities. In addition, as our drug development pipeline matures, we will have a greater need for commercial
manufacturing capacity. We do not own or operate manufacturing facilities for the production of clinical or commercial quantities of
our product candidates and we currently have no plans to build our own clinical or commercial scale manufacturing capabilities. To
meet our projected needs for commercial manufacturing in the event that one or more of our product candidates gains marketing
approval, third parties with whom we currently work will need to increase their scale of production or we will need to secure alternate
suppliers.
We may not be successful in establishing or maintaining strategic partnerships to further the development of our therapeutic
programs. Additionally, if any of our current or future strategic partners fails to perform its obligations or terminates the
partnership, the development and commercialization of the product candidates under such agreement could be delayed or
terminated. Such failures could have a material adverse effect on our operations and business.
Our success will depend in significant part on our ability to attract and maintain strategic partners and strategic relationships
with major biotechnology or pharmaceutical companies to support the development and commercialization of our product candidates.
In these partnerships, we would expect our strategic partner to provide capabilities in research, development, marketing and sales, in
addition to funding.
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
any product candidates and programs because our product candidates may be deemed to be at too early of a stage of development for
collaborative effort or third parties may not view our product candidates as having the requisite potential.
Any delay in entering into new strategic partnership agreements related to our product candidates could have an adverse effect
on our business, including delaying the development and commercialization of our product candidates. If we are not able to establish
and maintain strategic partnerships:
we will have fewer resources with which to continue to operate our business;
the development of certain of our product candidates may be terminated or delayed; and
our cash expenditures needed to develop such product candidates would increase significantly and we do not have the
cash resources to develop our product candidates on our own.
Even if we are successful in our efforts to establish new strategic partnerships, the terms that we agree upon may not be
favorable to us. Furthermore, we may not be able to maintain such strategic partnerships if, for example, development or approval of a
product candidate is delayed, sales of an approved product are disappointing or the partner experiences its own financial or operational
constraints or a change in business strategy. If any current or future strategic partners do not devote sufficient time and resources to its
arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be
adversely affected. In addition, if any strategic partner were to breach or terminate its arrangements with us, the development and
commercialization of the affected product candidate could be delayed, curtailed or terminated because we may not have sufficient
financial resources or capabilities to continue development and commercialization of the product candidate on its own. For example,
Ophthotech Corporation provided us formal written notice in January 2017 that it would not be able to move forward with the
development of tivozanib outside of Asia and the Middle East for the potential diagnosis, prevention and treatment of non-oncologic
diseases or conditions of the eye in humans pursuant to a research and exclusive option agreement with us and exercised its right to
terminate its agreement with us, effective April 2017. Similarly, in June 2016, JSC “Pharmstandard-Ufimskiy Vitamin Plant” notified
us that, due to economic and market changes in Russia, it was exercising its right to terminate its license agreement with us to develop
and commercialize tivozanib in the territories of Russia, Ukraine and the Commonwealth of Independent States, effective September
9, 2016. Our current partner Biodesix can opt-out of its agreement with us at any time prior to the first commercial sale of
ficlatuzumab, at which point Biodesix would not be responsible for any future costs associated with developing and commercializing
ficlatuzumab other than any ongoing clinical studies.
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Much of the potential revenue from any of our strategic partnerships will likely consist of contingent payments, such as
development milestones and royalties payable on sales of any successfully developed drugs. Any such contingent revenue will depend
upon our, and our strategic partners’, ability to successfully develop, introduce, market and sell new drugs. In some cases, we are not
involved in these processes, and we depend entirely on our strategic partners. Any of our strategic partners may fail to develop or
effectively commercialize these drugs because it:
decides not to devote the necessary resources because of internal constraints, such as limited personnel with the requisite
scientific expertise, limited cash resources or specialized equipment limitations, or the belief that other product candidates
may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
does not have sufficient resources necessary to carry the product candidate through clinical development, regulatory
approval and commercialization; or
cannot obtain the necessary regulatory approvals.
If one or more of our strategic partners fails to develop or effectively commercialize product candidates for any of the foregoing
reasons, we may not be able to replace the strategic partner with another partner to develop and commercialize a product candidate
under the terms of the strategic partnership. We may also be unable to obtain, on terms acceptable to us, a license from such strategic
partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product
candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve
future profitability, and could cause our stock price to decline.
Risks Related to Our Intellectual Property Rights
We could be unsuccessful in obtaining or maintaining adequate patent protection for one or more of our product candidates,
which could result in competition and a decrease in the potential market share for our product candidates.
We cannot be certain that patents will be issued or granted with respect to applications that are currently pending, or that issued
or granted patents will not later be found to be invalid and/or unenforceable. The patent position of biotechnology and pharmaceutical
companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the United
States Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or
predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in
biotechnology and pharmaceutical patents. Consequently, patents may not issue from our pending patent applications. As such, we do
not know the degree of future protection that we will have on our proprietary products and technology. The scope of patent protection
that the USPTO will grant with respect to the antibodies in our antibody product pipeline is uncertain. It is possible that the USPTO
will not allow broad antibody claims that cover closely related antibodies as well as the specific antibody. Upon receipt of FDA
approval, competitors would be free to market antibodies almost identical to ours, including biosimilar antibodies, thereby decreasing
our market share.
If we do not obtain patent term extensions under the Hatch-Waxman Act and similar non-U.S. legislation to extend the term of
patents covering each of our product candidates, our business may be materially harmed.
Patents have a limited duration. The term of a U.S. patent, if granted from an application filed on or after June 8, 1995, is
generally 20 years from its earliest U.S. non-provisional filing date. Even if patents covering our product candidates are obtained,
once the patents expire, we may be open to competition from competitive medications. Given the amount of time required for the
development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or
shortly after such candidates are commercialized. As a result, our owned or in-licensed patent rights may not provide us with
sufficient rights to exclude others from commercializing products similar or identical to ours.
Depending upon the circumstances, the term of our owned and in-licensed patent rights that cover our product candidates may
be extended in the U.S. under the Hatch-Waxman Act and by similar legislation in other countries for delays incurred when seeking
marketing approval for a drug candidate. For example, the Hatch-Waxman Act permits a patent term extension of up to five years for
a patent covering an approved product as compensation for effective patent term lost during product development and the FDA
regulatory review process. However, we may not receive an extension if we fail to apply within the applicable deadline, fail to apply
prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could
be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the
period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to
market competing products sooner. As a result, our revenue from applicable products could be reduced, possibly materially.
The U.S. patent rights that we exclusively license covering tivozanib are scheduled to expire from 2018 to 2023. The U.S.
patent covering the molecule and its therapeutic use is scheduled to expire in 2022. In view of the length of time tivozanib has been
under regulatory review at the FDA, however, a patent term extension of up to 5 years may be available, which, if granted, would
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extend the term of this patent until 2027. However, the length of the extension could be less than we request, or no extension may be
granted at all. If we are unable to obtain a patent term extension or the term of any such extension is less than we request, the period
of time during which we can enforce our patent rights covering tivozanib or its use will be shortened, and our competitors may obtain
approval to market a competing product sooner. As a result, our potential revenue from tivozanib could be materially reduced,
causing material harm to our business.
Issued patents covering one or more of our products could be found invalid or unenforceable if challenged in patent office
proceedings, or in court.
If we or one of our strategic partners were to initiate legal proceedings against a third-party to enforce a patent covering one of
our products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States,
defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an
alleged failure to meet one or more statutory requirements for patentability, including, for example, lack of novelty, obviousness, lack
of written description or non-enablement. In addition, patent validity challenges may, under certain circumstances, be based upon non-
statutory obviousness-type double patenting, which, if successful, could result in a finding that the claims are invalid for obviousness-
type double patenting or the loss of patent term, including a patent term adjustment granted by the United States Patent and Trademark
Office, if a terminal disclaimer is filed to obviate a finding of obviousness-type double patenting. Grounds for an unenforceability
assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the
USPTO, or made a misleading statement, during prosecution. Additionally, third parties are able to challenge the validity of issued
patents through administrative proceedings in the patent offices of certain countries, including the USPTO and the European Patent
Office. Although we have conducted due diligence on patents we have exclusively in-licensed, and we believe that we have
conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of
invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot
be certain that there is no invalidating prior art, of which we and the patent examiner were unaware 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 one of our products. Such a loss of patent protection could have a material adverse impact on our business.
Claims that our platform technologies, our products or the sale or use of our products infringe the patent rights of third parties
could result in costly litigation or could require substantial time and money to resolve, even if litigation is avoided.
We cannot guarantee that our platform technologies, our products, or the use of our products, do not infringe third-party patents.
Third parties might allege that we are infringing their patent rights or that we have misappropriated their trade secrets. Such third
parties might resort to litigation against us. The basis of such litigation could be existing patents or patents that issue in the future.
It is also possible that we failed to identify relevant third-party patents or applications. For example, applications filed before
November 29, 2000, and certain applications filed after that date that will not be filed outside the United States remain confidential
until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest
filing, which is referred to as the priority date. Therefore, patent applications covering our products or platform technology could have
been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to
certain limitations, be later amended in a manner that could cover our platform technologies, our products or the use of our products.
With regard to tivozanib, we are aware of a third-party United States patent, and corresponding foreign counterparts, that
contain broad claims related to the use of an organic compound, that, among other things, inhibits tyrosine phosphorylation of a VEGF
receptor caused by VEGF binding to such VEGF receptor. We are also aware of a third party United States patent that contains broad
claims related to the use of a tyrosine kinase inhibitor in combination with a DNA damaging agent such as chemotherapy or radiation,
and we have received written notice from the patent owners indicating that they believe we may need a license from them in order to
avoid infringing their patent rights. With regard to ficlatuzumab, we are aware of two separate families of United States patents,
United States patent applications and foreign counterparts, with each of the two families being owned by a different third party, that
contain broad claims related to anti-HGF antibodies having certain binding properties and their use. With regard to AV-203, we are
aware of a third-party United States patent that contains broad claims relating to anti-ErbB3 antibodies. In the event that an owner of
one or more of these patents were to bring an infringement action against us, we may have to argue that our product, its manufacture
or use does not infringe a valid claim of the patent in question. Furthermore, if we were to challenge the validity of any issued United
States patent in court, we would need to overcome a statutory presumption of validity that attaches to every United States patent. This
means that in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims.
There is no assurance that a court would find in our favor on questions of infringement or validity.
In order to avoid or settle potential claims with respect to any of the patent rights described above or any other patent rights of
third parties, we may choose or be required to seek a license from a third-party and be required to pay license fees or royalties or both.
These licenses may not be available on commercially acceptable terms, or at all. Even if we or our strategic partners were able to
obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual
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property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business
operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.
This could harm our business significantly.
Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming,
regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us
with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and
attention of our management team, distracting them from the pursuit of other company business.
Unfavorable outcomes in an intellectual property litigation could limit our research and development activities and/or our ability to
commercialize certain products.
If third parties successfully assert intellectual property rights against us, we might be barred from using aspects of our
technology platform, or barred from developing and commercializing related products. Prohibitions against using specified
technologies, or prohibitions against commercializing specified products, could be imposed by a court or by a settlement agreement
between us and a plaintiff. In addition, if we are unsuccessful in defending against allegations of patent infringement or
misappropriation of trade secrets, we may be forced to pay substantial damage awards to the plaintiff. There is inevitable uncertainty
in any litigation, including intellectual property litigation. There can be no assurance that we would prevail in any intellectual property
litigation, even if the case against us is weak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to
obtain a license from the patent owner in order to continue our research and development programs or our partnerships or to market
our product(s). It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. This
could limit our research and development activities, our ability to commercialize specified products, or both.
Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to
sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a
material adverse effect on our ability to raise the funds necessary to continue our clinical trials, in-license needed technology, or enter
into strategic partnerships that would help us bring our product candidates to market.
In addition, any future patent litigation, interference or other administrative proceedings will result in additional expense and
distraction of our personnel. An adverse outcome in such litigation or proceedings may expose us or our strategic partners to loss of
our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially
acceptable terms, if at all.
An intellectual property litigation could lead to unfavorable publicity that could harm our reputation and cause the market price of
our common stock to decline.
During the course of any patent litigation, there could be public announcements of the results of hearings, rulings on motions,
and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the
perceived value of our products, programs, or intellectual property could be diminished. In such event, the market price of our
common stock may decline.
AV-380 and tivozanib are protected by patents exclusively licensed from other companies or institutions. If the licensors terminate
the licenses or fail to maintain or enforce the underlying patents, our competitive position would be harmed and our partnerships
could be terminated.
Certain of our product candidates and out-licensing arrangements depend on patents and/or patent applications owned by other
companies or institutions with which we have entered into intellectual property licenses. In particular, we hold exclusive licenses from
St. Vincent’s for therapeutic applications that benefit from inhibition or decreased expression or activity of MIC-1, which we refer to
as GDF15 and which we used in our AV-380 program, and from KHK for tivozanib. We may enter into additional license agreements
as part of the development of our business in the future. Our licensors may not successfully prosecute certain patent applications under
which we are licensed and on which our business depends. Even if patents issue from these applications, our licensors may fail to
maintain these patents, may decide not to pursue litigation against third-party infringers, may fail to prove infringement, or may fail to
defend against counterclaims of patent invalidity or unenforceability. In addition, in spite of our best efforts, a licensor could claim
that we have materially breached a license agreement and terminate the license, thereby removing our or our licensees’ ability to
obtain regulatory approval for and to market any product covered by such license. If these in-licenses are terminated, or if the
underlying patents fail to provide the intended market exclusivity, competitors would have the freedom to seek regulatory approval of,
and to market, identical products. In addition, the partners to which we have sublicensed certain rights under these licenses, including
Novartis and EUSA, would likely have grounds for terminating our partnerships if these licenses are terminated or the underlying
patents are not maintained or enforced. This could have a material adverse effect on our results of operations, our competitive
business position and our business prospects.
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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other
proprietary information.
In addition to patents, we rely on trade secrets, technical know-how, and proprietary information concerning our business
strategy in order to protect our competitive position. In the course of our research, development and business activities, we often rely
on confidentiality agreements to protect our proprietary information. Such confidentiality agreements are used, for example, when we
talk to potential strategic partners. In addition, each of our employees is required to sign a confidentiality agreement upon joining our
company. We take steps to protect our proprietary information, and we seek to carefully draft our confidentiality agreements to protect
our proprietary interests. Nevertheless, there can be no guarantee that an employee or an outside party will not make an unauthorized
disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor
will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take
against persons making such unauthorized disclosures.
Trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants,
contractors, or outside scientific collaborators might intentionally or inadvertently disclose our trade secret information to competitors.
Enforcing a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time-consuming, and the
outcome is unpredictable. In addition, courts outside the United States sometimes are less willing than U.S. courts to protect trade
secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
Our research and development strategic partners may have rights to publish data and other information to which we have rights.
In addition, we sometimes engage individuals or entities to conduct research relevant to our business. The ability of these individuals
or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject
to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our confidential
information. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentiality
of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade
secret information may be jeopardized.
Intellectual property rights may not address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
Others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of
the patents that we own or have exclusively licensed.
We or our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent
or pending patent application that we own or have exclusively licensed.
We or our licensors or strategic partners might not have been the first to file patent applications covering certain of our
inventions.
Others may independently develop similar or alternative technologies or duplicate any of our technologies without
infringing our intellectual property rights.
It is possible that our pending patent applications will not lead to issued patents.
Issued patents that we own or have exclusively licensed may not provide us with a competitive advantage; for example,
our issued patents may not be broad enough to prevent the commercialization of competitive antibodies that are biosimilar
to one or more of our antibody products, or may be held invalid or unenforceable, as a result of legal challenges by our
competitors.
Our competitors might conduct research and development activities in countries where we do not have patent rights and
then use the information learned from such activities to develop competitive products for sale in our major commercial
markets.
We may not develop additional proprietary technologies that are patentable.
The patents of others may have an adverse effect on our business.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly
patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological complexity and legal
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complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time-consuming and inherently uncertain. In
addition, several recent events have increased uncertainty with regard to our ability to obtain patents in the future and the value of
patents once obtained. Among these, in September 2011, patent reform legislation passed by Congress was signed into law in the U.S.
The new patent law introduces changes including a first-to-file system for determining which inventors may be entitled to receive
patents, and a new post-grant review process that allows third parties to challenge newly issued patents. It remains to be seen how the
biopharmaceutical industry will be affected by such changes in the patent system. In addition, the U.S. Supreme Court has ruled on
several patent cases in recent years, either narrowing the scope of patent protection available in specified circumstances or weakening
the rights of patent owners in specified situations. 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 could weaken our ability to obtain new patents or
to enforce our existing patents and patents that we might obtain in the future.
Risks Related to Regulatory Approval and Marketing of Our Product Candidates and Other Legal Compliance Matters
Even if we complete the necessary preclinical studies and clinical trials, the regulatory approval process is expensive, time-
consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our product
candidates. If we or our collaborators are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we
will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.
Our product candidates and the activities associated with their development and commercialization, including their design,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, export
and import, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the EMA
and comparable regulatory authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us
from commercializing the product candidate. We and our collaborators have not received approval to market any of our product
candidates from regulatory authorities in any jurisdiction. We have only limited experience in filing and supporting the applications
necessary to gain marketing approvals and expect to rely on third-party contract research organizations to assist us in this process.
Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to the
various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing
regulatory approval also requires the submission of information about the product manufacturing process to, and inspection of
manufacturing facilities by, the relevant regulatory authority. Our product candidates may not be effective, may be only moderately
effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our
obtaining marketing approval or prevent or limit commercial use.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years if
additional clinical trials are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including
the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development
period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product
application, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries
have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient
for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from
preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval we or
our collaborators ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved
product not commercially viable.
Accordingly, if we or our collaborators experience delays in obtaining approval or if we fail to obtain approval of our product
candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenues will be materially
impaired.
Failure to obtain marketing approval in foreign jurisdictions would prevent our product candidates from being marketed in such
jurisdictions.
In order to market and sell our medicines in the European Union and many other jurisdictions, we or our collaborators must
obtain marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among
countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain
FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining
FDA approval. In addition, in many countries outside the United States, a product be approved for reimbursement before the product
can be approved for sale in that country. We or our collaborators may not obtain approvals from regulatory authorities outside the
United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or
jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in
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other countries or jurisdictions or by the FDA. We may not be able to file for marketing approvals and may not receive necessary
approvals to commercialize our products in any market.
We may not be able to obtain orphan drug designation or orphan drug exclusivity for our product candidates, and, even if we do,
that exclusivity may not prevent the FDA or the EMA from approving other competing products.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs and biologics for
relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug
if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals
annually in the United States. We or our collaborators may seek orphan drug designations for other product candidates and may be
unable to obtain such designations.
Even if we obtain orphan drug designation for a product candidate, we may not be able to obtain orphan drug exclusivity for that
candidate. Generally, a product with orphan drug designation only becomes entitled to orphan drug exclusivity if it receives the first
marketing approval for the indication for which it has such designation, in which case the FDA or the EMA will be precluded from
approving another marketing application for the same product for that indication for the applicable exclusivity period. The applicable
exclusivity period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six
years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market
exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or the EMA determines that the request for
designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of
patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from
competition because different products can be approved for the same condition. Even after an orphan drug is approved, the FDA can
subsequently approve the same drug or biologic for the same condition if the FDA concludes that the later product is clinically
superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
Even if we or our collaborators obtain marketing approvals for our product candidates, the terms of approvals and ongoing
regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to
generate revenue.
Once marketing approval has been granted, an approved product and its manufacturer and marketer are subject to ongoing
review and extensive regulation. We and our collaborators must therefore comply with requirements concerning advertising and
promotion for any of our product candidates for which we obtain marketing approval. Promotional communications with respect to
prescription products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the
product’s approved labeling. Thus, we will not be able to promote any products we develop for indications or uses for which they are
not approved.
In addition, manufacturers of approved products and those manufacturers’ facilities are required to comply with extensive FDA
requirements, including ensuring that quality control and manufacturing procedures conform to cGMPs, which include requirements
relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting
requirements. We and our collaborators and our contract manufacturers could be subject to periodic unannounced inspections by the
FDA to monitor and ensure compliance with cGMPs.
Accordingly, assuming we receive marketing approval for one or more of our product candidates, we will continue to expend
time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality
control.
If we and our collaborators are not able to comply with post-approval regulatory requirements, we could have the marketing
approvals for our products withdrawn by regulatory authorities and our ability to market any products could be limited, which could
adversely affect our ability to achieve or sustain profitability. Further, the cost of compliance with post-approval regulations may have
a negative effect on our operating results and financial condition.
Any product candidate for which we or our collaborators obtain marketing approval could be subject to restrictions or withdrawal
from the market and we may be subject to substantial penalties if we fail to comply with regulatory requirements or if we
experience unanticipated problems with our product candidates, when and if any of them are approved.
Any product candidate for which we or our collaborators obtain marketing approval, along with the manufacturing processes,
post-approval clinical data, labeling, advertising and promotional activities for such product, will be subject to continual requirements
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of and review by the FDA and other regulatory authorities. These requirements include submissions of safety and other post-
marketing information and reports, registration and listing requirements, cGMP requirements relating to quality control and
manufacturing, quality assurance and corresponding maintenance of records and documents, and requirements regarding the
distribution of samples to physicians and recordkeeping. Even if marketing approval of a product candidate is granted, the approval
may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain
requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the medicine, including the
requirement to implement a risk evaluation and mitigation strategy.
The FDA and other agencies, including the Department of Justice, or the DOJ, closely regulate and monitor the post-approval
marketing and promotion of products to ensure that they are marketed and distributed only for the approved indications and in
accordance with the provisions of the approved labeling. The FDA and DOJ impose stringent restrictions on manufacturers’
communications regarding off-label use and if we do not market our products for their approved indications, we may be subject to
enforcement action for off-label marketing. Violations of the Federal Food, Drug, and Cosmetic Act and other statutes, including the
False Claims Act, relating to the promotion and advertising of prescription products may lead to investigations and enforcement
actions alleging violations of federal and state health care fraud and abuse laws, as well as state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our products, manufacturers or
manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
restrictions on such products, manufacturers or manufacturing processes;
restrictions on the labeling or marketing of a product;
restrictions on distribution or use of a product;
requirements to conduct post-marketing studies or clinical trials;
warning letters or untitled letters;
withdrawal of the products from the market;
refusal to approve pending applications or supplements to approved applications that we submit;
recall of products;
damage to relationships with collaborators;
unfavorable press coverage and damage to our reputation;
fines, restitution or disgorgement of profits or revenues;
suspension or withdrawal of marketing approvals;
refusal to permit the import or export of our products;
product seizure;
injunctions or the imposition of civil or criminal penalties; and
litigation involving patients using our products.
Non-compliance with European Union requirements regarding safety monitoring or pharmacovigilance, and with requirements
related to the development of products for the pediatric population, can also result in significant financial penalties. Similarly, failure
to comply with the European Union’s requirements regarding the protection of personal information can also lead to significant
penalties and sanctions.
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Our relationships with healthcare providers, physicians and third party payors will be subject to applicable anti-kickback, fraud
and abuse and other healthcare laws and regulations, which, in the event of a violation, could expose us to criminal sanctions, civil
penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, physicians and third party payors will play a primary role in the recommendation and prescription of any
product candidates for which we obtain marketing approval. Our future arrangements with healthcare providers, physicians and third
party payors may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the
business or financial arrangements and relationships through which we market, sell and distribute any products for which we obtain
marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the
referral of an individual for, or the purchase, order or recommendation or arranging of, any good or service, for which
payment may be made under a federal healthcare program such as Medicare and Medicaid;
the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions,
against individuals or entities for, among other things, knowingly presenting, or causing to be presented, false or fraudulent
claims for payment by a federal healthcare program or making a false statement or record material to payment of a false
claim or avoiding, decreasing or concealing an obligation to pay money to the federal government, with potential liability
including mandatory treble damages and significant per-claim penalties, currently set at $10,781 to $21,563 per false claim;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for
executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing
regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy,
security and transmission of individually identifiable health information;
the federal Physician Payments Sunshine Act requires applicable manufacturers of covered products to annually report to
CMS (i) payments and other transfers of value to physicians and teaching hospitals, and (ii) certain physician ownership or
investment interests; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws and transparency
statutes, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by
third party payors, including private insurers.
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government and may require manufacturers to report
information related to payments and other transfers of value to other healthcare providers and healthcare entities, or marketing
expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of
which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
If our operations are found to be in violation of any of the laws described above or any governmental regulations that apply to
us, we may be subject to penalties, including civil and criminal penalties, damages, fines, individual imprisonment, integrity
obligations, exclusion from funded healthcare programs and the curtailment or restructuring of our operations. Any such penalties
could adversely affect our financial results. We are developing and implementing a corporate compliance program designed to ensure
that we will market and sell any future products that we successfully develop from our product candidates in compliance with all
applicable laws and regulations, but we cannot guarantee that this program will protect us from governmental investigations or other
actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted
against us and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on
our business, including the imposition of significant fines or other sanctions.
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 our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may
be subject to significant civil, criminal and administrative penalties, damages, fines, individual imprisonment, integrity obligations,
exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our
operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in
compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusion from
government funded healthcare programs.
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Current and future legislation may increase the difficulty and cost for us or our collaborators to obtain marketing approval of our
product candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and
proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of our product
candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any products for which we obtain
marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may
result in more rigorous coverage criteria and in additional downward pressure on the price that we may receive for any approved
products.
For example, in March 2010, President Obama signed into law the Affordable Care Act, as amended by the Health Care and
Education Affordability Reconciliation Act, or collectively the ACA. In January 2017, Congress voted to adopt a budget resolution for
fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the ACA.
The Budget Resolution is not a law, however, it is widely viewed as the first step toward the passage of legislation that would repeal
certain aspects of the ACA. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with
authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision
of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or
manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of the
ACA that are repealed.
Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include the Budget
Control Act of 2011, which, among other things, led to aggregate reductions to Medicare payments to providers of up to 2% per fiscal
year that started in 2013 and, due to subsequent legislation, will continue until 2025. In addition, the American Taxpayer Relief Act
of 2012, 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 new laws may result in additional reductions in
Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which
regulatory approval is obtained.
We expect that other healthcare reform measures that may be adopted in the future, may result in additional reductions in
Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward
pressure on the price that we receive for any approved product. 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 products.
In addition, with the new Administration and Congress, there will likely be additional legislative changes, including repeal and
replacement of certain provisions of the ACA. It remains to be seen, however, precisely what the new legislation will provide, when it
will be enacted and what impact it will have on the availability of healthcare and containing or lowering the cost of healthcare. Such
reforms could have an adverse effect on anticipated revenue from product candidates that we may successfully develop and for which
we may obtain marketing approval and may affect our overall financial condition and ability to develop product candidates.
Moreover, legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and
promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or
whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing
approvals of our product candidates, if any, may be. In addition, increased scrutiny by the United States Congress of the FDA’s
approval process may significantly delay or prevent marketing approval, as well as subject us and any collaborators to more stringent
product labeling and post-marketing testing and other requirements.
Laws and regulations governing any international operations we may have in the future may preclude us from developing,
manufacturing and selling certain products outside of the United States and require us to develop and implement costly
compliance programs.
If we expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws
and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S.
individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any
foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the
individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United
States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly
reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of
internal accounting controls for international operations.
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Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In
addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated
by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in
connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to
FCPA enforcement actions.
Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing
with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data
relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to
comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product
candidates outside of the United States, which could limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties
and suspension or debarment from government contracting. The Securities and Exchange Commission, or SEC, also may suspend or
bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or
incur costs that could have a material adverse effect on our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory
procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. From time to time and in the
future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and
may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste
products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of
contamination or injury resulting from the use or disposal of our 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 for failure to comply with such laws and regulations.
We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous materials, but this insurance may not provide adequate coverage against potential liabilities.
However, we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and
regulations. Current or future environmental laws and regulations may impair our research, development or production efforts, which
could adversely affect our business, financial condition, results of operations or prospects. In addition, failure to comply with these
laws and regulations may result in substantial fines, penalties or other sanctions.
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, such as the countries of the European Union, the pricing of prescription pharmaceuticals is subject to
governmental control and access. In these countries, pricing negotiations with governmental authorities can take considerable time
after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we or our
collaborators may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available
therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels,
our business could be materially harmed.
We rely significantly upon information technology and any failure, inadequacy, interruption or security lapse of that technology,
including any cyber security incidents, could harm our ability to operate our business effectively.
Despite the implementation of security measures, our internal computer systems and those of third parties with which we
contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our operations,
and could result in a material disruption of our clinical and commercialization activities and business operations, in addition to
possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in our
regulatory approval efforts and significantly increase our costs to recover or reproduce the data. 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 public disclosure of confidential or
proprietary information, we could incur liability and our product development and commercialization efforts could be delayed.
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Risks Related to Employee Matters and Managing Growth
If we fail to attract and keep senior management, we may be unable to successfully develop our product candidates, conduct our
clinical trials and commercialize our product candidates.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management personnel. We
are highly dependent upon our senior management, as well as others on our management team. We have completed several reductions
in force related to restructurings we have completed in the past, which could make it more difficult to retain or attract employees in the
future. The loss of services of employees, and in particular, of a member of management could delay or prevent our ability to
successfully maintain or enter into new licensing arrangements or collaborations, the successful development of our product
candidates, the completion of our planned clinical trials or the commercialization of our product candidates. We do not carry “key
person” insurance covering any members of our senior management. Our employment arrangements with all of these individuals are
“at will,” meaning they or we can terminate their service at any time.
We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies,
universities, governmental entities and other research institutions, many of which have substantially greater resources with which to
reward qualified individuals than we do. We may face challenges in retaining our existing senior management and key employees and
recruiting new employees to join our company as our business needs change. We may be unable to attract and retain suitably qualified
individuals, and our failure to do so could have an adverse effect on our ability to implement our future business plans.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and
requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures
to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have
established, to comply with federal and state health-care fraud and abuse laws and regulations, to report financial information or data
accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices.
These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of
information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We
have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such
laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our
rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
In addition, during the course of our operations, our directors, executives and employees may have access to material, nonpublic
information regarding our business, our results of operations or potential transactions we are considering. Despite the adoption of an
insider trading policy, we may not be able to prevent a director, executive or employee from trading in our common stock on the basis
of, or while having access to, material, nonpublic information. If a director, executive or employee was to be investigated, or an action
was to be brought against a director, executive or employee for insider trading, it could have a negative impact on our reputation and
our stock price. Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert
attention of our management team from other tasks important to the success of our business.
Risks Related to Ownership of Our Common Stock
If we fail to meet the requirements for continued listing on the Nasdaq Global Select Market, our common stock could be delisted
from trading, which would decrease the liquidity of our common stock and our ability to raise additional capital.
Our common stock is currently listed for quotation on the Nasdaq Global Select Market. We are required to meet specified
requirements to maintain our listing on the Nasdaq Global Select Market, including, among other things, a minimum bid price of
$1.00 per share. On October 11, 2016, we received a deficiency letter from the Listing Qualifications Department, or the Staff, of the
Nasdaq Stock Market notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below
the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Select Market. We have been provided an
initial period of 180 calendar days, or until April 10, 2017, to regain compliance with the minimum bid price requirement. If, at any
time before April 10, 2017, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive trading days,
we may be eligible to regain compliance with the minimum bid price requirement. Under certain circumstances, Nasdaq could require
that the bid price exceed $1.00 for more than ten consecutive trading days before determining that we comply with Nasdaq’s
continued listing standards. From October 11, 2016, the date of the deficiency letter, to the date of filing of this Annual Report on
Form 10-K, our common stock had not closed above $1.00 on any trading day.
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To maintain our common stock listing on the Nasdaq Global Select Market, we are also required to maintain a minimum market
value of listed securities, or MVLS, of $50,000,000. On January 6, 2017, we received a deficiency letter from the Staff notifying us
that, for the prior 30 consecutive trading days, our MVLS had fallen below the minimum $50,000,000 requirement for continued
inclusion on the Nasdaq Global Select Market. On March 1, 2017, we received a follow-up letter from the Staff notifying us that, as
of February 28, 2017, we had regained compliance with the minimum MVLS requirement because our MVLS was above $50,000,000
for 10 consecutive trading days. Although we regained compliance with the MVLS requirement as of February 28, 2017, our MVLS
is still low and we may fail to meet the MVLS requirement again in the future.
If we fail to satisfy the Nasdaq Global Select Market’s continued listing requirements, we may transfer to the Nasdaq Capital
Market, which generally has lower financial requirements for initial listing, to avoid delisting, or, if we fail to meet its listing
requirements, the OTC Bulletin Board. However, we may not be able to satisfy the initial listing requirements for the Nasdaq Capital
Market. For example, we do not currently meet the Nasdaq Capital Market’s stockholders’ equity requirement. A transfer of our
listing to the Nasdaq Capital Market or having our common stock trade on the OTC Bulletin Board could adversely affect the liquidity
of our common stock. Any such event could make it more difficult to dispose of, or obtain accurate quotations for the price of, our
common stock, and there also would likely be a reduction in our coverage by securities analysts and the news media, which could
cause the price of our common stock to decline further. We may also face other material adverse consequences in such event, such as
negative publicity, a decreased ability to obtain additional financing, diminished investor and/or employee confidence, and the loss of
business development opportunities, some or all of which may contribute to a further decline in our stock price.
The market price of our common stock has been, and is likely to be, highly volatile, and could fall below the price you paid. A
significant decline in the value of our stock price could also result in securities class-action litigation against us.
The market price of our common stock has been, and is likely to continue to be, highly volatile and subject to wide fluctuations
in price in response to various factors, many of which are beyond our control, including:
new products, product candidates or new uses for existing products introduced or announced by our strategic partners, or
our competitors, and the timing of these introductions or announcements;
actual or anticipated results from and any delays in our clinical trials;
results of regulatory reviews relating to our product candidates;
the results of our efforts to develop, acquire or in-license additional product candidates or products;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain
patent protection for our technologies;
announcements by us of material developments in our business, financial condition and/or operations;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures and capital
commitments;
additions or departures of key scientific or management personnel;
conditions or trends in the biotechnology and biopharmaceutical industries;
actual or anticipated changes in earnings estimates, development timelines or recommendations by securities analysts;
general economic and market conditions and other factors that may be unrelated to our operating performance or the
operating performance of our competitors, including changes in market valuations of similar companies; and
sales of common stock by us or our stockholders in the future, as well as the overall trading volume of our common stock.
In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have
experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of
those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of
our operating performance.
Periods of volatility in the market for a company’s stock are often followed by litigation against the company. For example,
since our May 2, 2013 announcement regarding the vote of the Oncologic Drugs Advisory Committee of the FDA, we and certain of
our former officers and directors have been involved in a number of legal proceedings, including those described in Part I, Item 3 of
this report under the heading “Legal Proceedings”. These proceedings and other similar litigation, if instituted against us, could result
in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business
and financial condition.
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We and our collaborators may not achieve development and commercialization goals in the time frames that we publicly estimate,
which could have an adverse impact on our business and could cause our stock price to decline.
We set goals, and make public statements regarding our expected timing for certain accomplishments, such as statements we
have made about the initiation and completion of clinical trials, filing and approval of regulatory applications and other developments
and milestones under our research and development programs and those of our partners and collaborators for tivozanib, ficlatuzumab,
AV-203, AV-380 and the AV-353 platform. The actual timing of these events can vary significantly due to a number of factors,
including, without limitation, delays or failures in our preclinical studies or clinical trials, the amount of time, effort and resources
committed to our programs and the uncertainties inherent in the regulatory approval process. As a result, there can be no assurance
that our preclinical studies and clinical trials will advance or be completed in the time frames we expect or announce, that we will
make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for
the achievement of key milestones under any of our programs. If we fail to achieve one or more of the milestones described above as
planned, our business could be materially adversely affected and the price of our common stock could decline.
Our management has broad discretion over our use of available cash and cash equivalents and might not spend our available cash
and cash equivalents in ways that increase the value of your investment.
Our management has broad discretion on where and how to use our cash and cash equivalents and you will be relying on the
judgment of our management regarding the application of our available cash and cash equivalents to fund our operations. Our
management might not apply our cash and cash equivalents in ways that increase the value of your investment. We expect to use a
substantial portion of our cash to fund existing and future research and development of our preclinical and clinical product candidates,
with the balance, if any, to be used for working capital and other general corporate purposes, which may in the future include
investments in, or acquisitions of, complementary businesses, joint ventures, partnerships, services or technologies. Our management
might not be able to yield a significant return, if any, on any investment of this cash. You will not have the opportunity to influence
our decisions on how to use our cash reserves.
Fluctuations in our quarterly operating results could adversely affect the price of our common stock.
Our quarterly operating results may fluctuate significantly. Some of the factors that may cause our operating results to fluctuate
on a period-to-period basis include:
the status of our clinical development programs;
the level of expenses incurred in connection with our clinical development programs, including development and
manufacturing costs relating to our clinical development candidates;
the implementation of restructuring and cost-savings strategies;
the implementation or termination of collaboration, licensing, manufacturing or other material agreements with third
parties, and non-recurring revenue or expenses under any such agreement;
costs associated with lawsuits against us or other litigation in which we may become involved, including the current
purported class action described elsewhere in Part I, Item 3 of this report under the heading “Legal Proceedings”;
changes in our loan agreement with Hercules, including the existence of any event of default that may accelerate
payments due thereunder; and
compliance with regulatory requirements.
Period-to-period comparisons of our historical and future financial results may not be meaningful, and investors should not rely
on them as an indication of future performance. Our fluctuating results may fail to meet the expectations of securities analysts or
investors. Our failure to meet these expectations may cause the price of our common stock to decline.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock
price.
As widely reported, global credit and financial markets have been experiencing extreme volatility, and in some cases,
disruptions, over the past several years, in many cases, over extended periods. Although certain of these trends have recently showed
signs of reversing, there can be no assurance that rapid or extended periods of deterioration in credit and financial markets and
confidence in economic conditions will not occur. Our general business strategy may be adversely affected by external economic
conditions and a volatile business environment or unpredictable and unstable market conditions. If the equity and credit markets are
not favorable at any time we seek to raise capital, it may make any necessary debt or equity financing more difficult, more costly, and
more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse
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effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development
plans. In addition, there is a risk that one or more of our current service providers, manufacturers or other partners may not survive
economically turbulent times, which could directly affect our ability to attain our operating goals on schedule and on budget.
At December 31, 2016, we had approximately $23.3 million of cash, cash equivalents and marketable securities consisting of
cash on deposit with banks, a U. S. government money market fund, and corporate debt securities, including commercial paper. As of
the date of this report, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our
cash equivalents. However, no assurance can be given that deterioration in conditions of the global credit and financial markets would
not negatively impact our current portfolio of cash equivalents or our ability to meet our financing objectives. Dislocations in the
credit market may adversely impact the value and/or liquidity of cash equivalents owned by us.
There is a possibility that our stock price may decline because of volatility of the stock market and general economic conditions.
Future sales of shares of our common stock, including shares issued upon the exercise of currently outstanding options, could
negatively affect our stock price.
A substantial portion of our outstanding common stock can be traded without restriction at any time. Some of these shares are
currently restricted as a result of securities laws, but will be able to be sold, subject to any applicable volume limitations under federal
securities laws with respect to affiliate sales, in the near future. As such, sales of a substantial number of shares of our common stock
in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares
intend to sell such shares, could reduce the market price of our common stock. In addition, we have a significant number of shares that
are subject to outstanding options. The exercise of these options and the subsequent sale of the underlying common stock could cause
a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in the future at a time and at
a price that we deem appropriate.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our
share price and trading volume could decline.
The trading market for our common stock may depend in part on the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover
us, or provide favorable coverage. A lack of research coverage may negatively impact the market price of our common stock. To the
event we do have analyst coverage, if one or more analysts downgrade our stock or change their opinion of our stock, our share price
would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
A decline in our stock price may affect future fundraising efforts.
We currently have no product revenues, and depend entirely on funds raised through other sources. One source of such funding
is future debt and/or equity offerings. Our ability to raise funds in this manner depends upon, among other things, our stock price,
which may be affected by capital market forces, evaluation of our stock by securities analysts, product development success (or
failure), and internal management operations and controls.
Provisions in our certificate of incorporation, our by-laws or Delaware law might discourage, delay or prevent a change in control
of our company or changes in our management and, therefore, depress the market price of our common stock.
Provisions of our certificate of incorporation, our by-laws or Delaware law may have the effect of deterring unsolicited
takeovers or delaying or preventing a change in control of our company or changes in our management, including transactions in
which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. These
provisions include:
advance notice requirements for stockholder proposals and nominations;
the inability of stockholders to act by written consent or to call special meetings;
the ability of our board of directors to make, alter or repeal our by-laws; and
the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder
approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a
potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.
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In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from
engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or
within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay
in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the
likelihood that a stockholder could receive a premium for shares of our common stock held by a stockholder in an acquisition.
Our business could be negatively affected as a result of the actions of activist shareholders.
Proxy contests have been waged against companies in the biopharmaceutical industry over the last few years. If faced with a
proxy contest, we may not be able to successfully respond to the contest, which would be disruptive to our business. Even if we are
successful, our business could be adversely affected by a proxy contest because:
responding to proxy contests and other actions by activist shareholders may be costly and time-consuming, and may
disrupt our operations and divert the attention of management and our employees;
perceived uncertainties as to the potential outcome of any proxy contest may result in our inability to consummate
potential acquisitions, collaborations or in-licensing opportunities and may make it more difficult to attract and retain
qualified personnel and business partners; and
if individuals that have a specific agenda different from that of our management or other members of our board of
directors are elected to our board as a result of any proxy contest, such an election may adversely affect our ability to
effectively and timely implement our strategic plan and create additional value for our stockholders.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our ability to produce accurate financial statements and on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us, on an annual basis, to review and evaluate our internal controls, and
requires our independent registered public accounting firm to attest to the effectiveness of our internal controls. Despite our efforts, we
can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions with respect to the
effectiveness of our internal control over financial reporting under Section 404. There is a risk that neither we nor our independent
registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial
reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements.
In connection with the audit of our consolidated financial statements for the year ended December 31, 2016, we and our
independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A
material weakness is a deficiency, or a 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 financial statements will not be prevented or detected on a
timely basis. This material weakness related to the failure during 2016 to regularly reconcile the U.K. bank account held by our U.K.
subsidiary, Aveo Pharma Limited, that was established to support prior European operations that existed in 2012 to 2013 and had not
yet been repatriated. As a result, our internal controls did not detect on a timely basis that, in October 2016, the bank closed this
account due to inactivity. At our request, the bank has subsequently remitted the funds to our bank account in the U.S. The account
balance at the time the account was closed represented approximately 3% of our total cash, cash equivalents and marketable securities
as of December 31, 2016. Although no misappropriation of funds occurred, the control deficiency created the possibility that a
misappropriation of funds and/or a material misstatement to our consolidated financial statements may not have been prevented or
detected on a timely basis. Accordingly, this control deficiency was considered to represent a material weakness and, as a result, we
concluded that our internal control over financial reporting was not effective as of December 31, 2016.
With respect to this material weakness, certain remediation efforts have been deemed to have occurred as the account has been
closed and the funds have been remitted to our bank account in the U.S. However, we continue to evaluate additional controls and
procedures that we may design and put in place to address the material weakness. For more information, refer to Part II, Item 9A of
this report under the heading “Controls and Procedures—Internal Control Over Financial Reporting.”
We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be
sufficient to remediate the control deficiency that led to the material weakness in our internal control over financial reporting or to
avoid potential future material weaknesses. If we are unable to successfully remediate any material weaknesses in our internal control,
or if we identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we
may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to
59
applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may
decline as a result. We also could become subject to investigations by NASDAQ, the Securities and Exchange Commission, or SEC,
or other regulatory authorities.
We do not expect to pay any cash dividends for the foreseeable future.
You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay
any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and
expand our existing operations. In addition, our ability to pay cash dividends is currently prohibited by the terms of our debt financing
arrangements and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may
be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should
not purchase our common stock.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax
credit carryforwards.
As of December 31, 2016, we had federal and state net operating loss carryforwards of $476.2 million and $366.9 million,
respectively, and federal and state research and development tax credit carryforwards of $10.3 million and $4.2 million, respectively,
each of which if not utilized will expire at various dates through 2036. These net operating loss and tax credit carryforwards could
expire unused and be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of
1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally
defined as a greater than 50% change, by value, in its equity ownership over a 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
may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside
of our control. We have not conducted a detailed study to document whether our historical activities qualify to support the research
and development credit carryforwards. A detailed study could result in adjustment to our research and development credit
carryforwards. If we determine that an ownership change has occurred and our ability to use our historical net operating loss and tax
credit carryforwards is materially limited, or if our research and development carryforwards are adjusted, it would harm our future
operating results by effectively increasing our future tax obligations.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We sublease our principal facilities, which consist of approximately 5,000 square feet of office space located at 1 Broadway,
Cambridge, Massachusetts. Our lease arrangement is cancellable with 30 days’ notice to our landlord. We believe that our existing
facilities are sufficient for our current needs and for the foreseeable future.
ITEM 3.
Legal Proceedings
Two class action lawsuits have been filed against us and certain of our former officers and directors, (Tuan Ha-Ngoc, David N.
Johnston, William Slichenmyer and Ronald DePinho), in the United States District Court for the District of Massachusetts, one
captioned Paul Sanders v. Aveo Pharmaceuticals, Inc., et al., No. 1:13-cv-11157-JLT, filed on May 9, 2013, and the other captioned
Christine Krause v. AVEO Pharmaceuticals, Inc., et al., No. 1:13-cv-11320-JLT, filed on May 31, 2013. On December 4, 2013, the
District Court consolidated the complaints as In re AVEO Pharmaceuticals, Inc. Securities Litigation et al., No. 1:13-cv-11157-DJC,
and an amended complaint was filed on February 3, 2014. The amended complaint purported to be brought on behalf of shareholders
who purchased our common stock between January 3, 2012 and May 1, 2013. This consolidated amended complaint was dismissed
without prejudice on March 20, 2015, and the lead plaintiffs then filed a second amended complaint bringing similar allegations, and
which no longer named Mr. DePinho as a defendant. We moved to dismiss again, and after a second round of briefing and oral
argument, the court ruled in our favor and dismissed the second amended complaint with prejudice on November 18, 2015. The lead
plaintiffs have appealed the court’s decision to the United States Court of Appeals for the First Circuit. They also filed a motion to
vacate and reconsider the district court’s judgment, which we have opposed. On January 3, 2017, the Court granted Plaintiffs’ motion
to vacate the dismissal and judgment and Plaintiffs filed a motion to dismiss their appeal on February 8, 2017. On February 2, 2017,
Plaintiffs filed a third amended complaint, on behalf of shareholders who purchased common stock between May 16, 2012 and May 1,
2013, alleging claims similar to those alleged in the prior complaints, namely that we and certain of our former officers and directors
violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making
60
allegedly false and/or misleading statements concerning the phase 3 trial design and results for our TIVO-1 clinical trial in an effort to
lead investors to believe that the drug would receive approval from the FDA. On March 2, 2017, we filed an answer to the third
amended complaint, and the parties have initiated discovery. The lawsuit seeks unspecified damages, interest, attorneys’ fees, and
other costs. We deny any allegations of wrongdoing and intend to continue to vigorously defend against this lawsuit. However, there
is no assurance that we will be successful in our defense or that insurance will be available or adequate to fund any settlement or
judgment or the litigation costs of the action. Moreover, we are unable to predict the outcome or reasonably estimate a range of
possible loss at this time.
On April 4, 2014, Karen J. van Ingen, a purported purchaser of AVEO stock, filed a derivative complaint allegedly on behalf of
AVEO in the United States District Court for the District of Massachusetts, or the Court, Civil Action No. 1:14-cv-11672-DJC,
naming AVEO, as a nominal defendant and also naming as defendants present and former members of our board of directors,
including Tuan Ha-Ngoc, Henri A. Termeer, Kenneth M. Bate, Anthony B. Evnin, Robert Epstein, Raju Kucherlapati, Robert C.
Young, and Kenneth E. Weg. The complaint alleged breach of fiduciary duty and abuse of control between January 2012 and May
2013 with respect to allegedly misleading statements and omissions regarding tivozanib. The lawsuit seeks, among other relief,
unspecified damages, costs and expenses, including attorneys’ fees, an order requiring us to implement certain corporate governance
reforms, restitution from the defendants and such other relief as the court might find just and proper. We filed a motion to dismiss the
derivative complaint, and after briefing and oral argument, on March 18, 2015 the Court ruled in our favor and dismissed the case with
prejudice. The plaintiff then filed a motion seeking to vacate the Court’s order of dismissal and permit filing of an amended
complaint, which we opposed, and which the Court denied on June 30, 2015. The plaintiff has appealed the Court’s decision to the
United States Court of Appeals for the First Circuit. The parties have reached an agreement in principle to settle this matter. The
settlement involves certain corporate governance changes and other non-monetary relief. The plaintiff is seeking an award of
attorney’s fees, costs, and expenses in the amount of $822,116, as well as an incentive award of $2,500, both of which we expect will
be paid by insurance in the amount ordered by the Court. On September 16, 2016, the Court granted preliminary approval to the
proposed settlement. On December 19, 2016, the Court held a final settlement hearing on the terms of the proposed settlement and to
consider the award of fees to the plaintiff’s attorneys. No objections to the settlement were filed with the Court or raised at the
hearing. At the hearing, the Court indicated orally that the settlement will be approved, and heard argument regarding the size of
plaintiff’s potential attorney’s fee award. A formal approval order has not yet entered and the Court has not ruled on the final amount
of fees for the plaintiff’s attorneys (which, as stated above, are expected to be paid by insurance). Until a formal approval order has
been entered, there can be no complete assurance that the Court will approve the settlement.
On July 3, 2013, the staff, or SEC Staff, of the United States Securities and Exchange Commission, or the Commission, served a
subpoena on us for documents and information concerning tivozanib, including related communications with the FDA, investors and
others. In September 2015, the SEC Staff invited us to discuss the settlement of potential claims asserting that we violated federal
securities laws by omitting to disclose to investors the recommendation by the staff of the FDA on May 11, 2012, that we conduct an
additional clinical trial with respect to tivozanib. On March 29, 2016, the Commission filed a complaint against us and three of our
former officers in the U.S. District Court for the District of Massachusetts alleging that we misled investors about our efforts to obtain
FDA approval for tivozanib. Without admitting or denying the allegations in the Commission’s complaint, we consented to the entry
of a final judgment pursuant to which we paid the Commission a $4.0 million civil penalty to settle the Commission’s claims against
us. On March 31, 2016, the District Court entered a final judgment which (i) approved the settlement; (ii) permanently enjoined us
from violating Section 17(a) of the Securities Act of 1933, as amended, Sections 10(b) and 13(a) of the Securities Exchange Act of
1934, as amended, and rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder; and (iii) ordered us to pay the agreed-
to civil penalty. The Commission’s action against our three former officers is still pending. We are not a party to any litigation or
discussions between the SEC Staff and the former officers, and we can make no assurance regarding the outcome of that action or the
Commission’s claims against those individuals.
ITEM 4.
Mine Safety Disclosures
Not applicable.
61
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Price Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “AVEO”. The following table sets forth
the high and low sale prices per share for our common stock for the periods indicated:
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
2.02 $
3.50 $
2.59 $
1.47 $
High
Low
1.27 $
1.15 $
1.09 $
0.89 $
0.78
1.16
1.14
0.92
0.82
0.84
0.81
0.54
$
$
$
$
$
$
$
$
Holders
As of March 17, 2017, there were approximately 57 holders of record of our common stock. We believe that the number of
beneficial owners of our common stock at that date was substantially greater.
Dividends
We have never declared or paid any cash dividends on our common stock and our ability to pay cash dividends is currently
prohibited by the terms of our debt financing arrangements. We currently intend to retain earnings, if any, for use in our business and
do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, on our
common stock will be at the discretion of our board of directors after taking into account various factors, including our financial
condition, operating results, anticipated cash needs, and plans for expansion.
Purchase of Equity Securities
We did not purchase any of our equity securities during the period covered by this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
62
Comparative Stock Performance Graph
The information included under the heading “Comparative Stock Performance Graph” in this Item 5 of Part II of this Annual
Report on Form 10-K shall not be deemed to be “soliciting material” or subject to Regulation 14A or 14C, “filed” for purposes of
Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference
in any filing under the Securities Act of 1933, as amended, or the Exchange Act.
The graph below matches AVEO Pharmaceuticals, Inc.’s cumulative 5-Year total shareholder return on common stock with the
cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. The graph tracks the performance
of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 12/31/2011 to 12/31/2016.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among AVEO Pharmaceuticals, Inc., the NASDAQ Composite Index
and the NASDAQ Biotechnology Index
$350
$300
$250
$200
$150
$100
$50
$0
12/11
12/12
12/13
12/14
12/15
12/16
AVEO Pharmaceuticals, Inc.
NASDAQ Composite
NASDAQ Biotechnology
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
AVEO Pharmaceuticals, Inc.
NASDAQ Composite
NASDAQ Biotechnology
12/11
12/12
12/13
12/14
12/15
12/16
100.00
100.00
100.00
46.80
116.66
134.68
10.64
166.01
232.37
4.88
189.42
307.67
7.33
201.25
328.76
3.14
217.50
262.08
63
ITEM 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements
and the Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this Annual Report on Form 10-K. The Balance Sheet Data at December 31, 2016 and 2015 and the Statement of
Operations Data for each of the three years in the period ended December 31, 2016 have been derived from our audited Consolidated
Financial Statements for such years, included elsewhere in this Annual Report on Form 10-K. The Balance Sheet Data at December
31, 2014, 2013 and 2012, and the Statement of Operations Data for each of the two years in the period ended December 31, 2013 have
been derived from the audited Consolidated Financial Statements for such years not included in this Annual Report on Form 10-K.
Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Statement of Operations data:
2016
Revenue
Operating expenses:
Research and development
General and administrative
Restructuring and lease exit
Total operating expenses
Loss from operations
Interest expense, net
Change in fair value of warrant liability
Other (expense) income
Net loss before income taxes
Income tax provision
Net loss
Basic and diluted net loss per share
Weighted average number of common shares outstanding
Balance sheet data:
Cash, cash equivalent, and marketable securities
Working capital
Total assets
Loans payable, including current portion, net of discount
Accumulated deficit
Total stockholders' (deficit) equity
2015
Years Ended December 31,
2014
(in thousands, except per share data)
19,024 $
18,123 $
2013
1,293 $
2012
19,286
$
2,515 $
$
$
$
23,703
8,205
—
31,908
(29,393)
(1,949)
4,751
(195)
(26,786)
(101)
(26,887) $
12,875
14,217
4,358
31,450
(12,426)
(2,286)
—
(289)
(15,001)
—
(15,001) $
38,254
18,589
11,729
68,572
(50,449)
(2,356)
—
66
(52,739)
—
91,358
36,932
2,633
130,923
(111,637)
(3,004)
—
247
(114,394)
—
(52,739) $ (107,029) $ (114,394)
68,468
28,712
8,017
105,197
(103,904)
(3,002)
—
(123)
(107,029)
—
(0.39) $
69,268
(0.27) $
55,701
(1.01) $
52,289
(2.10) $
50,928
(2.64)
43,374
2016
2015
Years Ended December 31,
2014
(in thousands)
2013
2012
23,348 $
15,966
27,285
14,003
(521,916)
(1,923)
34,135 $
27,978
40,542
9,471
(495,029)
17,227
52,306 $
18,773
70,662
20,652
(480,028)
20,606
118,506 $
97,511
146,346
19,205
(427,289)
69,938
160,602
151,551
207,469
26,037
(320,260)
118,938
64
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our
financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and
analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section in
Part 1—Item 1A of this report for a discussion of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company dedicated to advancing a broad portfolio of targeted therapeutics for oncology and other
areas of unmet medical need. Our proprietary platform has delivered unique insights into cancer and related diseases. Our strategy is
to leverage these biomarker insights and partner resources to advance the development of our clinical pipeline.
Our pipeline includes our lead candidate tivozanib, an oral, once-daily, vascular endothelial growth factor, or VEGF tyrosine
kinase inhibitor, or TKI. Tivozanib is a potent, selective and long half-life inhibitor of all three VEGF receptors and is designed to
optimize VEGF blockade while minimizing off-target toxicities, potentially resulting in improved efficacy and minimal dose
modifications. Tivozanib has been investigated in several tumor types, including renal cell, colorectal and breast cancers.
In June 2013, the U.S. Food and Drug Administration, or FDA, issued a complete response letter denying our application for
approval of the use of tivozanib in first-line treatment of advanced renal cell carcinoma, or RCC, citing concerns regarding the
negative trend in overall survival in TIVO-1, our first pivotal phase 3 clinical trial.
In May 2016, we initiated enrollment and treatment of patients in TIVO-3, a new phase 3 clinical trial of tivozanib, in the third-
line treatment of patients with refractory RCC seeking to address the overall survival, or OS, concerns from the TIVO-1 trial presented
in the June 2013 complete response letter from the FDA and to support a request for regulatory approval of tivozanib in the United
States as a third-line treatment and as a first-line treatment for RCC. We expect to complete enrollment in the TIVO-3 trial in June
2017, and to report top line data in the first quarter of 2018. The TIVO-3 trial passed an initial safety data assessment in February 2017.
We expect a pre-planned interim futility analysis to occur mid-year 2017.
In March 2017, we initiated enrollment in the TiNivo trial, a phase 1/2 trial of tivozanib in combination with Opdivo®, or
nivolumab, an immune checkpoint, or PD-1, inhibitor, for the treatment of RCC. Bristol-Myers Squibb is supplying nivolumab for the
TiNivo trial, and we are the trial sponsor. The TiNivo trial is being led by the Institut Gustave Roussy in Paris under the direction of
Professor Bernard Escudier, MD, Chairman of the Genitourinary Oncology Committee. The phase 1 trial will primarily evaluate the
safety of tivozanib in combination with nivolumab at escalating doses of tivozanib and, assuming favorable results, is expected to be
followed by a phase 2 expansion at the established combination dose. We expect to receive initial data from the phase 1 portion of the
TiNivo trial in the first half of 2017.
In February 2016, EUSA Pharma (UK) Ltd., or EUSA, our European licensee, submitted a marketing authorization application,
or MAA, for tivozanib with the European Medicines Agency, or EMA, for the treatment of RCC. The application was validated in
March 2016, confirming that the submission was complete and that the EMA would initiate its review process. EUSA received the
Day 120 List of Questions from the Committee for Medicinal Products for Human Use, or CHMP, of the EMA in July 2016, and
submitted its responses in November 2016. In January 2017, EUSA received the Day 180 List of Outstanding Issues, or LOI, from the
CHMP, of the EMA. The Day 180 LOI signifies that the MAA is not approvable at the present time, and outlines outstanding
deficiencies, which are then required to be satisfactorily addressed in an oral explanation and/or in writing prior to a final application
decision. EUSA has informed AVEO that it expects to submit written responses to the Day 180 LOI in April 2017, and the EMA has
tentatively scheduled EUSA to provide an oral explanation to the CHMP in May 2017.
We also have a pipeline of monoclonal antibodies, including:
(i)
Ficlatuzumab, a potent hepatocyte growth factor, or HGF, antibody that inhibits the activity of the HGF/c-Met pathway.
Ficlatuzumab is in early stage clinical development, with ongoing studies in acute myloid leukemia, or AML, and
squamous cell cancer of the head and neck, or SCCHN. We and our worldwide partner Biodesix, Inc., or Biodesix, will
share equally in all future costs and profits relating to the development of ficlatuzumab;
(ii) AV-203, a potent, high-affinity inhibitor of the ErbB3 pathway. Our partner CANbridge Life Sciences Ltd., or
CANbridge, will fund manufacturing and clinical development through proof-of-concept in esophageal squamous cell
carcinoma;
65
(iii) AV-380, a potent, humanized IgG1 inhibitory monoclonal antibody targeting growth differentiating factor-15, or GDF15,
a divergent member of the TGF-ß family, for the potential treatment or prevention of cachexia. We have licensed AV-380
to Novartis, which will fund all development, manufacturing and commercialization; and
(iv) The AV-353 platform, a family of potent inhibitory antibody candidates specific to Notch 3, one of which has
demonstrated an ability in preclinical models to potentially reverse disease phenotype for pulmonary arterial hypertension,
or PAH. We are currently seeking a partner to advance development of the AV-353 platform for the potential treatment
of PAH.
Going Concern
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. To
continue as a going concern, we must secure additional capital to provide us with additional liquidity. We believe that our approximate
$23.3 million in cash, cash equivalents and marketable securities at December 31, 2016, could allow us to fund our planned operations
into the fourth quarter of 2017; however, additional funds will be needed to extend these operations into 2018 and maintain
compliance with our $10.0 million financial covenant under our loan agreement with Hercules Technology II, L.P. and Hercules
Technology III, L.P., affiliates of Hercules Technology Growth, which we collectively refer to as Hercules. We expect that, in order to
obtain additional capital, we will need to complete public or private financings of debt or equity, and / or receive milestone payments
from our partners. We may also seek to procure additional funds through future arrangements with collaborators, licensees or other
third parties, and these arrangements would generally require us to relinquish or encumber rights to some of our technologies or drug
candidates. Moreover, we may not be able receive milestone payments or complete additional financing or enter into such
arrangements on acceptable terms, if at all. For more information, refer to “—Liquidity and Capital Resources—Operating Capital
Requirements and Going Concern” below and Note 1 to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
Strategic Partnerships
CANbridge
In March 2016, which we refer to as the Effective Date, we entered into a collaboration and license agreement with CANbridge,
or the CANbridge Agreement, under which we granted CANbridge the exclusive right to develop, manufacture and commercialize
AV-203, our proprietary ErbB3 (HER3) inhibitory antibody, for the diagnosis, treatment and prevention of disease in humans and
animals in all countries other than the United States, Canada and Mexico. Under the terms of the CANbridge Agreement, if we
determine to grant a license to any ErbB3 inhibitory antibody in the United States, Canada or Mexico, we are obligated to first
negotiate with CANbridge for the grant to CANbridge of a license to such rights. The parties have both agreed not to directly or
indirectly develop or commercialize any other ErbB3 inhibitory antibody product during the term of the CANbridge Agreement other
than pursuant to the CANbridge Agreement.
CANbridge has responsibility for all activities and costs associated with the further development, manufacture, regulatory
filings and commercialization of AV-203 throughout its licensed territory. CANbridge is obligated to use commercially reasonable
efforts to develop and obtain regulatory approval for AV-203 in each of China, Japan, the United Kingdom, France, Italy, Spain, and
Germany. CANbridge will bear all costs for development of AV-203 through proof-of-concept in esophageal squamous cell
carcinoma, after which we would expect to contribute to certain worldwide development costs.
Pursuant to the CANbridge Agreement, CANbridge paid us an upfront fee of $1.0 million in April 2016. CANbridge also agreed
to reimburse us $1.0 million for certain manufacturing costs and expenses that we previously incurred, $0.5 million of which will be
due on the earlier of (i) the date of validation by CANbridge of certain manufacturing development activities we conducted and
(ii) twelve months from the Effective Date, and the remaining $0.5 million of which will be due on the earlier of (i) the date of
validation by CANbridge of such manufacturing development activities or (ii) eighteen months from the Effective Date. We are also
eligible to receive up to $42.0 million in potential development and regulatory milestone payments and up to $90.0 million in potential
sales based milestone payments based on annual net sales of licensed products. Upon commercialization, we are eligible to receive a
tiered royalty, with a percentage range in the low double-digits, on net sales of approved licensed products. CANbridge’s obligation to
pay royalties for each licensed product expires on a country-by-country basis on the later of the expiration of patent rights covering
such licensed product in such country, the expiration of regulatory data exclusivity in such country and ten years after the first
commercial sale of such licensed product in such country. A percentage of any milestone and royalty payments received by us,
excluding upfront and reimbursement payments, are due to Biogen Idec International GmbH, or Biogen Idec, as a sublicensing fee
under our option and license agreement with Biogen dated March 18, 2009, as amended.
66
EUSA
In December 2015, we entered into a license agreement with EUSA under which we granted to EUSA the exclusive,
sublicensable right to develop, manufacture and commercialize tivozanib in the territories of Europe (excluding Russia, Ukraine and
the Commonwealth of Independent States), Latin America (excluding Mexico), Africa, Australasia and New Zealand for all diseases
and conditions in humans, excluding non-oncologic diseases or conditions of the eye. EUSA is obligated to use commercially
reasonable efforts to seek regulatory approval for and commercialize tivozanib throughout its licensed territories in RCC. With the
exception of certain support to be provided by us in connection with the application for marketing approval by the EMA, EUSA has
responsibility for all activities and costs associated with the further development, manufacture, regulatory filings and
commercialization of tivozanib in its licensed territories.
Under the license agreement, EUSA made a research and development funding payment to us of $2.5 million in 2015. EUSA is
required to make a further research and development funding payment of $4.0 million if the EMA grants marketing approval for
tivozanib for treatment of RCC. We are eligible to receive additional research funding from EUSA, including up to $20.0 million for
the data generated by our phase 3 clinical trial in third-line RCC if EUSA elects to utilize such data for regulatory or commercial
purposes, and up to $2.0 million for the data generated by a phase 1 combination trial with a checkpoint inhibitor if EUSA elects to
utilize such data for regulatory or commercial purposes. We would be entitled to receive milestone payments of $2.0 million per
country upon reimbursement approval, if any, for RCC in each of France, Germany, Italy, Spain and the United Kingdom, and an
additional $2.0 million for the grant of marketing approval, if any, in three of the following five countries: Argentina, Australia,
Brazil, South Africa and Venezuela. We are also eligible to receive a payment of $2.0 million in connection with a filing by EUSA
with the EMA for marketing approval, if any, for tivozanib for the treatment of each of up to three additional indications and $5.0
million per indication in connection with the EMA’s grant of marketing approval for each of up to three additional indications, as well
as up to $335.0 million upon EUSA’s achievement of certain sales thresholds. We are also eligible to receive tiered double digit
royalties on net sales, if any, of licensed products in its licensed territories ranging from a low double digit up to mid-twenty percent
depending on the level of annual net sales. Thirty percent of any non-research and development related milestone and royalty
payments we receive is due to Kyowa Hakko Kirin Co., Ltd. (formerly Kirin Brewery Co. Ltd.), or KHK as a sublicensing fee under
our license agreement with KHK. The research and development funding payments under the EUSA license agreement are not
subject to sublicensing payment to KHK.
Novartis
In August 2015, we entered into a license agreement with Novartis International Pharmaceutical Ltd., or Novartis, under which we
granted Novartis the exclusive right to develop and commercialize AV-380 and our related antibodies that bind to GDF15 worldwide.
Under this agreement, Novartis is responsible for all activities and costs associated with the further development, regulatory filing and
commercialization of AV-380 worldwide.
Novartis made an upfront payment to us of $15.0 million in September 2015. We are also eligible to receive (a) up to $53.0
million in potential clinical milestone payments and up to $105.0 million in potential regulatory milestone payments tied to the
commencement of clinical trials and to regulatory approvals of products developed under the license agreement in the United States,
the European Union and Japan; and (b) up to $150.0 million in potential sales based milestone payments based on annual net sales of
such products. Upon commercialization, we are eligible to receive tiered royalties on net sales of approved products ranging from the
high single digits to the low double-digits. Novartis has responsibility under the license agreement for the development, manufacture
and commercialization of the licensed antibodies and any resulting approved therapeutic products. In December 2015, Novartis also
exercised its right under the license agreement to acquire our inventory of clinical quality drug substance, reimbursing us approximately
$3.5 million for such existing inventory.
Certain milestones achieved by Novartis would trigger milestone payment obligations from us to St. Vincent’s Hospital Sydney
Limited, which we refer to as St. Vincent’s, under our amended and restated license agreement with St. Vincent’s. In addition, royalties
on approved products, if any, will be payable to St. Vincent’s, and we and Novartis will share that obligation equally.
Pharmstandard
In August 2015, we entered into a license agreement with JSC “Pharmstandard-Ufimskiy Vitamin Plant,” or Pharmstandard, a
company registered under the laws of the Russian Federation. Pharmstandard is a subsidiary of Pharmstandard OJSC. Under the
license agreement, we granted to Pharmstandard the exclusive, sublicensable right to develop, manufacture and commercialize
tivozanib in the territories of Russia, Ukraine and the Commonwealth of Independent States, for all diseases and conditions in humans,
excluding non-oncologic ocular conditions.
In June 2016, following unsuccessful efforts to renegotiate certain terms of the Pharmstandard license agreement,
Pharmstandard notified us that due to economic and market changes in Russia it was exercising its right to terminate the license
67
agreement effective September 9, 2016. Upon termination of the license agreement, the licenses to tivozanib granted to Pharmstandard
were terminated, all product rights and regulatory documents were transferred to us, and Pharmstandard is no longer responsible for
the development and commercialization of tivozanib in its licensed territories. Pharmstandard filed an application for marketing
authorization in Russia for tivozanib for the treatment of renal cell carcinoma that was accepted by the Ministry of Health of the
Russian Federation in February 2016. This application was withdrawn following Pharmstandard’s termination notice.
Ophthotech
In November 2014, we entered into a research and exclusive option agreement with Ophthotech Corporation, or Ophthotech,
pursuant to which we provided Ophthotech an exclusive option to enter into a definitive license agreement whereby we would grant
Ophthotech the right to develop and commercialize tivozanib outside of Asia and the Middle East for the potential diagnosis,
prevention and treatment of non-oncologic diseases or conditions of the eye in humans. Pursuant to this option agreement, we granted
to Ophthotech an exclusive, royalty-free license or sublicense, as applicable, under intellectual property rights controlled by us solely
to perform the research and development activities related to the use of tivozanib for the specific purposes outlined in the agreement
during the option period. These activities included formulation work for ocular administration, preclinical research and the conduct of
a phase 1/2a proof-of-concept clinical trial of a product containing tivozanib in patients with wet age-related macular degeneration.
Ophthotech paid us $0.5 million in consideration for the grant of the option. Such amount is non-refundable and not creditable against
any other amounts due under the agreement.
In January 2017, Ophthotech notified us that it will not be able to develop tivozanib and exercised its right to terminate the
option agreement effective April 3, 2017.
Biodesix
In April 2014, we and Biodesix entered into the Biodesix Agreement to develop and commercialize ficlatuzumab. Under the
Biodesix Agreement, we granted Biodesix perpetual, non-exclusive rights to certain intellectual property, including all clinical and
biomarker data related to ficlatuzumab, to develop and commercialize VeriStrat®, Biodesix’s proprietary companion diagnostic test.
Biodesix granted us perpetual, non-exclusive rights to certain intellectual property, including diagnostic data related to VeriStrat, with
respect to the development and commercialization of ficlatuzumab; each license includes the right to sublicense, subject to certain
exceptions. Pursuant to a joint development plan, we retain primary responsibility for clinical development of ficlatuzumab. In
September 2016, we and Biodesix announced the termination of the FOCAL trial, a phase 2 proof-of-concept clinical study of
ficlatuzumab in which VeriStrat was used to select clinical trial subjects.
Under the Biodesix Agreement, with the exception of the costs incurred for the FOCAL trial, we and Biodesix are each required
to contribute 50% of all clinical, regulatory, manufacturing and other costs to develop ficlatuzumab. Pursuant to the Biodesix
Agreement, Biodesix was obligated to fund all costs of the FOCAL trial up to a cap of $15 million, following which all costs of the
FOCAL trial would be shared equally. In connection with the discontinuation of the FOCAL trial, on October 14, 2016, we and
Biodesix amended the Biodesix Agreement. Under the amendment, we agreed to share 50% of all program costs from August 1, 2016
forward. In return for bearing 50% of the FOCAL closeout costs after August 1, 2016, we will be entitled to recover an agreed
multiple of the additional costs borne by us out of any income Biodesix receives from the partnership in connection with the licensing,
development or commercialization of ficlatuzumab. We do not anticipate that these remaining costs will be material. Following such
recovery, the payment structure under the original Biodesix Agreement, which generally provides that the parties share equally in any
costs and revenue, will resume without such modification.
Pending marketing approval or the sublicense of ficlatuzumab, and subject to the negotiation of a commercialization agreement,
each party would share equally in commercialization profits and losses, subject to our right to be the lead commercialization party.
St. Vincent’s Hospital
In July 2012, we entered into a license agreement with St. Vincent’s, under which we obtained an exclusive, worldwide license
to research, develop, manufacture and commercialize products for therapeutic applications that benefit from inhibition or decreased
expression or activity of MIC-1, which is also known as GDF15. We believe GDF15 is a novel target for cachexia, and we are
exploiting this license in our AV-380 program for cachexia. Under the agreement, we have the right to grant sublicenses subject to
certain restrictions. We have a right of first negotiation to obtain an exclusive license to certain improvements that St. Vincent’s or
third parties may make to licensed therapeutic products. Under the license agreement, St. Vincent’s also granted us non-exclusive
rights for certain related diagnostic products and research tools.
68
In connection with entering into the original license agreement with St. Vincent’s in July 2012, we paid St. Vincent’s an upfront
license fee of $0.7 million and a low five-figure amount to reimburse St. Vincent’s for patent-related expenses it incurred with respect
to a specified licensed patent.
In August 2015, in connection with the execution of our license agreement with Novartis, we entered into an amended and
restated agreement with St. Vincent’s, pursuant to which we made an upfront payment to St. Vincent’s of $1.5 million. Under our
license agreement with St. Vincent’s:
We (or any sublicensee) are obligated to use diligent efforts to conduct research and clinical development and
commercially launch at least one licensed therapeutic product, and to maximize profits from licensed therapeutic products
for the benefit of us and St. Vincent’s. Subject to certain conditions, we have also agreed to achieve specified research,
development and regulatory milestones by specified dates. If we (or a sublicensee) do not achieve a given milestone by
the agreed date, we have the option of paying the amount we would have been obligated to pay had we timely achieved
the milestone, and, if we do so, St. Vincent’s will not have the right to terminate the license agreement based on our
failure to timely achieve such milestone.
We have agreed that, for as long as there is a valid claim in the licensed patents, we will not, and we will ensure that our
affiliates and our sublicensees do not, develop or commercialize any product, other than a licensed therapeutic product, for
the treatment, prevention or prophylaxis of cachexia, decreased appetite or body weight, that binds to GDF15 or the
GDF15 receptor and that is a GDF15 antagonist, and will not license or induce any other person to do the same.
We (or any sublicensee) are required to make milestone payments, up to an aggregate total of $18.9 million, upon the
earlier of achievement of specified development and regulatory milestones or a specified date for the first indication, and
upon the achievement of specified development and regulatory milestones for the second and third indications, for
licensed therapeutic products, some of which payments may be increased by a mid to high double-digit percentage rate for
milestones payments made after we grant any sublicense under the license agreement, depending on the sublicensed
territory or territories;
We (or any sublicensee) will be required to pay tiered royalty payments equal to a low-single-digit percentage of any net
sales we or our sublicensees make from licensed therapeutic products, an obligation we share with Novartis equally. The
royalty rate escalates within the low-single-digit range during each calendar year based on increasing licensed therapeutic
product sales during such calendar year. Our royalty payment obligations for a licensed therapeutic product in a particular
country end on the later of 10 years after the date of first commercial sale of such licensed therapeutic product in such
country or expiration of the last-to-expire valid claim of the licensed patents covering such licensed therapeutic product in
such country, and are subject to offsets under certain circumstances; and
We (or any sublicensee) will be required to reimburse St. Vincent’s for some or all of the reasonable costs and expenses it
incurs in patent management, filing, prosecuting and maintaining the licensed patents.
Astellas Pharma
In February 2011, we and our wholly-owned subsidiary AVEO Pharma Limited entered into a collaboration and license
agreement with Astellas Pharma Inc. and certain of its subsidiaries pursuant to which we and Astellas intended to develop and
commercialize tivozanib for the treatment of a broad range of cancers. Astellas elected to terminate the agreement effective August
2014, at which time the tivozanib rights were returned to us. In accordance with the Astellas Agreement, committed development
costs, including the costs of completing certain tivozanib clinical development activities, continue to be shared equally.
Biogen Idec
In March 2009, we entered into an exclusive option and license agreement with Biogen Idec regarding the development and
commercialization of our discovery-stage ErbB3-targeted antibodies for the potential treatment and diagnosis of cancer and other
diseases in humans outside of North America. In March 2014, we amended our agreement with Biogen Idec, and regained worldwide
rights to AV-203. Pursuant to the amendment, we were obligated to in good faith use reasonable efforts to seek a collaboration partner
to fund further development and commercialization of ErbB3-targeted antibodies. We satisfied this obligation in March 2016 upon
entering into our license agreement with CANbridge. We are obligated to pay Biogen Idec a percentage of milestone payments we
receive under the CANbridge agreement and single-digit royalty payments on net sales related to the sale of AV-203, up to cumulative
maximum amount of $50.0 million.
Kyowa Hakko Kirin
In December 2006, we entered into a license agreement with KHK under which we obtained an exclusive license, with the right
to grant sublicenses subject to certain restrictions, to research, develop, manufacture and commercialize tivozanib, pharmaceutical
69
compositions thereof and associated biomarkers. Our exclusive license covers all territories in the world except for Asia and the
Middle East, where KHK has retained the rights to tivozanib. Under the license agreement, we obtained exclusive rights in our
territory under certain KHK patents, patent applications and know-how related to tivozanib, to research, develop, make, have made,
use, import, offer for sale, and sell tivozanib for the diagnosis, prevention and treatment of any and all human diseases and conditions.
We and KHK each have access to and can benefit from the other party’s clinical data and regulatory filings with respect to tivozanib
and biomarkers identified in the conduct of activities under the license agreement.
Under the license agreement, we are obligated to use commercially reasonable efforts to develop and commercialize tivozanib in
our territory, including meeting certain specified diligence goals. Prior to the first anniversary of the first post-marketing approval sale
of tivozanib in our territory, neither we nor any of our subsidiaries has the right to conduct certain clinical trials of, seek marketing
approval for or commercialize any other cancer product that also works by inhibiting the activity of a VEGF receptor.
We have upfront, milestone and royalty payment obligations to KHK under our license agreement. Upon entering into the
license agreement with KHK, we made an upfront payment in the amount of $5.0 million. In March 2010, we made a milestone
payment to KHK in the amount of $10.0 million in connection with the dosing of the first patient in our first phase 3 clinical trial of
tivozanib (TIVO-1). In December 2012, we made a $12.0 million milestone payment to KHK in connection with the acceptance by
the FDA of our 2012 new drug application, or NDA filing for tivozanib. Each milestone under the KHK agreement is a one-time only
payment obligation. Accordingly, we did not owe KHK another milestone payment in connection with the dosing of the first patient in
our TIVO-3 trial, and would not owe a milestone payment to KHK if we file an NDA with the FDA following the completion of our
TIVO-3 clinical trial. If we obtain approval for tivozanib in the U.S., we would owe KHK a one-time milestone payment of $18.0
million, provided that we do not sublicense U.S. rights for tivozanib prior to obtaining a U.S. regulatory approval. If we were to
sublicense the U.S. rights, the associated U.S. regulatory milestone would be replaced by a specified percentage of sublicensing
revenue, as set forth below.
If we sublicense any of our rights to tivozanib to a third party, as we have done with EUSA pursuant to our license agreement,
the sublicense defines the payment obligations of the sublicensee, which may vary from the milestone and royalty payment obligations
under our KHK license relating to rights we retain. We are required to pay KHK a fixed 30% of amounts we receive from our
sublicensees, including upfront license fees, milestone payments and royalties, but excluding amounts we receive in respect of
research and development funding or equity investments, subject to certain limitations. In accordance with the sublicensing
provisions of our KHK agreement, in 2011 we made a $22.5 million payment to KHK related to the upfront license payment received
under a collaboration and license agreement we entered into with Astellas Pharmaceuticals, Inc., the termination of which became
effective on August 11, 2014. If tivozanib is approved in the European Union, or EU, the $4.0 million research and development
reimbursement milestone that would be owed to us by EUSA would not be subject to a sublicense revenue payment to KHK, nor
would a research and development reimbursement payment upon an election by EUSA to use the data generated from our TIVO-3 or
TiNivo trials for regulatory or commercial purposes, which could be up to $20.0 million for the TIVO-3 data and up to $2.0 million
TiNivo data. We would, however, owe KHK 30% of other, non-research and development payments we may receive from EUSA
pursuant to our license agreement, including EU reimbursement approval milestones in up to five specified EU countries, EU
marketing approvals for up to three additional indications beyond RCC, marketing approvals in up to three specified licensed
territories outside of the EU, sales-based milestones and royalties, as set forth above.
We are also required to pay tiered royalty payments on net sales we make of tivozanib in our territory, which range from the low
to mid-teens as a percentage of net sales. The royalty rate escalates within this range based on increasing tivozanib sales. Our royalty
payment obligations in a particular country in our territory begin on the date of the first commercial sale of tivozanib in that country,
and end on the later of 12 years after the date of first commercial sale of tivozanib in that country or the date of the last to expire of the
patents covering tivozanib that have been issued in that country.
The license agreement will remain in effect until the expiration of all of our royalty and sublicense revenue obligations to KHK,
determined on a product-by-product and country-by-country basis, unless we elect to terminate the license agreement earlier. If we fail
to meet our obligations under the agreement and are unable to cure such failure within specified time periods, KHK can terminate the
agreement, resulting in a loss of our rights to tivozanib and an obligation to assign or license to KHK any intellectual property or other
rights we may have in tivozanib, including our regulatory filings, regulatory approvals, patents and trademarks for tivozanib.
Financial Overview
We do not have a history of being profitable and, as of December 31, 2016, we had an accumulated deficit of $521.9 million.
We anticipate that we will continue to incur significant operating costs over the next several years as we continue our planned
development activities for our preclinical and clinical products. We will need additional funding to support our operating activities,
and the timing and nature of activities contemplated for 2017 and thereafter will be conducted subject to the availability of sufficient
financial resources. Refer to the “—Going Concern” and “Liquidity and Capital Resources—Operating Capital Requirements and
Going Concern” sections for a further discussion of our funding requirements.
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Revenue
To date, we have not generated any revenue from product sales. All of our revenue to date has been derived from license fees,
milestone payments, premium over the fair value of convertible preferred shares sold to our strategic partners, and research and
development payments received from our strategic partners.
In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and
development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under
licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the
timing and amount of license fees, research and development reimbursements, milestone and other payments received under our
strategic partnerships, and the payments that we receive upon the sale of our products, to the extent any are successfully
commercialized. We do not expect to generate revenue from product sales in the near term. If we or our strategic partners fail to
complete the development of our drug candidates in a timely manner or obtain regulatory approval for them, our ability to generate
future revenue, and our results of operations and financial position, would be materially adversely affected.
Research and Development Expenses
Research and development expenses have historically consisted of expenses incurred in connection with the discovery and
development of our product candidates. We recognize research and development expenses as they are incurred. These expenses
consist primarily of:
employee-related expenses, which include salaries, benefits and stock-based compensation expense;
expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct
our clinical trials and a substantial portion of our preclinical studies;
the cost of acquiring and manufacturing drug development related materials;
the cost of completing certain tivozanib clinical development activities that were initiated as part of our prior partnership
with Astellas;
facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance
of facilities and equipment, and depreciation of fixed assets;
license fees for, and milestone payments related to, in-licensed products and technology; and
costs associated with outsourced development activities, regulatory approvals and medical affairs
Research and development expenses are net of amounts reimbursed under our agreements with Astellas and Biodesix for
Astellas’ and Biodesix’ respective shares of development costs incurred by us under our joint development plans with each respective
partner.
We expect that research and development expenses in 2017 will remain at current levels as we seek to advance and complete
enrollment in the TIVO-3 trial and the TiNivo trial.
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We track external development expenses and personnel expense on a program-by-program basis and allocate common expenses,
such as scientific consultants and laboratory supplies, to each program based on the personnel resources allocated to such program.
Facilities, depreciation, stock-based compensation, research and development management and research and development support
services are not allocated among programs and are considered overhead. Below is a summary of our research and development
expenses for the years ended December 31, 2016, 2015 and 2014, respectively:
2016
Years Ended December 31,
2015
($ in thousands)
2014
2016 / 2015
Comparison
$
%
2015 / 2014
Comparison
$
%
Tivozanib
AV-380 Program in Cachexia
Ficlatuzumab
AV-203
Other pipeline programs
Other research and development
Overhead
Total research and development expenses
Tivozanib
$
$
21,231 $
464
746
76
—
—
1,186
23,703 $
8,513 $
2,408
80
532
11
10
1,321
12,875 $
9,530 $12,718 149% $ (1,017) (11)%
12,968 (1,944) (81)% (10,560) (81)%
666 833%
(1,499) (95)%
1,579
(456) (86)%
(1,311) (71)%
1,843
(11) (100)%
(61) (85)%
72
(10) (100)%
(57) (85)%
67
(135) (10)% (10,874) (89)%
12,195
38,254 $10,828 84% $(25,379) (66)%
We have pursued partnering options to fund further tivozanib development in appropriate clinical settings outside of our
strategic focus. Our licensee, EUSA, has submitted an application for marketing authorization for tivozanib for the treatment of RCC
to the EMA. EUSA is responsible for all activities and costs associated with the further development and commercialization of
tivozanib within its licensed territories, excluding non-oncologic diseases or conditions of the eye. We continue to share the costs of
development activities to which we and Astellas were committed at the time the Astellas partnership was terminated.
In May 2016, we initiated TIVO-3, an additional phase 3 trial of tivozanib vs. sorafenib. TIVO-3, which is expected to enroll
approximately 322 patients in the refractory RCC setting, will use progression-free survival, or PFS, as the primary endpoint and OS
as a secondary endpoint, and is designed to address the OS concerns presented in the June 2013 complete response letter from the
FDA and to support a request for approval of tivozanib as a third-line treatment and as a first-line treatment. We expect the total
estimated remaining costs of this trial, including drug supply and distribution, to be approximately $22.0 million to $25.0 million
through completion. We have also initiated the TiNivo trial in collaboration with Bristol-Myers Squibb, or BMS, which is providing
nivolumab for the study. We are the study sponsor. The TiNivo trial is a phase 1/2 trial of tivozanib in combination with nivolumab,
a PD-1 inhibitor, for the treatment of RCC, for which our costs, including tivozanib drug supply and distribution, could be in the range
of $2.0 million to $2.5 million.
AV-380 Program in Cachexia
In August 2015, we entered into a license agreement with Novartis, under which we granted Novartis the exclusive right to
develop and commercialize AV-380 and related AVEO antibodies that bind to GDF15 worldwide. Under this agreement, Novartis is
responsible for all activities and costs associated with the further development, regulatory filing and commercialization of AV-380
worldwide. We do not expect to incur any significant costs related to AV-380 in future periods beyond any milestone fees and
royalties payable to St.Vincent’s pursuant to our in-licensing agreement, which comprises substantially all of the costs incurred during
the year ended December 31, 2016.
AV-203
In March 2014, we regained our worldwide rights from Biogen Idec to develop, manufacture and commercialize AV-203. In
March 2016, we entered into a collaboration and license agreement with CANbridge, under which we granted CANbridge the
exclusive right to develop and commercialize AV-203 in all countries other than the United States, Canada and Mexico. CANbridge is
responsible for all costs of developing and commercializing AV-203 within its licensed territory. For a period of time following the
completion of certain proof-of-concept clinical studies by CANbridge involving the use of AV-203 for the treatment of squamous cell
esophagus cancer, we agreed to negotiate exclusively with CANbridge for (a) the right to co-develop ErbB3 inhibitory antibody
products for the treatment of squamous cell esophagus cancer or (b) the right to include the United States, Canada and Mexico as part
of the licensed territories. We do not expect to incur any significant costs related to AV-203 prior to CANbridge’s completion of a
proof-of-concept clinical study.
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Ficlatuzumab
In April 2014, we entered into the Biodesix Agreement to develop and commercialize ficlatuzumab, our potent HGF inhibitory
antibody. Pursuant to the agreement, Biodesix was to provide up to $15.0 million for the phase 2 FOCAL trial of ficlatuzumab in
combination with erlotinib in first-line advanced non-small cell lung cancer patients selected using Biodesix’s proprietary companion
diagnostic VeriStrat. In connection with the discontinuation of the FOCAL trial, on October 14, 2016 we and Biodesix amended the
Biodesix Agreement. Under the amendment, we agreed to fund 50% of the shutdown costs of the FOCAL trial after August 1, 2016.
In return, we would be entitled to reimbursement at a multiple of such shutdown expenses out of any future revenues Biodesix
receives from ficlatuzumab. All manufacturing and all non-FOCAL development, regulatory or commercial expenses for ficlatuzumab
will continue to be equally shared, as provided in the original Biodesix Agreement. Due to the unpredictable nature of clinical
development, we are unable to estimate with any certainty the costs we will incur in the future development of ficlatuzumab.
Uncertainties of Estimates Related to Research and Development Expenses
The process of conducting preclinical studies and clinical trials necessary to obtain FDA approval for each of our product
candidates is costly and time-consuming. The probability of success for each product candidate and clinical trial may be affected by a
variety of factors, including, among others, the quality of the product candidate’s early clinical data, investment in the program,
competition, manufacturing capabilities and commercial viability.
At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be
necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may
commence from sales of any approved products. This uncertainty is due to the numerous risks and uncertainties associated with
developing drugs, including the uncertainty of:
our ability to establish and maintain strategic partnerships, the terms of those strategic partnerships and the success of
those strategic partnerships, if any, including the timing and amount of payments that we might receive from strategic
partners;
the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for any product
candidate;
the progress and results of our clinical trials;
the costs, timing and outcome of regulatory review of our product candidates;
the emergence of competing technologies and products and other adverse market developments; and
the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual
property-related claims.
As a result of the uncertainties associated with developing drugs, including those discussed above, we are unable to determine
the duration and completion costs of current or future clinical stages of our product candidates, or when, or to what extent, we will
generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of
success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue
and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success, if any, of each
product candidate, as well as ongoing assessment of each product candidate’s commercial potential. We will need to raise substantial
additional capital in the future in order to fund the development of our preclinical and clinical product candidates.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance,
corporate development, information technology, legal and human resource functions. Other general and administrative expenses
include facility costs not otherwise included in research and development expenses, patent filing, prosecution and defense costs and
professional fees for legal, consulting, pre-commercialization activities, auditing and tax services. We anticipate that our general and
administrative expenses in 2017 will remain at current levels.
Warrants Issued in Connection with Private Placement
We account for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer assets as liabilities
regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as permanent or
temporary equity. These warrants are subject to revaluation at each balance sheet date, and any changes in fair value are recorded as a
non-cash component of other expense, until the earlier of their exercise or expiration or upon the completion of a liquidation event.
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Interest Expense, Net
Interest income consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our
investment policy is capital preservation. Interest expense consists of interest, amortization of debt discount, and amortization of
deferred financing costs associated with our loans payable.
Income Taxes
We calculate our provision for income taxes on ordinary income based on our projected annual tax rate for the year. We
recorded a loss for the years ended December 31, 2016, 2015, and 2014, and since we maintain a full valuation allowance on all of our
deferred tax assets, we have recorded no income tax provision or benefit during the years ended December 31, 2016, 2015, and 2014,
except for a $0.1 million provision recorded in the year ended December 31, 2016 related to withholding taxes incurred in a foreign
jurisdiction.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial
Statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, accrued clinical expenses, and stock-based compensation. We base our estimates on historical
experience, known trends and events and various other factors that we and our management believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our revenues have historically been generated primarily through collaborative research, development and commercialization
agreements. The terms of these agreements generally contain multiple elements, or deliverables, which may include (i) licenses, or
options to obtain licenses, to our technology, (ii) research and development activities to be performed on behalf of the collaborative
partner, and (iii) in certain cases, services in connection with the manufacturing of pre-clinical and clinical material. Payments to us
under these arrangements typically include one or more of the following: non-refundable, upfront license fees; option exercise fees;
funding of research and/or development efforts; milestone payments; and royalties on future product sales.
When evaluating multiple element arrangements, we consider whether the deliverables under the arrangement represent separate
units of accounting. This evaluation requires subjective determinations and requires management to make judgments about the
individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. In
determining the units of accounting, management evaluates certain criteria, including whether the deliverables have standalone value,
based on the relevant facts and circumstances for each arrangement. The consideration received is allocated among the separate units
of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to each of the separate
units.
We determine the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or
VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling
price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires significant
judgment. We typically use best estimates of selling price to estimate the selling price for licenses to our proprietary technology, since
we often do not have VSOE or TPE of selling price for these deliverables. In those circumstances where we utilize the best estimate of
selling price to determine the estimated selling price of a license to our proprietary technology, we consider market conditions as well
as entity-specific factors, including those factors contemplated in negotiating the agreements and internally developed models that
include assumptions related to the market opportunity, estimated development costs, probability of success and the time needed to
commercialize a product candidate pursuant to the applicable license. In validating our best estimate of selling price, we evaluate
whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the
allocation of arrangement consideration among multiple deliverables.
We typically receive non-refundable, upfront payments when licensing our intellectual property in conjunction with a research
and development agreement. When management believes the license to our intellectual property does not have stand-alone value from
the other deliverables to be provided in the arrangement, we generally recognize revenue attributed to the license on a straight-line
basis over our contractual or estimated performance period, which is typically the term of our research and development obligations. If
management cannot reasonably estimate when our performance obligation ends, then revenue is deferred until management can
74
reasonably estimate when the performance obligation ends. When management believes the license to our intellectual property has
stand-alone value, we generally recognize revenue attributed to the license upon delivery. The periods over which revenue should be
recognized are subject to estimates by management and may change over the course of the research and development agreement. Such
a change could have a material impact on the amount of revenue we record in future periods.
Payments or reimbursements resulting from our research and development efforts for those arrangements where such efforts are
considered as deliverables are recognized as the services are performed and are presented on a gross basis so long as there is
persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably assured.
Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying
balance sheets.
At the inception of each agreement that includes milestone payments, we evaluate whether each milestone is substantive and at
risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether (a) the
consideration is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the enhancement of the value
of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve the milestone, (b) the
consideration relates solely to past performance, and (c) the consideration is reasonable relative to all of the deliverables and payment
terms within the arrangement. We evaluate factors such as the scientific, regulatory, commercial and other risks that must be
overcome to achieve the respective milestone, the level of effort and investment required to achieve the respective milestone and
whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this
assessment.
We aggregate our milestones into four categories: (i) clinical and development milestones, (ii) regulatory milestones, (iii)
commercial milestones, and (iv) patent-related milestones. Clinical and development milestones are typically achieved when a product
candidate advances into a defined phase of clinical research or completes such phase. For example, a milestone payment may be due
to us upon the initiation of a phase 3 clinical trial for a new indication, which is the last phase of clinical development and could
eventually contribute to marketing approval by the FDA or other global regulatory authorities. Regulatory milestones are typically
achieved upon acceptance of the submission for marketing approval of a product candidate or upon approval to market the product
candidate by the FDA or other global regulatory authorities. For example, a milestone payment may be due to us upon the FDA’s
acceptance of a New Drug Application, or NDA. Commercial milestones are typically achieved when an approved pharmaceutical
product reaches certain defined levels of net sales by the licensee, such as when a product first achieves global sales or annual sales of
a specified amount. Patent-related milestones are typically achieved when a patent application is filed or a patent is issued with respect
to certain intellectual property related to the applicable collaboration.
Revenues from clinical and development, regulatory, and patent-related milestone payments, if the milestones are deemed
substantive and the milestone payments are nonrefundable, are recognized upon successful accomplishment of the milestones. We
have concluded that the clinical and development, regulatory and patent-related milestones pursuant to our current research and
development arrangements are substantive. Milestones that are not considered substantive are accounted for as license payments and
recognized on a straight-line basis over the remaining period of performance. Revenues from commercial milestone payments are
accounted for as royalties and are recorded as revenue upon achievement of the milestone, assuming all other revenue recognition
criteria are met.
Accrued Expenses and Accrued Clinical Trial Costs and Contract Research Liabilities
As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves
identifying services which have been performed on our behalf, and estimating the level of service performed and the associated cost
incurred for such service as of each balance sheet date in our financial statements. Given our current business, the primary area of
uncertainty concerning accruals which could have a material effect on our operating results is with respect to service fees paid to
contract manufacturers in conjunction with the production of clinical drug supplies and to contract research organizations in
connection with our clinical trials. In connection with all of the foregoing service fees, our estimates are most affected by our
understanding of the status and timing of services provided. The majority of our service providers, including contract research
organizations, invoice us in arrears for services performed. In the event that we do not identify some costs which have begun to be
incurred, or we under or overestimate the level of services performed or the costs of such services in a given period, our reported
expenses for such period would be understated or overstated. We currently reflect the effects of any changes in estimates based on
changes in facts and circumstances directly in our operations in the period such change becomes known.
Our arrangements with contract research organizations in connection with clinical trials often provide for payment prior to
commencing the project or based upon predetermined milestones throughout the period during which services are expected to be
performed. We recognize expense relating to these arrangements based on the various services provided over the estimated time to
completion. The date on which services commence, the level of services performed on or before a given date, and the cost of such
services are often determined based on subjective judgments. We make these judgments based upon the facts and circumstances
75
known to us based on the terms of the contract and our ongoing monitoring of service performance. During the years ended December
31, 2016, 2015 and 2014, we had arrangements with multiple contract research organizations whereby these organizations commit to
performing services for us over multiple reporting periods. We recognize the expenses associated with these arrangements based on
our expectation of the timing of the performance of components under these arrangements by these organizations. Generally, these
components consist of the costs of setting up the trial, monitoring the trial, closing the trial and preparing the resulting data. Costs
related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial.
With respect to financial reporting periods presented in this Annual Report on Form 10-K, and based on our receipt of invoices
from our third party providers, the timing of our actual costs incurred have not differed materially from our estimated timing of such
costs. In light of the foregoing, we do not believe our practices for estimating future expenses and making judgments concerning the
accrual of expenses are reasonably likely to change in the future.
Stock-Based Compensation
Under our stock-based compensation programs, we periodically grant stock options and restricted stock to employees, directors
and nonemployee consultants. We also issue shares under an employee stock purchase plan. The fair value of all awards is recognized
in our statements of operations over the requisite service period for each award.
Awards that vest as the recipient provides service are expensed on a straight-line basis over the requisite service period. Other
awards, such as performance-based awards that vest upon the achievement of specified goals, are expensed using the accelerated
attribution method if achievement of the specified goals is considered probable. We have also granted awards that vest upon the
achievement of market conditions. Per Accounting Standards Codification, or ASC, 718 Share-Based Payments, market conditions
must be considered in determining the estimated grant-date fair value of share-based payments and the market conditions must be
considered in determining the requisite service period over which compensation cost is recognized. We estimate the fair value of the
awards with market conditions using a Monte Carlo simulation, which utilizes several assumptions including the risk-free interest rate,
the volatility of our stock and the exercise behavior of award recipients. The grant-date fair value of the awards is then recognized
over the requisite service period, which represents the derived service period for the awards as determined by the Monte Carlo
simulation.
We use the Black-Scholes option pricing model to value our stock option awards without market conditions, which requires us
to make certain assumptions regarding the expected volatility of our common stock price, the expected term of the option grants, the
risk-free interest rate and the dividend yield with respect to our common stock. In 2016, we began calculating volatility using our
historical data. Previously, we did not have sufficient history to support a calculation of volatility using only our historical data. As
such, prior to 2016, we used a weighted-average volatility considering our own volatility since March 2010 and the volatilities of
several peer companies. For purposes of identifying similar entities, we considered characteristics such as industry, length of trading
history, similar vesting terms and in-the-money option status. Due to a lack of our own historical data, we elected to use the
“simplified” method for “plain vanilla” options to estimate the expected term of our stock option grants. Under this approach, the
weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free
interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar
expected life. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no present
intention to pay cash dividends.
The fair value of equity-classified awards to employees and directors are measured at fair value on the date the awards are
granted. Awards to nonemployee consultants are recorded at their fair values and are re-measured as of each balance sheet date until
the recipient’s services are complete.
During the years ended December 31, 2016, 2015 and 2014, respectively, the assumptions used in the Black-Scholes pricing
model for new grants were as follows:
Volatility factor
Expected term (in years)
Risk-free interest rates
Dividend yield
2016
Years Ended December 31,
2015
2014
72.18% - 74.47%
73.04% - 78.70%
69.38% - 77.92%
3.00 - 6.25
1.07% - 2.01%
—
5.50 - 6.25
1.54% - 1.93%
—
5.50 - 6.25
1.81% - 2.02%
—
We recognized stock-based compensation expense of approximately $1.0 million, $1.1 million and $2.8 million for the years
ended December 31, 2016, 2015, and 2014, respectively. During the years ending December 31, 2016, 2015 and 2014, we estimated
our expected forfeiture rates to be 76%, 71% and 62%, respectively. As of December 31, 2016, we had approximately $0.8 million of
76
total unrecognized stock-based compensation expense for stock options, which we expect to recognize over a weighted-average period
of approximately 2.5 years.
We record compensation expense only for those awards that we ultimately expect will vest. We have performed an historical
analysis of option awards that were forfeited prior to vesting and recorded total stock option expense that reflected this estimated
forfeiture rate. We cannot currently predict the total amount of stock-based compensation expense to be recognized in any future
period because such amounts will depend on levels of stock-based payments granted in the future as well as the portion of the awards
that actually vest. Forfeitures are estimated each period and adjusted if actual forfeitures differ from those estimates. Actual forfeitures
may differ from our estimates as a result of significant changes in our operations.
We have historically granted stock options at exercise prices that are not less than the fair market value of our common stock.
Warrants Issued in Connection with Private Placement
We account for warrant instruments that either conditionally or unconditionally obligate the issuer to transfer assets as liabilities
regardless of the timing of the redemption feature or price, even though the underlying shares may be classified as permanent or
temporary equity. In May 2016, we issued warrants to purchase an aggregate of 17,642,482 shares of our common stock in connection
with a private placement financing and recorded the warrants as a liability. See “—Liquidity and Capital Resources—Private
Placement/PIPE Warrants” below. The fair value of these warrants has been determined using the Black-Scholes pricing model. These
warrants are subject to revaluation at each balance sheet date, and any changes in fair value are recorded as a non-cash component of
other income (expense), net in our Statements of Operations until the earlier of their exercise or expiration or upon the completion of a
liquidation event.
The key assumptions used to value the PIPE Warrants were as follows:
Expected price volatility
Expected term (in years)
Risk-free interest rates
Stock price
Dividend yield
Results of Operations
Original Issuance
76.25%
5.00
1.22%
0.89
—
December 31, 2016
78.18%
4.50
1.93%
0.54
—
$
$
Comparison of Years Ended December 31, 2016, 2015 and 2014
Revenues
Strategic Partner:
Novartis
CANbridge
EUSA
Biogen Idec
Pharmstandard
Astellas
Ophthotech
Total revenues
$
$
Years Ended December 31,
2015
2016
2014
2016 / 2015
Comparison
$
%
2015 / 2014
Comparison
$
%
($ in thousands)
1,028 100%
1,028
395
38
939
—
115
— $ 18,450 $
—
14
268
61
—
231
— $(18,450) (100)% $ 18,450 100%
0
—
-%
—
14 100%
14,520
—
3,564
39
381 2721%
(230)
878 1439%
—
(116)
2,515 $ 19,024 $ 18,123 $(16,509)
61 100%
(3,564) (100)%
192 492%
5%
901
-%
(50)%
(87)% $
(86)% (14,252)
(98)%
In 2016 as compared to 2015, revenue decreased by $16.5 million, principally due to $18.5 million in revenue that was
recognized in 2015 related to Novartis for the $15.0 million upfront payment received in connection with our licensing agreement
entered into in August 2015 and $3.5 million for the purchase of our inventory of clinical material in the fourth quarter of 2015. This
decrease was partially offset by the $1.0 million upfront payment received in connection with our collaboration and license agreement
with CANbridge entered into in March 2016 and $0.8 million in the acceleration of deferred revenue that was recognized upon the
effective termination of our licensing agreement with Pharmstandard in September 2016 that otherwise would have been recognized
over the performance period through April 2022.
77
In 2015 as compared to 2014, revenue increased by $0.9 million principally due to the recognition of $18.5 million of revenue
associated with the receipt of a $15.0 million upfront payment for our license of AV-380 to Novartis and Novartis’ subsequent
purchase of clinical material for $3.5 million. These amounts were partially offset by a decrease of $3.6 million of revenue from
Astellas following the termination of our collaboration agreement in 2014 and a decrease of $14.3 million of revenue recognized from
our arrangement with Biogen due to the one-time recognition of previously deferred revenue following an amendment to our
agreement in 2014.
Research and Development Expenses
2016
Years Ended December 31,
2015
($ in thousands)
2014
2016 / 2015
Comparison
$
%
2015 / 2014
Comparison
$
%
Tivozanib
AV-380 Program in Cachexia
Ficlatuzumab
AV-203
Other pipeline programs
Other research and development
Overhead
Total research and development expenses
$
$
21,231 $
464
746
76
—
—
1,186
23,703 $
8,513 $
2,408
80
532
11
10
1,321
12,875 $
9,530 $12,718 149% $ (1,017) (11)%
12,968 (1,944) (81)% (10,560) (81)%
666 833%
(1,499) (95)%
1,579
(456) (86)%
(1,311) (71)%
1,843
(11) (100)%
(61) (85)%
72
(10) (100)%
67
(57) (85)%
(135) (10)% (10,874) (89)%
12,195
38,254 $10,828 84% $(25,379) (66)%
In 2016 as compared to 2015, research and development expenses increased by $10.8 million due to a $12.7 million increase in
tivozanib, principally related to the advancement of the TIVO-3 trial that commenced patient enrollment and treatment in May 2016.
This increase was partially offset by a $1.5 million decrease related to the upfront fee incurred under the amended St. Vincent’s
license agreement entered into in August 2015. We expect that research and development expenses in 2017 will remain at current
levels as we seek to advance and complete enrollment in the TIVO-3 and TiNivo trials.
In 2015 as compared to 2014, research and development expenses decreased by $25.4 million principally attributable to a $7.8
million decrease in employee compensation, benefits, contract labor and consulting and a decrease of $9.2 million in facilities, IT, and
other costs following our January 2015 restructuring; a decrease of $7.6 million in outsourced services costs primarily related to the
completion of the manufacture of AV-380 material in 2014; and a decrease of $0.8 million in medical affairs and external clinical trial
costs associated with the decreased number of active patients enrolled in our clinical trials.
Included in research and development expenses were stock-based compensation expenses of approximately $0.3 million in each
of 2016 and 2015, and $0.9 million in 2014.
General and Administrative Expenses
Years Ended December 31,
2015
2016
2014
($ in thousands)
2016 / 2015
Comparison
2015 / 2014
Comparison
$
%
$
%
General and administrative
$
8,205 $
14,217 $
18,589 $(6,012) (42)% $(4,372) (24)%
In 2016 as compared to 2015, general and administrative expenses decreased by $6.0 million, principally the result of a $4.8
million decrease in external costs associated with various ongoing legal matters, including $4.0 million related to the settlement of
SEC claims and $0.8 million in legal fees, as well as a $0.7 million decrease in employee compensation following our decreased
headcount and the reduction of our utilized facility space following our 2015 restructuring. In 2017, we anticipate that general and
administrative expenses will remain at current levels.
In 2015 as compared to 2014, general and administrative expenses decreased by $4.4 million, principally the result of a $4.1
million decrease in salaries, benefits, contract labor and consulting and a decrease of $4.5 million in facilities, IT, insurance and other
infrastructure costs following our January 2015 restructuring as well as a $2.0 million decrease in external legal costs associated with
various ongoing legal matters. These amounts were partially offset by $4.0 million in expense incurred in 2015 related to the accrual
of an estimated settlement liability, for accounting purposes, related to the SEC claims and an increase in depreciation expense of $2.2
million due to the acceleration of depreciation in connection with the termination of our lease agreement of 650 East Kendall Street in
September 2014.
78
Included in general and administrative expenses were stock-based compensation expenses of approximately $0.7 million, $0.8
million and $1.9 million in 2016, 2015 and 2014, respectively.
Restructuring and Lease Exit
Years Ended December 31,
2015
2016
2014
($ in thousands)
2016 / 2015
Comparison
$
%
2015 / 2014
Comparison
$
%
Restructuring and lease exit
—
4,358
11,729 (4,358) (100)% (7,371) (63)%
In 2016 as compared to 2015, restructuring and lease exit expenses decreased by $4.4 million as a result of the January 2015
restructuring that was substantially completed in March 2015. As part of this restructuring, we eliminated our internal research
function, reducing our headcount by approximately 40 positions.
In 2015 as compared to 2014, restructuring and lease exit expenses decreased by $7.4 million. The expenses incurred during
2015 relate to costs associated with elimination of our research function and the associated reductions in headcount as part of our
January 2015 restructuring. The expenses incurred during 2014 relate to costs associated with partially vacating and subsequently
terminating the agreement for our leased space at 650 East Kendall Street, which occurred in September 2014.
Change in Fair Value of Warrant Liability
2016
Change in fair value of warrant liability
4,751
Years Ended December 31,
2015
2014
($ in thousands)
—
2016 / 2015
Comparison
$
%
2015 / 2014
Comparison
%
$
— 4,751 100% —
-%
In May 2016, we issued warrants in connection with a private placement financing and recorded the warrants as a liability. The
changes in the fair value at the end of each reporting date are recorded as a non-cash gain or loss in the Statements of Operations. The
lower stock price as of the December 31, 2016 reporting date principally resulted in a $4.8 million gain in fair value during 2016.
Interest Expense, net
Years Ended December 31,
2015
2016
2014
($ in thousands)
2016 / 2015
Comparison
%
$
2015 / 2014
Comparison
%
$
Interest expense, net
(1,949)
(2,286)
(2,356) $ 337
(15)% $ 70
(3)%
In 2016 as compared to 2015, interest expense, net decreased by $0.3 million principally attributable to the decrease in the
average outstanding balances on our loan with Hercules, resulting from amounts borrowed under the 2012 Amendment being paid in
full by the end of 2015. In 2017, we anticipate that interest expense will remain at current levels.
In 2015 as compared to 2014, interest expense, net decreased by $0.1 million principally attributable to the declining average
outstanding balance on our loan with Hercules.
Contractual Obligations and Commitments
The following table summarizes our non-cancellable contractual obligations at December 31, 2016 (in thousands):
Hercules loan agreement (1)
$
Clinical trial costs and contract research (2) $
Operating leases (3)
19,051 $
27,901 $
60
4,386 $
20,601 $
60
14,665 $
7,300
—
Total
Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years
—
— $
—
— $
—
—
Total contractual obligations
$
47,012 $
25,047 $
21,965 $
79
(1)
Includes scheduled interest payments and end of term payments totaling $690,000 due at the time of the final payments of the
outstanding principal in connection with the 2014 Amendment and 2016 Amendment under the Hercules loan agreement.
(2) Clinical trial costs and contract research principally include contracts for human clinical trials and clinical drug distribution. In
the event a contract is terminated prior to the planned completion, the amount paid under such contracts may be less than the
amounts presented.
(3) We sublease our principal office facility at One Broadway in Cambridge, MA. Our lease arrangement is cancellable within 30
days’ notice to our landlord. As a result, our operating lease obligation as of December 31, 2016 is the January 2017 rent
payable to our landlord
(4) Under our license agreement with Kyowa Hakko Kirin, we are required to make certain milestone payments upon the
achievement of specified regulatory milestones. We are also required to pay 30% of certain amounts we receive from
sublicensees, including upfront license fees, milestone payments and royalties, other than amounts we receive in respect of
research and development funding or equity investments, subject to certain limitations. Additionally, under our license
agreement with St. Vincent’s, we are required to make certain milestone payments upon the earlier of achievement of specified
development and regulatory milestones or a specified date for the first indication, and upon the achievement of specified
development and regulatory milestones for the second and third indications. At this time, we cannot reasonably estimate when
or if we may be required to make other additional payments to Kyowa Hakko Kirin or St. Vincent’s and have not included any
additional amounts in the table above.
(5) As discussed in Note 4 to our consolidated financial statements, we have executed license agreements for patented technology
and other technology related to research projects, including technology to humanize ficlatuzumab and other antibody product
candidates. The license agreements required us to pay non-refundable license fees upon execution, and in certain cases, require
milestone payments upon the achievement of defined development goals. We have not included any additional milestone
payments in the table above as we are not able to make a reasonable estimate of the probability and timing of such payments, if
any. In addition to the amounts in the table above, these four agreements include sales and development milestones of up to
$22.5 million. $5.5 million and $4.2 million per product, respectively, and single digit royalties as a percentage.
Liquidity and Capital Resources
We have financed our operations to date primarily through the sale of private placements and public offerings of our common
stock and preferred stock, license fees, milestone payments and research and development funding from strategic partners, and loan
proceeds. In May 2016, we raised approximately $20.3 million in net cash proceeds, consisting of $15.4 million in net proceeds from a
private placement of 17,642,842 units, each including one share of our common stock and a warrant to purchase one share of our
common stock, and $4.9 million in net proceeds from additional borrowings under our Hercules loan agreement. As of December 31,
2016, we had cash, cash equivalents and marketable securities of approximately $23.3 million. See “Operating Capital
Requirements and Going Concern” below and Note 1 to the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K for a further discussion of our liquidity and the conditions and events which raise substantial doubt regarding
our ability to continue as a going concern. Currently, our funds are invested in a U.S. government money market fund, and corporate
debt securities, including commercial paper. The following table sets forth the primary sources and uses of cash for each of the periods
set forth below:
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
2016
Years Ended December 31,
2015
(in thousands)
2014
$
$
(31,066) $
(764)
20,292
(11,538) $
(18,230) $
(6,316)
(1,126)
(25,672) $
(54,248)
54,710
1,018
1,480
Our operating activities used cash of $31.1 million, $18.2 million and $54.2 million in 2016, 2015 and 2014, respectively. Cash
used in operations was due principally to our net loss adjusted for non-cash items and changes in working capital.
Our investing activities used cash of $0.8 million and $6.3 million in 2016 and 2015, respectively, and provided $54.7 million in
2014. Cash used by investing activities in each of 2016 and 2015 was principally the net result of the purchase of marketable
securities, partially offset by the maturities of marketable securities in each period and proceeds from the sale of equipment of $1.2
million in 2015. Cash provided by investing activities in 2014 was the net result of maturities of marketable securities, partially offset
by the purchase of marketable securities and purchases of property and equipment of $12.9 million.
80
Our financing activities provided cash of $20.3 million and $1.0 million in 2016 and 2014, respectively, and used cash of $1.1
million in 2015. In 2016, we raised approximately $20.3 million in net cash proceeds, consisting of $15.4 million in net proceeds from
a private placement of 17,642,842 units, each including one share of our common stock and a warrant to purchase one share of our
common stock, or the PIPE Warrants, and $4.9 million in net proceeds from additional borrowings under our Hercules loan
agreement. In 2015, we raised approximately $10.5 million in net proceeds from the sale of our common stock, including $10.2
million under our at-the-market, or ATM, facility with FBR & Co., or FBR, (formerly MLV & Co. LLC), and $0.3 million from the
issuance of stock for stock-based compensation arrangements, offset by $11.6 million in principal payments under our Hercules loan
agreement. In 2014, we raised approximately $8.8 million in net cash proceeds, including $8.6 million in net proceeds from the
additional borrowings under our Hercules loan agreement and $0.2 million from the issuance of stock for stock-based compensation
arrangements offset by $7.8 million in principal payments on loans payable to Hercules.
Private Placement / PIPE Warrants
In May 2016, we entered into a securities purchase agreement with a select group of qualified institutional buyers, institutional
accredited investors and accredited investors pursuant to which we sold 17,642,482 units, at a price of $0.965 per unit, for gross
proceeds of approximately $17.0 million. Each unit consisted of one share of our common stock and a warrant to purchase one share
of our common stock, which we refer to as the PIPE Warrants. The PIPE Warrants have an exercise price of $1.00 per share and are
exercisable in any manner at any time for a period of five years from the date of issuance. Certain of our directors and executive
officers purchased an aggregate of 544,039 units in this offering at the same price as the other investors. The net offering proceeds to
us were approximately $15.4 million after deducting placement agent fees and other offering expenses payable by us.
The PIPE Warrants contain a provision giving the warrant holder the option to receive cash, equal to the fair value of the
remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually
defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480, Distinguishing Liabilities
from Equity requires that these warrants be classified as a liability and not as equity. Accordingly, we recorded a warrant liability in
the amount of approximately $9.3 million. The fair value of these warrants has been determined using the Black-Scholes pricing
model and the changes in the fair value at the time of each reporting date are recorded in the Statements of Operations and
Comprehensive Income (Loss). During the year ended December 31, 2016, we recorded an approximate $4.8 million gain in fair value
in the Statements of Operations that principally resulted from the lower stock price as of the December 31, 2016 reporting date. As of
December 31, 2016, none of the PIPE Warrants have been exercised.
At-The-Market Issuance Sales Agreement with FBR
In February 2015, we entered into an at-the-market issuance sales agreement, which we refer to as the Sales Agreement, with
FBR & Co., or FBR, (formerly MLV & Co. LLC), pursuant to which we could issue and sell shares of our common stock from time to
time up to an aggregate amount of $17.9 million, at our option, through FBR as our sales agent. Sales of common stock through FBR
may be made by any method that is deemed an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act
of 1933, as amended. Subject to the terms and conditions of the Sales Agreement, FBR will use commercially reasonable efforts to
sell our common stock based upon our instructions (including any price, time or size limits or other customary parameters or
conditions we may impose). We are not obligated to make any sales of common stock under the Sales Agreement. Any shares sold
will be sold pursuant to an effective shelf registration statement on Form S-3. We are required to pay FBR a commission of up to 3%
of the gross proceeds. The Sales Agreement may be terminated by us at any time.
On May 7, 2015, we filed a shelf registration statement on Form S-3 with the SEC, which we refer to as the 2015 Shelf. The
2015 Shelf covers the offering, issuance and sale of up to $100 million of our common stock, preferred stock, debt securities, warrants
and/or units. The 2015 Shelf was filed to replace our then existing $250 million shelf registration statement, which expired at the end
of May 2015, and which we refer to as the 2012 Shelf. On May 7, 2015, we also amended the Sales Agreement to provide for the
offering, issuance and sale of up to $15.0 million of our common stock under the 2015 Shelf. The prior at-the-market offering
initiated under the original Sales Agreement expired along with the 2012 Shelf. As of December 31, 2016, we have sold
approximately 5.9 million shares pursuant to the Sales Agreement, as amended, resulting in proceeds of approximately $10.2 million,
net of commissions and issuance costs. No shares have been sold during the year ended December 31, 2016.
Approximately $9.1 million remains available for sale under the Sales Agreement.
Credit Facilities
On May 28, 2010, we entered into a loan and security agreement, or the Loan Agreement, with Hercules. The Loan Agreement
was subsequently amended in March 2012, or the 2012 Amendment; September 2014, or the 2014 Amendment; and May 2016, or the
2016 Amendment. Amounts borrowed under the 2012 Amendment were repaid in full in 2015.
81
Pursuant to the 2014 Amendment, we received additional loan proceeds from Hercules in the amount of $10.0 million and were
not required to commence principal payments until May 1, 2016. An end-of-term payment of approximately $0.5 million continues to
be due on January 1, 2018 or on such earlier date if the loan is prepaid.
Pursuant to the 2016 Amendment, we received additional loan proceeds from Hercules in the amount of $5.0 million, which
increased the aggregate outstanding principal balance under the Loan Agreement to $15.0 million. We are not required to commence
principal payments on the $15.0 million loan until July 1, 2017, at which time we will be required to make 30 equal monthly payments
of principal and interest through December 2019. An end-of-term payment of approximately $0.2 million is due on December 1, 2019.
The 2016 Amendment includes a financial covenant that requires us to maintain an unrestricted cash position greater than or equal to
$10.0 million through the date of completion of our Phase 3 TIVO-3 trial. Refer to Note 1 to the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for discussion of the adverse consequences of failure to comply with the
financial covenant.
Under the 2016 Amendment, from March 1, 2017 through June 30, 2017, we may draw down an additional $5.0 million in
funding upon the satisfaction of the following conditions: (i) achieving developmental progression satisfactory to Hercules on a
minimum of two (2) clinical programs (other than the Phase 3 TIVO-3 trial) that are either managed directly by us or funded, in whole
or in part, by us and (ii) having an unrestricted cash position greater than or equal to $25.0 million on the date of the draw down
request. If we draw down the additional $5.0 million in funding, the commencement of principal payments on the aggregate $20.0
million loan balance will be deferred by six months from July 1, 2017 until January 1, 2018.
We must make interest payments on the principal balance of the loan each month it remains outstanding. Per annum interest is
payable on the loan balance at the greater of 11.9% and an amount equal to 11.9% plus the prime rate minus 4.75%, as determined
daily, provided however, that the per annum interest rate shall not exceed 15.0%. Our annual interest rate as of December 31, 2016
was 11.9%.
We have determined that the risk of subjective acceleration under the material adverse events clause included in this loan and
security agreement is remote and, therefore, have classified the outstanding principal amount in current and long-term liabilities based
on the timing of scheduled principal payments. As of December 31, 2016, we are in compliance with all of the financial covenants
and, through the date of this filing, the lenders have not asserted any events of default under the loan. We do not believe that there has
been a material adverse change as defined in the loan agreement.
The loans are secured by a lien on all of our personal property (other than intellectual property), whether owned as of, or
acquired after, the date of the Loan Agreement.
Operating Capital Requirements and Going Concern
We have devoted substantially all of our resources to our drug development efforts, comprised of research and development,
manufacturing, conducting clinical trials for our product candidates, protecting our intellectual property and general and
administrative functions relating to these operations. Our future success is dependent on our ability to develop our product candidates
and ultimately upon our ability to attain profitable operations. As of December 31, 2016, we had cash, cash equivalents and
marketable securities totaling approximately $23.3 million, working capital of $16.0 million and an accumulated deficit of $521.9
million.
We anticipate that we will continue to incur significant operating losses for the next several years as we incur expenses to
continue to execute on our clinical development strategy to advance our clinical stage assets. We will require substantial additional
funds to continue our development programs and to fulfill our planned operating goals. In particular, our currently planned operating
and capital requirements include the need for substantial working capital to support our development activities for tivozanib. For
example, we estimate that the remaining costs for the TIVO-3 trial for RCC, including drug supply and distribution, could be in the
range of $22.0 million to $25.0 million in the aggregate through 2018. We have also initiated the TiNivo trial in collaboration with
BMS, which is providing nivolumab for the study. We are the study sponsor. The TiNivo trial is a phase 1/2 study of tivozanib
combined with nivolumab, a PD-1 inhibitor, for the treatment of patients with RCC for which our costs, including tivozanib drug
supply and distribution, could be in the range of $2.0 million to $2.5 million through 2018. Moreover, we have future payment
obligations and cost-sharing arrangements under certain of our collaboration and license agreements. For example, under our
agreements with KHK and St. Vincent’s, we are required to make certain clinical and regulatory milestone payments, have royalty
obligations with respect to product sales and are required to pay a specified percentage of sublicense revenue in certain instances.
We are subject to a number of risks, including the need for substantial additional capital for clinical research and product
development and the risk that we are unable to maintain compliance with our financial covenant pursuant to our Loan Agreement with
Hercules, which requires us to maintain unrestricted cash (defined as cash and liquid cash, including marketable securities) greater
82
than or equal to $10.0 million through the date of completion of our Phase 3 TIVO-3 trial. Non-compliance with the financial
covenant would be considered an event of default that could result in Hercules, at its option, accelerating and demanding payment of
all outstanding obligations together with a prepayment charge. Refer to Note 6 to the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for further description of our Loan Agreement.
Based upon our approximate $23.3 million in existing cash, cash equivalents and marketable securities as of December 31,
2016, we do not have sufficient cash on hand to support operations and maintain compliance with the $10.0 million financial covenant
under our Loan Agreement with Hercules for at least the next twelve months from the date of filing this Annual Report on Form 10-K.
These conditions raise substantial doubt about our ability to continue as a going concern.
Our plans to address these conditions include pursuing one or more of the following steps to raise additional funding, none of
which can be guaranteed or are entirely within our control:
Raise funding through the possible sales of our common stock, including public or private equity financings.
Raise funding of up to $9.1 million through possible sales of our common stock under our Sales Agreement with FBR.
Satisfy the conditions that are set forth in our Loan Agreement with Hercules that would enable us to draw down an
additional $5.0 million in funding under the Loan Agreement, as further described in “—Credit Facilities” above. If we
draw down the additional $5.0 million in funding, the commencement of principal payments on the aggregate $20.0
million loan balance will be deferred by six months from July 1, 2017 until January 1, 2018.
Continue to seek a partner to advance development of the AV-353 platform for the potential treatment of PAH.
Earn milestone payments pursuant to collaboration and license agreements or restructure / monetize existing potential
milestone and/or royalty payments under those collaboration and license agreements.
There can be no assurance, however, that we will receive cash proceeds from any of these potential resources or, to the extent
cash proceeds are received, those proceeds would be sufficient to support our operations and allow us to maintain compliance with our
financial covenant for at least the next twelve months from the date of filing this Annual Report on Form 10-K. We have concluded
the likelihood that our plan to obtain sufficient funding from one or more of these sources will be successful, while reasonably
possible, is less than probable. Accordingly, we have concluded that substantial doubt exists regarding our ability to continue as a
going concern.
We believe that our approximate $23.3 million in cash, cash equivalents and marketable securities at December 31, 2016 could
allow us to fund our planned operations into the fourth quarter of 2017. This estimate assumes no receipt of milestone payments from
our partners or related payment of potential licensing milestones to third parties, no additional funding from new partnership
agreements, no equity financings, no debt financings, no accelerated repayment of our term loan and no further sales of equity under
our Sales Agreement with FBR. Accordingly, the timing and nature of activities contemplated for 2017 and thereafter will be
conducted subject to the availability of sufficient financial resources.
There are numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical
products. Accordingly, our future funding requirements may vary from our current expectations and will depend on many factors,
including, but not limited to:
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such
agreements;
the number and characteristics of the product candidates we pursue;
the scope, progress, results and costs of researching and developing our product candidates, and of conducting preclinical
and clinical trials;
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including
litigation costs and the outcome of such litigation;
the absence of any breach, acceleration event or event of default under our loan agreement with Hercules or under any
other agreements with third parties;
the outcome of legal actions against us, including the current lawsuits described in Part I, Item 3 of this report under the
heading “Legal Proceedings”;
83
the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales
and distribution costs;
the cost of manufacturing our product candidates and any products we successfully commercialize;
the timing, receipt and amount of sales of, or royalties on, our future products, if any; and
our ability to continue as a going concern.
We will require additional funding to extend our planned operations into 2018 and maintain compliance with our financial
covenant under our Loan Agreement with Hercules. We may seek to sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. If we raise
additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or
the loans under credit facilities could provide for rights senior to those of our common stock and could contain covenants that would
restrict our operations. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. We also
expect to seek additional funds through arrangements with collaborators, licensees or other third parties. These arrangements would
generally require us to relinquish or encumber rights to some of our technologies or drug candidates, and we may not be able to enter
into such arrangements on acceptable terms, if at all. If we are unable to raise substantial additional capital in the near term, whether
on terms that are acceptable to us, or at all then we may trigger an event of default under our Loan Agreement with Hercules and we
may be required to:
delay, limit, reduce or terminate our clinical trials or other development activities for one or more of our product
candidates; and/or
delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be
necessary to commercialize our product candidates, if approved.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined
under applicable SEC rules.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to changes in interest rates. As of December 31, 2016, we had cash, cash equivalents and
marketable securities of $23.3 million, consisting of cash on deposit with banks, a U.S. government money market fund, and corporate
debt, including commercial paper. We do not hold any of these instruments for trading or speculative purposes. Our funds are invested
in accordance with investment guidelines as approved by our Board of Directors
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest
rates, particularly because our investments are in short-term cash equivalents. Our cash equivalents and marketable securities are
subject to interest rate risk and could fall in value if market interest rates increase. Due to the short-term duration of our investment
portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on
the fair market value of our portfolio. We have the ability to hold our cash equivalents until maturity, and therefore we would not
expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on
our investments. We do not currently have any auction rate securities.
Our loans payable are subject to interest rate risk. As of December 31, 2016, our aggregate principal balance outstanding on our
Loan Agreement with Hercules was $15.0 million. Per annum interest is payable on the principal balance of the loan each month it
remains outstanding at the greater of 11.9% and an amount equal to 11.9% plus the prime rate minus 4.75% as determined daily,
provided however, that the per annum interest rate shall not exceed 15.0%. As of December 31, 2016, the interest rate was 11.9%. For
every 1% increase in the prime rate over 4.75%, given the amount of debt outstanding under the loan agreement as of December 31,
2016, and expected loan payments during 2017, we would have a decrease in future annual cash flows of approximately $0.1 million
over the next twelve-month period as a result of such 1% increase.
We are also exposed to market risk related to change in foreign currency exchange rates. We contract with contract research
organizations and investigational sites that are located around the world. We are subject to fluctuations in foreign currency rates in
connection with these agreements. We do not currently hedge our foreign currency exchange rate risk.
84
ITEM 8.
Financial Statements and Supplementary Data
AVEO PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................................................................................................................
Consolidated Balance Sheets as of December 31, 2016 and 2015.......................................................................................................
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014 ....................................................
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2016, 2015 and 2014 ....................................
Consolidated Statements of Stockholders’ (Deficit) Equity for the Years Ended December 31, 2016, 2015 and 2014 ....................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 ...................................................
Notes to Consolidated Financial Statements ........................................................................................................................................
86
87
88
89
90
91
92
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
AVEO Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of AVEO Pharmaceuticals, Inc. as of December 31, 2016 and 2015,
and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2016. These financial statements are the responsibility of AVEO Pharmaceuticals,
Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
AVEO Pharmaceuticals, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated 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 will require additional capital to fund its current operating
plan and maintain compliance with the financial covenant included in its loan agreement. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note
1. The 2016 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AVEO
Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated March 22, 2017, expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 22, 2017
86
AVEO PHARMACEUTICALS, INC.
Consolidated Balance Sheets
(In thousands, except par value amounts)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable
Clinical trial retainers
Other prepaid expenses and other current assets
Total current assets
Property and equipment, net
Clinical trial retainers
Other assets
Total assets
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable
Accrued clinical trial costs and contract research
Other accrued liabilities
Loans payable, net of discount
Deferred revenue
Settlement liability (Note 15)
Total current liabilities
Loans payable, net of current portion and discount
Deferred revenue
Warrant liability (Note 7)
Other liabilities
Total liabilities
Stockholders' (deficit) equity:
$
$
$
December 31,
2016
December 31,
2015
15,096 $
8,252
1,027
1,702
238
26,315
—
940
30
27,285 $
2,186 $
3,998
1,531
2,124
510
—
10,349
11,879
1,697
4,593
690
29,208
26,634
7,501
4,641
467
1,133
40,376
23
117
26
40,542
1,425
1,966
2,140
2,053
814
4,000
12,398
7,418
2,881
—
618
23,315
Preferred stock, $.001 par value: 5,000 shares authorized at each of December 31,
2016 and 2015; no shares issued and outstanding at each of December 31, 2016 and
2015
Common stock, $.001 par value: 200,000 shares authorized at each of December 31,
2016 and 2015; 75,863 and 58,182 shares issued and outstanding as of December 31,
2016 and 2015, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ (deficit) equity
Total liabilities and stockholders’ (deficit) equity
—
—
76
519,911
6
(521,916)
(1,923)
27,285 $
58
512,201
(3)
(495,029)
17,227
40,542
$
See accompanying notes.
87
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Collaboration and licensing revenue
Operating expenses:
Research and development
General and administrative
Restructuring and lease exit
Loss from operations
Other income (expense), net:
Interest expense, net
Change in fair value of warrant liability
Other (expense) income
Other income (expense), net
Net loss before provision for income taxes
Provision for income taxes
Net loss
Basic and diluted net loss per share:
Net loss per share
Weighted average number of common shares outstanding
2016
Year Ended December 31,
2015
2014
$
2,515 $
19,024 $
18,123
23,703
8,205
—
31,908
(29,393)
(1,949)
4,751
(195)
2,607
(26,786)
(101)
(26,887) $
12,875
14,217
4,358
31,450
(12,426)
(2,286)
—
(289)
(2,575)
(15,001)
—
(15,001) $
(0.39) $
69,268
(0.27) $
55,701
38,254
18,589
11,729
68,572
(50,449)
(2,356)
—
66
(2,290)
(52,739)
—
(52,739)
(1.01)
52,289
$
$
See accompanying notes.
88
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities
Comprehensive loss
2016
Year Ended December 31,
2015
2014
$
(26,887) $
(15,001) $
(52,739)
$
9
(26,878) $
(3)
(15,004) $
2
(52,737)
See accompanying notes.
89
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ (Deficit) Equity
(In thousands)
Common Shares
Shares
51,809 $
Par Value
Additional
Paid-in
Capital
52 $ 497,177 $
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
(2) $ (427,289) $
Total
Stockholders'
(Deficit)
Equity
69,938
52,289 $
Balance at December 31, 2013
Stock-based compensation expense related to equity-
classified awards
Issuance of common stock to settle liability-classified
share awards granted to directors
Issuance of common stock under employee stock
purchase plan
Issuance of warrants in connection with loans
payable
Issuance of restricted stock awards, net of forfeitures
Change in unrealized gain (loss) on investments
Net loss
Balance at December 31, 2014
Stock-based compensation expense related to equity-
classified awards
Exercise of stock options
Issuance of common stock to settle liability-classified
share awards granted to directors
Issuance of common stock under employee stock
purchase plan
Issuance of common stock from at-the-market sales
agreement (net of issuance costs of $157)
Forfeiture of restricted stock awards
Change in unrealized gain (loss) on investments
Net loss
Balance at December 31, 2015
Issuance of common stock and warrants in a private
placement, excluding to related parties (net of
issuance costs of $1.6 million)
Issuance of common stock and warrants to related
parties
Stock-based compensation expense related to equity-
classified awards
Issuance of warrants in connection with a private
placement
Issuance of warrants in connection with loans
payable
Exercise of stock options
Issuance of common stock under employee stock
purchase plan
Change in unrealized gain (loss) on investments
Net loss
Balance at December 31, 2016
—
31
139
—
310
—
—
—
166
8
7
5,913
(201)
—
—
—
—
—
39
—
—
—
—
2,750
—
51
—
191
—
—
—
—
52 $ 500,582 $
413
—
—
—
—
—
—
1,132
241
7
—
27
10,212
—
—
—
6
—
—
—
58 $ 512,201 $
17
14,829
—
999
—
(9,344)
—
—
667
33
—
—
—
76 $ 519,911 $
2
—
—
58,182 $
17,098
544
1
524
—
—
—
—
2,750
—
51
—
191
—
—
—
—
—
2
—
(52,739)
— $ (480,028) $
413
—
2
(52,739)
20,606
—
—
—
—
—
—
—
—
1,132
241
7
27
—
—
—
—
—
(3)
—
(15,001)
(3) $ (495,029) $
10,218
—
(3)
(15,001)
17,227
14,846
525
999
—
—
(9,344)
—
—
667
33
—
—
—
—
—
9
—
—
—
(26,887)
6 $ (521,916) $
2
9
(26,887)
(1,923)
75,863 $
See accompanying notes.
90
AVEO PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$
(26,887) $
(15,001) $
(52,739)
2016
Year Ended December 31,
2015
2014
Impairment of property and equipment
Depreciation and amortization
Net loss (gain) on disposal of fixed assets
Stock-based compensation
Non-cash interest expense
Non-cash change in fair value of warrant liability
Amortization of premium and discount on investments
Changes in operating assets and liabilities:
Restricted Cash
Accounts receivable
Tenant improvement allowance receivable
Prepaid expenses and other current assets
Other noncurrent assets
Accounts payable
Accrued clinical trial costs and contract research
Other accrued liabilities
Settlement liability
Deferred revenue
Lease exit obligation
Deferred rent
Other liabilities
Net cash used in operating activities
Investing activities
Purchases of marketable securities
Proceeds from maturities and sales of marketable securities
Purchases of property and equipment
Proceeds from sale of property and equipment
Net cash (used in) provided by investing activities
Financing activities
Proceeds from issuance of common stock and warrants, net of issuance costs
Proceeds from issuance of common stock and warrants to related parties
Proceeds from issuance of loan payable and warrants
Proceeds from issuance of stock for stock-based compensation
arrangements
Payments of debt issuance costs
Principal payments on loans payable
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information
Cash paid for interest
Non-cash financing activity
Fair value of warrants issued in connection with long term debt
Fair value of warrants issued in connection with private placement
$
$
$
$
See accompanying notes.
91
—
30
—
999
465
(4,751)
14
—
3,614
—
(340)
(827)
760
2,032
(609)
(4,000)
(1,488)
—
—
(78)
(31,066)
(29,421)
28,664
(7)
(764)
14,846
525
5,000
36
(115)
—
20,292
(11,538)
26,634
15,096 $
232
9,567
253
1,132
655
—
34
2,997
(2,300)
—
(116)
96
(1,820)
(3,562)
(1,627)
4,000
2,927
(5,206)
(10,569)
78
(18,230)
(19,085)
11,550
(22)
1,241
(6,316)
10,218
—
—
268
—
(11,612)
(1,126)
(25,672)
52,306
26,634 $
7,600
6,219
(127)
2,808
347
—
221
598
(1,357)
5,833
1,503
50
(993)
(1,153)
(911)
—
(17,623)
4,981
(9,505)
0
(54,248)
(42,306)
109,767
(12,942)
191
54,710
—
—
10,000
191
(1,388)
(7,785)
1,018
1,480
50,826
52,306
1,539 $
1,983 $
2,018
667 $
9,344 $
—
— $
413
—
AVEO Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
December 31, 2016
(1) Organization
AVEO Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company dedicated to advancing a broad portfolio of
targeted therapeutics for oncology and other areas of unmet medical need. The Company’s proprietary platform has delivered unique
insights into cancer and related diseases. The Company’s strategy is to leverage these biomarker insights and partner resources to
advance the development of its clinical pipeline.
The Company’s pipeline includes its lead candidate tivozanib, an oral, once-daily, vascular endothelial growth factor (“VEGF”)
tyrosine kinase inhibitor (“TKI”). Tivozanib is a potent, selective and long half-life inhibitor of all three VEGF receptors and is
designed to optimize VEGF blockade while minimizing off-target toxicities, potentially resulting in improved efficacy and minimal
dose modifications. Tivozanib has been investigated in several tumor types, including renal cell, colorectal and breast cancers
In June 2013, the U.S. Food and Drug Administration (“FDA”) issued a complete response letter denying the Company’s
application for approval of the use of tivozanib in first-line treatment of advanced renal cell carcinoma (“RCC”), citing concerns
regarding the negative trend in overall survival in the Company’s first pivotal phase 3 trial (the “TIVO-1” study). In May 2016, the
Company initiated enrollment and treatment of patients in a new phase 3 trial of tivozanib in the third-line treatment of patients with
refractory RCC (the “TIVO-3” study), seeking to address the overall survival concerns presented in the June 2013 complete response
letter from the FDA and to support a request for regulatory approval of tivozanib in the United States as a third-line treatment and as a
first-line treatment for RCC. The Company expects to complete enrollment in the TIVO-3 study in June 2017 and to report top line data
in the first quarter of 2018. TIVO-3 is also expected to undergo a pre-planned futility analysis approximately mid-year 2017.
In March 2017, the Company initiated enrollment in a phase 1/2 trial of tivozanib in combination with Opdivo® (“nivolumab”),
an immune checkpoint (“PD-1”) inhibitor, for the treatment of advanced RCC (the “TiNivo” trial). Bristol-Myers Squibb is supplying
nivolumab for the TiNivo trial, and the Company is the trial sponsor. The study is being led by the Institut Gustave Roussy in Paris
under the direction of Professor Bernard Escudier, MD, Chairman of the Genitourinary Oncology Committee. The phase 1 trial will
primarily evaluate the safety of tivozanib in combination with nivolumab at escalating doses of tivozanib and, assuming favorable
results, is expected to be followed by a phase 2 expansion at the established combination dose. The Company expects to receive initial
data from the phase 1 portion of the TiNivo trial in the first half of 2017.
In February 2016, EUSA Pharma (UK) Ltd. (“EUSA”), the Company’s European licensee, submitted a Marketing Authorization
Application (“MAA”) for tivozanib with the European Medicines Agency (“EMA”) for the treatment of RCC. The EMA validated the
MAA in March 2016, confirming that the submission was complete and that it would initiate its review process. EUSA received the
Day 120 List of Questions from the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA in July 2016, and
submitted its responses in November 2016. In January 2017, EUSA received the Day 180 List of Outstanding Issues (“LOI”) from the
CHMP of the EMA. The Day 180 LOI signifies that the MAA is not approvable at the present time, and outlines outstanding
deficiencies, which are then required to be satisfactorily addressed in an oral explanation and/or in writing prior to a final application
decision. EUSA has informed the Company that it expects to submit written responses to the Day 180 LOI in April 2017, and the
EMA has tentatively scheduled EUSA to provide an oral explanation to the CHMP in May 2017.
The Company also has a pipeline of monoclonal antibodies, including:
(i)
Ficlatuzumab, a potent hepatocyte growth factor (“HGF”) antibody that inhibits the activity of the HGF/c-Met pathway.
Ficlatuzumab has ongoing clinical trials in acute myloid leukemia (“AML”) and squamous cell cancer of the head and
neck. The Company and its worldwide partner Biodesix, Inc (“Biodesix”) will share equally in all future costs and profits
relating to the development of ficlatuzumab.
(ii) AV-203, a potent, high-affinity inhibitor of the ErbB3 pathway. The Company’s partner CANbridge Life Sciences Ltd.
(“CANbridge”) will fund manufacturing and clinical development through proof-of-concept in esophageal squamous cell
carcinoma.
(iii) AV-380, a potent, humanized IgG1 inhibitory monoclonal antibody targeting growth differentiating factor-15 (“GDF15”),
a divergent member of the TGF-ß family, for the potential treatment or prevention of cachexia. The Company has licensed
AV-380 to Novartis International Pharmaceutical Ltd. (“Novartis”), which will fund all development, manufacturing and
commercialization; and
(iv) The AV-353 platform, a family of potent inhibitory antibody candidates specific to Notch 3, one of which has
demonstrated an ability in preclinical models to potentially reverse disease phenotype for pulmonary arterial hypertension
92
(“PAH”). The Company is currently seeking a partner to advance development of the AV-353 platform for the potential
treatment of PAH.
As used throughout these condensed consolidated financial statements, the terms “AVEO,” and the “Company” refer to the
business of AVEO Pharmaceuticals, Inc. and its two wholly-owned subsidiaries, AVEO Pharma Limited and AVEO Securities
Corporation.
Liquidity and Going Concern
The Company has financed its operations to date primarily through private placements and public offerings of its common stock
and preferred stock, license fees, milestone payments and research and development funding from strategic partners, and loan
proceeds. The Company has devoted substantially all of its resources to its drug development efforts, comprising research and
development, manufacturing, conducting clinical trials for its product candidates, protecting its intellectual property and general and
administrative functions relating to these operations. The future success of the Company is dependent on its ability to develop its
product candidates and ultimately upon its ability to attain profitable operations. As of December 31, 2016, the Company had cash,
cash equivalents and marketable securities totaling approximately $23.3 million, working capital of $16.0 million and an accumulated
deficit of $521.9 million.
The Company is subject to a number of risks, including the need for substantial additional capital for clinical research and
product development and the risk that it is unable to maintain compliance with its financial covenant pursuant to its Loan Agreement
with Hercules, which requires the Company to maintain unrestricted cash (defined as cash and liquid cash, including marketable
securities) greater than or equal to $10.0 million through the date of completion of the Company’s Phase 3 TIVO-3 trial. Non-
compliance with the financial covenant would be considered an event of default that could result in Hercules, at its option,
accelerating and demanding payment of all outstanding obligations together with a prepayment charge. Refer to Note 6 for further
description of the Company’s loan and security agreement.
Based upon the Company’s approximately $23.3 million in existing cash, cash equivalents and marketable securities as of
December 31, 2016, the Company does not have sufficient existing cash, cash equivalents and marketable securities to support
operations and maintain compliance with the financial covenant for at least the next year following the date that the financial
statements are issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one
year after the date that the financial statements are issued.
Management’s plans to alleviate these conditions that raise substantial doubt regarding the Company’s ability to continue as a
going concern include pursuing one or more of the following steps to raise additional funding, none of which can be guaranteed or are
entirely within the Company’s control:
Raise funding through the possible sales of the Company’s common stock, including public or private equity financings.
Raise funding through the possible sales of the Company’s common stock under the at-the-market issuance sales
agreement (the “Sales Agreement”) with FBR & Co. (formerly MLV & Co. LLC) (“FBR”), as discussed in Note 7.
Raise funding under the Company’s loan and security agreement (the “Loan Agreement”) with Hercules Technology II,
L.P. and Hercules Technology III, L.P., affiliates of Hercules Technology Growth (collectively, “Hercules”), which, as
described in Note 6, provides access to additional funding only if certain specified conditions are met.
Continue to seek a partner to advance development of the AV-353 platform for the potential treatment of PAH.
Earn milestone payments pursuant to collaboration and license agreements described in Note 4 or restructure / monetize
existing potential milestone and/or royalty payments under those collaboration and license agreements.
There can be no assurance, however, that the Company will receive cash proceeds from any of these potential resources or, to
the extent cash proceeds are received, those proceeds would be sufficient to support the Company’s operations and allow the
Company to maintain compliance with its financial covenant for at least the next year following the date that the financial statements
are issued. Management has concluded the likelihood that its plan to obtain sufficient funding from one or more of these sources will
be successful, while reasonably possible, is less than probable. Accordingly, management has concluded that substantial doubt exists
regarding the Company’s ability to continue as a going concern.
If the Company is unable to raise capital when needed or on attractive terms, or if it is unable to procure partnership
arrangements to advance its programs, or if it is unable to maintain compliance with the financial covenant in the loan and security
agreement, the Company would be forced to delay, reduce or eliminate its research and development programs and any future
commercialization efforts.
93
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the ordinary course of business. The 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 the uncertainties described above.
(2) Basis of Presentation
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AVEO Pharma
Limited and AVEO Securities Corporation. The Company has eliminated all significant intercompany accounts and transactions in
consolidation.
Certain reclassifications have been made to prior periods to conform to current period presentation. Reclassification of prior
year amounts have been made to separately present clinical trial retainers from other prepaid expenses and other current assets, and
other non-current assets, and accrued clinical trial costs and contract research from other accrued liabilities on the consolidated
balance sheets and to present interest expense net of interest income on the consolidated statements of operations. There was no
impact on total liabilities, total other expenses or net income (loss) resulting from these reclassifications.
(3) Significant Accounting Policies
Revenue Recognition
The Company’s revenues are generated primarily through collaborative research, development and commercialization
agreements. The terms of these agreements generally contain multiple elements, or deliverables, which may include (i) licenses, or
options to obtain licenses, to the Company’s technology, (ii) research and development activities to be performed on behalf of the
collaborative partner, and (iii) in certain cases, services in connection with the manufacturing of pre-clinical and clinical material.
Payments to the Company under these arrangements typically include one or more of the following: non-refundable, upfront license
fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales.
When evaluating multiple element arrangements, the Company considers whether the deliverables under the arrangement
represent separate units of accounting. This evaluation requires subjective determinations and requires management to make
judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual
relationship. In determining the units of accounting, management evaluates certain criteria, including whether the deliverables have
standalone value, based on the relevant facts and circumstances for each arrangement. The consideration received is allocated among
the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria are applied to
each of the separate units.
The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective
evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE is not available, or best
estimate of selling price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires
significant judgment. The Company typically uses best estimate of selling price to estimate the selling price for licenses to the
Company’s proprietary technology, since the Company often does not have VSOE or TPE of selling price for these deliverables. In
those circumstances where the Company utilizes best estimate of selling price to determine the estimated selling price of a license to
the Company’s proprietary technology, the Company considers market conditions as well as entity-specific factors, including those
factors contemplated in negotiating the agreements and internally developed models that include assumptions related to the market
opportunity, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant
to the license. In validating the Company’s best estimate of selling price, the Company evaluates whether changes in the key
assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement
consideration among multiple deliverables.
The Company typically receives non-refundable, upfront payments when licensing its intellectual property in conjunction with a
research and development agreement. When management believes the license to its intellectual property does not have stand-alone
value from the other deliverables to be provided in the arrangement, the Company generally recognizes revenue attributed to the
license on a straight-line basis over the Company’s contractual or estimated performance period, which is typically the term of the
Company’s research and development obligations. If management cannot reasonably estimate when the Company’s performance
obligation ends, then revenue is deferred until management can reasonably estimate when the performance obligation ends. When
management believes the license to its intellectual property has stand-alone value, the Company generally recognizes revenue
attributed to the license upon delivery. The periods over which revenue should be recognized are subject to estimates by management
and may change over the course of the research and development agreement. Such a change could have a material impact on the
amount of revenue the Company records in future periods.
94
Payments or reimbursements resulting from the Company’s research and development efforts for those arrangements where
such efforts are considered as deliverables are recognized as the services are performed and are presented on a gross basis so long as
there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably
assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the
accompanying balance sheets.
At the inception of each agreement that includes milestone payments, the Company evaluates whether each milestone is
substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of
whether (a) the consideration is commensurate with either (1) the entity’s performance to achieve the milestone, or (2) the
enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity’s performance to achieve
the milestone, (b) the consideration relates solely to past performance, and (c) the consideration is reasonable relative to all of the
deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, regulatory, commercial
and other risks that must be overcome to achieve the respective milestone, the level of effort and investment required to achieve the
respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the
arrangement in making this assessment.
The Company aggregates its milestones into four categories: (i) clinical and development milestones, (ii) regulatory milestones,
(iii) commercial milestones, and (iv) patent-related milestones. Clinical and development milestones are typically achieved when a
product candidate advances into a defined phase of clinical research or completes such phase. For example, a milestone payment may
be due to the Company upon the initiation of a phase 3 clinical trial for a new indication, which is the last phase of clinical
development and could eventually contribute to marketing approval by the FDA or other global regulatory authorities. Regulatory
milestones are typically achieved upon acceptance of the submission for marketing approval of a product candidate or upon approval
to market the product candidate by the FDA or other global regulatory authorities. For example, a milestone payment may be due to
the Company upon the FDA’s acceptance of a New Drug Application (“NDA”). Commercial milestones are typically achieved when
an approved pharmaceutical product reaches certain defined levels of net sales by the licensee, such as when a product first achieves
global sales or annual sales of a specified amount. Patent-related milestones are typically achieved when a patent application is filed or
a patent is issued with respect to certain intellectual property related to the applicable collaboration.
Revenues from clinical and development, regulatory, and patent-related milestone payments, if the milestones are deemed
substantive and the milestone payments are nonrefundable, are recognized upon successful accomplishment of the milestones. The
Company has concluded that the clinical and development, regulatory and patent-related milestones pursuant to its current research
and development arrangements are substantive. Milestones that are not considered substantive are accounted for as license payments
and recognized on a straight-line basis over the remaining period of performance. Revenues from commercial milestone payments are
accounted for as royalties and are recorded as revenue upon achievement of the milestone, assuming all other revenue recognition
criteria are met.
Research and Development Expenses
Research and development expenses are charged to expense as incurred. Research and development expenses consist of costs
incurred in performing research and development activities, including internal costs for salaries, bonuses, benefits, stock-based
compensation, facilities, and research-related overhead, and external costs for clinical trials, drug manufacturing and distribution,
license fees, consultants and other contracted services.
Warrants Issued in Connection with Private Placement
In May 2016, the Company issued warrants to purchase an aggregate of 17,642,482 shares of common stock in connection with
a private placement financing and recorded the warrants as a liability. The Company accounts for warrant instruments that either
conditionally or unconditionally obligate the issuer to transfer assets as liabilities regardless of the timing of the redemption feature or
price, even though the underlying shares may be classified as permanent or temporary equity. The fair value of these warrants has
been determined using the Black-Scholes pricing model. These warrants are subject to revaluation at each balance sheet date, and any
changes in fair value are recorded as a non-cash component of other income (expense), net until the earlier of their exercise or
expiration or upon the completion of a liquidation event. During the year ended December 31, 2016, as a result of the fair value
adjustment of the warrant liability, the Company recorded a decrease in the fair value of the warrant liability of approximately $4.8
million, respectively, in its Statements of Operations. Refer to Note 7, “Common Stock - Private Placement / PIPE Warrants” for
further discussion on the calculation of the fair value of the warrant liability.
95
The following table rolls forward the fair value of the Company’s warrant liability, the fair value of which is determined by
Level 3 inputs for the year ended December 31, 2016 (in thousands):
Fair value at January 1, 2016
Issuance of warrants on May 13, 2016
Change in fair value
Fair value at December 31, 2016
Cash and Cash Equivalents
$
$
—
9,344
(4,751)
4,593
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase and
an investment in a U.S. government money market fund to be cash equivalents. Changes in the balance of cash and cash equivalents
may be affected by changes in investment portfolio maturities, as well as actual cash disbursements to fund operations.
The Company’s cash is deposited in highly-rated financial institutions in the United States. The Company invests in U.S.
government money market funds, high-grade, short-term commercial paper, corporate bonds and other U.S. government agency
securities, which management believes are subject to minimal credit and market risk. The carrying values of the Company’s cash and
cash equivalents approximate fair value due to their short term maturities.
Marketable Securities
Marketable securities consist primarily of investments which have expected average maturity dates in excess of three months,
but not longer than 24 months. The Company invests in high-grade corporate obligations, including commercial paper, and U. S.
government and government agency obligations that are classified as available-for-sale. Since these securities are available to fund
current operations they are classified as current assets on the consolidated balance sheets.
Marketable securities are stated at fair value, including accrued interest, with their unrealized gains and losses included as a
component of accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. The fair value
of these securities is based on quoted prices and observable inputs on a recurring basis. The cost of marketable securities is adjusted
for amortization of premiums and accretion of discounts to maturity, with such amortization and accretion recorded as a component of
interest expense, net. Realized gains and losses are determined on the specific identification method. Unrealized gains and losses are
included in other comprehensive loss until realized, at which point they would be recorded as a component of interest expense, net.
96
Below is a summary of cash, cash equivalents and marketable securities at December 31, 2016 and December 31, 2015:
December 31, 2016
Cash and cash equivalents:
Cash and money market funds
Corporate debt securities
Total cash and cash equivalents
Marketable securities:
Corporate debt securities due within 1 year
Total marketable securities
Total cash, cash equivalents and marketable securities
December 31, 2015:
Cash and cash equivalents:
Cash and money market funds
Corporate debt securities
Total cash and cash equivalents
Marketable securities:
Corporate debt securities due within 1 year
Government agency securities due within 1 year
Total marketable securities
Total cash, cash equivalents and marketable securities
Concentrations of Credit Risk
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
$
$
$
14,091 $
1,005
15,096
8,246
8,246
23,342 $
21,822 $
4,812
26,634
6,504 $
1,000
7,504
34,138 $
— $
—
—
6
6
6 $
— $
—
—
— $
—
—
— $
— $
—
—
14,091
1,005
15,096
—
—
— $
8,252
8,252
23,348
— $
—
—
21,822
4,812
26,634
(3) $
—
(3)
(3) $
6,501
1,000
7,501
34,135
Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents,
marketable securities and accounts receivable. The Company maintains deposits in highly-rated federally-insured financial institutions
in excess of federally insured limits. The Company’s investment strategy is focused on capital preservation. The Company invests in
instruments that meet the high credit quality standards outlined in the Company’s investment policy. This policy also limits the
amount of credit exposure to any one issue or type of instrument.
The Company’s accounts receivable primarily consists of amounts due to the Company from licensees and collaborators. As of
December 31, 2016, the Company had approximately $1.0 million of accounts receivable outstanding, of which approximately $0.8
million was due from Biodesix pursuant to the Company’s collaboration arrangement for ficlatuzumab (refer to Note 4). The
Company has not experienced any material losses related to accounts receivable from individual licensees or collaborators.
Fair Value Measurements
The fair value of the Company’s financial assets and liabilities reflects the Company’s estimate of amounts that it would have
received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the
Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to
minimize the use of unobservable inputs (the Company’s assumptions about how market participants would price assets and
liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable
inputs used in order to value the assets and liabilities:
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a
market in which transactions for the asset or liability occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets
for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use
in pricing the asset or liability.
97
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input
that is significant to the fair value measurement. The Company measures the fair value of its marketable securities by taking into
consideration valuations obtained from third-party pricing sources. The pricing services utilize industry standard valuation models,
including both income and market based approaches, for which all significant inputs are observable, either directly or indirectly, to
estimate fair value. These inputs include reported trades of and broker-dealer quotes on the same or similar securities, issuer credit
spreads, benchmark securities and other observable inputs.
As of December 31, 2016, the Company’s financial assets valued based on Level 1 inputs consisted of cash and cash equivalents
in a U.S. government money market fund and its financial assets valued based on Level 2 inputs consisted of high-grade corporate
bonds and commercial paper. During the year ended December 31, 2016, the Company did not have any transfers of financial assets
between Levels 1 and 2.
As of December 31, 2016, the Company’s financial liabilities that were recorded at fair value consisted of a warrant liability.
The fair value of the Company’s loans payable at December 31, 2016 approximates its carrying value, computed pursuant to a
discounted cash flow technique using a market interest rate and is considered a Level 3 fair value measurement. The effective interest
rate, which reflects the current market rate, considers the fair value of the warrants issued in connection with the loan, loan issuance
costs and the deferred financing charge.
The following table summarizes the assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and
December 31, 2015:
Financial assets carried at fair value:
Cash and money market funds
Corporate debt securities
Total cash and cash equivalents
Marketable securities:
Corporate debt securities due within 1 year
Total marketable securities
Total cash, cash equivalents and marketable securities
Financial liabilities carried at fair value:
Warrant liability
Total warrant liability
Financial assets carried at fair value:
Cash and money market funds
Corporate debt securities
Total cash and cash equivalents
Marketable securities:
Corporate debt securities due within 1 year
Government agency securities due within 1 year
Total marketable securities
Total cash, cash equivalents and marketable securities
Fair Value Measurements as of December 31, 2016
Level 1
Level 2
Level 3
Total
(in thousands)
14,091 $
—
14,091 $
— $
1,005
1,005 $
— $
—
— $
14,091
1,005
15,096
— $
— $
14,091 $
8,252
8,252 $
9,257 $
— $
— $
— $
8,252
8,252
23,348
— $
— $
— $
— $
4,593 $
4,593 $
4,593
4,593
Fair Value Measurements as of December 31, 2015
Level 1
Level 2
Level 3
Total
(in thousands)
21,822 $
—
21,822 $
— $
4,812
4,812 $
— $
— $
21,822
4,812
26,634
— $
—
— $
21,822 $
6,501 $
1,000
7,501 $
12,313 $
— $
—
— $
— $
6,501
1,000
7,501
34,135
$
$
$
$
$
$
$
$
$
$
$
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of
the respective assets. Maintenance and repair costs are charged to expense as incurred. Depreciation expense for the years ended
98
December 31, 2016, 2015 and 2014 was $30 thousand, $9.6 million and $6.2 million, respectively. In September 2014, the Company
entered into a Lease Termination Agreement (refer to Note 12). As a result, the Company revised the estimated useful life of its
leasehold improvements related to this space, resulting in an increase in depreciation expense of approximately $2.4 million during the
year ended December 31, 2014. In February 2015, the Company provided notice that it would surrender the remaining space on
May 29, 2015. Accordingly, the Company again revised the estimated useful life of its leasehold improvements related to this office
space and amortized such assets through May 2015, resulting in an additional $2.9 million of depreciation expense during the year
ended December 31, 2015.
Long-lived Assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever changes in business
circumstances indicate that the carrying amount of the asset may not be fully recoverable. The Company recognized $0, $0.2 million
and $7.6 million of impairment losses during the years ended December 31, 2016, 2015 and 2014, respectively, primarily related to
leasehold improvements.
Basic and Diluted Loss per Common Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period,
excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is computed using the
weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding
using the treasury stock method. However, for the years ended December 31, 2016, 2015 and 2014, diluted net loss per share is the
same as basic net loss per share as the inclusion of weighted average shares of unvested restricted common stock and common stock
issuable upon the exercise of stock options and warrants would be anti-dilutive.
The following table summarizes outstanding securities not included in the computation of diluted net loss per common share as
their inclusion would be anti-dilutive for the years ended December 31, 2016, 2015 and 2014, respectively:
Outstanding stock options
Outstanding warrants
Unvested restricted stock
Total
Stock-Based Compensation
2016
4,858,678
19,453,295
—
24,311,973
Years Ended December 31,
2015
4,796,005
608,696
42,750
5,447,451
2014
5,817,313
608,696
477,600
6,903,609
Under the Company’s stock-based compensation programs, the Company periodically grants stock options and restricted stock
to employees, directors and nonemployee consultants. The Company also issues shares under an employee stock purchase plan. The
fair value of all awards is recognized in the Company’s statements of operations over the requisite service period for each award.
Awards that vest as the recipient provides service are expensed on a straight-line basis over the requisite service period. Other
awards, such as performance-based awards that vest upon the achievement of specified goals, are expensed using the accelerated
attribution method if achievement of the specified goals is considered probable. The Company has also granted awards that vest upon
the achievement of market conditions. Per Accounting Standards Codification (“ASC”) 718 Share-Based Payments, market conditions
must be considered in determining the estimated grant-date fair value of share-based payments and the market conditions must be
considered in determining the requisite service period over which compensation cost is recognized. The Company estimates the fair
value of the awards with market conditions using a Monte Carlo simulation, which utilizes several assumptions including the risk-free
interest rate, the volatility of the Company’s stock and the exercise behavior of award recipients. The grant-date fair value of the
awards is then recognized over the requisite service period, which represents the derived service period for the awards as determined
by the Monte Carlo simulation.
The Company uses the Black-Scholes option pricing model to value its stock option awards without market conditions, which
require the Company to make certain assumptions regarding the expected volatility its common stock price, the expected term of the
option grants, the risk-free interest rate and the dividend yield with respect to its common stock. In 2016, the Company began
calculating volatility using its historical data. Previously, the Company did not have sufficient history to support a calculation of
volatility using only its historical data. As such, prior to 2016, the Company used a weighted-average volatility considering the
Company’s own volatility since March 2010 and the volatilities of several peer companies. For purposes of identifying similar entities,
the Company considered characteristics such as industry, length of trading history, similar vesting terms and in-the-money option
status. Due to the lack of the Company’s own historical data, the Company elected to use the “simplified” method for “plain vanilla”
99
options to estimate the expected term of the Company’s stock option grants. Under this approach, the weighted-average expected life
is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate used for each grant
is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. The Company
utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends and has no present intention to pay
cash dividends.
The fair value of equity-classified awards to employees and directors are measured at fair value on the date the awards are
granted. Awards to nonemployee consultants are recorded at their fair values and are re-measured as of each balance sheet date until
the recipient’s services are complete. During the years ended December 31, 2016, 2015 and 2014, the Company recorded the
following stock-based compensation expense:
Research and development
General and administrative
Restructuring
Total stock-based compensation expense
2016
Years Ended December 31,
2015
(in thousands)
2014
$
$
293 $
706
—
999 $
298 $
765
69
1,132 $
899
1,909
—
2,808
Stock-based compensation expense is allocated to research and development and general and administrative expense based upon
the department of the employee to whom each award was granted. Expenses recognized in connection with the modification of awards
in connection with the Company’s strategic restructurings are allocated to restructuring expense. No related tax benefits of the stock-
based compensation expense have been recognized.
Income Taxes
The Company provides for income taxes using the asset-liability method. Under this method, deferred tax assets and liabilities
are recognized based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company calculates its provision for
income taxes on ordinary income based on its projected annual tax rate for the year. Uncertain tax positions are recognized if the
position is more-likely-than-not to be sustained upon examination by a tax authority. Unrecognized tax benefits represent tax positions
for which reserves have been established.
Segment and Geographic Information
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial
information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company views its operations and manages its business in one operating segment principally in the
United States. As of December 31, 2016 and 2015, the Company has $0.8 million and $1.0 million, respectively, of net assets located
in the United Kingdom.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such
estimates and assumptions include revenue recognition, contract research accruals, measurement of the warrant liability and
measurement of stock-based compensation. The Company bases its estimates on historical experience and various other assumptions
that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they
become known. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”) that will supersede nearly all existing revenue recognition
guidance under US GAAP. The standard was originally scheduled to be effective for public entities for annual and interim periods
beginning after December 15, 2016. In July 2015, the standard was deferred by one year and will now be effective for annual and
interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim periods beginning after
December 15, 2016. ASU 2014-09 also permits two methods of adoption: retrospectively to each prior reporting period presented (full
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retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (the modified retrospective method). The Company anticipates adopting ASU 2014-09 using the modified retrospective
method. The Company will adopt this standard on January 1, 2018 and is currently evaluating the effect this standard will have on its
revenue recognition policies and its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU is intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern within one
year of the date of issuance of the entity’s financial statements and to provide related footnote disclosures even in circumstances where
conditions are mitigated as a result of management’s plans. The Company has adopted this standard effective for the year ended
December 31, 2016. The Company faces certain risks and uncertainties as further described in Note 1, “Organization,” that may
continue to have an effect on the Company’s disclosures in future periods.
In March 2016, the FASB issued ASU No. 2016-09, Compensation─Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. This ASU is intended to simplify certain aspects of the accounting for share-based
payment transactions, such as allowing entities to elect to account for forfeitures as they occur or to continue to estimate the number of
awards that are expected to vest. The standard is effective for public entities for annual and interim periods beginning after December
15, 2016. The Company is currently evaluating the impact that the adoption of this standard will have on its financial statements.
(4) Collaborations and License Agreements
Out-License Agreements
CANbridge
In March 2016, the Company entered into a collaboration and license agreement (the “CANbridge Agreement”) with
CANbridge Life Sciences Ltd. (“CANbridge”). Under the terms of the CANbridge Agreement, the Company granted CANbridge the
exclusive right to develop, manufacture and commercialize AV-203, the Company’s proprietary ErbB3 (HER3) inhibitory antibody,
for the diagnosis, treatment and prevention of disease in humans and animals in all countries other than the United States, Canada and
Mexico (the “CANbridge Licensed Territory”). Under the terms of the CANbridge Agreement, if the Company determines to grant a
license to any ErbB3 inhibitory antibody in the United States, Canada or Mexico, the Company is obligated to first negotiate with
CANbridge for the grant to CANbridge of a license to such rights. The effective date of the license agreement is March 16, 2016 (the
“Effective Date”).
CANbridge made an upfront payment to the Company of $1.0 million in April 2016, net of $0.1 million of withholding taxes.
CANbridge has agreed to reimburse the Company $1.0 million for certain manufacturing costs and expenses previously incurred by
the Company with respect to AV-203, $0.5 million of which will be due to the Company on the earlier of (i) the date of validation by
CANbridge of certain manufacturing development activities conducted by the Company prior to the Effective Date or (ii) twelve
months from the Effective Date, and the remaining $0.5 million of which will be due to the Company on the earlier of (i) the date of
validation by CANbridge of such manufacturing development activities or (ii) eighteen months from the Effective Date. The Company
is also eligible to receive up to $42.0 million in potential development and regulatory milestone payments and up to $90.0 million in
potential sales based milestone payments based on annual net sales of licensed products. Upon commercialization, the Company is
eligible to receive a tiered royalty, with a percentage range in the low double-digits, on net sales of approved licensed products.
CANbridge’s obligation to pay royalties for each licensed product expires on a country-by-country basis on the later of the expiration
of patent rights covering such licensed product in such country, the expiration of regulatory data exclusivity in such country and ten
years after the first commercial sale of such licensed product in such country. No milestone payments have been earned as of
December 31, 2016.
CANbridge is obligated to use commercially reasonable efforts to develop and commercialize AV-203 in each of China, Japan,
the United Kingdom, France, Italy, Spain, and Germany. CANbridge has responsibility for all activities and costs associated with the
further development, manufacture, regulatory filings and commercialization of AV-203 in the CANbridge Licensed Territory.
The Company and CANbridge have each agreed to not directly or indirectly develop or commercialize any ErbB3 inhibitory
antibody product during the term of the CANbridge Agreement other than pursuant to the CANbridge Agreement.
A percentage of any milestone and royalty payments received by the Company, excluding upfront and reimbursement payments,
are due to Biogen Idec International GmbH (“Biogen”) as a sublicensing fee under the option and license agreement between the
Company and Biogen dated March 18, 2009, as amended.
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Activities under the CANbridge Agreement were evaluated under ASC 605-25 Revenue Recognition—Multiple Element
Arrangements (“ASC 605-25”) to determine whether such activities represented a multiple element revenue arrangement. The
CANbridge Agreement includes the following non-contingent deliverables: (i) the Company’s grant of an exclusive license to develop
and commercialize AV-203 in the CANbridge Licensed Territory, (ii) the Company’s obligation to transfer all technical knowledge
and data useful in the development and manufacture of AV-203 and (iii) the Company’s obligation to participate on a joint steering
committee during the proof-of-concept development period. The relative selling price of the Company’s joint steering committee
participation had de minimis value. The Company determined that the delivered license and know-how did have stand-alone value
from the undelivered element and have accounted for these items as separate deliverables. The Company allocated the upfront
consideration of $1.0 million to the units of accounting and recognized the $1.0 million attributed to the delivered license and know-
how as revenue during the year ended December 31, 2016.
The Company believes the regulatory milestones that may be achieved under the CANbridge Agreement are consistent with the
definition of a milestone included in ASC 605-28, Revenue Recognition—Milestone Method, and, accordingly, the Company will
recognize payments related to the achievement of such milestones, if any, when each such milestone is achieved. Factors considered in
this determination included scientific and regulatory risks that must be overcome to achieve each milestone, the level of effort and
investment required to achieve each milestone, and the monetary value attributed to each milestone.
EUSA
In December 2015, the Company entered into a license agreement with EUSA Pharma (UK) Limited (“EUSA”) under which the
Company granted to EUSA the exclusive, sublicensable right to develop, manufacture and commercialize tivozanib in the territories
of Europe (excluding Russia, Ukraine and the Commonwealth of Independent States), Latin America (excluding Mexico), Africa,
Australasia and New Zealand (the “EUSA Licensed Territories”) for all diseases and conditions in humans, excluding non-oncologic
diseases or conditions of the eye. EUSA filed an MAA with the EMA in February 2016 for tivozanib in the treatment of RCC. The
application was validated in March 2016, confirming that the submission was complete and that the EMA would initiate its review
process. In January 2017, EUSA received the Day 180 List of Outstanding Issues (LOI) from the Committee for Medicinal Products
for Human Use (CHMP) of the EMA. The Day 180 LOI signifies that the MAA is not approvable at the present time, and outlines
outstanding deficiencies, which are then required to be satisfactorily addressed in an oral explanation and/or in writing prior to a final
application decision. EUSA has informed the Company that it expects to submit written responses to the Day 180 LOI in April 2017,
and the EMA has tentatively scheduled EUSA to provide an oral explanation to the CHMP at its May 2017 meeting.
Under the license agreement, EUSA made a research and development funding payment to the Company of $2.5 million during
the year ended December 31, 2015. EUSA is required to make a further research and development funding payment of $4.0 million if
the European Medicines Agency (the “EMA”) grants marketing approval for tivozanib for treatment of RCC. The Company is eligible
to receive additional research funding from EUSA, including up to $20.0 million for the Company’s phase 3 study in third-line RCC if
EUSA elects to utilize data generated by the study and up to $2.0 million for a phase 1 combination study with a checkpoint inhibitor
if EUSA elects to utilize data generated by the study for regulatory or commercial purposes. The Company will be entitled to receive
milestone payments of $2.0 million per country upon reimbursement approval for RCC, if any, in each of France, Germany, Italy,
Spain and the United Kingdom, and an additional $2.0 million for the grant of marketing approval, if any, in three of the following
five countries: Argentina, Australia, Brazil, South Africa and Venezuela. The Company is also eligible to receive a payment of $2.0
million in connection with a filing by EUSA with the EMA for marketing approval, if any, for tivozanib for the treatment of each of
up to three additional indications and $5.0 million per indication in connection with the EMA’s grant of marketing approval for each
of up to three additional indications, as well as potentially up to $335.0 million upon EUSA’s achievement of certain sales
thresholds. The Company is also eligible to receive tiered double-digit royalties on net sales, if any, of licensed products in the EUSA
Licensed Territories ranging from a low double digit up to mid-twenty percent depending on the level of annual net sales. A
percentage of any non-research and development milestone and royalty payments received by the Company is due to Kyowa Hakko
Kirin Co., Ltd. (formerly Kirin Brewery Co., Ltd.) (“KHK”) as a sublicensing fee under the license agreement between the Company
and KHK dated as of December 21, 2006, pursuant to which the Company acquired exclusive rights to develop and commercialize
tivozanib for all human diseases outside of Asia and the Middle East. The research and development funding payments under the
EUSA license agreement are not subject to sublicensing payment to KHK.
EUSA is obligated to use commercially reasonable efforts to seek regulatory approval for and commercialize tivozanib
throughout the EUSA Licensed Territories in RCC. With the exception of certain support to be provided by the Company in
connection with the application for marketing approval by the EMA, EUSA has responsibility for all activities and costs associated
with the further development, manufacture, regulatory filings and commercialization of tivozanib in the EUSA Licensed Territories.
Activities under the agreement were evaluated under ASC 605-25 to determine whether such activities represented a multiple
element revenue arrangement. The agreement with EUSA includes the following non-contingent deliverables: (i) the Company’s grant
of an exclusive license to develop and commercialize the tivozanib in the EUSA Licensed Territories; (ii) the Company’s obligation to
transfer all technical knowledge and data useful in the development and manufacture of tivozanib; (iii) the Company’s obligation to
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cooperate with EUSA and support its efforts to file for marketing approval in the EUSA Licensed Territories, (iv) the Company’s
obligation to provide access to certain regulatory information resulting from the Company’s ongoing development activities outside of
the EUSA Licensed Territories and (v) the Company’s participation in a joint steering committee. The Company determined that the
delivered license did not have stand-alone value from the undelivered elements and have accounted for these items as a single bundled
deliverable. The Company allocated upfront consideration of $2.5 million to the bundled unit of accounting and is recognizing it over
the Company’s performance period through April 2022, the remaining patent life of tivozanib. The Company recognized
approximately $0.4 million and $14 thousand as revenue during the years ended December 31, 2016 and 2015, respectively.
The Company believes the regulatory milestones that may be achieved under the EUSA agreement are consistent with the
definition of a milestone included in ASC 605-28, Revenue Recognition—Milestone Method, and, accordingly, the Company will
recognize payments related to the achievement of such milestones, if any, when each such milestone is achieved. Factors considered in
this determination included scientific and regulatory risks that must be overcome to achieve each milestone, the level of effort and
investment required to achieve each milestone, and the monetary value attributed to each milestone. No milestone payments have been
earned as of December 31, 2016.
Novartis
In August 2015, the Company entered into a license agreement with Novartis. Under the license agreement, the Company has
granted to Novartis the exclusive right to develop and commercialize worldwide the Company’s proprietary antibody AV-380 and
related AVEO antibodies that bind to GDF15 for the treatment and prevention of diseases and other conditions in all indications in
humans (the “Product”).
Pursuant to the license agreement, Novartis made an upfront payment to the Company of $15.0 million in September 2015.
Novartis also has acquired the Company’s inventory of clinical quality, AV-380 biological drug substance and reimbursed the
Company for approximately $3.5 million for such existing inventory. As of December 31, 2016, the Company was also eligible to
receive up to $53.0 million in potential clinical and development milestone payments and up to $105.0 million in potential regulatory
milestone payments tied to the commencement of clinical trials and to regulatory approvals of products developed under the license
agreement in the United States, the European Union and Japan, and it is eligible to receive up to $150.0 million in potential
commercial milestone payments based on annual net sales of such products. Upon commercialization, the Company is eligible to
receive tiered royalties on net sales of approved products ranging from the high single digits to the low double-digits.
Certain milestones achieved by Novartis or timelines associated with the development plan would trigger milestone payment
obligations from the Company to St. Vincent’s Hospital Sydney Limited (“St. Vincent’s”) under the Company’s amended and restated
license agreement with St. Vincent’s. In addition, royalties on approved products will be payable to St. Vincent’s, and the Company
and Novartis will share that obligation equally.
Novartis has responsibility under the license agreement for the development, manufacture and commercialization of the
Company’s antibodies and any resulting approved therapeutic products. The Company has agreed that it will not directly or indirectly
develop, manufacture or commercialize any GDF15 modulator as a human therapeutic during the term of the license agreement.
Activities under the agreement with Novartis were evaluated under ASC 605-25 to determine whether such activities
represented a multiple element revenue arrangement. The agreement with Novartis includes the following non-contingent
deliverables: (i) the Company’s grant of an exclusive, worldwide license to develop and commercialize the Product; (ii) the
Company’s obligation to transfer all technical knowledge and data useful in the development and manufacture of the Product; and (iii)
the Company’s obligation to cooperate with Novartis’ requests for transition assistance during a 90-day period. The Company
determined that the option to purchase the Company’s existing inventory was a contingent deliverable.
The Company determined the delivered license and obligation to transfer technical knowledge and data have standalone value
from the undelivered cooperation. The Company allocated upfront consideration of $15.0 million to the delivered license and
technical knowledge and recognized this amount as revenue during the year ended December 31, 2015. The relative selling price of
the undelivered cooperation had de minimis value.
The Company received a cash payment of $3.5 million related to the delivery of its inventory of clinical quality drug substance
to Novartis during the three months ended March 31, 2016. No milestone payments have been earned as of December 31, 2016.
Pharmstandard
In August 2015, the Company entered into a license agreement with JSC “Pharmstandard-Ufimskiy Vitamin Plant,” a company
registered under the laws of the Russian Federation (“Pharmstandard”). Pharmstandard is a subsidiary of Pharmstandard OJSC. Under
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the license agreement, the Company granted to Pharmstandard the exclusive, sublicensable right to develop, manufacture and
commercialize tivozanib in the territories of Russia, Ukraine and the Commonwealth of Independent States (the “Pharmstandard
Licensed Territories”) for all diseases and conditions in humans, excluding non-oncologic ocular conditions.
In June 2016, following unsuccessful efforts to renegotiate certain terms of the Pharmstandard license agreement,
Pharmstandard notified the Company that due to economic and market changes in Russia it was exercising its right to terminate the
license agreement effective September 9, 2016. Upon termination of the license agreement, the licenses to tivozanib granted to
Pharmstandard were terminated, all product rights and regulatory documents were transferred to the Company and Pharmstandard is
no longer responsible for the development and commercialization of tivozanib in the Pharmstandard Licensed Territories.
Pharmstandard filed an application for marketing authorization in Russia for tivozanib for the treatment of renal cell carcinoma that
was accepted by the Ministry of Health of the Russian Federation in February 2016. This application was withdrawn following
Pharmstandard’s termination notice.
Activities under the agreement with Pharmstandard were evaluated under ASC 605-25 to determine whether such activities
represented a multiple element revenue arrangement. The agreement with Pharmstandard included the following non-contingent
deliverables: (i) the Company’s grant of an exclusive license to develop and commercialize tivozanib in the Pharmstandard Licensed
Territories, (ii) the Company’s obligation to provide access, upon request, to all clinical data, regulatory filings, safety data and
manufacturing data to Pharmstandard for use in the development and commercialization of tivozanib in the Pharmstandard Licensed
Territories, (iii) the Company’s obligation to participate in certain development and commercialization planning meetings and (iv) the
Company’s obligation to provide support for certain development, regulatory or manufacturing activities if requested by
Pharmstandard.
The Company determined the delivered license did not have standalone value from the undelivered items and that the
arrangement should be treated as a single unit of accounting. The Company allocated the upfront payment of $1.0 million to the
bundled unit of accounting and was recognizing it over the Company’s performance period through April 2022, the remaining patent
life of tivozanib. Upon the effective date of the termination, the remaining deferred revenue of approximately $0.9 million was
recognized. The Company recognized approximately $0.9 million and $61 thousand as revenue during the years ended December 31,
2016 and 2015, respectively.
Ophthotech
In November 2014 the Company entered into a research and exclusive option agreement (the “Option Agreement”), with
Ophthotech Corporation (“Ophthotech”) pursuant to which the Company provided Ophthotech an exclusive option to enter into a
definitive license agreement whereby the Company would grant Ophthotech the right to develop and commercialize tivozanib outside
of Asia and the Middle East for the potential diagnosis, prevention and treatment of non-oncologic diseases or conditions of the eye in
humans.
Pursuant to this Option Agreement, the Company granted to Ophthotech an exclusive, royalty-free license or sublicense, as
applicable, under intellectual property rights controlled by the Company solely to perform the research and development activities
related to the use of tivozanib for the specific purposes outlined in the agreement during the option period. These activities included
formulation work for ocular administration, preclinical research and the conduct of a phase 1/2a proof-of-concept clinical trial of a
product containing tivozanib in patients with wet age-related macular degeneration (the “POC Study”).
Ophthotech paid the Company $0.5 million in consideration for the grant of the option. Such amount is non-refundable and not
creditable against any other amounts due under the agreement.
Under the Option Agreement, the Company was entitled to receive, among other potential payments, a one-time milestone
payment of $6.0 million on December 31, 2016; provided, however, that the milestone payment would not be payable if Ophthotech
gave the Company a notice of termination of the Option Agreement within thirty (30) days after December 31, 2016. In January 2017,
Ophthotech formally notified the Company that it is not going to be able to develop tivozanib and is exercising its right to terminate
the Option Agreement effective April 3, 2017.
Activities under the agreement with Ophthotech were evaluated under ASC 605-25 to determine whether such activities
represented a multiple element revenue arrangement. The agreement with Ophthotech includes the following non-contingent
deliverables: (i) the Company’s obligation to grant an exclusive option to Ophthotech to enter into a license agreement to develop and
commercialize products incorporating tivozanib for treatment of diseases or conditions of the eye outside of Asia and the Middle East
during the option period (the “Option Grant Deliverable”); (ii) the Company’s obligation to enter into an amendment with KHK to
modify the terms of the existing KHK license agreement to negotiate a mutually acceptable form of license agreement; and (iii) the
Company’s obligation to transfer research-grade tivozanib drug substance for Ophthotech to conduct the option period research.
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The Company determined that the delivered Option Grant Deliverable did not have standalone value from the remaining
deliverables since Ophthotech could not obtain the intended benefit of the option without the remaining deliverables. Similarly, the
remaining deliverables have no standalone value without the Option Grant Deliverable. The Company is accounting for the
deliverables as one unit of accounting.
Under the Option Agreement, the Company received a cash payment of $0.5 million during the year ended December 31, 2014.
The Company deferred the payment and is recording the deferred revenue over the Company’s period of performance, which is
currently estimated to be through December 2017. The Company recorded approximately $0.1 million, $0.2 million and $38 thousand
of revenue during the years ended December 31, 2016, 2015 and 2014, respectively. Upon the effective date of the termination, the
remaining deferred revenue of approximately $0.1 million will be recognized.
Biodesix
In April 2014, the Company entered into a worldwide co-development and collaboration agreement with Biodesix (the
“Biodesix Agreement”) to develop and commercialize ficlatuzumab, the Company’s HGF inhibitory antibody. Under the Biodesix
Agreement, the Company granted Biodesix perpetual, non-exclusive rights to certain intellectual property, including all clinical and
biomarker data related to ficlatuzumab, to develop and commercialize VeriStrat®, Biodesix’s proprietary companion diagnostic test.
Biodesix granted the Company perpetual, non-exclusive rights to certain intellectual property, including diagnostic data related to
VeriStrat, with respect to the development and commercialization of ficlatuzumab; each license includes the right to sublicense,
subject to certain exceptions. Pursuant to a joint development plan, the Company retains primary responsibility for clinical
development of ficlatuzumab. In September 2016, the Company and Biodesix announced the termination of a phase 2 proof-of-
concept clinical study of ficlatuzumab in which VeriStrat® was used to select clinical trial subjects (the “FOCAL” trial).
Under the Biodesix Agreement, with the exception of the costs incurred for the FOCAL trial, the Company and Biodesix are
each required to contribute 50% of all clinical, regulatory, manufacturing and other costs to develop ficlatuzumab. Pursuant to the
Biodesix Agreement, Biodesix was obligated to fund all costs of the FOCAL trial up to a cap of $15 million, following which all costs
of the FOCAL trial would be shared equally. In connection with the discontinuation of the FOCAL trial, on October 14, 2016 the
Company and Biodesix amended the Biodesix Agreement. Under the amendment, the Company agreed to share 50% of the cost of the
FOCAL trial from August 1, 2016 through its closeout. In return for bearing 50% of the FOCAL costs after August 1, 2016, the
Company will be entitled to recover an agreed multiple of the additional costs borne by the Company out of any income Biodesix
receives from the partnership in connection with the licensing or commercialization of ficlatuzumab. Following such recovery, the
payment structure under the original Biodesix Agreement, which generally provides that the parties share equally in any costs and
revenue, will resume without such modification.
Pending marketing approval or the sublicense of ficlatuzumab, and subject to the negotiation of a commercialization agreement,
each party would share equally in commercialization profits and losses, subject to the Company’s right to be the lead
commercialization party.
Prior to the first commercial sale of ficlatuzumab, each party has the right to elect to discontinue participating in further
development or commercialization efforts with respect to ficlatuzumab, which is referred to as an “Opt-Out”. If either AVEO or
Biodesix elects to Opt-Out, with such party referred to as the “Opting-Out Party”, then the Opting-Out Party shall not be responsible
for any future costs associated with developing and commercializing ficlatuzumab other than any ongoing clinical trials. If AVEO
elects to Opt-Out, it will continue to make the existing supply of ficlatuzumab available to Biodesix for the purposes of enabling
Biodesix to complete the development of ficlatuzumab, and Biodesix will have the right to commercialize ficlatuzumab. After election
of an Opt-Out, the non-opting out party shall have sole decision-making authority with respect to further development and
commercialization of ficlatuzumab. Additionally, the Opting-Out Party shall be entitled to receive, if ficlatuzumab is successfully
developed and commercialized, a royalty equal to 10% of net sales of ficlatuzumab throughout the world, if any, subject to offsets
under certain circumstances.
Prior to any Opt-Out, the parties shall share equally in any payments received from a third party licensee; provided, however,
after any Opt-Out, the Opting-Out Party shall be entitled to receive only a reduced portion of such third-party payments. The
agreement will remain in effect until the expiration of all payment obligations between the parties related to development and
commercialization of ficlatuzumab, unless earlier terminated.
Activities under the Biodesix Agreement were evaluated under ASC 605-25 to determine whether such activities represented a
multiple element revenue arrangement. The Biodesix Agreement includes the following non-contingent deliverables: (i) the
Company’s obligation to deliver perpetual, non-exclusive rights to certain intellectual property including clinical and biomarker data
related to ficlatuzumab for use in developing and commercializing VeriStrat; (ii) the Company’s obligation to participate in the joint
steering committee; and (iii) the Company’s obligation to provide its existing supply of ficlatuzumab for development purposes. The
Company concluded that any deliverables that would be delivered after the FOCAL trial is complete were contingent deliverables
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because these services are contingent upon the results of the FOCAL trial. As these deliverables were contingent, and are not at an
incremental discount, they are not evaluated as deliverables at the inception of the arrangement. These contingent deliverables will be
evaluated and accounted for separately as each related contingency is resolved. As of December 31, 2016, no contingent deliverables
had been provided by the Company.
The Company determined that the perpetual, non-exclusive rights to certain intellectual property for use in developing and
commercializing VeriStrat did not have standalone value from the remaining deliverables since Biodesix could not obtain the intended
benefit of the license without the remaining deliverables. Since the remaining deliverables will be performed over the same period of
performance, there is no difference in accounting for the deliverables as one unit or multiple units of accounting, and therefore, the
Company is accounting for the deliverables as one unit of accounting.
The Company records the consideration earned in connection with the FOCAL trial, which consists of reimbursements from
Biodesix for expenses related to the trial, as a reduction to research and development expense during the period that reimbursable
expenses are incurred. As a result of the cost sharing provisions in the Biodesix Agreement, the Company reduced research and
development expenses by approximately $2.5 million, $3.5 million and $2.7 million during the years ended December 31, 2016, 2015
and 2014, respectively. The amount due to the Company from Biodesix pursuant to the cost-sharing provision was approximately $0.8
million and $1.1 million at December 31, 2016 and 2015, respectively. The Company received cash payments related to cost
reimbursements of approximately $2.8 million and $4.2 million during the years ended December 31, 2016 and 2015, respectively.
Astellas Pharma
In February 2011, the Company, together with its wholly-owned subsidiary AVEO Pharma Limited, entered into a collaboration
and license agreement (the “Astellas Agreement”) with Astellas Pharma Inc. and certain of its subsidiaries (together, “Astellas”),
pursuant to which the Company and Astellas intended to develop and commercialize tivozanib for the treatment of a broad range of
cancers. Astellas elected to terminate the agreement effective on August 11, 2014, at which time the tivozanib rights were returned to
the Company. In accordance with the Astellas Agreement, committed development costs, including the costs of completing certain
tivozanib clinical development activities, continue to be shared equally.
The Company accounted for the joint development and commercialization activities in North America and Europe as a joint
risk-sharing collaboration in accordance with ASC 808, Collaborative Arrangements. Payments from Astellas with respect to
Astellas’ share of tivozanib development and commercialization costs incurred by the Company pursuant to the joint development
plan were recorded as a reduction to research and development expense and general and administrative expense in the accompanying
consolidated financial statements due to the joint risk-sharing nature of the activities in North America and Europe. As a result of the
cost-sharing provisions in the Astellas Agreement, the Company decreased research and development expenses by $0.3 million, $0.7
million and $3.5 million during the years ended December 31, 2016, 2015 and 2014, respectively. The net amount due to the
Company from Astrellas pursuant to the cost-sharing provisions was $0.1 million at each of December 31, 2016 and 2015.
Under the agreement, the Company received cash payments related to reimbursable payments and milestone payments of $0.3
million, $1.5 million and $4.1 million during the years ended December 31, 2016, 2015 and 2014, respectively.
Biogen Idec International GmbH
In March 2009, the Company entered into an exclusive option and license agreement with Biogen regarding the development
and commercialization of the Company’s discovery-stage ErbB3-targeted antibodies, AV-203, for the potential treatment and
diagnosis of cancer and other diseases outside of North America. Under the agreement, the Company was responsible for developing
ErbB3 antibodies through completion of the first phase 2 clinical trial designed in a manner that, if successful, will generate data
sufficient to support advancement to a phase 3 clinical trial.
In March 2014, the Company and Biogen amended the exclusive option and license agreement (the “Amendment”). Pursuant to
the Amendment, Biogen agreed to the termination of its rights and obligations under the agreement, including Biogen’s option to
(i) obtain a co-exclusive (with AVEO) worldwide license to develop and manufacture ErbB3 targeted antibodies and (ii) obtain
exclusive commercialization rights to ErbB3 products in countries in the world other than North America. As a result, AVEO has
worldwide rights to AV-203. Pursuant to the Amendment, the Company was obligated to use reasonable efforts to seek a collaboration
partner for the purpose of funding further development and commercialization of ErbB3 targeted antibodies. The Company is also
obligated to pay Biogen a percentage of milestone payments received by AVEO from future partnerships after March 28, 2016 and
single digit royalty payments on net sales related to the sale of ErbB3 products, if any, up to cumulative maximum amount of $50
million.
106
The Company concluded that the Amendment materially modified the terms of the agreement and, as a result, required the
application of ASC 605-25. Based upon the terms of the Amendment, the remaining deliverables included the Company’s obligation
to seek a collaboration partner to fund further development of the program and the Company’s obligation to continue development and
commercialization of the licensed products if a collaboration partner is secured (“Development Deliverable”). The Company
concluded that its obligation to use best efforts to seek a collaboration partner does not have standalone value from the Development
Deliverable upon delivery and thus the deliverables should be treated as a single unit of accounting.
Upon modifying the arrangement, the Company had $14.7 million of deferred revenue remaining to be amortized. The
Company is not entitled to receive any further consideration from Biogen Idec under the agreement, as amended. The Company
allocated a portion of the remaining deferred revenue to the undelivered unit of accounting based upon the Company’s best estimate of
the selling price, as the Company determined that neither VSOE nor TPE were available. The Company determined the best estimate
of selling price to be approximately $0.6 million and recognized the remaining $14.1 million as collaboration revenue in March 2014.
The deferred revenue associated with the undelivered unit of accounting was recognized on a straight-line basis over the period of
performance, or through March 2016, when the Company executed its agreement with CANbridge.
Under the agreement, the Company recorded revenue of $38 thousand, $0.3 million and $14.5 million during the years ended
December 31, 2016, 2015 and 2014, respectively.
In March 2016, the Company entered into a collaboration and license agreement for AV-203 with CANbridge. See “—
CANbridge” herein for a further description of that arrangement.
In-License Agreements
St. Vincent’s
In July 2012, the Company entered into a license agreement with St. Vincent’s, under which the Company obtained an
exclusive, worldwide license to research, develop, manufacture and commercialize products for human therapeutic, preventative and
palliative applications that benefit from inhibition or decreased expression or activity of MIC-1, which is also referred to as GDF15.
Under the agreement, the Company has the right to grant sublicenses subject to certain restrictions. Under the license agreement, St.
Vincent’s also granted the Company non-exclusive rights for certain related diagnostic products and research tools.
In order to sublicense certain necessary intellectual property rights to Novartis in August 2015, the Company and St. Vincent’s
amended and restated the license agreement (the “Amended St. Vincent’s Agreement”). Under the Amended St. Vincent’s Agreement,
the Company was required to make an upfront payment to St. Vincent’s of $1.5 million. St. Vincent’s is also eligible to receive up to
approximately $18.9 million in connection with development and regulatory milestones and /or defined timelines under the Amended
St. Vincent’s Agreement. Royalties for approved products resulting from the Amended St. Vincent’s Agreement will also be payable
to St. Vincent’s, and the Company and Novartis will share that obligation equally. Under the license agreement with Novartis, the
Company is required to maintain the Amended St. Vincent’s Agreement in effect, and not enter into any amendment that would
adversely affect Novartis’ rights during the term of the license agreement with Novartis.
During the year ended December 31, 2016, the Company made a $0.4 million milestone payment to St. Vincent’s related to the
selection of a development candidate.
Kyowa Hakko Kirin (KHK)
In December 2006, the Company entered into a license agreement with KHK under which it obtained an exclusive license, with
the right to grant sublicenses subject to certain restrictions, to research, develop, manufacture and commercialize tivozanib,
pharmaceutical compositions thereof and associated biomarkers. Its exclusive license covers all territories in the world except for Asia
and the Middle East, where KHK has retained the rights to tivozanib. Under the license agreement, the Company obtained exclusive
rights in its territory under certain KHK patents, patent applications and know-how related to tivozanib, to research, develop, make,
have made, use, import, offer for sale, and sell tivozanib for the diagnosis, prevention and treatment of any and all human diseases and
conditions. The Company and KHK each have access to and can benefit from the other party’s clinical data and regulatory filings with
respect to tivozanib and biomarkers identified in the conduct of activities under the license agreement.
Under the license agreement, the Company is obligated to use commercially reasonable efforts to develop and commercialize
tivozanib in its territory, including meeting certain specified diligence goals. Prior to the first anniversary of the first post-marketing
approval sale of tivozanib in its territory, neither the Company nor any of its subsidiaries has the right to conduct certain clinical trials
of, seek marketing approval for or commercialize any other cancer product that also works by inhibiting the activity of a VEGF
receptor.
107
The Company has upfront, milestone and royalty payment obligations to KHK under the license agreement. Upon entering into
the license agreement with KHK, the Company made an upfront payment in the amount of $5.0 million. In March 2010, the Company
made a milestone payment to KHK in the amount of $10.0 million in connection with the dosing of the first patient in the Company’s
first phase 3 clinical trial of tivozanib (TIVO-1). In December 2012, the Company made a $12.0 million milestone payment to KHK in
connection with the acceptance by the FDA of the Company’s 2012 NDA filing for tivozanib. Each milestone under the KHK
agreement is a one-time only payment obligation, accordingly, the Company did not owe KHK another milestone payment in
connection with the dosing of the first patient in the Company’s TIVO-3 trial, and would not owe a milestone payment to KHK if the
Company files an NDA with the FDA following the completion of the TIVO-3 clinical trial. If the Company obtains approval for
tivozanib in the U.S., the Company would owe KHK a one-time milestone payment of $18.0 million, provided that the Company does
not sublicense U.S. rights for tivozanib prior to obtaining a U.S. regulatory approval. If the Company were to sublicense the U.S.
rights, the associated U.S. regulatory milestone would be replaced by a specified percentage of sublicensing revenue, as set forth
below.
If the Company sublicenses any of its rights to tivozanib to a third party, as it has done with EUSA, the sublicense defines the
payment obligations of the sublicensee, which may vary from the milestone and royalty payment obligations under the KHK license
relating to rights the Company retains. The Company is required to pay KHK a fixed 30% of amounts the Company receives from its
sublicensees, including upfront license fees, milestone payments and royalties, but excluding amounts the Company receives in
respect of research and development funding or equity investments, subject to certain limitations. In accordance with the sublicensing
provisions of the KHK agreement, in 2011 the Company made a $22.5 million payment to KHK related to the upfront license payment
received under a collaboration and license agreement the Company entered into with Astellas Pharmaceuticals, Inc., the termination of
which became effective on August 11, 2014. If tivozanib is approved in the EU, the $4.0 million research and development
reimbursement milestone that would be owed to the Company by EUSA would not be subject to a sublicense revenue payment to
KHK, nor would a research and development reimbursement payment upon an election by EUSA to use the data generated from the
TIVO-3 or TiNivo trials for regulatory or commercial purposes, which could be up to $20.0 million for the TIVO-3 data and up to
$2.0 million TiNivo data. The Company would, however, owe KHK 30% of other, non-R&D payments the Company may receive
from EUSA pursuant to the EUSA agreement, including EU reimbursement approval milestones in up to five specified EU countries,
EU marketing approvals for up to three additional indications beyond RCC, marketing approvals in up to three specified licensed
territories outside of the EU, sales-based milestones and royalties.
The Company is also required to pay tiered royalty payments on net sales it makes of tivozanib in its territory, which range
from the low to mid-teens as a percentage of net sales. The royalty rate escalates within this range based on increasing tivozanib sales.
The Company’s royalty payment obligations in a particular country in its territory begin on the date of the first commercial sale of
tivozanib in that country, and end on the later of 12 years after the date of first commercial sale of tivozanib in that country or the date
of the last to expire of the patents covering tivozanib that have been issued in that country.
The license agreement will remain in effect until the expiration of all of the Company’s royalty and sublicense revenue
obligations to KHK, determined on a product-by-product and country-by-country basis, unless the Company elects to terminate the
license agreement earlier. If the Company fails to meet its obligations under the agreement and is unable to cure such failure within
specified time periods, KHK can terminate the agreement, resulting in a loss of our rights to tivozanib and an obligation to assign or
license to KHK any intellectual property or other rights the Company may have in tivozanib, including its regulatory filings,
regulatory approvals, patents and trademarks for tivozanib.
Other License Agreements
The Company has entered into various cancelable license agreements for patented technology and other technology related to
research projects, including technology to humanize ficlatuzumab, AV-203 and other antibody product candidates. The Company is
obligated to pay annual maintenance payments of $25,000, which are recognized as research and development expense over the
maintenance period. Under an additional agreement, if the parties agree to the use of the licensed technology in development of a
product, the Company will be required to make a $1.0 million license payment per product. Three of these agreements also include
development and sales-based milestones of up to $22.5 million, $5.5 million and $4.2 million per product, respectively, and single
digit royalties as a percentage of sales.
Certain other research agreements require the Company to remit royalties in amounts ranging from 0.5% to 1.5% based on net
sales of products utilizing the licensed technology. No expenses were incurred during the years ended December 31, 2016, 2015 and
2014. The Company has not paid any royalties to date.
108
(5) Other Accrued Liabilities
Other accrued expenses consisted of the following:
Professional fees
Compensation and benefits
Restructuring
Other
Total
December 31,
2016
December 31,
2015
$
$
(in thousands)
464 $
891
—
176
1,531 $
573
938
357
272
2,140
(6) Loans Payable
On May 28, 2010, the Company entered into the Loan Agreement with Hercules. The Loan Agreement was subsequently
amended in March 2012 (the “2012 Amendment”), September 2014 (the “2014 Amendment”) and May 2016 (the “2016
Amendment”). Amounts borrowed under the 2012 Amendment were repaid in full in 2015.
Pursuant to the 2014 Amendment, the Company received additional loan proceeds from Hercules in the amount of $10.0 million
and was not required to commence principal payments until May 1, 2016, with the last principal payment due on January 1, 2018. An
end-of-term payment of approximately $0.5 million continues to be due on January 1, 2018 or on such earlier date if the loan is
prepaid. The Company incurred approximately $0.2 million in loan issuance costs paid directly to Hercules, which were offset against
the loan proceeds and are accounted for as a loan discount. The 2014 Amendment was accounted for as a loan modification in
accordance with ASC 470-50, Debt—Modifications and Extinguishments (“ASC 470-50”).
In connection with the 2014 Amendment, the Company issued warrants to the lenders to purchase up to 608,696 shares of the
Company’s common stock at an exercise price equal to $1.15 per share. The Company recorded the fair value of the warrants of
approximately $0.4 million as stockholders’ equity and as a discount to the related loan outstanding and is amortizing the value of the
discount to interest expense over the term of the loan using the effective interest method. As of December 31, 2016, none of these
warrants have been exercised.
Pursuant to the 2016 Amendment, the Company received additional loan proceeds from Hercules in the amount of $5.0 million,
which increased the aggregate outstanding principal balance under the Loan Agreement to $15.0 million. The Company is not required
to commence principal payments on the $15 million loan until July 1, 2017, at which time the Company will be required to make 30
equal monthly payments of principal and interest through December 2019. An end-of-term payment of approximately $0.2 million is
due on December 1, 2019. The Company incurred approximately $0.1 million in loan issuance costs paid directly to Hercules, which
were offset against the loan proceeds and are accounted for as a loan discount. The 2016 Amendment was accounted for as a loan
modification in accordance with ASC 470-50. The 2016 Amendment includes a financial covenant that requires the Company to
maintain an unrestricted cash position greater than or equal to $10.0 million through the date of completion of the Company’s Phase 3
TIVO-3 trial. Because the Company was in compliance with the financial covenant at December 31, 2016, the Company has classified
the outstanding principal in current and long-term liabilities based on the timing of scheduled principal payments. Refer to Note 1 for
the potential adverse consequences of not complying with the financial covenant in future periods.
Under the 2016 Amendment, from March 1, 2017 through June 30, 2017, the Company may draw down an additional $5.0
million in funding upon the satisfaction of the following conditions: (i) achieving developmental progression satisfactory to Hercules
on a minimum of two (2) clinical programs (other than the Phase 3 TIVO-3 trial) that are either managed directly by the Company or
funded, in whole or in part, by the Company and (ii) having an unrestricted cash position greater than or equal to $25.0 million on the
date of the draw down request. If the Company draws down the additional $5.0 million in funding, the commencement of principal
payments on the aggregate $20.0 million loan balance will be deferred by six months from July 1, 2017 until January 1, 2018.
In connection with the 2016 Amendment, the Company issued warrants to Hercules to purchase up to 1,202,117 shares of the
Company’s common stock at an exercise price equal to $0.87 per share. The Company recorded the fair value of the warrants of
approximately $0.7 million as a component of stockholders’ equity and as a discount to the related loan outstanding and is amortizing
the value of the discount to interest expense over the term of the loan using the effective interest method. As of December 31, 2016,
none of these warrants have been exercised.
The unamortized discount to be recognized over the remainder of the loan period was approximately $1.0 million and $0.5
million as of December 31, 2016 and December 31, 2015, respectively.
109
The Company must make interest payments on the loan balance each month it remains outstanding. Per annum interest is
payable on the principal balance of the loan each month it remains outstanding at the greater of 11.9% and an amount equal to 11.9%
plus the prime rate minus 4.75% as determined daily, provided however, that the per annum interest rate shall not exceed 15.0%
(11.9% as of December 31, 2016).
As part of the Loan Agreement, Hercules also received an option, subject to the Company’s written consent, not to be
unreasonably withheld, to purchase, either with cash or through conversion of outstanding principal under the loan, up to $2.0 million
of equity of the Company sold in any sale by the Company to third parties of equity securities resulting in at least $10.0 million in net
cash proceeds to the Company, subject to certain exceptions. The Company has evaluated the embedded conversion option, and has
concluded that it does not need to be bifurcated and separately accounted for. No amount will be recognized for the conversion feature
until such time as the conversion feature is exercised and it can be determined whether a beneficial conversion feature exists. In
connection with the Company’s May 2016 private placement (refer to Note 7), Hercules purchased 259,067 units for cash proceeds of
$0.2 million to the Company. This purchase was separate from the $2.0 million equity purchase option under the Loan Agreement.
The loans are secured by a lien on all the Company’s personal property (other than intellectual property), whether owned or
acquired after the date of the Loan Agreement. The Loan Agreement defines events of default, including the occurrence of an event
that results in a material adverse effect upon the Company’s business operations, properties, assets or condition (financial or
otherwise), its ability to perform its obligations or upon the ability of the lenders to enforce any of their rights or remedies with respect
to such obligations, or upon the collateral under the Loan Agreement, the related liens or the priority thereof. As of December 31,
2016, the Company was in compliance with all loan covenants, Hercules has not asserted any events of default and the Company does
not believe that there has been a material adverse change as defined in the loan agreement.
The Company has determined that the risk of subjective acceleration under the material adverse events clause is remote and
therefore has classified the outstanding principal in current and long-term liabilities based on the timing of scheduled principal
payments.
Future minimum payments under the loans payable outstanding as of December 31, 2016 are as follows (amounts in thousands):
Year Ending December 31:
2017
2018
2019
Less amount representing interest
Less unamortized discount
Less deferred charges
Less loans payable current, net of discount
Loans payable, net of current portion and discount
$
$
4,386
7,506
7,159
19,051
(3,361)
(997)
(690)
(2,124)
11,879
(7) Common Stock
As of December 31, 2016, the Company had 200,000,000 authorized shares of common stock, $0.001 par value, of which
75,862,946 shares were issued and outstanding.
Private Placement / PIPE Warrants
In May 2016, the Company entered into a securities purchase agreement with a select group of qualified institutional buyers,
institutional accredited investors and accredited investors pursuant to which the Company sold 17,642,482 units, at a price of $0.965
per unit, for gross proceeds of approximately $17.0 million. Each unit consisted of one share of the Company’s common stock and a
warrant to purchase one share of the Company’s common stock (the “PIPE Warrants”). The PIPE Warrants have an exercise price of
$1.00 per share and are exercisable for a period of five years from the date of issuance. Certain of the Company’s directors and
executive officers purchased an aggregate of 544,039 units in this offering at the same price as the other investors. The net offering
proceeds to the Company were approximately $15.4 million after deducting placement agent fees and other offering expenses payable
by the Company.
The PIPE Warrants contain a provision giving the warrant holder the option to receive cash, equal to the fair value of the
remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually
defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480, Distinguishing Liabilities
110
from Equity requires that these warrants be classified as a liability and not as equity. Accordingly, the Company recorded a warrant
liability in the amount of approximately $9.3 million upon issuance of the PIPE Warrants. The fair value of these warrants has been
determined using the Black-Scholes pricing model, and the changes in the fair value at the time of each reporting date are recorded in
the Statements of Operations. During the year ended December 31, 2016, as a result of the fair value adjustment of the warrant
liability, the Company recorded a decrease in the fair value of the warrant liability of approximately $4.8 million in the Statements of
Operations. As of December 31, 2016, none of the PIPE Warrants have been exercised.
The key assumptions used to value the PIPE Warrants were as follows:
Expected price volatility
Expected term (in years)
Risk-free interest rates
Stock price
Dividend yield
ATM Sales Agreement
Original Issuance
76.25%
5.00
1.22%
0.89
—
December 31, 2016
78.18%
4.50
1.93%
0.54
—
$
$
In February 2015, the Company entered into an at-the-market issuance sales agreement (the “Sales Agreement”) with FBR &
Co. (formerly MLV & Co. LLC) (“FBR”), pursuant to which the Company could issue and sell shares of its common stock from time
to time up to an aggregate amount of $17.9 million, at the Company’s option, through FBR as its sales agent. Sales of common stock
through FBR may be made by any method that is deemed an “at-the-market” offering as defined in Rule 415 promulgated under the
Securities Act of 1933, as amended. Subject to the terms and conditions of the Sales Agreement, FBR will use commercially
reasonable efforts to sell the common stock based upon the Company’s instructions (including any price, time or size limits or other
customary parameters or conditions the Company may impose). The Company is not obligated to make any sales of its common stock
under the Sales Agreement. Any shares sold will be sold pursuant to an effective shelf registration statement on Form S-3. The
Company will pay FBR a commission of up to 3% of the gross proceeds. The Sales Agreement may be terminated by the Company at
any time.
On May 7, 2015, the Company filed a shelf registration statement on Form S-3 with the SEC, which covers the offering,
issuance and sale by the Company of up to $100.0 million of its common stock, preferred stock, debt securities, warrants and/or units
(the “2015 Shelf”). The 2015 Shelf was filed to replace the Company’s existing $250.0 million shelf registration statement (the “2012
Shelf”). On May 7, 2015, the Company also amended its Sales Agreement with FBR to provide for the offering, issuance and sale by
the Company of up to $15.0 million of its common stock under the 2015 Shelf, which replaced the Company’s existing $17.9 million
offering that expired along with the expired 2012 Shelf. As of December 31, 2016, the Company has sold approximately 5.9 million
shares pursuant to the Sales Agreement, as amended, resulting in proceeds of approximately $10.2 million, net of commissions and
issuance costs. No shares have been sold during the year ended December 31, 2016.
Approximately $9.1 million remains available for sale under the Sales Agreement.
(8) Stock-based Compensation
Stock Incentive Plan
The Company maintains the 2010 Stock Incentive Plan (the “Plan”) for employees, consultants, advisors, and directors, as
amended in March 2013 and June 2014. The Plan provides for the grant of equity awards such as stock options and restricted stock.
The Company has reserved 8,500,000 shares of common stock under the Plan. The Plan provides that the exercise price of incentive
stock options cannot be less than 100% of the fair market value of the common stock on the date of the award for participants who
own less than 10% of the total combined voting power of stock of the Company and not less than 110% for participants who own
more than 10% of the total combined voting power of the stock of the Company. Options and restricted stock granted under the Plan
vest over periods as determined by the Board, which generally are equal to four years. Options generally expire ten years from the date
of grant. As of December 31, 2016, there were 2,746,513 shares available for future issuance under the Plan.
111
The following table summarizes stock option activity during the year ended December 31, 2016:
Weighted-
Average
Options
Exercise Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at January 1, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Vested or expected to vest at December 31, 2016
Exercisable at December 31, 2016
4,796,005 $
1,781,134 $
(38,749) $
(1,679,712) $
4,858,678 $
3,043,129 $
2,327,806 $
3.78
1.01
0.84
5.17
2.31
3.04
3.63
7.98 $
7.63 $
7.34 $
—
—
—
Stock options to purchase 197,650 shares of common stock contain market conditions which were not deemed probable of
vesting at December 31, 2016.
The fair value of stock options subject only to service or performance conditions that are granted to employees is estimated on
the date of grant using the Black-Scholes option-pricing model using the assumptions noted in the following table:
Volatility factor
Expected term (in years)
Risk-free interest rates
Dividend yield
2016
Years Ended December 31,
2015
2014
72.18% - 74.47%
73.04% - 78.70%
69.38% - 77.92%
3.00 - 6.25
1.07% - 2.01%
—
5.50 - 6.25
1.54% - 1.93%
—
5.50 - 6.25
1.81% - 2.02%
—
The risk-free interest rate is determined based upon the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with
maturities similar to those of the expected term of the options being valued. The Company does not expect to pay dividends in the
foreseeable future.
In 2016, the Company began calculating volatility using its historical data. Previously, the Company did not have sufficient
history to support a calculation of volatility using only its historical data. As such, in 2014 and 2015, the Company used a weighted-
average volatility considering the Company’s own volatility since March 2010, and the volatilities of several peer companies. For
purposes of identifying similar entities, the Company considered characteristics such as industry, length of trading history, similar
vesting terms and in-the-money option status. Due to lack of available option activity data, the Company elected to use the
“simplified” method for “plain vanilla” options to estimate the expected term of the stock option grants. Under this approach, the
weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. Based upon
these assumptions, the weighted-average grant date fair value of stock options granted during the years ended December 31, 2016,
2015 and 2014 was $0.65, $0.75 and $1.15, respectively.
The Company is required to include an estimate of the value of the awards that will be forfeited in calculating compensation
costs, which the Company estimates based upon actual historical forfeitures. The forfeiture estimates are recognized over the requisite
service period of the awards on a straight-line basis. The Company estimated its forfeiture rate to be approximately 76%, 71% and
62% during the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, there was $0.8 million of total unrecognized stock-based compensation expense related to stock
options granted to employees under the Company’s 2002 Stock Incentive Plan and 2010 Stock Incentive Plan (collectively, the
“Plans”). The expense is expected to be recognized over a weighted-average period of 2.5 years. The intrinsic value of options
exercised during the years ended December 31, 2016 and 2015 was $6,000 and $58,000, respectively. No options were exercised
during the year ended December 31, 2014.
Stock Incentive Plan—Restricted Stock
The Company periodically grants awards of restricted stock to employees. These awards typically vest upon completion of the
requisite service period or upon achievement of specified performance targets.
112
The following table summarizes the restricted stock activity during the year ended December 31, 2016:
Unvested at January 1, 2016
Granted
Vested/Released
Unvested at December 31, 2016
Number of Shares
Weighted-
Average
Fair-Value
42,750 $
—
(42,750)
—
1.61
—
1.61
—
The fair value of restricted stock awards that vested was $0.1 million in each of the years ended December 31, 2016 and 2015,
and $0.2 million for the year ended December 31, 2014.
Employee Stock Purchase Plan
In February 2010, the Board of Directors adopted the 2010 Employee Stock Purchase Plan (the “ESPP”) pursuant to which the
Company may sell up to an aggregate of 250,000 shares of Common Stock, as amended in March 2013. The ESPP allows eligible
employees to purchase common stock at a price per share equal to 85% of the lower of the fair market value of the common stock at
the beginning or end of each six-month period during the term of the ESPP. The Company has reserved 764,000 shares of common
stock under the ESPP. As of December 31, 2016, there were 307,282 shares available for future issuance under the ESPP.
Pursuant to the ESPP, the Company did not sell any shares of common stock during the year ended December 31, 2016. For
the year ended December 31, 2015, the Company sold a total of 7,138 shares of common stock at purchase prices of $0.75 and $1.07,
respectively, which represent 85% of the closing price of the Company’s common stock on June 30, 2015 and December 31, 2015,
respectively. For the year ended December 31, 2014, the Company sold a total of 139,032 shares of common stock at purchase prices
of $1.53 and $0.71, respectively, which represent 85% of the closing price of the Company’s common stock on June 30, 2014 and
December 31, 2014, respectively. The total stock-based compensation expense recorded as a result of the ESPP was approximately $2
thousand, $27 thousand and $0.2 million during the years ended December 31, 2016, 2015 and 2014, respectively.
(9) Commitments and Contingencies
Operating Leases
The Company leases office and has leased lab space and equipment under various operating lease agreements. Rent expense
under the operating leases amounted to $0.6 million, ($9.1) million and $4.1 million for the years ended December 31, 2016, 2015 and
2014, respectively. For the year ended December 31, 2014, $3.1 million of rent expense is included within lease exit costs on the
Company’s statement of operations. The net rent credit for the year ended December 31, 2015 was recorded within operating expenses
and allocated to research and development and general and administrative expense based upon the use of the underlying facility space.
Refer to the following paragraphs and Note 12 for further discussion of the net rent credit recognized in 2015.
In May 2015, the Company began leasing office space under a cancellable arrangement. The Company recognized rent expense
of approximately $0.2 million related to this lease during the year ended December 31, 2015.
On May 9, 2012, the Company entered into a lease agreement with BMR-650 E KENDALL B LLC (“BMR”), under which the
Company agreed to lease 126,065 square feet of space located at 650 East Kendall Street, Cambridge, Massachusetts to be used for
office, research and laboratory space. The initial term of the lease agreement was approximately twelve years and seven months (the
“initial term”). The Company has determined that the lease should be classified as an operating lease.
In order to make the space usable for the Company’s operations, substantial improvements were made to the space. These
improvements were planned, managed and carried out by the Company and the improvements were tailored to the Company’s needs.
BMR agreed to reimburse the Company for up to $14.9 million of the improvements, and the Company bore all risks associated with
any cost overruns that may be incurred. As such, the Company determined it was the owner of the improvements and, as such, the
Company accounted for tenant improvement reimbursements from BMR as a lease incentive. The Company recorded a deferred lease
incentive (included as a component of the deferred rent balance in the accompanying consolidated balance sheets) and the incentive
was amortized as an offset to rent expense over the term of the lease. Rent expense, inclusive of the escalating rent payments, was
recognized on a straight-line basis over the initial term of the lease agreement. Refer to Note 12 for further discussion regarding the
termination of this lease. The Company recognized rent expense of approximately ($9.5) and $4.3 million related to the lease during
the years ended December 31, 2015 and 2014, respectively. The expense recognized during the years ended December 31, 2015 and
2014 included the recognition of deferred rent credits totaling $10.6 million and $3.8 million, respectively, following the termination
of the lease agreement.
113
Employment Agreements
Certain key executives are covered by severance and change in control agreements. Under these agreements, if the executive’s
employment is terminated without cause or if the executive terminates his employment for good reason, such executive will be entitled
to receive severance equal to his base salary, benefits and prorated bonuses for a period of time equal to either 12 months or 18
months, depending on the terms of such executive’s individual agreement. In addition, in December 2007, the Company approved a
key employee change in control severance benefits plan, which was amended in November 2009, and which provides for severance
and other benefits under certain qualifying termination events upon a change in control for a period of time ranging from 6 months to
18 months, depending upon the position of the key employee.
Refer to Note 15 for further discussion of legal contingencies.
(10) Income Taxes
The Company accounts for income taxes under the provisions of ASC 740. For the year ended December 31, 2016 the Company
recorded a $0.1 million tax provision for foreign withholding taxes in connection with the $1.0 million upfront payment by
CANbridge under the collaboration and license agreement entered into in March 2016. For the years ended December 31, 2015 and
2014, the Company did not have any federal, state, or foreign income tax expense as it generated taxable losses in all filing
jurisdictions.
A reconciliation of the expected income tax benefit computed using the federal statutory income tax rate to the Company’s
effective income tax rate is as follows for the years ended December 31, 2016, 2015 and 2014:
Income tax computed at federal statutory tax rate
State taxes, net of federal benefit
Research and development credits
Other permanent differences
Foreign rate differential
Foreign withholding taxes
SEC settlement liability
Other
Change in valuation allowance
Total
2016
34.0%
5.2%
1.4%
6.1%
(0.1)%
(0.4)%
—
(6.6)%
(39.6)%
—
Years Ended December 31,
2015
34.0%
5.3%
2.0%
(2.0)%
(0.1)%
—
(9.1)%
(3.8)%
(26.3)%
—
2014
34.0%
5.3%
2.6%
(0.8)%
—
—
—
(5.7)%
(35.4)%
—
Prior to 2011, the Company had incurred net operating losses from inception. At December 31, 2016, the Company had
domestic federal, state, and UK net operating loss carryforwards of approximately $476.2 million, $366.9 million, and $6.7 million
respectively, available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2024 through
2036 and the state loss carryforwards begin to expire in 2030 and continue through 2036. The foreign net operating loss carryforwards
in the UK do not expire. The Company also had federal and state research and development tax credit carryforwards of approximately
$10.3 million and $4.2 million, respectively, available to reduce future tax liabilities and which expire at various dates. The federal
credits expire beginning in 2023 through 2036 and the state credits expire beginning in 2019 through 2031. The net operating loss and
research and development carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain changes in the ownership interest of significant stockholders.
The Company’s net deferred tax assets as of December 31, 2016 and 2015 are as follows (in thousands):
NOL carryforwards
Research and development credits
Deferred revenue
Other temporary differences
Valuation allowance
Total
$
$
2016
2015
182,433 $
13,060
867
4,570
(200,930)
— $
170,200
12,721
1,451
5,935
(190,307)
—
A full valuation allowance has been recorded in the accompanying consolidated financial statements to offset these deferred tax
assets because the future realizability of such assets is uncertain. This determination is based primarily on the Company’s historical
losses. Accordingly, future favorable adjustments to the valuation allowance may be required, if and when circumstances change. The
114
valuation allowance increased by $10.6 million, $3.9 million and $18.6 million during the years ended December 31, 2016, 2015, and
2014, respectively, primarily due to the generation of net operating loss carryforwards.
As of December 31, 2016, the Company had federal and state net operating losses of approximately $4.1 million related to
excess tax deductions that have been excluded from the above table. The benefit of these net operating losses will be recognized as an
increase in additional paid in capital when it results in a reduction of taxes payable.
The Company applies FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109”
(codified within ASC 740, Income Taxes), for the financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns. Unrecognized tax benefits represent tax positions for
which reserves have been established. A full valuation allowance has been provided against the Company’s deferred tax assets, so
that the effect of the unrecognized tax benefits is to reduce the gross amount of the deferred tax asset and the corresponding valuation
allowance. Since the Company has incurred net operating losses since inception, it has never been subject to a revenue agent review.
The Company is currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions
for the tax years ended 2013 through 2016. Carryforward tax attributes generated in years past may still be adjusted upon future
examination if they have or will be used in a future period. The Company is currently not under examination by the Internal Revenue
Service or any other jurisdictions for any tax years.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense. No interest and penalties have been recognized by the
Company to date.
The Company anticipates that the amount of unrecognized tax benefits recorded will not change in the next twelve months.
The following is a reconciliation of the Company’s gross uncertain tax positions at December 31, 2016, 2015 and 2014:
Amount established upon adoption
Additions for current year tax provisions
Additions for prior year tax provisions
Reductions of prior year tax provisions
Balance as of end of year
(11) Strategic Restructuring
2016
Years Ended December 31,
2015
(in thousands)
2014
$
$
1,200 $
—
—
—
1,200 $
1,200 $
—
—
—
1,200 $
1,200
—
—
—
1,200
On January 6, 2015, the Board of the Company approved a strategic restructuring of the Company that eliminated the
Company’s internal research function and aligned the Company’s resources with the Company’s future strategic plans. As part of this
restructuring, the Company eliminated approximately two-thirds of the Company’s workforce, or 40 positions across the organization.
The Company substantially completed the restructuring during the quarter-ended March 31, 2015.
115
The following table summarizes the components of the Company’s restructuring activity recorded in operating expenses and in
accrued expenses in the accompanying consolidated balance sheet:
Restructuring
amounts accrued
at
December 31,
2015
Restructuring
expense
incurred
during the year ended
December 31,
2016
Restructuring
amounts
paid
during the year ended
December 31,
2016
Restructuring
amounts
accrued at
December 31,
2016
Employee severance, benefits and related costs.
$
357
— $
(357)
—
Restructuring
amounts accrued
at
December 31,
2014
Restructuring
expense
incurred
during the year ended
December 31,
2015
Restructuring
amounts
paid
during the year ended
December 31,
2015
Restructuring
amounts
accrued at
December 31,
2015
Employee severance, benefits and related costs.
$
—
3,560 $
(3,203) $
357
(12) Facility Lease Exit
On May 9, 2012, the Company entered into a lease agreement with BMR-650 E KENDALL B LLC (“BMR”), under which the
Company agreed to lease 126,065 square feet of space located at 650 East Kendall Street, Cambridge, Massachusetts to be used for
office, research and laboratory space. The initial term of the lease agreement was approximately twelve years and seven months (the
“initial term”). The Company had determined that the lease should be classified as an operating lease.
In order to make the space usable for the Company’s operations, substantial improvements were made to the space. These
improvements were planned, managed and carried out by the Company and the improvements were tailored to the Company’s needs.
BMR agreed to reimburse the Company for up to $14.9 million of the improvements, and the Company bore all risks associated with
any cost overruns that may be incurred. As such, the Company determined it was the owner of the improvements and, as such, the
Company accounted for tenant improvement reimbursements from BMR as a lease incentive. The Company recorded a deferred lease
incentive (included as a component of the deferred rent balance in the accompanying consolidated balance sheets) and the incentive
was amortized as an offset to rent expense over the term of the lease. Rent expense, inclusive of the escalating rent payments, was
recognized on a straight-line basis over the initial term of the lease agreement.
In September 2014, the Company entered into the Lease Termination Agreement pursuant to which the Company immediately
surrendered leased space at 650 East Kendall Street in Cambridge, Massachusetts that it had previously ceased using earlier in 2014.
In connection with the Lease Termination Agreement, the Company agreed to pay the landlord a termination fee totaling $15.6
million. The Company also agreed to surrender its remaining leased space upon 90 days written notice prior to September 24, 2015. In
February 2015, the Company provided notice that it would surrender the remaining space on May 29, 2015. Accordingly, the
Company revised the estimated useful life of its leasehold improvements related to this office space and amortized such assets through
May 2015, resulting in an additional $2.9 million of depreciation expense during the six months ended June 30, 2015. Similarly, the
Company accelerated the amortization of its deferred rent and leasehold improvement allowance associated with this office space
through May 2015, resulting in an additional $3.5 million of amortization during the six months ended June 30, 2015. Upon the
surrender of the remaining space, the Company had no further rights or obligations with respect to the lease. The Company secured
office space appropriate for its current needs under a cancellable arrangement that began in May 2015. The Company recognized rent
expense of approximately ($9.5) million and $4.3 million related to the lease during the years ended December 31, 2015 and 2014,
respectively. The net rent credit for the year ended December 31, 2015 and December 31, 2014 were recorded within operating
expenses and allocated to research and development and general and administrative expense based upon the use of the underlying
facility space. The expense recognized during the years ended December 31, 2015 and 2014 include the recognition of deferred rent
credits totaling $10.6 million and $3.8 million, respectively, following the termination of the lease agreement.
116
The following table summarizes the components of the Company’s lease exit activity recorded in current liabilities at December
31, 2015:
Lease Exit
amounts
accrued at
December 31,
2014
Accretion
Expense
incurred
during the
year ended
December 31,
2015
Amounts paid
during the
year ended
December 31,
2015
Additional
expense
incurred
during the
year ended
December 31,
2015
Amounts
accrued at
December 31,
2015
Lease exit costs
$
4,981
224 $
(5,477) $
272 $
—
No costs were incurred during the year ended December 31, 2016.
(13) Employee Benefit Plan
In 2002, the Company established the AVEO Pharmaceuticals, Inc. 401(k) Plan (the “401(k) Plan”) for its employees, which is
designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the 401(k)
Plan within statutory and 401(k) Plan limits. The Company makes matching contributions of 50% of the first 5% of employee
contributions. The Company made matching contributions of $0.1 million for each of the years ended December 31, 2016, 2015 and 2014.
(14) Quarterly Results (Unaudited)
Collaboration and licensing revenue
Operating expenses
Loss from operations
Change in fair value warranty liability
Other expense, net
Net loss
Net loss per share
Collaboration and licensing revenue
Restructuring and lease exit
Operating expenses
(Loss) income from operations
Other expense, net
Net (loss) income
Net (loss) income per share
(15) Legal Proceedings
March 31, 2016
June 30, 2016
September 30,
2016
December 31,
2016
Three Month Ended
(in thousands, expect per share data)
(unaudited)
193 $
7,335
(7,142)
(996)
(468)
(8,606) $
(0.13) $
992 $
6,585
(5,593)
1,178
(551)
(4,966) $
(0.07) $
1,203 $
8,435
(7,232)
—
(378)
(7,710) $
(0.13) $
$
$
$
127
9,553
(9,426)
4,569
(748)
(5,605)
(0.07)
March 31, 2015
June 30, 2015
September 30,
2015
December 31,
2015
Three Month Ended
(in thousands, expect per share data)
(unaudited)
134 $
25
4,730
(4,621)
(835)
(5,456) $
(0.10) $
15,158 $
—
6,691
8,467
(553)
7,914 $
0.14 $
134 $
4,333
5,950
(10,149)
(725)
(10,874) $
(0.21) $
$
$
$
3,598
—
9,721
(6,123)
(462)
(6,585)
(0.11)
Two class action lawsuits have been filed against the Company and certain of the Company’s former officers and directors,
(Tuan Ha-Ngoc, David N. Johnston, William Slichenmyer and Ronald DePinho), in the United States District Court for the District of
Massachusetts, one captioned Paul Sanders v. Aveo Pharmaceuticals, Inc., et al., No. 1:13-cv-11157-JLT, filed on May 9, 2013, and
the other captioned Christine Krause v. AVEO Pharmaceuticals, Inc., et al., No. 1:13-cv-11320-JLT, filed on May 31, 2013. On
December 4, 2013, the District Court consolidated the complaints as In re AVEO Pharmaceuticals, Inc. Securities Litigation et al.,
No. 1:13-cv-11157-DJC, and an amended complaint was filed on February 3, 2014. The amended complaint purported to be brought
on behalf of shareholders who purchased the Company’s common stock between January 3, 2012 and May 1, 2013. This consolidated
117
amended complaint was dismissed without prejudice on March 20, 2015, and the lead plaintiffs then filed a second amended
complaint bringing similar allegations, and which no longer named Mr. DePinho as a defendant. The Company moved to dismiss
again, and after a second round of briefing and oral argument, the court ruled in the Company’s favor and dismissed the second
amended complaint with prejudice on November 18, 2015. The lead plaintiffs have appealed the court’s decision to the United States
Court of Appeals for the First Circuit. They also filed a motion to vacate and reconsider the district court’s judgment, which the
Company has opposed. On January 3, 2017, the Court granted Plaintiffs’ motion to vacate the dismissal and judgment and Plaintiffs
filed a motion to dismiss their appeal on February 8, 2017. On February 2, 2017, Plaintiffs filed a third amended complaint, on behalf
of shareholders who purchased common stock between May 16, 2012 and May 1, 2013, alleging claims similar to those alleged in the
prior complaints, namely that the Company and certain of its former officers and directors violated Sections 10(b) and/or 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements
concerning the phase 3 trial design and results for its TIVO-1 clinical trial in an effort to lead investors to believe that the drug would
receive approval from the FDA. On March 2, 2017, we filed an answer to the third amended complaint, and the parties have initiated
discovery. The lawsuit seeks unspecified damages, interest, attorneys’ fees, and other costs. The Company denies any allegations of
wrongdoing and intends to continue to vigorously defend against this lawsuit. However, there is no assurance that the Company will
be successful in its defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of
the action. Moreover, the Company is unable to predict the outcome or reasonably estimate a range of possible loss at this time.
On April 4, 2014, Karen J. van Ingen, a purported purchaser of AVEO stock, filed a derivative complaint allegedly on behalf of
AVEO in the United States District Court for the District of Massachusetts (the “Court”), Civil Action No. 1:14-cv-11672-DJC,
naming AVEO, as a nominal defendant and also naming as defendants present and former members of our board of directors,
including Tuan Ha-Ngoc, Henri A. Termeer, Kenneth M. Bate, Anthony B. Evnin, Robert Epstein, Raju Kucherlapati, Robert C.
Young, and Kenneth E. Weg. The complaint alleged breach of fiduciary duty and abuse of control between January 2012 and May
2013 with respect to allegedly misleading statements and omissions regarding tivozanib. The lawsuit seeks, among other relief,
unspecified damages, costs and expenses, including attorneys’ fees, an order requiring us to implement certain corporate governance
reforms, restitution from the defendants and such other relief as the court might find just and proper. The Company filed a motion to
dismiss the derivative complaint, and after briefing and oral argument, on March 18, 2015 the Court ruled in its favor and dismissed
the case with prejudice. The plaintiff then filed a motion seeking to vacate the Court’s order of dismissal and permit filing of an
amended complaint, which the Company opposed, and which the Court denied on June 30, 2015. The plaintiff has appealed the
Court’s decision to the United States Court of Appeals for the First Circuit. The parties have reached an agreement in principle to
settle this matter. The settlement involves certain corporate governance changes and other non-monetary relief. The plaintiff is seeking
an award of attorney’s fees, costs, and expenses in the amount of $822,116, as well as an incentive award of $2,500, both of which the
Company expects will be paid by insurance in the amount ordered by the Court. On September 16, 2016, the Court granted
preliminary approval to the proposed settlement. On December 19, 2016, the Court held a final settlement hearing on the terms of the
proposed settlement and to consider the award of fees to the plaintiff’s attorneys. No objections to the settlement were filed with the
Court or raised at the hearing. At the hearing, the Court indicated orally that the settlement will be approved, and heard argument
regarding the size of plaintiff’s potential attorney’s fee award. A formal approval order has not yet entered and the Court has not ruled
on the final amount of fees for the plaintiff’s attorneys (which, as stated above, are expected to be paid by insurance). Until a formal
approval order has been entered, there can be no complete assurance that the Court will approve the settlement.
On July 3, 2013, the staff (the “SEC Staff”) of the United States Securities and Exchange Commission (the “Commission”)
served a subpoena on the Company for documents and information concerning tivozanib, including related communications with the
FDA, investors and others. In September 2015, the SEC Staff invited the Company to discuss the settlement of potential claims
asserting that the Company violated federal securities laws by omitting to disclose to investors the recommendation by the staff of the
FDA on May 11, 2012, that the Company conduct an additional clinical trial with respect to tivozanib. On March 29, 2016, the
Commission filed a complaint against the Company and three of its former officers in the U.S. District Court for the District of
Massachusetts alleging that the Company misled investors about its efforts to obtain FDA approval for tivozanib. Without admitting
or denying the allegations in the Commission’s complaint, the Company consented to the entry of a final judgment pursuant to which
the Company paid the Commission a $4.0 million civil penalty to settle the Commission’s claims against it. On March 31, 2016, the
District Court entered a final judgment which (i) approved the settlement; (ii) permanently enjoined the Company from violating
Section 17(a) of the Securities Act of 1933, as amended, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934, as
amended, and rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder; and (iii) ordered the Company to pay the
agreed-to civil penalty. The Commission’s action against the Company’s three former officers is still pending. The Company is not a
party to any litigation or discussions between the SEC Staff and the former officers, and the Company can make no assurance
regarding the outcome of that action or the Commission’s claims against those individuals.
118
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of
December 31, 2016. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our
management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
not effective as of December 31, 2016 due to the existence of the material weakness in our internal control over financial reporting
referenced below.
Management’s report on the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) appears below.
Internal Control Over Financial Reporting
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the
company’s board of directors, management and other personnel, 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
and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control—Integrated Framework (2013 framework).
Based on our assessment, the Company’s management identified the following material weakness in internal control over
financial reporting:
This material weakness related to the failure during 2016 to regularly reconcile the U.K. bank account held by our U.K.
subsidiary, Aveo Pharma Limited, that was established to support prior European operations that existed in 2012 to 2013 and had not
yet been repatriated. As a result, the Company’s internal controls did not detect on a timely basis that, in October 2016, the bank
closed this account due to inactivity. At our request, the bank has subsequently remitted the funds to our bank account in the U.S. The
account balance at the time the account was closed represented approximately 3% of our total cash, cash equivalents and marketable
securities as of December 31, 2016.
Although no misappropriation of funds occurred, the control deficiency created the possibility that a misappropriation of funds
and/or a material misstatement to our consolidated financial statements may not have been prevented or detected on a timely basis.
119
Accordingly, this control deficiency was considered to represent a material weakness and, as a result, we concluded that our internal
control over financial reporting was not effective as of December 31, 2016.
Control activities related to all other cash and cash investment accounts were operating effectively throughout the year ended
December 31, 2016. Our consolidated financial statements present fairly, in all material respects, the Company’s financial position,
results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP. The control deficiency described above
did not result in any misstatements in the consolidated financial statements
We are committed to remediating the control deficiency that resulted in this material weakness. Certain remediation efforts have
been deemed to have occurred as the account has been closed and the funds have been remitted to our bank account in the U.S.
However, we continue to evaluate additional controls and procedures that we may design and put in place to address the material
weakness.
Any actions we take or may take to remediate the material weakness are subject to continued management review supported by
testing, as well as oversight by the Audit Committee of our Board of Directors. We cannot assure you, in any way, that material
weaknesses or significant deficiencies will not occur in the future and that we will be able to remediate such weaknesses or
deficiencies in a timely manner, which could impair our ability to accurately and timely report our financial position, results of
operations or cash flows.
Our independent registered public accounting firm has issued an attestation report of our internal control over financial
reporting. This report appears below.
120
(b) Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Board of Directors and Stockholders of
AVEO Pharmaceuticals, Inc.
We have audited AVEO Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). AVEO Pharmaceuticals, Inc.’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to
express an opinion on AVEO Pharmaceuticals, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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 the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Management has identified a material weakness related to the failure to reconcile a bank account on a regular basis and the resulting
failure to detect on a timely basis that the account had been closed by the bank due to inactivity. We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AVEO
Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss,
stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2016. This material
weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016 financial
statements, and this report does not affect our report dated March 22, 2017, which expressed an unqualified opinion on those financial
statements that included an explanatory paragraph regarding AVEO Pharmaceuticals, Inc.’s ability to continue as a going concern.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the
control criteria, AVEO Pharmaceuticals, Inc. has not maintained effective internal control over financial reporting as of December 31,
2016, based on the COSO criteria.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 22, 2017
121
Changes in Internal Control Over Financial Reporting
Other than as described in this Item 9A, there were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B.
Other Information
None.
122
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item 10 will be contained in the sections entitled “Election of Directors,” “Corporate
Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in the definitive proxy statement we will
file in connection with our 2017 Annual Meeting of Stockholders and is incorporated by reference herein. The information required by
this item relating to executive officers may be found in Part I, Item 1 of this report under the heading “Business—Executive Officers”
and is incorporated herein by reference.
ITEM 11.
Executive Compensation
The information required by this Item 11 will be contained in the sections entitled “Executive and Director Compensation,”
“Executive and Director Compensation—Compensation Committee Interlocks and Insider Participation” and “Executive and Director
Compensation—Compensation Committee Report” appearing in the definitive proxy statement we will file in connection with our
2017 Annual Meeting of Stockholders and is incorporated by reference herein.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be contained in the sections entitled “Ownership of Our Common Stock” and
“Executive and Director Compensation—Equity Compensation Plan Information” appearing in the definitive proxy statement we will
file in connection with our 2017 Annual Meeting of Stockholders and is incorporated by reference herein.
ITEM 13.
Certain Relationships and Related Person Transactions, and Director Independence
The information required by this Item 13 will be contained in the sections entitled “Certain Relationships and Related Person
Transactions” appearing in the definitive proxy statement we will file in connection with our 2017 Annual Meeting of Stockholders
and is incorporated by reference herein.
ITEM 14.
Principal Accounting Fees and Services
The information required by this Item 14 will be contained in the section entitled “Corporate Governance—Principal
Accountant Fees and Services” appearing in the definitive proxy statement we will file in connection with our 2017 Annual Meeting
of Stockholders and is incorporated by reference herein.
123
PART IV
ITEM 15.
Exhibits, Financial Statement Schedules
(a) Documents filed as part of Form 10-K.
(1)
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss) Income
Consolidated Statements of Stockholders’ (Deficit) Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
Schedules
Schedules have been omitted as all required information has been disclosed in the financial statements and related footnotes.
(3)
Exhibits
The Exhibits listed in the Exhibit Index are filed as a part of this Form 10-K.
ITEM 16.
Form 10-K Summary
None.
124
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 22, 2017
AVEO PHARMACEUTICALS, INC.
By:
/s/ MICHAEL BAILEY
Michael Bailey
President & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ MICHAEL BAILEY
Michael Bailey
/s/ KEITH S. EHRLICH
Keith S. Ehrlich
/s/ KENNETH M. BATE
Kenneth M. Bate
/s/ ANTHONY B. EVNIN
Anthony B. Evnin
/s/ HENRI TERMEER
Henri Termeer
/s/ ROBERT C. YOUNG
Robert C. Young
Title
President, Chief Executive Officer and Director
Principal Executive Officer
Chief Financial Officer
Principal Financial and Accounting Officer
Director
Director
Director
Director
Date
March 22, 2017
March 22, 2017
March 22,2017
March 22, 2017
March 22, 2017
March 22, 2017
125
EXHIBIT INDEX
Description of Exhibit
Form
File Number
Date of
Filing
Exhibit
Number
Filed
Herewith
Incorporated by Reference
Articles of Incorporation and Bylaws
Restated Certificate of Incorporation of the Registrant
8-K 001-34655 03/18/2010
3.1
Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant
8-K
001-34655
06/03/2015
3.1
Exhibit
Number
3.1
3.2
3.3
Second Amended and Restated Bylaws of the Registrant
S-1/A 333-163778 02/08/2010
3.5
Instruments Defining the Rights of Security Holders,
Including Indentures
Specimen Stock Certificate evidencing the shares of common
stock
S-1/A 333-163778 03/09/2010
4.1
Registration Rights Agreement, dated May 13, 2016, by and
among the Company and the Investors named therein
Material Contracts—Management Contracts and
Compensatory Plans
8-K
001-34655
05/13/2016
10.3
2002 Stock Incentive Plan, as amended
S-1/A 333-163778 02/23/2010
10.1
Form of Incentive Stock Option Agreement under 2002 Stock
Incentive Plan
Form of Nonstatutory Stock Option Agreement under 2002
Stock Incentive Plan
Form of Restricted Stock Agreement under 2002 Stock
Incentive Plan
Amended and Restated 2010 Stock Incentive Plan, as
amended
S-1
333-163778 12/16/2009
10.2
S-1
333-163778 12/16/2009
10.3
S-1
333-163778 12/16/2009
10.4
8-K 001-34655 06/23/2014
99.1
Form of Incentive Stock Option Agreement under 2010 Stock
Incentive Plan
S-1/A 333-163778 02/08/2010
10.6
Form of Nonqualified Stock Option Agreement under 2010
Stock Incentive Plan
Form of Restricted Stock Agreement under 2010 Stock
Incentive Plan
S-1/A 333-163778 02/08/2010
10.7
10-K 001-34655 03/30/2012
10.8
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Key Employee Change in Control Severance Benefits Plan
S-1
333-163778 12/16/2009
10.8
10.10
2010 Employee Stock Purchase Plan, as amended
S-1/A 333-163778 02/23/2010 10.17
10.11
Amendment No. 1 to 2010 Employee Stock Purchase Plan
8-K 001-34655 06/04/2013
99.2
10.12
10.13
10.14
10.15
10.16
10.17
Offer Letter by Registrant to Michael Bailey, dated as of
January 6, 2015
Severance and Change in Control Agreement, dated as of
January 9, 2015, by and between the Registrant and Michael
Needle
Transition and Separation Agreement, dated as of January 6,
2015, by and between the Registrant and Tuan Ha-Ngoc
Offer Letter by the Registrant to Michael Needle, dated
January 8, 2015
Severance and Change in Control Agreement, dated as of
December 11, 2009, by and between the Registrant and Tuan
Ha-Ngoc
Severance Agreement, dated September 13, 2010, by and
between the Registrant and Michael Bailey
10-Q 001-34655 05/07/2015
10.1
10-Q 001-34655 05/07/2015
10.2
10-Q 001-34655 05/07/2015
10.3
10-Q 001-34655 05/07/2015
10.4
S-1
333-163778 12/16/2009 10.10
10-Q 001-34655 11/05/2010
10.1
126
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29†
10.30†
10.31†
10.32†
10.33
10.34
10.35†
Description of Exhibit
Form
File Number
Date of
Filing
Exhibit
Number
Filed
Herewith
Incorporated by Reference
Letter Agreement regarding Retention Bonus Award and
Severance Agreement, dated February 3, 2014, by and
between the Company and Michael Bailey
Offer Letter by and between the Registrant and Keith Ehrlich,
dated April 21, 2015
Material Contracts—Financing Agreements
10-K
001-34655
3/13/2014
10.22
10-K
001-34655
03/15/2016
10.19
Loan and Security Agreement, dated May 28, 2010, by and
among the Company, Hercules Technology II, L.P. and
Hercules Technology III, L.P.
Amendment No. 1 to Loan and Security Agreement, dated
December 21, 2011, by and among the Company, Hercules
Technology II, L.P. and Hercules Technology III, L.P.
Amendment No. 2 to Loan and Security Agreement, dated
March 31, 2012, by and among the Company, Hercules
Technology II, L.P. and Hercules Technology III, L.P.
Amendment No. 3 to Loan and Security Agreement, dated
September 24, 2014, by and among the Company, Hercules
Technology Growth Capital, Inc., Hercules Capital Funding
Trust 2012-1 and Hercules Technology III, L.P.
Warrant, dated as of September 24, 2014, issued by the
Registrant to Hercules Technology II, L.P. and Hercules
Technology III, L.P.
Securities Purchase Agreement, dated May 13, 2016, by and
among the Company and the Investors named therein
Form of Warrant to Purchase Common Stock
Warrant Agreement, dated May 13, 2016, by and between the
Company and Hercules Capital, Inc.
Amendment No. 4 to Loan and Security Agreement, dated
May 13, 2016, by and among the Company and the Lenders
party thereto
Material Contracts—License and Strategic Partnership
Agreements
License Agreement, dated as of December 21, 2006, by and
between the Registrant and Kirin Brewery Co. Ltd.
Option and License Agreement, dated as of March 18, 2009,
by and between the Registrant and Biogen Idec International
GmbH
Amendment No. 1 to Option and License Agreement, dated
as of March 18, 2014 by and between the Registrant and
Biogen Idec MA Inc.
Co-Development and Collaboration Agreement, dated as of
April 9, 2014 by and between the Registrant and Biodesix
Inc.
ATM Sales Agreement, dated February 27, 2015 by and
between the Company and MLV & Co. LLC
Amendment No. 1 to ATM Sales Agreement, dated May 7,
2015 by and between the Registration and MLV & Co. LLC
License Agreement, dated August 13, 2015, by and between
the Registrant and Novartis International Pharmaceutical Ltd.
127
8-K
001-34655
06/04/2010
10.1
10-K
001-34655
03/30/2012
10.25
8-K
001-34655
04/04/2012
10.1
10-Q
001-34655
11/05/2014
10.1
10-Q
001-34655
11/05/2014
10.2
8-K
8-K
8-K
001-34655
05/13/2016
10.1
001-34655
05/13/2016
10.2
001-34655
05/13/2016
10.5
10-Q
001-34655
08/04/2016
10.4
S-1
333-163778 12/16/2009
10.22
S-1
333-163778 12/16/2009
10.26
10-Q
001-34655
05/07/2014
10.1
10-Q
001-34655
05/07/2014
10.2
8-K
001-34655
2/27/2015
1.1
10-Q
001-34655
05/07/2015
10.6
10-Q
001-34655
11/09/2015
10.2
Description of Exhibit
Form
File Number
Date of
Filing
Exhibit
Number
Filed
Herewith
Incorporated by Reference
Amended and Restated License Agreement, dated August 13,
2015, by and between the Registrant and St. Vincent’s
Hospital Sydney Limited
License Agreement, dated December 18, 2015, by and
between the Registrant and EUSA Pharma (UK) Limited
Collaboration and License Agreement, dated March 17, 2016,
by and between the Registrant and CANbridge Life Sciences
Ltd.
First Amendment, dated October 14, 2016, to Co-
Development and Collaboration Agreement, dated April 9,
2014, by and between the Company and Biodesix, Inc.
10-Q
001-34655
11/09/2015
10.3
10-K
001-34655
03/15/2016
10.42
10-Q
001-34655
05/10/2016
10.1
10-Q
001-34655
11/04/2016
10.1
Exhibit
Number
10.36†
10.37†
10.38†
10.39†
21.1
23.1
31.1
31.2
32.1
32.2
Additional Exhibits
Subsidiaries of the Registrant
Consent of Ernst & Young LLP
Certification of principal executive officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended.
Certification of principal financial officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended.
Certification of principal executive officer pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of principal financial officer pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Calculation Linkbase Document.
101DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Label Linkbase Document.
101.PRE XBRL Taxonomy Presentation Linkbase Document.
X
X
X
X
X
X
X
X
X
X
X
X
†
Confidential treatment has been granted as to certain portions, which portions have been omitted and separately filed with the
Securities and Exchange Commission.
128