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, 2019
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 001-39103
CABALETTA BIO, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2929 Arch Street, Suite 600
Philadelphia, PA
(Address of principal executive offices)
82-1685768
(I.R.S. Employer
Identification No.)
19104
(Zip Code)
Registrant’s telephone number, including area code: (267) 759-3100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.00001 per share
Trading
Symbol(s)
CABA
Name of each exchange on which registered
The 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
.
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant’s common stock began trading on The Nasdaq Global Select Market on October 25, 2019. As of March 20, 2020, the aggregate market value of the registrant’s voting and non-
voting common stock held by non-affiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the
common stock was last sold on March 20, 2020 was approximately $144.0 million. The registrant has provided this information as of March 20, 2020 because the registrant was not a public
company as of the last business day of its most recently completed second fiscal quarter and therefore cannot calculate the aggregate market value of its voting and non-voting equity held by non-
affiliates as of such date.
The number of shares of registrant’s Common Stock outstanding as of March 20, 2020 was 24,034,022.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for its 2020 annual meeting of shareholders, which the
registrant intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of December 31, 2019. Except with
respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contains express or implied forward-looking statements that are based on our management’s belief and assumptions
and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are
reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, but are
not limited to, statements about:
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the success, cost and timing and conduct of our clinical trial program, initially our planned Phase 1 clinical trial of DSG3-CAART, or the
DesCAARTesTM Trial, and our other product candidates, including statements regarding the timing of initiation and completion of the
clinical trials and the period during which the results of the clinical trials will become available;
the timing of and our ability to obtain and maintain regulatory approval of our product candidates, including DSG3-CAART, MuSK-
CAART, FVIII-CAART and DSG3/1-CAART, in any of the indications for which we plan to develop them, and any related restrictions,
limitations, and/or warnings in the label of an approved product candidate;
the impact of any business interruptions to our operations or to those of our clinical sites, manufacturers, suppliers, or other vendors
resulting from the coronavirus disease (COVID-19) outbreak or similar public health crisis;
our expected use of proceeds from the initial public offering and the period over which such proceeds, together with cash, will be
sufficient to meet our operating needs;
our plans to pursue research and development of other product candidates;
our plan to infuse our DSG3-CAART product candidate without lymphodepletion or other preconditioning agents initially in our planned
DesCAARTesTM Trial;
the potential advantages of our proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABA platform, and our
product candidates;
the extent to which our scientific approach and CABA platform may potentially address a broad range of diseases;
the potential benefits and success of our arrangements with the Trustees of the University of Pennsylvania, or Penn, and the Children’s
Hospital of Philadelphia, or CHOP, and our scientific co-founders, Drs. Milone and Payne;
our ability to successfully commercialize our product candidates, including DSG3-CAART and our other product candidates;
the potential receipt of revenue from future sales of DSG3-CAART and our other product candidates;
the rate and degree of market acceptance and clinical utility of DSG3-CAART and our other product candidates;
our estimates regarding the potential market opportunity for DSG3-CAART and our other product candidates, and our ability to serve
those markets;
our sales, marketing and distribution capabilities and strategy, whether alone or with potential future collaborators;
our ability to establish and maintain arrangements or a facility for manufacture of DSG3-CAART and our other product candidates;
our ability to obtain funding for our operations, including funding necessary to initiate and complete our planned DesCAARTesTM Trial
and our ongoing preclinical studies of MuSK-CAART, DSG3/1-CAART and FVIII-CAART;
the potential achievement of milestones and receipt of payments under our collaborations;
our ability to enter into additional collaborations with existing collaborators or other third parties;
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates and our ability to
operate our business without infringing on the intellectual property rights of others;
the success of competing therapies that are or become available, and our competitive position;
the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;
the impact of government laws and regulations in the United States and foreign countries; and
our ability to attract and retain key scientific or management personnel.
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in
this Annual Report on Form 10-K. The forward-looking statements
1
contained in this Annual Report on Form 10-K are made as of the date of this Annual Report on Form 10-K, and we undertake no obligations to publicly
update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
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Item 1. Business.
Overview
PART I
We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies for patients with B cell-
mediated autoimmune diseases. Our proprietary technology utilizes Chimeric AutoAntibody Receptor, or CAAR, T cells that are designed to selectively
bind and eliminate only specific B cells that produce disease-causing autoantibodies, or pathogenic B cells, while sparing normal B cells. Our lead
CAAR T cell product candidate was designed based on the Chimeric Antigen Receptor, or CAR, T cell technology that has been successfully developed
and is marketed for the treatment of B cell cancers. We believe our technology, in combination with our proprietary Cabaletta Approach for selective B cell
Ablation platform, called our CABA platform, has applicability across over two dozen B cell-mediated autoimmune diseases that we have identified,
reviewed and prioritized. In order to accelerate product development for our lead program and to access a proven cell therapy manufacturing platform, we
have entered into a collaboration with the University of Pennsylvania, or Penn. We hold multiple agreements with Penn to develop CAAR T cell therapies
for the treatment of these diseases. Our goal is to leverage our team’s expertise in autoimmunity and engineered T cell therapy and our collaboration with
Penn to rapidly discover and develop our portfolio of CAAR T product candidates. Our initial focus is on pemphigus vulgaris, or PV, which is an
autoimmune blistering skin disease. We submitted an Investigational New Drug application, or IND, for our lead product candidate, DSG3-CAART, to the
U.S. Food and Drug Administration, or the FDA, in August 2019. Our IND was cleared in September 2019, and DSG3-CAART received orphan drug
designation from the FDA for the treatment of PV in January 2020. We are advancing DSG3-CAART into a Phase 1 trial for the treatment of mucosal PV,
or mPV, in 2020. We are also advancing additional product candidates currently in discovery-stage or preclinical development for the treatment of muscle-
specific kinase myasthenia gravis, or MuSK MG, mucocutaneous PV, or mcPV, and Hemophilia A with Factor VIII, or FVIII, alloantibodies.
B cell-mediated autoimmune diseases occur when certain populations of B cells mistakenly produce autoantibodies, which are directed against
specific healthy tissue or cells in the body. The presence of autoantibodies can manifest in a variety of autoimmune diseases and result in the destruction of
healthy tissue in the body. Current treatment options for B cell-mediated autoimmune diseases are generally limited to corticosteroids and other generalized
immunosuppressants that offer only temporary disease suppression, may require chronic, in-hospital administration and are associated with potentially life-
threatening side effects. We believe the ideal therapy for B cell-mediated autoimmune diseases would selectively and completely eliminate the pathogenic
B cells while sparing the body’s normal B cells.
We are pioneering the development of a new class of engineered T cell therapies that express CAARs to selectively engage and eliminate
pathogenic B cells. Our CAARs build upon the scientific foundation of CARs, differing primarily in the use of the antigen rather than an antibody
fragment, which enables the CAAR T cells to serve as a “decoy” for specific autoantibodies expressed on the surface of B cells. This allows these
pathogenic B cells to engage with the CAAR T cells instead of benign antigens, resulting in their elimination. By harnessing the power of targeted cell
therapy, we believe our CABA platform, as developed by our team, has the potential to be a one-time curative therapy that may be a safer and more
effective option than current treatments. We have developed our CABA platform to inform product candidate development from scientific, clinical and
commercial assessment through CAAR design. Using our CABA platform, we have identified and thoroughly evaluated over two dozen B cell-mediated
autoimmune diseases that we believe will be amenable to treatment with the Cabaletta approach and have advanced several of our highest priority targets
into discovery and preclinical testing.
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Our current product candidate pipeline is illustrated below.
*
**
In our discovery stage, we perform epitope mapping and optimize CAAR construct and design.
May not be required if Phase 2 is a registrational clinical trial.
Our initial therapeutic focus is on PV, a chronic, autoimmune blistering skin disease that affects over 17,000 patients across the United States and
over 25,000 patients across the European Union. The affected PV population in Asia is recognized to be significantly higher than in each of the United
States and the European Union. Despite a current standard of care that includes corticosteroids and adjunctive immunosuppressive agents, PV remains
associated with frequent recurrences as well as substantial morbidity and mortality. Our lead product candidate, DSG3-CAART, is being evaluated for the
treatment of mPV, a subtype of PV that affects mucosal surfaces. mPV is caused by autoantibodies against the cell adhesion protein desmoglein 3, or
DSG3. DSG3-CAART is designed to selectively target B cells expressing autoantibodies specific for DSG3, which may prevent these B cells from
producing DSG3 antibodies that are the cause of mPV while preserving general B cell immune function. The FDA accepted our IND for DSG3-CAART in
September 2019 and granted orphan drug designation to DSG3-CAART for the treatment of PV in January 2020. Our next PV-directed product candidate,
DSG3/1-CAART, is being designed to target B cells expressing autoantibodies against DSG3 and desmoglein 1, or DSG1. It is being developed for the
treatment of mucocutaneous PV, or mcPV, another subtype of PV that affects both mucosal and skin surfaces and is caused by autoantibodies against DSG3
and DSG1, respectively.
Our second product candidate, MuSK-CAART, is designed to treat a subset of patients with myasthenia gravis, or MG. MG is an autoimmune
disease induced by autoantibodies targeting the neuromuscular junction, or NMJ, which can lead to life-threatening muscle weakness. Our product
candidate targets B cells expressing autoantibodies against a transmembrane protein, muscle-specific kinase, or MuSK, and is being developed for the
treatment of MuSK MG.
We are also pursuing development of an additional product candidate, FVIII-CAART, which is being designed to treat a subset of patients with
Hemophilia A, an X-linked bleeding disorder caused by mutations in the FVIII gene. While our CABA platform is primarily focused on the treatment of B
cell-mediated autoimmune diseases, we believe our approach may be applicable in other instances where B cell antibody production is implicated in
response to exogenous FVIII, which is administered for the treatment of Hemophilia A. Specifically, we have identified an unmet need in cases where the
immune system produces antibodies against exogenous antigens, which is known as an alloimmune response. Some patients receiving repeated
administrations of exogenous FVIII will develop alloantibodies against the treatment, also known as inhibitors, neutralizing its therapeutic potential.
Patients with FVIII alloantibodies may often require high-dose FVIII, immune tolerance induction with FVIII, agents that mimic FVIII or plasmapheresis
to remove the FVIII alloantibodies. FVIII-CAART
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leverages a CAAR designed to target B cells expressing alloantibodies against FVIII, and it is initially being developed as an adjunctive therapy for
Hemophilia A patients who develop FVIII alloantibodies.
Our strategy is to build upon our first mover advantage in the field of targeted cell therapy for B cell-mediated autoimmune diseases and further
advance the discovery, development and commercialization of our CAAR T portfolio. Our scientific founders are leading experts in B cell-mediated
autoimmune diseases and CAR T technology, and we are led by an experienced team with demonstrated success in discovering, developing, manufacturing,
and evaluating novel cell therapy products in clinical trials. In addition, we have partnered our discovery and initial development efforts with Penn, a
pioneer in cell and gene therapy with a proven track record of expertise in the translational research, clinical development and manufacturing of cell
therapy products, in order to accelerate timelines for our first product candidate to enter clinical trials.
Our History and Team
Our scientific co-founders, Aimee Payne, M.D., Ph.D., and Michael Milone, M.D., Ph.D., began partnering at Penn in 2013 to combine Dr. Payne’s
expertise in B cell-mediated autoimmune diseases with Dr. Milone’s deep and experienced insights into the design and implementation of CAR T products.
Dr. Payne is a worldwide leader in characterizing B cell-mediated autoantibody repertoires in PV and other autoimmune diseases. Dr. Milone is a renowned
scientist in CAR T therapy and was a co-inventor of and a key driver in the preclinical discovery and development efforts that yielded Kymriah, the first
FDA-approved CAR T therapy for the treatment of B cell cancers. Dr. Payne’s laboratory surmised that by incorporating an antigen instead of an antibody
fragment as the extracellular domain of the CAAR, specific pathogenic B cells could be targeted. This resulted in a collaboration between the two
investigators to apply the scientific foundation of CAR T technology as it has been advanced by Drs. Payne and Milone in order to address B cell-mediated
autoimmune diseases.
Their first scientific publication, “Reengineering chimeric antigen receptor T cells for targeted therapy of autoimmune disease” (Science, July
2016), attracted the attention of a colleague, Steven Nichtberger, M.D., who is an adjunct professor at the Wharton School at the University of
Pennsylvania, teaching a class on biotech company formation, financing and leadership in the Vagelos Life Sciences & Management Program.
Additionally, Dr. Nichtberger has experience creating and building companies, including a novel cellular therapy company, which required transferring the
technology from an academic institution, establishing a research and development organization, hiring of manufacturing and quality teams, creating novel
manufacturing processes, reaching agreement with the FDA on novel clinical development pathways and constructing a commercial-scale Good
Manufacturing Practices, or GMP, facility that manufactured autologous cell therapy products for clinical trials. In 2017, based on over a year of interaction
and discussions regarding the optimal strategy to advance the scientific opportunity into a commercially developed product portfolio that could offer
potentially curative treatment options to patients, Drs. Payne, Milone and Nichtberger decided to launch Cabaletta Bio.
The longstanding and highly productive partnership between our co-founders has been complemented by additional management experience that
brings a successful history of translating academic cellular therapy research from Penn and elsewhere into commercially sponsored clinical trials and the
establishment of a GMP manufacturing facility and organization. Gwendolyn Binder, Ph.D., our Executive Vice President, Science and Technology, was an
early member of the Translational Research Program Operations team at Penn for over five years and participated in the submission and acceptance of
multiple INDs for novel engineered T cell therapy products. As part of the cell therapy organization at Penn, Dr. Binder partnered with Dr. Milone and
others to drive the IND-enabling translational studies that facilitated the initial CAR T clinical trial in B cell cancers at Penn. Dr. Binder also built and led a
clinical stage biotechnology company’s manufacturing operations and quality teams, including creation of a fully functioning commercial grade GMP
facility. Dr. Binder also built the translational research program and ultimately led the company’s research organization.
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Our Research and Manufacturing Collaboration with Penn
Our CABA platform has already produced multiple product candidates through our sponsored research agreements, or SRAs, with Penn for the
laboratories of our scientific co-founders, Drs. Payne and Milone. Our continuing relationship with our scientific co-founders provides important guidance
and insights to us. Our contractual relationship with Penn through ongoing licensing and research arrangements also provides important services around
manufacturing supply.
In July 2019, we amended and restated our worldwide license agreement with Penn to develop our CAAR T technology to treat B cell-mediated
autoimmune and alloimmune diseases. This license agreement provides us with access to multiple patent families covering CAAR T therapy as applied to
the field of B cell-mediated autoimmune and alloimmune diseases and to the robust intellectual property portfolio created by Penn under these SRAs in this
field. See “—Our Material Agreements—Amended and Restated License Agreement with Penn.”
Our ongoing collaboration with Penn is also based on a Master Translational Research Services Agreement, or the Services Agreement, that we
entered into in October 2018, along with multiple additional agreements under the Services Agreement to engage and partner in individual Penn entities,
including cell product manufacturing, correlative research, vector manufacturing, clinical trial operations and protocol development. In addition to the
Services Agreement, we have agreements in place with various functional areas and centers that provide additional resources to Penn as well as contractual
commitments from Penn with the goal of providing the capacity to manufacture our lead product candidate, DSG3-CAART. Penn has also agreed to
manufacture vector product for use in our clinical trials. Penn’s obligations are subject to certain limitations and termination rights. See “—Our Material
Agreements—Master Translational Research Services Agreement with Penn”.
We believe Penn is uniquely suited to be our partner in our efforts to develop product candidates leveraging our CAAR T technology based on a
decade of experience, including manufacturing and clinical support for approximately a dozen active cell therapy clinical trials. The original manufacturing
process for the first FDA-approved CAR T therapy was developed at Penn before being transferred to Novartis Pharmaceuticals Corporation during late-
stage clinical trials. We currently plan to leverage Penn’s experience, validated standard operating procedures, manufacturing facilities and staffing to
accelerate initial development efforts for our lead product candidate.
Our Strategy
Our goal is to build upon our first mover advantage and expertise in cell therapies for B cell-mediated autoimmune diseases to accelerate the
discovery, development and commercialization of our CAAR T cell therapies, with a focus on reliable manufacturing. We believe achieving this goal could
result in potentially curative therapies for patients with unmet medical needs who suffer from certain B cell-mediated autoimmune diseases. To achieve this
goal, key elements of our strategy include:
•
Achieving clinical proof-of-concept for our lead product candidate, DSG3-CAART in mPV, the first in a series of well-understood and
validated B cell-mediated autoimmune diseases for which we are developing CAAR T cell product candidates. It is well-established that
the presence of DSG3 autoantibodies and DSG3 autoantibody producing B cells in patients are both necessary and sufficient to cause mPV
in the vast majority of cases. We believe our biologic understanding coupled with the well-understood clinical signs, symptoms and natural
course of the disease, identify mPV as a model disease to evaluate our CAAR T approach. In addition, we have made significant
investment in the design and development of DSG3-CAART, generating a lead candidate that has demonstrated robust target engagement
and no off-target toxicities in preclinical studies. Taken together, our Phase 1 clinical trial evaluating DSG3-CAART for the treatment of
mPV represents an optimal first opportunity to establish initial clinical proof-of-concept of our CABA platform.
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•
•
•
Leveraging our CABA platform to identify optimal targets for the CAAR T approach and apply learnings from DSG3-CAART to
advance additional product candidates. Shortly after inception, we undertook a comprehensive review of all known B cell-mediated
autoimmune diseases in order to evaluate and prioritize the opportunity for selective destruction of B cells in an effort to cure B cell-
mediated autoimmune diseases. Central to this analysis were (i) scientific, clinical and commercial assessment, (ii) epitope mapping to
determine regions targeted by autoantibodies, (iii) evaluation of the ability to optimize the CAAR construct and design with the goal of
selectively ablating reactive B cells, and (iv) evaluation of existing or required development of new preclinical models and in vitro and in
vivo clinical testing. As we performed this analysis of potential product candidates, we considered possible paths for clinical trial design
and regulatory approval. This analysis incorporated the extensive learnings gleaned from years of effort devoted to development of DSG3-
CAART. We prioritized the targets and since then have been focused on being first to discover and develop a series of products with each
providing the potential for cure of an important B cell-mediated autoimmune disease in patients. We intend to continue to apply our
proprietary learnings from DSG3-CAART, including scientific and regulatory learnings, to most effectively advance these additional
opportunities. Preclinical studies that are generally similar to, and informed by, DSG3-CAART preclinical studies are actively ongoing with
other CAAR T cell product candidates.
Expanding upon our established IP position and first mover advantage in CAAR T therapy targeted towards B cell-mediated
autoimmune diseases. We are focused on protecting our intellectual property as we continue to pursue the development of future product
candidates. We believe the issued U.S. patent on our initial CAAR constructs is the first patent covering cells engineered to express the
known pathogenic epitopes recognized by DSG3 and DSG1 autoantibodies, which we are working to supplement with additional patent
filings. The design of a broadly effective CAAR requires a deep understanding of the location of immunogenic epitopes targeted by
autoantibodies, a competency that we believe we are uniquely positioned to utilize in product candidate development. We believe there is a
particularly high value to the first mover advantage including, but not limited to, experience in discovery, preclinical development,
regulatory efforts, intellectual property and insights from clinical trials that can be translated across programs.
Leveraging our cellular therapy experience and knowledge in addition to knowledge gained through our Penn collaboration to rapidly
build our own fully-integrated internal infrastructure. We have differentiated expertise that we believe is uniquely suited for the
continued buildout of our CABA platform specializing in B cell-mediated autoimmune diseases. Our scientific co-founders who initially
developed our technology continue to collaborate closely with us through SRAs. In addition, our management team has a successful history
of building the capabilities of cell therapy-based companies from the discovery and preclinical stage through Phase 3 readiness. In
combination with our team, which possesses significant experience in executing on manufacturing strategies for cell therapy products, our
partnership with Penn allows us to utilize their existing infrastructure, which accelerated our ability to submit our first IND. In parallel, we
continue to build out an experienced team to manage the relationship with Penn while also developing and continuing to implement a path
to our manufacturing independence. Ultimately, we intend to prepare and build our own manufacturing facility depending on the
achievement of sufficient initial clinical trial data for DSG3-CAART.
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B Cell-Mediated Autoimmune Diseases: Overview and Current Treatment Paradigm
The body’s immune system, which is designed to protect the body from infection and cancer, includes B cells and T cells. B cells are responsible
for producing antibodies against antigens that the body perceives as foreign whereas T cells are responsible for cell-mediated immunity. In the case of B
cell-mediated autoimmune diseases, certain populations of the patient’s B cells mistakenly produce antibodies directed against normal tissues and cells,
leading to disease. While these autoantibodies are the major effectors of B cell-mediated autoimmune diseases, the underlying root cause of each B cell-
mediated autoimmune disease is the defective B cells that mistakenly make these pathogenic antibodies. These pathogenic B cells express autoantibodies
on their surface with the same antigen specificity as the circulating pathogenic autoantibodies, which can be used to distinguish them from the healthy B
cell population, as shown in the figure below.
Antibodies are B cell receptors that drive B cell maturation. CD19 serves as a B cell marker throughout the naïve B cell phase, while CD20 is a surface
marker expressed later in B cell maturation. CAAR T is designed to eliminate antigen specific B cells and prevent their further development to antibody
producing plasma cells. IgM: immunoglobulin M; IgD: immunoglobulin D; IgA: immunoglobulin A; sIg: surface immunoglobulin, representing the
autoantibody on the B cell surface.
Current treatment options for autoimmune mediated diseases involve generalized immune suppression, achieved through corticosteroids,
immunosuppressive medications and biologics. Most commonly, corticosteroids are used on both a chronic and acute basis to control disease, and act via a
variety of mechanisms to control or downregulate multiple inflammatory pathways. In many cases, systemic immunosuppressive medications often used in
chemotherapy such as mycophenolate, azathioprine and methotrexate, are added in an effort to minimize symptoms and manage the expected recurrences
in patients. Biologic therapies have emerged as a new class of therapies and have a variety of targets including cytokines, B cells, and co-stimulation
molecules. One particular biologic, rituximab, is an anti-CD20 antibody and is employed in multiple autoimmune diseases. Rituximab was approved by the
FDA in 2018 for treatment of moderate to severe PV. Currently existing treatment options target parts of the immune system in addition to disease-causing
B cells, and in general require chronic administration to reduce recurrence rates. We believe the ideal therapy in autoimmune diseases would completely
and specifically eliminate the pathogenic B cells while sparing the immune cells that protect against infection, without requiring chronic administration.
Our Approach
Using our CABA platform, we are developing engineered T cell therapy candidates that express CAARs, which serve as “decoys” for antibodies
expressed on the surface of B cells. We believe these CAARs enable the T cells to specifically engage and eliminate pathogenic B cells while sparing
normal B cells. By harnessing the power of cell therapy, our technology has the potential to overcome the ability of these B cells to evade elimination and
thus lead to durable responses. Our CAAR T platform is based on the foundation of established CAR T therapeutics, differing primarily in their use of the
antigen rather than an antibody fragment to target pathogenic B cells. We
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believe our technology has broad applicability and we are building a portfolio of product candidates for B cell-mediated autoimmune diseases.
Background: CAR T Cells
Engineered T cell therapy is a type of immunotherapy in which human T cells are genetically modified to express specific receptors, enabling the T
cells to recognize and eliminate pathogenic cells.
A key application of engineered cell therapy involves the use of CARs, which are engineered molecules that enable T cells to identify specific
antigens present on the surface of diseased cells. When expressed on the patient’s T cells, the CAR directs the T cells to kill cells that express a particular
antigen. These CAR-expressing T cells, or CAR T cells, can proliferate, generating memory CAR T cells.
Many companies are using CAR T technology to develop therapies for the treatment of B cell cancers. Several drug candidates have demonstrated
clinical success, leading to the first FDA regulatory approvals of CAR T therapies for certain B cell cancers. In these B cell cancers, CAR T therapy has
resulted in complete remission of disease in many patients, even in cancer patients with severe, refractory disease. Despite success in treating certain B cell
cancers, we believe that CARs have not yet been developed or evaluated as a treatment option for other types of B cell-mediated autoimmune diseases in
patients.
Our Technology: CAARs
Our CAAR T platform builds upon the scientific foundation of CARs to enable targeted B cell elimination in an autoimmune setting, which may
lead to complete and durable remission of disease while sparing all other B cell populations that can provide beneficial immunity from infection.
The co-stimulatory domain and the signaling domain of both a CAR T cell and CAAR T cell carry out the same activation and cytotoxic functions
once the engineered cell therapy engages a B cell. Our CAAR T cells differ from CAR T cells primarily in the extracellular targeting domain. Our CAAR T
cells incorporate the relevant parts of the autoantigen that is subject to attack in autoimmune disease, as shown in the figure below.
Key differences between CAR T (left) vs. CAAR T therapy (right). A CAR T cell typically contains a signaling domain and a co-stimulatory domain and
incorporates antibody fragments that recognize a specific antigen, such as CD19, which is present in both B cell leukemia cells and healthy B cells. In
contrast, a CAAR T cell typically contains an antigen as its targeting domain rather than an antibody fragment. The antigen is recognized by the specific,
pathogenic antibody along with the limited population of B cells that produce the antibody. The model CAAR T cell depicted here contains an identical
signaling domain and a co-stimulatory domain. The primary
9
difference between a CAR T cell and a CAAR T cell is the target domain expressed on the cell surface. The example shown demonstrates the pan-B cell
ablation that happens when targeting the B cell lineage marker, CD19, and the highly selective pathogenic B cell targeting approach of CAAR T.
Potential Advantages of CAAR T Cell Therapy in B Cell-Mediated Autoimmune Diseases
In contrast to currently available therapies for B cell-mediated autoimmune diseases, based on observations of CAR T activity in refractory B cell
cancers, we believe a single CAAR T treatment could potentially offer complete and durable remission of certain specific B cell-mediated autoimmune
diseases while leaving the humoral, or bodily fluid, antibody-producing immune system intact. We believe our CAAR T cells can recognize the specific
autoantibodies that are responsible for causing an underlying disease and kill the cells that express the autoantibodies on their surface. As a result, we
believe CAAR T cell therapy used in B cell-mediated autoimmune disease has the potential for durable elimination of pathogenic B cells and an associated
elimination of clinical recurrences with an improved adverse event, or tolerability, profile relative to the current standard of care.
Enhanced target specificity and preservation of humoral immune system
Preservation of the humoral immune system with CAAR T cell therapy represents a potentially meaningful benefit over existing CD19- or CD20-
targeting methods for B cell ablation, as patients would be less susceptible to infection they may encounter after non-specific B cell elimination and would
not require chronic in-hospital treatment with intravenous immunoglobulin, or IVIG, or other prophylactic therapies. Additionally, because self-reactive B
cells make up only 0.01% to 1% of the normal B cell population, we believe the risk of on-target toxicity may be reduced compared to systemically
immunosuppressive medications that non-specifically weaken the immune system. Continued use of these drugs poses significant risks, such as the
potential for fatal infections due to the non-specific tempering of the immune system related to the complete depletion of CD20+ or CD19+ B cells.
Potential for complete, long-lasting elimination of pathogenic B cells
The current standard of care for B cell-mediated autoimmune disease displays limited and transient therapeutic benefit while also weakening the
humoral immune system. We believe our CAAR T cells have the potential to eliminate the reactive, antibody-producing B cells that are ultimately
responsible for disease, while sparing normal B cells. The curative potential of CAAR T cells would be consistent with clinical findings from use of CAR T
products in B cell cancers and would be a significant improvement relative to the current standard of care for certain B cell-mediated autoimmune diseases.
While CAR T has demonstrated significant clinical success in B cell cancers, cancer cells employ a variety of mechanisms to evade detection by
targeting immune cells, and antigen escape poses a significant risk of failure for CAR T cell treatment in oncology. Antigen escape in CAR T treatment
occurs when the antigen that the CAR T cell targets is lost from the malignant cell. Clinically, this results in response rates that decline from an initial
complete response level of about 80% to approximately 50% over a period of years.
We believe this risk of antigen escape is reduced in our setting as mechanisms to evade CAAR T therapy would involve B cell receptor down-
regulation or mutation such that antigen specificity is lost. We believe that the implication of this is that the mutated B cell would no longer produce
autoantibodies that recognize the antigen and therefore should no longer be pathogenic. We also believe that a single infusion of CAAR T cells has the
potential for curative effects due to either complete ablation of pathogenic cells or production of memory CAAR T cells.
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Our CABA Platform
Our team has developed our CABA platform to inform product candidate development from indication selection through preclinical studies. Using
our CABA platform, our team has identified our highest priority target indications following a rigorous analysis of B cell-mediated autoimmune diseases.
A deep understanding of the antigenic epitopes targeted in these diseases is required to design and construct a successful CAAR. Our scientific founders
have studied B cell repertoires for many years in the context of PV. Their expertise is essential to provide insights and guidance regarding our portfolio of
products. We leverage the experience and insight gained from the development of each product candidate to improve the efficiency of our CABA platform
in evaluating additional potential product candidates.
Scientific, Clinical and Commercial Assessment
Through broad literature review and consultation with internal and external experts, we have identified and continue to monitor the universe of
diseases where pathogenic B cells are implicated in disease pathophysiology. From this set of possible indications, our team then evaluates each disease
based on numerous criteria, which include, but are not limited to:
Biologic Opportunity for Cure
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the presence of the antibody is well established in patients with the clinical manifestations of the disease;
the identified antibody has been shown to be necessary and sufficient in causing clinical disease;
there is a correlation between antibody titer and disease activity;
B cell-depleting therapies are shown or believed to be effective in treating the disease;
the antibody repertoire has been or can be characterized for the disease;
Identifiable and Underserved Patient Populations
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a routine and established antibody test exists or can be developed for diagnosis and biomarker assessment;
the clinical course and severity of the disease warrant a cellular therapy despite current standard of care;
products in development do not have the potential to materially improve outcomes versus the current standard of care;
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Evaluation of Preclinical and Clinical Development Pathway
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preclinical in vitro and in vivo models exist or can be developed; and
potential clinical trial designs and endpoints appear reasonable and achievable.
In addition to assessing the underlying biologic and clinical rationale for each potential target, we also assess commercial feasibility of CAAR T
therapy in various B cell-mediated indications. As part of this assessment, we evaluate the direct lifetime drug and overall healthcare costs due to the
burden from the disease, including the costs of managing potential adverse effects from existing standard of care compared to the potential CAAR T
therapy.
We perform this rigorous and detailed conceptual analysis to enable us to be thorough and thoughtful before committing significant resources to a
program. We believe this analysis allows us to prioritize and advance potential product candidates through the CABA platform with a higher degree of
confidence and a higher probability of success.
Epitope Mapping
Epitope mapping involves identifying specific sites on the antigen that are responsible for binding to the antibody of interest. This step is required
in order to facilitate an understanding of CAAR design and feasibility. An understanding of the locations of the key immunogenic epitopes on the antigen
heavily informs the potential feasibility of a CAAR. With an understanding of these epitopes, we then leverage our cell therapy expertise to design the
CAAR construct.
CAAR Construct / Design
Our scientists and collaborators design and create multiple CAAR constructs following completion of epitope mapping, which are tested against
the antibody or antibodies of interest. The goal in CAAR design is to maximize the inclusion of known immunogenic epitopes on the antigen while also
optimizing the size of the construct to improve the ability of the CAAR to bind to the antibody. Determining the location of antigen expression and if there
are other antigens that may unintentionally cross-react with the CAAR will also inform CAAR design and feasibility. The size of the antigen will also
determine whether a CAAR can be designed based on the size constraints of the delivery system. Once we have designed and developed optimal CAAR
constructs, we test them in a variety of in vitro and in vivo studies.
In Vitro and In Vivo Testing
In vitro preclinical testing is focused on establishing the specificity and activity of the potential CAAR T cell product candidate against B cells
expressing known pathogenic target antibodies. Specificity is evaluated against non-target membrane proteins that may be expressed on other cells, with
specific focus against any proteins that are known to bind to the antigen presented on the CAAR. CAAR T function is tested in the presence and absence of
soluble, or free, antibodies isolated from patients, since these antibodies may enhance or inhibit CAAR T cell function. Where relevant animal models
exist, the CAAR T cell product candidate is tested in one or more models to address specific questions around safety and the ability of the potential product
candidate to reduce disease activity in vivo.
Pipeline
We are developing a portfolio of CAAR T cell product candidates for the treatment of B cell-mediated autoimmune diseases. Our lead product
candidate, DSG3-CAART, targets B cells that express pathogenic autoantibodies against the DSG3 protein, which cause mPV. The publication of the first
in vivo evaluation of activity and toxicity of the candidate in an animal model was followed by additional preclinical studies to support our IND
submission. Our IND was cleared by the FDA in September 2019 and DSG3-CAART was granted orphan drug designation for the treatment of PV by the
FDA in January 2020. We plan to initiate our DesCAARTes™ Trial in 2020. Our next PV-directed product candidate, DSG3/1-CAART, targets B cells that
give rise to pathogenic autoantibodies against either the DSG3 or DSG1 protein, which cause mcPV, and could address a broader PV population.
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Our second product candidate, MuSK-CAART, targets B cells that give rise to pathogenic autoantibodies against the MuSK receptor in patients
with MG. An additional product candidate, FVIII-CAART, targets B cells that produce alloantibodies against exogenous FVIII in Hemophilia A patients
who consequently require repeated and increased exogenous FVIII administration. We are exploring additional CAAR T cell product candidates that will
focus on patients with B cell-mediated autoimmune diseases with well-defined antibody targets.
Our Product Candidates
DSG3-CAART for Mucosal PV
Our lead product candidate, DSG3-CAART, is a CAAR T cell therapy expressing DSG3 antigen epitopes as the extracellular domain of a chimeric
immunoreceptor, and is designed to enable specific cytotoxicity toward B cells with DSG3 autoantibody targeting abilities. We believe this strategy has the
potential to enable direct elimination of DSG3 autoantibody memory B cells and indirect elimination of DSG3-specific short-lived plasma cells that
produce the pathogenic autoantibodies.
Scientific, Clinical and Commercial Assessment
PV is a potentially fatal, chronic autoimmune disease characterized by acantholysis, which is the loss of adhesion between cells of the skin or
mucous membranes. Desmosomes are a collection of proteins that provide the structure for epithelial cells to connect with each other. PV results when
specific pathogenic autoantibodies disrupt desmosomes by targeting DSG3 and/or DSG1, which are proteins that are part of the desmosomes. These
autoantibodies cause the upper layer of the epidermis to split away from its base resulting in characteristic erosions and blisters. Widespread damage to the
skin and mucous membranes increases susceptibility to life-threatening systemic infections. PV has two major subtypes:
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mPV—Characterized by DSG3 autoantibodies only, affecting only mucosal surfaces—accounts for approximately 25% of PV
mcPV—Characterized by DSG3 autoantibodies and DSG1 autoantibodies, affecting both mucosal and cutaneous surfaces—accounts for
approximately 75% of PV
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The presence of DSG-specific antibodies is 98% to 100% sensitive and specific in identifying patients with PV, and these antibodies have been
deemed both necessary and sufficient to cause the disease. Thus, in the absence of DSG autoantibodies, PV generally does not occur. In mPV, patients will
typically develop painful skin blisters on their mucosal membrane surface, including mouth, nose, throat, genitals, and other orifices, often leading to an
inability to eat, drink and function normally. The pathogenic DSG3 autoantibody is made by a specific small number of aberrant B cells, which express the
DSG3 autoantibody on their surface. An overview of mPV and mcPV is provided in the figure below.
Visual evidence of clinical manifestations of PV. (Left panel) Inside of cheek of a patient with mPV, showing sloughing mucosa and blistering. (Right panel)
Back of a patient showing cutaneous skin blistering and sloughing in a patient with mcPV. Image credit: D@nderm.
Like most autoimmune diseases, the current standard of care for PV relies on general immune suppression, which is often transiently effective but
can lead to severe infection, potentially resulting in hospitalization and death. First-line therapy for PV typically consists of corticosteroids in moderate to
high doses in combination with the anti-CD20 monoclonal antibody rituximab where clinically appropriate. Second-line therapy focuses on the several
systemically immunosuppressive medications such as mycophenolate, azathioprine and methotrexate. Additional options used in the acute setting with
severe disease presentation include plasmapheresis, or infusions of intravenous immunoglobulin.
B cell depletion with rituximab was approved by the FDA for the treatment of PV in 2018 and is playing an increasing role as part of the standard
of care because it has proven to be one of the more effective therapies for PV. However, data suggest that a significant number of patients treated with
rituximab will relapse with or without chronic therapy. Despite its recent approval for use as an adjuvant therapy with corticosteroids in PV, rituximab has
several limitations in terms of efficacy, safety and convenience. Rituximab treatment frequently results in relapse, which is reduced but still occurs despite
chronic treatment every six months in PV. It does not specifically target the pathogenic B cells, but rather it depletes all CD20-expressing B cells, which
leads to an ongoing risk of severe infection and death. As such, there remains not only an unmet medical need in PV, but also a need for safer therapies that
can provide a reliable, durable and complete remission off of all other medications.
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There are several emerging therapies also being developed for the treatment of PV, which are being evaluated in late-stage clinical trials. These
therapies provide important alternative therapeutic options for patients; however, we believe based on early published data that these therapies are unlikely
to be curative and do not specifically ablate autoantibody producing B cells.
Epitope Mapping
DSG3 consists of five extracellular cadherin, or EC, domains as shown schematically in the figure below. Since T cell activation depends on the
intermembrane distance of the immunologic synapse, we tested different combinations of ECs for expression in primary human T cells using DSG3
fragments as the extracellular domain as shown in the figure below.
Image showing the naturally occurring DSG3 protein and the five EC domains. (B) The CAAR constructs that were evaluated in preclinical studies,
containing the whole or subsets of the DSG3 protein. The transmembrane and intracellular signaling domains are identical to those in the CART19 studies
published by Penn.
CAAR Construct / Design
The DSG3 EC1-5 CAAR was minimally functional, likely due to the extracellular domain being too large to enable CAAR function or aggregation
of the CAAR on the T cell surface. The CAAR designs with either DSG3 EC1-3 or DSG3 EC1-4 showed interferon-gamma production after exposure to
the target cells, demonstrating specific cytotoxic activity across targets. In addition, no cytokine production was detected after exposure to cells that did not
express surface immunoglobulins or other non-target cells.
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The DSG3 EC1-3 was not effective against one target cell known to bind to the DSG3 EC3-4 domain. Together, this data suggests that the DSG3
EC1-4 CAAR is the optimal construct to balance activity while retaining the ability to target locations of known pathogenic antibodies, as shown in the
figures below.
Cytotoxicity assay to assess killing activity of DSG3 CAART. Negative control is a CAR T with an antibody fragment attached to the extracellular domain.
* indicates construct that was selected for further development. E:T ratio = effector to target ratio.
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In Vitro Studies
A variety of in vitro studies were conducted to evaluate DSG3-CAART from a preclinical activity and toxicity perspective. These studies included
an evaluation of DSG3-CAART against proteins that are known to bind the DSG3 antigen, a screen of DSG3-CAART against an array of other membrane
proteins and a set of studies designed to evaluate the potential effects of soluble DSG3 antibodies against DSG3-CAART. The results of these studies are
summarized below.
Evaluation of DSG3-CAART reactivity against known DSG3 binding proteins. The DSG3 antigen presented on the
extracellular domain of DSG3-CAART may naturally bind proteins in the body. These proteins may bind to and activate DSG3-CAART,
potentially causing toxicity. The native binding proteins for DSG3 are the desmocollin proteins, which are important for cell adhesion in
the skin and mucosa. We performed a variety of studies to test whether DSG3-CAART recognizes and activates the desmocollin proteins.
Epithelial cells isolated from various primary organ systems that express some level of desmocollin proteins were screened. Potential
DSG3-CAART activity was evaluated through the detection of cytokines released against each cell type and cytotoxicity. The data
demonstrated an absence of inflammatory T cell cytokines after being exposed to these cells, indicating an absence of T cell activation. No
cytotoxicity was detected except at very high, non-pharmacologically feasible doses. Collectively, we believe there is sufficient evidence to
suggest that the DSG3 protein in the context of a CAAR does not meaningfully interact with desmocollin proteins.
Evaluation of DSG3-CAART off-target binding against membrane proteins. A membrane protein array was utilized to screen
the DSG3-CAART extracellular domain against 5,300 membrane proteins, which encompass the approximate number of membrane
proteins contained in the human genome. The confirmatory screen yielded no off-target signals, except for one weak signal against a
protein that is known to bind to glycoproteins, and which was detected in both the test and control conditions. Further evaluation of this
protein in cell-based assays indicated that DSG3-CAART does not recognize and activate against this protein.
Evaluation of the effect of soluble antibodies on DSG3-CAART function. We expect that circulating antibodies may prompt an
active immune response against treatment with CAAR T cell therapy. These antibodies can induce proliferation of DSG3 CAAR T cells
but may also neutralize the cells. In our preclinical in vitro studies, we observed that while DSG3 antibodies may have a variable effect on
CAAR function, there was no systematic effect to enhance or reduce CAAR function. These dynamics were evaluated in a series of in vitro
studies as follows:
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Soluble DSG3 antibodies were added to CAAR T cell cytotoxicity assays, at a range of concentrations likely to be
encountered in patients, to assess the impact on CAAR function. In all cases when the CAAR T cells were tested in the
presence of soluble DSG3 antibodies, they retained their killing function. In addition, the presence of antibodies did not
demonstrate a systematic effect to enhance or reduce the CAAR T cells’ cytotoxic ability. Therefore, we believe that
removal of circulating soluble DSG3 antibodies from patients prior to infusions may not be necessary to enable potential
benefit.
Monoclonal DSG3 antibodies with an enhancing effect were evaluated in combination with PV patient serum to assess
their impact on DSG3 CAAR T cell division and stimulation of cytokine production. Monoclonal DSG3 antibodies were
capable of inducing DSG3 CAAR T cell division and stimulated production of moderate levels of cytokine production, as
measured by interferon gamma. Therefore, we believe the presence of DSG3 autoantibodies in patients may contribute to
the DSG3 CAAR T cell population expansion post-infusion.
Antibodies purified from PV patients were added to DSG3 CAAR T cells at a range of concentrations known to commonly
occur in patients in order to evaluate the extent to which patient serum may activate CAAR T cells. These antibodies
induced a dose dependent increase in interferon gamma.
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•
Off-target toxicity may also be seen due to antibody-mediated bridging of DSG3 CAAR T cell cytotoxicity against
hematopoietic cells that express receptors designed to bind to antibodies, known as Fc receptors. To evaluate this, we
loaded DSG3 antibodies onto cells expressing antibody-binding receptors, and evaluated the ability of DSG3 CAAR T
cells to bind and activate against these targets in vitro. No evidence of cytotoxicity was observed, suggesting the potentially
low risk of off-target killing mediated by this mechanism.
In Vivo Studies
To evaluate DSG3-CAART in vivo, four murine models were used. These models were designed to directly compare the potency of DSG3-CAART
in comparison with CART19 cells; evaluate the potential for on-target skin toxicity; and measure the activity of DSG3-CAART in the presence of
polyclonal soluble DSG3 antibodies.
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Evaluation of potency of DSG3-CAART in a human B cell tumor line compared to CART19 cells. This B cell model contained
genetically-modified B cells to express DSG3 antibodies on the cell surface in addition to luciferase, a bioluminescence marker,
and allowed evaluation of DSG3-CAART’s ability to engage and kill B cells that express the pathogenic antibody. CART19 cells
were used as a positive control in this model as the B cells express CD19 on their cell surface. In this model, DSG3-CAART was
found to result in a similar reduction of B cells compared to the CART19 cells.
Evaluation of on-target skin toxicity mediated by DSG3-CAART. A human skin-xenografted model was used to evaluate the
potential skin toxicity of DSG3-CAART by evaluating if the extracellular domain would react with desmocollin proteins, which
are the known target for DSG3. These results were compared directly to a positive control CAR T expressing a DSG3 specific
antibody as an extracellular domain. In this model, we observed the absence of skin toxicity mediated by the DSG3-CAART cells
compared to the positive control, which did demonstrate skin toxicity.
Evaluation of DSG3-CAART in the presence of soluble antibodies. We also tested a model where mice have circulating DSG3
antibodies to mimic the situation in PV patients. In this model, the DSG3 antibodies have well-defined and different epitopes with
varying affinities, which may reflect the potential breadth of B cell targets that could be encountered in PV patients. The mice were
then treated with DSG3-CAART, which was compared to non-CAAR expressing T cells, or negative control CAR T cells. In this
model, we observed amelioration of disease (see figure A below), reduction of DSG3 antibody titers (see figure B below), as well
as control of the pathogenic B cells (see figure C below), by DSG3-CAART. In this model, DSG3-CAART also demonstrated
dose-related activity, particularly in regard to reduction of serum autoantibodies, epithelial-bound autoantibodies (not shown in
Figures) and DSG3-CAART engraftment, suggesting that higher DSG3-CAART doses may promote engraftment (see Figures D
and E). We believe these results show the functional activity of DSG3-CAART in the presence of soluble antibody.
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Histology showing DSG3 CAAR maintaining normal epithelial cell structure in treated animals.
OD450 is a proxy measure for anti-serum DSG3antibodies in the blood. * indicates statistically significant reduction in DSG3 serum antibody level in
DSG3-CAART treated mice. P value is < 0.05. *** indicates statistically significant increase in DSG3 serum antibody level in the negative control CAR
treated group. P value is < 0.001.
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Total flux is a quantitative measure of cell bioluminescence, which approximates cell activity in this assay.
D
OD450 is a proxy measure for the level serum anti-DSG3 antibodies in the blood. Serum anti-DSG3 ELISA was performed on day 10 for all mice with
remaining serum samples available, indicating that mice treated with the 3x107 and 1x107 DSG3-CAART dose effectively reduced serum anti-DSG3 IgG
production compared to mice treated with NTD T-cells or the 3x106 DSG3-CAART dose.** indicates statistically significant reduction in DSG3 serum
antibody level in DSG3-CAART treated mice. P value is < 0.01. * indicates statistically significant increase in DSG3 serum antibody level in the negative
control CAR treated group. P value is < 0.05. ns indicates a non-significant difference.
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Quantification by flow cytometry of CD3-positive T-cells in peripheral blood on day 10 and 17 is shown. The data support dose-related DSG3-CAART
engraftment based on increased CD3+ cells with increased DSG3-CAART dose.
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Evaluation of DSG3-CAART in an active immune model. An exploratory active immune mouse model for PV was developed to
better represent the human phenotype in autoimmune disease. This model involved generating anti-DSG3 B cells in a mouse
without DSG3 by repeated immunization with human DSG3. Splenocytes containing anti-DSG3 B cells from the immunized
mouse were transferred into an immunodeficient mouse to generate the PV phenotype. These mice produced DSG3 antibodies
against multiple extracellular domains of the DSG3 antigen, including EC5, at physiologic levels comparable to those observed in
PV patients. Treatment with DSG3 EC1-4 CAAR T cells, in the absence of preconditioning, effectively lowered serum DSG3
antibody levels by ELISA, reduced antibodies against relevant DSG3 domains by epitope mapping and reduced blistering by
histology. These mice retained autoantibodies targeting the DSG3 EC5 region, though the mice did not show clinical
manifestations of PV.
•
See figure F below for a schematic representation of the experiment.
F
Schematic representation of the PV active immune model. A DSG3 knockout mouse is immunized with DSG3 EC1-5. The knockout mouse develops
antibodies against DSG3 across all EC domains. The splenocytes from the knockout mouse are transferred to an immunodeficient mouse where the DSG3
antibodies cause a clinical phenotype consistent with PV. Those mice are then treated with DSG3-CAART (EC1-4 domains only).
Clinical Development Plan
We submitted an IND to the FDA for a Phase 1 trial of DSG3-CAART in August 2019. The FDA accepted our IND for DSG3-CAART in
September 2019 and granted orphan drug designation to DSG3-CAART for the treatment of PV in January 2020. Based on communications with the FDA,
we expect that the DSG3-CAART trial
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will be designed as a Phase 1, open-label trial to assess the safety and tolerability of various dosing regimens of DSG3-CAART in the treatment of subjects
with active mPV. DSG3-CAART will be administered by intravenous infusion, using a fractionated-dose infusion scheme of escalating numbers of DSG3-
CAART cells for the initial cohorts in the first phase. This dosing scheme is designed to reduce the potential risks associated with acute infusion-related
toxicities while preserving potential benefit for subjects by allowing a total infused dose that we believe is large enough to be potentially therapeutic based
on prior CAR T trials.
We expect that the Phase 1 trial will have three parts:
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Part A: Fractionated dose escalation
Part B: Fractionation reduction at the selected dose
Part C: Expansion phase at the selected dose and administration scheme
In Part A, the split dose uses dose fractionation to accommodate a low number of cells in the first infusion while still advancing the dose within the
cohort up towards and spanning the range of cell doses that have been therapeutic in past gene-engineered T cell therapy trials. In Part B, the dose selected
from Part A will be delivered in a decreasing number of dose fractionations to determine the dose fractionation strategy. In Part C, subjects will be enrolled
at the dose and fractionation, as determined in Part A and B, to generate additional safety and outcome data to support the rationale for and design of future
clinical trials.
Patients are eligible to be enrolled if they have a confirmed diagnosis of mPV based on biopsy for histology and positive DSG3 ELISA; active
disease at screening; elevated DSG3 by ELISA at screening; and previously been inadequately managed by, or refractory to, or relapsed after, or with
contraindications to or intolerance of at least two prior systemic therapies. The primary objective of the trial is to evaluate the safety of DSG3-CAART
cells, and secondary objectives include evaluating the initial signs of target engagement.
We believe the risk of cytokine release syndrome, or CRS, a potentially life-threatening toxicity that has been observed after treatment with some
types of immunotherapy, may be reduced with our CAAR T cells, due to its correlation with target cell burdens. In the context of treating cancer, the target
cell population consists of all B cells (healthy and cancerous), whereas our CAAR T cells only target the small subset of disease-causing reactive B cell
population. While the possibility of cytokine release in a clinical trial resulting from strongly activating soluble antibody cannot be ruled out, to date we
have not observed any evidence of it in preclinical studies.
The primary endpoint of the study is the incidence of adverse events within three months of DSG3-CAART infusion, including dose limiting
toxicity defined as occurring within 28 days of infusion. The FDA has requested, and we have agreed, that we will share data from cohort A to inform a
discussion on the optimal design of cohort C. According to FDA guidance, the submission of cohort A data is not gating to planned enrollment in cohort B
and the FDA plans to provide feedback, if any, in a timely manner. In addition, we plan to report on acute tolerability data on no less than a cohort basis,
which is defined to include adverse events within eight days following DSG3-CAART infusion. We believe the eight-day timeframe appropriately covers
the period of time when one would expect the onset of CRS in most subjects. We also currently intend to communicate serious adverse events once we
have sufficient understanding of the events, if they materially change timelines or the trial design.
We also expect to provide updates from time-to-time related to target engagement in subjects receiving DSG3-CAART typically only once data is
available for a full cohort. Although possible but not expected in the lower dosing cohorts, we believe target engagement could be observed if DSG3
autoantibody titer falls within six months after DSG3-CAART infusion in addition to other parameters of engraftment and target engagement that will be
monitored regularly. Clinical responses, including improvement or resolution of mucosal lesions and absence of new lesions will also be evaluated.
DSG3/1-CAART for mcPV
Scientific and Commercial Assessment
Our next PV product candidate, DSG3/1-CAART, is being designed to target DSG3 and/or DSG1 autoantibodies on pathogenic B cells that cause
mcPV. mcPV is the most severe and most common subtype of PV
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and affects approximately 75% of PV patients. While mPV is caused by DSG3 autoantibodies, mcPV involves autoantibodies to both DSG3 and DSG1,
resulting in the additional involvement of skin erosion and blistering. Similar to mPV, mcPV is typically treated with immune suppression, which has a
high rate of relapse and potential for hospitalizations and fatal infections.
Epitope Mapping
DSG1 consists of five EC domains, with all known pathogenic epitopes occurring in the DSG1 EC1-4 domains. Similar to development of DSG3-
CAART, we tested different combinations of DSG1 ECs for expression in primary human T cells using DSG1 fragments as the DSG1 EC domains. Given
prior development of DSG3 CAAR, we leveraged those findings in the design of our DSG1 CAAR.
CAAR Construct / Design
We also tested multiple combinations of EC domains of DSG1 CAAR administered alone and in combination with the DSG3 EC1-4 CAAR to
evaluate for cell-surface expression of the CAAR along with the potency and breadth of target cell killing. In this setting, the DSG1 EC1-4 CAAR showed
robust and specific cytotoxicity towards all known pathogenic epitopes.
In Vitro Studies
CAAR development for mcPV, based on the targeting of DSG3- and/or DSG1-specific B cells, has shown promising preclinical results. DSG1
CAAR T cells specifically killed DSG1-specific B cells in vitro. In addition, we observed that with a 1:1 mixture of DSG3 and DSG1 CAAR T cells had
killing capabilities without synergistic or antagonistic effect.
In Vivo Studies
The activity and toxicity of DSG3 and DSG1-CAAR T cells was evaluated using human skin xenografts in comparison with anti-CART19 cells,
which are known from human clinical trials not to cause direct skin toxicity. A 1:1 mixture of DSG3 and DSG1 CAAR T cells did not show off-target
toxicity in vivo.
Development Plan
From a regulatory and clinical trial design perspective, we anticipate that many of the elements incorporated into the planned DesCAARTesTM
Trial will carry over to DSG3/1-CAART. We plan to evaluate the initial cohorts of patients from the planned DesCAARTesTM Trial to evaluate for safety
and evidence of target engagement prior to proceeding with an IND submission for DSG3/1-CAART. We believe that, because mcPV is the most prevalent
subset of PV and the patients are generally followed by the same subspecialists, it will allow for a wider patient pool eligible for a clinical trial. We
anticipate the DSG3/1-CAART clinical trial protocol will have a significant amount of overlap with the DSG3-CAART protocol, but it will be informed by
clinical data from the early cohorts in the DesCAARTesTM Trial. We further anticipate being able to use the same centers from the DesCAARTesTM Trial
to enroll patients for the DSG3/1-CAART clinical trials.
We are currently evaluating advanced manufacturing technologies that would potentially allow us to administer DSG3/1-CAART as a single
product rather than requiring separate administration. The size of the DSG3/1 product candidate will likely require us to incorporate additional technologies
to accommodate the size of the final CAAR construct. An evaluation of potential technologies to achieve this objective is ongoing. Upon completing the
evaluation of these manufacturing technologies, we expect to conduct additional in vitro and in vivo studies using the combined product. While a product
that administers a DSG3 CAAR and DSG1 CAAR as two separate products may be feasible, we believe that there would be significant advantages to
developing a combined product from a regulatory and commercial perspective.
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MuSK-CAART for MuSK Myasthenia Gravis
Scientific, Clinical and Commercial Assessment
MG is an autoimmune disease induced by autoantibodies targeting the neuromuscular junction, or NMJ, which can lead to life-threatening muscle
weakness. Generalized MG, or gMG, is characterized by profound muscle weakness throughout the body, resulting in motor impairment, disabling fatigue,
shortness of breath due to respiratory muscle weakness and episodes of respiratory failure.
gMG affects approximately 65,000 to 70,000 patients in the United States. The majority of patients who develop gMG have autoantibodies against
some part of the NMJ that are known to be pathogenic. 80% to 90% of patients with gMG have autoantibodies against the acetylcholine receptor, or AchR,
detectable in their serum. Approximately 6% to 7.5% of patients with gMG have autoantibodies against MuSK, which is a different target on the surface of
the muscle membrane.
Patients diagnosed with MuSK MG have a different recommended treatment course compared to patients with AchR MG. Importantly, many
patients with MuSK MG respond poorly to cholinesterase inhibitors, which are often the first line of therapy in AchR MG. In that setting, patients with
MuSK MG are typically started on corticosteroids in addition to one or more steroid-sparing immunosuppressive agents. Corticosteroids are tapered to the
extent possible to prevent disease relapse, though many remain dependent on corticosteroid despite concomitant treatment with immunosuppressive
medications. In the acute setting, plasmapheresis or intravenous immunoglobulin may be used to address severe disease. Rituximab is often considered as a
second-line therapeutic option in patients with an inadequate response to initial immunosuppressive medications. Importantly, complement is not thought to
be meaningfully implicated in the pathophysiology of MuSK MG, and complement inhibitors are not indicated for treatment of disease.
Epitope Mapping
The MuSK protein has a similar structure and size as compared to DSG3. MuSK contains four extracellular domains, as shown below.
Figure illustrating the domains of the wild-type MuSK protein.
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Studies conducted in patients with MuSK MG have revealed that the autoantibodies may be against epitopes located in each of the extracellular
domains for MuSK.
CAAR Construct and Design
With an understanding that pathogenic autoantibody epitopes may target any domain of MuSK, multiple MuSK CAAR candidates have been
engineered that incorporate all extracellular domains. Each CAAR construct is being or will be tested in preliminary in vitro and in vivo experiments.
Development Plan
The initial in vitro studies with our MuSK-CAART product candidate have been completed. These studies were followed by preliminary in vivo
studies to evaluate toxicity of the MuSK-CAAR construct along with evaluation of target engagement. We presented data from preclinical in vitro studies
evaluating MuSK-CAART activity at the American Neurological Association annual meeting in October 2019. At the conference, data was presented
showing that MuSK CAAR T cells containing the native MuSK extracellular domain were able to specifically kill B cells expressing anti-MuSK antibodies
that target different MuSK epitopes. Additionally, MuSK CAAR T cells did not demonstrate cytotoxicity toward cells expressing LRP4, which is a
different protein in the neuromuscular junction that can bind with MuSK in certain configurations.
Data from our preliminary in vitro and in vivo studies of MuSK-CAART has been accepted for presentation at the American Academy of
Neurology’s annual meeting in April 2020, but the meeting was subsequently cancelled due to the COVID-19 pandemic and an alternative venue for
presentation has not yet been provided. The efficacy and safety of MuSK CAAR T cells were investigated using in vitro cytotoxicity assays, in vitro
screens for off-target toxicity and a mouse model to evaluate the efficacy of human MuSK CAAR T cells against MuSK antibody expressing B cells in
vivo. MuSK CAAR T cells demonstrated specific cytotoxicity toward a panel of MuSK antibody expressing B cells targeting different MuSK epitopes.
Cytotoxicity toward cells expressing LRP4 was not observed. In the mouse model, MuSK CAAR T cells, but not non-transduced or control CAAR T cells,
suppressed the expansion of MuSK antibody expressing B cells.
FVIII-CAART for Hemophilia A with Factor VIII Alloantibodies
While our CABA platform is primarily directed towards the treatment of B cell-mediated autoimmune diseases, we believe the approach may be
applicable in other instances where B cell antibody production is implicated. Specifically, we have identified an opportunity to apply the CABA platform to
develop potential CAAR adjunctive therapies in cases where the immune system has or produces antibodies against potential therapies, which is known as
an alloimmune response. These alloantibodies can prevent a particular therapy from being delivered effectively because the therapy is degraded by the
immune response due to alloantibody binding. We believe our approach has the potential to address the alloantibody response by specifically ablating the B
cells responsible for producing the alloantibodies through a similar mechanism seen in autoimmune disease. With the alloantibody producing cells ablated,
the treatment could then be provided.
Scientific, Clinical and Commercial Assessment
Hemophilia A is an X-linked bleeding disorder caused by mutations in the FVIII gene resulting in a deficiency of functional FVIII, a critical factor
in blood coagulation. It affects about 1:5,000 male births. Severe Hemophilia A, where FVIII levels are less than 1% of normal, accounts for about 60% of
all cases and is characterized by frequent spontaneous bleeds. Currently, Hemophilia A is treated with FVIII replacement via intravenous administration.
The main complication of FVIII replacement therapy is that 20% to 30% of patients with severe disease develop neutralizing alloantibodies against
the FVIII protein. These alloantibodies decrease the levels of FVIII and at high titers, render attempts to replace or stimulate the production of FVIII
ineffective. The risk of alloantibody development for patients with severe Hemophilia A is highest during their initial FVIII exposures. The standard
treatment to reverse alloantibody formation consists of repeated high-dose infusions of FVIII, which has limited efficacy, a high cost and is difficult to
titrate to an appropriate therapeutic level for the patient. We believe FVIII-
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CAART could be effective in addressing patients with Hemophilia A who have developed FVIII antibodies that require repeated, high-dose administrations
of FVIII.
Epitope Mapping
The following image depicts FVIII, which is a large glycoprotein consisting of six domains that interact with each other to form the full complex.
Studies conducted in patients with Hemophilia A have revealed that acquired FVIII alloantibodies following exogenous FVIII administration are
typically directed against A2, C1 and C2 domains of FVIII.
CAAR Construct and Design
Preliminary FVIII CAAR and CAAR-like constructs have been engineered that target parts, but not all, of the FVIII domains. Dr. Milone, one of
our scientific co-founders, has led the development of one such construct.
Development Plan
Internally, we are conducting additional studies to optimize our FVIII-CAART development. The focus of these studies will be to fully characterize
any additional pathogenic epitopes and construct a FVIII-CAART that includes additional FVIII domains. Given the size of the FVIII protein, this will
likely require us to incorporate additional technologies to reduce the size of the final CAAR construct. An evaluation of potential technologies to achieve
this objective is ongoing.
Manufacturing
Manufacturing Strategy
We intend to implement a three-stage plan that we believe will ultimately enable us to achieve manufacturing independence. Part of our strategy
relies on engaging non-profit and commercial suppliers early and in a staged manner. We believe partnering with proven and reputable manufacturing
partners will allow us to efficiently deploy financial and personnel resources. Stage 1 of this plan is in place and utilizes the deep expertise in cell and
vector manufacturing from our partners at Children’s Hospital of Philadelphia, or CHOP, and Penn. This includes early development work, support of the
DSG3-CAART IND, and cell and vector product manufacturing for our DesCAARTesTM Trial. We believe these facilities will allow us to move efficiently
into clinical trials but are not sufficient to support a commercial license.
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Stage 2 of our plan is designed to engage partners who are qualified for manufacturing of vector at commercial grade and scale and cell therapy
products. We are aware that changes in any manufacturing process or facility introduces regulatory and scientific risk to a development program, if the
changes result in a product that is not comparable. We plan to mitigate these risks primarily in two ways:
1.
2.
By securing contract development and manufacturing organizations, or CDMOs, partners during Stage 2 of our manufacturing strategy
early on for both vector and cell manufacturing. We plan to prioritize potential partners who are qualified to, and have an established track
record of, the commercial production of vector and cell products. We believe this allows us to make one change in our supply partners
during an early period of clinical development to facilitate in vitro comparability testing and clinical validation, prior to controlled clinical
studies.
By licensing the cell manufacturing process used for our planned Phase 1 DSG3-CAART first-in-human study from Penn. We believe this
will provide time to enable us to understand the process used in order to reduce the chance of changes that may impact comparability.
In addition to Stage 2, and contingent on sufficient clinical evidence from our planned DesCAARTesTM Trial, we are further planning to pursue
Stage 3 in manufacturing supply. During Stage 3, we plan to build, qualify and run our own manufacturing facility. We believe this additional stage will
enable full control of continuous improvement, product development and commercial supply for products arising from our CABA platform. Our Chief
Executive Officer and Executive Vice President, Science and Technology have both, in prior roles, built and led organizations that have constructed and
commissioned cell therapy facilities.
Vector Manufacturing
The lentiviral vector that we plan to use in the initial subjects in our Phase 1 clinical trial for DSG3-CAART was manufactured at CHOP. We have
also reserved multiple vector manufacturing slots at Penn, which we may use in our DSG3-CAART or subsequent clinical trials. In parallel, we are
engaging in development work with multiple CDMOs with a plan to secure production slots for vector which may be used in our DSG3-CAART or
subsequent clinical trials. We believe these efforts will provide us with sufficient clinical-grade vector to move forward with our anticipated clinical trials.
Cell Manufacturing
We have entered into a collaboration with the Clinical Cell and Vaccine Production Facility, or CVPF, at Penn, to provide focused scientific,
technical and regulatory support for CAAR T cell manufacture. CVPF is accredited by the Foundation for the Accreditation of Cellular Therapy and is
capable of and experienced at supporting manufacture for early-phase clinical trials of novel cell therapy products in first-in-man clinical trials. We expect
to rely upon CVPF to provide initial Phase 1 clinical trial drug supply for DSG3-CAART. Penn’s manufacturing process for DSG3-CAART is directly
related to the process developed at Penn for early clinical trials of CART19, which subsequently became known commercially as Kymriah. The process
was later transferred to Novartis Pharmaceuticals Corporation and further modified for the Kymriah program.
As we scale our manufacturing of DSG3-CAART and our other product candidates to meet our expected needs for further clinical trials, we may or
may not rely on Penn, but we also expect to rely on CDMOs and other third parties for the manufacturing and processing of our clinical trial materials. Any
CDMO that we select will be subject to cGMP requirements. We believe the use of contract manufacturing for our pipeline programs will be cost-effective
and allow us to rapidly prepare for clinical trials in accordance with our development plans. In preparation for this transition, we have engaged multiple
third-party contractors to manufacture clinical grade viral vector used to deliver the applicable CAAR gene into the T cells. We have also initiated
development work with certain contractors for cGMP and commercial vector production. We expect third-party manufacturers will be capable of providing
and processing sufficient quantities of our product candidates to meet anticipated clinical trial demands and commercial need.
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Once we have sufficient clinical data from subjects in our DSG3-CAART study, we intend to begin the process of engineering and then
establishing our own commercial scale GMP-compliant manufacturing facility. We believe this will allow us to enhance supply chain control, increase
supply capacity and help ensure clinical and commercial demand for our pipeline programs is met in the event that DSG3-CAART receives marketing
approval. Informed by our experience in building cell therapy facilities and creating supply chains, we plan to develop a robust supply chain with
alternative sources to maintain continuous supply. In parallel with these activities, we are evaluating and executing proof-of-concept studies to test
advanced manufacturing and automation technologies to continuously improve the manufacturing process and meet commercial and scalability targets.
Commercialization
Our aim is to become a fully integrated cellular therapy company in order to improve the lives of patients with B cell-mediated autoimmune
diseases. We have designed a strategic approach to move forward with our lead product candidate, DSG3-CAART, while at the same time having a number
of product candidates in development. The product candidates from our CABA platform address clinical indications where there is a compelling
opportunity to improve clinical outcomes in comparison with the current standard of care in an easily identified patient population. Our initial product
candidates are focused on rare disease populations where we believe there is potential to commercialize independently. This is due to a concentration of
treatment paradigms and limited but easily identified patient populations. Our plan is to focus commercialization and launch efforts initially in the United
States, and eventually in the European Union and Asia-Pacific geographies.
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong focus on
intellectual property. We face competition from many different players, including large and specialty pharmaceutical and biotechnology companies,
academic research organizations and governmental agencies. Any therapeutic candidates we successfully develop and commercialize will compete with the
existing standard of care as well as any novel therapies that may gain regulatory approval in the future.
Existing treatment options for PV are limited. Rituximab, marketed by Roche Holding AG, is the first drug to have received approval for PV in the
United States in over 60 years. In Europe, the approved therapies for PV are corticosteroids, azathioprine and rituximab. Other standard of care treatments
include various immunosuppressants, plasmapheresis, and intravenous immunoglobulin infusions given monthly or on another periodic chronic basis.
Additionally, multiple biopharmaceutical companies have therapies in clinical development.
Competition in the MuSK MG autoimmune space is currently dominated by the current standard of care, rituximab. A second approved approach
to treating patients is IVIG, which is available through CSL Behring LLC, Grifols, S.A., and Mitsubishi Tanabe Pharma Corporation. Additionally, multiple
biopharmaceutical companies have therapies in clinical development.
Multiple therapies are approved or in development for the treatment of Hemophilia A patients who develop alloantibodies against FVIII. Standard
of care is typically immune tolerance induction, or ITI, therapy with higher doses of FVIII. Available treatments for those who do not respond to ITI
include anti-inhibitor coagulation complexes, recombinant factor VIIa, and bispecific factor IXa- and factor X-directed antibodies. Companies who market
products or are developing product candidates within these categories of medicine include Catalyst Pharmaceuticals, Inc., Novo Nordisk A/S, OPKO
Health, Inc., Roche Holding AG and Takeda Pharmaceutical Company.
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We believe we are the first and only company developing CAAR T drug candidates for the treatment of B cell-mediated autoimmune diseases.
However, despite the significant differences in discovery, development and target populations between oncology and autoimmune targets, we recognize that
companies with an investment and expertise in CAR T cell development for oncology indications could attempt to leverage their expertise into B cell-
mediated autoimmune disease-affected populations. We are aware of biotechnology companies that are exploring other methods of engineering T cells for
the treatment of autoimmune conditions. In addition, some biotechnology companies are engineering red blood cells to incorporate self-antigens with the
goal of tolerizing the immune system to treat autoimmune and alloimmune conditions.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial
resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and
marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industry may result in even more resources
being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified
scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies
complementary to, or necessary for, our programs.
Intellectual Property and Barriers to Entry
We strive to protect the proprietary technologies that we believe are important to our business, including pursuing and maintaining patent
protection intended to cover our product candidates and their use, as well as other inventions that are important to our business. In addition to patent
protection, we also rely on know-how, confidentiality agreements, invention assignment agreements and trade secrets to protect aspects of our business that
are not amenable to, or that we do not consider appropriate for, patent protection, to develop and maintain our proprietary position. The confidentiality
agreements are designed to protect our proprietary information and the invention assignment agreements are designed to grant us ownership of technologies
that are developed for us by our employees, consultants or certain other third parties. We seek to preserve the integrity and confidentiality of our data and
trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have
confidence in our agreements and security measures, either may be breached, and we may not have adequate remedies. In addition, our trade secrets may
otherwise become known or independently discovered by competitors.
Our commercial success depends in part upon our ability to obtain and maintain patent and other proprietary protection for commercially important
technologies, inventions and trade secrets related to our business, defend and enforce our intellectual property rights, particularly our patent rights, preserve
the confidentiality of our trade secrets and operate without infringing valid and enforceable intellectual property rights of others.
The patent positions for biotechnology companies like us are generally uncertain and can involve complex legal, scientific and factual issues. In
addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued, and its scope can be reinterpreted and even
challenged after issuance. As a result, we cannot guarantee that any of our product candidates will be protectable or remain protected by enforceable
patents. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the
claims of any issued patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged, circumvented or
invalidated by third parties.
As of February 1, 2020, our patent estate (all of which has been in-licensed) included one issued U.S. patent, seven pending U.S. patent
applications, and 14 pending foreign patent applications. See “—Our Material Agreements—Amended and Restated License Agreement with Penn.”
With regard to our DSG3-CAART and DSG3/1-CAART product candidates, we have one issued U.S. patent with claims directed to a genetically
modified cell containing a chimeric autoantibody receptor containing an extracellular domain containing DSG3, DSG1 or fragments thereof, which is
scheduled to expire in 2035, without taking a potential patent term extension into account. We also have four pending U.S. patent applications and
counterpart patent applications pending in Canada, China and Europe, which if issued, would be expected to expire in 2035. This patent family is owned by
Penn and exclusively licensed to us in the field of the license.
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With regard to our MuSK-CAAR T cell product candidate, we have one pending U.S. patent application and one pending International, or PCT,
patent application, which if issued, would be expected to expire in 2039. This patent family is owned by Penn and exclusively licensed to us in the field of
the license.
With regard to our FVIII-CAAR T cell product candidate, we have one pending U.S. patent application and counterpart patent applications pending
in Australia, Canada, China, Europe, Japan, Hong Kong, Korea, Mexico, New Zealand, and Russia, which if issued, would be expected to expire in 2037.
This patent family is co-owned by Penn and CHOP and is exclusively licensed to us in the field of the license.
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, the term of a patent covering an FDA-approved drug may be eligible for a patent term extension under the Hatch-Waxman Act
as compensation for the loss of patent term during the FDA regulatory review process. The period of extension may be up to five years beyond the
expiration of the patent, but cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval. Only one patent
among those eligible for an extension may be extended, and a given patent may only be extended once. Similar provisions are available in Europe and in
certain other jurisdictions to extend the term of a patent that covers an approved drug. It is possible that issued U.S. patents covering each of our product
candidates may be entitled to patent term extensions. If our product candidates receive FDA approval, we intend to apply for patent term extensions, if
available, to extend the term of patents that cover the approved product candidates. We also intend to seek patent term extensions in any jurisdictions where
they are available, however, there is no guarantee that the applicable authorities, including the FDA, will agree with our assessment of whether such
extensions should be granted, and even if granted, the length of such extensions.
In addition to patent protection, we also rely on know-how and trade secret protection for our proprietary information that is not amenable to, or
that we do not consider appropriate for, patent protection, to develop and maintain our proprietary position. However, trade secrets can be difficult to
protect. Although we take steps to protect our proprietary information, including restricting access to our premises and our confidential information, as well
as entering into agreements with our employees, consultants, advisors and potential collaborators, third parties may independently develop the same or
similar proprietary information or may otherwise gain access to our proprietary information. As a result, we may be unable to meaningfully protect our
know-how, trade secrets, and other proprietary information.
In addition, we plan to rely on regulatory protection based on orphan drug exclusivities, data exclusivities, and market exclusivities. See “—
Government Regulation” for additional information.
Our Material Agreements
Amended and Restated License Agreement with the Trustees of the University of Pennsylvania and the Children’s Hospital of Philadelphia
In July 2019, we entered into an amended and restated license agreement, or the License Agreement, with Penn and CHOP, collectively the
Institutions, pursuant to which we obtained (a) a non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two
subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain patent rights
of the Institution to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-
exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn’s know-how, which know-how satisfies certain
criteria and is listed on a mutually agreed-to schedule, to make, have made, use, sell, offer for sale, import and have imported products in the same two
subfields of use. Our rights are subject to the rights of the U.S. government and certain rights retained by the Institutions.
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Unless earlier terminated, the License Agreement will expire with respect to a product upon the later of (a) the expiration of the last to expire patent
or patent application covering such product or (b) 10 years after the first commercial sale of such product. We may terminate the License Agreement in its
entirety or on a subfield-by-subfield basis at any time for convenience upon a certain number of days’ prior written notice. Penn may terminate the License
Agreement in its entirety or on a subfield-by-subfield basis for our uncured material breach, including for our failure to meet certain diligence obligations
and milestone events. We, however, may extend the achievement date of any milestone event for an additional period of time by making a payment in a
certain amount, subject to certain limitations in the number of times each event may be extended.
Penn maintains control of all filing, prosecution and maintenance of the Institutions’ patent rights licensed by us, and we are responsible for all
ongoing patent costs during the term of the agreement. We also reimbursed Penn for its out-of-pocket expenses incurred prior to the effective date of the
agreement with respect to the filing, prosecution and maintenance of the patent rights licensed by us. Under the terms of the License Agreement, we are
also obligated to pay $2.0 million annually for three years beginning August 2018 for funding to the laboratories of each of Drs. Milone and Payne. See “—
Sponsored Research Agreements with the Trustees of the University of Pennsylvania.”
Under the License Agreement, we must use commercially reasonable efforts to develop and commercialize a product in each subfield. During the
term of the License Agreement until the first commercial sale of the first product, we are obligated to pay Penn a non-refundable, non-creditable annual
license maintenance fee of $10,000. We are required to pay certain milestone payments upon the achievement of specified clinical and commercial
milestones. Milestone payments are reduced by a certain percentage for the second product that achieves a milestone, by an additional percentage for the
third product that achieves a milestone, and so on, for each subsequent product that achieves a milestone. In the event that we are able to successfully
develop and launch multiple products under the License Agreement, total milestone payments could approach $20.0 million. Penn is also eligible to receive
tiered royalties at percentage rates in the low single-digits, subject to an annual minimum royalty, on annual worldwide net sales of any products that are
commercialized by us, our affiliates or our sublicensees that contain, use, embody, result from the use of or incorporate, or are covered by, the intellectual
property licensed by us. To the extent we sublicense our license rights under the License Agreement, Penn would be eligible to receive tiered sublicense
income at percentage rates in the mid-single to low double-digits. We have also entered into a subscription and technology transfer agreement with Penn,
pursuant to which we owed Penn an upfront subscription fee, which was paid in 2019, and a nominal non-refundable royalty on the net sales of products, a
portion of which will be credited toward milestone payments and royalties under this License Agreement. Technology transfer activities would be at our
cost and subject to agreement as to the technology to be transferred.
Sponsored Research Agreements with Penn
Dr. Michael Milone
In April 2018, we entered into a Sponsored Research Agreement with Penn for the laboratory of Dr. Milone, or the Milone SRA, pursuant to which
we agreed to sponsor certain research related to the development of (i) T cell based immunotherapies for autoimmune and alloimmune antibodies of
pathologic significance and (ii) a clinical grade microfluidic device designed for single step selection and activation of T cells from blood samples to be
conducted in Dr. Milone’s laboratory at Penn. Under the Milone SRA, Penn granted us a perpetual, irrevocable, non-transferable, non-exclusive license to
use all intellectual property resulting from the research sponsored by us for internal research purposes. In addition, Penn granted us an option to include, in
exchange for a fee, any intellectual property resulting from the research sponsored by us that relates to CAAR T cell therapies for hemophilia and/or
pemphigus within the scope of the License Agreement. Penn also granted us an option to negotiate a license to all other intellectual property resulting from
the research sponsored by us. Unless earlier terminated, the Milone SRA will expire on April 23, 2021.
Dr. Aimee Payne
In April 2018, we entered into a Sponsored Research Agreement with Penn for the laboratory of Dr. Payne, or the Payne SRA, pursuant to which
we agreed to sponsor certain research related to the development of T cell based immunotherapies for autoimmune and alloimmune antibodies of
pathologic significance to be conducted in Dr. Payne’s laboratory at Penn. Under the Payne SRA, Penn granted us a perpetual, irrevocable, non-
transferable, non-exclusive license to use all intellectual property resulting from the research sponsored by us for internal research purposes. In addition,
Penn granted us an option to include, in exchange for a fee, any intellectual property resulting from the research sponsored by us that relates to CAAR T
cell therapies for hemophilia, MG and/or pemphigus within the scope of the License Agreement. Penn also granted us an option to negotiate a license to all
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other intellectual property resulting from the research sponsored by us. Unless earlier terminated, the Payne SRA will expire on April 23, 2021.
We have committed to funding a defined research plan for three years through April 2021 under both the Milone SRA and Payne SRA. We have
estimated the three-year cost of the two SRAs to be $8.5 million, which satisfies the $2.0 million annual obligation under the License Agreement.
Master Translational Research Services Agreement with Penn
In October 2018, we entered into a Master Translational Research Services Agreement with Penn, or the Services Agreement, pursuant to which
Penn agreed to perform certain services related to the research and development of the technology licensed to us under the License Agreement, as well as
certain clinical, regulatory and manufacturing services. The Services Agreement will expire on the later of (i) October 19, 2021 or (ii) completion of the
services for which we have engaged Penn under the Services Agreement. Either party may terminate this agreement with or without cause upon a certain
number of days’ prior written notice. The services encompassed by the Services Agreement are performed by different organizations at Penn pursuant to
certain addenda to the Services Agreement, including the Center for Advanced Retinal and Ocular Therapeutics, or CAROT, Addendum and the CVPF
Addendum. In addition, in July 2019 we entered into an Alliance Agreement with Penn, pursuant to which we will pay Penn a nominal annual fee in order
for Penn to provide an adequate and consistent level of support to the services that it provides to us.
The CAROT Addendum
Under the CAROT Addendum, Penn manufactures vector that is then to be used by the CVPF in the manufacture of our product candidates. In the
event that certain materials owned by Penn are incorporated into a product developed for us, Penn has agreed to grant us a limited license to use those
materials. Further, Penn agreed to grant us an exclusive, paid-up, royalty-free, transferable, irrevocable, perpetual exclusive license to any deliverables
produced under the CAROT Addendum, except with respect to certain technical information of Penn that is contained or incorporated in the deliverables,
to which Penn agreed to grant us a limited nonexclusive license. However, any necessary technology transfer would be pursuant to the subscription and
technology transfer agreement described above.
The CVPF Addendum
Under the CVPF Addendum, Penn conducts process validation studies and large-scale engineering runs for our product candidates. Under the
CVPF Addendum, CVPF will contractually agree to manufacture agreed upon quantities of DSG3-CAART material for use in connection with our
DesCAARTesTM Trial, unless the agreement is terminated by either party. Any necessary technology transfer would be pursuant to the subscription and
technology transfer agreement described above.
Research Agreement with The Regents of the University of California
In October 2018, we entered into a Research Agreement, or the UC Agreement, with The Regents of the University of California, or the UC
Regents, pursuant to which the UC Regents agreed to perform certain research projects relating to the toxicity and activity of MuSK CAAR T cells in
various models of anti-MuSK MG, or the UC Research.
The UC Agreement provides that the UC Regents will own all rights to any intellectual property developed solely by UC Regents employees in
conducting the UC Research, or developed solely by any of our employees that conduct the UC Research using the UC Regents’ facilities or resources. The
UC Regents granted us an irrevocable, royalty-free, nonexclusive, worldwide, nontransferable, perpetual license to use this UC-owned intellectual property
for internal research purposes only.
We and the UC Regents jointly own the rights to any intellectual property jointly developed by our employees and UC Regents employees in
conducting the UC Research, provided that our employees did not use the UC Regents’ facilities or resources in the research. We were granted an option to
acquire a non-exclusive or exclusive,
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worldwide, transferable license, including the right to sublicense, to make, use sell, offer for sale, import and otherwise exploit products embodying these
joint inventions.
If we exercise our option with respect to certain intellectual property under the UC Agreement, any license we enter into will require us to
diligently pursue timely commercial development and marketing of product candidates using such intellectual property, and will be subject to other terms
and conditions to be negotiated at the time of entering into any such license. Unless earlier terminated, the term of the UC Agreement will expire on
October 1, 2020.
Government Regulation
U.S. Regulation
As a biopharmaceutical company that operates in the United States, we are subject to extensive regulation. Our cell products will be regulated as
biologics. With this classification, commercial production of our products will need to occur in registered facilities in compliance with cGMP for biologics.
The FDA categorizes human cell- or tissue-based products as either minimally manipulated or more than minimally manipulated, and has determined that
more than minimally manipulated products require clinical trials to demonstrate product safety and efficacy and the submission of a BLA for marketing
authorization. Our products are considered more than minimally manipulated and will require evaluation in clinical trials and the submission and approval
of a BLA before we can market them.
Government authorities in the United States (at the federal, state and local level) and in other countries extensively regulate, among other things,
the research, development, testing, manufacturing, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising,
distribution, post-approval monitoring and reporting, marketing and export and import of biopharmaceutical products such as those we are developing. Our
product candidates must be approved by the FDA before they may be legally marketed in the United States and by the appropriate foreign regulatory
agency before they may be legally marketed in foreign countries. Generally, our activities in other countries will be subject to regulation that is similar in
nature and scope as that imposed in the United States, although there can be important differences. Additionally, some significant aspects of regulation in
Europe are addressed in a centralized way, but country-specific regulation remains essential in many respects. The process for obtaining regulatory
marketing approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of
substantial time and financial resources.
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U.S. Biological Product Development
In the United States, the FDA regulates biologics under the Federal Food, Drug, and Cosmetic Act, or FDCA, and the Public Health Service Act, or
PHSA, and their implementing regulations. Biologics are also subject to other federal, state and local statutes and regulations. The process of obtaining
regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of
substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process,
approval process or after approval, may result in delays to the conduct of a study, regulatory review and approval or subject an applicant to administrative
or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval,
license suspension or revocation, refusal to allow an applicant to proceed with clinical trials, imposition of a clinical hold, issuance of untitled or warning
letters, product recalls or withdrawals from the market, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals
of government contracts, restitution, disgorgement of profits, or civil or criminal investigations or penalties. Any agency or judicial enforcement action
could have a material adverse effect on us.
Our drug product candidates must be approved by the FDA through the Biologics License Application, or BLA, process before they may be legally
marketed in the United States. The process required by the FDA before a biologic may be marketed in the United States generally involves the following:
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completion of extensive nonclinical, sometimes referred to as preclinical, laboratory tests, animal studies and formulation studies in
accordance with applicable regulations, including the FDA’s Good Laboratory Practice, or GLP, regulations and standards;
submission to the FDA of an IND which must become effective 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 applicable IND regulations, good clinical practices,
or GCPs, and other clinical trial-related regulations to establish the safety and efficacy of the proposed drug product candidate for its
proposed indication;
submission to the FDA of a BLA, which includes not only the results of the clinical trials, but also, detailed information on the chemistry,
manufacture and quality controls for the product candidate and proposed labelling;
satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the product is produced to
assess compliance with the FDA’s current good manufacturing practice, or cGMP, requirements to assure that the facilities, methods and
controls are adequate to preserve the product’s identity, strength, quality, purity and potency;
potential FDA audit of the preclinical trial sites and/or clinical trial sites that generated the data in support of the BLA; and
FDA review and approval of the BLA prior to any commercial marketing or sale of the product in the United States.
The data required to support a BLA is generated in two distinct development stages: preclinical and clinical. The preclinical development stage
generally involves laboratory evaluations of drug chemistry, formulation and stability, as well as studies to evaluate toxicity in animals, which support
subsequent clinical testing. The conduct of the preclinical studies must comply with federal regulations, including GLPs. The sponsor must submit the
results of the preclinical studies, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical
protocol, as well as other information, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational
drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials and
places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before
the clinical trial can begin. The FDA may also impose clinical holds on a drug product candidate at any time before or during clinical trials due to safety
concerns, non-compliance, or other issues affecting the integrity of the trial. Accordingly, we cannot be sure that submission of an IND will result in the
FDA allowing clinical trials to begin, or that, once begun, issues will not arise that could cause the trial to be suspended or terminated.
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In addition to the submission of an IND to the FDA before initiation of a clinical trial in the United States, certain human clinical trials involving
recombinant or synthetic nucleic acid molecules had historically been subject to review by the Recombinant DNA Advisory Committee, or RAC, of the
NIH Office of Biotechnology Activities, or the NIH Office of Biotechnology Activities, or OBA, pursuant to the NIH Guideline. On August 17, 2018, the
NIH issued a notice in the Federal Register and issued a public statement proposing changes to the oversight framework for gene therapy trials, including
changes to the applicable NIH Guidelines to modify the roles and responsibilities of the RAC with respect to human clinical trials of gene therapy products,
and requesting public comment on its proposed modifications. During the public comment period, which closed October 16, 2018, the NIH announced that
it will no longer accept new human gene transfer protocols for review as a part of the protocol registration process or convene the RAC to review individual
clinical protocols. In April 2019, NIH announced the updated guidelines, which reflect these proposed changes, and clarify that these trials will remain
subject to the FDA’s oversight and other clinical trial regulations, and oversight at the local level will continue as set forth in the NIH Guidelines.
Specifically, under the NIH Guidelines, supervision of human gene transfer trials includes evaluation and assessment by an Institutional Biosafety
Committee, or IBC, a local institutional committee that reviews and oversees research utilizing recombinant or synthetic nucleic acid molecules at that
institution. The IBC assesses the safety of the research and identifies any potential risk to public health or the environment, and such review may result in
some delay before initiation of a clinical trial. While the NIH Guidelines are not mandatory unless the research in question is being conducted at or
sponsored by institutions receiving NIH funding of recombinant or synthetic nucleic acid molecule research, many companies and other institutions not
otherwise subject to the NIH Guidelines voluntarily follow them.
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The clinical stage of development involves the administration of the drug product candidate to healthy volunteers and patients under the
supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include
the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to
be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part
of the IND. Further, each clinical trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical trial will be
conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals
participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the informed consent form that
must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.
There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries. Sponsors of
certain clinical trials of FDA-regulated products, including biologics, are required to register and disclose certain clinical trial information, which is
publicly available at www.clinicaltrials.gov.
Clinical trials are generally conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap. Phase 1 clinical trials
generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the drug product candidate.
The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action tolerability, adverse effects, and safety of the drug product
candidate and, if possible, to gain early evidence on effectiveness. Phase 2 clinical trials typically involve studies in disease-affected patients to determine
the dose required to produce the desired benefits. At the same time, safety and further pharmacokinetic and pharmacodynamic information is collected, as
well as identification of possible adverse effects and safety risks and preliminary evaluation of efficacy. Phase 3 clinical trials generally involve large
numbers of patients at multiple sites, in multiple countries, and are designed to provide the data necessary to demonstrate the efficacy of the product for its
intended use, its safety in use, and to establish the overall benefit/risk relationship of the product and provide an adequate basis for product approval. Phase
3 clinical trials may include comparisons with placebo and/or other comparator treatments. The duration of treatment is often extended to mimic the actual
use of a product during marketing. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of a BLA. In
certain instances, FDA may condition approval of a BLA on the sponsor’s agreement to conduct additional clinical trials to further assess the biologic’s
safety and effectiveness after BLA approval. Such post-approval trials are sometimes referred to as Phase 4 clinical trials. These trials are used to gain
additional experience from the treatment of patients in the intended therapeutic indication and further document clinical benefit in the case of drugs
approved under Accelerated Approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in
withdrawal of approval for products.
Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA, and written
IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies
suggesting a significant risk to humans exposed to the biologic, findings from animal or in vitro testing that suggest a significant risk for human subjects,
and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1,
Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA, the IRB, or the sponsor may suspend
or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable
health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance
with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by
an independent group of qualified experts organized by the clinical 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 intervals based on access to certain data from the trial and may halt the
clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as interim data suggesting a lack of efficacy. We
may also suspend or terminate a clinical trial based on evolving business objectives and/or competitive climate. Concurrent with clinical trials, companies
usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug
product candidate as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The
manufacturing process must be capable of consistently producing quality batches of the drug product candidate and, among other things, must develop
methods for testing the identity, strength, quality, potency and purity of the final product. Additionally,
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appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug product candidate does not undergo
unacceptable deterioration over its shelf life.
BLA and FDA Review Process
Following trial completion, trial data are analyzed to assess safety and efficacy. The results of preclinical studies and clinical trials are then
submitted to the FDA as part of a BLA, along with proposed labeling for the product and information about the manufacturing process and facilities that
will be used to ensure product quality, results of analytical testing conducted on the chemistry of the drug product candidate, and other relevant
information. The BLA is a request for approval to market the biologic for one or more specified indications and must contain proof of safety, purity,
potency and efficacy, which is demonstrated by extensive preclinical and clinical testing. The application may include both negative or ambiguous results
of preclinical and clinical trials as well as positive findings. Data may come from company-sponsored clinical trials intended to test the safety and efficacy
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 efficacy of the investigational product to the satisfaction of the FDA. FDA
approval of a BLA must be obtained before a biologic may be marketed in the United States.
Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a significant user fee, which is adjusted on
an annual basis. PDUFA also imposes an annual prescription drug product program fee. Fee waivers or reductions are available in certain circumstances,
including a waiver of the application fee for the first application filed by a small business.
Once a BLA has been accepted for filing, which occurs, if at all, sixty days after the BLA’s submission, the FDA’s goal is to review BLAs within
10 months of the filing date for standard review or six months of the filing date for priority review, if the application is for a product intended for a serious
or life-threatening condition and the product, if approved, would provide a significant improvement in safety or effectiveness. The FDA has substantial
discretion in the approval process and may refuse to accept any application or decide that the data is insufficient for approval, and may require additional
preclinical, clinical or other studies before it accepts the filing. Additionally, the review process is often significantly extended by FDA requests for
additional information or clarification.
After the BLA submission is accepted for filing, the FDA reviews the BLA to determine, among other things, whether the proposed drug product
candidate is safe and effective for its intended use, and whether the drug product candidate is being manufactured in accordance with cGMP to assure and
preserve the drug product candidate’s identity, strength, quality, purity and potency. The FDA may refer applications for novel drug product candidates or
drug product candidates which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other
experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound
by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. The FDA will likely re-
analyze the clinical trial data, which could result in extensive discussions between the FDA and us during the review process. The review and evaluation of
a BLA by the FDA is extensive and time consuming and may take longer than originally planned to complete, and we may not receive a timely approval, if
at all.
Before approving a BLA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether
the facilities comply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in
compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. In addition, before
approving a BLA, the FDA may also audit data from clinical trials to ensure compliance with GCP requirements. After the FDA evaluates the application,
manufacturing process and manufacturing facilities, it 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 indicates that the review
cycle of the application is complete and the application will not be approved in its present form. A Complete Response Letter usually describes all of the
specific deficiencies in the BLA identified by the FDA. The Complete Response Letter may require additional clinical data and/or an additional pivotal
Phase 3 clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. If a
Complete Response Letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, withdraw the
application or request a hearing. Even if such data and information is submitted, the FDA may
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ultimately decide that the BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive, and the FDA may
interpret data differently than we interpret the same data.
There is no assurance that the FDA will ultimately approve a product for marketing in the United States, and we may encounter significant
difficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly limited to specific populations,
severities of allergies, and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further,
the FDA may require that certain contraindications, warnings or precautions be included in the product labeling or may condition the approval of the BLA
on other changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-market testing or clinical
trials and surveillance to monitor the effects of approved products. For example, the FDA may require Phase 4 testing which involves clinical trials
designed to further assess the product’s safety and effectiveness and may require testing and surveillance programs to monitor the safety of approved
products that have been commercialized. The FDA may also place other conditions on approvals including the requirement for a Risk Evaluation and
Mitigation Strategy, or REMS, to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a
proposed REMS. The FDA will not approve the BLA without an approved REMS, if required. A REMS could include medication guides, physician
communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of
these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals
may be withdrawn for non-compliance with regulatory standards or based on the results of post-market studies or surveillance programs. Additionally,
post-approval, many types of changes to the approved product, such as adding new indications, changing manufacturing processes and adding labeling
claims, are subject to further testing requirements and FDA review and approval. Such post-approval requirements can be costly and time-consuming and
can affect the potential market and profitability of the product.
Orphan Designation and Exclusivity
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition,
which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United
States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of
disease or condition will be recovered from sales of the product.
Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the identity of the
therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the
duration of the regulatory review and approval process.
If a product that has orphan drug designation subsequently receives the first FDA approval for the disease or condition for which it has such
designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug
or biologic for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority
to the product with orphan exclusivity on the basis of greater effectiveness or safety or providing a major contribution to patient care or in instances of drug
supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different
indication but that could be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven
years if a competitor obtains approval before we do for the same product, as defined by the FDA, for the same indication we are seeking approval, or if our
product is determined to be contained within the scope of the competitor’s product for the same indication or disease. If we pursue marketing approval for
an indication broader than the orphan drug designation we have received, we may not be entitled to orphan drug exclusivity. Orphan drug status in the
European Union has similar, but not identical, requirements and benefits.
Expedited Development and Review Programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs and biological products that meet
certain criteria. Specifically, new drugs and biological products are eligible for Fast Track designation if they are intended to treat a serious or life-
threatening condition and nonclinical or
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clinical data demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product
and the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a
Fast Track product concurrently with, or at any time after, submission of an IND, and the FDA must determine if the product qualifies for Fast Track
designation within 60 days of receipt of the sponsor’s request. Under the Fast Track designation, the FDA may consider for review sections of the
marketing application on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections
of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required
user fees upon submission of the first section of the application.
Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended
to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review, or review within a six-
month timeframe from the date a complete BLA is accepted for filing, if it has the potential to provide a significant improvement in safety and
effectiveness compared to available therapies. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or
biological product designated for priority review in an effort to facilitate the review.
Additionally, a product may be eligible for accelerated approval. An investigational drug may obtain accelerated approval if it treats a serious or
life-threatening condition and generally provides a meaningful advantage over available therapies and demonstrates an effect on a surrogate endpoint that is
reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is
reasonably likely to predict an effect on IMM or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug or
biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug
shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to
assure safe use of the drug, such as:
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distribution restricted to certain facilities or physicians with special training or experience; or
distribution conditioned on the performance of specified medical procedures.
The limitations imposed would be commensurate with the specific safety concerns presented by the product. In addition, the FDA currently
requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch
of the product. Fast Track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development
or approval process.
Breakthrough Designation
A product can be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening condition and preliminary clinical
evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. A sponsor may
request that a drug product candidate be designated as a breakthrough therapy concurrently with, or at any time after, the submission of an IND, and the
FDA must determine if the drug product candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. If so
designated, the FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor
throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to gather preclinical and clinical data
is as efficient as practicable, involving senior managers and experienced review staff in a cross-disciplinary review, assigning a cross-disciplinary project
lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and
the sponsor, and taking steps to ensure that the design of the clinical trials is as efficient as practicable.
Accelerated Approval for Regenerative Medicine Advanced Therapies
As part of the 21st Century Cures Act, Congress amended the FDCA to create an accelerated approval program for regenerative advanced
therapies, which include cell therapies, therapeutic tissue engineering products,
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human cell and tissue products, and combination products using any such therapies or products. Regenerative medicine advanced therapies do not include
those human cells, tissues, and cellular and tissue-based products regulated solely under section 361 of the Public Health Service Act and 21 CFR Part
1271. The new program is intended to facilitate efficient development and expedite review of regenerative medicine advanced therapies, which are
intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition. A drug sponsor may request that FDA designate a drug as a
regenerative medicine advanced therapy concurrently with or at any time after submission of an IND. FDA has 60 calendar days to determine whether the
drug meets the criteria, including whether there is preliminary clinical evidence indicating that the drug has the potential to address unmet medical needs
for a serious or life-threatening disease or condition. A new drug application or BLA for a regenerative medicine advanced therapy may be eligible for
priority review or accelerated approval through (1) surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or (2) reliance
upon data obtained from a meaningful number of sites. Benefits of such designation also include early interactions with FDA to discuss any potential
surrogate or intermediate endpoint to be used to support accelerated approval. A regenerative medicine advanced therapy that is granted accelerated
approval and is subject to post approval requirements may fulfill such requirements through the submission of clinical evidence, clinical studies, patient
registries, or other sources of real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or post approval
monitoring of all patients treated with such therapy prior to its approval.
Pediatric Trials
Under the Pediatric Research Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and efficacy of the
product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for
which the product is safe and effective. The FDCA requires that a sponsor who is planning to submit a marketing application for a drug or biological
product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial
Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase 2 meeting or as may be agreed between the sponsor and FDA. The initial PSP must
include an outline of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints
and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or
partial waiver of the requirement to provide data from pediatric studies along with supporting information. The FDA and the sponsor must reach agreement
on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on
data collected from nonclinical studies, early phase clinical trials, and/or other clinical development programs. The FDA may, on its own initiative or at the
request of the applicant, grant deferrals for submission of data or full or partial waivers.
Post-Marketing Requirements
Following approval of a new product, a manufacturer and the approved product are subject to continuing regulation by the FDA, including, among
other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with the product, providing
the regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion and
advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting products for uses or in
patient populations that are not described in the product’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and
educational activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available drugs and
biologics for off-label uses, manufacturers may not market or promote such off-label uses.
Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and
other regulators, which may or may not be received or may result in a lengthy review process. Prescription drug promotional materials must be submitted
to the FDA in conjunction with their first use.
In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA
regulations require that products be manufactured in specific approved facilities and in accordance with cGMPs. We rely, and expect to continue to rely, on
third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. cGMP regulations require,
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among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to
investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved products are
required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area
of production and quality control to maintain cGMP compliance. These regulations also impose certain organizational, procedural and documentation
requirements with respect to manufacturing and quality assurance activities. BLA holders using contract manufacturers, laboratories or packagers are
responsible for the selection and monitoring of qualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where
applicable, their suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to
cGMP, could result in enforcement actions that interrupt the operation of any such facilities or the ability to distribute products manufactured, processed or
tested by them. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA,
including, among other things, recall or withdrawal of the product from the market.
The FDA also may require post-approval testing, sometimes referred to as Phase 4 testing, REMS and post-marketing surveillance to monitor the
effects of an approved product or place conditions on an approval that could restrict the distribution or use of the product. Discovery of previously
unknown problems with a product or the failure to comply with applicable FDA requirements can have negative consequences, including adverse publicity,
judicial or administrative enforcement, untitled or warning letters from the FDA, mandated corrective advertising or communications with doctors, and
civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling,
including the addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also, new
government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or
prevent regulatory approval of our products under development.
Other Regulatory Matters
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in
addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, or CMS, other divisions of the Department of Health
and Human Services (e.g., the Office of Inspector General, or OIG, and Office for Civil Rights), the Drug Enforcement Administration, the Consumer
Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and
state and local governments. In the United States, sales, marketing and scientific/educational programs must also comply with federal and state fraud and
abuse laws, data privacy and security laws, transparency laws, and pricing and reimbursement requirements in connection with governmental payor
programs, among others. The handling of any controlled substances must comply with the U.S. Controlled Substances Act and Controlled Substances
Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act.
Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection and unfair competition laws.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing,
storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure to
meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts, including government
contracts. In addition, even if a firm complies with FDA and other requirements, new information regarding the safety or efficacy of a product could lead
the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or withdrawal of future products marketed by us could materially
affect our business in an adverse way.
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Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example:
(i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or
(iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of the FDA approval of our drug product candidates, some of our U.S. patents may be eligible
for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman
Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product
development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14
years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the
submission date of a BLA plus the time between the submission date of a BLA and the approval of that application, except that the review period is
reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for the extension
and the application for the extension must be submitted prior to the expiration of the patent. The U.S. PTO, in consultation with the FDA, reviews and
approves the application for any patent term extension or restoration. In the future, we may apply for restoration of patent term for our currently owned or
licensed patents to add patent life beyond its current expiration date, depending on the expected length of the clinical trials and other factors involved in the
filing of the relevant BLA.
An abbreviated approval pathway for biological products shown to be biosimilar to, or interchangeable with, an FDA-licensed reference biological
product was created by the Biologics Price Competition and Innovation Act of 2009, or BPCI Act, which was part of the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively the ACA. This amendment to the PHSA attempts to
minimize duplicative testing. Biosimilarity, which requires that the biological product be highly similar to the reference product notwithstanding minor
differences in clinically inactive components and that there be no clinically meaningful differences between the product and the reference product in terms
of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability requires that a
biological product be biosimilar to the reference product and that the product can be expected to produce the same clinical results as the reference product
in any given patient and, for products administered multiple times, that the product and the reference product 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 biological product.
However, complexities associated with the larger, and often more complex, structure of biological products as compared to small molecule drugs, as well as
the processes by which such products are manufactured, pose significant hurdles to implementation that are still being worked out by the FDA.
A reference biological product is granted twelve years of exclusivity from the time of first licensure of the product, and the FDA will not accept an
application for a biosimilar or interchangeable product based on the reference biological product until four years after first licensure. “First licensure”
typically means the initial date the particular product at issue was licensed in the United States. This does not include a supplement for the biological
product or a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related
entity) for a change that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device, or strength,
unless that change is a modification to the structure of the biological product and such modification changes its safety, purity, or potency. Whether a
subsequent application, if approved, warrants exclusivity as the “first licensure” of a biological product is determined on a case-by-case basis with data
submitted by the sponsor.
Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to
existing exclusivity periods and patent terms. This six-month exclusivity, which attaches to the twelve-year exclusivity period for reference biologics, may
be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “Written Request” for such a trial.
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Pricing and Reimbursement
United States
Sales of our products will depend, in part, on the extent to which our products, once approved, will be covered and reimbursed by third-party
payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly
reducing reimbursements for medical products and services. The process for determining whether a third-party payor will provide coverage for a drug
product, including a biologic, typically is separate from the process for setting the price of a drug product or for establishing the reimbursement rate that a
payor will pay for the drug product once coverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, also
known as a formulary, which might not include all of the approved drugs for a particular indication.
In order to secure coverage and reimbursement for any drug product candidate that might be approved for sale, we may need to conduct expensive
pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the drug product candidate, in addition to the costs
required to obtain FDA or other comparable regulatory approvals. Whether or not we conduct such studies, our drug product candidates may not be
considered medically necessary or cost-effective. A third-party payor’s decision to provide coverage for a drug product does not imply that an adequate
reimbursement rate will be approved. Third party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an
appropriate return on our investment in product development. In the United States, the principal decisions about reimbursement for new drug products are
typically made by the U.S. Centers for Medicare and Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, or
HHS. CMS decides whether and to what extent a new drug product will be covered and reimbursed under Medicare, and private payors tend to follow
CMS to a substantial degree. However, no uniform policy of coverage and reimbursement for drug products exists among third-party payors and coverage
and reimbursement levels for drug products can differ significantly from payor to payor. Additionally, one third-party payor’s decision to cover a particular
product or service does not ensure that other payors will also provide coverage for the product or service, and the level of coverage and reimbursement can
differ significantly from payor to payor. As a result, the coverage determination process will often require us to provide scientific and clinical support for
the use of our products to each payor separately and can be a time-consuming process, with no assurance that coverage and adequate reimbursement will be
applied consistently or obtained in the first instance.
The containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs, including biologics, have been
a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment
programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. In many countries, the prices of
drug products are subject to varying price control mechanisms as part of national health systems. In general, the prices of drug products under such systems
are substantially lower than in the United States. Other countries allow companies to fix their own prices for drug products, but monitor and control
company profits. Accordingly, in markets outside the United States, the reimbursement for drug products may be reduced compared with the United States.
Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures,
could further limit our net revenue and results. Decreases in third-party reimbursement for our drug product candidate or a decision by a third-party payor
to not cover our drug product candidate could reduce physician usage of the drug product candidate and have a material adverse effect on our sales, results
of operations and financial condition.
Outside of the United States, the pricing of pharmaceutical products is subject to governmental control in many countries. For example, 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 approved. Some countries may require the completion of additional studies that compare the cost effectiveness of a
particular therapy to currently available therapies or so-called health technology assessments, in order to obtain reimbursement or pricing approval. Other
countries may allow companies to fix their own prices for products, but monitor and control product volumes and issue guidance to physicians to limit
prescriptions. Efforts to control prices and utilization of pharmaceutical products will likely continue as countries attempt to manage healthcare
expenditures.
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Other Healthcare Laws and Compliance Requirements
Healthcare providers, physicians, and third-party payors will play a primary role in the recommendation and prescription of any products for which
we obtain marketing approval. Our business operations in the United States and our current and future arrangements with clinical investigators, healthcare
providers, consultants, third-party payors and patients may expose us to broadly applicable federal and state 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 drugs for which
we obtain marketing approval. In the United States, these laws include: the federal Anti-Kickback Statute, the False Claims Act, and HIPAA.
The Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to
knowingly and willfully solicit, receive, offer or pay any remuneration, directly or indirectly, in cash or in kind, that is intended to induce or reward
referrals, including the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare
program, such as Medicare or Medicaid. Violations of this law are punishable by imprisonment, criminal fines, administrative civil money penalties and
exclusion from participation in federal healthcare programs. In addition, a person or entity does not need to have actual knowledge of the statute or specific
intent to violate it. Moreover, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
Although we would not submit claims directly to payors, drug manufacturers can be held liable under the federal civil False Claims Act, which
imposes civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities (including manufacturers) for, among other
things, knowingly presenting, or causing to be presented to federal programs (including Medicare and Medicaid) claims for items or services, including
drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Penalties for
a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties for each separate false
claim, the potential for exclusion from participation in federal healthcare programs and, although the federal False Claims Act is a civil statute, conduct that
results in a False Claims Act violation may also implicate various federal criminal statutes. The government may deem manufacturers to have “caused” the
submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off- label.
Claims which include items or services resulting from a violation of the federal Anti-Kickback Statute are false or fraudulent claims for purposes of the
False Claims Act. Our future marketing and activities relating to the reporting of wholesaler or estimated retail prices for our products, if approved, the
reporting of prices used to calculate Medicaid rebate information and other information affecting federal, state and third-party reimbursement for our
products, and the sale and marketing of our product candidates, are subject to scrutiny under this law.
HIPAA created new federal criminal statutes that prohibit among other things, knowingly and willfully executing, or attempting to execute, a
scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property owned by, or under the
control or custody of, any healthcare benefit program, including private third party payors, knowingly and willfully embezzling or stealing from a
healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or
covering up by trick, scheme or device, a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of
or payment for healthcare benefits, items or services. Like the federal Anti-Kickback Statute a person or entity does not need to have actual knowledge of
the statute or specific intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or
caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed
or is false or fraudulent.
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We may be subject to data privacy and security regulations by both the federal government and the states in which we conduct our business.
HIPAA, as amended by HITECH, and their implementing regulations, mandates, among other things, the adoption of uniform standards for the electronic
exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health
information, which require the adoption of administrative, physical and technical safeguards to protect such information. Among other things, HITECH
makes HIPAA’s security standards directly applicable to business associates, defined as independent contractors or agents of covered entities, which include
certain health care providers, health plans, and healthcare clearinghouses, that create, receive or obtain protected health information in connection with
providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered
entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce
the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy
and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in
significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in
the imposition of significant civil and criminal penalties.
Additionally, the federal Physician Payments Sunshine Act, or the Sunshine Act, within the ACA, and its implementing regulations, require that
certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health
Insurance Program (with certain exceptions) report annually to CMS information related to certain payments or other transfers of value made or distributed
to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, physicians, certain other healthcare
professionals, and teaching hospitals and to report annually certain ownership and investment interests held by physicians, certain other healthcare
professionals, and their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to
certain non-physician providers such as physician assistants and nurse practitioners. In addition, many states also govern the reporting of payments or other
transfers of value, many of which differ from each other in significant ways, are often not pre-empted, and may have a more prohibitive effect than the
Sunshine Act, thus further complicating compliance efforts.
Similar federal, state and foreign fraud and abuse laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or
marketing arrangements and claims involving healthcare items or services. Such laws are generally broad and are enforced by various state agencies and
private actions. Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in
addition to items and services reimbursed under Medicaid and other state programs. Some state laws require pharmaceutical companies to comply with the
pharmaceutical industry’s voluntary compliance guidelines and the relevant federal government compliance guidance, and require drug manufacturers to
report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.
In order to distribute products commercially, we must comply with state laws that require the registration of manufacturers and wholesale
distributors of drug and biological products in a state, including, in certain states, manufacturers and distributors who ship products into the state even if
such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to
establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable
of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical and
biotechnology companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales,
marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare
entities from providing certain physician prescribing data to pharmaceutical and biotechnology companies for use in sales and marketing, and to prohibit
certain other sales and marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.
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The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform,
especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of
interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry. 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, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, individual imprisonment,
exclusion of drugs from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations,
any of which could adversely affect our ability to operate our business and our financial results. 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 exclusions from government funded healthcare programs. Ensuring business arrangements comply with applicable healthcare laws, as
well as responding to possible investigations by government authorities, can be time- and resource- consuming and can divert a company’s attention from
the business.
Current and Future Legislation
In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes
and proposed changes regarding the healthcare system directed at broadening the availability of healthcare, improving the quality of healthcare, and
containing or lowering the cost of healthcare.
For example, in March 2010, the ACA was enacted in the United States. The ACA includes measures that have significantly changed, and are
expected to continue to significantly change, the way healthcare is financed by both governmental and private insurers. Among the provisions of the ACA
of greatest importance to the pharmaceutical industry are that the ACA:
1.
2.
3.
4.
5.
6.
7.
made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising
the minimum basic Medicaid rebate on average manufacturer price, or AMP, on most branded prescription drugs and adding a new rebate
calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded
products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP;
imposed a requirement on manufacturers of branded drugs to provide a 50% point-of-sale discount (increased to 70% pursuant to the
Bipartisan Budget Act of 2018, effective as of January 1, 2019) off the negotiated price of branded drugs dispensed to Medicare Part D
beneficiaries in the coverage gap (i.e., “donut hole”) as a condition for a manufacturer’s outpatient drugs being covered under Medicare
Part D;
extended a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
expanded the entities eligible for discounts under the 340B Drug Discount Program;
established a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs
that are inhaled, infused, instilled, implanted, or injected;
imposed an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs, apportioned among
these entities according to their market share in certain government healthcare programs, and
established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical
effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute
may affect the market for certain pharmaceutical products. The ACA established the Center for Medicare and Medicaid Innovation within
CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending,
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potentially including prescription drug spending. Funding has been allocated to support the mission of the Center for Medicare and
Medicaid Innovation through 2019.
Various portions of the ACA are currently undergoing constitutional challenges in the Fifth Circuit Court and the United States Supreme Court.
The Trump Administration has issued various Executive Orders eliminating cost sharing subsidies and various provisions that would impose a fiscal burden
on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or
medical devices, and Congress has introduced several pieces of legislation aimed at significantly revising or repealing the ACA. It is unclear whether the
ACA will be overturned, repealed, replaced, or further amended, and we cannot predict what affect further changes to the ACA would have on our
business.
Moreover, in May 2018, the Trump administration released its “Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,” or the
Blueprint. The Blueprint contains several potential regulatory actions and legislative recommendations aimed at lowering prescription drug prices,
including measures to promote innovation and competition for biologics, changes to Medicare Part D to give plan sponsors more leverage when negotiating
prices with manufacturers, and updating the Medicare drug-pricing dashboard to make price increases and generic competition more transparent. In
addition, HHS released a Request for Information, or RFI, soliciting public input on ways to lower drug pricing. Together, the recommendations in the
Blueprint and RFI, if enacted by Congress and HHS, could lead to changes to Medicare Parts B and D, including the transition of certain drugs covered
under Part B to Part D or the offering of alternative purchasing options under the Competitive Acquisition Program that currently applies to selected drugs
and biologics covered under Part B. In May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy, a type of
prior authorization, for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019. While
most of the proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have
each indicated that it will continue to seek new legislative, administrative and/or additional measures to control drug costs.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. 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 2013 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 up to 2% per
fiscal year, which went into effect in April 2013, following passage of the Bipartisan Budget Act of 2013, and will remain in effect through 2029 unless
additional congressional action is taken. Further, 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. Any reduction in
reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors, which may adversely
affect our future profitability. Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug
pricing practices.
On May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right to Try Act,
was signed into law. The law, among other things, provides a federal framework for certain patients to request access to certain investigational new drug
products that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. There is no obligation for a pharmaceutical
manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.
We cannot predict what healthcare reform initiatives may be adopted in the future. Further federal, state and foreign legislative and regulatory
developments are likely, and we expect ongoing initiatives to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated
revenues from product candidates and may affect our overall financial condition and ability to develop product candidates.
The Foreign Corrupt Practices Act
The FCPA prohibits any U.S. individual or business from paying, offering, or 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
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with 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.
Additional Regulation
In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational
Safety and Health Act, the Resource Conservancy and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws
govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastes generated by, our operations. If our
operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental
fines. We believe that we are in material compliance with applicable environmental laws and that continued compliance therewith will not have a material
adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations.
Europe / Rest of World Government Regulation
In addition to regulations in the United States, we may be subject to a variety of regulations in other jurisdictions that we may in the future select
governing, among other things, clinical trials and any commercial sales and distribution of our products. Whether or not we obtain FDA approval of a
product, we would need to obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or
marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical
trial application much like the IND prior to the commencement of human clinical trials. In the EU, for example, a clinical trial application must be
submitted to each country’s national health authority and an independent ethics committee, much like the FDA and IRB, respectively. Once the clinical trial
application is approved in accordance with a country’s requirements, clinical trial development may proceed. Because biologically sourced raw materials
are subject to unique contamination risks, their use may be restricted in some countries.
The requirements and process governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country.
In all cases, the clinical trials must be conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have
their origin in the Declaration of Helsinki.
To obtain regulatory approval of an investigational drug or biological product under EU regulatory systems, we must submit an MAA. The
application used to file the BLA in the United States is similar to that required in the EU, with the exception of, among other things, country-specific
document requirements.
For other countries outside of the EU, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials must be conducted in
accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we or our potential collaborators fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
European Union General Data Protection Regulation
In addition to EU regulations related to the approval and commercialization of our products, we may be subject to the EU’s General Data
Protection Regulation, or GDPR. The GDPR imposes stringent requirements for controllers and processors of personal data of persons in the EU,
including, for example, more robust disclosures to individuals and a strengthened individual data rights regime, shortened timelines for data breach
notifications, limitations on retention of information, increased requirements pertaining to special categories of data, such as health data, and additional
obligations when we contract with third-party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the
transfer of personal data out of the European Union to the United States and other third countries. In addition, the GDPR provides that EU member states
may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric or health data.
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The GDPR applies extraterritorially, and we may be subject to the GDPR because of our data processing activities that involve the personal data of
individuals located in the European Union, such as in connection with our EU clinical trials. Failure to comply with the requirements of the GDPR and the
applicable national data protection laws of the EU member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide annual
turnover of the preceding financial year, whichever is higher, and other administrative penalties. GDPR regulations may impose additional responsibility
and liability in relation to the personal data that we process and we may be required to put in place additional mechanisms to ensure compliance with the
new data protection rules.
Employees
As of December 31, 2019, we had 22 employees, 21 of whom were full-time. Of those, 16 were engaged in research and development activities.
All company employees are located in Philadelphia, PA, or the surrounding area. We do not have any employees that are represented by a labor union or
covered under a collective bargaining agreement. We consider our relationship with our employees to be good.
Corporate History and Trademarks
We were incorporated under the laws of the State of Delaware in April 2017 under the name Tycho Therapeutics, Inc. In August 2018, our
corporate name was changed to Cabaletta Bio, Inc. Our principal executive offices are located at 2929 Arch Street, Suite 600, Philadelphia, PA 19104 and
our telephone number is (267) 759-3100. Our website address is www.cabalettabio.com. We do not incorporate the information on or accessible through
our website into this Annual Report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website to be part
of this Annual Report on Form 10-K. We have included our website address in this Annual Report on Form 10-K solely as an inactive textual reference.
We view our operations and measure our business as one reportable segment. All of the Company's tangible assets are held in the United States.
Refer to Note 2, Summary of Significant Accounting Policies, to our financial statements appearing elsewhere in this Annual Report on Form 10-K for
additional information.
We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This
Annual Report on Form 10-K may also contain trademarks, service marks and trade names of third parties, which are the property of their respective
owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this Annual Report on Form 10-K is not intended to, and
does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to
in this Annual Report on Form 10-K may appear without the ®, ™ or SM symbols, but the omission of such references is not intended to indicate, in any
way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable owner of these trademarks, service marks and
trade names.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website located at
www.cabalettabio.com as soon as reasonably practicable after they are filed with or furnished to the SEC. These reports are also available at the SEC’s
Internet website at www.sec.gov.
A copy of our Corporate Governance Guidelines, Code of Conduct and Business Ethics and the charters of the Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee are posted on our website, www.cabalettabio.com, under the heading “Investors &
Media.”
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Item 1A. Risk Factors.
Our business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described
below, together with all of the other information contained in this Annual Report on Form 10-K, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the condensed financial statements and the related notes. If any of the following risks actually occur, it
could harm our business, prospects, operating results and financial condition and future prospects. In such event, the market price of our common stock
could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described
below and elsewhere in this Annual Report.
Risks Related to Our Business, Technology and Industry
We are early in our development efforts. If we are unable to advance our product candidates through clinical development, obtain regulatory
approval and ultimately commercialize our product candidates, or experience significant delays in doing so, our business will be materially
harmed.
We are early in our development efforts. We plan to initiate our DesCAARTesTM Trial in 2020. Our ability to generate product revenues, which we
do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of one or more of our
product candidates. Even if we are able to develop and commercialize a marketable product, we may face challenges generating revenue from product
sales. The success of our product candidates will depend on several factors, including the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
successful completion of preclinical studies resulting in data that is supportive of advancing to an IND submission;
successful submission and acceptance of INDs or comparable applications;
successful initiation of clinical trials;
demonstration of adequate safety to progress to a therapeutic dose level;
successful patient enrollment in and completion of clinical trials;
receipt and related terms of regulatory and marketing approvals and licensures from applicable regulatory authorities;
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers for clinical supply and
commercial manufacturing of our product candidates;
making arrangements with various medical divisions across hospitals for administration of our product candidates, including with cancer
treatment centers to conduct leukapheresis and with the relevant hospital divisions to perform infusion;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
establishing sales, marketing and distribution and patient administration capabilities and launching commercial sales of our products, if and
when licensed, whether alone or in collaboration with others;
acceptance of our products, if and when licensed, by patients, the medical community and third-party payors;
effectively competing with other therapies targeting the same indications as our product candidates;
obtaining and maintaining third-party coverage and adequate reimbursement; and
maintaining a continued acceptable safety profile of our products following licensure.
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If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or be unable to successfully
commercialize our product candidates, which would materially harm our business. If we do not receive regulatory approvals for our product candidates, we
may not be able to continue our operations.
Cellular therapies, including our engineered CAAR T product candidates, represent a novel approach to the treatment of B cell-mediated
autoimmune diseases, which creates significant challenges for us. Negative perception or increased regulatory scrutiny of any product
candidates that we develop could adversely affect our ability to conduct our business or obtain regulatory approvals for such product
candidates.
Cellular therapies are a novel approach and negative perception or increased regulatory scrutiny of any product candidates that we develop could
adversely affect our ability to conduct our business or obtain regulatory approvals for such product candidates. Cellular therapies in general, and CAAR T
cell therapies in particular, remain novel therapies, with no cellular immunotherapies licensed to date in the United States or the European Union to treat
autoimmune diseases or alloimmune responses. CAAR T cell therapies may not gain the acceptance of the public or the medical community. For example,
CAR Ts and other cellular therapies have in some cases caused severe side effects, including death, and their broader use may therefore be limited. Even if
CAR Ts and other cellular therapies are accepted by the public and medical community in the short term, long-term adverse events observed in these
therapies may increase negative perception and regulatory scrutiny. Although our CAAR Ts are different from CAR Ts and other cellular therapies, they
may be viewed in the same vein, limiting their market acceptance. Public perception may be influenced by claims that gene therapy, including the insertion
of a transgene, is unsafe, and products incorporating gene therapy may not gain the acceptance of the public or the medical community. The patient
populations targeted by our product candidates are also typically not at risk of near-term death, even if they may suffer life-threatening symptoms, so
patients will need to deem the benefits of cell therapy to be worth the risk of unknown potential adverse side effects. Our success will depend upon
physicians who specialize in the treatment of B cell-mediated autoimmune diseases targeted by our product candidates prescribing treatments that involve
the use of our product candidates in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may
be available. Adverse events in clinical trials of our product candidates or in clinical trials of others developing similar products and the resulting publicity,
as well as any other adverse events in the field of cellular therapies, could result in a decrease in demand for any product that we may develop.
We are developing a pipeline of CAAR T product candidates that are intended for use in treating individuals with B cell-mediated autoimmune
disease. Advancing these novel product candidates creates significant challenges for us, including:
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manufacturing our product candidates to our specifications and in a timely manner to support our clinical trials, and, if licensed,
commercialization;
sourcing clinical and, if licensed, commercial supplies for the materials used to manufacture our product candidates;
understanding and addressing variability in the quality and quantity of a subject’s T cells, which could ultimately affect our ability to
manufacture clinical supply and, if licensed, commercial supply of our product candidates in a reliable and consistent manner;
educating medical personnel regarding the potential side effect profile of our product candidates, if licensed, such as the potential adverse
side effects related to pemphigus flare from infusion of activated T cells or medication taper, cytokine release syndrome, or CRS, or other
unexpected adverse effects of therapy with our product candidates;
facilitating patient access to the limited number of facilities able to administer our product candidates, if licensed;
using medicines to manage adverse side effects of our product candidates that may not adequately control the side effects and/or may have
a detrimental impact on the efficacy of the treatment;
potentially utilizing preconditioning agents in patients to enhance engraftment in advance of administering our product candidates, which
may increase the risk of adverse side effects;
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obtaining and maintaining regulatory approval for our product candidates, as the FDA and other regulatory authorities have limited or no
experience with development of engineered T cell therapies for the treatment of B cell-mediated autoimmune diseases;
establishing sales and marketing capabilities upon obtaining any regulatory approval to gain market acceptance of a novel therapy; and
managing costs of inputs and other supplies while scaling production.
In addition, preclinical murine and other animal models may not exist or be adequate for some or all of the B cell-mediated autoimmune diseases
we choose to pursue in our programs, and because we have not commenced clinical trials of any of our product candidates, we are unable to predict
whether there may be short-term or long-term effects from treatment with any product candidates that we develop. In developing our product candidates,
we have not exhaustively explored different options in the method for manufacturing CAAR T cells. We may find our existing manufacturing process may
be substantially improved with future design or process changes, necessitating further clinical testing, delaying commercial launch of our first products, and
causing us to incur additional expenses. For example, while we have used a lentiviral vector in our manufacturing process, we may in the future find that
another viral vector or non-viral vector-based process offers advantages. Switching from one lentiviral vector to another or switching from lentiviral to
another delivery system would necessitate additional process development and clinical testing, and this may delay the development of existing product
candidates.
In addition, we do not know the doses to be evaluated in pivotal trials or, if licensed, commercially. Finding a suitable dose may delay our
anticipated clinical development timelines. Our expectations with regard to our scalability and costs of manufacturing may vary significantly as we develop
our product candidates and understand these critical factors. We may experience delays in developing a sustainable, reproducible and scalable
manufacturing process or transferring that process to commercial partners, which may prevent us from completing our clinical studies or commercializing
our product candidates on a timely or profitable basis, if at all.
Moreover, our product candidates may not perform successfully in clinical trials or may be associated with adverse events that distinguish them
from the chimeric antigen receptor T, or CAR T, therapies that have previously been licensed. For instance, subjects in our clinical trials will be infused
with our proposed therapies, and may possess strongly activating soluble antibodies, which, are not present in oncology patients and when they interact
with our infused product candidates, could result in potential adverse side effects, such as CRS. Unexpected side effects or clinical outcomes would
significantly impact our business. Adverse side effects caused by even one of our product candidates could negatively affect our ability to develop future
product candidates based on our CABA platform.
In addition, two of our current product candidates, DSG3/1-CAART and FVIII-CAART, and certain of our future product candidates may require
introducing large transgenes into T cells, and lentiviral vectors may have too limited a genome capacity to accomplish this process. We currently use
lentiviral vector transduction for transgene delivery. However, lentiviral vectors have a limited genome capacity that restricts the size of the transgene that
can be delivered using this vector system. For example, designing a lentiviral vector that will have sufficient capacity to introduce DSG3 CAAR and DSG1
CAAR together into T cells may not be possible. In addition to reducing lentiviral vector titers that may substantially increase the cost of gene transfer, it
may be entirely unsuccessful, thus necessitating use of alternative strategies for transfer of these larger transgenes into T cells.
Further, the clinical study requirements of the FDA and other regulatory agencies and the criteria they use to determine the safety, potency and
purity of a product candidate are determined according to the type, complexity, novelty and intended use and market of the potential products. The
regulatory approval process for novel product candidates such as ours is less clear, and can be more complex and consequently have higher development
risk, be more expensive and take longer than for other, better known or extensively studied pharmaceutical or other product candidates. Approvals by the
FDA for existing cell therapies treating B cell-mediated diseases, such as Kymriah (Novartis Pharmaceuticals Corporation) and Yescarta (Gilead Sciences,
Inc.), may not be indicative of what the FDA may require for approval of our therapies. Approvals by any regulatory agency may not be indicative of what
any other regulatory agency may require for approval or what such regulatory agencies may require for approval in connection with new product
candidates. As we advance our product candidates, we will be required to consult with these regulatory agencies and comply with applicable requirements
and guidelines. If we fail to do so, we may be
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required to delay or discontinue development of such product candidates. These additional processes may result in a review and approval process that is
longer than we otherwise would have expected. More restrictive statutory regimes, government regulations or negative public opinion would have an
adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of
our product candidates or demand for any products we may develop.
In addition, responses by agencies at the federal and state level to negative public perception or ethical concerns may result in new legislation or
regulations that could limit our ability to develop or commercialize any product candidates, obtain or maintain regulatory approval or otherwise achieve
profitability. The FDA has expressed interest in further regulating biotechnology products, such as cellular therapies. Agencies at both the federal and state
level in the United States, as well as the U.S. Congressional committees and other government entities or governing agencies have also expressed interest
in further regulating the biotechnology industry. Such action may delay or prevent commercialization of some or all of our product candidates. Adverse
developments in clinical trials of cellular therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements
for approval of any of our product candidates. These regulatory review agencies and committees and the new requirements or guidelines they promulgate
may lengthen the regulatory review process, require us to perform additional studies or trials, increase our development costs, lead to changes in regulatory
positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or
restrictions.
Patients receiving T cell-based immunotherapies, such as our product candidates, may experience serious adverse events, including
neurotoxicity, CRS and killing of cells other than the intended B cells that express the autoantibodies. If our product candidates are revealed to
have high and unacceptable severity and/or prevalence of side effects or unexpected characteristics, their clinical development, regulatory
approval, and commercial potential will be negatively impacted, which will significantly harm our business, financial condition and prospects.
Our product candidates are CAAR T cell-based immunotherapies. There is a possibility that our product candidates could have adverse side effects,
such as neurotoxicity and CRS. In other similarly designed cellular immunotherapies to treat cancer, there have been life threatening events related to
severe neurotoxicity and CRS requiring intense medical intervention, such as intubation or medications to support blood pressure, and in several cases,
resulted in death. Severe neurotoxicity is a condition that is currently defined clinically by cerebral edema, confusion, drowsiness, speech impairment,
tremors, seizures or other central nervous system side effects, when such side effects are serious enough to lead to intensive care. CRS is a condition that is
currently defined clinically by certain symptoms related to the release of cytokines, which can include fever, chills and low blood pressure, when such side
effects are serious enough to lead to intensive care with mechanical ventilation or significant medications to support blood pressure.
Our product candidates may have serious and potentially fatal targeting of cells within the body due to unexpected protein interactions with the
CAAR. Although we have completed multiple preclinical studies designed to screen for toxicity caused by unintended off-target recognition by the cell
binding domain of the DSG3 CAAR, our product candidates may still recognize and react with one or more proteins unrelated to the intended surface
immunoglobin target protein to which it is designed to link. If unexpected binding occurs in normal tissue, our product candidates may target and kill the
normal tissue in a patient, leading to serious and potentially fatal adverse events, undesirable side effects, toxicities or unexpected characteristics. Detection
of any unexpected targeting may halt or delay any ongoing clinical trials for our product candidates and prevent or delay regulatory approval. While we
have developed a preclinical screening process to identify cross-reactivity of our product candidates, we cannot be certain that this process will identify all
potential tissue that our product candidates may target. For example, a membrane protein array with DSG3-CAART yielded one weak signal against a
protein that is designed to bind to glycoproteins and which was detected in both the test and control conditions. Further analysis of this protein in
confirmatory cell-based assays repeatedly demonstrated that DSG3-CAART does not recognize nor activate against this protein. However, this further
analysis may prove to be inaccurate. Any unexpected targeting that impacts patient safety could materially impact our ability to advance our product
candidates into clinical trials or to proceed to marketing approval and commercialization.
Results of our studies could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Undesirable side
effects caused by our product candidates could cause us or regulatory
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authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA. The
FDA has requested and we have agreed to provide data on the subjects dosed in Part A of our Phase 1 trial of DSG3-CAART prior to dosing subjects in
Phase B. The FDA has communicated that the dosing of subjects in cohort Phase B1 is not subject to review of Part A data and that they will provide
feedback, if any, in a timely manner. In some cases, side effects such as neurotoxicity or CRS have resulted in clinical holds of ongoing clinical trials and/or
discontinuation of the development of the product candidate. Given that the autoimmune and alloimmune diseases we are seeking to treat are, in some
cases, less serious than the later stage cancers being treated with other immunotherapy products, we believe the FDA and other regulatory authorities likely
will apply a different benefit-risk assessment thresholds such that even if our product candidate demonstrated a similar safety profile as current CAR T
therapies, the FDA may ultimately determine that the harmful side effects outweigh the benefits and require us to cease clinical trials or deny approval of
our product candidates. We believe tolerance for adverse events in the patient population being pursued with CAAR T cell therapies will be lower than it is
in oncology, and the risks of negative impact from these toxicities may therefore be higher for us than for CAR T programs in oncology.
Furthermore, treatment-related side effects could also affect patient recruitment or the ability of enrolled patients to complete the studies or result in
potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, as toxicities
resulting from T cell-based immunotherapies are not normally encountered in routine medical care. Medical personnel may need additional training
regarding T cell-based immunotherapy product candidates to understand their side effects. Inadequate training in recognizing or failure to effectively
manage the potential side effects of T cell-based immunotherapy product candidates could result in patient deaths. Any of these occurrences may harm our
business, financial condition and prospects significantly.
In addition to side effects caused by our product candidates, the preconditioning, administration process or related procedures, which we evaluate
from time to time as part of our process improvement and optimization efforts, may also cause adverse side effects. For example, severe neurotoxicity has
been noted to be associated with the use of certain lymphodepleting regimens. While we believe there are sufficient data from other CAR T programs to
suggest that it is reasonable for us to initiate our first clinical trial of DSG3-CAART without a preconditioning regimen, we cannot be certain that a
preconditioning regimen, with or without lymphodepleting agents, will not be required.
Although we plan to infuse DSG3-CAART without preconditioning initially in our planned DesCAARTesTM Trial, we may in the future use a
preconditioning regimen for our CAAR T cell product candidates, which may increase the risk of adverse side effects and impact our ability to
accurately assess the efficacy of our product candidates.
In oncology patients receiving CAR T cell therapy, a lymphodepleting preconditioning regimen is typically used to condition the patient prior to
CAR T cell infusion in order to improve tumor immunogenicity and to promote the expansion of the infused CAR T cells. Together, these effects have been
shown to enhance the clinical activity of CAR T cells in oncology patients. These regimens often include cyclophosphamide and fludarabine and are
usually administered within the week prior to infusion of CAR T cells. Serious adverse events have been observed in some patients following CAR T cell
infusion, and these include infection, cytokine release syndrome and neurotoxicity. The preconditioning regimen may contribute to the occurrence and
severity of these adverse events due to its role in inducing lymphopenia, or low levels of lymphocytes in the blood, and enhanced CAR T cell activity.
Lymphodepleting preconditioning may not be required in all oncology settings for CAR T cell activity. A recent clinical trial in multiple myeloma
patients published in 2019 in The Journal of Clinical Investigation showed similar clinical activity of CAR T cell infusions in patients with or without a
lymphodepleting preconditioning regimen. Furthermore, the requirement for lymphodepleting preconditioning for potentiating engineered T cell therapy
outside of oncology has not been well established. Specifically, the effect on tumor immunogenicity is not relevant in settings outside oncology, and
therefore the contribution of this aspect to the potential enhancing effect of preconditioning would not apply.
In addition, a lymphodepleting regimen may eliminate pathogenic B cells targeted by our CAAR T cell product candidates. As a result, any
lymphodepleting regimen for preconditioning that we use may adversely affect our ability to use DSG3 autoantibody titers, a standard clinical assay, to
assess the activity of DSG3-CAART. An
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inability to use DSG3 autoantibody levels to demonstrate the specific activity of our CAAR T cell product candidates may require us to rely on the
objective measurement of blister formation in patients, which can be a less sensitive and accurate measurement of CAAR T cell activity. This therefore
could delay efficient clinical development. As a result of these factors, including the concern that lymphodepletion may confer a potential increased safety
risk to an autoimmune patient population, we believe the inclusion of such a regimen must be justified by clinical data demonstrating the need for it in the
setting of autoimmune patients and is therefore difficult to justify in our first-in-human studies.
We therefore plan to initiate our Phase 1 trial of DSG3-CAART without a preconditioning regimen. If clinical data suggest that a preconditioning
regimen is advisable, or if FDA requires that we employ a preconditioning regimen, we may employ such a regimen. If we ultimately use a preconditioning
regimen, with or without lymphodepleting agents, prior to infusing patients with our CAAR T cell product candidates, our clinical patients may experience
increased or more severe adverse effects specifically related to the preconditioning regimen, some of which may result in death. These undesirable side
effects, whether associated with the preconditioning regimen alone or in combination with our CAAR T cell product candidates, could cause delays in
patient enrollment in our clinical trials, could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a change to our
clinical trial design, a more restrictive label or the delay or denial of regulatory approval by the FDA. Any of the foregoing may increase the duration and
expense of the clinical development of our product candidates or limit market acceptance of such product candidates, if approved, any of which could have
a material adverse effect on our business and financial condition. Even if we do not use a preconditioning regimen, patients may experience adverse effects
related to our CAAR T cell product candidates, and our decision to design our clinical trials without preconditioning does not eliminate the risk of those
side effects.
Our business is highly dependent on the success of our initial product candidates targeting B cell-mediated autoimmune diseases, particularly
DSG3-CAART. All of our product candidates will require significant additional preclinical and clinical development before we can seek
regulatory approval for and launch a product commercially.
Our business and future success depend on our ability to obtain regulatory approval of, and then successfully launch and commercialize our initial
product candidates targeting B cell-mediated autoimmune diseases, including DSG3-CAART, MuSK-CAART, DSG3/1-CAART and others that may be
selected from preclinical programs. Our product candidates are in the early stages of development and will require additional preclinical studies, clinical
trials, regulatory review and licensure, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts
before we can generate any revenue from product sales. There is no guarantee that we will be able to advance our product candidates through clinical
development or obtain marketing approval for any of our product candidates. The process for obtaining marketing approval for any product candidate is
very long and risky and there will be significant challenges for us to address in order to obtain marketing approval as planned, if at all.
Our IND was cleared in September 2019, and we plan to initiate our DesCAARTesTM Trial in 2020. DSG3-CAART has only been administered in
murine models to date, and such results may not be predictive of the results of our planned clinical trial or any future clinical trials. Because DSG3-CAART
is the first product candidate that we plan to test in the clinic, we may experience preliminary complications surrounding trial design, protocol
establishment and execution, establishing trial protocols, patient recruitment and enrollment, quality and supply of clinical doses, or safety issues. For
example, while the majority of oncology CAR T clinical trials have been conducted with a lymphodepleting or other preconditioning regimen prior to
infusion, we do not intend to use pre-infusion lymphodepletion or other preconditioning regimen initially in our planned Phase 1 trial. However, we may
determine that use of a lymphodepleting or other preconditioning regimen is necessary for our product candidates to be successful, which could result in
delays in clinical development and will expose patients to the associated risks.
Additionally, a failure of our planned clinical trial of DSG3-CAART could influence physicians’ and regulators’ opinions with regard to the
viability of our CABA platform more broadly, particularly if treatment-related side effects are observed. The occurrence of any of these risks could
significantly harm our development plans and business prospects. If treatment-related side effects are observed with the administration of DSG3-CAART,
or if it is viewed as less safe, potent or pure than other therapies, our ability to develop other CAAR T cell therapies may be significantly harmed.
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Our product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their
regulatory approval, limit their commercial potential or result in significant negative consequences.
Undesirable or unacceptable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical
trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA. Further, clinical trials by their nature utilize a
sample of the potential patient population. With a limited number of subjects and limited duration of exposure, rare and severe side effects of our product
candidates may only be uncovered with a significantly larger number of patients exposed to the drug. Undesirable side effects could also result in an
expansion in the size of our clinical trials, increasing the expected costs and timeline of our clinical trials. Additionally, results of our clinical trials could
reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.
Licensed CAR T cell therapies and those under development have shown frequent rates of CRS and neurotoxicity, and adverse events have resulted
in the death of patients. Similar adverse events could occur during treatment with our CAAR T cell product candidates. For example, activation of CAAR T
cells by patient autoantibodies or alloantibodies could stimulate CRS. When CAAR T cells are infused and the CAAR binds to soluble antibodies in the
blood or tissues of treated patients, these soluble antibodies may trigger the CAAR, resulting in an activation of the immune system that is too high, leading
to CRS. Further, it is possible that patients will exhibit acute rejection of the CAAR T cells because of preexisting immunity to the antigen within the
CAAR. This could render our product candidates ineffective.
If unacceptable toxicities or health risks, including risks inferred from other unrelated immunotherapy trials, arise in the development of our
product candidates, we could suspend or terminate our trials or the FDA, the Data Safety Monitoring Board, or DSMB, or local regulatory authorities such
as institutional review board, or IRBs, could order us to cease clinical trials. Competent national health authorities, such as the FDA, could also deny
approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of
enrolled subjects to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or
managed by the treating medical staff, as toxicities resulting from T cell therapy are not normally encountered in the general patient population and by
medical personnel. We expect to have to train medical personnel using CAAR T cell product candidates to understand the side effect profile of our product
candidates for both our preclinical studies and clinical trials and upon any commercialization of any of our product candidates, if licensed. Inadequate
training in recognizing or managing the potential side effects of our product candidates could result in patient deaths. Any of these occurrences may harm
our business, financial condition and prospects significantly.
Our planned preclinical studies and clinical trials may fail to demonstrate the safety, potency and purity of any of our product candidates,
which would prevent or delay regulatory approval and commercialization.
Before obtaining regulatory approvals for the commercial sale of any of our product candidates, we must demonstrate through lengthy, complex
and expensive preclinical testing and clinical trials that our product candidates are safe, potent and pure for use in each target indication. Clinical trials are
expensive and can take many years to complete, and their outcomes are inherently uncertain. Failure can occur at any time during the clinical trial process.
The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials, including
in any post-approval studies of our product candidates. In addition, initial success in any clinical trials may not be indicative of results obtained when such
trials are completed. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Product
candidates in later stages of clinical trials may fail to show the desired safety, potency and purity profile despite having progressed through preclinical
studies and initial clinical trials.
A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of potency or
efficacy, insufficient durability of potency or efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials, and we cannot be
certain that we will not face similar setbacks. These setbacks have been caused by, among other things, preclinical and other nonclinical findings made
while clinical trials were underway, or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported
adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses and many companies that believed their
product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval. Most product
candidates that commence clinical trials are never approved as products.
Any preclinical studies or clinical trials that we may conduct may not demonstrate the safety, potency and purity necessary to obtain regulatory
approval to market our product candidates. If the results of our ongoing or
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future preclinical studies and clinical trials are inconclusive with respect to the safety, potency and purity of our product candidates, if we do not meet the
clinical endpoints with statistical and clinically meaningful significance, or if there are safety concerns associated with our product candidates, we may be
prevented or delayed in obtaining marketing approval for such product candidates. In some instances, there can be significant variability in safety, potency
or purity results between different preclinical studies and 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 clinical trial protocols and the
rate of dropout among clinical trial participants. For example, because our CAAR T cell product candidates only target approximately 0.01% to 1% of the
B cells in a patient, they may not engage enough of the target to achieve adequate engraftment necessary for elimination of all pathogenic B cells.
Insufficient safety or potency in clinical trials may delay product development to enable time to modify the product candidate for next generation
approaches or make manufacturing changes or may lead us to discontinue development of the product candidate.
In addition, for DSG3-CAART, MuSK-CAART and any future trials that may be completed, we cannot guarantee that the FDA will interpret the
results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are not
satisfactory to the FDA to support a marketing application, approval of our product candidates may be significantly delayed, or we may be required to
expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product
candidates.
Interim, topline or preliminary data from any preclinical studies or clinical trials that we conduct may change as more data become available
and are subject to audit and verification procedures that could result in material changes in the final data.
Based on a pre-IND interaction with the FDA, we expect our initial clinical trial for our lead product candidate will be open-label. From time to
time, we may publicly disclose preliminary or topline or data from our preclinical studies and clinical trials, which will be based on a preliminary analysis
of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related
to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have
received or had the opportunity to fully and carefully evaluate all data. Additionally, we expect that in our planned DesCAARTesTM Trial, the product
candidate will be administered by intravenous infusion, using a fractionated-dose infusion scheme of escalating numbers of DSG3-CAART cells. Because
of the fractionated-dose infusion scheme, if we release topline results from our planned Phase 1 clinical trial, they may differ from the final data we observe
once all dose levels have been administered within the initial cohort.
As a result, the topline results that we report may differ from future results of the same studies, or different conclusions or considerations may
qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that
may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with
caution until the final data are available. From time to time, we may also disclose interim data from planned interim analyses in our clinical trials. Interim
data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment
continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our
business prospects. Further, disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock.
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Regulatory agencies, including the FDA, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may
interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the
particular product candidate or product and our company in general.
If the interim, topline or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the
conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business,
operating results, prospects or financial condition.
We have no experience as a company in conducting clinical trials.
Although our key employees have significant experience in leading clinical development programs, we have no experience as a company in
conducting clinical trials. In part because of this lack of experience, we cannot be certain that our ongoing preclinical studies will be completed on time or
that our planned preclinical studies and clinical trials will begin or be completed on time, if at all. Any clinical trial that we conduct, including our planned
DesCAARTesTM Trial, will require significant financial and management resources and reliance on third-party clinical investigators, contract research
organizations, or CROs, and consultants. For example, the coordination of the clinical trial sites for our DesCAARTesTM Trial will be conducted by a
CRO. Relying on third-party clinical investigators, CROs and consultants may force us to encounter delays and expenses that are outside of our control.
We may not be able to file INDs to commence clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us
to proceed.
We submitted an IND to the FDA to initiate a clinical trial of DSG3-CAART targeting mPV in August 2019, which was cleared by the FDA in
September 2019. The timing of submissions on future product candidates will be dependent on further preclinical and manufacturing success. We cannot be
sure that submission of an IND or IND amendment will result in the FDA allowing testing and clinical trials to begin, or that, once begun, issues will not
arise that would cause us or the FDA to suspend or terminate such clinical trials. Additionally, even if such regulatory authorities agree with the design and
implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory authorities will not change
their requirements in the future.
We may encounter substantial delays in our clinical trials or may not be able to conduct our trials on the timelines we expect or at all.
Clinical testing is expensive, time consuming and subject to uncertainty. We cannot guarantee that any clinical trials will be conducted as planned
or completed on schedule, if at all. Even if these trials begin as planned, issues may arise that could suspend or terminate such clinical trials. A failure of
one or more clinical trials can occur at any stage of testing, and our future clinical trials may not be successful. Events that may prevent successful or
timely completion of clinical development include:
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inability to generate sufficient preclinical, toxicology or other in vivo or in vitro data to support the initiation of clinical trials;
delays in sufficiently developing, characterizing or controlling a manufacturing process suitable for clinical trials;
delays in developing suitable assays for screening patients for eligibility for clinical trials with respect to certain product candidates;
delays in reaching a consensus with the FDA and other regulatory agencies on trial design;
delays in reaching agreement on acceptable terms with prospective CROs and clinical study sites, the terms of which can be subject to
extensive negotiation and may vary significantly among different CROs and clinical trial sites;
delays in obtaining required institutional review board, or IRB, approval at each clinical trial site;
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imposition of a temporary or permanent clinical hold by regulatory agencies for a number of reasons, including after review of an IND
submission or amendment, or equivalent application or amendment; as a result of a new safety finding that presents unreasonable risk to
clinical trial participants; a negative finding from an inspection of our clinical study operations or study sites; developments on trials
conducted by competitors for related technology that raises FDA concerns about risk to patients of the technology broadly; or if FDA finds
that the investigational protocol or plan is clearly deficient to meet its stated objectives;
delays in recruiting suitable patients to participate in our clinical trials;
delays in treating one or more patients, once enrolled, due to their inability to accommodate parts of the complex study procedures
schedule;
difficulty collaborating with patient groups and investigators;
failure by our CROs, other third parties or us to adhere to clinical trial requirements;
limitations on our recourse in our CRO relationship with Penn as compared to a CRO that is not an academic institution;
failure to perform in accordance with the FDA’s good clinical practice, or GCP, requirements or applicable regulatory guidelines in other
countries;
transfer of manufacturing processes to any new CDMO or our own manufacturing facilities or any other development or commercialization
partner for the manufacture of product candidates;
delays in having patients complete participation in a trial or return for post-treatment follow-up;
patients dropping out of a trial;
occurrence of adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;
changes in the standard of care on which a clinical development plan was based, which may require new or additional trials;
the cost of clinical trials of our product candidates being greater than we anticipate;
clinical trials of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators
requiring us, to conduct additional clinical trials or abandon product development programs;
delays or failure to secure supply agreements with suitable raw material suppliers, or any failures by suppliers to meet our quantity or
quality requirements for necessary raw materials; and
delays in manufacturing, testing, releasing, validating or importing/exporting sufficient stable quantities of our product candidates for use
in clinical trials or the inability to do any of the foregoing.
Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to generate
revenue. In addition, if we make manufacturing or formulation changes to our product candidates, we may be required to, or we may elect to, conduct
additional trials to bridge our modified product candidates to earlier versions. Clinical trial delays could also shorten any periods during which our product
candidates and products, if licensed, have patent protection and may allow our competitors to bring products to market before we do, which could impair
our ability to successfully commercialize our product candidates and may harm our business and results of operations.
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We could also encounter delays if a clinical trial is suspended or terminated by us, by the DSMB for such trial or by the FDA or other regulatory
authority, or if the IRBs of the institutions in which such trials are being conducted suspend or terminate the participation of their clinical investigators and
sites subject to their review. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical
trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from
using a product candidate, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
Delays in the initiation, conduct or completion of any clinical trial of our product candidates will increase our costs, slow down our product
candidate development and approval process and delay or potentially jeopardize our ability to commence product sales and generate revenue. In addition,
many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory
approval of our product candidates. In the event we identify any additional product candidates to pursue, we cannot be sure that submission of an IND will
result in the FDA allowing clinical trials to begin in a timely manner, if at all. Any of these occurrences may significantly harm our business, financial
condition and prospects.
Monitoring safety of patients receiving our product candidates will be challenging, which could adversely affect our ability to obtain regulatory
approval and commercialize our product candidates.
For our planned clinical trials of DSG3-CAART and our other product candidates, we expect to continue to contract with Penn and other academic
medical centers and hospitals experienced in the assessment and management of toxicities arising during clinical trials. In the future, we may also contract
with non-academic medical centers and hospitals with similar capabilities. Nonetheless, these centers and hospitals may have difficulty observing patients,
including due to failure by patients to comply with post-clinical trial follow-up programs, and treating toxicities, which may be more challenging due to
personnel changes, inexperience, shift changes, house staff coverage or related issues. This could lead to more severe or prolonged toxicities or even patient
deaths, which could result in us or the FDA delaying, suspending or terminating one or more of our clinical trials, and which could jeopardize regulatory
approval. We also expect the centers using DSG3-CAART and our other product candidates, if licensed, on a commercial basis could have similar difficulty
in managing adverse events. Medicines used at centers to help manage adverse side effects of DSG3-CAART and our other product candidates may not
adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely
affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in
accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its
conclusion. The enrollment of patients depends on many factors, including:
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the size and nature of the patient population;
the patient eligibility criteria defined in the protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
recruiting an adequate number of suitable patients to participate in a clinical trial;
reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and clinical trial sites;
obtaining IRB approval at each clinical trial site;
the proximity of patients to trial sites;
the design of the trial and whether the FDA agrees to the design and implementation of the trial;
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our ability to identify clinical trial sites and recruit clinical trial investigators with the appropriate capabilities, competencies and
experience;
clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studied in relation to other
available therapies, including any new drugs that may be approved for the indications we are investigating;
the occurrence of dose-limiting toxicity in the clinical trial;
the efforts to facilitate timely enrollment in clinical trials;
the patient referral practices of physicians;
the ability to monitor patients adequately during and after treatment;
our ability to obtain and maintain patient consents;
the risk that patients enrolled in clinical trials will drop out of the trials before the infusion of our product candidates or trial completion;
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the ability of patients to meet the complex follow-up requirements of the clinical trial.
In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product
candidates, and this competition will reduce the number and types of patients available to us because some patients who might have opted to enroll in our
trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, some of
our clinical trial sites may also be used by some of our competitors, which may reduce the number of patients who are available for our clinical trials in that
clinical trial site.
Moreover, because our product candidates represent a departure from more commonly used methods for B cell-mediated autoimmune disease
treatment, potential patients and their doctors may be inclined to use conventional therapies, such as corticosteroids or systemic immunosuppressive
medications, rather than enroll patients in our clinical trial.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our planned clinical trials, which could prevent
completion of these trials and adversely affect our ability to advance the development of our product candidates.
Our planned initial Phase 1 clinical trial and expected Phase 1 clinical trials for each of our product candidates will be pilot dose escalation studies
with a limited number of patients. The activity and toxicity data from these clinical trials of our product candidates may differ from future results of Phase
2 and/or Phase 3 clinical trials that enroll a larger number of patients.
Since the number of patients that we plan to dose in our planned DesCAARTesTM Trial is small, the results from such clinical trial, once
completed, may be less reliable than results achieved in larger clinical trials, which may hinder our efforts to obtain regulatory approval for our product
candidates. In our planned DesCAARTesTM Trial, we plan to evaluate the toxicity profile of DSG3-CAART and establish the recommended dose for the
next clinical trial. The preliminary results of clinical trials with smaller sample sizes, such as our planned DesCAARTesTM Trial, can be disproportionately
influenced by various biases associated with the conduct of small clinical trials, such as the potential failure of the smaller sample size to accurately depict
the features of the broader patient population, which limits the ability to generalize the results across a broader community, thus making the clinical trial
results less reliable than clinical trials with a larger number of patients. As a result, there may be less certainty that such product candidates would achieve a
statistically significant effect in any future clinical trials. If we conduct any future clinical trials of DSG3-CAART, we may not achieve a statistically
significant result or the same level of statistical significance, if any, that we might have anticipated based on the results observed in our initial Phase 1
clinical trial.
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The market opportunities for our product candidates may be limited to those patients who are ineligible for or have failed prior treatments and
may be small.
Our projections of both the number of people who have the B cell-mediated autoimmune diseases we are targeting, as well as the subset of people
with these diseases in a position to receive second or later lines of therapy and who have the potential to benefit from treatment with our product
candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys of
clinics, patient foundations, or market research and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of
these B cell-mediated autoimmune diseases. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable
patient population for our product candidates may be limited or may not be amenable to treatment with our product candidates. For instance, we expect our
lead product candidate, DSG3-CAART, to initially target a small patient population that suffers from mPV. Even if we obtain significant market share for
our product candidates, because the potential target populations are small, we may never achieve profitability without obtaining regulatory approval for
additional indications.
We may not be successful in our efforts to identify additional product candidates. Due to our limited resources and access to capital, we must
prioritize development of certain product candidates, which may prove to be wrong and may adversely affect our business.
Although we intend to explore other therapeutic opportunities, in addition to the product candidates that we are currently developing, we may fail
to identify viable new product candidates for clinical development for a number of reasons. If we fail to identify additional potential product candidates,
our business could be materially harmed.
Research programs to pursue the development of our existing and planned product candidates for additional indications and to identify new product
candidates and disease targets require substantial technical, financial and human resources whether or not they are ultimately successful. Our research
programs may initially show promise in identifying potential indications and/or product candidates, yet fail to yield results for clinical development for a
number of reasons, including:
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the research methodology used may not be successful in identifying potential indications and/or product candidates;
potential product candidates may be identified but may not be able to be expressed on T cells in a manner that enables product activity;
potential product candidates may, after further study, be shown to have harmful adverse effects or other characteristics that indicate they are
unlikely to be effective drugs; or
it may take greater human and financial resources than we will possess to identify additional therapeutic opportunities for our product
candidates or to develop suitable potential product candidates through internal research programs, thereby limiting our ability to develop,
diversify and expand our product portfolio.
Because we have limited financial and human resources, we intend to initially focus on research programs and product candidates for a limited set
of indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have
greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial
products or profitable market opportunities.
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Accordingly, there can be no assurance that we will ever be able to identify additional therapeutic opportunities for our product candidates or to
develop suitable potential product candidates through internal research programs, which could materially adversely affect our future growth and prospects.
We may focus our efforts and resources on potential product candidates or other potential programs that ultimately prove to be unsuccessful.
If we fail to develop additional product candidates, our commercial opportunity will be limited.
One of our core strategies is to pursue clinical development of additional product candidates beyond DSG3-CAART, MuSK-CAART, DSG3/1-
CAART and FVIII-CAART. Developing, obtaining regulatory approval and commercializing additional CAAR T cell product candidates will require
substantial additional funding and is prone to the risks of failure inherent in medical product development. We cannot provide you any assurance that we
will be able to successfully advance any of these additional product candidates through the development process.
Even if we receive FDA approval to market additional product candidates for the treatment of B cell-mediated autoimmune diseases, we cannot
assure you that any such product candidates will be successfully commercialized, widely accepted in the marketplace or more effective than other
commercially available alternatives. If we are unable to successfully develop and commercialize additional product candidates, our commercial opportunity
will be limited. Moreover, a failure in obtaining regulatory approval of additional product candidates may have a negative effect on the approval process of
any other, or result in losing approval of any approved, product candidate.
We currently have no marketing and sales organization and as a company have no experience in marketing products. If we are unable to
establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be
able to generate product revenue.
We currently have no sales, marketing or distribution capabilities and as a company have no experience in marketing pharmaceutical products. We
intend to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time.
We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.
Additionally, there are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales
force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales
force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these
commercialization expenses. These efforts may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing
personnel.
If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will need to pursue collaborative arrangements
regarding the sales and marketing of our products, if licensed. However, there can be no assurance that we will be able to establish or maintain such
collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of
such third parties, which may not be successful. Our product revenues and profitability, if any, are likely to be lower than if we were to market, sell and
distribute any products that we develop ourselves. In addition, we may have little or no control over the marketing and sales efforts of such third parties and
our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for
third parties to assist us with the sales and marketing efforts of our product candidates.
There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with
third-party collaborators to commercialize any product in the United States or overseas.
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to
compete effectively.
The biopharmaceutical and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong focus
on intellectual property. We face competition from many different players, including large and specialty pharmaceutical and biotechnology companies,
academic research organizations and
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governmental agencies. Any therapeutic candidates we successfully develop and commercialize will compete with the existing standard of care as well as
novel therapies that may gain regulatory approval in the future. Many of our competitors have substantially greater financial, technical and other resources,
such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or
early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies.
Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. We
believe we are the first and only company developing CAAR T drug candidates for the treatment of B cell-mediated autoimmune diseases. However,
despite the significant differences in discovery, development and target populations between oncology and autoimmune targets, we recognize that
companies with an investment and expertise in CAR T cell development for oncology indications could attempt to leverage their expertise into B cell-
mediated autoimmune disease affected populations. Competition may increase further as a result of advances in the commercial applicability of
technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed
in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less
costly than our product candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our
technologies and products.
Specifically, while rituximab is the first drug for the treatment of PV, the target indication of our lead product candidate, DSG3-CAART, to have
received regulatory approval in the United States in over 60 years, we are aware that multiple biopharmaceutical companies have therapies in clinical
development. We are also aware of other biopharmaceutical companies developing therapies for muscle-specific kinase myasthenia gravis, or MuSK MG,
and Hemophilia A patients who develop alloantibodies against FVIII. While we do not expect these product candidates to be directly competitive to our
product candidates, even if we obtain regulatory approval of our product candidates, the availability and price of these other products could limit the
demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product
candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if
physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. For additional
information regarding our competition, see “Business—Competition”.
We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not
be able to successfully implement our business strategy.
Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly
qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific, and medical personnel, including our Chief
Executive Officer and President, our Scientific Advisory Board members, our Chief Medical Officer, our Executive Vice President, Science and
Technology, and our Chief Financial Officer. The loss of the services of any of our executive officers, other key employees, and other scientific and medical
advisors, and our inability to find suitable replacements could result in delays in product development and harm our business.
Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable
terms or at all. To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest
over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our
control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees,
members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment
agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave
our employment at any time, with or without notice. We do not maintain “key person” insurance policies on the lives of these individuals or the lives of any
of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior
managers as well as junior, mid-level and senior scientific and medical personnel.
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We expect to grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2019, we had 21 full-time employees and one part-time employee. As our development and commercialization plans and
strategies develop, and as we continue to transition into operating as a public company, we expect to rapidly expand our employee base and continue to add
managerial, operational, sales, research and development, marketing, financial and other personnel. For example, we are still dependent on Penn and
certain Penn-affiliated entities to continue providing certain research and development as well as manufacturing services under that certain research
services agreement. Current and future growth imposes significant added responsibilities on members of management, including:
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identifying, recruiting, integrating, maintaining and motivating additional employees;
managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while
complying with our contractual obligations to contractors and other third parties; and
improving our operational, financial and management controls, reporting systems and procedures.
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Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage
our growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a
substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and
consultants to provide certain services, including certain research and development as well as general and administrative support, pursuant to agreements
which expire after a certain period of time. There can be no assurance that the services of independent organizations, advisors and consultants will continue
to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our
outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be
extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There
can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically
reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, or if
we are not able to raise sufficient funds in the future to support our hiring efforts beyond our research and development personnel, we may not be able to
successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research,
development and commercialization goals.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations, Penn’s operations and those of any CDMOs, CROs and other contractors and consultants that we may engage could be subject to
earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical
epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these
business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We currently rely on Penn to produce
and process our first product candidate and anticipate that in the future we will rely on a third-party CDMO for the same. Our ability to obtain clinical
supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business
interruption.
Even if we obtain regulatory approval of our product candidates, the products may not gain the market acceptance among physicians, patients,
hospitals, treatment centers and others in the medical community necessary for commercial success.
The use of engineered T cells as a potential treatment for B cell-mediated autoimmune diseases is a recent development and may not become
broadly accepted by physicians, patients, hospitals, treatment centers and others in the medical community. We expect physicians to be particularly
influential and we may not be able to convince them to use our product candidates for many reasons. Additional factors will influence whether our product
candidates are accepted in the market, including:
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the clinical indications for which our product candidates are licensed;
physicians, hospitals, treatment centers and patients considering our product candidates as a safe and effective treatment;
the potential and perceived advantages of our product candidates over alternative treatments;
the prevalence and severity of any side effects;
product labeling or product insert requirements of the FDA or other regulatory authorities;
limitations or warnings contained in the labeling approved by the FDA;
the timing of market introduction of our product candidates as well as competitive products;
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the cost of treatment in relation to alternative treatments;
the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities;
the willingness of patients to pay out-of-pocket in the absence of coverage and adequate reimbursement by third-party payors and
government authorities;
relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies; and
the effectiveness of our sales and marketing efforts.
The product candidates we plan to develop and commercialize are premised on offering a potential cure for B cell-mediated autoimmune diseases,
which may result in a high degree of uncertainty related to pricing and long-term demand for our product. Our target patient populations are relatively
small. Because of this pricing and demand for our product candidates, if licensed, may not be adequate to support an extended period of commercial
viability, which could adversely affect our continued ability to successfully produce and market our product or any follow-on products.
In addition, if our product candidates are licensed but fail to achieve market acceptance among physicians, patients, hospitals, treatment centers or
others in the medical community, we will not be able to generate significant revenue. Even if our products achieve market acceptance, we may not be able
to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our products, are more
cost effective or render our products obsolete.
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 our product candidates cause or are perceived to cause injury or are found to be otherwise
unsuitable during clinical 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 or a breach of warranties. Claims could also be asserted
under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be
required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources.
Regardless of the merits or eventual outcome, liability claims may result in:
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inability to bring our product candidates to the market;
decreased demand for our product candidates;
injury to our reputation;
withdrawal of clinical trial participants;
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any product candidate; and
a decline in our share price.
Since we have not yet commenced marketing of any products, we do not yet hold product liability insurance for commercialization of our product
candidates. Our inability to obtain sufficient product liability insurance at an
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acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with
corporate collaborators. Our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no
coverage. Assuming we obtained clinical trial insurance for our clinical trials, we may have to pay amounts awarded by a court or negotiated in a
settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay
such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be
available or adequate should any claim arise.
Risks Related to Our Financial Condition and Capital Requirements
We have incurred net losses in every period since our inception and anticipate that we will incur substantial net losses over the next several
years, and may never achieve or maintain profitability.
Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and
significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and
become commercially viable. We have only recently licensed rights to the patents underlying our product candidates and plan to initiate our
DesCAARTesTM Trial in 2020. We have no products licensed for commercial sale, and we will continue to incur significant research and development and
other expenses related to our ongoing operations. Our net losses may fluctuate significantly from quarter to quarter and year to year. We have to date
financed our operations primarily through private placements of our preferred stock.
As a result, we are not profitable and have incurred net losses in each period since our inception. For the years ended December 31, 2019 and 2018,
we recorded net losses of $16.9 million and $12.2 million, respectively. As of December 31, 2019, we had an accumulated deficit of $33.0 million. We
expect to incur significant losses for the foreseeable future, and we expect these losses to increase substantially if, and as, we:
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continue our research and development efforts and submit additional Investigational New Drug applications, or INDs, for our product
candidates;
conduct preclinical studies and clinical trials for our current and future product candidates;
further develop our product candidate platform;
continue to discover and develop additional product candidates;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific manufacturing and commercial personnel;
establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product
candidates for which we may obtain regulatory approval, whether through a contract development and manufacturing organization, or
CDMO, or through a manufacturing facility that we establish;
acquire or in-license other product candidates and technologies, including advanced manufacturing and translational capabilities that we
will need for the further development and possible commercialization of our product candidates;
seek marketing approvals for any product candidates that successfully complete clinical trials;
establish a sales, marketing and distribution infrastructure to support the sales and marketing of any product candidates for which we may
obtain marketing approvals; and
add operational, financial and management information systems and personnel, including personnel to support our product development
and planned future commercialization efforts, as well as to support our transition to a public company.
To become and remain profitable, we must succeed in developing, and eventually commercializing, a product or products that generate significant
revenue. The ability to achieve this success will require us to be effective in a range of challenging activities, including completing preclinical testing and
clinical trials of our product candidates,
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discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any
products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities and have not yet demonstrated our
ability to successfully develop any product candidate, obtain regulatory approvals, manufacture a commercial scale product or arrange for a third party to
do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. We may never be able to develop,
manufacture or commercialize a marketable product.
Even if we are able to succeed in these activities, we may never generate revenues that are significant enough to achieve profitability. Because of
the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of
increased expenses or when, or if, we will be able to achieve profitability. Our expenses will increase if, among other things:
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there are any delays in completing our clinical trials or the development of any of our product candidates;
we are required by the U.S. Food and Drug Administration, or the FDA, or other regulatory authorities to perform trials or studies in
addition to, or different than, those expected; or
there are any third-party challenges to our intellectual property or we need to defend against any intellectual property-related claim.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the
timing or amount of increased expenses we will incur or when, if ever, we will be able to achieve profitability. Even if we succeed in commercializing one
or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop, seek regulatory
approval for and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown
factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our
ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and
working capital.
We have a limited operating history, which may make it difficult for you to evaluate the success of our business to date and to assess our future
viability, and we may face significant challenges and expense as we test our product candidates and build our capabilities.
We were incorporated in 2017 and initially acquired rights to license certain patent rights Penn in August 2018. We are early in our development
efforts, have a limited operating history and are subject to the risks inherent to any newly-formed organization, including, among others, risks that we may
not be able to hire sufficient qualified personnel and establish operating controls and procedures.
Our limited operating history, particularly in light of the rapidly evolving cell therapy field, may make it difficult to evaluate our technology and
industry and predict our future performance. Our short history as an operating company makes any assessment of our future success or viability subject to
significant uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving fields. If we do not
address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly
from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our shareholders should not rely
upon the results of any quarterly or annual period as an indicator of future operating performance.
We currently do not have in-house resources sufficient to enable our chimeric autoantibody receptor, or CAAR, T cell platform. We are reliant on
several manufacturing and support services from Penn through a Master Translational Research Services Agreement, or the Services Agreement, as well as
certain research and development and general and administrative services through two sponsored research agreements. We also rely on Penn for access to
key technologies for current manufacturing of our product candidates. As we build our own capabilities, and enter into agreements with third parties, we
expect to encounter risks and uncertainties frequently experienced by growing companies in new and rapidly evolving fields, including the risks and
uncertainties described herein. Our ability to rely on services from Penn is limited to a specified period of time, to specific capabilities, and is subject to
Penn’s right to terminate these services with or without cause. If we are unable to establish necessary
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relationships with third party partners and build our own capabilities, our operating and financial results could differ materially from our expectations, and
our business could suffer.
All of our programs require additional preclinical research and development, clinical development, regulatory approval in multiple jurisdictions,
obtaining manufacturing supply, capacity and expertise, building of a commercial organization, substantial investment and significant marketing efforts
before we generate any revenue from product sales. Other programs of ours require additional discovery research and then preclinical and clinical
development. In addition, our product candidates must be licensed for marketing by the FDA before we may commercialize any product.
In addition, as an early-stage company, we have encountered and may continue to encounter unforeseen expenses, difficulties, complications,
delays and other known and unknown circumstances. As we advance our product candidates, we will need to transition from a company with a research
focus to a company capable of supporting clinical development and if successful, commercial activities. We may not be successful in such a transition.
We have not generated any revenue from our product candidates and our ability to generate revenue from product sales and become profitable
depends significantly on our success in a number of areas.
To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant
market potential at an adequate profit margin after cost of goods sold and other expenses. All of our product candidates are in the early stages of
development and we will require additional preclinical studies, clinical development, regulatory review and approval, substantial investment, access to
sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. We plan to initiate
our DesCAARTesTM Trial, our most advanced product candidate, targeting pathogenic B cells in patients with mucosal pemphigus vulgaris, or mPV, in
2020. Our other product candidates, which include DSG3/1-CAART, targeting pathogenic B cells in patients with mucocutaneous pemphigus vulgaris, or
mcPV, MuSK-CAART, targeting pathogenic B cells in a subset of patients with myasthenia gravis, or MG, and FVIII-CAART, for potential use as an
adjunctive therapy targeting a subset of patients with Hemophilia A who develop alloantibody resistance to Factor VIII, or FVIII, replacement therapy,
have yet to complete IND-enabling studies. We have not yet administered any of our product candidates in humans and, as such, we face significant
translational risk as our product candidates advance to the clinical stage. Our ability to generate revenue depends on a number of factors, including, but not
limited to:
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timely completion of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate
and will depend substantially upon the performance of third-party academic and commercial contractors;
our ability to complete IND-enabling studies and successfully submit INDs or comparable applications;
whether we are required by the FDA to conduct additional clinical trials or other studies beyond those planned to support the licensure and
commercialization of our product candidates or any future product candidates;
our ability to demonstrate to the satisfaction of the FDA the safety, potency, purity and acceptable risk to benefit profile of our product
candidates or any future product candidates;
the prevalence, duration and severity of potential side effects or other safety issues experienced with our product candidates or future
product candidates, if any;
the cost of manufacturing and processing our product candidates being greater than we anticipate;
the timely receipt of necessary marketing approvals from the FDA;
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the willingness of physicians, operators of clinics and patients to utilize or adopt any of our product candidates or future product candidates
to treat B cell-mediated autoimmune diseases;
our ability and the ability of third parties with whom we contract to manufacture adequate clinical and commercial supplies of our product
candidates or any future product candidates, remain in good standing with regulatory authorities and develop, validate and maintain
commercially viable manufacturing processes that are compliant with current Good Manufacturing Practices, or cGMP;
our ability to successfully develop a commercial and competitive strategy and thereafter commercialize our product candidates or any
future product candidates in the United States, if licensed for marketing, reimbursement, sale and distribution, whether alone or in
collaboration with others;
patient demand for our product candidates and any future product candidates, if licensed; and
our ability to establish and enforce intellectual property rights in and to our product candidates or any future product candidates.
Many of the factors listed above are beyond our control and could cause us to experience significant delays or prevent us from obtaining regulatory
approvals or commercialize our product candidates. Even if we are able to commercialize our product candidates, we may not achieve profitability soon
after generating product sales, if ever. If we are unable to generate sufficient revenue through the sale of our product candidates or any future product
candidates, we may be unable to continue operations without continued funding.
If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Additionally, even if we
succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures
to research, develop and market additional product candidates. Our failure to become and remain profitable would decrease the value of our company and
could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the
value of our company also could cause you to lose all or part of your investment.
We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The
size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and
expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
We will require substantial additional financing to develop and commercialize our product candidates and implement our operating plans. If we
fail to obtain additional financing or cannot obtain financing at the levels we require, we may be delayed in our plans or unable to complete the
development and commercialization of our product candidates.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the
preclinical and clinical development of our product candidates, including our planned DesCAARTesTM Trial, our initial in vitro studies and expected in
vivo studies of MuSK-CAART, and our planned studies for DSG3/1-CAART as well as research and development, preclinical studies and clinical trials for
FVIII-CAART and any future product candidates, to seek regulatory approvals for our product candidates, to enable commercial production of our
products, if licensed, and to initiate and complete registration trials for multiple products. While we currently expect our existing cash and cash equivalents
to be sufficient to fund our operations through completion of Part A Dose Escalation of our planned Phase 1 clinical trial, we expect to require significant
additional financing to complete this Phase 1 trial, and any future clinical trials of DSG3-CAART and our other product candidates. Further, if licensed, we
will require significant additional amounts of cash to launch and commercialize our product candidates.
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As of December 31, 2019, we had approximately $136.2 million of cash and cash equivalents. On October 29, 2019, we completed an initial public
offering of our common stock by issuing 7,275,501 shares of our common stock (including 475,501 shares of our common stock pursuant to the
underwriters’ option to purchase additional shares that we issued in November 2019), at $11.00 per share, for gross proceeds of $80.0 million, or net
proceeds of $71.0 million. Based on our current operating plan, we believe that the net proceeds from our IPO together with our existing cash and cash
equivalents will be sufficient to fund our operations through at least the third quarter of 2022. However, we have based this estimate on assumptions that
may prove to be wrong. Additionally, changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we
may need to spend more money than currently expected because of circumstances beyond our control. We may require substantial additional capital for the
further development and commercialization of our product candidates, including funding our internal manufacturing capabilities, and may need to raise
additional funds sooner if we choose to expand more rapidly than we presently anticipate. Because the length of time and activities associated with
development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved
marketing and commercialization activities. Our future funding requirements, both near- and long-term, will depend on many factors, including, but not
limited to:
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the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;
the clinical development plans we establish for these product candidates;
the number and characteristics of product candidates that we may develop or in-license;
the terms of any collaboration agreements we may choose to conclude;
the outcome, timing and cost of meeting regulatory requirements established by the FDA;
the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product
candidates;
the effect of competing technological and market developments;
the costs of establishing and maintaining a supply chain for the development and manufacture of our product candidates;
the cost and timing of establishing, expanding and scaling manufacturing capabilities;
the cost of maintaining the amount patient data for which we would be responsible following commercialization of one or more of our
product candidates; and
the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory
approval in regions where we choose to commercialize our products on our own.
We cannot be certain that additional funding will be available on acceptable terms, or at all. Until we are able to generate sufficient revenue to
finance our cash requirements, we will need to finance our future cash needs through a combination of public or private equity offerings, debt financings,
collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we are unable to raise additional capital in
sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue our research and development initiatives. We
could be required to seek collaborators for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable
than might otherwise be available or relinquish or license on unfavorable terms our rights to our product candidates in markets where we otherwise would
seek to pursue development or commercialization ourselves.
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Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could
result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital may be needed in the future to continue our planned operations, including conducting clinical trials,
commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may
sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If
we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result
in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock.
Pursuant to our equity incentive plans, our management is authorized to grant stock options to our employees, directors and consultants.
Additionally, the number of shares of our common stock reserved for issuance under the 2019 Stock Option and Incentive Plan automatically increased on
January 1, 2020 and will automatically increase each January 1 thereafter through and including January 1, 2029, by 4% of the total number of shares of
our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. Unless our
board of directors elects not to increase the number of shares available for future grant each year, our stockholders may experience additional dilution,
which could cause our stock price to fall.
Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our
common stock to decline.
Risks Related to Our Intellectual Property
We rely heavily on certain in-licensed patent and other intellectual property rights in connection with our development of our product
candidates and, if we fail to comply with our obligations under our existing and any future intellectual property licenses with third parties, we
could lose license rights that are important to our business.
Our ability to develop and commercialize our product candidates is heavily dependent on in-licenses to patent rights and other intellectual property
granted to us by third parties. For example, we depend heavily on our License Agreement with Penn and CHOP, pursuant to which we obtained (a) a non-
exclusive, non-sublicensable, worldwide research license to intellectual property controlled by Penn and CHOP to make, have made and use products in
two subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of such
intellectual property to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-
exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn’s know-how to make, have made, use, sell, offer for
sale, import and have imported products in the same two subfields of use. We may enter into additional license agreements in the future. Our license
agreement with Penn and CHOP imposes, and we expect that future license agreements will impose, various diligence, milestone payment, royalty,
insurance and other obligations on us. If we fail to comply with our obligations under these licenses, our licensors, including Penn and CHOP, may have the
right to terminate these license agreements, in which event we might not be able to market our product candidates. Termination of any of our license
agreements or reduction or elimination of our licensed rights may also result in our having to negotiate new or reinstated licenses with less favorable terms.
We may need to obtain additional licenses from third parties to advance our research or allow commercialization of our product candidates, and we
have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be
required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or
commercialize the affected product candidates, which could harm our business significantly. We cannot provide any assurances that third-party patents do
not exist which might be enforced against our current product candidates or future products, resulting in either an injunction prohibiting our sales, or, with
respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.
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Furthermore, in many cases, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the
patents, covering technology that we in-license from third parties. For example, pursuant to our License Agreement with Penn and CHOP, Penn controls
such activities for the patent rights licensed to us under such agreement. Therefore, although we provide input to Penn and CHOP on these activities, we
cannot be certain that these patents will be prosecuted, maintained and enforced in a manner consistent with the best interests of our business. If our current
or future licensors or collaboration partners fail to obtain, maintain or protect any patents or patent applications licensed to us, our rights to such patents and
patent applications may be reduced or eliminated and our right to develop and commercialize any of our product candidates that are the subject of such
licensed rights could be adversely affected.
Disputes may arise between us and our current and future licensors regarding intellectual property subject to a license agreement, including those
related to:
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the scope of rights granted under the License Agreement and other interpretation-related issues;
whether we have breached the License Agreement and whether any such breach is subject to a cure period;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the
licensing agreement;
our right to sublicense patent and other rights to third parties under collaborative development relationships;
our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our
product candidates, and what activities satisfy those diligence obligations; and
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our
partners.
Furthermore, disputes may arise between us and our current or future licensors regarding the ownership of intellectual property developed by us,
such that we may be required to assign or otherwise transfer such intellectual property to such licensor. In the event that the assigned or transferred
intellectual property is covered by an existing license agreement with such licensor we may be required to make additional royalty or milestone payments,
or both, to such licensor. If the assigned or transferred intellectual property is not covered by an existing license agreement, then we may be required to
enter into an additional license agreement to advance our research or allow commercialization of our product candidates, which may not be available on
commercially reasonable terms or at all.
If disputes over intellectual property that we have licensed, or license in the future, prevent or impair our ability to maintain our current licensing
arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
If our efforts to protect the proprietary nature of the intellectual property related to our current and any future product candidates are not
adequate, we may not be able to compete effectively in our market.
Our success depends in large part on our ability to obtain and maintain intellectual property protection in the United States and other countries with
respect to our product candidates. If we do not adequately protect or enforce our intellectual property rights, competitors may be able to erode or negate any
competitive advantage we may have, which could harm our business and ability to achieve profitability. To protect our proprietary position, we have in-
licensed patent rights in the United States and abroad relating to the product candidates that are important to our business. The patent application and
approval process is expensive, complex and time-consuming. Our licensors may not be able to file and prosecute all necessary or desirable patent
applications at a reasonable cost or in a timely manner.
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The patent position of biotechnology and pharmaceutical companies generally is highly uncertain. No consistent policy regarding the breadth of
claims allowed in biotechnology and pharmaceutical patents has emerged to date in the United States or in many foreign jurisdictions. In addition, the
determination of patent rights with respect to biological and pharmaceutical products commonly involves complex legal and factual questions, which has in
recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are
highly uncertain. Pending patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and
until a patent issues from such applications. Assuming the other requirements for patentability are met, currently, the first to file a patent application is
generally entitled to the patent. However, prior to March 16, 2013, in the United States, the first to invent was entitled to the patent. Publications of
discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are
typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that our licensors were the first to make the
inventions claimed in the patents or pending patent applications we in-license, or that our licensors were the first to file for patent protection of such
inventions.
Moreover, because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, the patents or pending patent
applications we in-license may be challenged in the courts or patent offices in the United States and abroad. For example, we may be subject to a third
party preissuance submission of prior art to the U.S. Patent and Trademark Office, or USPTO, or become involved in post-grant review procedures,
derivation proceedings, reexaminations, or inter partes review in the United States, or oppositions and other comparable proceedings in foreign
jurisdictions, challenging our patent rights or the patent rights of others. An adverse determination in any such challenges may result in loss of exclusivity
or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or
commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and product candidates. In
addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized.
Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of the patents
we in-license or narrow the scope of our patent protection. In addition, the laws of foreign countries may not protect our rights to the same extent or in the
same manner as the laws of the United States. For example, European patent law is more restrictive than U.S. patent law in connection with the
patentability of methods of treatment of the human body.
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We cannot predict whether the patent applications we in-license currently being pursued will issue as patents, whether the claims of any patent that
has or may issue will provide us with a competitive advantage or prevent competitors from designing around the claims to develop competing technologies
in a non-infringing manner, or whether we or our licensors will be able to successfully pursue patent applications in the future relating to our current
product candidates or future products and product candidates. Moreover, the patent application and approval process is expensive and time-consuming. We
or our licensors may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Furthermore,
we, or any future partners, collaborators, or licensees, may fail to identify patentable aspects of inventions made in the course of development and
commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to seek additional
patent protection.
It is possible that defects of form in the preparation or filing of patent applications may exist, or may arise in the future, for example with respect to
proper priority claims, inventorship, claim scope, or requests for patent term adjustments. If we fail to establish, maintain or protect such patents and other
intellectual property rights, such rights may be reduced or eliminated. If there are material defects in the form, preparation, prosecution or enforcement of
the patents or patent applications we in-license, such patents may be invalid and/or unenforceable, and such applications may never result in valid,
enforceable patents. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our
business.
Even if the patent applications we in-license issue as patents, they may not issue in a form that will provide us with any meaningful protection,
prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our
patent rights by developing similar or alternative technologies or products in a non-infringing manner. Our competitors may also seek approval to market
their own products similar to or otherwise competitive with our product candidates. Alternatively, our competitors may seek to market generic versions of
any approved products by submitting abbreviated BLAs to the FDA during which process they may claim that patents licensed by us are invalid,
unenforceable or not infringed. In these circumstances, we may need to defend or assert our intellectual property rights, or both, including by filing lawsuits
alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find the patents we in-license invalid or
unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have in-licensed valid and enforceable patents, these
patents still may not provide protection against competing products or processes sufficient to achieve our business objectives. Any of the foregoing could
have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.
In the future, we likely will need to expand our patent portfolio to pursue patent coverage for new product candidates that we wish to develop. The
patent prosecution process is competitive, and other companies, some which may have greater resources than we do in this area, may also be pursuing
intellectual property rights that we may consider necessary or attractive in order to develop and commercialize future product candidates.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, maintaining, defending and enforcing patents on our product candidates in all countries throughout the world would be
prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those in the United
States. The deadline to pursue protection in foreign jurisdictions for many of the patent families licensed under the License Agreement with Penn has not
yet expired. Prior to applicable deadlines, we and Penn will need to decide where to pursue protection, and we will not have the opportunity to pursue
protection unless we do so in applicable jurisdictions prior to the deadlines. Although our License Agreement grants us worldwide rights, there can be no
assurance that we will obtain or maintain patent rights in or outside the United States under any future license agreements. In addition, the laws of some
foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States even in jurisdictions where we
and our licensors pursue patent protection. Consequently, we and our licensors may not be able to prevent third parties from practicing our inventions in all
countries outside the United States, even in jurisdictions where we and our licensors pursue patent protection, or from selling or importing products made
using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we and our licensors
have not pursued and obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where
we and our licensors have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our
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product candidates and the patents we in-license or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property
protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of the patents we in-license or
marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights, even if obtained, in foreign
jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put the patents we in-license at
risk of being invalidated or interpreted narrowly and the patent applications we in-license at risk of not issuing and could provoke third parties to assert
claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial
advantage from the intellectual property that we develop or license.
We or our licensors may be subject to claims challenging the inventorship or ownership of the patents and other intellectual property that we
own or license.
We or our licensors may be subject to claims that former employees, collaborators or other third parties have an ownership interest in the patents
and intellectual property that we in-license or that we may own or in-license in the future. While it is our policy to require our employees and contractors
who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful
in executing such an agreement with each party who in fact develops intellectual property that we regard as our own or such assignments may not be self-
executing or may be breached. Our licensors may face similar obstacles. We or our licensors could be subject to ownership disputes arising, for example,
from conflicting obligations of employees, consultants or others who are involved in developing our product candidates. For example, our scientific co-
founders, Drs. Payne and Milone, are members of our scientific advisory board and are also employed by and subject to Penn’s intellectual property policy.
Litigation may be necessary to defend against any claims challenging inventorship or ownership. If we or our licensors fail in defending any such claims,
we may have to pay monetary damages and may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual
property, which could adversely impact our business, results of operations and financial condition.
Some intellectual property which we have in-licensed was discovered through government funded programs and thus is subject to federal
regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations
may limit our exclusive rights and limit our ability to contract with non-U.S. manufacturers.
Certain of the intellectual property rights we have licensed, including rights licensed to us by Penn relating to our DSG3-CAART and DSG3/1-
CAART product candidates, was generated through the use of U.S. government funding and may therefore be subject to certain federal laws and
regulations. As a result, the U.S. government has certain rights to intellectual property embodied in our DSG3-CAART and DSG3/1-CAART product
candidates and may have rights in future product candidates pursuant to the Bayh-Dole Act of 1980. These U.S. government rights in certain inventions
developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any
governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any
of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is
necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations, also
referred to as “march-in rights”. The U.S. government also has the right to take title to these inventions if we, or the applicable licensor, such as Penn, fail
to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual
property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us or the
applicable licensor to expend substantial resources. In addition, the U.S. government requires that products embodying the subject invention or produced
through the use of the subject invention be manufactured substantially in the United States. The manufacturing preference requirement can be waived if the
owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees
that would be likely to
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manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S.
manufacturers may limit our ability to contract with non-U.S. product manufacturers for product candidates covered by such intellectual property.
We may become involved in lawsuits to protect or enforce our patent rights or other intellectual property rights, which could be expensive, time
consuming and unsuccessful.
Competitors may infringe, misappropriate or otherwise violate patents, trademarks, copyrights or other intellectual property that we own or in-
license. To counter infringement, misappropriation or other unauthorized use, we may be required to file claims, which can be expensive and time
consuming and divert the time and attention of our management and scientific personnel. Any claims we assert against perceived violators could provoke
these parties to assert counterclaims against us alleging that we infringe, misappropriate or otherwise violate their intellectual property, in addition to
counterclaims asserting that the patents we in-license are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a
court will decide that a patent we in-license is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from
using the invention at issue. There is also a risk that, even if the validity of such patents is upheld, the court will construe the patent’s claims narrowly or
decide that we do not have the right to stop the other party from using the invention at issue on the grounds that the patent claims do not cover the
invention. An adverse outcome in a litigation or proceeding involving the patents we in-license could limit our ability to assert the patent we in-license
against those parties or other competitors and may curtail or preclude our ability to exclude third parties from making and selling similar or competitive
products. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition.
Even if we establish infringement, misappropriation or another violation of our intellectual property rights, the court may decide not to grant an
injunction against the offender and instead award only monetary damages, which may or may not be an adequate remedy. Furthermore, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings
or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our shares.
Moreover, there can be no assurance that we will have sufficient financial or other resources to file and pursue such claims, which typically last for years
before they are concluded. Even if we ultimately prevail in such claims, the monetary cost of such litigation and the diversion of the attention of our
management and scientific personnel could outweigh any benefit we receive as a result of the proceedings. Any of the foregoing may have a material
adverse effect on our business, financial condition, results of operations and prospects.
Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability
to protect our product candidates.
Changes in either the patent laws or the interpretation of the patent laws in the United States or other jurisdictions could increase the uncertainties
and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. On September 16, 2011, the Leahy-Smith
America Invents Act, or the Leahy-Smith Act, was signed into law. When implemented, the Leahy-Smith Act included several significant changes to U.S.
patent law that impacted how patent rights could be prosecuted, enforced and defended. In particular, the Leahy-Smith Act also included provisions that
switched the United States from a “first-to-invent” system to a “first-to-file” system, allowed third-party submission of prior art to the USPTO during
patent prosecution and set forth additional procedures to attack the validity of a patent by the USPTO administered post grant proceedings. Under a first-to-
file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on
an invention regardless of whether another inventor had made the invention earlier. The USPTO developed new regulations and procedures governing the
administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first
to file provisions, only became effective on March 16, 2013. It remains unclear what impact, if any, the Leahy-Smith Act will have on the operation of our
business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of the patent
applications we in-license and the enforcement or defense of the issued patents we in-license, all of which could have a material adverse effect on our
business.
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The patent positions of companies engaged in the development and commercialization of biologics are particularly uncertain. For example, the
Supreme Court of the United States issued its decision in Association for Molecular Pathology v. Myriad Genetics, Inc., or Myriad, a case involving patent
claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2. Myriad held that an isolated segment of
naturally occurring DNA, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patent-eligible subject matter, but that complementary DNA,
which is an artificial construct that may be created from RNA transcripts of genes, may be patent-eligible. Thereafter, the USPTO issued a guidance
memorandum instructing USPTO examiners on the ramifications of the Prometheus and Myriad rulings and apply the Myriad ruling to natural products
and principles including all naturally occurring nucleic acids. Certain claims of our in-licensed patent applications contain, and any future patents we may
obtain may contain, claims that relate to specific recombinant DNA sequences that are naturally occurring at least in part and, therefore, could be the
subject of future challenges made by third parties.
We cannot assure you that our efforts to seek patent protection for one or more of our product candidates will not be negatively impacted by this
Supreme Court decision, rulings in other cases or changes in guidance or procedures issued by the USPTO. We cannot fully predict what impact the
Supreme Court’s decisions in Myriad may have on the ability of life science companies to obtain or enforce patents relating to their products in the future.
These decisions, the guidance issued by the USPTO and rulings in other cases or changes in USPTO guidance or procedures could have a material adverse
effect on our existing patent rights and our ability to protect and enforce our intellectual property in the future.
If we are unable to protect the confidentiality of trade secrets, our business and competitive position would be harmed.
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect certain
proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce, and any other elements of our
product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents.
However, trade secrets can be difficult to protect and some courts inside and outside the United States are less willing or unwilling to protect trade secrets.
We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific
advisors, and contractors. We cannot guarantee that we have entered into such agreements with each party that may have or has had access to our trade
secrets or proprietary technology and processes. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining
physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these
individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach.
In addition, our trade secrets may otherwise become known or be independently discovered by competitors. Competitors and other third parties
could infringe, misappropriate or otherwise violate our intellectual property rights, design around our protected technology or develop their own
competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or independently
developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology
or information to compete with us. If our trade secrets are not adequately protected or sufficient to provide an advantage over our competitors, our
competitive position could be adversely affected, as could our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate,
we may have insufficient recourse against third parties for misappropriating our trade secrets.
We may become subject to claims that we are infringing certain third-party patents or other third-party intellectual property rights, any of
which may prevent or delay our development and commercialization efforts and have a material adverse effect on our business.
Our commercial success depends in part on avoiding infringing, misappropriating and otherwise violating the patents and other intellectual
property and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and
other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, and administrative
proceedings such as interferences, inter partes review and post grant review proceedings before the USPTO and opposition proceedings before foreign
patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned or controlled by third parties, including our
competitors, exist in the fields in which we are pursuing product candidates. As the biotechnology and pharmaceutical industries expand and more patents
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are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.
Third parties may assert that we or our licensors are employing their proprietary technology without authorization. There may be third-party
patents or patent applications with claims to materials, methods of manufacture or methods for treatment relating to our product candidates and, because
patent applications can take many years to issue, there may be currently pending third party patent applications which may later result in issued patents, in
each case that our product candidates, their manufacture or use may infringe or be alleged to infringe. We may fail to identify potentially relevant patents or
patent applications, incorrectly conclude that a patent is invalid or does not cover our activities, or incorrectly conclude that a patent application is unlikely
to issue in a form of relevance to our activities.
Parties making patent infringement claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to
further develop and commercialize one or more of our product candidates. Defense of these claims, including demonstrating non-infringement, invalidity or
unenforceability of the respective patent rights in question, regardless of their merit, is time-consuming, would involve substantial litigation expense and
would be a substantial diversion of employee resources from our business. For example, in order to successfully challenge the validity of any U.S. patent in
federal court, we would need to overcome a presumption of validity. This is a high burden requiring us to present clear and convincing evidence as to the
invalidity of any such U.S. patent claim, and we can provide no assurance that a court of competent jurisdiction would invalidate the claims of any such
U.S. patent. We may not have sufficient resources to bring these actions to a successful conclusion. There could also be public announcements of the results
of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a
material adverse effect on the price of our shares.
In the event that a holder of any such patents seeks to enforce its patent rights against us with respect to one or more of our product candidates, and
our defenses against the infringement of such patent rights are unsuccessful, we may be precluded from commercializing our product candidates, even if
approved, without first obtaining a license to some or all of these patents, which may not be available on commercially reasonable terms or at all.
Moreover, we may be required to pay significant fees and royalties to secure a license to the applicable patents. Such a license may only be non-
exclusive, in which case our ability to stop others from using or commercializing technology and products similar or identical to ours may be limited.
Furthermore, we could be liable for damages to the holder of these patents, which may be significant and could include treble damages if we are found to
have willfully infringed such patents. In the event that a challenge to these patents were to be unsuccessful or we were to become subject to litigation or
unable to obtain a license on commercially reasonable terms with respect to these patents, it could harm our business, financial condition, results of
operations and prospects.
We are aware of third-party issued U.S. patents relating to the lentiviral vectors which may be used in the manufacture or use of our product
candidates. If these patent rights were enforced against us, we believe that we have defenses against any such action, including that these patents would not
be infringed by our product candidates and/or that these patents are not valid. However, if these patents were enforced against us and defenses to such
enforcement were unsuccessful, unless we obtain a license to these patents, which may not be available on commercially reasonable terms, or at all, we
could be liable for damages and precluded from commercializing any product candidates that were ultimately held to infringe these patents, which could
have a material adverse effect on our business, financial condition, results of operations and prospects.
Even in the absence of a finding of infringement, we may need or may choose to obtain licenses from third parties to advance our research or allow
commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, or at all. In that event,
we would be unable to further develop and commercialize our product candidates. Claims that we have misappropriated the confidential information or
trade secrets of third parties could have a similar negative impact on our business. Any of the foregoing could materially adversely affect our business,
results of operations and financial condition.
Patent term may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
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. In the United States, the Drug Price Competition and Patent Term
Restoration Act of 1984 permits
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a patent term extension of up to five years beyond the normal expiration of the patent, which is limited to the approved indication (or any additional
indications approved during the period of extension). However, a patent term extension cannot extend the remaining term of a patent beyond a total of 14
years from the date of the product’s approval by the FDA, only one patent applicable to an approved drug is eligible for the extension, and only those
claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. In the future, if and when our product
candidates receive FDA approval, we plan to apply for patent term extensions on patents covering those product candidates in any jurisdiction where these
are available. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other
countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to the patents we in-license, or
may grant more limited extensions than we request. Moreover, we may not receive an extension because of, for example, failing to apply within applicable
deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. If this occurs, our competitors may
be able to take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product
earlier than might otherwise be the case.
We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of
their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Certain of our employees, consultants or advisors are currently, or were previously, employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and advisors do
not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or
disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may
be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management. Our licensors may face similar risks, which could have an adverse impact on intellectual property that is licensed to us.
Intellectual property rights do not necessarily address all potential threats.
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. For example:
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others may be able to make products that are similar to our product candidates or utilize similar cell therapy technology but that are not
covered by the claims of our current or future patent portfolio;
we, or our current or future licensors or collaborators, might not have been the first to make the inventions covered by the issued patent or
pending patent application that we license now or that we may license or own in the future;
we, or our current or future licensors or collaborators, might not have been the first to file patent applications covering certain of our or
their inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our licensed
intellectual property rights;
it is possible that our current or future licensed patent applications will not lead to issued patents;
issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or
other third parties;
our competitors or other third parties 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 harm our business;
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we may choose not to file a patent application in order to maintain certain trade secrets or know-how, and a third party may subsequently
file a patent application covering such intellectual property; and
third-party patents may issue with claims covering our activities; we may have infringement liability exposure arising from such patents.
Should any of these events occur, they could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Reliance on Third Parties
We are reliant on a research services agreement with Penn for our nonclinical research and development activities and current manufacturing
activities.
If Penn and its affiliated entities were to fail to perform their obligations in accordance with the terms of the Services Agreement or terminate the
Services Agreement with little notice, we may have difficulty continuing our normal business operations and our business prospects, financial condition
and results of operations could be harmed. In addition, the termination of our relationship with Penn and the Services Agreement and any delay in
appointing or finding a suitable replacement provider, if one exists, could make it difficult for us to operate our business for that period. Moreover, we will
be reliant on Penn to assist us with any necessary technology transfer. Any delays or inadequacies in such technology transfer, or disputes regarding the
scope of such technology transfer, could delay our operations, including our clinical trials, require us to expend additional resources and otherwise have an
adverse effect on our business.
Additionally, over time we will need to transition from receiving the services that Penn currently provides to performing such services internally.
The Services Agreement is scheduled to expire on the later of October 19, 2021 or completion of all research and development projects, and unless the
Services Agreement is amended, Penn will not be obligated to provide any further services under the Services Agreement after that time. In addition, Penn
has the right to terminate the Services Agreement in whole at any time with 90 days’ notice and to terminate any research and development project being
performed under the Services Agreement if the Penn service provider appointed to lead such project is unavailable and Penn is unavailable to find a
replacement within 60 days for such service provider. Penn also has the right to terminate certain manufacturing services being performed under the
Services Agreement with 180 days’ written notice. From time to time, we may enter into further addenda to the Services Agreement that provide Penn with
the right to terminate such addenda with limited notice periods. If we do not have adequate personnel and capabilities at the time that we assume
responsibilities for such services, we may not be successful in effectively or efficiently transitioning these services from Penn, which could disrupt our
business and have a material adverse effect on our financial condition and results of operations. Further, we will incur costs relating to establishing our own
financial, administrative, information technology and other support functions as well as running and maintaining such functions on a going-forward basis.
In addition, the process of establishing such functions may distract our management from focusing on business and strategic opportunities and could result
in disruptions to our business. Even if we are able to successfully transition these services, they may be more expensive or less efficient than the services
we are receiving from Penn during the transition period.
We will rely on third parties, including Penn, to conduct our clinical trials. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
We depend and will continue to depend upon third parties, including independent investigators and collaborators, such as universities, medical
institutions, CROs and strategic partners, to conduct our preclinical studies and clinical trials under agreements with us. Specifically, we depend on our
collaborator, Penn, pursuant to the terms of the Services Agreement, to enroll patients and conduct the DesCAARTesTM Trial at the first clinical trial site,
to be located at Penn, in a timely and appropriate manner. If Penn does not conduct the trial on the timeline we expect or otherwise fails to support the trial,
our clinical trial results could be significantly delayed, thereby adversely impacting our leadership position in the CAAR T industry and our ability to
progress additional product candidates. Further, although we intend to transition our manufacturing needs to a CDMO and eventually secure our own
clinical manufacturing facility, we must currently rely on Penn to manufacture supplies and process our product
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candidates. As we open additional clinical trial sites, we expect to have to negotiate budgets and contracts with CROs and study sites, which may result in
delays to our development timelines and increased costs.
We will rely heavily on these third parties, including Penn, to conduct our preclinical studies and clinical trials, and as a result, will have limited
control over the clinical investigators and limited visibility into their day-to-day activities, including with respect to their compliance with the approved
clinical protocol. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with applicable protocol, legal, regulatory
and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to
comply with Good Clinical Practices, or GCPs, which are regulations and guidelines enforced by the FDA for product candidates in clinical development.
Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third
parties fail to comply with applicable GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may
require us to perform additional clinical trials before approving our marketing applications. We cannot provide assurance that, upon inspection, such
regulatory authorities will not determine that some or all of our clinical trials do not fully comply with the GCP requirements. For any violations of laws
and regulations during the conduct of our clinical trials, we could be subject to untitled and warning letters or enforcement action that may include civil
penalties up to and including criminal prosecution. In addition, our clinical trials must be conducted with biologic product produced under cGMPs and will
require a large number of test patients. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a
government-sponsored database within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
If we or these third parties do not successfully carry out their contractual duties, meet expected deadlines, or conduct our clinical trials in
accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for any
product candidates we may develop and will not be able to, or may be delayed in our efforts to, successfully commercialize our medicines. Our failure or
the failure of these third parties to comply with applicable regulatory requirements or our stated protocols could also subject us to enforcement action.
Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or
healthcare privacy and security laws.
Any third parties conducting our clinical trials will not be our employees and, except for remedies available to us under our agreements with such
third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical programs. These third
parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or
other drug development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual
duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due
to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated
and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize our product candidates. As a result, our
financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue
could be delayed.
If any of our relationships with trial sites, or any CRO that we may use in the future, terminates, we may not be able to enter into arrangements
with alternative trial sites or CROs or do so on commercially reasonable terms. Switching or adding third parties to conduct our clinical trials involves
substantial cost and requires extensive management time and focus. In addition, there is often a natural transition period when a new third party commences
work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully
manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays
or challenges will not have a material adverse impact on our business, financial condition and prospects.
We also expect to rely on other third parties to store and distribute drug supplies for our clinical trials. Any performance failure on the part of our
distributors could delay clinical development or marketing approval of any product candidates we may develop or commercialization of our medicines,
producing additional losses and depriving us of potential product revenue.
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We intend to rely on third parties to manufacture our clinical product supplies, and we may have to rely on third parties to produce and process
our product candidates, if licensed.
Although we may eventually secure our own clinical manufacturing facility for any late phase clinical development that we undertake, we currently
rely on Penn to supply raw materials and other important components that are used to manufacture our product candidates and intend in the future to rely
on CDMOs. In the case of any manufacturing performed for us by Penn, the services performed for us risk being delayed because of the competing
priorities that Penn has for utilization of its manufacturing resources and any capacity issues that thereby arise.
We do not yet have sufficient information to reliably estimate the cost of the manufacturing and processing of our product candidates in clinical
quantity or commercial quantity, and the actual cost to manufacture and process our product candidates could ultimately materially and adversely affect the
commercial viability of our product candidates. As a result, we may never be able to develop a commercially viable product.
In addition, our anticipated reliance on a limited number of third-party manufacturers exposes us to the following risks:
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We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the
FDA may have questions regarding any replacement contractor. This may require new testing and regulatory interactions. In addition, a
new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt
of FDA questions, if any.
Our third-party manufacturers might be unable to timely formulate and manufacture our product or produce the quantity and quality
required to meet our clinical and commercial needs, if any.
Contract manufacturers may not be able to execute our manufacturing procedures appropriately.
Any contract manufacturers that we engage may not perform as agreed or may not remain in the contract manufacturing business for the
time required to supply our clinical trials or to successfully produce, store and distribute our product candidates.
Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict
compliance with cGMP and other government regulations. We do not have control over third-party manufacturers’ compliance with these
regulations and standards.
We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in the
manufacturing process for our product candidates.
Our third-party manufacturers could breach or terminate their agreement with us.
Furthermore, all of our contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such
companies, which exposes our manufacturers to regulatory risks related to the production of such materials and products. As a result, failure to meet the
regulatory requirements for the production of those materials and products may affect the regulatory clearance of our contract manufacturers’ facilities
generally. If the FDA does not approve these facilities for the manufacture of our product candidates or if any agency withdraws its approval in the future,
we may need to find alternative manufacturing facilities, which would negatively impact our ability to develop, obtain regulatory approval for or market
our product candidates, if licensed.
Our contract manufacturers would also be subject to the same risks we face in developing our own manufacturing capabilities, as described above.
Each of these risks could delay our clinical trials, the approval, if any of our product candidates by the FDA or the commercialization of our product
candidates or result in higher costs or deprive us of potential product revenue. In addition, we will rely on third parties to perform release tests on our
product candidates prior to delivery to patients. If these tests are not appropriately done and test data are not reliable, patients could be put at risk of serious
harm.
For more information, see “Risk Factors—Risks Related to Manufacturing and Supply”.
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We may form or seek strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of
such alliances or licensing arrangements.
We may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties
that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product
candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term
expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in
seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to
establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of
development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety, potency
and purity. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development and
commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition
and results of operations.
If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them
with our existing operations and company culture. For instance, our License Agreement with Penn and CHOP requires significant research and
development commitments that may not result in the development and commercialization of our product candidates, including DSG3-CAART and our
other product candidates. We cannot be certain that, following a strategic transaction or license, we will achieve the results, revenue or specific net income
that justifies such transaction.
We may not realize the benefits of acquired assets or other strategic transactions, including any transactions whereby we acquire or license
manufacturing and other advanced technologies.
In August 2018, we entered into a License Agreement with Penn and the Children’s Hospital of Philadelphia, or CHOP, which was amended and
restated in July 2019, or the License Agreement, pursuant to which we were granted licenses to certain patent rights for the research and development of
products, as well as an exclusive license under those same patent rights to make, use, sell and import such products, in the autoimmune disease and
alloimmune response subfields, in each case, for the treatment of humans.
We actively evaluate various strategic transactions on an ongoing basis. We may acquire other businesses, products or technologies as well as
pursue joint ventures or investments in complementary businesses. The success of our strategic transactions, including the License Agreement, and any
future strategic transactions depends on the risks and uncertainties involved including:
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unanticipated liabilities related to acquired companies or joint ventures;
difficulties integrating acquired personnel, technologies and operations into our existing business;
retention of key employees;
diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition
integration challenges;
increases in our expenses and reductions in our cash available for operations and other uses;
disruption in our relationships with collaborators or suppliers as a result of such a transaction; and
possible write-offs or impairment charges relating to acquired businesses or joint ventures.
If any of these risks or uncertainties occur, we may not realize the anticipated benefit of any acquisition or strategic transaction. Additionally,
foreign acquisitions and joint ventures are subject to additional risks, including those related to integration of operations across different cultures and
languages, currency risks, potentially adverse tax consequences of overseas operations and the particular economic, political and regulatory risks associated
with specific countries.
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Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities
or amortization expenses or write-offs of goodwill, any of which could harm our financial condition.
Risks Related to Manufacturing and Supply
We currently rely upon Penn for our manufacturing needs, and we intend to rely on other third parties for our future manufacturing needs
prior to establishing our own manufacturing facility.
We are currently reliant upon Penn for our cell product manufacturing for our lead product candidate, DSG3-CAART. In parallel with initiating our
first clinical trial, we plan to establish a relationship with a CDMO to help secure the manufacturing supply chain for future product candidates. We will
need to develop relationships with suppliers, increase the scale of production and demonstrate comparability of the material produced at these facilities to
the material that was previously produced. Transferring manufacturing processes and know-how is complex and involves review and incorporation of both
documented and undocumented processes that may have evolved over time.
In addition, transferring production to different facilities may require utilization of new or different processes to meet the specific requirements of a
given facility. We would expect additional comparability work will also need to be conducted to support the transfer of certain manufacturing processes and
process improvements. We cannot be certain that all relevant know-how and data has been adequately incorporated into the manufacturing process until the
completion of studies (and the related evaluations) intended to demonstrate the comparability of material previously produced with that generated by any
CDMO that we engage for our manufacturing needs. If we are not able to successfully transfer and produce comparable product candidates, our ability to
further develop and manufacture our product candidates may be negatively impacted.
We plan to eventually establish our own manufacturing facility. While the addition of our own manufacturing facility would provide us with future
flexibility within our manufacturing network, we still may need to identify additional CDMOs for continued production of supply for some or all of our
product candidates. Given the nature of our manufacturing processes, the number of CDMOs who possess the requisite skill and capability to manufacture
our CAAR T cell immunotherapy product candidates is limited.
Further, we may not be able to achieve clinical manufacturing and cell processing through Penn on a timely basis, on our own or at any future
CDMO. While our current manufacturing process is based off the validated process developed at Penn for CD19 CAR T, or CART19, we have limited
experience as an organization in managing the CAAR T engineering process. Finally, because clinical manufacturing and cell processing is highly complex,
we cannot be sure that the manufacturing processes employed by Penn, any CDMO that we engage in the future, or by us at a manufacturing facility that
we establish will consistently result in T cells that will be safe and effective.
If we are to operate our own manufacturing facility, significant resources will be required and we may fail to successfully operate our facility,
which could adversely affect our clinical trials and the commercial viability of our product candidates.
If we establish our own manufacturing facility, our operations will be subject to review and oversight by the FDA and the FDA could object to our
use of our manufacturing facility. We must first receive approval from the FDA prior to licensure to manufacture our product candidates, which we may
never obtain. Even if licensed, we would be subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure
strict compliance with cGMPs and other government regulations. Our license to manufacture product candidates will be subject to continued regulatory
review.
Our cost of goods development is at an early stage. The actual cost to manufacture and process our product candidates could be greater than we
expect and could materially and adversely affect the commercial viability of our product candidates.
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The manufacture of biopharmaceutical products is complex and requires significant expertise, and can be impacted by resource constraints,
labor disputes and workforce limitations.
The manufacture of biopharmaceutical products is complex and requires significant expertise, including the development of advanced
manufacturing techniques and process controls. Manufacturers of cell therapy products often encounter difficulties in production, particularly in scaling out
and validating initial production and ensuring the absence of contamination. These problems include difficulties with production costs and yields, quality
control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly
enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of product candidates or in the manufacturing
facilities upon which we currently or will rely, such manufacturing facilities may need to be closed for an extended period of time to investigate and
remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of our product candidates, whether by Penn,
by a third-party CDMO, or at any manufacturing facility that we may establish, will not occur in the future.
Penn, third-party CDMOs that we engage or we may fail to manage the logistics of storing and shipping our product candidates. Storage failures
and shipment delays and problems caused by us, our vendors or other factors not in our control, such as weather, could result in loss of usable product or
prevent or delay the delivery of product candidates to patients.
Penn, third-party CDMOs that we engage, or we may also experience manufacturing difficulties due to resource constraints, labor disputes or
workforce limitations arising from the expanding need for manufacturing in the cell therapy field and the limited number of training programs for technical
staff. If we were to encounter any of these difficulties, our ability to provide our product candidates to patients would be jeopardized.
We are dependent upon the availability of specialty raw materials and the production capabilities of small manufacturers to source the
components of our product candidates.
Our product candidates require many specialty raw materials, some of which are manufactured by small companies with limited resources and
experience to support a commercial product, and the suppliers may not be able to deliver raw materials to our specifications. In addition, those suppliers
generally do not have the capacity to support commercial products manufactured under cGMP by biopharmaceutical firms. The suppliers may be ill-
equipped to support our needs, especially in non-routine circumstances like an FDA inspection or medical crisis, such as widespread contamination. We
also do not have contracts with many of these suppliers, and we may not be able to contract with them on acceptable terms or at all. Accordingly, we may
experience delays in receiving key raw materials to support clinical or commercial manufacturing.
In addition, some raw materials are currently available from a single supplier, or a small number of suppliers. We cannot be sure that these
suppliers will remain in business or that they will not be purchased by one of our competitors or another company that is not interested in continuing to
produce these materials for our intended purpose. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we
may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort to qualify a new supplier could result in
additional costs, diversion of resources or reduced manufacturing yields, any of which would negatively impact our operating results. Further, we may be
unable to enter into agreements with a new supplier on commercially reasonable terms, which could have a material adverse impact on our business.
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Our product candidates are uniquely manufactured. If we, Penn or any of our third-party manufacturers encounter difficulties in
manufacturing our product candidates, our ability to provide supply of our product candidates for clinical trials or, if licensed, for commercial
sale, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.
The manufacturing process used to produce our product candidates is complex and novel and it has not yet been validated for commercial
production. Among the complex processes used in the manufacture of our product candidates is the manufacture of the lentiviral delivery vector used to
deliver the applicable CAAR gene into the T cells. For example, the manufacture of our product candidates includes harvesting white blood cells from each
patient, stimulating certain T cells from the white blood cells and thereby causing them to activate and proliferate, combining patient T cells with our
lentiviral delivery vector through a process known as transduction, expanding the transduced T cells to obtain the desired dose, and ultimately infusing the
modified T cells back into the patient’s body. Notably, the manufacture of both DSG3/1-CAART and FVIII-CAART will likely involve particularly
complex processes due to the need to deliver large transgenes in a vector delivery system with limited capacity. Because of these complexities, the cost to
manufacture our product candidates is higher than traditional small molecule chemical compounds and monoclonal antibodies, and the manufacturing
process is less reliable and is more difficult to reproduce. Furthermore, our manufacturing process development and scale-up is at an early stage. The actual
cost to manufacture and process our product candidates could be greater than we expect and could materially and adversely affect the commercial viability
of our product candidates.
Our manufacturing process may be susceptible to logistical issues associated with the collection of white blood cells from patients’ blood,
variability in the quality of white blood cells collected from patients’ blood, procurement of lentiviral vectors and shipment to the product candidate
manufacturing site as well as shipment of the final product to clinical centers, manufacturing issues associated with interruptions in the manufacturing
process, contamination, concentration and purity of batches of lentiviral vectors, equipment or reagent failure, improper installation or operation of
equipment, vendor or operator error, inconsistency in cell growth, and variability in product characteristics due to patient-to-patient variability. Even minor
deviations from normal manufacturing processes could result in reduced production yields, lot failures, product defects, product recalls, product liability
claims and other supply disruptions. If microbial, viral, or other contaminations are discovered in our product candidates or in the manufacturing facilities
in which our product candidates are made, production at such manufacturing facilities may be interrupted for an extended period of time to investigate and
remedy the contamination. Further, as product candidates are developed through preclinical studies to late-stage clinical trials toward approval and
commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to
optimize processes and results. Penn has informed us that it will be unable provide clinical supply for any late-phase clinical trials of our product
candidates that we may conduct. Therefore, we will need to enter into new agreements with CDMOs to produce clinical supply of our product candidates
for late-phase clinical trials. We cannot guarantee that we will be able to enter into such agreements on commercially acceptable terms, if at all. We will
need to transfer the technology to manufacture our product candidates to these CDMOs, and these CDMOs may decide or be required to adopt different
manufacturing protocols or processes, which may require us to amend any ongoing or proposed clinical trial protocols or perform additional preclinical
studies to demonstrate the comparability of any such new manufacturing protocols or processes. We cannot provide any assurance that Penn will provide
adequate support to efficiently and effectively transfer the technology or that disputes will not arise between us and Penn regarding the necessary scope of
technology transfer, that the technology transfer will be successful, or that any CDMO will be successful in producing our product candidates in sufficient
quantities or of acceptable quality, if at all. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could
cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.
Although we continue to optimize our manufacturing process for our product candidates, doing so is a difficult and uncertain task, and there are
risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential
problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of reagents and/or raw materials. We
ultimately may not be successful in transferring our production system from our contract manufacturer to any manufacturing facilities we may establish
ourselves, or our contract manufacturer may not have the necessary capabilities to complete the implementation and development process. If we are unable
to adequately validate or scale-up the manufacturing process for our product candidates with our current manufacturer, we will need to transfer to another
manufacturer and complete the manufacturing validation process, which can be lengthy. If we are able to adequately validate and scale-up the
manufacturing process for our product candidates with a contract manufacturer, we will still need to negotiate with such contract manufacturer an
agreement for commercial supply and it is not certain we will be able to come to agreement on terms acceptable to us. As a result, we may ultimately be
unable to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product
candidates are commercialized.
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The manufacturing process for any products that we may develop is subject to the FDA approval process, and we will need to contract with
manufacturers who can meet all applicable FDA requirements on an ongoing basis.
The manufacturing process for any products that we may develop is subject to the FDA approval process, and we will need to contract with
manufacturers who can meet all applicable FDA requirements on an ongoing basis. If we or our CDMOs are unable to reliably produce products to
specifications acceptable to the FDA, we may not obtain or maintain the approvals we need to commercialize such products. Even if we obtain regulatory
approval for any of our product candidates, there is no assurance that either we or our CDMOs will be able to manufacture the approved product in
accordance with requirements from the FDA, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to
meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or
more clinical trials, increase clinical trial costs, result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays,
suspension or withdrawal of approvals, license revocation, suspension of production or recalls of the product candidates or marketed biologics, operating
restriction and criminal prosecutions, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods, and have an
adverse effect on our business, financial condition, results of operations and growth prospects. Our future success depends on our ability to manufacture
our products, if licensed, on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying
with applicable regulatory requirements, and an inability to do so could have a material adverse effect on our business, financial condition, and results of
operations. In addition, we could incur higher manufacturing costs if manufacturing processes or standards change, and we could need to replace, modify,
design, or build and install equipment, all of which would require additional capital expenditures. Specifically, because our product candidates may have a
higher cost of goods than conventional therapies, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be
greater.
The manufacture of viral vectors is complex and variable, and there are a limited number of manufacturers able to supply us with viral vectors.
Our DSG3-CAART and MuSK-CAART product candidates utilize a lentiviral delivery vector and some or all of our other product candidates may
require a lentiviral delivery vector, a key drug substance that delivers the CAAR to the target T cells. We do not have the capability to manufacture
lentiviral vector and plan to obtain the vector we require from third parties. The manufacturing process for lentiviral vector is variable and still evolving. It
is not uncommon for manufacturing runs to fail, whether due to contamination, supplier error, or equipment failure, or to be delayed. To the extent our
product candidates use a lentiviral delivery vector, a lack of vector supply will cause us to be unable to manufacture our CAAR T cells as well as a delay in
patient enrollment, which may have a negative impact on our ability to successfully develop our product candidates.
Further, there are a limited number of manufacturers capable of producing lentiviral vectors. It can be challenging to secure a relationship with any
of these manufacturers, and the manufacturing and release process can take a significant amount of time. We have secured a supply of lentiviral vector from
CHOP sufficient for a portion of the patients we plan to enroll in our DesCAARTesTM Trial. We have also reserved additional vector manufacturing
capacity at Penn and we have engaged other CDMOs to evaluate their potential capabilities and capacity for additional supply. There is no assurance that
we will be able to secure adequate and timely supply of lentiviral vector. Moreover, we cannot be certain that our CAAR T cell product candidates
produced with lentiviral vector from different manufacturers will be comparable or that results of clinical trials will be consistent if conducted with
lentiviral vector from different manufacturers.
Vector production also requires the production of high-quality DNA plasmids, for which there is also a limited number of suppliers. Although we
have established relationships with multiple suppliers for lentiviral vector and plasmids, we do not yet have our own clinical-scale manufacturing facility
established, and are therefore highly dependent on the ability of these suppliers to manufacture necessary materials and to deliver these materials to us on a
timely and reliable basis.
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We may encounter difficulties in production, particularly with respect to process development or scaling up of our manufacturing capabilities.
If we encounter such difficulties, our ability to provide supply of our CAAR T cells for clinical trials or for commercial purposes could be
delayed or stopped.
Establishing clinical and commercial manufacturing and supply is a difficult and uncertain task, and there are risks associated with scaling to the
level required for advanced clinical trials or commercialization, including, among others, increased costs, potential problems with process scale-out,
process reproducibility, stability issues, lot consistency, and timely availability of reagents or raw materials. For example, we may find it difficult to
establish a manufacturing process that is consistent. If this occurs, we may need to complete more than one manufacturing run for each treated patient,
which would impact the availability of adequate coverage and reimbursement from third-party payors. Competitors that have developed CAR T cell
therapies have had difficulty reliably producing engineered T cell therapies in the commercial setting. If we experience similar challenges manufacturing
product candidates to approved specifications, this may limit our product candidates’ utilization and our ability to receive payment for these product
candidates once licensed. Alternatively, these challenges may require changes to our manufacturing processes, which could require us to perform additional
clinical studies, incurring significant expense. We may ultimately be unable to reduce the expenses associated with our product candidates to levels that
will allow us to achieve a profitable return on investment.
If we or our third-party suppliers use hazardous, non-hazardous, biological or other materials in a manner that causes injury or violates
applicable law, we may be liable for damages.
Our research and development activities involve the controlled use of potentially hazardous substances, including chemical and biological
materials. We and our suppliers are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage,
handling and disposal of medical and hazardous materials. Although we believe that we and our suppliers’ procedures for using, handling, storing and
disposing of these materials comply with legally prescribed standards, we and our suppliers cannot completely eliminate the risk of contamination or injury
resulting from medical or hazardous materials. As a result of any such contamination or injury, we may incur liability or local, city, state or federal
authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or
penalized with fines, and the liability could exceed our resources. We do not have any insurance for liabilities arising from medical or hazardous materials.
Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our research,
development and production efforts, which could harm our business, prospects, financial condition or results of operations.
Changes in product candidate manufacturing or formulation may result in additional costs or delay, which could adversely affect our business,
results of operations and financial condition.
As product candidates are developed through preclinical studies to later-stage clinical trials towards approval and commercialization, it is common
that various aspects of the development program, such as manufacturing methods or formulation, are altered along the way in an effort to optimize
processes and results. Any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or
other future clinical trials conducted with the altered materials or with materials made with the altered methods. Such changes may also require additional
testing, or notification to, or approval by the FDA or other regulatory authorities. This could delay completion of clinical trials, require the conduct of
bridging clinical trials or studies, require the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates
and/or jeopardize our ability to commence product sales and generate revenue.
Risks Related to Government Regulation
The FDA regulatory approval process is lengthy and time-consuming, and we may experience significant delays in the clinical development
and regulatory approval of our product candidates.
The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products, including biologics,
are subject to extensive regulation by the FDA and other regulatory authorities in the United States. We are not permitted to market any biological drug
product in the United States until we receive approval of a Biologics License Application, or BLA, from the FDA. We have not previously submitted a
BLA to the FDA, or similar licensure filings to comparable foreign authorities. A BLA must include extensive preclinical and clinical data and supporting
information to establish the product candidate’s safety, potency and purity for each desired indication. The BLA must also include significant information
regarding the chemistry, manufacturing and controls for the product, including with respect to chain of identity and chain of custody of the product.
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We expect the novel nature of our product candidates to create further challenges in obtaining regulatory approval. For example, the FDA has not
previously reviewed regulatory applications for the commercial development of CAAR T cells for treatment of pemphigus, and there is no therapy
currently approved by the FDA for the treatment of mPV. Because of this, we have little guidance as to which endpoints will be accepted, how many
clinical trials we may expect to conduct, and whether open-label clinical trials will be deemed acceptable, among other things. We may also request
regulatory approval of future CAAR T cell-based product candidates by target, regardless of disease type or origin, which the FDA may have difficulty
accepting if our clinical trials only involved diseases of certain origins. The FDA may also require a panel of experts, referred to as an Advisory
Committee, to deliberate on the adequacy of the safety, potency and purity data to support licensure. The opinion of the Advisory Committee, although not
binding, may have a significant impact on our ability to obtain licensure of the product candidates based on the completed clinical trials, as the FDA often
adheres to the Advisory Committee’s recommendations. Further, given the rapidly evolving landscape of cell therapy, we could encounter a significant
change in the regulatory environment for our product candidates once we have already begun one or more lengthy and expensive clinical trials for our
product candidates. Accordingly, the regulatory approval pathway for our product candidates may be uncertain, complex, expensive and lengthy, and
approval may not be obtained.
We may also experience delays in completing planned clinical trials for a variety of reasons, including delays related to:
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obtaining regulatory authorization to begin a trial, if applicable;
the availability of financial resources to commence and complete the planned trials;
reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
obtaining approval at each clinical trial site by an independent IRB;
recruiting suitable patients to participate in a trial;
having patients complete a trial, including having patients enrolled in clinical trials dropping out of the trial before the product candidate is
manufactured and returned to the site, or return for post-treatment follow-up;
clinical trial sites deviating from trial protocol or dropping out of a trial;
addressing any patient safety concerns that arise during a trial;
adding new clinical trial sites; or
manufacturing sufficient quantities of qualified materials under cGMPs and applying them on a patient by patient basis for use in clinical
trials.
We could also encounter delays if physicians encounter unresolved ethical issues associated with enrolling patients in clinical trials of our product
candidates in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be suspended or
terminated by us, the IRBs for the institutions in which such trials are being conducted or by the FDA or other regulatory authorities due to a number of
factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial
operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side
effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations or administrative actions, lack of adequate
funding to continue the clinical trial, or based on a recommendation by the DSMB. If we experience termination of, or delays in the completion of, any
future clinical trial of our product candidates, the commercial prospects for our product candidates will be harmed, and our ability to generate product
revenue will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval
process and jeopardize our ability to commence product sales and generate revenue. Many of the factors that cause, or lead to, a delay in the
commencement or completion of clinical trials may ultimately lead to the denial of regulatory approval of our product candidates.
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We expect the product candidates we develop will be regulated as biological products, or biologics, and therefore they may be subject to
competition.
The Biologics Price Competition and Innovation Act of 2009, or BPCIA, was enacted as part of the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act, or collectively the ACA, to establish an abbreviated pathway for the approval of biosimilar
and interchangeable biological products. The regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics,
including the possible designation of a biosimilar as “interchangeable” based on its similarity to a licensed biologic. Under the BPCIA, an application for a
biosimilar product cannot be licensed by the FDA until 12 years after the reference product was licensed under a BLA. The law is complex and is still
being interpreted and implemented by the FDA. In addition, as discussed more fully below, since the BPCIA was enacted as part of the ACA, if the ACA is
invalidated in its entirety as unconstitutional, then the BPCIA could be considered invalid as well. While it is uncertain when such processes intended to
implement the BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for
our biological product candidates.
We believe that any of the product candidates we develop that is licensed in the United States as a biological product under a BLA should qualify
for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the
FDA will not consider the subject product candidates to be reference products for competing products, potentially creating the opportunity for generic
competition sooner than anticipated. Moreover, the extent to which a biosimilar, once licensed, will be substituted for any one of the reference products in a
way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and
regulatory factors that are still developing.
The regulatory landscape that will govern our product candidates is uncertain; regulations relating to more established cell therapies and other
therapies for B cell-mediated autoimmune diseases are still developing, and changes in regulatory requirements could result in delays or
discontinuation of development of our product candidates or unexpected costs in obtaining regulatory approval.
Because we are developing novel CAAR T cell product candidates that are unique biological entities, the regulatory requirements that we will be
subject to are not entirely clear. Even with respect to more established products that fit into the categories of gene therapies or cell therapies, the regulatory
landscape is still developing. For example, regulatory requirements governing gene therapy products and cell therapy products have changed frequently and
may continue to change in the future. Moreover, there is substantial, and sometimes uncoordinated, overlap in those responsible for regulation of existing
gene therapy products and cell therapy products. For example, in the United States, the FDA has established the Office of Tissues and Advanced Therapies,
formerly known as the Office of Cellular, Tissue and Gene Therapies, within its Center for Biologics Evaluation and Research, or CBER, to consolidate the
review of gene therapy and related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER on its review. Gene therapy
clinical trials are also subject to review and oversight by an institutional biosafety committee, a local institutional committee that reviews and oversees
basic and clinical research conducted at the institution participating in the clinical trial. Although the FDA decides whether individual gene therapy
protocols may proceed, review process and determinations of other reviewing bodies can impede or delay the initiation of a clinical study, even if the FDA
has reviewed the study and approved its initiation. Conversely, the FDA can place an IND application on clinical hold even if such other entities have
provided a favorable review. Furthermore, each clinical trial must be reviewed and approved by an independent IRB at or servicing each institution at
which a clinical trial will be conducted. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the
FDA or other regulatory bodies to change the requirements for approval of any of our product candidates.
Complex regulatory environments exist in other jurisdictions in which we might consider seeking regulatory approvals for our product candidates,
further complicating the regulatory landscape. For example, in the European Union, a special committee called the Committee for Advanced Therapies was
established within the EMA in accordance with Regulation (EC) No 1394/2007 on advanced-therapy medicinal products, or ATMPs, to assess the quality,
safety and efficacy of ATMPs, and to follow scientific developments in the field. ATMPs include gene therapy products as well as somatic cell therapy
products and tissue engineered products. These various regulatory
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review committees and advisory groups and new or revised guidelines that they promulgate from time to time may lengthen the regulatory review process,
require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent
approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. Because the regulatory landscape
for our CAAR T cell product candidates is new, we may face even more cumbersome and complex regulations than those emerging for gene therapy
products and cell therapy products. Furthermore, even if our product candidates obtain required regulatory approvals, such approvals may later be
withdrawn because of changes in regulations or the interpretation of regulations by applicable regulatory agencies. Delay or failure to obtain, or unexpected
costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue
to maintain our business.
If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals for our product candidates, we will not be able to
commercialize, or will be delayed in commercializing, 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, distribution, import and export are subject to comprehensive
regulation by the FDA and other regulatory agencies in the United States. Before we can commercialize any of our product candidates, we must obtain
marketing approval. We have not received approval to market any of our product candidates from regulatory authorities in any jurisdiction and it is possible
that none of our product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval. We, as a company,
have no experience in filing and supporting the applications necessary to gain regulatory approvals and expect to rely on third-party CROs and/or
regulatory consultants to assist us in this process. Securing regulatory 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 drug candidate’s safety, potency and purity.
Securing regulatory approval also requires the submission of information about the drug 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 regulatory approvals 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 IND, BLA or equivalent application types, may cause delays in the approval or rejection of an application. The FDA has
substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require
additional preclinical, clinical or other studies. Our product candidates could be delayed in receiving, or fail to receive, regulatory approval for many
reasons, including the following:
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the FDA may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA that a drug candidate is safe, potent and pure for its proposed indication or
a related companion diagnostic is suitable to identify appropriate patient populations;
the results of clinical trials may not meet the level of statistical significance required by the FDA for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA may disagree with our interpretation of data from preclinical studies or clinical trials;
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the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an BLA or other
submission or to obtain regulatory approval in the United States or elsewhere;
the FDA may fail to approve the manufacturing processes, test procedures and specifications, or facilities that we may establish or of third-
party manufacturers with which we may contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA may significantly change in a manner rendering our clinical data insufficient for approval.
Of the large number of drugs in development, only a small percentage successfully complete the FDA approval process and are commercialized.
The lengthy approval process as well as the unpredictability of future clinical trial results may result in our failing to obtain regulatory approval to market
our product candidates, which would significantly harm our business, results of operations and prospects.
We expect the novel nature of our product candidates to create further challenges in obtaining regulatory approval. As a result, our ability to
develop product candidates and obtain regulatory approval may be significantly impacted. For example, the general approach for FDA approval of a new
biologic or drug is for sponsors to seek licensure or approval based on dispositive data from well-controlled, Phase 3 clinical trials of the relevant product
candidate in the relevant patient population. Phase 3 clinical trials typically involve hundreds of patients, have significant costs and take years to complete.
We believe that we may be able to utilize the FDA’s Regenerative Medicine Advanced Therapy designation for our product candidates given the limited
alternatives for treatments for certain rare diseases and B cell-mediated autoimmune diseases, but the FDA may not agree with our plans.
Moreover, approval of genetic or biomarker diagnostic tests may be necessary to advance some of our product candidates to clinical trials or
potential commercialization. In the future, regulatory agencies may require the development and approval of such tests. Accordingly, the regulatory
approval pathway for such product candidates may be uncertain, complex, expensive and lengthy, and approval may not be obtained.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited
indications than we request, may not approve the price we intend to charge for our products, if licensed, may grant approval contingent on the performance
of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for
the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product
candidates.
If we 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.
Even though we may apply for orphan drug designation for our product candidates, we may not be able to obtain orphan drug marketing
exclusivity.
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, defined as a
disease or condition with a patient population of fewer than 200,000 in the United States, or a patient population of 200,000 or more in the United States
when there is no reasonable expectation that the cost of developing and making available the drug or biologic in the United States will be recovered from
sales in the United States for that drug or biologic. In order to obtain orphan drug designation, the request must be made before submitting a BLA. In the
United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax
advantages, and user-fee waivers. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed
publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
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If a product that has orphan drug designation subsequently receives the first FDA approval of that particular product for the disease for which it has
such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a
BLA, to market the same biologic (meaning, a product with the same principal molecular structural features) for the same indication for seven years, except
in limited circumstances such as a showing of clinical superiority to the product with orphan drug exclusivity or if FDA finds that the holder of the orphan
drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or
condition for which the drug was designated. As a result, even if one of our product candidates receives orphan exclusivity, the FDA can still approve other
biologics that do not have the same principal molecular structural features for use in treating the same indication or disease or the same biologic for a
different indication or disease during the exclusivity period. Furthermore, the FDA can waive orphan exclusivity if we are unable to manufacture sufficient
supply of our product or if a subsequent applicant demonstrates clinical superiority over our product.
We have obtained from the FDA orphan drug designation for DSG3-CAART for the treatment of pemphigus vulgaris (PV). We may seek orphan
drug designation for certain other of our product candidates, but may be unable to obtain orphan drug designation for some or all of our product candidates
in specific orphan indications in which we believe there is a medically plausible basis for the use of these products. Even if we obtain orphan drug
designation, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan designated
indication and may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure sufficient
quantities of the product to meet the needs of patients with the rare disease or condition, or if a subsequent applicant demonstrates clinical superiority over
our products, if licensed. In addition, although we may seek orphan drug designation for other product candidates, we may never receive such designations.
Although we may pursue expedited regulatory approval pathways for a product candidate, it may not qualify for expedited development or, if it
does qualify for expedited development, it may not actually lead to a faster development or regulatory review or approval process.
Although we believe there may be an opportunity to accelerate the development of certain of our product candidates through one or more of the
FDA’s expedited programs, such as fast track, breakthrough therapy, Regenerative Medicine Advanced Therapy, accelerated approval or priority review, we
cannot be assured that any of our product candidates will qualify for such programs.
For example, we may seek a Regenerative Medicine Advanced Therapy, or RMAT, designation for some of our product candidates. An RMAT is
defined as cell therapies, therapeutic tissue engineering products, human cell and tissue products, and combination products using any such therapies or
products. Gene therapies, including genetically modified cells that lead to a durable modification of cells or tissues may meet the definition of a
Regenerative Medicine Therapy. The RMAT program is intended to facilitate efficient development and expedite review of RMATs, which are intended to
treat, modify, reverse, or cure a serious or life-threatening disease or condition. A new drug application or a BLA for an RMAT may be eligible for priority
review or accelerated approval through (1) surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit or (2) reliance upon
data obtained from a meaningful number of sites. Benefits of such designation also include early interactions with FDA to discuss any potential surrogate
or intermediate endpoint to be used to support accelerated approval. A Regenerative Medicine Therapy that is granted accelerated approval and is subject to
post-approval requirements may fulfill such requirements through the submission of clinical evidence, clinical studies, patient registries, or other sources of
real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or post-approval monitoring of all patients treated
with such therapy prior to its approval. Although RMAT designation or access to any other expedited program may expedite the development or approval
process, it does not change the standards for approval. If we apply for RMAT designation or any other expedited program for our product candidates, the
FDA may determine that our proposed target indication or other aspects of our clinical development plans do not qualify for such expedited program. Even
if we are successful in obtaining a RMAT designation or access to any other expedited program, we may not experience faster development timelines or
achieve faster review or approval compared to conventional FDA procedures. Access to an expedited program may also be withdrawn by the FDA if it
believes that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review
procedure does not ensure that we will ultimately obtain regulatory approval for such product candidate.
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Even if we receive regulatory approval of our product candidates, we will be subject to ongoing regulatory obligations and continued regulatory
review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements
or experience unanticipated problems with our product candidates.
Any regulatory approvals that we receive for our product candidates will require surveillance to monitor the safety, potency and purity of the
product candidate. We believe it is likely that the FDA will require a Risk Evaluation and Mitigation Strategy, or REMS, in order to approve our product
candidates, which could entail requirements for a medication guide, physician communication plans or additional elements to assure safe use, such as
restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA approves our product candidates, the
manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for
our product candidates will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-
marketing information and reports, registration, as well as continued compliance with cGMPs and cGCPs for any clinical trials that we conduct post-
approval. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence
to commitments made in any BLA, other marketing application and previous responses to inspectional observations. Accordingly, we and others with
whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality
control. In addition, the FDA could require us to conduct another study to obtain additional safety or biomarker information.
Further, we will be required to comply with FDA promotion and advertising rules, which include, among others, standards for direct-to-consumer
advertising, restrictions on promoting products for uses or in patient populations that are not described in the product’s approved uses (known as “off-label
use”), limitations on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet and social
media. Later discovery of previously unknown problems with our product candidates through follow-up programs with our clinical trial patients, including
adverse events of unanticipated severity or frequency, or with our third-party suppliers or manufacturing processes, or failure to comply with regulatory
requirements, may result in revisions to the approved labeling to add new safety information, imposition of post-market studies or clinical studies to assess
new safety risks, or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other
things:
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restrictions on the marketing or manufacturing of our product candidates, withdrawal of the product from the market or voluntary or
mandatory product recalls;
fines, warning letters or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us or suspension or revocation of
license approvals;
product seizure or detention, or refusal to permit the import or export of our product candidates; and
injunctions or the imposition of civil or criminal penalties.
The FDA’s policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our
product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or
executive action. For example, certain policies of the current U.S. President’s administration may impact our business and industry. Namely, the current
U.S. President’s administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant
burdens on, or otherwise materially delay, FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking,
issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these orders will be implemented, and the extent to
which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions on FDA’s ability to engage in
oversight and implementation activities in the normal course, our business may be negatively impacted. If we are slow or unable to adapt to changes in
existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing
approval that we may have obtained, and we may not achieve or sustain profitability.
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Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it
difficult for us to sell our product candidates, if licensed, profitably.
Successful commercialization of our product candidates, if licensed, will depend in part on the extent to which reimbursement for those drug
products will be available from government health administration authorities, private health insurers, and other organizations. Government authorities and
third-party payors, such as private health insurers and health maintenance organizations, decide which drug products they will pay for and establish
reimbursement levels. The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford a
drug product. Sales of drug products depend substantially, both domestically and abroad, on the extent to which the costs of drugs products are paid for by
health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration
authorities, private health coverage insurers and other third-party payors. Significant uncertainty exists as to the coverage and reimbursement status of any
product candidates for which we obtain regulatory approval. Any product candidate for which we seek regulatory approval and reimbursement will need to
meet or surpass our target product profile, or TPP, to be deemed a viable alternative to currently approved therapies. In addition, because our product
candidates represent new approaches to the treatment of B cell-mediated autoimmune diseases, we cannot accurately estimate the potential revenue from
our product candidates.
Third-party payors decide which drugs and treatments they will cover and the amount of reimbursement. Reimbursement by a third-party payor
may depend upon a number of factors, including, but not limited to, the third-party payor’s determination that use of a product is:
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a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.
Obtaining coverage and reimbursement of a product from a government or other third-party payor is a time-consuming and costly process that
could require us to provide the payor with supporting scientific, clinical and cost-effectiveness data for the use of our products, if licensed. In the United
States, the principal decisions about reimbursement for new drug products are typically made by the Centers for Medicare and Medicaid Services, or CMS,
an agency within the U.S. Department of Health and Human Services, or HHS. CMS decides whether and to what extent a new drug product will be
covered and reimbursed under Medicare, and private payors tend to follow CMS to a substantial degree. However, no uniform policy of coverage and
reimbursement for drug products exists among third-party payors and coverage and reimbursement levels for drug products can differ significantly from
payor to payor. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the
product. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our
investment in product development.
Even if we obtain coverage for a given product, if the resulting reimbursement rates are insufficient, hospitals may not approve our product for use
in their facility or third-party payors may require co-payments that patients find unacceptably high. Patients are unlikely to use our product candidates
unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Separate reimbursement for
the product itself may or may not be available. Instead, the hospital or administering physician may be reimbursed only for providing the treatment or
procedure in which our product is used. Further, from time to time, CMS revises the reimbursement systems used to reimburse health care providers,
including the Medicare Physician Fee Schedule and Outpatient Prospective Payment System, which may result in reduced Medicare payments. In some
cases, private third-party payors rely on all or portions of Medicare payment systems to determine payment rates. Changes to government healthcare
programs that reduce payments under these programs may negatively impact payments from private third-party payors, and reduce the willingness of
physicians to use our product candidates.
The marketability of any product candidates for which we receive regulatory approval for commercial sale may suffer if government and other
third-party payors fail to provide coverage and adequate reimbursement. We expect downward pressure on pharmaceutical pricing to continue. Further,
coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for
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one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the
future.
Healthcare legislative measures aimed at reducing healthcare costs may have a material adverse effect on our business and results of
operations.
In the United States, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that
could prevent or delay regulatory approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any
product candidates for which we obtain regulatory approval. We expect that current laws, as well as 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, or any collaborators, may receive for any approved products.
In March 2010, President Obama signed into law the ACA. Among the provisions of the ACA of potential importance to our business and our
product candidates are the following:
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an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription products and biologic products;
an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for products that are
inhaled, infused, instilled, implanted or injected;
expansion of healthcare fraud and abuse laws, including the civil False Claims Act and the federal Anti-Kickback Statute, new government
investigative powers and enhanced penalties for noncompliance;
a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% (increased to 70% as of January 1,
2019) point-of-sale discounts off negotiated prices of applicable brand products to eligible beneficiaries during their coverage gap period,
as a condition for the manufacturer’s outpatient products to be covered under Medicare Part D;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
new requirements to report certain financial arrangements with physicians and teaching hospitals;
a new requirement to annually report product samples that manufacturers and distributors provide to physicians;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research;
a new Independent Payment Advisory Board, or IPAB, which has authority to recommend certain changes to the Medicare program to
reduce expenditures by the program that could result in reduced payments for prescription products; and
established the Center for Medicare and Medicaid Innovation within CMS to test innovative payment and service delivery models.
Since its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and we
expect there will be additional challenges and amendments to the ACA in the future. Various portions of the ACA are currently undergoing legal and
constitutional challenges in the Fifth Circuit Court and the United States Supreme Court and the Trump Administration has issued various Executive Orders
which eliminated cost sharing subsidies and various provisions that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden
on individuals, healthcare providers, health insurers, or manufacturers of
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pharmaceuticals or medical devices. Additionally, Congress has introduced several pieces of legislation aimed at significantly revising or repealing the
ACA. It is unclear whether the ACA will be overturned, repealed, replaced, or further amended. We cannot predict what affect further changes to the ACA
would have on our business.
Further legislation or regulation could be passed that could harm our business, financial condition and results of operations. Other legislative
changes have been proposed and adopted since the Affordable Care Act was enacted. For example, in August 2011, President Obama signed into law the
Budget Control Act of 2011, which, among other things included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which
went into effect in April 2013 and will remain in effect through 2029 unless additional Congressional action is taken. In January 2013, the American
Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including
hospitals, imaging centers and treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers
from three to five years. These new laws and regulations 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 we may obtain regulatory approval or the frequency with which any such product
candidate is prescribed or used.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening
the availability of healthcare and containing or lowering the cost of healthcare. The implementation of cost containment measures or other healthcare
reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates. Such reforms could have an
adverse effect on anticipated revenue from product candidates that we may successfully develop and for which we may obtain regulatory approval and may
affect our overall financial condition and ability to develop product candidates.
In addition, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.
Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient assistance programs, and reform
government program reimbursement methodologies for drugs. At the federal level, the U.S. President’s administration’s budget for fiscal year 2020
contains further drug price control measures that could be enacted during the 2020 legislative session or in other future legislation, including, for example,
measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under
Medicaid, and to eliminate cost sharing for generic drugs for low-income patients. Further, the current U.S. President’s administration released a
“Blueprint”, or plan, to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer
competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and
reduce the out of pocket costs of drug products paid by consumers. HHS has already started the process of soliciting feedback on some of these measures
and, at the same, is immediately implementing others under its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare
Advantage Plans the option of using step therapy, a type of prior authorization, for Part B drugs beginning January 1, 2020. This final rule codified CMS’s
policy change that was effective January 1, 2019. On September 25, 2019, the Senate Finance Committee introduced the Prescription Drug Pricing
Reduction Action of 2019, a bill intended to reduce Medicare and Medicaid prescription drug prices. The proposed legislation would restructure the Part D
benefit, modify payment methodologies for certain drugs, and impose an inflation cap on drug price increases. An even more restrictive bill, the Lower
Drug Costs Now Act of 2019, was introduced in the House of Representatives on September 19, 2019, and would require HHS to directly negotiate drug
prices with manufacturers. The Lower Drugs Costs Now Act of 2019 has passed out of the House and was delivered to the Senate on December 16, 2019.
However, it is unclear whether either of these bills will make it through both chambers and be signed into law, and if either is enacted, what effect it would
have on our business.
Although a number of these, and other proposed measures will require authorization through additional legislation to become effective, Congress
and the current U.S. President’s administration have each indicated that it will continue to seek new legislative and/or administrative measures to control
drug costs. While some proposed measures will require authorization through additional legislation to become effective, Congress and the current U.S.
President’s administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. Individual
states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical
product pricing, including price or
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patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some
cases, designed to encourage importation from other countries and bulk purchasing.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at containing or
lowering the cost of healthcare. For example, in 2016, the United Kingdom referendum on its membership in the EU resulted in a majority of the United
Kingdom voters voting to exit the EU, often referred to as Brexit. Brexit has already and may continue to adversely affect European and/or worldwide
regulatory conditions. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in Europe, including those related to the
pricing of prescription pharmaceuticals, as the United Kingdom determines which EU laws to replicate or replace, which could impair our ability to
transact business in the EU and the United Kingdom in the future, if we elect to seek regulatory approval and commercialize any of our products there, if
approved. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain
profitability, or commercialize our product. Such reforms could have an adverse effect on anticipated revenue from product candidates that we may
successfully develop and for which we may obtain regulatory approval and may affect our overall financial condition and ability to develop product
candidates.
We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care
organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:
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the demand for our product candidates, if we obtain regulatory approval;
our ability to set a price that we believe is fair for our products, if licensed;
our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and
the availability of capital.
Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors,
which may adversely affect our future profitability.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs
that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the
handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research and development activities involve the use of biological and
hazardous materials and produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We
cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of our commercialization efforts, research and
development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations
governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized
by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and
regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we
may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail
our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and
have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. Breach of certain
environmental, health and safety laws and regulations could also in certain circumstances constitute a breach of our License Agreement with Penn. In
addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or
future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result
in substantial fines, penalties or other sanctions.
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Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not
carry specific biological waste or hazardous waste insurance coverage, workers compensation or property and casualty and general liability insurance
policies that include coverage for damages and fines arising from biological or hazardous waste exposure or contamination.
Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners
and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the laws of the FDA,
provide true, complete and accurate information to the FDA, comply with manufacturing standards we have established, comply with healthcare fraud and
abuse laws in the United States and similar foreign fraudulent misconduct laws, or report financial information or data accurately or to disclose
unauthorized activities to us. If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States,
our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase.
These laws may impact, among other things, our current activities with principal investigators and research patients, as well as proposed and future sales,
marketing and education programs.
Our relationships with customers, healthcare providers, physicians, and third-party payors will be subject, directly or indirectly, to federal and
state healthcare fraud and abuse laws, false claims laws, health information privacy and security laws, and other healthcare laws and
regulations. If we or our employees, independent contractors, consultants, commercial partners and vendors violate these laws, we could face
substantial penalties.
These laws may impact, among other things, our clinical research program, as well as our proposed and future sales, marketing and education
programs. In particular, the promotion, sales and marketing of healthcare items and services is subject to extensive laws and regulations designed to prevent
fraud, kickbacks, self-dealing and other abusive practices, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims
Act, which may constrain the business or financial arrangements and relationships through which such companies sell, market and distribute
pharmaceutical products. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales
commission, customer incentive and other business arrangements. We may also be subject to federal, state and foreign laws governing the privacy and
security of individual identifiable health information and other personally identifiable information. The U.S. healthcare laws and regulations that may affect
our ability to operate include, but are not limited to:
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the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in
return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for
which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. A
person or entity can be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In
addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the False Claims Act, or FCA. The Anti-Kickback Statute has been interpreted to apply to arrangements between
pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. There are a number of
statutory exceptions and regulatory safe harbors protecting some common activities from prosecution;
federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, which prohibit, among other things,
individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by
Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or
statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal
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government, or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the
federal government. Manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors if
they are deemed to “cause” the submission of false or fraudulent claims. The FCA also permits a private individual acting as a
“whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that
prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by
means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or
control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying,
concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery
of, or payment for, healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a
person or entity can be found guilty of violating HIPAA without actual knowledge of the statute or specific intent to violate it;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their
respective implementing regulations, which impose, among other things, requirements on certain covered healthcare providers, health
plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or
disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable
health information without appropriate authorization. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make
civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for
damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing
federal civil actions; the federal Physician Payment Sunshine Act, created under the Patient Protection and Affordable Care Act, and its
implementing regulations, which require manufacturers of drugs, devices, biologicals and medical supplies for which payment is available
under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the HHS information
related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and
chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to certain non-physician
providers such as physician assistants and nurse practitioners;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private
insurers, and may be broader in scope than their federal equivalents; state and foreign laws that require pharmaceutical companies to
comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the
federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug
manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or
marketing expenditures; and state and foreign laws governing the privacy and security of individually identifiable health information and
other personally identifiable information in certain circumstances, many of which differ from each other in significant ways and often are
not preempted by HIPAA, thus complicating compliance efforts.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing,
storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
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The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform,
especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of
interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry. Ensuring business arrangements comply with applicable healthcare laws, as well as responding to possible investigations by
government authorities, can be time- and resource-consuming and can divert a company’s attention from the business.
The failure to comply with any of these laws or regulatory requirements subjects entities to possible legal or regulatory action. Depending on the
circumstances, failure to meet applicable regulatory requirements can result in civil, criminal and administrative penalties, damages, fines, disgorgement,
individual imprisonment, possible exclusion from participation in federal and state funded healthcare programs, contractual damages and the curtailment or
restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other
agreement to resolve allegations of non-compliance with these laws. Any action for violation of these laws, even if successfully defended, could cause a
pharmaceutical manufacturer to incur significant legal expenses and divert management’s attention from the operation of the business. Prohibitions or
restrictions on sales or withdrawal of future marketed products could materially affect business in an adverse way.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of
our business activities, or our arrangements with physicians, some of who receive stock options as compensation, could be subject to challenge under one
or more of such laws. If we or our employees, independent contractors, consultants, commercial partners and vendors violate these laws, we may be subject
to investigations, enforcement actions and/or significant penalties. We have adopted a code of business conduct and ethics, but it is not always possible to
identify and deter employee misconduct or business noncompliance, and the precautions we take to detect and prevent inappropriate conduct 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. Efforts to ensure that our business arrangements will comply with applicable healthcare
laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply
with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions
are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our
business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from
participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings,
additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of
non-compliance with these laws, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results
of operations.
European data collection is governed by restrictive regulations governing the use, processing, and cross-border transfer of personal
information.
The collection and processing of personal data – including health data – is governed by the European Union-wide General Data Protection
Regulation, or GDPR, which became applicable on May 25, 2018. The GDPR applies to any business, regardless of its location, that provides goods or
services to residents in the EU or monitors the behavior of individuals within the European Union. The GDPR imposes more stringent operational
requirements for processors and controllers of personal data, including, for example, special protections for “sensitive information” which includes health
and genetic information of data subjects residing in the European Union, expanded disclosures about how personal information is to be used, limitations on
retention of information, increased requirements pertaining to health data and pseudonymized (i.e., key-coded) data, mandatory data breach notification
requirements and higher standards for controllers to demonstrate that they have obtained valid consent for certain data processing activities. GDPR grants
individuals the opportunity to object to the processing of their personal information, allows them to request deletion of personal information in certain
circumstances, and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights have been
violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the European Union to
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the United States and other jurisdictions that have not been deemed to offer “adequate” privacy protections. The GDPR provides that European Union
Member States may make their own further laws and regulations in relation to the processing of genetic, biometric or health data, which could result in
differences between Member States, limit our ability to use and share personal data or could cause our costs to increase, and harm our business and
financial condition. Our clinical trial activity conducted within the member states of the European Union is regulated by the GDPR. In addition, we are
subject to evolving and strict rules on the transfer of personal data out of the European Union to the United States. Furthermore, the current main data
transfer mechanisms (Privacy Shield and Standard Contractual Clauses) are the subject of a legal challenge before the European Court of Justice, raising
the possibility of future uncertainty about mechanisms that may be used to legitimize cross-border transfers of personal data. Failure to comply with
European Union data protection laws may result in fines (for example, of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the
preceding financial year (whichever is higher) under the GDPR) and other administrative penalties, which may be onerous and adversely affect our
business, financial condition, results of operations and prospects. As a result of the implementation of the GDPR, we may be required to put in place
additional mechanisms ensuring compliance with the new data protection rules. There is significant uncertainty related to the manner in which data
protection authorities will seek to enforce compliance with GDPR. Enforcement uncertainty and the costs associated with ensuring GDPR compliance be
onerous and adversely affect our business, financial condition, results of operations and prospects. Further, the United Kingdom’s decision to leave the
European Union, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, it is
unclear how data transfers to and from the United Kingdom will be regulated now that the United Kingdom has left the European Union.
If our security measures are breached or unauthorized access to individually identifiable health information or other personally identifiable
information is otherwise obtained, our reputation may be harmed, and we may incur significant liabilities.
Unauthorized access to, or security breaches of, our systems and databases could result in unauthorized access to data and information and loss,
compromise or corruption of such data and information. The systems of Penn, any CDMOs that we may engage in the future, and present and future CROs,
contractors and consultants also could experience breaches of security leading to the exposure of confidential and sensitive information. Such breaches of
security could be caused by computer hacking, phishing attacks, ransomware, dissemination of computer viruses, worms and other destructive or disruptive
software, denial of service attacks, and other malicious activity, which may be heretofore unknown. The number and complexity of these threats continue to
increase over time.
In the event of a security breach, our company could suffer loss of business, severe reputational damage adversely affecting investor confidence,
regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations,
significant costs for remediation and other liabilities. For example, the loss of preclinical study or clinical trial data from completed or future preclinical
studies or clinical trials 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 disclosure of confidential or
proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.
We have incurred and expect to incur significant expenses to prevent security breaches, including costs related to deploying additional personnel
and protection technologies, training employees, and engaging third-party solution providers and consultants. Although we expend significant resources to
create security protections that shield our customer data against potential theft and security breaches, such measures cannot provide absolute security.
Moreover, as we outsource more of our information systems to vendors and rely more on cloud-based information systems, the related security risks will
increase, and we will need to expend additional resources to protect our technology and information systems.
We have in the past experienced breaches of our security measures. For example, in 2019, we believe a phishing incident led to certain employee
email accounts being accessed by an unauthorized third party. We initiated an investigation to determine whether further action was required under
applicable law. The incident did not have a material impact on our business or financial condition. While we believe we responded appropriately, including
implementing remedial measures with the goal of preventing similar such events in the future, there can be no
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assurance that we will be successful in these remedial and preventative measures or in successfully mitigating the effects of potential future incidents or
cyber-attacks. We thus remain at risk for future breaches, including, without limitation, breaches that may occur as a result of third-party action, or
employee, vendor or contractor error or malfeasance and other causes. If, in the future, we experience a data breach or security incident, we would be likely
to experience harm to our reputation, financial performance, and customer and vendor relationships, and the possibility of litigation or regulatory
investigations or actions by state and federal governmental authorities and non-U.S. authorities.
Interruptions in the availability of server systems or communications with internet or cloud-based services, or failure to maintain the security,
confidentiality, accessibility or integrity of data stored on such systems, could harm our business.
We rely upon a variety of internet service providers, third-party web hosting facilities and cloud computing platform providers to support our
business. Failure to maintain the security, confidentiality, accessibility or integrity of data stored on such systems could result in interruptions in our
operations, damage our reputation in the market, increase our service costs, cause us to incur substantial costs, subject us to liability for damages and/or
fines, and divert our resources from other tasks, any one of which could materially adversely affect our business, financial condition, results of operations
and prospects. If our security measures or those of our third-party data center hosting facilities, cloud computing platform providers, or third-party service
partners, are breached, and unauthorized access is obtained to our data or our information technology systems, we may incur significant legal and financial
exposure and liabilities.
We also do not have control over the operations of the facilities of our cloud service providers and our third-party web hosting providers, and they
also may be vulnerable to damage or interruption from natural disasters, cybersecurity attacks, terrorist attacks, power outages and similar events or acts of
misconduct. In addition, any changes in these providers’ service levels may adversely affect our ability to meet our requirements and operate our business.
Risks Related to Ownership of Our Common Stock
The price of our stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some
of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this
annual report, these factors include:
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the commencement, enrollment or results of our planned preclinical studies or clinical trials of our product candidates or any preclinical
studies or future clinical trials we may conduct, or changes in the development status of our product candidates;
our decision to initiate a preclinical study or clinical trial, not to initiate a preclinical study or clinical trial or to terminate an existing
preclinical study or clinical trial;
adverse results or delays in preclinical studies or clinical trials of our product candidates;
any delay in our regulatory filings for our product candidates and any adverse development or perceived adverse development with respect
to the applicable regulatory authority’s review of such filings, including, without limitation, the FDA’s issuance of a “refusal to file” letter
or a request for additional information;
our failure to commercialize our product candidates;
adverse regulatory decisions, including failure to receive regulatory approval of our product candidates;
changes in laws or regulations applicable to our product candidates, including, but not limited to, clinical trial requirements for approvals;
adverse developments concerning our manufacturers or suppliers;
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our inability to obtain adequate product supply for any licensed product or inability to do so at acceptable prices;
our inability to establish collaborations, if needed;
additions or departures of key scientific or management personnel;
unanticipated serious safety concerns related to the use of our product candidates;
introduction of new products or services offered by us or our competitors;
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
our ability to effectively manage our growth;
the size and growth of our initial target markets;
our ability to successfully treat additional types of B cell-mediated autoimmune diseases;
actual or anticipated variations in annual or quarterly operating results;
our cash position;
our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;
publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage by
securities analysts;
changes in the market valuations of similar companies;
overall performance of the equity markets;
sales of our common stock by us or our stockholders in the future;
trading volume of our common stock;
changes in accounting practices;
ineffectiveness of our internal controls;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection
for our technologies;
significant lawsuits, including patent or stockholder litigation;
general political and economic conditions; and
other events or factors, many of which are beyond our control.
In addition, the stock market in general, and The Nasdaq Global Select Market and biopharmaceutical companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market
and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, securities
class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of
litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, operating
results or financial condition.
We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate
declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.
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Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters
subject to stockholder approval.
Our executive officers, directors, and 5% stockholders beneficially owned, in the aggregate, approximately 85.0% of our outstanding voting
common stock, or 89.0% of our common stock, assuming all shares of non-voting common stock are converted into voting common stock in accordance
with the terms of our amended and restated certificate of incorporation. Accordingly, these stockholders will have the ability to influence us through this
ownership position and significantly affect the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to
significantly affect the outcome of elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other
major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your
best interest as one of our stockholders.
We are an emerging growth company and a “smaller reporting company,” and we cannot be certain if the reduced reporting requirements
applicable to emerging growth companies and smaller reporting companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act. For as long as we continue to be an
emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that
are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, as amended, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We could be an emerging growth company for up to five years following the date of completion of our initial
public offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the
last day of the fiscal year (a) following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue
of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by
non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt
during the prior three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have
different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively
and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, we are not subject to the same new or revised accounting
standards as other public companies that are not emerging growth companies and our financial statements may not be comparable to other public
companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are also a “smaller reporting company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. We would cease to
be a smaller reporting company if we have a public float in excess of $250 million, or have annual revenues in excess of $100 million and a public float in
excess of $700 million, determined on an annual basis. Consequently, even after we no longer qualify as an emerging growth company, we may still qualify
as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we
may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our
common stock and our stock price may be more volatile.
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to
operate our business could be harmed.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal
controls. The Sarbanes-Oxley Act requires that we evaluate and determine the
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effectiveness of our internal control over financial reporting and, beginning with our second annual report following our initial public offering, provide a
management report on internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to
include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our 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 in accordance
with generally accepted accounting principles. We have begun the process of documenting, reviewing, and improving our internal controls and procedures
for compliance with Section 404 of the Sarbanes-Oxley Act. We have begun recruiting additional finance and accounting personnel with certain skill sets
that we need as a public company.
Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our
existing processes, and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal
controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our
operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate
financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our service to new and
existing customers.
The dual class structure of our common stock may limit your ability to influence corporate matters and may limit your visibility with respect to
certain transactions.
The dual class structure of our common stock may limit your ability to influence corporate matters. Holders of our common stock are entitled to
one vote per share, while holders of our non-voting common stock are not entitled to any votes. Nonetheless, each share of our non-voting common stock
may be converted at any time into one share of our common stock at the option of its holder by providing written notice to us, subject to the limitations
provided for in our amended and restated certificate of incorporation. Entities affiliated with or managed by Baker Brothers Life Sciences, L.P. and Adage
Capital Partners, LP hold an aggregate of 6,409,519 shares of our non-voting common stock pursuant to our Third Amended and Restated Certificate of
Incorporation. At any time, upon written notice, these entities could convert a portion of these shares of non-voting common stock into up to an aggregate
of 27% of our shares of common stock. Upon 61 days’ prior written notice, these entities could convert all of their respective shares of non-voting common
stock into shares of common stock, which would result in such entities holding approximately 32% of the voting power of our outstanding common stock
following the completion of our initial public offering. Consequently, if holders of our non-voting common stock exercise their option to make this
conversion, this will have the effect of increasing the relative voting power of those prior holders of our non-voting common stock, and correspondingly
decreasing the voting power of the holders of our common stock, which may limit your ability to influence corporate matters. Additionally, stockholders
who hold, in the aggregate, more than 10% of our common stock and non-voting common stock, but 10% or less of our common stock, and are not
otherwise a company insider, may not be required to report changes in their ownership due to transactions in our non-voting common stock pursuant to
Section 16(a) of the Exchange Act, and may not be subject to the short-swing profit provisions of Section 16(b) of the Exchange Act.
A significant portion of our total outstanding shares is restricted from immediate resale but may be sold into the market in the near future,
which could cause the market price of our common stock to decline significantly.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, upon the expiration of the
lock-up agreements, the early release of these agreements, or the perception in the market that the holders of a large number of shares of common stock
intend to sell shares, could reduce the market price of our common stock.
All shares of common stock not sold in our October 2019 initial public offering will be able to be sold in the public market beginning 180 days
after the date of our initial public offering. The underwriters may, in their sole
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discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. Shares issued upon the exercise of stock
options outstanding under our equity incentive plans or pursuant to future awards granted under those plans will become available for sale in the public
market to the extent permitted by the provisions of applicable vesting schedules, any applicable market standoff and lock-up agreements, and Rule 144 and
Rule 701 under the Securities Act of 1933, as amended, or the Securities Act.
Certain holders of our common stock have rights, subject to conditions, to require us to file registration statements covering their shares or to
include their shares in registration statements that we may file for ourselves or other stockholders. We also filed a registration statement on Form S-8
registering the issuance of 4.5 million shares of common stock issued or reserved for future issuance under our equity compensation plans. Shares
registered under this registration statement on Form S-8 can be freely sold in the public market upon issuance and once vested, subject to volume
limitations applicable to affiliates and the lock-up agreements described above. If any of these additional shares are sold, or if it is perceived that they will
be sold, in the public market, the market price of our common stock could decline.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our
technologies or product candidates.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances
and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest
will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness
would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional
debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to
conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have
to relinquish valuable rights to our technologies or product candidates or grant licenses on terms unfavorable to us.
Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the
market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of
control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:
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a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at
one time;
a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our
stockholders;
a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, or
by a majority of the total number of authorized directors;
advance notice requirements for stockholder proposals and nominations for election to our board of directors;
a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition
to any other vote required by law, upon the approval of the holders of not less than 75% of the votes that all our stockholders would be
entitled to cast in an annual election of directors;
a requirement of approval of not less than 75% of all outstanding shares of our voting stock to amend any bylaws by stockholder action or
to amend specific provisions of our certificate of incorporation; and
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the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval
and which preferred stock may include rights superior to the rights of the holders of common stock.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law,
which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These anti-takeover provisions
and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for
stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and
could also delay or impede a merger, tender offer or proxy contest involving our company. These provisions could also discourage proxy contests and make
it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or
prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
Our amended and restated bylaws designate certain courts as the sole and exclusive forum for certain types of actions and proceedings that
may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, or employees.
Pursuant to our amended and restated bylaws, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the
State of Delaware (or, if the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the
State of Delaware) will be the sole and exclusive forum for state law claims for: (i) any derivative action or proceeding brought on our behalf; (ii) any
action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders;
(iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or
bylaws; (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; or (v) any action asserting a claim
governed by the internal affairs doctrine (the Delaware Forum Provision). The Delaware Forum Provision will not apply to any causes of action arising
under the Securities Act of 1933, as amended (the Securities Act) or the Securities Exchange Act of 1934. In addition, our amended and restated bylaws
provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented
to the foregoing provisions. We recognize that the forum selection clause in our bylaws may impose additional litigation costs on stockholders in pursuing
any such claims, particularly if the stockholders do not reside in or near the State of Delaware. Additionally, the forum selection clauses in our amended
and restated bylaws may limit our stockholders’ ability to bring a claim in a forum that they find favorable for disputes with us or our directors, officers or
employees, which may discourage such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our
stockholders. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts
where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less
favorable to us than our stockholders. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated bylaws to
be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could
materially adversely affect our business, financial condition and operating results.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our
business. In the event that one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our
business, our stock price may decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand
for our stock could decrease, which might cause our stock price and trading volume to decline.
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Changes in tax laws could adversely affect our business and financial condition.
The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and
by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely
affect us or holders of our common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. For
example, the Tax Cuts and Jobs Act, or the TCJA, significantly revised the Internal Revenue Code of 1986, as amended, or the Code. The TCJA included,
among other things, a reduction of the corporate tax rate from a top marginal tax rate of 35% to a flat rate of 21%, a limitation of the tax deduction for net
interest expense to 30% of adjusted earnings (except for certain small businesses), a limitation of the deduction for net operating losses to 80% of annual
taxable income for losses arising in taxable years beginning after December 31, 2017 and an elimination of net operating loss carrybacks for losses arising
in taxable years ending after December 31, 2017 (though any such net operating losses may be carried forward indefinitely) and the modification and repeal
of many business deductions and credits, including the reduction of the business tax credit for certain clinical testing expenses incurred in the testing of
certain drugs for rare diseases or conditions generally referred to as “orphan drugs.” Future changes in tax laws could have a material adverse effect on our
business, cash flow, financial condition or results of operations. Prospective investors in our common stock should consult with their legal and tax advisors
with respect to potential changes in tax laws and the tax consequences of investing in or holding our common stock.
Our ability to utilize our net operating losses and certain other tax attributes to offset future taxable income may be subject to certain
limitations.
As of December 31, 2019, we had U.S. federal, state and local net operating loss carryforwards of $17.5 million, $19.2 million and $10.1 million,
respectively. $0.3 million of the federal amounts expire in 2037. The state net operating losses begin to expire in 2037 and the local net operating losses
expire in 2039. Approximately $17.2 million of the federal net operating losses can be carried forward indefinitely. Certain net operating loss carryforwards
could expire unused and be unavailable to offset future taxable income. In addition, in general, under Sections 382 and 383 of the Code and corresponding
provisions of state law, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss
carryforwards or tax credits, or NOLs or credits, to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where
the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership
by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Our existing NOLs or credits may be subject to
limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs or credits could be further limited
by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an
ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be impaired under state law. Accordingly, we may not be able to
utilize a material portion of our NOLs or credits. Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability and
generating U.S. federal and state taxable income. As described above under “—Risks Related to Our Financial Condition and Capital Requirements”, we
have incurred significant net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future; and
therefore, we do not know whether or when we will generate the U.S. federal or state taxable income necessary to utilize our NOLs or credits. Under the
TCJA, net operating loss carryforwards generated in taxable years ending after December 31, 2017 will not be subject to expiration. However, any NOLs
generated in taxable years beginning after December 31, 2017 may only offset 80% of our annual taxable income.
Business interruptions resulting from the coronavirus disease (COVID-19) outbreak or similar public health crises could cause a disruption of
the development of our product candidates and adversely impact our business.
Public health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a novel strain of a virus
named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, surfaced in
Wuhan, China and has reached multiple other regions and countries, including Philadelphia, Pennsylvania where our primary office and laboratory space,
as well as our manufacturing partner Penn, are located. The coronavirus pandemic is evolving, and to date has led to the implementation of various
responses, including government-imposed quarantines, travel restrictions and other
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public health safety measures. The extent to which the coronavirus impacts our operations or those of our third party partners will depend on future
developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that will
emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Additionally, timely enrollment in planned clinical trials is dependent upon clinical trial sites which will be adversely affected by global health
matters, such as pandemics. We plan to conduct clinical trials for our product candidates in geographies which are currently being affected by the
coronavirus. Some factors from the coronavirus outbreak that will delay or otherwise adversely affect enrollment in the clinical trials of our product
candidates, as well as our business generally, include:
•
•
•
•
the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, including the
attention of physicians serving as our clinical trial investigators, hospitals serving as our clinical trial sites and hospital staff supporting the
conduct of our prospective clinical trials;
limitations on travel that could interrupt key trial and business activities, such as clinical trial site initiations and monitoring, domestic and
international travel by employees, contractors or patients to clinical trial sites, including any government-imposed travel restrictions or
quarantines that will impact the ability or willingness of patients, employees or contractors to travel to our clinical trial sites or secure visas
or entry permissions, a loss of face-to-face meetings and other interactions with potential partners, any of which could delay or adversely
impact the conduct or progress of our prospective clinical trials;
interruption in global shipping affecting the transport of clinical trial materials, such as patient samples, investigational drug product and
conditioning drugs and other supplies used in our prospective clinical trials; and
business disruptions caused by potential workplace, laboratory and office closures and an increased reliance on employees working from
home, disruptions to or delays in ongoing laboratory experiments and operations, product manufacturing and supply, staffing shortages,
travel limitations or mass transit disruptions, any of which could adversely impact our business operations or delay necessary interactions
with local regulators, ethics committees and other important agencies and contractors.
These and other factors arising from the coronavirus could worsen in countries that are already afflicted with the coronavirus or could continue to
spread to additional countries. Any of these factors, and other factors related to any such disruptions that are unforeseen, could have a material adverse
effect on our business and our results of operation and financial condition. Further, uncertainty around these and related issues could lead to adverse effects
on the economy of the United States and other economies, which could impact our ability to raise the necessary capital needed to develop and
commercialize our product candidates.
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 experienced extreme volatility and disruptions in the past several years, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and
uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic
conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or
continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, 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 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 and other partners may not survive an economic downturn,
which could directly affect our ability to attain our operating goals on schedule and on budget.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in Philadelphia, PA, where we lease 7,672 square feet of office, research and development space subject to a
lease agreement that is in effect through 2022. We expect to expand to a new space in 2022 that will both be adequate for near-term needs in addition to
providing additional space to grow. We feel that suitable additional research and development, laboratory and manufacturing space should be available in
the region on commercially reasonable terms.
Item 3. Legal Proceedings.
From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial,
employment and other matters which arise in the ordinary course of business. While the outcome of any such proceedings cannot be predicted with
certainty, as of December 31, 2019, we were not party to any legal proceedings that we would expect to have a material adverse impact on our financial
position, results of operations or cash flow.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on The Nasdaq Global Select Market under the symbol “CABA”. Trading of our common stock commenced on October
25, 2019, in connection with our initial public offering, or IPO. Prior to that time, there was no established public trading market for our common stock.
Stockholders
As of March 20, 2020, we had approximately 27 holders of record of our common stock. The actual number of holders of our common stock is
greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers or held
by other nominees. The number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings,
if any, to fund the development and growth of our business. We do not expect to pay any cash dividends in the foreseeable future. Any future determination
to pay dividends will be made at the discretion of our board of directors and will depend on various factors, including applicable laws, our results of
operations, financial condition, future prospects, then applicable contractual restrictions and any other factors deemed relevant by our board of directors.
Investors should not purchase our common stock with the expectation of receiving cash dividends.
Equity Compensation Plan
The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to Item 12 of Part III of
this Annual Report on Form 10-K.
Issuer Purchases 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
Set forth below is information regarding shares of common stock, shares of our preferred stock issued, and stock options granted and exercised by
us during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act. Included is the consideration, if any,
we received for such shares and options and information relating to the section of the Securities Act or the Securities and Exchange Commission, under
which exemption from registration was claimed. The information presented in this Item 5 gives effect to a 1-for-1.5 reverse stock split, which became
effective on October 16, 2019.
Issuances of Capital Stock
In January 2019, we issued and sold an aggregate of 6,963,788 shares of our Series B preferred stock to investors for aggregate consideration of
approximately $50.0 million. In addition, we issued a further 1,405,332 shares of Series B Preferred Stock in exchange for 1,405,332 shares of Series A-2
Preferred Stock.
No underwriters were involved in the foregoing sales of securities. The sales of securities described above were deemed to be exempt from
registration pursuant to Section 4(a)(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, as transactions by an issuer not
involving a public offering. All of the purchasers in these transactions represented to us in connection with their purchase that they were acquiring the
securities for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time.
Such purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant
to a registration or an available
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exemption from such registration. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.
Grants and Exercises of Stock Options under Equity Plans
During the period covered by this Form 10-K, we granted options to purchase an aggregate of 988,058 shares of common stock, with exercise
prices ranging from $4.23 to $9.54 per share, to directors, employees and consultants pursuant to our 2018 Stock Option and Grant Plan, as amended (the
“2018 Plan”). In 2019, 5,667, shares of common stock were issued upon the exercise of stock options pursuant to the 2018 Plan.
During the period covered by this Form 10-K, we granted options to purchase an aggregate of 352,781 shares of common stock, with exercise
prices ranging from $7.88 to $11.00 per share, to directors, employees and consultants pursuant to our 2019 Stock Option and Grant Plan, as amended (the
“2019 Plan”). In 2019, no shares of common stock were issued upon the exercise of stock options pursuant to the 2019 Plan.
No underwriters were involved in the foregoing issuance of securities. The issuances of the securities described above were deemed to be exempt
from registration pursuant to Section 4(a)(2) of the Securities Act or Rule 701 promulgated under the Securities Act as transactions pursuant to
compensatory benefit plans. The shares of common stock issued upon the exercise of options are deemed to be restricted securities. All recipients either
received adequate information about us or had access, through employment or other relationships, to such information.
Use of Proceeds from the Initial Public Offering
On October 29, 2019, we closed our initial public offering, or IPO, in which we issued and sold 7,275,501 shares of common stock at a public
offering price of $11.00 per share, including 475,501 shares of common stock at a price of $11.00 per share pursuant to the exercise of the underwriters’
over-allotment option. All of the shares of common stock issued and sold in our initial public offering were registered under the Securities Act pursuant to a
registration statement on Form S-1 (Registration No. 333-234017), which was declared effective by the SEC on October 24, 2019. Morgan Stanley & Co.
LLC, Cowen and Company and Evercore Group L.L.C. acted as joint book-running managers for the offering.
The aggregate net proceeds to us from the public offering, inclusive of the over-allotment exercise, were approximately $71.0 million, after
deducting underwriting discounts and commissions and other offering expenses payable by us of approximately $3.4 million. No offering expenses were
paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10% or more of any class of our equity securities or to
any other affiliates.
Information related to use of proceeds from registered securities is incorporated herein by reference to the “Use of Proceeds” section of the
Company’s final prospectus related to the IPO. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors,
including the progress of our research and development, the status of and results from non-clinical studies or clinical trials we may commence in the future,
as well as any collaborations that we may enter into with third parties for our product candidates or strategic opportunities that become available to us, and
any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. There has
been no material change in the planned use of proceeds from our IPO as described in our final prospectus. As of December 31, 2019, we have not used any
of the net proceeds from our initial public offering.
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Item 6. Selected Financial Data.
Information requested by this Item is not applicable as we are electing scaled disclosure requirements available to Smaller Reporting Companies
with respect to this Item.
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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 the section entitled
“Selected Financial Information” and our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K, or this Annual
Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual 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. As a result of
many factors, including those factors set forth in the section entitled “Risk Factors,” our actual results could differ materially from the results described in
or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled “Risk
Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please
also see the section entitled “Special Note Regarding Forward-Looking Statements.” We do not assume any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies for B cell-mediated
autoimmune diseases. Our proprietary technology utilizes CAAR T cells that are designed to selectively bind and eliminate B cells that produce disease-
causing autoantibodies, or pathogenic B cells, while sparing normal B cells. Our lead CAAR T cell product candidate was designed based on or CAR T cell
technology that has been successfully developed and is marketed for the treatment of B cell cancers. We believe our technology, in combination with our
proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABA platform, has applicability across over two dozen B cell-mediated
autoimmune diseases that we have identified, reviewed and prioritized. In order to accelerate product development for our lead program and to access a
proven cell therapy manufacturing platform, we have entered into a collaboration with the Trustees of the University of Pennsylvania, or Penn. We hold
multiple agreements with Penn to develop CAAR T cell therapies for the treatment of these diseases. Our goal is to leverage our team’s expertise in
autoimmunity and engineered T cell therapy and our collaboration with Penn to rapidly discover and develop our portfolio of CAAR T product candidates.
Our initial focus is on pemphigus vulgaris, or PV, which is an autoimmune blistering skin disease. We submitted an IND to the FDA in August 2019. Our
IND was cleared in September 2019, and we plan to initiate our DesCAARTesTM Trial in 2020. In January 2020, the FDA granted DSG3-CAART orphan
drug designation for the treatment of PV. We are also advancing additional product candidates currently in discovery-stage or preclinical development for
the treatment of muscle-specific kinase myasthenia gravis, or MuSK MG, mucocutaneous PV, or mcPV, and Hemophilia A with FVIII alloantibodies.
We were incorporated in April 2017. In August 2018, we entered into multiple agreements with Penn to develop the CAAR T technology to treat
B cell-mediated autoimmune diseases. Our operations to date have been financed primarily by net proceeds of $86.4 million from the sale of convertible
notes and convertible preferred stock and net proceeds of $71.0 million from the sale of common stock in our initial public offering, or IPO, in October
2019. As of December 31, 2019, we had $136.2 million in cash and cash equivalents.
Amended and Restated License Agreement with the Trustees of the University of Pennsylvania and the Children’s Hospital of Philadelphia
In August 2018, we entered into a license agreement with Penn, which was amended and restated in July 2019 to include the Children’s Hospital of
Philadelphia, or CHOP, collectively, the Institutions, and collectively with such amendment, the License Agreement, pursuant to which we obtained (a) a
non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two subfields of use, (b) effective as of October
2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of the Institutions’ intellectual property to make, use, sell,
offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-exclusive, worldwide, royalty-bearing
license, with limited rights to sublicense, under certain of Penn’s know-how to make, have made, use, sell, offer for sale, import and have imported
products in the same two subfields of use. Our rights are subject to the rights of the U.S. government and certain rights retained by the Institutions.
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Unless earlier terminated, the License Agreement will expire with respect to a product upon the later of (a) the expiration of the last to expire patent
or patent application covering such product or (b) 10 years after the first commercial sale of such product. We may terminate the License Agreement in its
entirety or on a subfield-by-subfield basis at any time for convenience upon a certain number of days’ prior written notice. Penn may terminate the License
Agreement in its entirety or on a subfield-by-subfield basis for our uncured material breach, including for our failure to meet certain diligence obligations
and milestone events. We, however, may extend the achievement date of any milestone event for an additional period of time by making a payment in a
certain amount, subject to certain limitations in the number of times each event may be extended.
Sponsored Research Agreements
We have two sponsored research agreements with Penn for the laboratories of Drs. Payne and Milone, who are also our scientific co-founders and
members of our scientific advisory board. Under these agreements, we are committed to funding a defined research plan for three years through April 2021.
The total estimated three-year cost of the two agreements is $8.5 million, which satisfies the $2.0 million annual obligation under the License Agreement.
Master Translational Research Services Agreement
In October 2018, we entered into a services agreement with Penn, or the Services Agreement, pursuant to which Penn agreed to perform certain
services related to the research and development of the technology licensed to us under the License Agreement, as well as certain clinical, regulatory and
manufacturing services. The research and development activities are detailed in Penn organization-specific addenda that are separately executed. The
Services Agreement will expire on the later of (i) October 19, 2021 or (ii) completion of the services for which we have engaged Penn under the Services
Agreement.
Components of Operating Results
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sales of products for several
years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval, we may generate
revenue in the future from product sales. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our
product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
We may also in the future enter into license or collaboration agreements for our product candidates or intellectual property, and we may generate
revenue in the future from payments as a result of such license or collaboration agreements.
Operating Expenses
Research and Development
Our research and development expenses include:
•
•
•
•
•
personnel costs, which include salaries, benefits and stock-based compensation expense;
expenses incurred under agreements with consultants, third-party contract organizations that conduct research and development activities
on our behalf;
costs related to sponsored research service agreements;
costs related to production of preclinical and clinical materials, including fees paid to contract manufacturers;
licensing fees for intellectual property and know-how;
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•
•
laboratory and vendor expenses related to the execution of preclinical studies and planned clinical trials; and
laboratory supplies and equipment used for internal research and development activities.
We have not reported program costs since inception because historically we have not tracked or recorded our research and development expenses
on a pre-clinical program-by-program basis. We use our personnel and infrastructure resources across the breadth of our research and development
activities, which are directed toward identifying and developing product candidates.
We expense all research and development costs in the periods in which they are incurred. Costs for certain research and development activities are
recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by Penn, our vendors and third-
party service providers.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and
development activities related to developing our product candidates, including investments in manufacturing, as our programs advance and we conduct
clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful
development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and
development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and
completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the
commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration,
costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
successful completion of preclinical studies and IND-enabling studies;
development of chemistry, manufacturing and controls, or CMC, processes and procedures for purposes of IND applications;
successful patient enrollment in, and the initiation and completion of, clinical trials;
the impact of any business interruptions to our operations or to those of our clinical sites, manufacturers, suppliers, or other vendors
resulting from the coronavirus disease (COVID-19) outbreak or similar public health crisis;
receipt of regulatory approvals from applicable regulatory authorities;
establishing commercial manufacturing capabilities or arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and non-patent exclusivity;
launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others;
acceptance of our product candidates, if and when approved, by patients, the medical community and third-party payors;
effectively competing with other therapies and treatment options;
a continued acceptable safety and efficacy profile following approval;
enforcing and defending intellectual property and proprietary rights and claims; and
achieving desirable medicinal properties for the intended indications.
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We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical
studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the
outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future
preclinical and clinical product candidates. For example, if the FDA or another regulatory authority, were to require us to conduct clinical trials beyond
those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or
enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the
completion of preclinical and clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue
the development of product candidates.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs, costs related to maintenance and filing of intellectual property,
depreciation expense and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs
consist of salaries, benefits and stock-based compensation expense. We expect our general and administrative expenses to increase over the next several
years to support our continued research and development activities, manufacturing activities, increased costs of operating as a public company and the
potential commercialization of our product candidates. We anticipate our general and administrative costs will increase and with respect to the hiring of
additional personnel, developing commercial infrastructure, fees to outside consultants, lawyers and accountants, and increased costs associated with being
a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, insurance
and investor relations costs.
Other Income and (Expense)
Our other income and (expense) includes (i) interest income earned on money-market fund cash equivalents; and (ii) fair value adjustments on
convertible notes for which we have elected the fair value option of accounting.
Results of Operations for the years ended December 31, 2019 and 2018
The following sets forth our results of operations:
Statements of Operations Data:
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income and (expense):
Interest income
Fair value adjustments on convertible notes
Net loss
Year Ended December 31,
2019
2018
(in thousands)
Change
11,671 $
7,012
18,683
(18,683)
1,740
—
(16,943) $
4,467 $
1,726
6,193
(6,193)
235
(6,244)
(12,202) $
7,204
5,286
12,490
(12,490)
1,505
6,244
(4,741)
$
$
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Research and Development Expenses
Research and development expenses were $11.7 million for the year ended December 31, 2019 as compared to $4.5 million for the year ended
December 31, 2018. The table below summarizes our research and development expenses:
Sponsored research activities
License of intellectual property and subscription fee
Manufacturing of preclinical and clinical supplies
Clinical trials
Personnel
Development services
Other
Year Ended December 31,
2019
2018
(in thousands)
Change
$
$
2,228 $
292
2,686
441
4,006
1,796
222
11,671 $
1,985 $
1,155
722
—
541
54
10
4,467 $
243
(863)
1,964
441
3,465
1,742
212
7,204
Specific changes in our research and development expenses period-on-period include a:
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•
•
$3.5 million increase in personnel costs due to the hiring of additional research and development staff during 2019, including $0.8 million
of stock-based compensation expense;
$2.0 million increase for manufacturing of preclinical and clinical supplies in anticipation of the planned DesCAARTesTM Trial;
$1.7 million increase in development services from the commencement of preclinical research;
$0.4 million increase in clinical trial work from the initial start-up costs of the planned DesCAARTesTM Trial; and
$0.9 million decrease for intellectual property license expense principally resulting from the one-time license fee in September 2018.
General and Administrative Expenses
General and administrative expenses were $7.0 million for the year ended December 31, 2019 as compared to $1.7 million for the year ended
December 31, 2018. The increase of $5.3 million in our general and administrative expenses period-on-period includes:
•
•
•
$2.8 million additional personnel costs due to the hiring of additional general and administrative employees in 2019, including an increase
of $0.8 million of stock-based compensation expense;
$1.1 million of additional services, including legal, audit and accounting, public relations, recruiting and other consulting fees; and
$1.4 million increase in other general and administrative expenses including rent, insurance and other costs associated with being a public
company.
Other Income and (Expense)
Interest income has increased $1.5 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 due to our
higher balance of cash and cash equivalents as a result of proceeds received from our issuances of our convertible notes in May 2018, convertible preferred
stock in October 2018 and January 2019 and common stock in October 2019. Other expense of $6.2 million for the year ended December 31, 2018 is
comprised of fair value adjustments to our convertible notes.
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Liquidity and Capital Resources
Since our inception in April 2017 through December 31, 2019, our operations have been financed by proceeds of $86.4 million from the sale of
convertible notes and our convertible preferred stock and proceeds of $71.0 million from the sale of common stock in our initial public offering. As of
December 31, 2019, we had $136.2 million in cash and cash equivalents. Cash in excess of immediate requirements is invested in accordance with our
investment policy, primarily with a view to liquidity and capital preservation.
We have incurred losses since our inception and, as of December 31, 2019, we had an accumulated deficit of $33.0 million. Our primary use of
cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative
expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding
prepaid expenses and other current assets, accounts payable and accrued expenses.
Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the
foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to
increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of
equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of
capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services,
costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise,
laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs.
Based upon our current operating plan, we believe that our existing cash and cash equivalents as of December 31, 2019 will enable us to fund our
operating expenses and capital expenditure requirements through at least the third quarter of 2022. We have based this estimate on assumptions that may
prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to
advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund
operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potentially
collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when
needed on favorable terms or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing
stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If
we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact
on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or
terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are
unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not
limited to:
•
•
•
•
the scope, progress, results and costs of researching, developing and manufacturing our lead product candidates or any future product
candidates, and conducting preclinical studies and clinical trials;
the timing of, and the costs involved in, obtaining regulatory approvals or clearances for our lead product candidates or any future product
candidates;
the impact of any business interruptions to our operations or to those of our clinical sites, manufacturers, suppliers, or other vendors
resulting from the coronavirus disease (COVID-19) outbreak or similar public health crisis;
the number and characteristics of any additional product candidates we develop or acquire;
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•
•
•
•
•
•
the timing of any cash milestone payments if we successfully achieve certain predetermined milestones;
the cost of manufacturing our lead product candidate or any future product candidates and any products we successfully commercialize,
including costs associated with building-out our manufacturing capabilities;
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such
agreements that we may enter into;
the expenses needed to attract and retain skilled personnel;
the costs associated with being a public company; and
the timing, receipt and amount of sales of any future approved or cleared products, if any.
Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials
and other research and development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and
uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital
outlays and operating expenditures associated with our current and anticipated product development programs.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash and cash equivalents
Operating Activities
Year Ended December 31,
2019
2018
(in thousands)
$
$
(16,045)
(693)
119,925
103,187
$
$
(4,661)
—
37,677
33,016
The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.
During the year ended December 31, 2019, cash used in operating activities of $16.0 million was attributable to our net loss of $16.9 million,
increased by the net change of $1.5 million in our net operating assets and liabilities and offset by non-cash charges of $2.4 million for stock-based
compensation charges and depreciation.
During the year ended December 31, 2018, cash used in operating activities of $4.7 million was attributable to our net loss of $12.2 million,
increased by the net change of $0.5 million in our net operating assets and liabilities and offset by non-cash charges of $8.0 million for changes in fair value
of our convertible notes, common stock issued for the Penn license and stock-based compensation charges.
Investing Activities
During the year ended December 31, 2019, we used $0.7 million of cash and cash equivalents in investing activities consisting of purchases of
property and equipment. We had no investing activities during the year ended December 31, 2018.
123
Financing Activities
During the year ended December 31, 2019, cash provided by financing activities of $119.9 million was attributable to $48.7 million of net proceeds
upon the issuance of Series B convertible preferred stock in January 2019 and $71.2 million of net proceeds from the issuance of common stock in our
initial public offering in October 2019.
During the year ended December 31, 2018, cash provided by financing activities of $37.7 million was comprised of $12.5 million of proceeds upon
the issuance of convertible notes in May 2018, $12.6 million of proceeds on the milestone closing of the convertible notes and issuance of our Series A-1
convertible preferred stock in October 2018, and $12.6 million net proceeds upon the issuance of our Series A convertible preferred stock in October 2018.
Contractual Obligations and Commitments
In February 2019, we entered into an operating lease agreement for new office space in Philadelphia, Pennsylvania. The lease term commenced in
May 2019 and will expire in July 2022. The initial annual base rent is $0.3 million, and such amount will increase by 2% annually on each anniversary of
the commencement date.
Our commitments include:
•
•
•
The License Agreement. Under the License Agreement, we are required to make milestone payments upon successful completion of certain
development, regulatory and sales milestones on a product-by-product and geographical basis. The payment obligations under the License
Agreement are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones
and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed
under the License Agreement. As of December 31, 2019, we are unable to estimate the timing or likelihood of achieving the milestones or
making future product sales. We are also obligated to pay $2.0 million annually for three years beginning August 2018 for funding to the
laboratories of Drs. Payne and Milone.
Under the License Agreement, we must use commercially reasonable efforts to develop and commercialize a product in each subfield.
During the term of the License Agreement until the first commercial sale of the first product, we are obligated to pay Penn a non-
refundable, non-creditable annual license maintenance fee of $10,000. We are required to pay certain milestone payments upon the
achievement of specified clinical and commercial milestones. Milestone payments are reduced by a certain percentage for the second
product that achieves a milestone, by an additional percentage for the third product that achieves a milestone, and so on, for each
subsequent product that achieves a milestone. In the event that we are able to successfully develop and launch multiple products under the
License Agreement, total milestone payments could approach $20.0 million. Penn is also eligible to receive tiered royalties at percentage
rates in the low single-digits, subject to an annual minimum royalty, on annual worldwide net sales of any products that are
commercialized by us or our sublicensees that contain or incorporate, or are covered by, the intellectual property licensed by us. To the
extent we sublicense our license rights under the License Agreement, Penn would be eligible to receive tiered sublicense income at
percentage rates in the mid-single to low double-digits. We have also entered into a subscription and technology transfer agreement with
Penn, pursuant to which we owed Penn an upfront subscription fee, which was paid in 2019, and a nominal non-refundable royalty on net
sales of products, a portion of which will be credited toward milestone payments and royalties under this License Agreement. Technology
transfer activities would be at our cost and subject to agreement as to the technology to be transferred.
Master Translational Research Services Agreement with Penn. Under the Services Agreement, we have contracted for additional research
and development services from various laboratories within Penn. The Services Agreement will expire on the later of (i) October 19, 2021
or (ii) completion of the services for which we have engaged Penn under the Services Agreement. We may incur up to $900 through the
remaining term of the Addendum in 2020 related to the manufacture of vector under the Center for Advanced Retinal and Ocular
Therapeutics, or CAROT, addendum.
Sponsored Research Agreements. We have two sponsored research agreements, or SRAs, with Penn for the laboratories of our scientific co-
founders Drs. Payne and Milone. Under the SRAs, we have
124
committed to funding a defined research plan for three years through April 2021. We have estimated the three-year cost of the two SRAs to
be $8.5 million, which satisfies the $2.0 million annual obligation under the License Agreement.
•
•
Manufacturing agreements. Under agreement with a manufacturer, we are progressing a staged plan for vector development and may incur
up to $1,300 in committed spend.
Other Purchase Commitments. In the normal course of business, we enter into various purchase commitments with third-party contract
manufacturers for the manufacture and processing of our product candidates and related raw materials, contracts with contract research
organizations for clinical trials and agreements with vendors for other services and products for operating purposes. These agreements
generally provide for termination or cancellation other than for costs already incurred.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have
been prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on
various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies
relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this Annual
Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial
statements.
Research and Development Costs
We estimate costs of research and development activities conducted by service providers, which include activities under the License Agreement,
the conduct of sponsored research, preclinical studies and contract manufacturing activities. We record the estimated costs of research and development
activities based upon the estimated amount of services provided and include these costs in the accrued and other current liabilities or prepaid expenses on
the balance sheets and within research and development expense on the statements of operations.
We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements
established with our collaboration partners and third-party service providers. We make significant judgments and estimates in determining the accrued
liabilities and prepaid expense balances in each reporting period. As actual costs become known, we adjust our accrued liabilities or prepaid expenses. We
have not experienced any material differences between accrued costs and actual costs incurred since our inception.
Stock-based Compensation
We recognize compensation costs related to stock-based awards, including stock options and non-vested stock, based on the estimated fair value of
the awards on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing
model, or Black-Scholes. The grant
125
date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting
period of the respective awards.
Black-Scholes requires the use of subjective assumptions to determine the fair value of stock-based awards. These assumptions include:
•
•
•
•
•
Fair Value of Common Stock—Historically, for all periods prior to our initial public offering in October 2019, the fair value of the shares of
common stock underlying our stock-based awards was estimated on each grant date by our board of directors. In order to determine the fair
value of our common stock underlying option grants, our board of directors considered, among other things, valuations of our common
stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified
Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The expected term for
option grants is determined using the simplified method. The simplified method deems the expected term to be the midpoint between the
vesting date and the contractual life of the stock-based awards.
Expected Volatility— As a privately held company historically, the Company has limited trading history for its common stock and, as such,
the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period
equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life
cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility
of our own stock price becomes available.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for
periods corresponding with the expected term of option.
Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock.
Therefore, we use an expected dividend yield of zero.
We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective
basis. In addition to the assumptions used in Black-Scholes, the amount of stock-based compensation expense we recognize in our financial statements
includes stock option forfeitures as they occurred.
Determination of the Fair Value of Convertible Notes
We have elected the fair value option for the accounting for our convertible notes issued in 2018. Fair value adjustments to the convertible notes are
included in our other income and (expenses). The fair value of the initial closing of our convertible notes in May 2018 was determined to be equal to the
proceeds of $12.5 million on issuance. The fair value of the convertible notes on conversion and of the milestone-based closing in October 2018 was
determined to be equal to the value of our Series A-1 convertible preferred stock and Series A-2 convertible preferred stock into which the convertible
notes were converted, which was determined to be $3.39 per share of Series A-1 convertible preferred stock and Series A-2 convertible preferred stock,
using an OPM framework and utilized the back-solve method for inferring and allocating the equity value predicated on the concurrent sale of Series A
convertible preferred stock. This method was selected as we concluded that the sale of the Series A convertible preferred stock was an arm’s-
length transaction. Application of the OPM back-solve method involves making assumptions for the expected time to liquidity, volatility and risk-free rate
and then solving for the value of equity such that value for the most recent financing equals the amount paid. The OPM allocation of total equity value was
determined with reference to a recent financing transaction and we assumed a 71% volatility rate, a 1.3-year estimated term and a probability weighted
average discount for lack of marketability of 35%. All outstanding convertible notes converted to convertible preferred stock in October 2018. There were
no convertible notes outstanding as of December 31, 2019 and 2018.
126
Emerging Growth Company Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or
revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Section
107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the
Securities Act of 1933 for complying with new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as
those standards apply to private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time,
which election is irrevocable. We have elected to use this extended transition period for complying with new or revised accounting standards that have
different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively
and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to
companies that comply with new or revised accounting pronouncements as of public company effective dates.
Subject to certain conditions, as an emerging growth company, we may rely on certain other exemptions and reduced reporting requirements,
including without limitation (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section
404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated
financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (a) the last day of the
fiscal year in which we have total annual gross revenue of $1.07 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date
of the completion of our initial public offering; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous
three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or the FASB, issued ASU 2016-02, Leases (Topic 842), with guidance regarding the
accounting for and disclosure of leases. The update requires lessees to recognize the liabilities related all leases, including operating leases, with a term
greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. This
guidance was effective for public companies for annual and interim periods beginning after December 15, 2018. For all other entities this standard is
effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021.
Early adoption is permitted. We will adopt Topic 842 for our annual period ending December 31, 2021, and we have yet to evaluate the effect that ASU
2016-02 will have on our financial statements or financial statement disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. We held cash and cash
equivalents of $136.2 million as of December 31, 2019. We generally hold our cash in interest-bearing money market treasury fund accounts. Our primary
exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of
our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on
the fair market value of our cash equivalents.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report. An index of those financial statements is
found in Item 15.
127
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices of financial
disclosure required to be reported under this Item.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed
to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended,
or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and
communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial
Officer), to allow timely decisions regarding required disclosure. In addition, the design of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to
their costs.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2019, the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure
controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) were effective at the reasonable assurance level as of December 31, 2019
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) or an attestation report of our independent registered accounting firm due to a transition period
established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the
fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
None.
128
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Except as set forth below, the information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with
the SEC in connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal
is posted on our website at
financial officer. The Code of Business Conduct and Ethics
executive officer and principal
http://investors.cabalettabio.com/corporate-governance/governance-highlights.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code
of Business Conduct and Ethics by posting such information on our website, at the address and location specified above and , to the extent required by the
listing standards of The Nasdaq Global Select Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
Item 11. Executive Compensation.
The information required by this Item 11 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020
Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020
Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020
Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019 and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 will be included in our definitive proxy statement to be filed with the SEC with respect to our 2020
Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019 and is incorporated herein by reference.
129
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements:
PART IV
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2019 and 2018
Statements of Operations for the Years Ended December 31, 2019 and 2018
Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2019 and 2018
Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to Financial Statements
(2) Financial Statement Schedules:
Page
F-2
F-3
F-4
F-5
F-6
F-7
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the
financial statements or the notes thereto.
(3) Exhibits. The exhibits required by Item 601 of Regulation S-K and Item 15(b) of this Annual Report on Form 10-K are listed in the Exhibit
Index immediately preceding the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index are incorporated by reference
herein.
Item 16. Form 10-K Summary
None.
130
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2019 and 2018
Statements of Operations for the Years Ended December 31, 2019 and 2018
Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended December 31, 2019 and 2018
Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Cabaletta Bio, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Cabaletta Bio, Inc. (the Company) as of December 31, 2019 and 2018, the related statements of
operations, convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018
Philadelphia, Pennsylvania
March 30, 2020
F-2
CABALETTA BIO, INC.
Balance Sheets
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Other assets
Deferred offering costs
Total Assets
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities:
Accounts payable
Accrued and other current liabilities
Total current liabilities
Commitments and contingencies (see Note 7)
Convertible preferred stock:
Series A, A-1 and A-2 convertible preferred stock, $0.00001 par value:
no shares and 12,393,497 shares authorized as of December 31,
2019 and 2018, respectively; no and 12,393,047 shares issued and
outstanding at December 31, 2019 and 2018 respectively; aggregate
liquidation preference of $38,256 at December 31, 2018
Stockholders’ equity (deficit):
Preferred stock, $0.00001 par value: 10,000,000 and no shares authorized
as of December 31, 2019 and 2018, respectively; no shares issued
or outstanding at December 31, 2019 and 2018, respectively
Voting and non-voting common stock, $0.00001 par value: 150,000,000
(voting 143,590,481 shares and non-voting 6,409,519 shares)
and 21,147,115 (voting) shares authorized as of December 31, 2019
and 2018, respectively; 24,034,022 (voting 17,624,503 shares and
non-voting 6,409,519 shares) and 3,848,320 (voting) shares
issued and outstanding at December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity (deficit)
Total liabilities convertible preferred stock and stockholders’ equity (deficit)
December 31,
2019
2018
$
$
$
136,204 $
4,348
140,552
815
101
—
141,468 $
920 $
2,227
3,147
33,017
977
33,994
—
—
180
34,174
603
340
943
—
43,921
—
—
—
171,280
(32,959)
138,321
141,468 $
—
1,762
(12,452)
(10,690)
34,174
$
The accompanying notes are an integral part of these financial statements.
F-3
CABALETTA BIO, INC.
Statements of Operations
(in thousands, except share and per share amounts)
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Fair value adjustments on convertible notes
Net loss
Deemed dividend
Net loss attributable to common stockholders
Net loss per voting and non-voting share, basic and diluted
Year Ended December 31,
2019
2018
$
$
$
11,671 $
7,012
18,683
(18,683)
1,740
—
(16,943)
(5,326)
(22,269) $
(4.07) $
4,467
1,726
6,193
(6,193)
235
(6,244)
(12,202)
—
(12,202)
(6.87)
The accompanying notes are an integral part of these financial statements.
F-4
Balance—December 31, 2017
Issuance of common stock in
connection with license
agreement
Issuance of common stock
Issuance of convertible
preferred stock upon
conversion of convertible
notes
Issuance of convertible
preferred stock upon
milestone closing of
convertible notes
Issuance of convertible
preferred stock, net of
issuance costs of $169
Stock-based compensation
Net loss
Balance—December 31, 2018
Issuance of convertible
preferred stock, net of
issuance costs of $1,293
Issuance of common stock
upon completion of initial
public offering, net of
issuance costs of $3,408
Issuance of common stock in
connection with exercise of
stock options
Exchange of convertible
preferred stock including
deemed dividend
Conversion of convertible
preferred stock into common
stock on a 1.5 for 1 basis
Stock-based compensation
Net loss
Balance—December 31, 2019
CABALETTA BIO, INC.
Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share and per share amounts)
Convertible
Preferred Stock
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
—
—
—
—
—
—
4,693,044
15,910
4,553,452
15,436
3,146,551
—
—
12,393,047
12,575
—
—
43,921
6,963,788
48,707
—
—
—
5,326
(19,356,835 )
—
—
—
$
(97,954 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares
3,333,332
Amount
481,318
33,670
—
—
—
—
—
3,848,320
—
7,275,501
5,667
—
12,904,534
—
—
24,034,022
$
Additional
Paid-in
Capital
Accumulated
Deficit
1
(250 )
Total
Stockholders’
Equity (Deficit)
(249 )
1,155
—
—
—
—
606
—
1,762
—
71,020
6
—
—
—
—
—
—
(12,202 )
(12,452 )
—
—
—
1,155
—
—
—
—
606
(12,202 )
(10,690 )
—
71,020
6
(1,762 )
(3,564 )
(5,326 )
97,954
2,300
—
171,280
$
—
—
(16,943 )
(32,959 ) $
$
97,954
2,300
(16,943 )
138,321
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these financial statements.
F-5
CABALETTA BIO, INC.
Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
Depreciation
Change in fair value of convertible notes
Common stock issued in exchange for research and development
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Deposits
Accounts payable
Accrued and other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of convertible notes
Proceeds from issuance of convertible preferred stock on milestone
closing of convertible notes
Proceeds from issuance of convertible preferred stock
Issuance costs of convertible preferred stock
Proceeds from issuance of common stock in connection with
the exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of convertible notes into convertible preferred stock
Conversion of convertible preferred stock into common stock
Exchange of convertible preferred stock, including deemed dividend
Issuance costs included in accounts payable and accrued and other
current liabilities
Property and equipment purchases included in accounts payable
Year Ended December 31,
2019
2018
$
(16,943) $
(12,202)
2,300
104
—
—
(3,372)
(101)
246
1,721
(16,045)
(693)
(693)
71,212
—
—
50,000
(1,293)
6
119,925
103,187
33,017
136,204 $
— $
97,954 $
10,090 $
192 $
226 $
606
—
6,244
1,155
(977)
234
279
(4,661)
—
—
—
12,535
12,567
12,744
(169)
—
37,677
33,016
1
33,017
18,779
—
—
180
—
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
F-6
CABALETTA BIO, INC.
Notes to the Financial Statements
(in thousands, except share and per share amounts)
1. Basis of Presentation
Cabaletta Bio, Inc. (the Company or Cabaletta) was incorporated in April 2017 in the State of Delaware as Tycho Therapeutics, Inc. and, in August
2018, changed its name to Cabaletta Bio, Inc. The Company is headquartered in Pennsylvania. Cabaletta is a clinical-stage biotechnology company focused
on the discovery and development of engineered T cell therapies for B cell-mediated autoimmune diseases.
Principal operations commenced in April 2018, when the Company executed two sponsored research agreements with the Trustees of the
University of Pennsylvania (Penn).
On October 16, 2019, the Company effected a 1-for-1.5 reverse split of the Company’s issued and outstanding shares of common stock, par value
$0.00001 per share (Common Stock). Upon the effectiveness of the reverse stock split: (i) all shares of outstanding Common Stock were adjusted; (ii) the
conversion price of the Series A convertible preferred stock (Series A Preferred), Series A-1 convertible preferred stock (Series A-1 Preferred), Series A-2
convertible preferred stock (Series A-2 Preferred) and Series B convertible preferred stock (Series B Preferred; collectively, the Preferred Shares) was
adjusted; (iii) the number of shares of Common Stock for which each outstanding option to purchase Common Stock is exercisable was adjusted; and (iv)
the exercise price of each outstanding option to purchase Common Stock was adjusted. All of the outstanding Common Stock share numbers (including
shares of Common Stock subject to the Company’s options and as converted for the outstanding convertible preferred stock shares), share prices, exercise
prices and per share amounts contained in the financial statements have been retroactively adjusted in the financial statements to reflect this reverse stock
split for all periods presented. The par value per share and the authorized number of shares of Common Stock and convertible preferred stock were not
adjusted as a result of the reverse stock split.
On October 29, 2019, the Company completed its initial public offering (IPO) of 6,800,000 shares of Common Stock at an offering price of
$11.00 per share. The Company received net proceeds of $66,156 after deducting underwriting discounts, commissions and estimated offering expenses. In
connection with the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into 12,904,534 shares of
Common Stock. In November 2019, the underwriters partially exercised their option and purchased an additional 475,501 shares of Common Stock
resulting in net proceeds to the Company of $4,864, after deducting underwriting discounts and commissions.
Risks and Uncertainties
The Company does not expect to generate revenue from sales of engineered T cell therapies for B cell-mediated autoimmune diseases or any other
revenue unless and until the Company completes preclinical and clinical development and obtains regulatory approval for one or more product candidates.
If the Company seeks to obtain regulatory approval for any of its product candidates, the Company expects to incur significant commercialization
expenses.
The Company has sustained annual operating losses and expects to continue to generate operating losses for the foreseeable future. The Company’s
ultimate success depends on the outcome of its research and development activities. The Company had cash and cash equivalents of $136,204 as of
December 31, 2019. Through December 31, 2019, the Company has incurred an accumulated deficit of $32,959. Management expects to incur additional
losses in the future as it continues its research and development and will need to raise additional capital to fully implement its business plan and to fund its
operations.
The Company intends to raise such additional capital through a combination of equity offerings, debt financings, government funding
arrangements, strategic alliances or other sources. However, if such financing is not available at adequate levels and on a timely basis, or such agreements
are not available on favorable terms, or at all, as and when needed, the Company will need to reevaluate its operating plan and may be required to delay or
discontinue the development of one or more of its product candidates or operational initiatives. The Company expects that its cash and cash equivalents as
of December 31, 2019, will be sufficient to fund its projected operations for at least 12 months following the date of these financial statements.
F-7
The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations,
protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing.
As a result, the Company is unable to predict the timing or amount of increased expenses or when or if the Company will be able to achieve or maintain
profitability. Further, the Company is currently dependent on Penn for much of its preclinical research, clinical research and development activities and
expects to be dependent upon Penn for initial manufacturing activities (Note 7). Product candidates currently under development will require significant
additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. Even
if the Company is able to generate revenues from the sale of its product candidates, if approved, it may not become profitable. If the Company fails to
become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced
to reduce its operations.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions
made in the accompanying financial statements include but are not limited to the fair value of common stock, stock-based compensation, the valuation
allowance on the Company’s deferred tax assets, and the fair value of convertible debt. The Company evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual
results could differ from those estimates.
Off-Balance Sheet Risk and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash
equivalents, which are maintained at a federally insured financial institution. The deposits held at this institution are in excess of federally insured limits.
The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to
the financial position of the depository institution in which those deposits are held. The Company has no off‑balance sheet risk, such as foreign exchange
contracts, option contracts, or other foreign hedging arrangements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash
equivalents. Cash equivalents consist primarily of amounts invested in money market accounts.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in
stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should the in-process equity financing be abandoned,
the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations. Offering costs, including legal,
accounting, and filing fees related to the IPO, were deferred and were offset against the offering proceeds upon the completion of the IPO. Upon
completion of the IPO, $3,408 of such deferred offering costs were reclassified to additional paid in capital. There were no deferred offering costs
capitalized as of December 31, 2019.
F-8
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Cost includes the acquisition costs and all costs necessary to
bring the asset to the location and working condition necessary for its intended use. Depreciation expense is recognized using the straight-line method over
the estimated useful life of each asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the accompanying statements of operations. Expenditures for normal, recurring or periodic repairs
and maintenance related to property and equipment are charged to expense as incurred. The cost for planned major maintenance activities, including the
related acquisition or construction of assets, is capitalized if it will result in future economic benefits.
Estimated useful lives for property and equipment are as follows:
Property and equipment
Laboratory equipment
Furniture and fixtures
Computer equipment
Leasehold improvements
Fair Value Measurement
Estimated useful life
Three years
Three years
Three years
Lesser of estimated useful life or remaining lease term
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated
with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would
be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable
inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as
follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These
include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that
are not active.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Accrued Research and Development Costs
The Company records accrued liabilities for estimated costs of research and development activities conducted by service providers, which include
activities under the Penn Agreement (Note 7), the conduct of sponsored research, preclinical studies and contract manufacturing activities. The Company
records the estimated costs of research and development activities based upon the estimated amount of services provided and includes these costs in
accrued and other current liabilities and prepaid expenses and other current assets in the accompanying balance sheets and within research and development
expense in the accompanying statements of operations.
The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with
service providers. The Company makes significant judgments and estimates in determining the accrued liabilities and prepaid expenses in each reporting
period. As actual costs become known, the Company adjusts its accrued liabilities and prepaid expenses. The Company has not experienced any material
differences between accrued costs and actual costs incurred since its inception.
F-9
Research and Development Expenses
Research and development costs include costs incurred for internal and external research and development activities and are expensed as incurred
in the accompanying statements of operations. Research and development costs consist of salaries and benefits, including associated stock-based
compensation, and laboratory supplies and facility costs, as well as fees paid to entities that conduct certain research and development activities on the
Company’s behalf.
Stock-based Compensation
The Company measures its stock-based awards granted to employees and non-employees based on the estimated fair values of the awards and
recognizes the compensation over the requisite service period. The Company uses the Black-Scholes option-pricing model (Black-Scholes) to estimate the
fair value of its stock-based awards. The Company uses the simplified method in accordance with guidance provided by the Securities and Exchange
Commission and calculates the expected term as the midpoint between the vesting date and the contractual term for certain awards with service or
performance conditions. Stock-based compensation is recognized using the straight-line method. As stock-based compensation is based on awards
ultimately expected to vest, it is reduced by forfeitures. The Company accounts for forfeitures as they occur.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax base. Deferred tax assets and liabilities, which relate primarily to the carrying amount of the Company’s property and equipment and its net
operating loss carryforwards, are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets where, based upon the available evidence, the Company concludes that it is more-
likely-than-not that the deferred tax assets will not be realized. In evaluating its ability to recover deferred tax assets, the Company considers all available
positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction
basis. Because of the uncertainty of the realization of deferred tax assets, the Company has recorded a full valuation allowance against its deferred tax
assets.
Reserves are provided for tax benefits for which realization is uncertain. Such benefits are only recognized when the underlying tax position is
considered more-likely-than-not to be sustained on examination by a taxing authority, assuming they possess full knowledge of the position and facts.
Interest and penalties related to uncertain tax positions are recognized in the provision of income taxes; however, the Company currently has no interest or
penalties related to uncertain income tax benefits.
Comprehensive Loss
The Company did not have any items of comprehensive income or loss other than net loss for the years ended December 31, 2019 and 2018.
Net Loss Per Share
The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required
for participating securities. The Company has voting and non-voting common stock. The rights, including the liquidation and dividend rights, of the holders
of the voting and non-voting common stock are identical, except with respect to voting. Each share of non-voting common stock may be converted at any
time into one share of voting common stock at the option of its holder by providing written notice to the Company, subject to the limitations provided for in
the amended and restated certificate of incorporation. The Company also considers its unvested shares of common stock held by the Company’s founders
and, prior to its
F-10
conversion to common stock, its convertible preferred stock to be participating securities as, in the event a dividend is paid on common stock, the holders
of convertible preferred stock and unvested shares of common stock would be entitled to receive dividends on a basis consistent with the common
stockholders. The net loss attributable to common stockholders is not allocated to the convertible preferred stock nor to the unvested shares of common
stock as the holders of those securities do not have a contractual obligation to share in losses.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the
weighted average number of shares of common stock, which excludes unvested shares of common stock. The undistributed loss for each year is allocated
to common stockholders based on the contractual participation rights of the voting and non-voting common stock as if the losses for the year had been
distributed. As the liquidation and dividend rights are identical, the undistributed losses are allocated on a proportionate basis. Net loss attributable to
common stockholders is calculated by adjusting the net loss of the Company for the deemed dividend associated with the exchange of Series A-2 Preferred
for Series B Preferred. Diluted net loss per share attributable to common stockholders is computed under the if-converted method and assumes that all non-
voting common stock has been converted to common stock. Since the Company was in a loss position for all periods presented, the effects of the other
potentially dilutive securities are antidilutive.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by
the Chief Operating Decision Maker (CODM) in deciding how to allocate resources to an individual segment and in assessing performance. The
Company’s CODM is its Chief Executive Officer. The Company has determined it operates in a single operating segment and has one reportable segment.
Related Party Transactions
The Company engaged a firm controlled by a former executive (until February 2019) of the Company for professional services related to
accounting, finance and other administrative functions. For the years ended December 31, 2019 and 2018, the costs incurred under this arrangement totaled
$601 and $186, respectively. These amounts were recorded as general and administrative expense in the accompanying statements of operations. As of
December 31, 2019 and 2018, amounts owed under this arrangement totaled $36 and $50, respectively, and are included in accounts payable and other
current liabilities in the accompanying balance sheets, respectively.
The Company engaged the services of its current Chief Executive Officer and President prior to his employment in October 2018. For the year
ended December 31, 2018, the costs incurred under this arrangement totaled $180, which was recorded as general and administrative expense in the
accompanying statements of operations.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Under the
JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until
such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised
accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging
growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial
statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842), with guidance regarding the
accounting for and disclosure of leases. The update requires lessees to recognize the liabilities related all leases, including operating leases, with a term
greater than 12 months on the balance sheet.
F-11
This update also requires lessees and lessors to disclose key information about their leasing transactions. This guidance will be effective for public
companies for annual and interim periods beginning after December 15, 2018. For all other entities, this standard is effective for annual reporting periods
beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted. The
Company expects to adopt Topic 842 for its annual period ending December 31, 2021 but has yet to evaluate the effect that ASU 2016-02 will have on its
financial statements or financial statement disclosures.
3. Fair Value Measurements
As of December 31, 2019 and 2018, the Company had money market funds, which were valued by the Company based on quoted market prices,
which represent a Level 1 measurement within the fair value hierarchy.
The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of
the fair value hierarchy utilized to determine such fair values:
Financial assets
Cash equivalents:
Money market funds
Total
Financial assets
Cash equivalents:
Money market funds
Total
Total
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
December 31, 2019
$
$
136,204 $
136,204 $
136,204 $
136,204 $
—
$
— $
—
—
Total
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
December 31, 2018
$
$
33,017 $
33,017 $
33,017 $
33,017 $
—
$
— $
—
—
The following table presents a roll-forward of the aggregate fair values of the Company’s convertible notes (Note 6) for which fair value is
determined by Level 3 inputs:
Balance—January 1, 2018
Initial fair value
Fair value adjustments
Conversion into convertible preferred stock
Balance—December 31, 2018
$
$
—
12,535
6,244
(18,779)
—
There were no transfers among Level categories in the periods presented.
The carrying value of cash, cash equivalents, accounts payable and accrued expenses that are reported on the balance sheets approximate their fair
value due to the short-term nature of these assets and liabilities.
F-12
4. Property, Plant and Equipment
Property plant and equipment consists of the following:
Laboratory equipment
Furniture and fixtures
Leasehold improvements
Computer equipment
Total property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
Depreciation expense was $104 and $0 for the years ended December 31, 2019 and 2018, respectively.
5. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
Research and development services
General and administrative services
Compensation expense
Other
6. Convertible Notes
December 31,
2019
2018
544 $
277
57
41
919
(104)
815 $
December 31,
2019
2018
231 $
297
1,522
177
2,227 $
—
—
—
—
—
—
—
181
36
121
2
340
$
$
$
$
In May 2018, the Company issued convertible notes (the Notes) with aggregate proceeds to the Company in an initial closing of $12,535, including
$5,000 issued to Penn. The Notes carried a stated interest rate of 7.5% per annum. All unpaid principal, together with the then accrued interest, for the
Notes was due and payable at the earlier of May 4, 2021 or upon an event of default. The terms of the Notes provided for an additional milestone-based
closing of $12,567 upon the achievement of certain Company-specific events. The Notes contained a number of provisions addressing automatic and
optional conversion, events of default and prepayment provisions.
The Notes were amended in September 2018 to adjust the terms of the automatic and optional conversion provisions. In October 2018, the Notes
were amended again to reduce the qualified financing threshold, make a qualified financing a milestone event, revise the structure of a milestone-based
closing and reallocate milestone closing purchase rights to new purchasers and the existing noteholders. On the same day, immediately following the
amendment of the Notes, the Company completed a qualified financing, issuing 3,146,551 shares of Series A Preferred for gross proceeds of $12,744 (Note
8). At this time, the Company issued 4,553,452 shares of Series A-1 Preferred in connection with the milestone-based closing resulting in $12,567 of
proceeds ($2.76 per share) and the Notes together with interest accrued thereon ($409) were converted into 2,819,267 shares of Series A-1 Preferred and
1,873,777 shares of Series A-2 Preferred, reflecting a conversion price per share of $2.76.
On issuance, the Company elected to account for the Notes at fair value with any changes in fair value being recognized through the statements of
operations until the Notes settled. In this connection, the Company’s policy is to report a single non-operating income/(expense) line item to record fair
value adjustments on convertible notes and does not report interest expense as a separate line item in the statements of operations. On issuance, total debt
issuance costs of $53 were expensed and recognized as general and administrative expense in the accompanying statements of operations.
On issuance, the fair value of the Notes was determined to be equal to $12,535, which is the principal amount of the Notes. The fair value of the
Notes upon settlement was determined based on the fair value of the Series A-1
F-13
Preferred and Series A-2 Preferred issued, which was determined to be $3.39 per share of Series A-1 Preferred and Series A-2 Preferred, using an option
pricing method (OPM) framework and utilized the back-solve method for inferring and allocating the equity value predicated on the capital raise that
transpired just prior to the valuation date. This method was selected as the Company concluded that the contemporaneous financing transaction was
an arm’s-length transaction. Application of the OPM back-solve method involves making assumptions for the expected time to liquidity, volatility and risk-
free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid. The OPM allocation of total equity
value was determined with reference to a recent financing transaction and the Company assumed a 71% volatility rate, a 1.3-year estimated term and a
probability weighted average discount for lack of marketability of 35%.
For the year ended December 31, 2018, the Company recognized $6,244 in in the accompanying statements of operations as other expense—fair
value adjustments on the Notes, which reflects (i) the difference between the conversion price per share of the Series A-1 Preferred and Series A-2
Preferred ($2.76) into which the Notes were converted, and the fair value of such Series A-1 Preferred and Series A-2 Preferred, (ii) the difference between
the price per share paid for the Series A-1 Preferred ($2.76) in the milestone-based closing and the fair market value of such Series A-1 Preferred and (iii)
interest accrued on the Notes ($409). All outstanding Notes were converted to 2,819,267 shares of Series A-1 Preferred and 1,873,777 shares of Series A-2
Preferred in October 2018 and no Notes were outstanding as of December 31, 2019 and 2018.
7. Commitments and Contingencies
Operating Lease Agreement
In February 2019, the Company entered into an operating lease agreement for new office space in Philadelphia, Pennsylvania. The lease term
commenced in May 2019 and will expire in July 2022. The initial annual base rent is $261, and such amount will increase by 2% annually on each
anniversary of the commencement date. The Company records rent expense on a straight-line basis over the lease term. Rent expense related to this lease
agreement recognized in the accompanying statement of operations was $178 for the year ended December 31, 2019.
As of December 31, 2019, the future minimum payments for operating leases are as follows:
2020
2021
2022
Thereafter
$
$
263
268
158
—
689
License Agreement with the Trustees of the University of Pennsylvania
In August 2018, the Company entered into a license agreement with Penn (the Penn Agreement) and activated the license in October 2018 pursuant
to which the Company obtained (a) a non-exclusive, non-sublicensable worldwide license to certain of Penn’s intellectual property to conduct research,
product development, clinical trials, cell manufacturing and other activities, and (b) an exclusive, worldwide, royalty-bearing right and license, with a right
to sublicense, on a target-by-target basis, under certain of Penn’s intellectual property to make, use, sell, offer for sale, import, and otherwise commercialize
products for the treatment of autoimmune and alloimmune diseases. In July 2019, the Penn Agreement was amended and restated to include CHOP as a
party to the agreement.
Unless earlier terminated, the Penn Agreement expires on the expiration or abandonment or other termination of the last valid claim in Penn’s
intellectual property licensed by the Company. The Company may terminate the Penn Agreement at any time for convenience upon 60 days written notice.
In the event of an uncured, material breach, Penn may terminate the Penn Agreement upon 60 days written notice.
Under the terms of the Penn Agreement, the Company issued 481,318 shares of common stock, with a value of $1,155, recorded as a research and
development expense in the accompanying statements of operations for the year ended December 31, 2018.
F-14
The Company also reimbursed Penn for its prior out-of-pocket expenses with respect to the filing, prosecution and maintenance of Penn’s
intellectual property licensed by the Company. The payment, totaling $89, is included in general and administrative expense in the accompanying
statements of operations for the year ended December 31, 2018. Under the terms of the Penn Agreement, the Company is obligated to pay $2,000 annually
for three years beginning August 2018 for funding to the laboratories of each of Drs. Milone and Payne (see Sponsored Research Agreements—Penn).
During the term of the Penn Agreement until the first commercial sale of the first product, the Company is obligated to pay Penn a non-refundable, non-
creditable annual license maintenance fee of $10. The Company is required to pay certain milestone payments upon the achievement of specified clinical
and commercial milestones. Milestone payments are reduced by a certain percentage for the second product that achieves a milestone, by an additional
percentage for the third product that achieves a milestone, and so on, for each subsequent product that achieves a milestone. In the event that the Company
is able to successfully develop and launch multiple products under the Penn Agreement, total milestone payments could approach $20,000. Penn is also
eligible to receive tiered royalties at percentage rates in the low single-digits, subject to an annual minimum royalty, on annual worldwide net sales of any
products that are commercialized by the Company or its sublicensees that contain or incorporate, or are covered by, the intellectual property licensed by the
Company. To the extent the Company sublicenses its license rights under the Penn Agreement, Penn would be eligible to receive tiered sublicense income
at percentage rates in the mid-single to low double-digits.
No amounts were due under the Penn Agreement as of December 31, 2019.
Sponsored Research Agreements
Penn
The Company has sponsored research agreements with two faculty members at Penn, who are also scientific co-founders of the Company and
members of the Company’s scientific advisory board. Under the agreements, the Company has committed to funding a defined research plan for three years
through April 2021. The total estimated three-year cost of $8,524 under the two agreements satisfies the Company’s annual obligation under the Penn
Agreement (see License Agreement with the University of Pennsylvania above). For the years ended December 31, 2019 and 2018, the Company
recognized research and development expense of $2,137 and $1,957, respectively, related to these agreements in the accompanying statements of
operations. As of December 31, 2019 and 2018, $1,588 and $884, respectively, of advance payments are included in prepaid expenses and other current
assets in the accompanying balance sheets.
F-15
Master Translational Research Services Agreement
In October 2018, the Company entered into a services agreement (the Services Agreement) with Penn for additional research and development
services from various laboratories within Penn. The research and development activities are detailed in separately executed Penn organization-specific
addenda.
Research and development expense related to executed addenda under the master translational research service agreement with Penn recognized
in the accompanying statements of operations for the year ended December 31, 2019 was $2,355. Amounts due under the master translational research
service agreement with Penn were $94 as of December 31, 2019 and is included in accrued liabilities. The Company may incur expenses up to $900
through the remaining term of the Addendum in 2020 related to the manufacture of vector under the Center for Advanced Retinal and Ocular Therapeutics,
or CAROT, Addendum.
Subscription and Technology Transfer Agreement
In July 2019, the Company entered into a subscription and technology transfer agreement pursuant to which the Company owed Penn an upfront
subscription fee, which was paid in 2019, and a nominal non-refundable royalty on the net sales of products, a portion of which will be credited toward
milestone payments and royalties, respectively, under the Amended License Agreement. Technology transfer activities will be at the Company’s cost and
subject to agreement as to the technology to be transferred. Under this agreement, the Company recognized $250 of research and development expense for
the year ended December 31, 2019.
Manufacturing Agreements
Under agreement with a manufacturer, the Company is progressing a staged plan for vector development and may incur up to $1,300 in
committed spend.
Other Purchase Commitments
In the normal course of business, the Company enters into various purchase commitments with third-party contract manufacturers for the
manufacture and processing of its product candidates and related raw materials, contracts with contract research organizations for clinical trials and
agreements with vendors for other services and products for operating purposes. These agreements generally provide for termination or cancellation, other
than for costs already incurred.
Indemnification
The Company enters into certain types of contracts that contingently requires the Company to indemnify various parties against claims from third
parties. These contracts primarily relate to (i) the Company’s bylaws, under which the Company must indemnify directors and executive officers, and may
indemnify other officers and employees, for liabilities arising out of their relationship, (ii) contracts under which the Company must indemnify directors
and certain officers and consultants for liabilities arising out of their relationship, (iii) contracts under which the Company may be required to indemnify
partners against certain claims, including claims from third parties asserting, among other things, infringement of their intellectual property rights, and
(iv) procurement, consulting, or license agreements under which the Company may be required to indemnify vendors, consultants or licensors for certain
claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products, technology
or services. From time to time, the Company may receive indemnification claims under these contracts in the normal course of business. In addition, under
these contracts, the Company may have to modify the accused infringing intellectual property and/or refund amounts received.
In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or
settlement, may cause a material adverse effect on the Company’s future business, operating results or financial condition. It is not possible to determine
the maximum potential amount under these contracts due to the limited history of prior indemnification claims and the unique facts and circumstances
involved in each particular agreement.
F-16
8. Convertible Preferred Stock
Preferred Stock
The Company has 10,000,000 shares of authorized preferred stock as of December 31, 2019, none of which is issued or outstanding. The preferred
stock is not redeemable and does not have a stated voting, dividend or liquidation preference.
Convertible Preferred Stock
The Company has issued Series A Preferred, Series A-1 Preferred, Series A-2 Preferred, and Series B Preferred (collectively, the Convertible
Preferred Stock). The Company classifies Convertible Preferred Stock outside of stockholders’ equity (deficit) because the shares contain deemed
liquidation rights that are a contingent redemption feature not solely within the control of the Company. The following table summarizes the Company’s
Convertible Preferred Stock:
Series A Preferred
Series A-1 Preferred
Series A-2 Preferred
Series B Preferred
Total Convertible
Preferred Stock
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
—
$
—
—
$
—
—
$
2,819,267
9,558
1,873,777
6,352
—
$
—
4,693,044
15,910
Balance—December 31, 2017
Issuance on conversion
of convertible notes
Issuance on milestone
closing of convertible
notes
Issuance
Issuance costs
Balance—December 31, 2018
Issuance
Exchange, including
deemed dividend
Issuance costs
Conversion to common
stock
Balance—December 31, 2019
—
$
—
—
3,146,551
—
3,146,551
—
—
—
—
—
—
12,744
(169 )
12,575
—
—
—
4,553,452
—
—
7,372,719
—
—
—
15,436
—
—
24,994
—
—
—
—
1,873,777
—
—
—
(1,405,332 )
—
—
—
—
6,352
—
(4,764 )
—
(1,588 )
—
—
—
—
—
6,963,788
1,405,332
—
—
—
—
—
—
50,000
10,090
(1,293 )
4,553,452
3,146,551
—
12,393,047
6,963,788
—
—
15,436
12,744
(169 )
43,921
50,000
5,326
(1,293 )
(97,954 )
—
(3,146,551 )
—
$
(12,575 )
—
(7,372,719 )
—
$
(24,994 )
(468,445 )
—
—
$
(8,369,120 )
—
$
(58,797 )
(19,356,835 )
—
—
$
In October 2018, the Company issued 3,146,551 shares of Series A Preferred, resulting in gross proceeds of $12,744. Series A-1 Preferred and
Series A-2 Preferred were issued October 2018 upon conversion of the Notes and in connection with the milestone closing of the Notes (Note 6).
In January 2019, the Company’s certificate of incorporation was amended to increase the authorized shares of Convertible Preferred Stock to
20,762,168 shares, and the Company issued 6,963,788 shares of Series B Preferred, resulting in gross proceeds of $50,000. In connection, the Company
issued a further 1,405,332 shares of Series B Preferred in exchange for 1,405,332 shares of Series A-2 Preferred. The Company determined the terms of the
Series B Preferred to be materially, qualitatively different than the terms of the Series A-2 Preferred and, as such, applied extinguishment accounting with
respect to the Series A-2 Preferred received in the exchange resulting in removal of the carrying amount of the Series A-2 Preferred received ($4,764), the
addition of the Series B Preferred issued at fair value determined with reference to the contemporaneous issuance of Series B Preferred ($10,090) and the
difference ($5,326) determined to be a deemed dividend recorded to additional paid-in capital (to the extent of paid-in capital) and accumulated deficit
within stockholders’ deficit on the balance sheet.
The holders of the Convertible Preferred Stock had various rights, preferences and privileges as follows:
Voting Rights
Series A-2 Preferred are non-voting shares. Each share of Series A Preferred, Series A-1 Preferred and Series B Preferred (the Voting Preferred
Stock) shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which such shares of Voting Preferred Stock
are convertible as of the record date for determining stockholders entitled to vote on such matter holds a number of votes equal to the number of shares of
common stock into which it is convertible. Generally, holders of Voting Preferred Stock shall vote together with the holders of common stock as a single
class and on an as-converted into common stock basis.
F-17
Holders of shares of Series A Preferred and Series A-1 Preferred, exclusively and as a separate class, are entitled to elect three members of the
board of directors. Holders of shares of common stock are entitled to elect one member of the board of directors. The holders of common stock and
Convertible Preferred Stock, voting together as a single class on an as-converted basis, are entitled to elect the balance (two) of the total number of
directors of the Company.
Dividends
The holders of shares of Convertible Preferred Stock shall be entitled to receive, on a pari passu basis, dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any dividend (other than dividends on shares of common stock payable in shares of
common stock) on the common stock, at a rate of (i) $0.24 per annum for each share of Series A Preferred, (ii) $0.1656 per annum for each share of Series
A-1 Preferred, (iii) $0.1656 per annum for each share of Series A-2 Convertible Preferred Stock and (iv) $0.4308 per annum for each share of Series B
Preferred, in each case, as adjusted for any stock splits, stock dividends, combinations, subdivisions, or other similar recapitalization affecting such shares.
Dividends are payable when, as and if declared by the board of directors, and such dividends shall not be cumulative.
The holders of each series of Convertible Preferred Stock can waive any dividend preference that the holders of such series of Convertible
Preferred Stock shall be entitled to receive upon the affirmative vote or written consent of the holders of at least a majority of the shares of such series of
Convertible Preferred Stock then outstanding, voting together as a separate series, and on an as-converted to common stock basis.
After payment of such dividends on the shares of Convertible Preferred Stock, any additional dividends or distributions shall be distributed among
all holders of common stock and Convertible Preferred Stock in proportion to the number of shares of common stock that would be held by each such
holder if all shares of Convertible Preferred Stock were converted to common stock at the then effective conversion price.
Optional Conversion Rights
Each share of Convertible Preferred Stock shall be convertible, at the option of the holder, at any time and from time to time, and without the
payment of additional consideration by the holder thereof, into such number of fully paid shares of common stock as is determined by dividing the
applicable original issuance price by the conversion price in effect at the time of conversion. The respective applicable conversion prices for the
Convertible Preferred Stock is subject to adjustment upon any future stock split, stock dividend, combination, reclassification or similar event affecting the
Convertible Preferred Stock or any series thereof. Such applicable conversion prices for the Convertible Preferred Stock and the rate at which the
Convertible Preferred Stock may be converted into shares of common stock, shall be subject to adjustment as provided. In connection with the IPO, each
1.5 outstanding share of Convertible Preferred Stock converted into one share of common stock.
Mandatory Conversion Rights
Each share of Convertible Preferred Stock automatically converts into the number of shares of common stock determined in accordance with the
conversion rate upon either: (a) the closing of a public offering of common stock at a price of at least $18.23 per share resulting in at least $50,000 of gross
proceeds, or (b) written consent of a majority of the holders of the then outstanding shares of Convertible Preferred Stock.
In the event of a mandatory conversion of Preferred Stock as a result of a Qualified IPO, each holder of Preferred Stock may elect to receive non-
voting Common Stock in lieu of all or a portion of such holder’s voting Common Stock. The non-voting shares of Common Stock shall have the same
rights and preferences as the Common Stock but shall be non-voting. The Convertible Preferred Stock was converted into 6,495,015 shares of voting
Common Stock and 6,409,519 shares of non-voting Common Stock as a result of the Company’s IPO in October 2019. No Convertible Preferred Stock was
outstanding as of December 31, 2019.
F-18
Liquidation
The holders of Convertible Preferred Stock then outstanding shall be entitled to be paid (a) out of the consideration payable to stockholders in the
event of a merger, consolidation, or reorganization involving the Company or a subsidiary or on the sale, lease, transfer, exclusive license or other
disposition by the Company or a subsidiary of all or substantially all assets of the not elected otherwise by a requisite of holders of the Series A Preferred,
or (b) out of the available proceeds the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares
of Convertible Preferred Stock then outstanding shall be entitled to be paid, on a pari passu basis, before any payment shall be made to the holders of
common stock by reason of their ownership thereof, an amount per share equal to the greater of (i) the applicable original issue price, plus any dividends
declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Convertible Preferred Stock been converted into
common stock immediately prior to such event. If upon any such event, the assets of the Company available for distribution to its stockholders shall be
insufficient to pay the holders of the outstanding shares of Convertible Preferred Stock the full amount to which they shall be entitled, the holders of shares
of Convertible Preferred Stock shall share ratably, on a pari passu basis, in any distribution of the assets available for distribution in proportion to the
respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with
respect to such shares were paid in full.
Anti-Dilution
Holders of Convertible Preferred Stock are afforded certain anti-dilution protection with respect to corporate events such as stock splits and
recapitalizations.
Redemption
The Company’s Convertible Preferred Stock is not redeemable but does contain deemed liquidation rights in the event of a merger, consolidation,
or reorganization involving the Company or a subsidiary or on the sale, lease, transfer, exclusive license or other disposition by the Company or a
subsidiary of all or substantially all assets of the Company, and unless elected otherwise by a requisite of holders of the Series A Preferred.
9. Common Stock
Common Stock
Pursuant to the Amended and Restated Certificate of Incorporation filed in August 2018, the Company was authorized to issue a total of
21,147,115 shares of common stock, of which 3,848,320 shares were issued and outstanding at December 31, 2018. In January 2019, the Company’s
certificate of incorporation was further amended to authorize the issuance of 29,000,000 shares of common stock. In October 2019, the Company’s
certificate of incorporation was further amended to authorize the issuance of 143,590,481 shares of voting common stock and 6,409,519 shares of non-
voting common stock. Holders of voting common stock shall have the exclusive right to vote for the election of directors of the Company and on all other
matters requiring stockholder action.
In connection with the issuance of the Notes in May 2018 (Note 6), several of the Company’s founders agreed to modify their shares of common
stock outstanding to include vesting provisions that require continued service to the Company in order to vest in those shares. As such, the 2,904,000
modified shares of common stock became compensatory upon such modification. The fair value of the awards on the modification date was determined to
be $0.74 per share of common stock, by calibrating to the recent Notes issuance considering the maximum conversion price and the seniority of the Notes.
The total compensation cost resulting from the modification was $2,126. The total compensation cost is being recognized over the three-year vesting term
attendant to the founders’ common shares. During the year ended December 31, 2019, the Company recognized $529 and $177 of this amount in research
and development expense and general and administrative expense, respectively. During the year ended December 31, 2018, the Company recognized $399
and $118 of this amount in research and development expense and general and administrative expense, respectively.
F-19
Common stockholders are entitled to dividends, if and when declared by the board of directors, subject to the prior rights of the Convertible
Preferred Stockholders. As of December 31, 2019, no dividends on common stock had been declared.
Non-Voting Common Stock Election
In October 2019, certain holders of the Company’s Convertible Preferred Stock elected to have such shares convert into 6,409,519 shares of non-
voting Common Stock following the closing of the Company’s IPO. The non-voting shares of Common Stock shall have the same rights and preferences as
the Common Stock, but shall be non-voting.
2018 Stock Option and Grant Plan
In September 2018, the Company adopted the 2018 stock option and grant plan (the 2018 Plan), which provided for the Company to sell or issue
common stock, or other stock-based awards, to employees, members of the board of directors and consultants of the Company. The 2018 Plan was
administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting
and other restrictions were determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share
of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock option may not
be greater than 10 years. The Company generally granted stock-based awards with service conditions only (service-based awards), although there has been
one grant with performance conditions. Stock options granted under the 2018 Plan generally vest over three to four years. There were 1,959,411 options
granted under the 2018 Plan prior to the plan termination upon consummation of the Company’s IPO in October 2019.
2019 Stock Option and Incentive Plan
The 2019 Stock Option and Incentive Plan (2019 Plan) was approved by the Company’s board of directors on October 14, 2019, and became
effective on October 23, 2019. The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers,
employees, directors and consultants. The number of shares initially reserved for issuance under the 2019 Plan is 2,342,288, which shall be cumulatively
increased on January 1, 2020 and each January 1 thereafter by 4% of the number of shares of the Company’s common stock outstanding on the
immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the
board of directors.
A summary of the stock option activity under the 2018 Plan and the 2019 Plan is presented below:
Outstanding as of January 1, 2018
Granted
Outstanding as of December 31, 2018
Granted
Exercised
Cancelled
Outstanding as of December 31, 2019
Options Exercisable at December 31, 2019
Number of
Shares
— $
971,353
971,353
1,340,839
(5,667)
(176,893)
2,129,632 $
365,385 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
—
1.01
1.01
7.97
1.01
4.22
5.12
1.61
— $
—
9.8 $
4,051
9.2 $
8.9 $
18,844
4,516
The aggregate intrinsic value of options granted is calculated as the difference between the exercise price of the options and the estimated fair value
of the Company’s common stock. The weighted average grant-date fair value of stock options granted during the year ended December 31, 2019 and 2018
was $5.24 and $1.91,
F-20
respectively. The aggregate grant-date fair value of options vested during the year ended December 31, 2019 and 2018 was $753 and $26, respectively.
The fair value of each award is estimated using Black-Scholes based on the following assumptions:
Risk-free interest rate
Expected term
Expected volatility
Expected dividend yield
For the Year Ended December 31,
2019
2018
1.39%—2.59%
0.3—6.1 years
70%—76%
0%
2.92%—2.96%
5.5—6.2 years
72%
0%
Black-Scholes requires the use of subjective assumptions which determine the fair value of stock-based awards. These assumptions include:
Fair value of common stock—Historically, because there has been no public market for the Company’s common stock, the fair value of the
Company’s common stock underlying stock-based awards was estimated on each grant date by the Company’s board of directors. In order to
determine the fair value of the Company’s common stock underlying stock-based awards, the Company’s board of directors considered, among
other things, a valuation of the Company’s common stock prepared by an unrelated third-party valuation firm in accordance with the guidance
provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued
as Compensation.
Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. The expected term for option
grants is determined using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the
contractual life of the stock-based awards.
Expected volatility—As a privately held company historically, the Company has limited trading history for its common stock and, as such, the
expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the
expected term of the stock-based awards. The comparable companies were chosen based on their similar size, stage in the life cycle or area of
specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own
stock price becomes available.
Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods
corresponding with the expected term of a stock-based award.
Expected dividend—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock.
Therefore, the Company used an expected dividend yield of zero.
Stock-based Compensation
The Company has recorded stock-based compensation in the accompanying statements of operations as follows:
Research and development
General and administrative
Total
For the Year Ended December 31,
2019
2018
$
$
1,304 $
996
2,300 $
455
151
606
As of December 31, 2019, there was $6,797 of unrecognized compensation cost related to unvested option awards, including $176 with respect to
one grant with performance-based vesting terms, which is expected to be recognized over a weighted-average period of 2.2 years. As of December 31,
2019, there was $912 of unrecognized compensation cost related to unvested founder stock awards, which is expected to be recognized over a weighted-
average period of 1.3 years.
F-21
2019 Employee Stock Purchase Plan
The 2019 Employee Stock Purchase Plan (2019 ESPP) was approved by the Company’s board of directors on October 14, 2019, and became
effective on October 23, 2019. A total of 234,229 shares of common stock were initially reserved for issuance under the 2019 ESPP, which shall be
cumulatively increased on January 1, 2020 and each January 1 thereafter through January 1, 2029 by the least of (i) 234,229 shares of common stock, (ii)
1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or (iii) such lesser number of shares
determined by the 2019 ESPP’s administrator. The 2019 ESPP allows eligible employees to purchase shares during certain offering periods.
10. Income Taxes
The reconciliation of federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Expected income tax benefit at the federal statutory rate
State and local taxes, net of federal benefit
Research and development credit, net
Non-deductible items
Change in valuation allowance
Total
For the Year Ended December 31,
2018
2019
21.0%
13.1
2.3
(3.3)
(33.1)
0.0%
21.0%
7.9
0.6
(16.8)
(12.7)
0.0%
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The principal components of the Company’s deferred tax assets consisted of the following:
Deferred tax assets:
Federal, state and local net operating loss carryforwards
License fee deductions
Research and development tax credits
Stock-based compensation deductions
Accrued expenses
Gross deferred tax assets
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Net deferred tax assets
December 31,
2019
2018
$
$
$
5,688 $
362
452
264
457
7,223
(7,223)
—
—
— $
— $
1,163
328
69
17
35
1,612
(1,612)
—
—
—
—
The Company increased its valuation allowance by $5,611 for the year ended December 31, 2019 in order to maintain a full valuation allowance
against its deferred tax assets. Based on the Company’s history of losses, the Company recorded a full valuation allowance against its deferred tax assets as
of December 31, 2019. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support a reversal of the
allowance.
As of December 31, 2019, the Company had federal, state and local net operating loss carryforwards of $17,480, $19,220 and $10,129,
respectively; $17,231 of the federal amounts do not expire, and the remaining $249 expire in 2037. The state net operating losses begin to expire in 2037.
The local net operating losses expire in 2039. As of December 31, 2019, the Company had federal research and development tax credit carryforwards of
$452, which begin to expire in 2038. Under the provisions of Sections 382 and 383 of the Internal Revenue Code of 1986,
F-22
as amended (the IRC), these net operating losses, credit carryforwards and other tax attributes may be subject to limitation based on previous significant
changes in ownership and upon future significant changes in ownership of the Company, as defined by the IRC.
The Company files income tax returns in the U.S. federal jurisdiction as well as in Pennsylvania and Philadelphia. The tax years 2018 and 2017
remain open to examination by the jurisdictions where the Company is subject to tax.
The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for
recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing
authority that has full knowledge of all relevant information.
11. Net Loss Per Share
For the year ended December 31, 2019, the Company had voting and non-voting common stock outstanding. Since the rights of the voting and non-
voting common stock are identical, except with respect to voting, the undistributed losses of the Company have been allocated on a proportionate basis to
the two classes. Diluted net loss per share is calculated using the if-converted method, which assumes conversion of all non-voting common stock to voting
common stock.
Voting common stock
Non-voting common
stock
Basic net loss per share:
Numerator
Allocation of undistributed losses attributable to common stockholders
$
(17,693) $
(4,576)
Denominator
Weighted average number of shares used in basic per share computation
Net loss per share, basic
Diluted net loss per share:
Numerator
Allocation of undistributed losses for basic computation
Reallocation of undistributed losses as a result of conversion of
non-voting to voting common shares
Allocation of undistributed losses
Denominator
Weighted average number of shares used in basic per share computation
Add: Conversion of non-voting to voting common shares outstanding
Weighted average number of shares used in diluted per share computation
$
$
$
4,345,530
(4.07) $
1,123,861
(4.07)
(17,693) $
(4,576)
(22,269) $
4,345,530
1,123,861
5,469,391
(4,576)
—
(4,576)
1,123,861
—
1,123,861
(4.07)
Net loss per share, diluted
$
(4.07) $
F-23
For the year ended December 31, 2018, basic and diluted net loss per share is:
Basic and diluted net loss per share:
Numerator
Net loss attributable to common stockholders
Denominator
Weighted average number of shares used in basic and
diluted per share computation
Net loss per share, diluted
Common stock
$
$
(12,202)
1,775,468
(6.87)
The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share, as their effect is anti-
dilutive:
Convertible preferred stock
Stock options to purchase common stock
Non-vested founder stock
Total
12. 401(k) Savings Plan
For the Year Ended December 31,
2019
2018
—
2,129,632
1,388,977
3,518,609
12,393,047
971,353
2,384,754
15,749,154
The Company maintains a defined-contribution savings plan under Section 401(k) of the IRC, or the 401(k) Plan. The 401(k) Plan covers all
employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pretax
basis. In 2019, the Company made a safe harbor nonelective contribution of 3% of eligible compensation on behalf of all employees. Effective January 1,
2020, the Plan provides for matching contributions on a portion of participant contributions pursuant to the 401(k) Savings Plan’s matching formula, up to
4% of eligible compensation. All matching contributions and participant contributions vest immediately. Contributions totaled $74 and $0 for the years
ended December 31, 2019 and 2018, respectively, and have been recorded in the statements of operations.
F-24
Exhibit
Number
EXHIBIT INDEX
Description
3.1
Third Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference to Exhibit
3.1 of the Registrant’s Current Report on Form 8-K (File No. 001-39103) filed on October 30, 2019)
3.2
Amended and Restated Bylaws of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 of the Registrant’s
Current Report on Form 8-K (File No. 001-39103) filed on October 30, 2019)
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-
1 (File No. 333-234017) filed on October 16, 2019)
4.2
Amended and Restated Investors' Rights Agreement among the Registrant and certain of its stockholders, dated January 2, 2019
(incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-234017) filed on
September 30, 2019)
4.3*
Description of Securities
10.1# 2018 Stock Option and Grant Plan, as amended, and form of award agreements thereunder (incorporated by reference to Exhibit 10.1
of the Registrant’s Registration Statement on Form S-1 (File No. 333-234017) filed on September 30, 2019)
10.2# 2019 Stock Option and Incentive Plan, and form of award agreements thereunder. (incorporated by reference to Exhibit 10.2 of the
Registrant’s Registration Statement on Form S-1/A (File No. 333-234017) filed on October 16, 2019)
10.3# 2019 Employee Stock Purchase Plan. (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form
S-1/A (File No. 333-234017) filed on October 16, 2019)
10.4# Senior Executive Cash Incentive Bonus Plan (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form
10-Q filed on December 5, 2019)
10.5# Form of Indemnification Agreement between the Registrant and each of its directors (incorporated by reference to Exhibit 10.5 of the
Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.6# Form of Indemnification Agreement between the Registrant and each of its executive officers (incorporated by reference to Exhibit
10.4 of the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.7
10.8
10.9
Amended and Restated License Agreement, dated as of July 23, 2019, among the Registrant, the Trustees of the University of
Pennsylvania and the Children’s Hospital of Philadelphia (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration
Statement on Form S-1, filed with the SEC on September 30, 2019)
Sponsored Research Agreement, dated as of April 23, 2018, between the Registrant and the Trustees of the University of
Pennsylvania (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, filed with the SEC
on September 30, 2019)
Sponsored Research Agreement, dated as of April 23, 2018, between the Registrant and the Trustees of the University of
Pennsylvania (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, filed with the SEC
on September 30, 2019)
131
10.10
10.11
10.12
10.13
Master Translational Research Services Agreement, dated as of October 2018, between the Registrant and the Trustees of the
University of Pennsylvania (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, filed
with the SEC on September 30, 2019)
CAROT Master Services Addendum to Master Translational Research Services Agreement, dated as of February 4, 2019, between
the Registrant and the Trustees of the University of Pennsylvania (incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
CVPF Master Services Addendum to Master Translational Research Services Agreement, dated as of October 22, 2018, between the
Registrant and the Trustees of the University of Pennsylvania (incorporated by reference to Exhibit 10.11 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
Research Agreement A19-3095, dated as of October 31, 2018, between the Registrant and The Regents of the University of
California (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on
September 30, 2019)
10.14
Lease, dated as of February 11, 2019, between the Registrant and Brandywine Cira, L.P. (incorporated by reference to Exhibit 10.13
to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.15
Consulting Agreement, dated as of May 7, 2018, between the Registrant and Danforth Advisors, LLC (incorporated by reference to
Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.16
Amendment No. 1 to Consulting Agreement, dated as of May 7, 2019, between the Registrant and Danforth Advisors, LLC
(incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1, filed with the SEC on September
30, 2019)
10.17# Employment Agreement between the Registrant and Steven Nichtberger (incorporated by reference to Exhibit 10.16 to the
Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.18# Employment Agreement between the Registrant and Anup Marda (incorporated by reference to Exhibit 10.17 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.19# Employment Agreement between the Registrant and Gwendolyn Binder (incorporated by reference to Exhibit 10.18 to the
Registrant’s Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.20# Employment Agreement between the Registrant and David Chang (incorporated by reference to Exhibit 10.19 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.21# Employment Agreement between the Registrant and Brian Stalter (incorporated by reference to Exhibit 10.20 to the Registrant’s
Registration Statement on Form S-1, filed with the SEC on September 30, 2019)
10.22#* Non-Employee Director Compensation Policy
21.1*
List of Subsidiaries of the Registrant
23.1*
Consent of Ernst & Young, independent registered public accounting firm
132
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as amended
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as amended
32.1**
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
#
+
*
**
Management Contract or compensatory plan or arrangement.
Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions.
Filed herewith.
The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated
by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the Registrant specifically incorporates it by reference.
133
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 30, 2020
Cabaletta Bio, Inc.
By:
/s/ Steven Nichtberger
Steven Nichtberger
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Steven Nichtberger
Steven Nichtberger
Director, Chief Executive Officer and President
March 30, 2020
(Principal Executive Officer)
/s/ Anup Marda
Anup Marda
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Catherine Bollard
Catherine Bollard
/s/ Brian Daniels
Brian Daniels
/s/ Richard Henriques
Richard Henriques
/s/ Mark Simon
Mark Simon
Director
Director
Director
Director
134
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
March 30, 2020
Exhibit 4.3
Description of the Registrant’s Securities Registered Pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended
The following summary of the general terms and provisions of the registered capital stock of Cabaletta Bio, Inc. (“Cabaletta”, “we”, “our”) does not
purport to be complete and is subject to, and qualified in its entirety by, reference to our Third Amended and Restated Certificate of Incorporation, or
certificate of incorporation, our Amended and Restated Bylaws, or bylaws, each of which is incorporated by reference as an exhibit to our most recent
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission, and applicable provisions of the Delaware General Corporation Law,
or the DGCL. Our common stock, par value $0.00001 per share is registered pursuant to Section 12(b) of the Securities and Exchange Act of 1934 and
trades on the Nasdaq Global Select Market under the symbol CABA. The summaries below do not purport to be complete statements of the relevant
provisions of the certificate of incorporation, the bylaws or the DGCL.
General
Our authorized capital stock consists of one hundred and forty-three million five hundred and ninety thousand four hundred and eighty-one (143,590,481)
shares of common stock, par value $0.00001 per share, or the common stock, six million four hundred and nine thousand five hundred and nineteen
(6,409,519) shares of non-voting common stock, par value $0.00001 per share, or the non-voting common stock, and ten million (10,000,000) shares of
undesignated preferred stock, par value $0.00001 per share, or the preferred stock.
Common Stock and Non-Voting Common Stock
The holders of our common stock and non-voting common stock have identical rights, provided that, (i) except as otherwise expressly provided in our
certificate of incorporation or as required by applicable law, on any matter that is submitted to a vote by our stockholders, holders of our common stock are
entitled to one vote per share of common stock, and holders of our non-voting common stock are not entitled to any votes per share of non-voting common
stock, including for the election of directors, and (ii) holders of our common stock have no conversion rights, while holders of our non-voting common
stock shall have the right to convert each share of our non-voting common stock into one share of common stock at such holder’s election, provided that as
a result of such conversion, such holder, together with its affiliates and any members of a Schedule 13(d) group with such holder, would not beneficially
own in excess of 4.99% of our common stock immediately prior to and following such conversion, unless otherwise as expressly provided for in our
certificate of incorporation. However, this ownership limitation may be increased or decreased to any other percentage designated by such holder of non-
voting common stock upon 61 days’ notice to us.
Holders of our common stock and non-voting common stock are entitled to receive ratably any dividends declared by our board of directors out of funds
legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock and non-voting
common stock have no preemptive rights or other subscription rights or redemption or sinking fund provisions.
In the event of our liquidation, dissolution or winding up, holders of our common stock and non-voting common stock will be entitled to share ratably in all
assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock.
Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “CABA.”
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.
Preferred Stock
Our board of directors will have the authority, from time to time, without further action by our stockholders, to issue up to 10,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include
dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting, or
the designation of, such series, any or all of which may be greater than the rights of common stock and non-voting common stock. The issuance of our
preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders and holders of our non-voting
common stock will receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of
delaying, deferring or preventing a change in control of our company or other corporate action.
Registration Rights
Certain holders of our shares of our common stock and non-voting common stock, including those issuable upon the conversion of preferred stock, will be
entitled to rights with respect to the registration of these securities under the Securities Act. These rights are provided under the terms of an investors’
rights agreement between us and holders of our preferred stock. The investors’ rights agreement includes demand registration rights, short-form registration
rights and piggyback registration rights. All fees, costs and expenses of underwritten registrations under this agreement will be borne by us and all selling
expenses, including underwriting discounts and selling commissions, will be borne by the holders of the shares being registered.
Demand Registration Rights
Upon or after the expiration of the 180-day lock-up period under our registration statement for our initial public offering, or our IPO, holders of our
common stock and non-voting common stock, including those issuable upon the conversion of preferred stock, will be entitled to demand registration
rights. Under the terms of the investors’ rights agreement, we will be required, upon the written request of holders of at least 40% of these securities, to file
a registration statement and use commercially reasonable efforts to effect the registration of all or a portion of these shares of common stock (including the
shares of common stock into which any shares of non-voting common stock held by such investors may be converted) for public resale. We are required to
effect only two registrations pursuant to this provision of the investors’ rights agreement.
Short-Form Registration Rights
Pursuant to the investors’ rights agreement, if we are eligible to file a registration statement on Form S-3, upon the written request of holders of at least
20% of these securities at an aggregate offer price of at least $5.0 million, we will be required to use commercially reasonable efforts to effect a registration
of such shares. We are required to effect only two registrations in any twelve month period pursuant to this provision of the investors’ rights agreement.
The right to have such shares registered on Form S-3 is further subject to other specified conditions and limitations.
Piggyback Registration Rights
Pursuant to the investors’ rights agreement, if we register any of our securities either for our own account or for the account of other security holders, the
holders of these shares are entitled to include their shares in the registration. Subject to certain exceptions contained in the investors’ rights agreement, we
and the underwriters may limit the number of shares included in the underwritten offering to the number of shares which we and the underwriters determine
in our sole discretion will not jeopardize the success of the offering.
Indemnification
Our investors’ rights agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify holders of registrable
securities in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for
material misstatements or omissions attributable to them.
Expiration of Registration Rights
The demand registration rights and short form registration rights granted under the investors’ rights agreement will terminate on the earliest of (i) a deemed
liquidation event, as defined in the investors’ rights agreement, (ii) the fifth anniversary of our IPO and (iii) at such time when the holders’ shares may be
sold without restriction pursuant to Rule 144 within a three month period.
In addition, we have entered into a side letter with certain of our investors pursuant to which, upon or after expiration of the lock-up agreements, if we
receive a written notice from any of such investors, we and the investors will enter into a registration rights agreement. The registration rights agreement
will provide that, subject to certain limitations, upon demand by any of the investors, we must file a Registration Statement on Form S-3 for resale under
the Securities Act of 1933 registering the common stock held by the investors (including any shares of common stock into which outstanding shares of
non-voting common stock may be converted) and use reasonable best efforts to effect such registration. If we enter into the registration rights agreement,
our registration obligations will continue in effect for up to ten years. The registration rights agreement also requires us to pay expenses relating to such
registrations and indemnify the investors against certain liabilities.
Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law
Our certificate of incorporation and bylaws include a number of provisions that may have the effect of delaying, deferring or preventing another party from
acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of
directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.
Board Composition and Filling Vacancies
Our certificate of incorporation provides for the division of our board of directors into three classes serving staggered three-year terms, with one class being
elected each year. Our certificate of incorporation provides that directors may be removed only for cause and then only by the affirmative vote of the
holders of 75% or more of the outstanding shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors,
however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our
directors then in office even if less than a quorum. The classification of directors, together with the limitations on removal of directors and treatment of
vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of directors.
No Written Consent of Stockholders
Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting,
and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take
stockholder actions and would prevent the amendment of our bylaws or removal of directors by our stockholders without holding a meeting of
stockholders.
Meetings of Stockholders
Our certificate of incorporation and bylaws provide that only a majority of the members of our board of directors then in office may call special meetings of
stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our
bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.
Advance Notice Requirements
Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or
new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in
writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal
executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws
specify the requirements as to form and content of all
stockholders’ notices. These requirements may preclude stockholders from bringing matters before the stockholders at an annual or special meeting.
Amendment to Certificate of Incorporation and Bylaws
Any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and, if required by law, our certificate of
incorporation must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding
shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, board composition,
limitation of liability and the amendment of our bylaws and certificate of incorporation must be approved by not less than 75% of the outstanding shares
entitled to vote on the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our bylaws may be
amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by
the affirmative vote of at least 75% of the outstanding shares entitled to vote on the amendment, or, if our board of directors recommends that the
stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case
voting together as a single class.
Undesignated Preferred Stock
Our certificate of incorporation authorizes 10,000,000 shares of preferred stock. The existence of authorized but unissued shares of preferred stock may
enable our board of directors to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example,
if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our
stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or
other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our
certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred
stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common
stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring
or preventing a change in control of us.
Choice of forum
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the
sole and exclusive forum for any state law claim for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of
breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; (3) any action asserting a
claim against us arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws; (4) any action to interpret, apply, enforce or
determine the validity of our certificate of incorporation or bylaws or (5) any action asserting a claim governed by the internal affairs doctrine. The choice
of forum provision does not apply to any actions arising under the Securities Act or the Exchange Act.
Section 203 of the DGCL
We are subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a
“business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder,
unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
•
•
before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;\
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining
the voting stock
•
outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding
voting stock owned by the interested stockholder; or
at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an
annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.
Section 203 defines a business combination to include:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested
stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class
or series of the corporation beneficially owned by the interested stockholder; and
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or controlled by the entity or person.
Exhibit 10.22
CABALETTA BIO, INC.
AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR
COMPENSATION POLICY
The purpose of this Amended and Restated Non-Employee Director Compensation Policy of Cabaletta Bio, Inc. (the
“Company”), is to provide a total compensation package that enables the Company to attract and retain, on a long-term basis,
high-caliber directors who are not employees or officers of the Company or its subsidiaries. In furtherance of the purpose stated
above, all non-employee directors shall be paid compensation for services provided to the Company as set forth below:
Cash Retainers
Annual Retainer for Board Membership: $35,000 for general availability and participation in meetings and conference
calls of our Board of Directors, to be paid quarterly in arrears, pro-rated based on the number of actual days served by the
director during such calendar quarter.
Additional Retainers for Committee Membership:
Audit Committee Chair:
Audit Committee member:
Compensation Committee Chair:
Compensation Committee member:
Nominating and Corporate Governance Committee
Chair:
Nominating and Corporate Governance Committee
member:
$15,000
$7,500
$10,000
$5,000
$8,000
$4,000
Note: Chair and committee member retainers are in addition to retainers for members of the Board of Directors.
Equity Retainers
Initial Award: An initial, one-time stock option award (the “Initial Award”) of 44,000 shares will be granted to each new non-
employee director upon his or her election to the Board of Directors, which shall vest in equal quarterly installments over three
years from the date of vesting commencement, provided, however, that all vesting shall cease if the director resigns from the
Board of Directors or otherwise ceases to serve as a director of the Company. The Initial Award shall expire ten years from the
date of grant, and shall have a per share exercise price equal to the Fair Market Value (as defined in the Company’s 2019 Stock
Option and Incentive Plan) of the Company’s common stock on the date of grant. This Initial Award
applies only to non-employee directors who are first elected to the Board of Directors subsequent to the Company’s initial
public offering.
Annual Award: Commencing in 2021, on each date of the Company’s Annual Meeting of Stockholders following the
completion of the Company’s initial public offering (the “Annual Meeting”), each continuing non-employee member of the
Board of Directors, other than a director receiving an Initial Award, will receive an annual stock option award (the “Annual
Award”) of 22,000 shares, which shall vest in full upon the earlier to occur of the first anniversary of the date of grant or the
date of the next Annual Meeting; provided, however, that all vesting shall cease if the director resigns from the Board of
Directors or otherwise ceases to serve as a director, unless the Board of Directors determines that the circumstances warrant
continuation of vesting. Such Annual Award shall expire ten years from the date of grant, and shall have a per share exercise
price equal to the Fair Market Value (as defined in the Company’s 2019 Stock Option and Incentive Plan) of the Company’s
common stock on the date of grant.
Each Initial Award and Annual Award will become immediately vested and exercisable upon a Sale Event (as defined in the
Company’s 2019 Stock Option and Incentive Plan).
Expenses
The Company will reimburse all reasonable out-of-pocket expenses incurred by non-employee directors in attending
meetings of the Board or any Committee.
Adopted October 14, 2019, and effective as of October 24, 2019
Amended and restated effective as of February 11, 2020
None.
List of Subsidiaries
Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-234367) pertaining to the Cabaletta Bio, Inc. 2018 Stock
Option and Incentive Plan, the Cabaletta Bio, Inc. 2019 Stock Option and Incentive Plan, and the Cabaletta Bio, Inc. 2019 Employee Stock Purchase Plan
of our report dated March 30, 2020, with respect to the financial statements of Cabaletta Bio, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 2019.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 30, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Nichtberger, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of Cabaletta Bio, Inc. (the “registrant”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(Paragraph omitted pursuant to SEC Release Nos. 33‑8238/34‑47986 and 33‑8392/34‑49313);
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 30, 2020
By:
/s/ Steven Nichtberger
Steven Nichtberger
Chief Executive Officer and President
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anup Marda, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of Cabaletta Bio, Inc. (the "registrant");
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(Paragraph omitted pursuant to SEC Release Nos. 33‑8238/34‑47986 and 33‑8392/34‑49313);
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 30, 2020
By:
/s/ Anup Marda
Anup Marda
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Cabaletta Bio, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 30, 2020
By:
/s/ Steven Nichtberger
Steven Nichtberger
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Cabaletta Bio, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the
Company.
Date: March 30, 2020
By:
/s/ Anup Marda
Anup Marda
Chief Financial Officer
(Principal Accounting and Financial Officer)